Q3 2020 GreenSky Inc Earnings Call
Good morning, and welcome to Green Skies third quarter 2020 financial results Conference call.
As a reminder, this event is straining lie on the Green Sky Investor Relations Web site and a replay will be available on the same site approximately two hours. After the completion of the call we will.
We'll begin with opening remarks and introductions.
At this time I would like to turn the call over to Tom Morabito, Vice President of Investor Relations Mr. Morabito you may begin.
Thank you Stephanie and good morning, everyone. Thank you all for joining us after the close of market trading hours yesterday Greensky issued a press release announcing results for its third quarter ended September Thirtyth 2020, you can access this press release on the Investor Relations section of the Green CGI website at <unk>.
Vision, we have posted our third quarter earnings presentation, which we will refer to during todays call.
Today, you will hear prepared remarks from David that look our chairman and Chief Executive Officer, Gary Benjamin Our Vice Chairman and Chief administrative officer, and Andrew King, Our executive Vice President and Chief Financial Officer.
Before we begin let me remind you that our presentation and discussions will include forward looking statements. These statements that are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those projected.
We will disclaim any obligation to update any forward looking statements, except as required by law.
Information about these risks and uncertainties is included in our press release issued yesterday as well as in our filings with regulators.
We also will be discussing non-GAAP financial measures on today's call. These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing greens guys performance.
These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation material. The press release dated November nine 2020, and on the Investor Relations page of our website.
Lastly, I wanted to mention that we will be hosting a virtual investor day on January 12, 2021, where members of the Greens guys Senior management team, who will be presenting key elements of the company strategy.
Logistical details will be sent out in early December.
At this time I'd like to turn the call over to Dave.
Thanks, Tom Good morning, everyone and thank you for joining us.
It's good to be with you today to review our third quarter 2020 results. Let me begin by welcoming two new Green Sky executives.
Tom Thanks for kicking off today's call. We're excited for you to join the team and looking forward to your contributions going forward.
I'm also pleased to welcome Andrew Kang, our new Chief Financial Officer, as you know Andrew joins Greenstein with over 20 years of financial services experience and I know he'll do a great job and that you will enjoy getting to know Andrew.
I also want to take this opportunity to thank Rob part low for his service to Green Sky for the past six years and for his ongoing leadership.
Green Dot had a very productive third quarter for multiple new IP product innovations to software releases enhancing our mobile user experience to successfully executing on initiatives to diversify and fortify our funding all while continuing to deliver strong results. Despite the challenges and headwinds of this year.
Turning to slide five our third quarter operating results and key business metrics reflect strong resiliency of demand in our core home improvement business.
We're also excited about the prospects of our elective healthcare business after the shutdowns with which occurred earlier this year.
In addition, as announced a few weeks ago, we have completed more than two and a half a billion dollars in funding in the third quarter, which we will touch on more in a moment.
Our transaction volume for the quarter was over $1.5 billion down 10% from approximately $1.6 billion in the third quarter of 2019.
Importantly, we continue to make solid progress within the year with Q3 volume up 9% sequentially compared to the second quarter of 2020.
This quarter continue to reflect headwinds related to our elective healthcare business, which was dramatically and negatively impacted as a result of demand to date mandated so the 19 shutdowns early this year.
We feel optimistic that our patient solutions transaction volume will begin to regain momentum as elective healthcare procedures nationally continue to restore.
Our transaction fee rate for the quarter was 7.3% up 40 basis points when compared to the third quarter of 2019, reflecting continued demand for certain loan products offered by our merchants and consumer preference for promotional financing.
We are happy to report that our overall servicing portfolio grew 9% year over year to $9.5 billion.
As we continue to generate new transaction volume, our servicing portfolio continues to grow and provide attractive recurring fee revenue that contributes to greens guys overall profitability.
Total revenue for the quarter was $142 million or 7% lower than Q2 of the prior year. However, when adjusting for the $16.4 million of servicing accent recognized in 2019 comparable third quarter revenue was 4% higher than the prior year. This was driven by stronger transaction fee rates.
Coupled with the higher servicing fee revenue due to the growth of our servicing portfolio and higher average servicing fees.
Green Sky reported a strong third quarter adjusted EBITDA of $38.7 million up 17% from the third quarter of 2019.
Similarly, adjusted EBITDA margin was 27% up from 22% last year.
These improvements were driven by stronger incentive payments in the quarter and reflects the continued strong credit performance of the portfolio.
The recurring revenue nature of Greens, guys technology business model, coupled with our industry leading.
Customer acquisition costs combined to continue to deliver highly attractive adjusted EBITDA margins.
In a few minutes Jerry will walk you through our key operating metrics, our key addressable markets and trends impacting our business and then Andrew will provide a detailed review of the quarter's operating results.
Turning to slide six I want to quickly update you on three key topics the ongoing impacts related to code and 19, the diversification of our funding model and an early look at our fourth quarter and full year 2021 expectations.
First as we continue to navigate COVID-19, we are committed to helping our consumers merchants bank partners and teammates navigate this challenging environment and to continue to focus on the safety of all our green Sky associates and their families.
We continue to benefit from our investments in our Green Sky technology infrastructure and I continue to be gratified by the innovation of our talented workforce.
As a result substantially all of our workforce continues to work remotely, while providing world class loan servicing and customer service levels to our bank partners merchants and Green Sky program consumer borrowers.
Next funding diversification we.
We announced last month, the completion of $875 million in funding initiatives, including the sale of approximately $775 million in loan participations in September and October.
As you know we've been planning these asset sales for some time and despite the extreme market volatility witnessed earlier this year I'm proud of our team for successfully completing these transactions and demonstrating the follow through on diversifying our funding model.
We also announced last month that Green Sky entered into a new long term bank partner relationship our largest in the last two years the $600 million per year commitment over the next three years will support the growth of our elected to health care business and as we develop this new relationship. We hope to include new products over time. These.
The addition of this new bank partner demonstrates the continued attractiveness of our bank waterfall model as a cornerstone of Greens guys established funding ecosystem and we continue to advance discussions both our existing and new perspective Bank partners to help strengthen our overall funding.
Turning now to an early look at our fourth quarter 2020, and full year 2021.
For the upcoming fourth quarter take into effect, both the ongoing economic impacts from coda 19, and our normal seasonality patterns, we expect to see transaction volume in the fourth quarter to contribute approximately one quarter of our full year 2020 volume of $5.4 billion.
Our technology teams are making tremendous progress on our deep new product roadmap delivering continued innovations for both our merchants and consumers were seeing strong momentum in new high quality additions to our existing robust merchant network in both home improvement and elective healthcare.
And our disciplined underwriting and the strong credit performance of the Green Sky loan portfolios will continue to drive our long term profitability through.
Through these and other ongoing initiatives absent any unexpected coated related setbacks, we anticipate the green Sky will deliver mid teen transaction volume growth in 2021.
After the impact of the pandemic and as the associated macroeconomic effects normalize in 2021, we anticipate adjusted EBITDA margins to trend towards 25% on a sustainable basis ill.
Ill now turn it over to Gerry.
Thank you David and good morning.
Greenspan is known enabled $26 billion of transactions for approximately 3.6 million consumers with the size of our loan servicing portfolio now approximating 9.5 billion.
With consumer spending considerably more time in their homes, our core home improvement vertical has continued to demonstrate strong resilience with as David mentioned transaction volumes, largely holding steady throughout the third quarter and improving in September when compared to August.
We continue to believe that the strong homeowner credit buyers present in our loan servicing portfolio represents an important differentiator when compressing the Greensboro program with most other consumer loan portfolios. We are very pleased with Greens guys third quarter credit performance, continuing the consistently improving trends that weve now witnessed over the past five core.
Orders.
As we discussed with you on our first and second quarter earnings call, 100% of the Greens card Bank funding partners agreed in mid March to offer voluntary payment deferrals for any Green Star program borrower requesting COVID-19 assistance.
Less than 1% of the balances of the Companys total servicing portfolio. We're in payment deferrals in response to pull the 19 assistance request of the under the third quarter, reflecting a significant improvement from approximately 4% at the end of June.
It was relatively low rate of payment deferrals compared with other consumer loan programs out in the market. We remain cautiously optimistic with respect to the ultimate performance of our relatively small COVID-19 hardship deferral portfolio.
Turning to slide eight of the presentation.
Our dollar credit weighted average FICO score of consumers that origination was 74 and the credit quality the consumer Super Prime loan servicing portfolio remains exceptional at the end of the quarter, 87% of borrowers had an origination weighted average FICO in excess of 739% have stores.
In excess of 780.
30 day, plus delinquencies observed at the end of third quarter were a mere 1.04%.
Compared to 1.29% at the end of the third quarter of 2019, reflecting a 25 basis point improvement compared to a year ago.
Turning to slide nine.
The PR on our new originations continued to increase quarter over quarter as our deferred interest rate promotional financing products continue to outperform.
As a result, the overall build a PR third quarter portfolio originations increased 30 basis points to 30.3%.
In conjunction with higher portfolio yields. The recent demand has also continued to keep transaction fee rates elevated for the third quarter up 7.3% although.
Although we continue to benefit from demand generated by consumer behavior, which we believe is partially a result of uncertainty of the pandemic. We expect the transaction fee rates will normalize to our historic trend of approximately 7% overtime.
On slide 10 as of September Thirtyth, we had a robust network of approximately 16000 merchants on Greens guys patented technology platform.
As mentioned on last quarters call over the past year, we have continued to focus on merchant quality.
While we plan to not only at high quality merchants. We also expect to generate increased broke duty for merchants that have been part of Lincoln ecosystem for many years, we will proactively partner with each of these merchants to successfully grow their businesses.
With COVID-19 persisting the partnerships, we cultivate with our merchants have never been more important.
In order for our merchants to better adapt to their customers financing needs of the current economic environment, we create our merchants and developed a whole suite of new promotional loan product offerings responsive to merchant input received these product innovations continue to be exceptionally well received.
Let me provide a little more color on our home improvement and patient solutions business.
We continue to compete within vast markets the domestic home improvement market exceeding 400 billion per year. Moreover, todays aging housing stock currently 39 years old on average bodes extremely well for the long term home improvement spending trends our.
Our home improvement business overall continued to see strong resiliency during the quarter notwithstanding some of the merchants reporting select COVID-19 related supply chain disruptions impacting total cycle time for job completions within their businesses.
While we believe Greens got to be the market leader in home improvement finance, we continue and enhance our product offerings as larger merchants and meet all our customer satisfaction credit and productivity targets and invest in advancing the effectiveness of our risk management processes.
And advances in medical technologies, and the aging use population will continue to drive attractive annual elective healthcare market growth.
Although we believe our patient solutions business to already be a top three player as of the end of 2019 are elective healthcare business had a challenging quarter as the impact of COVID-19 continued to significantly impact the number of elective procedures performed and as a result related transaction volumes. However, as David mentioned we are.
Expect to see material growth in this business and our latest strategic Bank Alliance is already serving as a significant catalyst.
I'd like to briefly touch on slide 11, which shows the effectiveness of our sales and marketing expenses as a percentage of revenue, which continues to outperform peers and highlights the efficiency, a leveraging green size deep merchant network and the loyalty of our merchants and their enthusiasm for our technology platform.
We believe greenslet is extremely well positioned to capture additional market share as economic conditions restore and normalized.
The quality of both our servicing portfolio and of the load facilitated for our funding partners remains exceptional with that I'll turn it over to Anders we could take you through the details of our third quarter 2020 financial performance Andrew Thank.
Thank you Gerry and David for the kind welcome and good morning, everyone. I am very excited to be with you. All today the shared Greens guys third quarter financial results.
Turning to slide 12, Greens, guys reported third quarter total revenue was $142 million or 7% lower year over year while.
While transit while transaction fee revenue was down 5% as a result of the lower volume in the quarter. We benefited from the 40 basis point increase in the transaction fee rate in Q3.
Servicing revenue for the quarter was $27 million, but if we adjust for the non cash changes in servicing assets, including the $16 million in Q3 2019 servicing revenue for the third quarter 2020, with 16% higher yield year over year.
This was driven by a higher servicing fee rate of approximately 1.19% in Q3 and by the larger average service portfolio balance.
Cost of revenue was $92 million for the quarter, reflecting an increase of $27 million year over year. This.
This change was due to four primary factors first.
Operating costs were higher for the quarter as you would expect due to the growth in the service portfolio.
And the costs associated with our loan participations sold as well as held for sale as of September Thirtyth were also higher.
However, these costs were offset by lower quarterly origination costs and strong incentive payment performance with true, which drove a sharp decline in the fair value change in the Fcr liability I will go into more detail on the components of cost of revenue shortly.
The financial guarantee expense for the quarter or the noncash impact of Cecil provided and improved by $1.4 million due to the improvement in our COVID-19 assistance portfolio that we described earlier.
Our operating profit on a GAAP basis of $9 million was most significantly impacted by the timing of the accounting recognition related to assets held for sale.
When you adjust for non cash items, our adjusted EBITDA grew 17% and EBITDA margin increased by 23%.
This was a result of stable operating costs positive credit performance and strong bank waterfall margins.
Turning to slide 13.
Total revenue for the first nine months of the year was $397 million and was in line with 2019 the average.
Average transaction fee rate for the year through the first nine months was 7.12% or 28 basis points higher than the same period last year.
As Gerry mentioned earlier, we have had strong demand for promotional products with attractive transaction fees in our home improvement business this year and.
And we continue to work with our product teams and our merchants to find additional ways to optimize transaction fees for these desirable financing solutions.
Servicing fees has contributed 22% of total revenues for the year with the average servicing fee rate, having increased to 1.25% from 1.15% for the nine months ended.
As a reminder, after adjusting for the noncash servicing asset booked in Q3 2019 servicing revenue was up 33% for the third for the first nine months of the year.
Turning to slide 14, I would like to dive deeper into the cost of revenue, which has been and continues to be an important component of green size profitability.
As I mentioned earlier, the total cost of revenue for the third quarter was $92 million let.
Let me go into a little bit more detail on how that cost breaks down.
First looking at the cost of revenue table on the left actual dollar origination expenses lower for the quarter driven in part by lower volume, but also benefiting from ongoing operational efficiencies.
Servicing related expenses increased year over year and it is important to note that as a percentage of the average service portfolio. These expenses have remained flat.
This highlights our continued operational cost discipline, while managing through the pandemic and it demonstrates the agile and highly scalable nature of our operations and highlights the effectiveness of our investments in technology.
Moving down the table over the last several quarters, we have highlighted the improving trends within the fair value change in the Fcr liability.
And specifically the improving trends attributed to stronger incentive payments this quarter was no different and reflecting this positive trend.
The Fcr the fair value change in the SCR liability was $21 million for the quarter down 51% from $43 million a year ago.
Shifting to the table on the right side of the slide I wanted to break down the components of the fair value change in the Fcr liability.
A strong improvement year over year was driven by significantly higher incentive payments received from our bank waterfall, which increased to $58 million, representing a 68% increase from a year ago. This.
This increase again reflects on most significant drivers of our profit the profitability for the quarter and can be attributed to the strong demand of our promotional products, our strong credit performance and the low interest rate environment.
The total fcr liability, which as you know as a liability on our balance sheet for future finance charge reversals was $187 million for the quarter and the SCR expense was $84 million is important to note that both the quarterly expense in the total ending SCR balance, we're both very stable year over year.
The complete the reconciliation of the total cost of revenue. We should also discuss the costs associated with the loan participation sales as part of our diversified funding model.
Back on the table to the left of the slide loan and loan participation sales costs were $31.8 million in the quarter, which reflect the realized the discounts on loan participation sold in the quarter as well as the discount on loan receivables held for sale on our balance sheet at the end of the quarter.
Gross cost of revenue, including these loan participation sales costs was $74 million or 3.1% as a percentage of the average service portfolio.
Taking into account this impact the gross cost of revenue is flat to the comparable cost from a year ago.
As we previously announced the asset sales completed in September and October were executed at approximately 95% of principal balance.
The three point at $31.8 million cost this quarter in combination with a 10.8 million dollar cost in Q2 2020 approximate that related cost of the sales and the assets held for sale remaining on our balance sheet.
New for this quarter, we also recognized a non cash mark to market on future loan participation purchase commitments not on green sky balance sheet at quarter end.
This is different in nature from the Mark to market recognition for loans, either sold or on green side of balance sheet at the end of the quarter.
As a result, the $18 million noncash item was an adjustment on our third quarter EBITDA.
The Mark to market represents the fair value of our agreement to facilitate loan sales for a bank partner, which was recorded based on a mark on September Thirtyth.
We adjust for this noncash item because was ultimately realize and recognize will depend on the structure and pricing for the future transactions at that time.
Turning to slide 15.
At the end of Q3, we increased our bank waterfall commitments with our existing partners to $8.3 billion of which approximately $1.5 billion of commitments were unused at the end of the quarter.
We also expect another $2.1 billion in revolving capacity to become available in the next 12 months to the pay down of existing balances.
Since the end of June three of our existing bank partners have renewed $3.7 billion in commitments.
In an existing partner expanded their commitment by an incremental $100 million.
The overall commitments significant available capacity and our renewing partners clearly demonstrate the ongoing strength of our bank amendments and reflect the strong demand in the current market.
You touched on this earlier and I want to mention that the new 600 million dollar per year up to $1.8 billion in total commitment over an initial three year term with.
Facilitating our elective healthcare business. This new funding capacity will be instrumental in supporting the growth of that vertical.
As part of our diversified funding strategy, we completed the first of a series of expected asset sales, which create incremental capacity for future transaction volume growth.
Together with our very strong bank waterfall commitments, we have ample funding for growth, while protecting our lifetime margins.
Furthermore, we are encouraged by the heightened interest and demand from bank and non bank investors for our products.
Before I conclude I want to highlight that as part of our Investor Day, We plan to provide additional details on how to dimension the mix of our funding in the coming year as well as the associated costs.
Thank you for the opportunity to discuss the quarter's financial results and for your interest in Green Sky.
Operator, this completes our prepared remarks, we are now ready to take questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that scholar one we'll pause for a moment to pentalver today roster.
Your first question comes from the line of Michael Young with Trulicity security.
Good morning.
Good morning.
Thanks for taking the question.
Wanted to start maybe just higher level on on the credit performance piece of.
It looks like you guys are maybe tighten the FICO box a little bit over the last couple of quarters and.
Credit performance has been really strong do you think that going into 2021, you made kind of loosen the standards back a little bit or mean revert and that may be supportive of that kind of mid teens transaction growth we expect.
Great question. So let me, let me start by saying that the credit performance, we're reporting now.
Is not is not really impacted by.
Any changes to our credit standards over the last six months.
Obviously, it takes longer than that to to show performance.
We certainly were very mindful about the unknowns of April.
But we do expect to have a more normal environment.
We hope over.
Over the coming months and quarters than sort of what we've seen last year.
And do you see anything thus far that would make you think that the outlook for credit performance would change and I think thats been a big driver of kind of the prudent fcr liability et cetera.
I think a lot of banks are expecting more kind of fallout potentially if there is.
Early next year. So just curious if you have any outlook on that.
We are cautiously optimistic left before covered we were experiencing our best credit performance, which was really driven by.
Our analytics.
Optimization not by changing approval rates. This pre coded. So there there are certainly headwinds of the unknown of what happens next and the economy and Theres another shutdown if there's a.
A lack of benefits and support for people who have been impacted but we've also got a lot of tailwinds as it relates to credit performance and that the optimization that we benefited from really for the last year included now so we're cautiously optimistic.
Hi, This is Andrew the one thing I'd add to just for context as you.
It's more point in time comment, but if you reflect on the delinquency performance for the quarter. It was down year over year and that does include the population of loans that have come out of Covance deferral. So we are seeing people come out of payment assistance and remain current on their their balances. So I think it's more of a push.
In time comment, but I think that's also a good reflection.
Okay, and if I could just sneak in one last one just on the Fourq you are I guess, the full year 2020 guidance on transaction volumes I guess that implies.
Clearly lower rating of transaction volumes in the fourth quarter is there some.
Is that just seasonal softness maybe or is that just comes in cases kind of creeping back up in expecting some lower amount of economic activity. Just anything you can provide there would be helpful. Yes. The first thing is.
Remember healthcare wise.
How long ago over 10% of our business and it's now.
As of a couple of months ago gone down too much closer to zero percent of our business.
So thats the biggest contributing factor to the headwind in overall growth.
Now that's a doctor's offices are reopened and ER.
And we're hoping for more stable.
Economic environment and.
The need for for.
Elective procedures.
Is obviously still there so we expect that to be.
A tailwind rather than a headwind.
Going into next year, but.
Certainly were between seasonality the distractions of what's going on and it's.
It's going to take us some number of months to rebuild healthcare.
That that's a reflection of those elements.
Yes, it's probably worth, noting we expect the fourth quarter volumes.
Breast is sort of a piece of the whole year to be very consistent with 2019, the same percentage of the years productivity.
In Q4.
We know in the home improvement business few consumers one contractors in their home between Thanksgiving Christmas and new years, we cant believe with the advent of coated.
Workers will be more embraced in people's homes, so similar seasonality to prior year.
Okay. Thanks.
Hi.
Your next question comes from the line of Steven Walsh with Morgan Stanley.
Hey, good morning, and and welcome Andrew.
Maybe picking up we're just sort of talking about the seasonal guidance and the transaction volumes being lower seems like the healthcare piece. This year not sort of banking on that rebounding anytime soon particularly with the potential for a second wave disruptions, but that would the forward flow agreement that something we should be thinking other the 21 year then.
As things normalize or people go back to the Doctor's office and consider elective procedures, but as far as the home improvement piece I heard you Gerry pointing out like you know probably not an incremental probably less demand for having people in the home.
But it seems almost like and correct me if I'm getting this wrong that third quarter had maybe a little bit and add in terms of activity as people started coming out of their houses.
And maybe if they were to go back in that there would be some kind of offset to the seasonal weakness I'm kind of curious how you're thinking about the push and pull a PDP will potentially spending more time at home, but obviously wanting to limit exposure, if they're trying to see loved ones around the holidays, how should we think about the ramp maybe from Fourq you back into the summer months.
2021, because the mid teens volume that you're talking about for growth implies that things don't pick up perhaps until well into next year.
Well, we're certainly going to be conservative number one.
Number two.
It will take time to rebuild health care, we continue to believe that overtime healthcare will be as large if not larger than our recruitment business.
As why the announcement of that strategic.
Strategic funding was very exciting for us.
As it relates to home improvement.
What we've seen is tremendous demand there's lots of noise in the market. There are supply chain challenges. There are companies that they are having trouble with labor.
Hi.
For for US Q4, and Q1 tend to be.
Slowest of the year.
So there is a ramp, but which certainly being careful as we think about how long it will take to ramp up health care and how long it will take for the us supply to catch up to demand and an improvement.
Understood and maybe switching to some of the other pieces of the of the sort of forward look I'm sorry for the adjusted EBITDA as you're coming through the the pandemic as being more sustainable at 25% and I think we had previously understood that to be sort of in the 25 till upwards of low thirtys I'm kind of curious like what shift.
Good.
Perhaps as you've looked at you know shifting the model towards a more balanced between the waterfall and originate to sell model how that shifted your thinking about the economics of the business and sort of what gets you to that 25% versus prior.
By our comments.
Yeah, So I think something that that's important.
As our expectation going forward.
Certainly is that from what we've seen there is incredible demand on the bank side.
We've seen that accelerate.
That's certainly very encouraging for us you've.
You've seen a bunch of renewals you've seen expansion you've seen even a new $1.8 billion relationship.
We also are very interested in having diversification and we believe that the.
Two types of funding.
Go hand in hand.
One time to add complexities of SCR. The other time has a very different kind of timing, but the way. We look at it is that our expectation going forward is that the net present value of the present value of the economics for green sky or the moral equivalent.
So.
From our perspective.
Ample funding an abundance of funding is very important and having great economics is.
Tied for first Andrew.
Thanks, David I think just tagging on.
When we think of you.
Twentys.
EBITDA margins I think we are taking into account.
You know addition.
Additional uncertainty as to how the you know the macroeconomic plays out and we're taking into account.
Some of the growth trends that were anticipating.
I would say that in.
In a more sustainable long term manner, we are still pointing to.
A high Twentys, 30% EBITDA margin target, but I think our our forward view for 2021 would be.
In a transition to that and taking into account some of the uncertainties that we're still waiting to play out.
Appreciate all that if I could just squeeze in a quick follow up here. It seems like you guys were talking about at your base case assumption at a high level is almost things do get a little bit worse before they get better I just want to make sure I'm understanding of what the essential underlying assumptions are so we can sort of measure them against us as conditions develop is that generally how you're thinking or is.
It's sort of base case, among some of the others that we've seen this in the space talking about a gradual recovery from here is there are we hearing that right.
I wouldn't say that they're there it's going to get worse before it gets better I think we've alluded to the fact that we think Q4 will be consistent from a.
Percentage of the year basis as last year, and so then there will be seasonality impact specific to that I think from there I think the trend continues to build on the momentum we've seen as we continue to come out of endemic and as a different operational pieces of the company continue to stabilize and normalize.
Whether that left at health care or that supply.
Supply chain.
For home improvement, but I wouldn't say I wouldn't characterize it necessarily as it gets worse before it gets better I'd say that we're we're trending upward from here.
I would just echo David's earlier comment historically, the second and third quarter are the highest in terms of productivity. The spring weather comes and people are starting to do work around the home outside typically the second and third quarters 26, 27% of the full year. So the seasonality that David spoke to really is more akin to what will.
See the rebound.
US, believing that things that or get worse before they get better.
Understood appreciate it surely.
Your next question comes from the line of Aaron said candidates maybe.
Thanks.
In terms of the the reduction of your underperforming merchant partners. It looks like they came down a couple of thousand versus.
Versus the prior quarter are you done with this exercise and did that have any impact on the transaction volumes for the quarter and what proportion of transactions. These merchants represent yeah.
We are we are substantially done with that and what we're really referring to our micro merchants.
And so.
It's a it's a.
That's a headline number but at the merchants that we called.
We're contributing almost no volume.
A loan gain quarter.
And we just concluded that there's too much risk and volatility.
And management required and isn't profitable so.
We're certainly interested in great merchants and great relationships by this kind of it's got to work for everybody. So.
That that had no no meaningful impact whatsoever.
Yes, I mean, it's very important in terms of.
What we're seeing in the market as we've had a string of great successes and winning new merchants taking margins from competition.
So we're very excited about the prospects for continued growth into next year.
Just to add a little context to David's comment I mentioned earlier, we're really competing in a vast market. This is a $400 billion annual domestic market. We've got 16000 merchants on the platform I think you've heard us say in the past there are about 155000 home improvement contractors that do more than $1 million or revenue domestically.
In our 16000 merchant roster, we've only got about 5500 that fall in that category.
So while we are the largest player in this marketplace, we've got tremendous growth potential to penetrate further than to David's point, we're interested in doing business with those merchants, where we can be a material vendor and we can put the resources for both to provide the merchant management and help them grow their business.
Thanks that's.
Helpful color I appreciate that the as congrats on the on the new bank financing for the elective healthcare how does that process work did you did you specifically search out of bank funding just just for elective healthcare was this something that the.
The bank partner just for whatever reason preferred to have that vertical.
As you've heard us say in the past, we maintain an ongoing pipeline a bank we're in dialogue all the time with banks.
This relationship came together, perhaps a little bit more quickly than prior relationships, but not inconsistent with our history and we continue to maintain a lengthy pipeline of interested parties. So it's a great opportunity a lot of enthusiasm and as David said, we expect this to be a catalyst and restoring or left the business on a row.
The business.
I think it's also fair to say that this particular financial institution has a unique interest in in health care. So it.
It was a very.
Very exciting strategic fit for both parties.
Okay and you are in your other bank partnerships that they are not specific to a to any and you and.
When you vertical there even across the book below fourth level.
It depends by bank partner.
As the company grew it was originally only home improvement some of our banks have have expanded into into health care. This is certainly the first one.
That started with health care.
Got it okay. Thank you.
Your next question comes from the line of John Davis with Raymond James.
Hey, good morning. This is not on for John Thanks for taking the questions.
So to start curious how volumes trended throughout the quarter I think you said flat in June so considering the Q is down 10% any commentary there or was it all just speaking it's not just health care or maybe in the October trends. You can you give us I know you mentioned September was back in August and expect come true for Q.
Yes.
So.
For profits primarily elective healthcare.
That's certainly the primary driver we definitely saw in the market some.
Allays associated with better supply chain or election noise, but for for Green status was this was really a story about.
The diminishment of our elective healthcare.
You know to David's point, it approximated 10% of originations Q4, 19, so that would have implied.
You know on an annual basis, 500, 500 $600 million a year that went to largely a negligible balances here is the shutdowns occurred nationwide. So.
So this was much a story about not having that elective healthcare vertical contributing.
Okay. Thank you and it appears that take rate year over year and was better than expected is there any change in margin behavior promotional activity and given the drop in rates have you seen more Americans, maybe shift more to interest free financing.
Great at all.
No what we've seen is historically.
Take rates, obviously it take rate is much higher this quarter than it was same quarter last year by 20 basis points less than prior quarter.
And I would caution anyone about we.
We say this would take rates are going up and we say this would take rates are going down they're typically give or take 2030 basis points around 700 basis points and they've been that way for almost all of our $26 billion of origination.
The thing that we want to remind people when take rate is at the peak of the season or trough of the year.
That our economics are neutral.
If you said to me would you further business that 8% transacting at 6% transaction see I'd say, which businesses doubling.
That's it that's what matters and the reason I say that is greens guys present value of cash flow profit.
Is neutral if it's a 6% product or 8% product.
It certainly places people who focus on gap.
But obviously, we're very focused on long term present value of cash flow.
And the answer to your question is Theres.
Theres natural seasonal volatility some merchants want a 12 month promotion some marches on an 18 month promotion.
Which categories running promotions that cost a little bit more which ones they cost a little bit last for.
For Green Sky, it's neutral.
Okay. Thanks, and then last one from me like it was going to be focused on health care going forward. It wasn't really talking about last quarter, where you had some financing and historically a second gets ranks and that's where you see from here I know the kind of the 17 year in this quarter it but now you've got 1.8 billion and.
And financing for next few years. So is there any a detailed at the mix of electronic health care over time, thanks, guys.
Well, we clearly look for the business to restore it back to 10% of originations.
The denominator effect takes place as at home improvement business grows that becomes larger obviously.
But we were there Q4 19, we will get back there in the not too distant future that would be a good objective to get back there over the next four to six quarters, if possible, but certainly there is ample market demand and enthusiasm in the sales force and in the provider network, but to move it into the teens an approximately higher when.
You bet, a home improvement business growing as rapidly as ours is that's a bit of a task. So we'll watch it grow overtime and as David said over the long haul this business should be as large if not larger.
That are home improvement business.
Okay. Thank you guys so much.
Your next question comes from the line of Vincent Caintic Stephens.
Hey, good morning, Thanks, very much for taking my questions. Just wanted to follow up again on the transaction volume and understanding that there is.
The.
Like the healthcare piece and taking that out.
Still I mean being down 20% year over year and down 19% quarter to quarter still seems like a big number just wondering if maybe we just focus on the home improvement side how.
How much.
Is the performance or is the guidance year over year and quarter to quarter and is it just the delay. So should we expect say the first quarter of 21 can make that up where we will just sort of shifted for fourth quarter to first quarter because of covered or other delays in the green jobs like it.
[noise] there were a couple assertions in there buried in the question. So let me sort of unpack that just a bit to make sure we're not talking over each other.
As David commented, we have had in elective healthcare business that basically drill to mic negligible levels.
In calendar 20, so that was on a run rate of five to 600 million of originations when you take that out of the equation and look at the home improvement on an apples and apples basis, you're not seeing anything that's remotely down 20%. So that a search that math just doesn't work happy to hop offline with you and sort of back into some none.
Birds, but.
The preface I think is off there as we look into 21 as we mentioned we have seasonality taking place fourth quarter is always our softest quarter.
It's just the nature of the consumer behavior around the holidays.
Q1 is our second than this quarter merchants take a breather they plan their year. They have their sales contacts they do their planning and then the weather breaks and things start picking up dramatically in the spring and into the summer as I mentioned, if we take the year and look it up sort of on a core four quarter by Q2 Q3.
26, 27% of annual originations happening in those two quarters.
So the seasonality is what will sort of lead into we don't expect that things are going to get worse, that's not in our baseline assumption.
We expect that supply chains will normalize we feel very very good about the demand for the home improvement products were talking to our merchants on a daily basis. David touched on also briefly merchants have been cautious and spending during the election cycle in terms of marketing and the fear that their messages have been lost media prices have really been driven up.
So you'll see those merchants come out next year and start marketing again consistent with prior periods. So we're expecting that double digit sort of mid teens kind of growth in origination that's a byproduct of the home improvement growth with restoration the elective healthcare business.
Yes, David I, just wanted to clarify.
Claire clarify or correct I think a comment that you made.
This action volume for the quarter was down.
10% not 20%.
And just remind remind everyone that.
Not long ago elective healthcare was 10% of our business. So precise we're very excited about the durability of our home improvement business as well as the momentum that we're seeing.
And where we're providing directional guidance as to how we think the overall business will continue to grow.
Isely next year.
Okay. Thank you for that just sorry, I was coming in the fourth quarter.
20 implied guidance, but that's helpful. So the the the electorate healthcare that was so 500 to 600 million and.
A quarter and so I guess that would be more like a third of your originations sorry, just trying to try to clarify it was where it was five to 600 million annual run rate annually.
Not long ago, it was over 10% of our business.
Gotcha, Okay. Thank you.
Separate question and just wanted to clarify on the.
The loan participation sales from the fair value Mark.
Mark on on that I'm, just maybe if you could go into more detail of what that is and what changes that fair value Mark over time, I know thats non cash just trying to understand that in more detail, if thats sort of like the EPS.
Fcr or they financial Guaranty, I'm, just sort of I'm just trying to understand the mechanics. Thank you.
Sure. So if you're referring to that line item mark to market on sales facilitation obligations of $18 million.
That as I described is related to a fair value assessment of an obligation we have to help facilitate loan sales for bank partners. So those are not on Greens guys balance sheet and they are not a cash item Directionally I think the way you can think about it is the Val <unk>.
Fair value Mark is consistent with.
The other side of the fence, which is I'm, calling you know the.
Recognized or realized.
Gain or loss on sales and or.
Receivables that are on the Greens guys balance sheet. So the fair value assessment is reflective of what has happened.
I would say directionally.
The we are adjusting it is a noncash item because the ultimate recognition of the facilitation obligations are sometime in the future.
And they will be dependent on the structure, which may be different and price, which may be different relative to what we recognized as part of the brain skies balance sheet. So that that's the primary differentiator between those two items.
Okay got you, but it's not like.
Like say, a guarantee or a certain level of performance guarantee.
I guarantee it is okay.
Okay understood thanks very much.
Thank you.
Your next question comes from the line of Robert Wild Pack with Autonomous research.
Good morning, guys can you give some additional details about that sales facilitation obligation why didn't seasonally instead are standing waterfall unless the dollar amount of loans, you're obligated to sell any any additional color you could provide there would be helpful.
Sure.
Hi, Rob this is it's not necessarily a bit type assessment. These are lower.
Loans facility originated by bank partner held on their balance sheet and as part of our agreement with them. We have an obligation to sell those loans after a certain period of time and so we're reflecting that fair.
Fair value Mark as part of that obligation.
But it is not representative of.
What is what is available are eligible for the SPV in fact, some of those loans could go into the SPP into the future some of those loans could be transacted in an alternate way. It's simply a arrangement we have with one of our bank partners to help facilitate originations and ultimately sell them.
As a solution for that funding.
Okay.
Jumping interrupted as David mentioned.
The Super regional banks are flush with cash we're seeing escalating demand for our portfolio.
We're getting calls on a daily basis from existing and perspective Bank partners looking for assets.
So in the case of the loans held for sale on the balance sheet to the Andrew just referenced.
That's not our balance sheet right now the banks balance sheet, if those move to a bank that would work with us less servicing alone on a waterfall basis for instance, the mark that were taking would be restored.
So to Andrews point, we don't know what the ultimate outcome is of that trade there could be no mark required. This is a conservative estimate is what it is.
Okay got it and then just on the on the funding more broadly.
No.
You may have a little bit is there an ideal mix that you're targeting between waterfall and whole loan sales.
Andrew why don't you touch on the fair absolutely and then we'll obviously talk a little bit more about this in January but I think really the idea here is.
We're not establishing the the sales as at some strict percentage or concentration of funding I think the whole point of diversification was to optimize as Jerry mentioned, we are seeing a significant amount of demand across our cable channels of funding so not all.
From Bank partners.
But also in the securitization market or through other sales to institutional investors, we will use all those opportunities to best optimize.
I would say that.
Just directionally and it's probably something like 20%.
At least from my might see today that would be expected to.
She sold but I would I would caution that because I think it could be higher or lower base.
Based on other attractive funding and that we'll see that materialize.
Okay, that's really helpful and I guess, if I could ask one quick one Jerry you mentioned that the $18 million Mark This quarter was a conservative estimate at night.
I appreciate that is there.
Possibility that that could ultimately get worse when you realize the sale.
If money markets, where the perversely move.
Just given where we've been in the normalization, that's taking place as people sort of begun to understood understand and absorb coded.
That wouldn't be a likely trend as I sit here today.
Okay. Thank you heading on all things being equal we expect that execution to improve overtime as we as we do more of those transactions, we get a recognition in the market.
Again, all things being equal that should improve.
Thank you for doing everything that Weve sold heretofore has been with servicing retained.
So we continue to enjoy that the income stream both sale.
That's really helpful. Thanks, guys.
Your next question comes from the line of Chris Donat with Piper somewhere.
Hi, Good morning. Good morning, Thanks for taking my question I wanted to ask one around the.
The home improvement categories on your slide number 10, and they've been trying to dig too deep into this but.
Relative to the second quarter looks like you saw improvement in windows and doors and weaker on H. bass.
Just wondering if there's anything notable there it didn't sound like the merchant.
Like you discontinued merchants were a factor, but we've got a bunch of cross currents like whether the pandemic. The stimulus package I'm, just wondering anything you'd call out as far as better demand.
For window originations, they maybe a little weaker on H. back.
Yes, so part of it no definitely.
Very specific supply chain challenges, particularly offer intact.
And there were earlier supply chain challenges for windows that seems to have restored. So I think there's lots of moving parts, but what we're seeing is.
Sort of a general view from from the purchase that Weve interviewed they expect.
Okay.
As a new locked down they expect sort of their supply chains that by Christmas.
And we're certainly seeing a lot of his statement yeah numerous items, but I think in terms in terms of what you're referencing Chris just a lot of noise satisfaction in the market.
Whether its supply chain or labor or election, but.
So there's nothing that nothing really too.
Either merchant attrition or merchant termination that we see we are seeing.
Continued strong at large.
Large strategic merger.
Okay, and then just while I'm asking on that just to double check like nothing related to the stimulus package that happened more in there yeah.
You know more in the second quarter timeframe that impacted and the reason im asking that if you're going to get another stimulus package. If we would expect any.
Any notable impact on your business and it doesn't seem like there was much of wine that fair to say.
That is correct in fact, I would say that the stimulus you know if you think about in our home improvement business.
As our average five to 770, averaging $125000 average stepping up 20 something percent 23%.
Generally these are not the borrower is there going to be add.
Motivated by sentiment now there was a slice of that population and certainly it's going to appreciate getting an extra $600 a week, what we see is that had more impact on payment.
It does on demand five origination hearing tax system is broken you need to do we expect system.
Certainly windows doors is more of a.
Want and indeed, we have not seen a a. has close correlation on demand.
Acted too.
Benefits or payments from the government as we have more of an acceleration on pain.
Got it okay. Thanks very much David.
Chris Good talking to you again into law.
Yeah.
Your next question comes from the line of bills lying in the Compass point.
My question has been answered thank you.
Thank you Bill.
Your next question comes from the line of Reggie Smith with JP Morgan.
Hey, good morning, guys. Thanks for squeezing me in.
Quick question and maybe this is too detailed we can take it offline, but I was curious.
One of the things that I've been struggling some model is that fcr expenses I get that the.
The liability is somewhat dictated by.
The size of the portfolio I know that ratio was kind of come down in.
In the last couple of quarters, but how should we think about that STR expenses.
Over the next few quarters.
I had a follow up question on the.
On the I.
I guess, the the gain or loss on sale piece.
Well, we can come back to that did you see I guess first question, yes. Your expenses, how should we think about that.
That ratio has bounced around quite a bit of that couple of quarters.
Hi, Thank you for the question. So it has bounced around for the past few quarters I think directionally, we would expect it to remain pretty stable.
Going forward, keeping in mind and taxes seasonality.
As well, but we can certainly take that offline.
When we when we catch up and we can try and dive a little deeper into that 40.
I want to highlight for you one of the benefits of the asset sales that Andrew highlighted although there was a discount realized we shed the fcr with respect to those assets.
Each of the portfolio that went bye-bye there is no fcr going forward, so well, Andrew suggesting the TNL trend looks stable going forward, which I would concur with we would expect based on the mix of how were funding our business to mimic the fcr side, if we have more funding coming from capital markets and less from auto book.
So for instance, there'd be less MCR liability to establish.
Sure got that on slick.
I guess just drilling in that $32 million.
I think you guys said that that include I guess expected discounts on loans that are held there having been sold yet is that correct and if so.
Should we expect that number to decline maybe <unk> is it almost a pull forward there or is it maybe to like a good portfolio kind of go forward. It is a pull forward that you would expect that to to come down.
Well. So the 32 includes loans that has not been sold so it's a it's a mark to market on on receivables held on our balance sheet.
That will be sold in the future so got it.
Correct.
But that really for the 500 or so million it shows up as held.
Got it.
So it's a combination of debt that balance you just.
Mentioned as well as what was actually sold in the quarter was actually so correct.
Got it I got it.
Okay.
That makes sense I mean.
I was I was going to ask you guys kind of have been touched on it but I was hoping to get.
Within the home improvement space, if there were any.
Any pockets of strength to call it looks like looks like windows and doors were relative bright spot, but maybe if you could talk about some of the weaker areas that if we could maybe I understand you.
Where things could kind of snap back next.
Next year and that kind of makes sense.
Hey, Reggie great great too.
Catch up.
You know actually look we saw a lot of.
Volatility over the last couple of months.
In windows and doors and age that.
Certainly the larger projects.
We are more complicated and add more moving parts.
That what we're really seeing is a great deal of demand.
And from everything we can see the leading indicators are very encouraging across the board.
Understood.
Okay cool. Thank you for squeezing me in and we will catch up.
Afterwards, because you guys. Thank you.
Thank you.
There are no further questions in queue I will now turn the conference back over to Mr., David say like E. Oh for closing remarks.
Thank you. Thank you everyone for your questions. Our consolidated third quarter 2020 results were highlighted by continued durability of our home improvement business renewed optimism for patient solutions and strong adjusted EBITDA growth of 17% as.
As mentioned in my initial remarks, our ongoing focus on product innovation merchant productivity and credit quality, along with our recently expanded and strong sources of funding positions us very well for future success. Thank.
Thank you again for joining us today, they stay healthy and safe and we look forward to speaking with you in January on our virtual Investor day.
Thank you.
Thank you for participating and Green Sky third quarter 2020, <unk> financial results Conference call you may now disconnect.
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