Q1 2021 GreenSky Inc Earnings Call
Good morning, and welcome to Green Sky is the first quarter 2021 financial results conference call.
Minder. This event is being streamed live on the screen Green Sky Investor Relations website.
And a replay will be available on the sales by approximately two hours. After the completion of the call. We will begin with opening remarks and introductions.
At this time I would like to turn the conference over to Brinker Daily of Investor Relations. Mr. Dailey, you may begin.
Thank you and good morning, everybody. Thank you all for joining US yesterday, the Green Sky issued a press release announcing a result of its first quarter 2021 ended March 31, 2021, you can access the press release on the Investor Relations section of the Green Sky website.
In addition, we have posted our first quarter 2021 earnings presentation.
Which will be referred to during today's call. Today, you will hear prepared remarks from David's Alec our chairman and Chief Executive Officer, and Andrew King Our executive Vice.
Vice President and Chief Finance Officer.
We all start joined by Chairman Benjamin.
Our chief our Vice Chairman and Chief administrative officer.
Before before we begin let me remind you that our presentation and discussions will include forward looking statements.
These are 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 disclaim any obligation to update any forward looking statement, except as required by law.
Information about these risks of the uncertainties is included in a press release issued yesterday as well as in our filings with the 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 most of.
Our GAAP results and we encourage you to consider all measures when analyzing green Sky's performance.
These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials. The press release dated May four 2021, and our Investor Relations page of our website at this time I will turn the call over to David.
Thank you breaker.
Good morning, everyone and thank you for joining us it's good to be with you today to review our first quarter 2021 results the.
The first quarter was another solid quarter for Green Sky and a very strong start to the year.
We have built on the momentum generated at the end of last year and a witnessing outstanding application volume growth across our markets that we believe will further propel our business in 2021.
Green Sky posted a company record first quarter, adjusted EBITDA of $35 million with a higher adjusted EBITDA margin of 28%.
Our outstanding year over year of profitability was in the face of still ongoing merchant supply chain difficulties related to the continued impacts of the pandemic.
First quarter of pro forma net income adjusting for nonrecurring fees exceeded 2021st quarter results by $24 million.
A driver of the company's strong performance was the outstanding performance of our service portfolio for the quarter of the 30, plus day delinquency rate, which is a leading indicator of credit performance was seven 6%.
<unk>, a strong improvement compared to the previous quarter ended the first quarter of 2020.
The strong credit performance has positive implications on our cost of revenue and other areas of impact our profitability, which Andrew will discuss in more detail shortly.
Andrew will also go into more detail on a funding efforts in a moment, but I would highlight the during the first 120 days of the year, we completed over $2 3 billion in new funding initiatives across a diverse set of sources, which included a new forward flow agreement additional loan sales and the increased commitment of a longstanding.
The bank partner.
The rapid success of diversifying our funding model has been a strength for green Sky and I'm thrilled with the progress we've made since we announced the strategy last year the.
These efforts and successes have directly resulted in a lower cost of funds in Q1 and will allow us to continue optimizing our cost of revenue to further increase profitability going forward.
Turning now to the results transaction volume for the quarter was $1 $3 billion, which puts us solidly on pace to meet our transaction volume guidance for the year taking into account the typical seasonality of originations.
From February to March total company transaction volume increased 28% month over month, showing strong momentum as a result of the investments we've made a new and existing merchant relationships. This compares favorably to growth in the same period in 2020, a 5% and in 2019.
<unk> of 21%.
Our servicing portfolio ended the quarter at $9 3 billion similar to what we and others are seeing in the broader consumer market.
Our servicing portfolio experienced higher prepayment rates compared to historical levels, while a higher prepayment rates can result in slightly lower servicing fee revenue, we benefit from lower bank waterfall costs, the same bank margin and lower future credit losses simply.
Simply put earlier prepayments boost lifetime loan profitability for the majority of our portfolio.
Despite these recent market trends, we expect our transaction volumes will outpace the prepayments in future quarters, resulting in strong and sustainable servicing portfolio of growth.
Turning to credit quality of the performance and composition of our servicing portfolio remained exceptional during the first quarter we.
We believe that many consumers are choosing to use of increased disposable income and stimulus checks to pay off their debt, which benefits the credit performance of our servicing portfolio.
The 30, plus day delinquency rate equaled just 76% of our overall servicing portfolio at the end of March an improvement of 47 basis points from a year ago, an improvement of 23 basis points from the end of 2020 day.
Delinquency rates continued to outperform due to the high credit quality of our program borrowers who have demonstrated resiliency. Despite last year's unprecedented challenges importantly, while some consumers are repaying their loans more rapidly transaction volume is originating at a faster pace as we continue to see strong demand and home improvement.
In fact March approvals represented the single largest month of approved credit lines in company history.
Next as we've done in the past I'd like to provide an update of the status of the COVID-19 disaster assistance program.
The Green Sky Club program borrowers are continuing to exit payment deferral at a faster rate than those requesting new enrollments and at the end of March approximately 0.2% of loans were $20 million of our servicing portfolio where in deferral status.
Of the loans that had previously received a deferral of approximately <unk>, 4% were greater than 30 days delinquent at the end of the quarter. While we are cautiously optimistic that we will continue to see improving trends. Our total exposure to borrowers that were impacted by the pandemic has declined substantially since the end of 2020.
Turning to slide six of the presentation. After a strong first quarter results, we are seeing real tailwind for the remainder of the year and our home improvement and elective health care businesses as a broader macroeconomic trends continue to improve.
We believe that improved consumer balance sheets and more time at home translates into continued and accelerating demand for home improvement projects.
In elective healthcare as states begin reopening in the final months of 2020, we've seen an upward trend in our patient solutions volume.
And as we sit here today of the majority of states are once again fully open for business and we see medical providers expanding both of their office staff and hours to work through patient backlog.
We anticipate increasing transaction volume within our elective healthcare business as the year progresses.
Our merchants are the key to our transaction volume so, let's turn to some updates on that front.
As previously mentioned, we recently renewed our partnership with the home depot and have further built on that success solidifying our market leading position in the home improvement space. During the quarter. We also expanded the strategic relationship with one of our largest sponsors and enhanced our agreement with one of our top III windows and doors merchants, whereby we expect to see a.
A material increase in their annual transaction volume in the coming year.
Other key wins in the Windows and doors space include a $20 million annual transaction volume of merchant and two regional 15 million annual transaction volume merchant wins from our competitors.
In addition to the great progress in Windows and doors. We also won a $30 million a year of transaction volume HVAC merchant from a competitor increasing green Sky's market share in the HVAC category, our second largest segment.
Coming off of the turbulent 2020, these wins strengthen our position as the leader in the largest consumer finance platform and home improvement as we optimize our relationships with existing merchants and win share with new partners.
In our elective healthcare business, our transaction volume as a percentage of our total company volume increased in the first quarter as we continued to build momentum. We shared previously that we completed the strategic alliance with clear Blue smiles, a cutting edge orthodontic provider and also a significantly expanded our relationship with the nation's largest provider of dental.
Implants for.
Furthermore, we successfully completed the integration work and launched a universal credit application within our elective health care business as a reminder of the Universal credit application, which was rolled out within our home improvement business. In 2019 is a tool that increases merchants approval rates without a degradation of green Sky is a credit quality through our partnership.
With a second look lenders and fosters a better consumer experience through a streamlined application process.
Just on these key wins and those in the pipeline I'm excited that we are not only taking market share. We were also growing volumes with our existing merchant relationships as illustrated on slide seven we have a demonstrated track record of helping our merchants grow transaction volumes on our platform for multiple years and believe that the recent wins with existing a new merge.
<unk> will further build on that success.
I'll now turn it over to Andrew to discuss our quarters financial highlights.
Thank you David and good morning, turning to slide eight of the presentation. So far of 2021 has continued to demonstrate a consistent progress and executing against our diversified funding strategy, which is today benefiting from both a more efficient loan sales and also from enhanced the relationships with our existing banks.
Funding partners.
We believe this quarter has demonstrated a disciplined execution on both fronts.
In March we announced the completion of a $1 billion forward flow sale agreement with a leading life insurance company, who is new to green Sky. The ecosystem in April we further expanded debt agreement by increasing its commitment by an additional $500 million for a total of $1 5 billion.
Subsequent to quarter end, a bank partner that has been part of Green Sky as a platform for multiple years increased its commitment by an additional $500 million increase.
The increasing their total revolving bank waterfall commitment to $2 billion.
That bank partner also extended its agreement for an additional two years into the fourth quarter of 2023.
Also in the first quarter, we completed approximately $315 million and planned loan sales at improved pricing as compared to the fourth quarter exceed.
Excluding a small number of zero percent loans the loans sold in the first quarter of were at or above par.
And since our inaugural loan sales in the third quarter of 2020, we have completed over $1 $5 billion in sales.
At this point Green Sky has a wide variety of funding options in place with a combination of strong bank waterfall commitments.
Forward flow agreement and a strong institutional investor demand for incremental loan purchases.
With these options, we now have the tools to further optimize our profitability across our loan products, which you'll see directly reflected in our updated 2021 guidance at all that I will provide additional details around shortly.
Let me give you some additional details around our funding commitments our bank waterfall commitments were approximately $9 $7 billion in total at the end of March prior to the $500 million Bank partner increase.
Approximately $1 $9 billion of commitments were unused at quarter end, and we expect an additional $2 $4 billion revolver.
The revolving capacity to become available in the next 12 months as consumers pay down their loans, providing ample funding for a planned future transaction volume.
With a combination of our expected waterfall capacity and the $1 5 billion forward flow agreement in place as well as institutional demand for our loans, we have the opportunity opportunity to be highly selective around the future incremental funding with a focus on further optimizing our overall costs.
As David noted earlier, a green Sky funding is the most diverse and a robust it has ever been in the history of the company and a strong demand for assets from both banks and institutional investors is now reflected in our improved sales costs.
Turning to the details around the first quarter financials on slide nine.
David mentioned earlier, the first quarter produced net income of $12 1 million compared to a net loss of a $10 $9 million in the first quarter of 2020.
Let me walk you through the key drivers of these of these results.
Starting with revenues total revenues for the quarter was $125 million up 3% year over year true.
Transaction fee revenue for the quarter was approximately $86 million driven by a transaction fee rate of 661% a six basis point improvement from the same quarter in 2020.
It is important to note that when excluding certain sponsor rebates that regularly occur in the first quarter of each year, our normalized transaction fee rate for the quarter was $6 eight 9%.
During the quarter, we also observed a product mix of originations more inline with the pre pandemic levels, reflecting higher APR and lower transaction fee rate.
And the guidance provided last quarter, we had anticipated this return to pre 2020, a transaction fee rates over the course of this year, but instead experienced a faster normalization within the first quarter.
As a result, we have updated our expectations to reflect the transaction fee rate for the remainder of the year will be more in line with pre pandemic levels of approximately six 8%.
It is important to note again as we have highlighted in the past a lower transaction fee rate is correlated to a higher loan portfolio, APR, which benefits incentive payment performance said another way, we continue to maximize our lifetime profitability of our transaction volume across all of our products take.
<unk> into account, both take rate as well as a collateral yields of the loans originated on a platform.
For the quarter total servicing revenue was 30, $34 $7 million compared to $31 $3 million and a 11% increase year over year.
Servicing fee revenue of $27 $5 million was $2 million lower due to a lower servicing the fee rate in the quarter of $1, one 8% compared to a 127% in the same quarter last year.
This change is attributable to a shift in volume among funding sources and from holding loan participations in a warehouse facility in 2021.
Our servicing asset fair value impact on revenue increased by $5 4 million to $7 $1 million in Q1. This.
This increase was primarily driven by the 23 basis points decrease in delinquency rate that we mentioned earlier.
And the improved performance forecast of our service for servicing portfolio.
Effectively our servicing spread has widened as a cost of service performing loans is far less than for nonperforming loans.
Operating expenses exclusive of nonrecurring professional fees was flat for the quarter when compared to last year, and our sales and marketing costs expressed as a percentage of revenue continued to decline to a interesting industry leading 4%.
Turning to the cost of revenue on slide 11, and our investor presentation overall.
The overall cost of revenue improved 11% compared to a year ago from $72 million to $64 million.
Want to remind everyone that green sky as a cost of revenue can be simplified into key into two key parts for.
First our costs related to originating and servicing or what I call operational cost of revenue and second our cost of funding, which includes a bank waterfall costs and our loan sales costs.
Beginning with the operational cost of revenue as a percentage of transaction volume origination related expenses decreased seven basis points year over year, continuing to benefit from our investment in green Sky as a technology platform or.
Our servicing related expense as a percentage of the average servicing portfolio was flat year over year as we have successfully overcome the higher level of costs associated with supporting a consumers during the COVID-19 pandemic.
Second our funding costs, which are made up of made up of two distinct components for our traditional bank waterfall cost accounted for approximately 85% of our servicing portfolio in Q1 of this year.
Compared to a 100% of our funding costs in the first quarter of 2020.
The second component of our loan sale cost is made up of the second components or a loan sale cost is made up of mark to market on loan participations, we hold on our balance sheet and mark to market obligations of loans held for sale with one of our bank partners.
Based on loans already sold are currently in a warehouse. These represented about 15% of our servicing portfolio in 'twenty in Q1 2021 as.
As we move through 2021, and we plan to provide additional granularity on the details behind the breakdown of both of these funding sources.
Overall, our cost of funds this past quarter was $7 million or 14% lower compared to the same quarter.
The last year, you will note that a year ago, we did not have any loan sale costs in the first quarter, having established a warehouse facility in Q2 of 2020 and completing our first loan sale in Q3 of that same here.
Our lower overall funding cost this quarter reflect both the strong performance from a bank waterfalls and the improved pricing of our loan sales in which we recognized approximately $8 6 million in mark to market on future sales facilitation of obligations combined.
Combined our overall cost of funding improved significantly compared to a year ago. When we launched a diversified funding platform. We believe loan sale costs would improve over time and this past quarter's results clearly demonstrate the successful outcome and not only maintaining but improving unit economics under a new funding model.
Bank waterfall cost as a percentage of the average bank portfolio improved approximately 100 basis points when compared to the first quarter of 2020.
Finance charge reversal of expense was approximately $26 million lower and our incentive payments benefited from those higher prepayments and lower charge offs.
On slide 11, the financial guarantee expense for the first quarter represented a $3 $9 million benefit which was attributable to the decrease in the delinquency rate and improved credit forecast through.
Through the remainder of the year, we anticipate the higher transaction volumes offset by stronger credit performance will keep the financial guarantee expense of relatively flat quarter over quarter.
As a reminder of the manner by which we are specifically impacted by the adoption of seasonal whereby the escrow that we put aside on behalf of our bank partners makes up nearly all of the financial guarantee expense.
Our ongoing bank partners have historically used a little to no escrow the <unk>.
So a methodology requires us to estimate an expense for each discrete loan facilitated as at the half.
It isn't a runoff rather than reflecting the actual growing loan portfolio as of our originating bank partners is important to note that no originating bank partner used escrow this quarter and we expect that to continue to be the case.
Moving to a revised full year guidance on slide 13.
As David mentioned in his opening remarks, we are on pace to achieve our full year transaction volume guidance of $6 2 billion for $6 5 billion and we believe the quarterly seasonal volume trends will be similar to pre 2020 period.
We are revising our full year revenue guidance to be between 600 $560 million and $570 million as we observed a transaction fee rates moved to prepay debt.
Pre pandemic levels by the end of Q1, we are now estimating 2021 transaction fee rate to be closer to historical levels prior to 2020.
Additionally, given the recent prepayment rate trends, we expect our servicing fees on the portfolio and interest income on loan receivables held for sale to be slightly lower for the year.
Important to reiterate that a lower transaction fee rate typically corresponds to a higher origination APR, which benefits incentive payments.
Also a higher prepayment rates contribute to lower associated bank margins as well as lower SCR expense with which both act as a benefit to a bank a waterfall costs.
Together overall profitability as evidenced by both net income and adjusted EBITDA is expected to be meaningful meaningfully stronger stronger for the for full year 2021, which is reflected in our upward revision of guidance.
We are increasing full year net income guidance to be between $35 million and $45 million of increasing adjusted EBITDA to be between $95 million kind of $105 million, reflecting a 17% from 19% adjusted EBITDA margin.
For the current full year guidance includes the potential impact from loans that are currently in or have previously been in deferral related to the two of the pandemic that could reduce incentive payments in the second half of the year of.
All of our most recent delinquency trends remain remained near record lows, which we expect to continue into the second quarter. Some uncertainty still remains is how these loans may perform in the second half of the year with continuing elevated unemployment rates and as federal stimulus, possibly tapers.
Our revised full year forecast reflects our current expectation of the portfolio performance, but as we progress through the year, we will have a greater visibility on how credit may ultimately perform.
For the extent of our servicing portfolio continues to reflect the current positive macro economic environment, there could be additional upside to our estimated profitability in the second half of the year.
For moving to Q&A, beginning on slide 14, I want to remind everyone that we have provided some additional assumptions on how to model T inputs underlying our 2021 guidance on transaction volume revenue and cost of revenue.
As mentioned, we expect transaction volume seasonality for the year of two closely resemble the average quarterly transaction volume percentage in years prior to 2020, reflecting a more normal seasonality pattern.
Also we estimate that transaction fee rates for the remainder of the year will be more closely aligned to trends prior to 2020 as both of these metrics are expected to normalize the pre pandemic levels.
In addition to update a transaction fee trends, we expect interest and other income to be between 10 million of $15 million for the year. This is a result of lower expected interest income from loan participations and held in our warehouse as we see the velocity of our loan sales accelerate in 2021 compared to the second half of last year.
Regarding the cost of revenue, we estimate on a cost of funds to be 50 basis points lower than our previous estimate reflecting the improved costs reported this past quarter.
Thank you for the opportunity to discuss our first quarter of 2021 financial results and for your ongoing interest and support of Green zone.
Operator, this completes our prepared remarks, and we're now ready to take questions.
Absolutely if you will.
To ask a question. Please press star one on your telephone keypad again, the star one to ask an audio question.
Your first question comes from the line of John Davis of Raymond James.
Hey, Good morning, guys, Hey, David just wanted to start out.
With transaction volume.
Obviously, you talked about some some key wins and a lot of momentum, especially.
I guess sequentially February to March.
Any thoughts on April and then what gives you confidence that you can hit that midpoint or higher of all of your guide that was unchanged on a transaction volume. Despite the at least a <unk> that was a little bit weaker than we had expected just curious also where that shook out maybe we just have the seasonality wrong, but just curious kind of what gives you.
Confidence given take slightly weaker trends in <unk>, yes. So.
Thank you John.
Transaction volume.
In April as we indicated had accelerating growth all of the leading indicators for us of through the roof and so the.
The first thing we look at our the number of applications that we receive daily weekly for example in April already in May.
And then it's a.
Which of those customers were approved and then that translates into a transaction volume typically over the next 60 to 90 days. So when we look at this February over the last February.
This march over last March isn't as relevant so we look at this March over March of 2019, and then we look at growth from February to March and growth from March to April and we see what the leading indicators are and we see how that tracks.
Very nicely to our full year forecast, which is broken out by a month, which does take into account seasonality keep.
Keep in mind I think historically Q1 has about 20% of a year.
And I think some people just took our annual transaction volume and divided by four or something closer to the dividing by four and obviously thats a pretty way off.
So all of the leading indicators show that we are at or better than where we expected for Q1 and certainly for Q2.
Okay. So just to be clear you kind of ended up where you expected for <unk>.
Overall for the details ethically, we beat budget okay.
Okay.
That's helpful. And then Andrew maybe just talk a help us a little bit I know, there's a lot of moving pieces in the <unk>.
The EBITDA margin that obviously can much better it looks like it was all SCR related but maybe just try and keep a high level of the puts and takes of why 28 in the first quarter I think the midpoint of guidance about a thousand basis points below at 18 like what are the big call outs of why it will decline.
Again, obviously above your prior guidance and then maybe help us a little bit was the.
The sequential or kind of a quarterly cadence of the from the expected margin kind of that can bounce around a lot.
Sure.
So I think I think the the one of the largest drivers of the the.
For the change in the in the revenue I'm sorry in the revised guidance is around the cost of revenue.
So trying to break that down.
Simply put a there we've seen as we have transitioned into.
A diversified funding model and that is something that we actually I believe tried to highlight when we first announced the strategy. We expected there to be some lower volatility around the FTR expense, we're seeing that come through.
Look a quarter over.
A quarter or so.
Our year over year in the first quarter, you'll see that there was a significant.
Decrease in the SCR expense a.
That coupled with.
More of improving loan sale costs is really helping to support them.
A more efficient cost of funds, which is contributing to the profitability.
That's probably the largest component.
Some extent, we're obviously benefiting as you would expect from improved credit performance.
As it required as it relates to our incentive payments.
The delinquency trends that continue to continue to be a near.
Near record lows and as a result, we continue to see.
Some of the the similar trends we saw in 2020, a related to the higher expected incentive payments, although I would I would attribute more of the cost of revenue improvement related to the SCR expense.
And then probably the last piece of it just as I mentioned earlier, the the the lunch sales costs continue to improve.
We've now.
A lot of a.
The components of that model in place.
And I'd say that when we discussed this in Q3 a week.
We talked about.
Our ability to improve upon that execution I think with the stability of the the markets.
Strong institutional investor demand, we've been able to accelerate that probably even faster than I would've expected. So.
Pound for pound I think.
The efficiency of our overall funding costs have been significantly improved that coupled with a.
Operating expenses, both in servicing collections as well as in our SG&A all being flat to a better are also contributing to a solid beat versus our initial expectations.
Okay and any comments the sorry, sorry, no go ahead, I think you were going to add.
Ask about just sequentially like you know how should we think about the margin all else equal kind of for <unk> and sort of obviously, you're implying it's going to be down but does it down a lot of <unk> and it gets better for <unk> or just help us a little bit with the.
How you guys are thinking about this from a cadence of quarterly cadence for spring.
No.
I think Q2.
We'll be we'll continue to see a lot of what I just described.
We would expect there to be.
Since the strong performance I think as David alluded to we expect.
The volumes to pick up as well seeing some of the leading indicators of the first quarter, I think where we what I try to be.
Be a little bit more transparent was in the second half of the year when I provided my a walk through on guidance.
We do I think the biggest kind of toggle there is the fact that we.
We do have and believe that there's still some uncertainty.
How are consumed.
Consumers will perform that had been impacted by COVID-19.
Overall.
What I call the the depth of that impact is definitely much smaller today, if you recall.
At the peak in 2020, our deferred portfolio was about a 4%. It's now 20 basis points. So the impact of the the sheer impact of of that is much much smaller. However, we still have about $20 million of loans that are in deferral, and we have about $40 million of loans debt.
Have had some level of the deferral in the past so with I think what we're trying to model is that there still remains some uncertainty.
The second half of the year related to how those loans could perform however.
We are cautiously optimistic because sitting here today, we're not seeing those those trends yet, but I would say our sentiment is not that different from many others, we hear that.
Still cautiously optimistic, but but modeling for a little bit more uncertainty.
Okay I appreciate it guys. Thanks.
Your next question comes from Giuliano.
Now with Compass point.
Good morning, and thanks for taking my questions.
From a starting point.
It would be entering the a little bit of a sense of.
What the different moving parts are within the FTR a change in the kind of the guidance on a go forward basis from what's the what's kind of the primary drivers of Orange.
What I mean by that is the what portion of that is more credit or a portion of that portfolio size. Because you may have more loan sales. So.
You're kind of at the portfolio of subject to the LCR might be contracting.
And there's a portion of that.
Even just beyond that.
The loan performance just from a better delinquency for fans.
Sure.
So.
In our prepared remarks I think.
What we tried to make transparent was that in Q1 about 85% of our loans.
From a cost of funds perspective is allocated for the bank waterfall costs.
And a 15% other.
Our service portfolio is based on loan sales. If you compare that to 2020 Q1 of 2020, a 100% of that would've been on bank waterfall, so effectively 15% of the servicing portfolio is now funded through loan sales as we talked about when you sell alone.
We don't incur any of the SCR expense. So if you look on page 11, you can see that the SCR expense on the right side in Q1 was about $77 $6 million.
And in Q1 of 2020, it was about $97 million. So there's a you can see the that a dramatic decrease in that that would be attributed to.
US primarily being able to diversify our funding model and the benefit that we had expected to achieve a on a bank waterfall costs.
Right below that you can see that incentive payments.
To a lesser degree improved so if you look at Q1 of 2020 incentive payments.
We're a $44 million.
And in Q1 2020 of incentive payments for $42 million, So theres still a benefit there.
That's primarily where you would see.
The credit the better credit performance of the portfolio come through so pound for pound, we're getting more from an SCR expense benefit, but we're also seeing the benefit from credit as well.
So that sounds a very good.
The then kind of on a go forward basis.
The obviously it seems to be a it looks like the.
The fiscal 'twenty, one is a bit front end loaded from an EBITDA perspective from what you seem to be assuming there's a similar trend a similar kind of some of the similar impacts that you were assuming before but just a little bit.
No less on the front end of the year and more in the back half of the year.
What I'm kind of curious about is how that cadence might run because at least from most of its.
Most companies the most consumer finance companies out there credit.
Credit seems to be extremely strong going into the second quarter. So I'm kind of curious how of that set up the flows through for the second quarter, if credit remains kind of Sim.
Ballpark to the first quarter during the second quarter and then how we should think about that cadence for the for Ya.
Sure I think.
We would echo that similar sentiment we feel that.
Into the second quarter, we feel credit will remain.
The similar.
As of Q1.
What we are what we what we don't know and what sort of being cautiously optimistic about is what happens in the second half of the year.
As you recall previously when we when we initially gave guidance for 2021.
We had indicated that we had expected higher.
The credit losses due to the pandemic kind of.
Through kind of going through the course of 2021, we obviously haven't seen that in Q1.
Not seeing that in Q2.
So I think it is still in our minds, a little yet to be determined on when we will still see it and again the magnitude of that overall impact is much much lower but I think we want to see Q2 performance before we're able to kind of continue the positive trend forward.
So to answer your question a Q2 very similar to Q1.
For the extent from some lower some uncertainty on how credit will perform in the second half of the year that all being said.
That's it.
The total full year guidance should give you an idea on how.
The impact will be in Q3 and Q4.
That's great. Thank you I'll jump back in the queue.
Thank you.
Your next question comes from the line of Michael Young with choice.
Hey, Thanks for taking the question.
Wanted to just kind of take the updated 'twenty, one guidance and put it I guess into the broader context of a 10 by nine by 30 strategic plan. It seems like this is more.
We thought it was kind of be more of a transition year with more of pandemic impact.
In 2021 before kind of reverting to the norm.
Maybe that's just going to be a lesser impact as that kind of a message or do you think this meaningfully impacts kind of that 10 by nine by 30 plan over the next couple of years.
Well, we think it certainly demonstrates that it's highly achievable and.
Certainly sitting here in May we're further along than we expect it to be going down that path.
I think I think it's important to point out this is a.
This is only an in one part of credit story.
And certainly going into Q1, we knew what delinquencies were so credit was not a big surprise for Q1, there is upside.
Around the credit but the.
The thing that I think is that we haven't really talked about is.
We're getting more efficient funding a more.
Our diverse funding.
And certainly transaction volumes are trending.
Exactly are better than we expected.
So.
Michael I appreciate you asking because the.
The way, we think about it is.
We're just getting that much closer faster right now than we had previously talked about to the 10 day nine by 30, and I think thats that.
That's a good step forward and of course, yes. There is there is upside.
For this year, Andrew you had something debt.
I would just say.
Short answer yes.
I think this puts us on track.
Squarely on 10 by non by 30.
We did talk about 2021 being a transitional year.
And I think we pointed to a higher loan sale costs I think.
Demonstrated an improvement there in Q1.
Of all things being equal a I think if that continues I think we're clearly on a path to meet our goals and then in terms of credit.
If we assume that there was going to be a larger.
Potential impact that's come down.
Considerably since we announced that in the Investor day in January.
But as I mentioned, a moment ago, there is still a little of uncertainties. So short answer is.
We think our results this quarter and thus far this year are squarely putting us.
To achieve that five year plan.
Thanks, and one other question just wanted to ask on the funding partners just kind of how those conversations are going.
On the one hand, I would think banks would be more desirous of funded assets at this point and the low rate environment on the other hand, maybe some of the institutional side, we've seen a big jump up in the 10 year treasury rates et cetera, So maybe as the.
Demand weaken there just any any color you could add on just kind of how those conversations are going that would be helpful. We're feeling like we are.
Living in the land of abundance.
Our superregional.
A national banks.
Certainly appreciate.
Super Prime.
Short duration loans, so there's certainly more demand.
However, as we've stated before it's really important to us to have diversification, we've seen excellent execution.
Which also by the way it conveniently as a much simpler accounting from bank buyers and non bank buyers.
And so for US this is about.
Number one optimizing diversification.
And long term economics, we're taking a long term view and that's certainly how we're treating a partners and vice versa, but we're seeing great demand.
And we're driving this toward diversification for the long term.
Okay perfect. Thanks, I'll step back.
Thank you.
Your next question comes from the line of Christian a with Piper Sandler.
Hi, good morning, everyone David.
You made a comment in your prepared remarks about I think there were three merchant you had a number of merchant wins, but I think three of them came from competitors.
For the ones, who won from competitors can you give us any sense of why you won.
What a.
What about Green Sky enabled you to take the business.
So in one case it was better integration tools.
In another case it was a better use of our better user experience.
And in a third case.
It was a combination of frustration with the law.
Legacy partner.
On on missing promises a.
And.
And just a reputation with their peers.
And so.
This isn't new for us.
It's how we've grown the business for years.
And we just wanted to kind of call. It out obviously, we had hundreds of wins in the quarter, but these were a large and directly coming from.
A for post competitor.
Understood.
And then just thinking about the.
The transaction volume guidance for the full year the.
No change there, but it seems like that.
The trends of working in your favor not just.
Some wins, but also health care.
Is the lack of changes reflect like the the onboarding can take time or it take time to ramp up a new merchant.
Or a conservatism and like how do you view about the healthcare ramp over the year I'm just trying to understand it seems like the world looks a little better now than it did a couple of months ago and that that might lead to better transaction or are you being more selective with your loans were noting that your FICO scores at origination or about a.
The 10 points higher than they were a year ago.
So so Chris.
Great question.
It's it's everything you've just described.
Really having lots of wins, taking market share growing the market does take time to ramp.
That's part of it.
Also sitting here in unchartered territory, and we're not going to pretend to know exactly what happens over the next eight months.
So there is a conservative bias.
And.
We.
A lot of conviction that.
We can meet or beat.
And we.
We're in the we're in the meet and beat.
Game, So that's what we're focused on.
I'd also highlight that David mentioned, this a moment ago, but our Q1 results.
We're ahead.
Ahead of our internal budget was.
On the on track with what we gave for the range of guidance. So I think.
For us.
Q1, certainly was a good data point, we'd like to have Q2 and the back.
And then and then reassess, but I think all trends or are a showing as David described.
Okay, and then just the last one for me.
On the FICO scores.
Because they are higher than they were before pandemic.
That reflects something of your funding partners and their what they're interested in in this environment or.
And is there an opportunity for you to widen your credit box going forward or do you think with the unchartered <unk>.
Waters that were in debt.
Youre going to be cautious around that.
So I can say, it's certainly not driven by us or our funding partners, it's driven by market demand.
And and.
I think you can imagine.
Hard to.
First of all we're talking about five or six points, but over the last couple of years hard hard to the.
Two.
To take exception to a 774 versus the 781 I don't think any any funding source wood wood, we'd see that as any kind of material degradation or improvement for that matter.
It's purely demand we think there is even more demand coming.
It's certainly a very very exciting time, but it's not driven.
By us.
We think there's lots of good 687, hundreds out there, we just need them to a.
To have some stability in their lives and we want to do more home improvement.
Got it thanks very much.
Thank you Chris.
If you would like to ask a question. Please press star one on your telephone keypad again, Thats star one to ask an audio question.
Your next question comes from the line of Rob.
At the autonomous research.
Good morning, guys.
Good morning, good morning, Rob.
Just a quick one on the financial guarantee expense, Andrew I think you said.
The expectation was flat sequentially does that mean that youre expecting it to be a negative expense for the rest of the year.
No. It means that it should just kind of not not be an expense or a benefit it should be pretty flat year over year for the range for a makeup.
And then.
David you talked about comparing March 2021 volumes March 2019 volume.
And Im just wondering if you'd be willing to share how much volume is up in April 2021 versus April 2019.
I mean, a deferred two to Andrew on that.
But what I can say, it's a very healthy.
And it gives us a lot of confidence that we'll meet or exceed our expectations.
Expectations for 'twenty one.
Yeah, I would say that.
March was the first month, we saw.
A real solid year over year growth.
Coupled with the fact that we talked about a credit line and the application of approval rates.
A recently kind of at all time highs I think that does have a leading indicator and in April.
As well as of the.
The remainder of the second quarter, showing favorably I think that I think the best way to think about it is if you look at the seasonality youll see that the second quarter of the year.
It was about 25 ish on a say 25%.
Of of the 26% sorry, it's a 26% of total volume so you should see a.
An expected increase from Q1 for Q2 relative to that seasonality.
Okay. Thank you.
At this time there are no further questions I would like to turn the call back to management for any additional or closing remarks.
Thank you for your questions and thank you again for joining US today, please stay healthy and safe and we look forward to speaking with you when we discuss our second quarter 2021 results.
Thank you for participating in today's conference call. You May now disconnect your lines at this time.
Okay.
Hi, Angie.
Hello.
Yeah.
Yeah.
Yeah.
Okay.
Okay.
Roger.
Hum.