Q1 2020 Earnings Call
Thank you for standing by conference operator, welcome to the easy and capital first quarter 2020 results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I would now let's turn the meeting over to Mr. Jonathan sacks. Please go ahead mr. websites.
Thank you operator, good afternoon, everyone. Thank you for participating in our conference call to discuss DCN Capital's first quarter 2020 results announced earlier today, joining us or Stephen Hudson, Chief Executive Officer, Mike <unk>, Chief Financial Officer Unusually summarizing. These results was issued this afternoon and the financial statements and Mdna for the three month.
Period ended March 31st 2020 have been filed a seat are these documents are available on our website at www Dot you see on capital Corp Dot com.
Presentation slides to be referenced during this car, except our accessible in the webcast as well as in 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 are sharing with you. Today includes forward looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties.
Refer you to the cautionary statements section of the Mdna 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 of any forward looking statements will prove to be correct.
You should note that the Companys earnings release financial statements M. DNA in today's call include references to a number of non IRS measures, which we believe helped to present the company and its operations in ways that are useful to investors. A reconciliation of these non <unk> F. R. S measures to I FRS measures can be found that aren't.
You know all figures are present in us dollars unless explicitly noted.
But these introductory remarks complete I'll now turn the call over to Steven Hudson Chief Executive Officer.
Thank you John and good afternoon, turning to page seven.
The disaster recovery plans that have ensure that all of our businesses and operations and functions have performed remotely given our four locations. These C. N has robust capabilities and protocols in place due to our necessary preparedness for hurricane season, and a seamless transition.
If the end in each of our subsidiaries are fully open for business, albeit on a remote basis with complete functionality servicing capability and our full suite a core product offerings.
The most important.
Back to take away from the <unk> remarks, or that each of our businesses has shown strong resilience through this unprecedented time well performance substantially improving through may have more speak to that shortly.
Turning to page eight I like to touch upon four areas a particular focus.
First of all the resilient businesses.
We produced strong results in the first quarter as you note of six cents, including Weve Expensed off a business development that we curtailed and will not be pursuing.
After initial pull back from the virus improving trends in place over the past several weeks will walk you through a shortly servicing them partnership income provide stability with financial institutions and our counterparties.
And finally, but not at least the quality their credit assets having December.
Demonstrated exceptional performance to our funding partners I'll be providing detail shortly on each of our businesses.
You see has proven model has liquidity to fund originations committed funding we raised some place both from our bank credit Union and institutional partners, who are purchasing loans as committed in addition to liquidity, we haven't our balance sheet.
Demand for Prime and Super Prime assets remain strong.
Our corporate liquidity remains high we as you know we have a 4 billion for year $1 billion committed lie with major banks, which was recently extended to 23, we have significant <unk> positive cash flow, we have legs as I think that we believe immaterial corporate expense reduction program in place, which will we will review shortly.
And we've done we've done a deep dive at all or on balance sheet assets to ensure there's no no impairment.
And finally, the we believe this is a significant period to take share we're well positioned to take share. During this economic disruption and we believe the franchise value as we support our partners and customers is pretty will creep.
Although it's difficult to provide the short range outcomes due to the virus.
I strongly believe a lowered withdrawing guidance for now and we'll refreshing at the other Q2 that our baseline for this company is the 27 cents that we produced in 2019 and by that I mean, the low end and I believe that we have a line of sight through to at least 36 cents of earnings for this company.
[noise] turning to page 10, [laughter] service Finance had an extraordinary strong first quarter operating income was up 43% year over year originations out with excluding pacer up 29%, Yeah, we have robust either grow by all accounts. It was a strong quarter [noise].
So it was everyone's asking what's happened since the end of the first quarter on page 11.
[noise], you've seen a 3% growth year over year with shelter in place orders in fact, you've seen strong each back growth I'm almost 30% in Q1, and almost 40 45, 46% in April Lennox volumes were very strong.
I think the two should charts on the right hand side of the slight tell the story is after an initial drop in April you've seen an increase in both the approvals and applications those be get Oh, fundings or originations in our world.
And you began to say that as may 13th with respect to the applications and approvals increasing.
The one a negative has been solar finance decision to limit solar production. We had did that we had undertaken did that before the crisis, it's not new and it's a shelter in place orders of state a place our installers have not been able to put solar arrays and on the homes of consumers, but that was already bought a planned for 2020.
Turning to the credit quality our portfolios on page 12, 12 were happy to report.
That our portfolios are or are performing better than almost any credit asset.
We've seen limited impact of payment deferments deferments that at 1.7% and you see the line on increases for additional request. We believe deferments have have bought them. The same time the performance on arrears and credit losses has been exceptional and they get to step back and save yourself.
Why why is this happening and I would make three observations for you. The first our portfolio is one of the Super Prime and Prime credits were not in the near prime or subprime business.
Our consumer profile or people, who make more than 40000 as you know a large chunk of the unemployment. The U.S. has been focused on inc. households, under $40000 your rental income.
And we are not in urban locations neither of our businesses are in Manhattan, or Chicago, or Dallas or L.A., we are a suburban and urban model with respect to triad and finally I would note that secured an amortizing nature in loans puts us in a better position to help before.
So I'm happy to say that our portfolios are exceeded our performing really well on behalf of our investors who have purchased these portfolios.
Turning to page 13 assets held for trading.
Down from 274 million in Q4 of 18 to 99 billion. There was arise during this quarter. These assets on our balance sheet at the same credit quality and characteristics as those in our bank portfolios and the moment people come back to the phones with their bank Counterparties. These assets will be sold.
[noise] page 14.
In summary of originations we've had I think.
At least two two years no new changed their strong originations for service.
Through each quarter.
Turning to Kessler group I'd like to note on the first line. The partnership revenue is up 32% year over year that reflects the results of the strategic shift we've made in Kessler away from onetime M&A type revenue to annuity based revenue we're happy that.
That strategy is working.
We saw some marketing services declined which has no surprise people are taking time to reorientate their marketing programs. We believe that's a timing in the deferred issue. It's not a lost revenue will walk you through that.
The second and the transaction revenue year over year, you have to note that in Q1 of 2019, there was a onetime largely from the sale the Walmart credit card portfolio.
Turning to 16.
I see the evidence of the shift away as I mentioned earlier from.
From one time to to recurring revenue, we're happy with that shift.
We believe in the marketing services business that business will not be lost that will be moved into late 2020. In early 21, I think it's really important to note the transaction service business, but the best year. The kg ever had was just after the posts global financial crisis of 2010 2000.
In 11, and we know the pipeline is building quite nicely as credit card.
Owners look for new opportunities.
Turning to page 17 with respect to our on balance sheet credit card investments, we have the opportunity as part of our deep dive across our entire balance sheet that we stressed this book to the levels of the great credit crisis, the great financial crisis I'm happy to report the because of the structures in place where it's the management fees.
Sure Laos caps or other protections that will we would cover 100% over invested capital and we can do you expect a positive return.
We're obviously not proceeding with additional investments of this type at this time as you know these investments were made with partners in order to derive core revenue from our service business.
Turning to try it on page 18.
Again strong results I believe inline with expectations both at originations.
And earnings I think a really important point to speak to the quality of the portfolio here in the service is that five new credit Union partners were signed up year to date three in the first quarter. One in April one of May I think that speaks volume to the quality of the assets that Tri Ed is originating.
We saw a loan receivables in the floor plan increase that was principally due to homes that have been manufactured sitting at a manufacturer site with improved contract and funding in place and there are waiting delivery to the site. The site has been restricted do the shelter in place that bog backlog will clear and that balance will come down.
Again, this was subject to a detailed credit scrub and we see no loss whatsoever, and then the floor plan business.
Turning to what's happening post post March on page 19.
Applications were down materially in April year over year happy to report that they have rebounded in may.
We've seen improvement traffic traffic manufactures temporally close 50% the plants response to quarantines most those plans of reopened by by this period.
Most dealers remained open I've seen improved foot traffic in the last three to four weeks.
Turning to try as a portfolio credit terms.
On behalf of as of the C of the credit unions of banks. It purchases, we implemented short term deferment programs approved by our banks. They typically a two to three month extension, which added the and as long as similar to service you'll see that those deferment request have come down. If you can if you contrast, the level deferments on this portfolio grew.
Versus traditional mortgage book, you'll see us fared much better.
The 30 say 30 day delinquency is up by one it's up to 1% I would note that in May those delinquencies in fact, our improving we have no changes to loan losses.
Page 21 originations remain strong.
Through through the quarter.
Michael.
Thank you, Steve turning to page 23, and the consolidated operating highlights total originations of 509 million were up over 21% compared to Q1 2019.
I'd like to growth of over 29% answers finance over 13% of Tri Ed.
Adjusted net income applicable to common shareholders of six cents per share is in line with our internal budget, reflecting the strong start we had to the year.
Turning to page 24 in the balance sheet highlights.
Total assets were down slightly compared to year end, but finance assets were up approximately 50 million, reflecting growth at service maintenance and Tri Ed as Steve noted earlier.
Our plan remains to continue to reduce on balance sheet assets portfolio sales that were in the queue for March got delayed due to the cobot 19 pandemic, we've begun to reengage with buyers. This week as people start to return to their desks.
That was up approximately 64 million largely due to the increase in finance asset.
Now turning to page 25, an income statement highlights we have provided a detailed breakdown of the income statement.
Key highlights of the growth in origination and management services revenue.
Again, reflecting the shift in our business to more recurring revenue streams.
Actually offset by the decrease in transactional revenues as noted in key technology.
Adjusted EBITDA was in line with Q1 2019, well adjusted operating income was up approximately 1.7 million compared to the prior year due to lower interest expense and lower non controlling interest expense, which reflects the buyout of the remaining non controlling interest and kg at the end of 2019.
Turning to page 26 operating expenses were up at service Finance and Tri Ed which was in line with their increase in revenue.
This was partially offset by lower operating expenses that AG due to impact of cost reductions implemented in Q1, 2019, and lower compensation costs due to lower revenue.
Corporate operating expenses of 7.5 million.
We are up compared to the prior year and our normalized run rate due to the nonrecurring business development another expenses related to the pursuit pursuit of our growth opportunities, but Steve noted earlier.
Finally, turning to page 27.
Response to the covert 19 pandemic, we launched a comprehensive expense reduction initiative, including reductions to executive salaries, 25% reduction and board of director fees and significant reductions to business development travel and entertainment and professional fees.
As a result, we expect corporate operating expenses to be in their $4 million range for the remainder of the year.
We also have an ongoing review underway at each of our operating companies.
With that I will turn it back to Steve.
Hey, Michael just on on page 28, highlighting our discontinued operations. These are also subject to the same detailed credit review.
The rail business is in good shape. The aviation business is fine as you would note that our aviation businesses largely that of civil aviation being corporate aircraft and helicopters.
We'll see what happens with corporate aircraft the helicopter market, we actually had some sales of assets and the first quarter in sales and the second quarter. So that market is.
Strangely enough coming back, we'll see where the value of business Jets lie, but I have a view that.
Those jets will actually be of larger demand right now long haul jets are not flying but.
I think post the crisis, there will be a demand will wait will lead to look at the valuation of those and.
The second or third quarter.
Turning to the.
To my closing remarks.
I'd like to highlight going back to the forecast.
Well, we withdraw and guidance, it's still my strong belief as CEO that we have a lower had a baseline of the lower end of 27 cents with a pass through the growth for 2020.
Got to get to the lower end of that and we'll see what what the virus brings us but.
I think I've been very.
Very comforted by the rebound in our businesses.
Both through in both service said that and Tri Ed.
We have we have high quality products and services I think the note I want to make two on that is that we're not a restaurant we're not an airline we're not a hotel none of our businesses lost its deferred and I think the reflection of that as it as you saw the rebound in April of businesses.
We have resilient and recurring businesses with strong growth opportunities.
And you see that evidence whether its manufactured housing or HVAC or roofing, we think we're well positioned we have robust liquidity.
And I believe our private Super Prime assets have performed exceptionally well through a stress period I wish we hadn't gone through this stress test, but we have and I'm very happy with the credit quality their portfolio.
And obviously our dividend is maintained.
Theres no question about our Devin.
With that operator and perhaps.
Two questions.
Thank you.
I'll now take questions from telephone lines.
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[noise]. The first question is from Jeffs question of RBC capital markets. Please go ahead.
Hi, good evening.
My first question was on surface finance. So if we looked at the 2019 revenues like roughly how much of that in revenues driven out of necessity.
Breaking down and needing to be replaced versus revenues that and.
Discretionary.
I cannot.
Division.
Yeah, So Jeff the I would say I'll get to the precise number but approximately 70% of.
Services businesses items like H. back roofing foundation hair, electrical and plumbing all of that was deemed essential we did see.
We did see other areas like windows and doors contract, but but.
Important, though that windows and doors has come back in the last three to four weeks.
So its overall the of the the numbers speak for themselves.
Yeah, there's been some deferred but obviously and people not wanting there.
There are kitchens or their bathrooms remodel, but the growth in the other areas as more than made up for it we've had some significant.
Competitive dislocation I don't want to go into individual competitors, but some competitors are not with us today.
And Thats helped us with with our growth.
Just to remind you Jeff last year, we had about 24% of our.
Originations in the solar areas. We've we've noted obviously, what's what's gone on solar what's going on solar, but but what what the heck with added growth we have.
And all those other areas so.
Just keep that in mind.
Okay, and then on Kessler.
Just trying to make sure I understand this right in terms of on managed assets.
See a decline in consumer spending.
That would presumably also be a bit about headwinds on kessel just revenue base is that correct yeah.
Well balances, yes, you would because we get based as you know Jeff on the annuity of stuff, we get paid basis points on the gross balances not with respect to credit losses, but we haven't seen that we've seen balances.
Slightly up.
And time will tell you know I can't I haven't got a crystal ball, but we haven't seen that contraction again, our revenue was based upon gross outstanding not with respect to credit losses.
Okay. Just my last question is staying on Kessler the credit card M&A you were talking about coming into global financial crisis, just just in general like in that type environment.
What did the reasons that what drives increased kinda M&A is it companies that are seeking to extract more economics from their financial services.
Dinner hour to kind of bottom line or.
What would be to kind of the key factors.
Jeff I, just think when you go into periods. The stress like you have during the financial crisis or when credit losses Spike as you go into recessions or are things you have.
Owners of these assets that rethink their strategy and as part of that rethinking the strategy typically what happens when you see portfolios moving around might have a total rethinking the strategy and exit the business or you might just be thinking about moving this portfolio that portfolio. When you have period, the stress that typically will create the opportunity.
Before that.
Rethinking strategy and that's what we've seen pretty consistently over the years.
And those cars just those conversations have begun.
Okay, great. Thank you.
[noise] Jeff.
The next question is from Tom Mackinnon SDN No capital. Please go ahead.
Thanks, very much good afternoon, just a couple of questions maybe Steve just starting with.
Comment about a line of sight.
Sense.
And that 27 cents baseline or maybe just what.
You talked about a broad range of outcome.
When you decided to take weight guidance I'm just wondering.
What is involved.
In a baseline assumption of 27.
36.
How long.
The likelihood of second wave.
And just a little bit of color that went into each one of those statements.
So tell me, obviously I haven't got up I mean got to view of how long the shutdown occurs.
We have been insulated.
As I mentioned earlier, our customers our suburban rural model.
So we are you seeing the smart recovery.
Both triad and service finance I can't predict it was going to be a second wave Tom.
So hence my caution on cast here I think we'll know that.
During the second quarter, but if you look to read the recovery Thats you've seen in may because I couldn't I can get back to my origination numbers for 2019.
Add about recovery continues and the competitive.
The competitors are gone away then I think we we have an opportunity to go to grow our share.
But I can't predict Tom.
I have a view of a personal view about.
The second wave I think we'll handle it but we'll wait and see.
And Tom we went through all exercise internally, obviously, we will work with each of the businesses come up with forecast under various different scenarios and I think.
[noise] feel pretty comfortable.
We did a real thorough job there and really kind of understand what the puts and takes could be here for this year. So I think when Steve is fairly confident when you said.
When you talk about.
Okay and with respect to service Finance I think the comments were based on results in a on April in early May.
In terms of originations you sit here on line second quarter 19, it does that mean, a I assume that means.
The second quarter.
Third quarter to date 29.
In terms of origination simmered according to the base.
2020.
Hi, Thanks.
I think what I said, Tom is on page 11.
That applications and approval were up 30%, 35% year over year.
Views the use the approval number.
If it gets.
Fundings right. So I think you can assume that fundings for that period. They take some time right. If I have approving a roofing job today it won't turned into an origination or funding for 30, or 45 days, but that 35% year over year increase on applications and approvals give you just gives you the competence you're hearing in my voice, we expect to originations.
It's it's a talk.
The top end of the funnel Paul.
And what we what we did say was that in April even in April where we where we where we saw whatever the adversity that we saw we still had 3% growth year over year in originations it serves finance.
Month to date in May look looks roughly similar these rigs like Steve said these originations these applications come in and there's a bit of a delayed between the application and approval and then the actual origination because we don't fund it till the jobs complete satisfaction of the cost.
That's helpful.
And then the <unk>.
I sort of finance.
I wanted just the services that you do there are deemed essential I thought it was somewhere near at 55% 70 is that all of that's Oh no Tommy.
I had mentioned earlier enough in a tape the interview.
But we were approximately 55% to 6% the park has come back in the last three or four weeks has been the windows and doors business. That's that's now up those those businesses are 70% and are extremely strong I think what you're seeing is that's super prime and prime credit for staying home.
And they're not spending money on vacations are not spending money on bidders out their spending money on improving their homes and you're seeing that elsewhere in the home improvement sector.
And our contractors have found workarounds to how to deal on a safe basis, and social distancing you know we're doing the consultations in the backyard and we've learned how to be they've learned how to perform the services on a safe basis.
A lot of learnings.
Yes.
Well, there's nothing to suggest that the business that.
That's right now would be.
Deemed non essential.
Correct.
Well thanks.
Okay.
[noise], yes.
The next question is from Jeff Sonic ask Cormark Securities. Please go ahead.
Hi, good morning, everyone or good afternoon, everyone.
You mentioned.
Yeah, the deferment levels at triad, and and a SFC can you just speak too.
What are the economics look like in terms of the impact on those two businesses.
So these are as you know Jeff. Good question. We these are the banks portfolio, we've already been paid for originating at we get paid to service that are servicing contracts allow for a little more revenue. We spent more time on it in the us differ a little different account of these are actual deferments.
I call them arrears, they get stuck on the under the contract.
And to collect them then.
We get paid on you've got a small lengthening of the contracts. So you can probably expect service revenue would be up a bit.
Let me get paid a little more for the work on it but right now to be to be clear.
While you're allowed to do is to call the consumer and asks how they're doing.
And whether they are employed and things like that you cannot aggressively pursue.
Collection activity.
However, we haven't seen a degradation in arrears so.
Feel very good to have you could talk to our.
Funding partners, who buy these assets, they're very happy with the call to these portfolios versus.
Other portfolios and you'll see that in the net additions and Tri Ed to new new buyers coming on board.
And I was thinking in terms of the added fee revenue you might pick up and that extension of the left the life of the cut that back at the book.
Fair.
Fair enough, Jeff we haven't had chance to model through that we're kind of dealing with his life.
There's probably an opportunity there we just have that chance to.
In our mind to it yet you are making sure those portfolios are safe and sound for our bank investors and credit investors.
Is the first the first priority.
And I guess, maybe you can speak a little too the conversations you're having with those partners today and how are they feeling about the new and now are they are they signaling anything to you in terms of their you know their appetite or you know that their view on pricing et cetera.
Well on pricing, you're given by Prime and Super Prime credit in the U.S. has not kept up.
And our competitors whether it be.
Non bank or more as well sort of synchrony have increased pricing so the pricing as the pricing.
Obviously these yields are attractive compared to other other investments there buyers together.
I think the performance speaks for itself, Jeff with the they're happy with the quality of.
These assets.
Right.
And maybe.
[music].
Well go ahead, sorry, John.
In terms of the complementary blow program in what you're holding on your balance sheet. There I think that's principally one funding partner you're working with so is there anything any change in the status of that a that program Oh, its two or three buyers who buy those paper there, though by the paper. This know what they're not sitting at their desk at the other end Jeff.
So we made sure the underwriting requirements are having change we made sure. We did a review of both the performance of the bank portfolio assets and these in their exact they're up right on top of each other as you'd expect there is no. There's no we're not taking lower rated credits or changing or underwriting standards.
And now the people in the last today was a busy day because people have come back to their desk and are now picking up their pens again.
So I am.
Comfortable confident we'll sell these assets.
And I did note the the added spend on corporate development. This quarter and then certainly seems like we're in a period, where there's going to be some dislocations how are you thinking about.
Being positioned to offered me the opportunistic here.
I think everything that we had Q1 we killed.
I'm just walked away from any conversations which was the appropriately prudent thing to do.
We'll watch both of our businesses.
All three of them are able to onboard.
Existing customers really existing challenges you seem to growth in dealers from.
Hum.
From from service, you've seen growth and triad.
I think we've had some I don't think we've had significant competitors leave vocals businesses and our focus has to be go after those dealers and we can do that without spending any money.
Okay, great. Thanks, I'll re queue.
The next question is from Vincent Caintic of Stephens. Please go ahead.
Thanks. Good afternoon. First question is if you could talk about the conversations you're having with the customers are your your dealerships that the different.
Segments. So.
For service finance, how how are the conversations and whether they asking for from the dealers and manufacturers same thing for try it and when you talk to your retail on bank partners on the Kessler side or any.
Help or specific discussions that are that are going on there just trying to get a sense. So.
Maybe what sort of.
Opportunities or yes topics are.
Yeah, well as we as you know Vincent than in the period a recovery.
Sales finance plays a disproportionate role in getting back revenue.
And we're in the conversations with our major manufacturers and dealer networks about promotional programs that will secure that revenues. So those conversations are underway with with those partners what are the promotions, we're going to add.
In the summer and in the fall to get consumers come back and I would say that consumers have come back based upon the numbers we have.
Front of us.
We continue to.
Manufacture sport and triad, they're offering you know 90 days don't pay good first pay with an idea thats all back by the manufacturing up by US. So those programs have been launched.
So a series of programs and by Downs have been launched others are in conversation. This is a notice of the chance for.
Sales finance has always been sort of 30% the revenue pie if you look at credit cards and cash.
And the recovery and I haven't got my numbers in front of B, but it tends to grow to 40, 50% of the pie. So we're going aggressively pursue that however, we're not going to pursue it at the expense of credit quality and maintain our underwriting standards. So we're not.
Providing lesser credit quality into our portfolios.
Okay great.
It was great to see that April and May growth was pretty strong and it seems like from the charts.
On the deck that.
And on April 15th I'm wondering how much of.
The the growth, it's maybe given by.
Yes government stimulus to U.S. consumers and it would it be a good number do you expect that 35% than 25% growth, you're seeing and service finance.
Tri Ed is that something that we should we should be expecting going forward.
Yeah, I don't move the vast vast majority of our customers would not qualify for U.S. bins.
But the Super Prime and prime nature unemployment in the other income levels I think what you see convinced that is just that the return to work that we found a way to to offer our services in a safe basis and again people are sitting home one improve their whole maybe John you want to add to that as having a lot of places in the country really started the clear and mid late April.
Not that everything was cleared it wasn't like your necessarily going out the restaurants or anything like that the people weren't getting back to work.
In addition to that I think you're talking about primers from prime customers. They probably had plans to do other things that they're probably not going to do right now, which is vacations or whatever it isn't they've they've come back and it decided to do some of the work.
Around the house that that they're looking at so for for various reasons I mean in the first week or so we saw in both companies I mean that was when you were deep into the Lockdowns renew and people are trying to figure it out I think as as that loosened up a little bit in different areas of the country, you really started to see a rebound.
Okay. That's helpful. Yes, that's great that sounds like you are over earning for the seamless that's that's great.
The last one I appreciate your your confidence that the baseline SBS expectations, even though you've pulled guidance. So I guess when I'm thinking about.
What's the worst.
I guess sort of worst case scenario Bear Creek are you can think of it because it seems like it's just that may be origination still down because it's because its deferred and that comes back later or are there other risks that we should just be.
Thinking about.
I think I think it's the latter Vincent that you could have it could be later to recover.
No I will see what happens in this quote unquote second wave but.
Even during the first wave in the heart of it we were flat we were flat to 19 in the depth of this right. We were renewing bank commitments in the depth of us.
So I think it's one of timing.
I know, it's one of timing that if you're if you're in if you're in Arizona and your air Conditioner breaks and the heats on in Arizona right now, it's going to be fixed.
If you've got to leaky roof, it's going to be done right. If you sold your home and waiting for delivery of your manufactured home, it's going to be delivered subject to that loosening up so.
And it's the risk is what I'm timing.
Okay.
Very much.
Yes.
The next question is from Mario Mendonca of TD Securities. Please go ahead.
And then just quickly on the home improvement and manufactured housing the expense lines lugs sort of like there.
Relative to that the reasonably strong revenue was there anything specific on the expense side, particularly in home improvement that would have driving expenses lower.
I'm, sorry, it's Michael and no nothing nothing noteworthy in the quarter trial.
Expenses lower than just.
I think each of those platforms have.
Yes, very good strong operating leverage so as we grow the topline that those margins.
Increase let's just we can dig into America I suspect that there has been almost no travel by the field force that we have almost 90 people to field labor working from home.
So they haven't been traveling Herman entertaining clients, we've had efficiencies.
On that front, we did do it wouldn't be in March and April we did views a little bit of reduction of headcount at the various operating units without cutting into the bus lending when we reduced by the way we put them on health benefits.
With the right to recall bumps, but that would be in April issue, but I expect most of it has been in travel entertainment those businesses.
Okay.
Going dealer advances in both home improvement in manufactured housing.
Well, what your argument before while we may not be will not see I think that was your your point that we well will not see any major issues with.
The quality of those loans inflections, what what arguments would you make Steve to suggest that those are high quality low.
So, let's let's deal with dealer advance I hold improve floor planning a tri Ed Thats, the similar things so the home and the floor planet Tri Ed we have secured registered interest on each one of the homes and we have a repurchase obligation by the manufacturer. So ill just as the chief credit officer as scrubbing the the.
The repurchase counterparty and we're comfortable with that we had two homes in total the totaled $100000, where the floor, where the dealer gotten troubled and the manufacture repurchased the homes.
So we scrubbed dollar collateral our secured interest and our repurchase obligations.
In any one new coming onto the.
Floorplan book in new customer gets a double scrubber.
On their onboarding.
You did see to your point, we saw modest increase in floor planning most of that relates to homes that have been manufactured sitting at the manufacturing facility, where we have a proof the customer we have sold the loan through to a credit union or waiting for someone to deliver that to a lot.
If I turn the dealer advance at the counter at the same asset at service finance.
Dealer advances that service finances, where we have a registered Rick we have an obligation from the dealer.
We've seen no degradation of the quality of that we monitor very closely we watch the aging on it.
We havent seen any where can we went through an account by account review on it where we are we've obviously capped.
Dealer advance limits by by individual dealers now because we've seen a change their quality, but we just want to be prudent on the management.
So I feel good after eldest and his teams work that we're not going to see.
A material, we're not going out to see an impairment or credit loss in those two books.
I think I can see how the dealer advances in floor planning would be secured I didnt honestly I didn't know that they were.
Secured by the home I can't see how anything in home improvement to be secure is that fair.
So, let's just use a lot of example, so if we're putting.
If we put out an air conditioner into your home right.
The it's all been it's all been completed except the thermostat hasn't been delivered.
Rick is registered and its effective right.
Until that thermostat has delivered we can't sell through to a bank, but the job is complete and you as a consumer of side off from the Rick as enforceable.
Okay. The Rick as you know is a registry records are registered lean on the home.
But it's not a leaner, which you can accelerate but as they use SEC filing and its filed at that point. So we filed our U.S cc and we're waiting for that thermostat to come in or.
Whatever it is as you know we don't we don't sell through a single loan to a bank until the consumer is 100% happy.
Yes. Thank you.
Sorry.
The next question is from Paul Holden of CBC. Please go ahead.
Hi, Thank you.
So first off a those weekly statute.
Our.
Thank you for that.
Turning to slide 12, particularly on on service finance and.
When I make sure I understand the chart a bottom eight.
The title on as percentage of loans, making payments.
How do I I do I understand that.
For 3.9%.
Stocks there.
Hey, Bob.
That that chart, it's actually interesting that's a chart that that banks and other credit lenders look at quite a bit but that's telling you as you're not seeing any really different behavior. Among your consumers in your loan portfolio year over year, well Thats showing you as a percentage of you PB or unpaid balances, which reflects the growth right. So it's actually apples to apples year over year.
You're seeing a basically at the same amount of payments coming through right. So it's not like you're witnessing there are materially different payment pattern from what you what you would've seen in any given month or at least year over year. So it is important understand so not only do we have actually a situation where 30 you were delinquency.
In all buckets has actually fallen for service finance throughout the year actually each month.
Deferment request, they spiked up a bit they came back down we're actually actually we're actually not even seeing any difference in payment patterns at service Finance I think Paul just a little bit color on John's is.
Before you get in arrears, you see a reduction in the payment activity.
We all these payments come through locked boxes in the us that's where this data is extracted day by day, we're not seeing a reduction in the payment activity, which ties into the low level over years. It was just it was a if it was a forward indicator over and above the rears number.
Got it helpful. Thank you.
So next question then is going back to the service finance held for trading so.
In the slide you say you anticipate sales tourism as counter parties come back online like.
I'm not exactly clear why they went off line given the payment performance and let's say your core flow a product maybe you can expand a little bit on that.
Those those parties went off line.
Well I mean.
Pause as you as you know.
At the beginning of March or Middle of March a lot of people were sent home or.
Warranties and are worried about other things I mean these portfolios we're dealing with the same banks the tip, sometimes if we're dealing with different teams inside those banks people, who buy buy these portfolios et cetera, we had a sale teed up for the end of March.
It just got it just got delayed and so now what we're seeing is people coming back to work you know they probably had some other issues they had to deal with us as what's going on they weren't necessarily buying assets. They were worried about other things and their portfolios for a couple of weeks now they're coming back to Reengage I, we're starting to talk again, and we think will start resuming the sales process here over the next couple.
And Paul if I go just had one other thing I think a lot of them as well given the dislocation in the market. We're chasing a lot of other opportunities are created as there is not to that in American back.
So my impression that is let's call that getting your core flow business.
As we've learned the past is more automated it sounds like this held for trading business et cetera. So there is less automated does that sound I'm here.
That's a 100% correct, although they get sold them blocks of 25 10 to 25 and the people buying these blocks aren't the automated core flow business at someone on the whole loan sales basket APC Bank, who did take three or four weeks often does want to come back and we had two today.
On these conversations the purpose of person is literally come back. It's one person's on like a derivative are trading desk at a big bank.
I understand.
[noise] deviation sales you put through in a quarter that 19 million. It does not like there's any loss on sale at least from what I can tell is that correct. There were sold in line with.
Last reported a carrying value.
Correct.
Okay. That's ALGICELL ill, just there was saying yes.
[noise] and then last question I had there is there's a slide and there were you mentioned you've done some head count reduction and some employees have been for load.
But then you know again when I won't.
When we highlight the fact that the flow is coming back and quite strongly and it may I'm, a little bit surprised to see that so.
Are you bring that head count by copper have you found new efficiencies in the business that require less people.
Yeah, no. It's it they were far lower than in April.
As as Weve.
And not everyone was furloughed. Some people are moved over to the service out of the business. Obviously in April the origination level wasn't historically step up for high level. So there were some furloughed some of those people are now returning to work.
Okay. So we should expect ASCII roughly be where would it being back in February March.
Correct.
Okay.
That's all for me thank you.
Fall.
The next question is from Jamie line as National Bank Financial. Please go ahead.
Yeah. Thanks first question in service Finance, just thinking about the April decline in originations given that lag between application and approvals of 30 to 45 days.
Most of that would have been applied for and approved back prior to any Kobe dislocation. So were there some deals or.
Transactions that might be cancelled in April as well that drag that number down to be flat year over year as opposed to still up from.
Grieco bid.
ER volumes.
The duration of the book is changed materially Jimmy because now we're into HVAC is a big part of the book and HVAC isn't weeks or two cents a couple of days.
And their condition or can be a day a furnace if it's cold anywhere its local north can be two or three days of the duration is quite short so you don't have.
And because solar has come down you don't have that long duration between what is an approval under funding.
Okay. So the approvals that we're seeing pickup in April and May should translate to Q2 originations correct.
Okay.
The hundred 50 million dollar cap one dealer advances is is that new.
And then.
The follow on is.
Why that I thought.
The idea of Harbin line of credit and that flexibility was.
Use the balance sheet in these times the stress.
The cap is an internal mechanism to its a point of which ill just looks a capital allocation to run the business right. We don't we will review the cap and make the case to the internal credit Committee, we want to go past that.
It's a stop and pause basis about where we're at.
No that's normal course.
So it's it's not new it's been in place and surface Finance was acquired in this is just the correct on that we're kind of talking about it I guess.
Correct.
Okay on a on triad.
And thinking about that that 1% delinquency rate granted it's it's trending into right direction now.
But can you can you refresh me and just remind me how the.
Hello Reserve account works with triad, and what level of delinquency or or loss would be required.
Yes for a bank to recapture some of that reserve account that you would have earned in the income.
Well.
The reserve the reserve account is set up by the bank are paid for by the bank upon the sale of the asset right. So we sell the alone to the bank we book.
Our piece of income the transaction fee and the balance of it. It then set up as a reserve under no circumstances, we have any recourse to ever have to put any more capital into.
Into the.
Sure. So the way it works typically is.
Over the life of alone that reserve is set up to protect the bank against prepayments and losses and.
For years recovered against that against that reserve.
The primary use of that is against prepayment because there's very little losses and tied to try that.
Losses, if they picked up they would have to pick up.
Very very materially before you do something like run through that reserve, but to the extent that you did remember it's not we would not be on the hope for any of that it would if it goes to the bank.
Yeah, I guess I write my question is more around that you're generating a return often that reserve account assuming certain loss.
Net loss experience and I was hoping you could just.
Refresh us on what that loss experience would be is that.
Anything above zero percent losses, they can recapture from that reserve accounts or is there a threshold yeah. I mean, the the reserve itself is used for any losses, there any prepayments, yes. It's if there was there any losses or any prepayments, so, but obviously theres an a built in assumption in terms of what the loss rates are and we've always.
Operated well below those loss rate assumptions.
So even in the middle of the financial crisis mentioned, the financial crisis loss peaked at around 115 basis points.
So.
And that's losses, what we're referring to in the slide deck with delinquencies.
Okay, and a and just one more on that how much of the reserve accounts would drive revenue.
In a quarter or on an annual basis. For example, just so I can.
And the size and what the importance of that reserve account as to our revenues.
It's about 10% to 15% of origination revenue.
Okay. That's great. Thank you.
Just moving to the at the end so on the finance receivables I guess have you are able to share any delinquency experience post a post quarter end in April and May had bought.
Evolved any differently than what's been reported for the quarter.
Well I think I think we.
We went through and share with you the deferments the credit quality is the same in April and.
You don't do you don't do rears mid mid month, but it's exactly the same with the end of March we've seen no degradation.
Okay, Great and question for Michael on the on the cash flow hedge loss. This quarter can you just walk me through.
The mechanics, there and then I noticed a large increase in derivative liability is just.
Wondering what kind of transactions are going on there and just.
<unk>.
Sure we've had.
Two hedges in place for a while one related to.
Our senior line, which is a floating rate liability. So we've got a.
A hedge on that and obviously as rates came down that's moved into a liability position.
Similarly, we hedge our.
The stock price movement on a share based compensation and the decrease in share price.
Late March obviously, we've got into a loss position from an asset position that year end.
Okay. Thanks that makes sense.
And two more here from me first on that on corporate expenses are the guide is now for 4 million, but yeah, I mean under the assumption that things start to normalize here pretty soon.
Should we expect that to trend back up to that to the 5 million range in the second half of the year, assuming things normalize.
Well it depends how long the virus.
The Kobin continuously we have you have a commitment for the salary reductions as long as that virus in place.
We'll look at when the virus and so the period of crisis ends, but going back to regular salary levels, but this for we're in a lighter interest with shareholders or not.
So it did this run rate is I would see it being at least the next two quarters.
Hey, Jim why don't I follow up you with the for the rest of your your questions. We've got we still have a couple of people MCU and only a couple of minutes left.
[noise]. Thank you.
Excellent.
The next question is for Invensense can take on Stevens. Please go ahead.
Hey, Thanks for the follow up sorry, just a quick one.
This is the the economics of the business change with market conditions are they contractual. So for example, and I think about service finance gain on sale is that is that said or does that fluctuate. Thank you.
That's all the yield to the consumer has not changed I mentioned earlier.
So it hasn't changed.
Okay, great. Thank you.
Yes.
The next question is from Tom Mackinnon of BMO capital.
Go ahead.
Yeah. Thanks for taking into my follow up here just on the salary reductions from executives what was essentially behind that Ken when were they will these be put in place.
And are these are we can expect and how long would these reductions sort of hold in place as well. Thanks.
So it was it was my program to Tom So I, let it and I think it's important that we align ourselves with the interest or shareholder it's been it's been a lot of pain here.
And I think that that's important that management a line itself and the board came on side in terms of how long. It's it's for the period a crisis until we see recovering our business.
Our share prices depressed and.
No I buy fuel to pay him personally in large shareholder venture loans feels a pain. So was it was it was our method of aligning lending or interest for shareholders.
And it was put in place or in the first quarter or was it.
Started ones are just now.
Started starting the second quarter now.
I can remember the payroll I can remember the payroll, Dave, but I, certainly see that might take home pay.
Yes.
[noise] [noise]. The next question is from Mario Mendonca of TD Securities. Please go ahead.
I appreciate the the next question is probably not this is not the most appropriate time to be thinking about this I want your your overall general Big picture you.
And what the the the ROI, we have your business, but youve accumulated but you put together here.
What do you really believe the long term hourly potential this businesses and I I know this isn't the right time to ask it because everything deal so different.
I'm asking the question because I wonder if you think that there's this pandemic has eroded the long term.
Earnings power of the company in anyway.
Yeah no that's.
That's a question I asked myself a lot there and I look at the the franchise value. If you will then I'll get back and precise already but I look at.
What our yields are originated at and what we're selling paper through because that really is the model.
And the volumes second part, but I haven't seen degradation on either side.
I think the qualities assets is of interest if you look to people who are wanting to come into our programs now merrell in terms of funders, you're seeing institutional investors pop up in more credit unions of size not to assure you guys see regional banks in the short term with us pop it.
They have their own set of issues, but the product as demand I think as long as performs the credit side you won't see degradation of yields were not seeing yields the customer we're not seeing degradation to the investor.
Hi, I do think it's not the kinda talk about it merial, but I think there is a significant opportunity to capture share here.
We've seen major competitors by the go away or substantially reduced operations and you got to do you have to grow in the context of available capital by your loans that in the context.
Prudent credit underwriting.
I think that marks business with the right partners could be a three or $4 billion year business next year, you're going to say it sounds crazy.
And the probably the sounds crazy on this call.
But I think thats the opportunity.
And the long term our away the business.
Well I haven't even though we're not going to be capital intensive you looked remarks business in terms of invested capital of 310 million then you've got to put some equity against the on balance sheet asset so call. It 350 merial.
I think marks business is capable of producing 102 120 million the run rate basis, when we get through those.
Today, obviously.
And Tri Ed we paid 110 million forward, if you take it add equity you on balance sheet asset so call. It 125.
I think triad as a line of sight to being 40 million to here on these are a pretax numbers ma'am.
And could cause for the same so I think.
We put our head down we can do execute we keep focusing their credit call. It makes sure bank partners are getting the performance, we expect and I think we'll be in good shape.
Thank you.
Yes.
There are no questions registered at this time. This concludes today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
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Okay.
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