Q1 2021 ECN Capital Corp Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the ECM capital first quarter 2021 with all the conference calls.
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I would now like to turn the meeting over to Mr. John When such please go ahead, Mr went bad.
Thank you operator, good afternoon, everyone. Thank you for participating in our conference call to discuss ECM Capital's first quarter 2021 results announced earlier today, joining us for Steven Hudson, Chief Executive Officer, Michael look for it cheap.
Chief Financial Officer, a news release summarizing. These results was issued this afternoon and the financial statements and MD&A for the three months period ended March 31, 2021 up and filed with SEDAR. These documents are available on our website at Www Dot <unk> capital Corp, Dotcom presentation slides to be referenced during the call.
All are accessible in the webcast as well as in PDF format under the presentations section of the company's website.
Before we begin I want to remind our listeners that some of the information. We are sharing with you. Today includes forward looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties.
Refer you to the cautionary statements section of the MD&A for a description of such risks uncertainties and assumptions, although management believes that the expectations reflected in these statements are reasonable we can obviously give no assurance that the expectations of any forward looking statements will prove to be correct.
You should note that the Companys earnings release financial statements M. DNA and today's call includes references to a number of non <unk> measures, which we believe help to present the company and its operations in ways that are useful to investors.
A reconciliation of these non <unk> measures to <unk> measures can be found in our MD&A. All figures are presented in U S dollars unless explicitly noted with these introductory remarks complete I'll now turn the call over to Steven Hudson Chief Executive Officer.
Thank you Joe and good afternoon, and welcome to our first quarter call turning to slide seven we are pleased to report adjusted operating earnings per share of <unk> <unk> per share, which is at the high end of our invest guidance provided at our Investor day.
Service Finance had a strong first quarter, including big box retailer and all in one which I'll discuss shortly approvals in the first quarter up year over year, 45% originations up 28% and as you'll see shortly that trend has continued into the second quarter. We.
We've also launched our partnership with Sam's club and oral one I'll be speaking to those in a moment.
Fully funded into 'twenty, one and 'twenty, two and we've been done begun discussions on our 2023 commitments.
Tried as well had a strong first quarter and has accelerated approvals into March and April boding, well for the second quarter for both businesses Q1 approvals of triad were up 15%, but accelerated in March and April Q1 originations up 38%.
Continued in April at 55%.
Land home is on track I'll speak to that in a moment, we are fully funded into 'twenty, one and 'twenty. Two we have five new funding partners, who have joined year to date in 'twenty one.
Kg.
Had strong partnership income marketing services as it returns to growth in the first quarter. The first quarter results were in line with management expectations with an EBITDA margin of 60% strong pipeline continues to drive return to growth in 'twenty one.
Turning to slide eight on guidance.
We are reiterating our 2021 adjusted EPS guidance of 46 to 51.
As announced at Investor day, with a growth of approximately 50% year over year and our first quarter results in early results in the second quarter gives us increased confidence in our targets for 2021.
We are reiterating our reiterating our growth for 'twenty EPS target for 2022 at 55 to 64.
We are as stated in our Investor Day, we will update this guidance on our Q2 call in August at this point, we will have better visibility on the growth opportunities launched in 2021, like Sam's club and others.
Yes.
Turning to slide 10 service adjusted operating income in the quarter of $18 million up 20% year over year originations up 28% managed portfolio up 27, as I mentioned earlier fully funded in 'twenty, one and 22 discussions underway on 23 demand for service <unk>.
<unk> and triad loans has never been higher as a result of liquidity in the financial services system and the performance of our portfolios, which I'll speak to in a second.
We continued to experience above average dealer growth in the quarter and year to date.
Included in the driven by Big box retailer all wanted effective take share and make sure strategies.
Going to page 11, a slide you've seen before wed like to put in a debt because it shows the consistent origination portfolio under 12 month look back as well as the servicing book I think the key illustration here is very effective take share and make sure of in March.
Take share and make share out of Mark shirt.
Purchase obligations.
Turning to 12, a little bit on the home improvement industry.
March the home improvement Research Institute make significant upward revisions to its projections from 'twenty one to 'twenty for.
Now expect incremental $254 billion of home improvement spending through 'twenty, four including 100 billion within the professional contractor segment.
We will begin to see post COVID-19 or the end of the COVID-19 pandemic hopefully as demand is increasing from one of them is focusing on larger projects that require professional contractors in the home there was a reluctance by consumers to invite.
Contractors and the whole net debt is now abating.
Turning to page 13, I want to make two highlights from those page I want to I want to make reference to the growing month over month increases, which is our increased confidence in the high end of our range for service.
And even with COVID-19 adjusted numbers.
The approvals are still strong in the high <unk> to low 40% range. It's a strong across the board, whether it's HVAC windows and doors and others. As you know we made a strategic call to exit effectively exit solar we still do some FERC for customers, but that is now becoming a significant.
As far less of our business on a go forward basis.
Turning to page 14 backlog a significant March 'twenty one.
As at March 21, the backlog is up 107% year over year across all product segments. This equates to $275 million in originations that are expected to close that backlog stood at $311 million in April 'twenty one.
Turning to <unk>, we're happy to announce our big Big box partnership with Sam's club that was announced in 'twenty one the image on the right hand side of the page comes off the link that's referenced on the left hand side of the page service Finance has entered into an agreement with Sam's club to administer a nationwide home improvement.
Service program, there are two core and distinct parts of that program, obviously theres the loan services to service club Sam's club members by service finance, author dealers and as well the marketing and sales provision of home improvement products inside the home.
Service Finance will leverages existing dealer network to fulfill members request for a myriad of home improvements such as HVAC roofing doors.
For those doors expected you can expect a sams club announcement in the near term.
Turning to page 16 on new programming. This quarter saw several large home improvement dealer networks continued take share on behalf of Mark and his team.
To draw one which is Dell tiles as you know Dell tiles is a subsidiary of Mohawk industries, the world's largest flowing company flooring company. It's interesting to note that one other three titles sold in America is a dell tile product.
This exclusive partnership with Dell tile, even gives us further confidence in our in our 2021 projections and Mark and his team continue to hit it out of the park.
As well as previously announced program Z. All on one has now launched we are encouraged by the results early results for this we'll update you on the August call for our second quarter call commercial has launched do you expect to sorry.
<unk> launched.
Do you expect an update as well on our second quarter call. All of this leads us to a strong sense of confidence in the 2021 originations at the high end of the range.
Turning to slide 17 held for trading assets updates.
As at the end of the quarter, we had $152 million of assets held for sale, we had a net FY sale.
Just after the quarter in early April for $137 million. As you know these are loans that qualify butter and sold sold in bulk to existing partners. We expect those bulk sales to move to flow arrangements shortly.
This lumpiness of of sales can create quarter by quarter differences in our servicing revenue Youll see servicing revenue. This quarter was at one 7% it will return to over 2% in the second quarter as we earn management fees on these assets that were sold of $152 million all in all the great results.
Turning to part portfolios that we manage on behalf of our partners. We are happy to report 53 basis points and 30 plus delinquencies in March is the lowest since August 18, net at the low end of historical ranges there are immaterial COVID-19 deferrals remaining.
19, as the chart you've seen in the past, which continues to show our monthly originations on a year over year basis.
Turning to 2021 guidance as I mentioned earlier, we are confident in our in our forecast and are now referencing the high end of our range.
Turning to slide 21 on triad triads adjusted operating income for the quarter was $7 1 million up almost 30% year over year. It is important to note that that operating income number includes $1 million of expenses for the land home build which is now complete the revenue from that.
Buildout will occur in the second third and fourth quarter.
Q1 originations were up 37% floor plan was at $127 million and floor plan is on pace for $150 million to $200 million originations in 'twenty, one floor plan as a strategic expansion of our product and as I mentioned earlier, five new bank and credit Union partners added in the for.
First quarter, turning to page 22, I would like to highlight two things for you.
As with service the continuing improvements in month over month, notwithstanding some weather in February that hit, Texas and related areas, which the second highlight is obviously the increased confidence in our forecast for Tri Ed as well.
Turning to page 23.
<unk> loans, we have channel and we have land home loans chattel loans were up 125%.
In the first quarter docs out is effectively the backlog where someone as you know has committed has been adjudicated and has signed the document we are waiting for delivery of the home to the site.
These have a 99% historical close rate the backlog is it six months or more that are really three reasons for that backlog increased demand.
Stafford manufacturers many U S firms are having to deal with the U S government paying people to stay home, which is a short term challenge and extended.
It's supply chains that we're all facing.
Turning to 'twenty four on land home, we've had the substantial build out costs, which come through in this quarter of approximate $1 million with revenue in Q2, Q3 and Q4.
We've implemented Black Knight Mortgaging service system, which is the gold standard in the U S industry for mortgages. We've also incorporated the origination pricing and adjudication systems of Freddie and Fannie.
We are now proving mortgages land home at $45 million, a month up from $25 million.
In the fourth quarter of last year, we are highly confident in our forecast of 150 to 200 million as I mentioned to an earlier call. We believe that land home can be as big as the channel mortgage business and triad it bodes well for 2022.
Docs out are approximately $135 million at the end of April with delivery, we are on pace for our target of $150 million to $200 million.
Turning to 'twenty five.
Assets held for trading these are bank eligible loans, which are held and sold.
Periodic sales, which are not a flow. This has been moderating down to $50 million. We expect further reductions to come in Q2 and Q3.
Sure.
Like service Finance on page 26, the credit trends are very favorable.
For Triad 30, plus day delinquencies have returned to a normal rate of four 6% net.
Net charge offs are at a cycle low of 20 basis points.
There are no COVID-19 deferrals remaining at triad.
Originations on 27 is a month by month year over year chart that we provided for service.
Turning to the guidance for triad originations are projected to grow for 50% at the midpoint floor plan at 120 to 140 and a mid point, we feel we feel highly confident about the forecast tending towards the upper end as we do with service.
Finally, turning to kg adjusted operating income of $11 3 million, which is in line with management expectations and now reflects the return to growth partnership revenue was upbeat.
So almost 9% year over year, reflecting solid partnership relationships and increased fees from our credit card investment management business.
As we referenced in the third quarter of last year, we've been able to close portfolio transactions without committing ECM capital. We are working on similar transactions, we expect to be successful during 2021.
Marketing services have continued to rebound from COVID-19 related levels in 'twenty.
We expect this company this business to hit its forecast.
Turning to 30 growth in core business is important. We've also as you know has had a strategic shift moving kg away from transactional revenue into the annuity type business that shift is continuing and success is bearing fruit.
We've seen a 9% increase in partnership revenue as well as increased revenue and profit from the credit card investment management business client marketing spend continues to recover post COVID-19 levels and new verticals are being average to average as I mentioned is referenced here. The marketing service revenue was up from two nine to one eight.
It reflects that would continue to growth that business was $1. One in the fourth quarter of 2020. We also continue to rollout new programs, which is banking as a service which is a b aes.
Through.
We're providing a comprehensive solution for their credit card business.
We've also in our credit card investment management business, which is officially launched our asset management Corp.
And as asset management services.
We have received a technical term PCI DSS, which means we are now certified to receive credit card information and manage it on behalf of our partners.
Highlights on slide 31 for kg, you see revenue increases at 19% at the midpoint.
EBITDA growth of 17% compared to that of 2020.
And we see adjusted.
Operating income increasing 21% we are confident in this forecast as well Michael.
Thanks, Steve.
Turning to page 33, and the Q1 consolidated operating results.
Originations for service Finance and Triad financial services of $662 million in Q1, 2021 were up 30% compared to Q1 2020, reflecting a 28% increase at service finance and a 37% increase of Tri Ed.
Net origination growth.
Q1, adjusted net income applicable to common shareholders to $19 7 million or <unk> <unk> per share compared to $14 5 million or $6 <unk> per share in the prior year quarter.
As discussed at Investor Day, and our Q4 call. We have eliminated results from our discontinued operations, we have or we continue to show legacy assets held for sales separately on our balance sheet.
Turning to page three for the balance sheet.
Key highlights in the balance share of the total assets and total debt were both up over the previous quarter with total assets of about 72 million and total debt up from.
Approximately 45 million the.
The increase in total assets and total debt was primarily driven by the increase in held for trading assets service finance and floor plan loans at Tri Ed with total assets and debt decreased subsequent to quarter end as a result of the sale of approximately $137 million in held for trading assets at service finance.
Managed and advisory assets are now approximately 33 billion comprised of $3 4 billion and servicing assets at service finance $2 7 billion in assets of Tri, Ed and manage it advisory assets of $26 $9 billion a kg.
Turning to page 35 of the income statement Q1, 'twenty. One 2021, adjusted EPS was <unk> <unk> per share at the top end of our guidance range and in line with analysts' consensus.
Q1, 2021, adjusted EBITDA was $35 5 million compared to $27 7 million in Q1 2012, the increase was driven by growth in all three of our business segments.
In Q2 in Q1 2021, our effective income tax rate was 17%, which is in line with our guidance range for the year.
Turning to page 36 on operating expenses key highlights of higher business segment operating expenses were primarily driven by the growth in originations and managed assets at service finance and triad as well as the build out of Trans land home business.
Excluding approximately $1 million of expenses related to land home try it operating expenses increased by less than the percentage increase in revenues demonstrating the operating leverage from that platform.
Corporate operating expenses of $6 2 million reflected a return to normal activity levels for business development professional services and travel expenses. We continue to expect corporate expenses to be in the range of $22 million to $23 million in 2021.
Legacy business expenses were $1 9 million in Q1, 2021, which were largely offset by legacy business revenues of $1 6 million.
Finally, just a quick point on share based compensation, which is not included in operating expenses, but does receive some attention you will note our Q1 expenses lower than Q4 and as noted in the MD&A about half of the expenses related to five year retention agreements for operating unit heads invest over five years based on meeting of specified operate.
Income targets, but get Expensed on an accelerated basis due to the accounting rules, we expect share based comp to continue to trend lower in Q2 through Q4.
And with that I'll pass it back to Steve. Thank.
Thank you Michael in closing turning to slide 38.
We are pleased to report the eight of adjusted operating earnings per share for Q1 high end of our range as stated at Investor Day Service finance originations of 28%.
And 52% in April give you a sense of how strong that businesses and confident in guiding you to the high end, we believe the big box for Sam's Sam's club partnership.
And they all have one will help drive significant growth for all parties in the coming quarters triad.
Triads Q1 originations at plus 30% and 55% in April give us similar confidence and the remaining in Q2 and the remaining part of 2021.
Land home is going to is going to be very successful $103 35 billion of docs out. We are on track for 150 to 200 million of incremental program as I mentioned that business will be as large as as our channel business, which should should approximate 4% to $600 million in 'twenty two.
<unk> is in line first quarter strong partnership.
Business continues and pipeline is strong.
As I mentioned, we will update 'twenty two guidance on our Q Q2 call as we get further evidence on our significant growth initiatives launched this year.
Capital, we are happy to report our dividend, which increased we announced the increase we ended up this quarter for <unk> and.
And as you note in the MD&A, we've been active in repurchasing stock price.
Latest thought I'd comment on the market today and interest rates.
Some of you have assets, but if you look at service finance from 2016 to 2018.
During that period U S 10 year treasuries went from one 4% over 3% our originations grew at 50% per annum.
Management team at service is very accomplished and is able to manage interest rate risk through increasing rates and menu.
Similar experience to that of Tri Ed I think it's also important to point out that our funding costs are really that of bank deposits as opposed to treasuries. If you look to bank deposits. They are in essence flat to down over the last three months, there's tremendous amount of liquidity in the U S and the Canadian but the U S financial services system.
So we are we are confident that we will be able to manage.
<unk> interest rates when it happens.
John over to you.
<unk>.
Thanks, Steve.
Just update our ESG slides not not a lot to update here in the quarter other than we.
We expect to announce a number of different initiatives in Q2, we have engaged with a number of different rating agencies to review our various lending programs for ESG certification, we expect to have.
Some results from that process. When we are ready to report in Q2 as well just wanted to reiterate our commitment overall tier.
S G.
Policy impact and disclosure.
Make sure we stay in front of our stakeholders.
With that we'll open it up for for questions. Thanks, operator.
Thank you.
We will now take questions from the phone line.
The other question. Please press star one on your telephone keypad.
Harold Thompson acknowledging door request.
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A brief pause while other participants register for a question.
Thank you for your question.
The first question comes from Nik Priebe with CIBC capital markets.
Please go ahead.
Okay. Good evening.
I'm just wondering if I could ask you to expand a little bit on the nature of the arrangement with that with Sam's club now that it's public.
So how does that model work, so if I understand it correctly the member would come in with a home improvement project that will be connected with a dealer from your network and then you would provide the financing were acquired what at Sam's club get out of it day to earn a referral fee from either you or the dealer just some insight on the economics of the arrangement will be helpful. There.
Yeah.
I appreciate it.
We're happy to have been selected as Sam's clubs partner, that's a significant.
Step for service finance and for ECM that service. We are we are prohibited under our confidentiality arrangements.
<unk> publicly speaking to those shortly.
Would love to go walk you through it but we have to wait for Sam's club, but I can tell you. This that the early results are encouraging.
And we think it will be very successful, but we have to wait for Sam's club.
Okay, Okay fair enough.
And then staying.
Staying at service finance.
One thing that stood out for me it looks like there continues to be a little bit of variability on the servicing fee line. So I think last quarter. It was a bit of a positive surprise and then it stepped down sequentially. Despite higher managed asset balances in this other rollout for the temporary fee concessions that were granted last year can you just help us understand how that line travels whether there is a scene.
The element or anything else that would account for some of the quarterly variability that we've seen.
Hi, Nick its Michael and Theres, a timing and a mixed component that sometimes you get a little bit of variability in the quarter. So as Steve noted I think in Q1 net.
And a large percentage of complementary flow loans on the balance sheet those didn't get sold to Q2. So Q2, you will see it.
Upwards and overall, we would expect it to come in around 2% for the year.
Managed assets.
Okay. Okay. That's helpful.
Yes, we don't get paid back on the loans that are accumulating for our client.
And given the growth in service, which has been very significant continues to be its a market, but we know right now that will be about two 1% for the second quarter and servicing fees.
Got it understood.
Okay. That's good for me I'll re queue. Thank you.
Thanks, Nick.
Our next question comes from Geoff Kwan with RBC capital markets. Please.
Please go ahead.
Hi.
Good afternoon.
The first question is I know you've talked a little bit on the Tri Ed side.
My question I guess more broadly with with some of the issues that we've seen.
Stuff like that lumber prices are materials constraints.
Semiconductor chip and stuff like that.
Are you seeing much of that and how would you kind of quantify the impact.
On the business.
Whether or not.
Service finance or triad.
Yeah.
Hey, Jeff how are you doing.
Net.
Like everybody else for seeing or hearing different sort of price increases across various different verticals.
Both the under sort of home improvement or in manufactured housing more the inputs to manufactured housing.
And sort of the end result of pricing.
Homes for example at this point.
We haven't seen any impact whatsoever on originations or income to date, but.
I suspect, we would will continue to moderate and see and see over the next couple of quarters I. Just have one follow up if you look to the originations of 37% growth for Q1 were able to get the loans of the door whether it be channel are now while Atlanta homes. So it hasn't stopped us from <unk>.
And I would also comment that the average ticket size is up both in triad and service there's no doubt the inflation has returned.
Inflation drives higher ticket prices, which produces higher fees on both originations and servicing.
Okay and just for my second question I, just wanted to clarify when you. When you gave your guidance before with respect to 2021 and 2022.
The Sam's club.
And all in one week dose.
<unk> would not have been included and hence why.
Net revenue to date.
It's a bit more visibility.
Probably included in there.
Got it.
Yes, I mean look we when we did our investor day.
<unk>, we knew that there was a number of significant programs in the pipeline whether it was the real land home launch and rollout at at triad or a number of the programs that youre aware of today and some of the other ones that we're working on at service Finance and we knew a number of those things are going to get launched in the spring as you know.
Looking at these things it takes time to roll. These programs out nationally. It takes time to train salespeople et cetera to really get selling these things and then ultimately grow those programs. So you got to get them launched and up and running and see how they are operating for a couple of months before you can really get an idea on guidance. So our view was.
As always let's get a couple of these things launched and then we can revisit it as we have some better data. We thought Q2 would be would be a good time for us.
To answer your question.
Yes.
Thank God, we're not included or not included Jeff.
Let me back up the importance of a Sam's club.
I have to stop or to wait for the Sams club announcement, but the importance of that as.
Is that we're now seeing the benefit of our dealer network.
Can now provide a guarantee like we do to our bank partners, where we're all of those loans that originated the consumer is happy it's on time, it's on budget and it works and we can now do that for Sam's club members Thats a powerful guarantee.
We've never been able to use that we are now using interest the policing and the oversight and all the work we do on our dealer group the annual reviews.
<unk> tax returns, making sure people are compliant, making sure our complaint level is R. R.
On resolve complaints at the CFPB are zero.
Now now.
We got power through our network and I think that will accrue.
The benefit of Sam's club members.
So think of that as an additional business service that we are now bringing to bring into the marketplace.
Okay, and sorry, just if I can maybe just maybe ask you differently, so with land home sands all in one.
What else would not be included in the current guidance that you have.
Now land land home was included in the guidance.
We havent Samson I'll go back.
Is there anything else.
No.
I think the overall thing.
As the market tends to be very strong youre.
Youre seeing all time highs in originations and all time highs and approvals and increasing ticket price. We don't think that's going to slow down.
C industry research groups, increasing our forecast through 2020 for it.
Very strong and I think that I think youll have positive a positive update on August.
Okay, great. Thank you.
The next question comes from Duncan with.
It's Steven.
Please go ahead.
Good afternoon, and thanks for taking my questions I have another.
Another one about.
The Sam's club and the all in line.
Siding additions.
Wondering are they.
Sams club.
The all in one partner already have.
Somebody else that they're working with and if there's maybe any volume share or is this completely.
New and.
Where.
And if theres any way to EBITDA.
For the current size and the upside.
Okay.
Cabinets, but it's an exclusive arrangement with Sam's club.
That we won through a competitive process.
I'll wait for sand in terms of all in one on one is just selling referring through the lower credit deals.
Through the people, we don't put those credits on our balance sheet.
And Theyre getting sold through and then John will provide an update on the all in one program in August as well, but it's being it's work.
Yes.
It's launched its up and running really got launched in April we've added hundreds of dealers at this point and <unk>.
Expect to continue to roll that out.
<unk> line throughout the balance of the year.
Super excited about it the early results have been fantastic, but it is still early and we want to make sure. We have some good information for you guys from Q2, you can imagine Sams club is.
Guards their membership and their members very very closely in the due diligence that mark <unk> and his team and Steve Miner and others went through for compliance compliance product was significant in over several several quarters and I think that vending alone in being awarded this partnership this relationship flex as a good housekeeping staff.
A approval on service finance and our dealer, where we're not and useless. We don't have 140000 dealers, which is great for Angi is list, we have 14000 dealers, which are heavily policed.
If we're lucky enough to become your partner, we know when that dealer walks into your home you're going to have a great experience and we're going to guarantee it.
Okay, Great. That's helpful and now I'll ask that again next quarter.
Create that.
Fair enough fair enough I appreciate it.
So switching gears to Kessler.
Kessler group, so interesting to see these new marketing programs that are outside kind of debt.
It seems like outside the existing scope of what we think about what credit card.
Maybe if you could talk about what.
Give us an example of an idea what kind of marketing programs and services. These are and when you think about the verticals that you could share.
So you've highlighted telecom, but sort of maybe what are the opportunity sets for.
For <unk> there. Thank you.
Yes, so basically if you look at the <unk>.
Kessler their historical business has been really helping to build and attract customers to our affinity credit card portfolios and relationships. That's what they've done that for 40 plus years as part of that you had to build sort of core competencies et cetera in terms of marketing consumer marketing.
Through various different channels.
Lot of targeting segmenting data et cetera, what what we always thought they had was they had some some exceptional process and data et cetera that you could mine and used to generate new new relationships on the marketing side.
We've been able to do that successfully across across credit cards or financial services over time, we talked to you about the telecom opportunity last quarter. As you can imagine you can imagine a large consumer cellular type company is doing typical consumer type marketing trying to generate new customer accounts, that's the kind of thing.
That we're working on.
You can imagine other consumer facing marketing opportunities out there.
Our wealth management identity theft.
Subscription services, there is a number of different verticals that we're looking at.
And exploring and we expect to have a number of different pilots in the market here.
In 2021.
Okay, Great. That's very helpful. Thanks, so much.
Our next question comes from Tom Mackinnon with BMO capital.
Please go ahead.
Yes, thanks very much good afternoon.
Just a couple of questions with respect to the.
For the corporate segment, a little bit of noise in there there seems to be some higher than expected corporate revenue.
I don't know, if there's gains or losses on some legacy sales.
There was a modest loss in legacy just looking for some guidance ex growth ought to be looking at that going forward.
<unk>.
Corporate expenses of $6 2 million.
If we annualize those were closer to $25 million, which is above your $22 million to $23 million guide for the year. So is there anything.
Seasonal or how should we be thinking about growth.
Three questions in one.
Thanks.
Hi, Tom It's Michael I'll start with the last one.
I mean, obviously quarter to quarter, you're going to have a little bit of variation.
And the expenses, we still think 'twenty two to 'twenty three that's where.
We're going to come in so it's a bit higher in Q1.
I suspect it will come back down in Q2 Q3 so.
But it will vary plus or minus 500, K a quarter.
<unk>.
In terms of the corporate revenues, Yeah, we did have some mark to market games from legacy portfolio investments so probably.
A little bit higher than.
Normal.
Generally expect 500 K too.
Revenue for corporate somewhere in that range, and we had a bit of.
And it always going to be some.
I think my near FX gains and losses as well. So we had some of that in this quarter, but generally it's.
We expect it to be 500, K positive quarter.
And sorry, the third question, yes, the legacy business, there was a modest loss share.
Yes.
Yes.
Going forward.
Okay.
Yes.
One of the reasons why we are accelerating the wind down was to do exactly that is to reduce the call. In Q1 last year was probably closer to $3 million and the losses, we've worked hard to reduce the burn rate on the legacy business now got it down to 300000 risk largely immaterial, which is why we're not even segregating it anymore.
<unk>.
So we expect to manage it.
Accordingly.
Im definitely under $1 million a quarter.
I think Tom it's good stewards, it's incumbent upon us to recover all the capital legacy assets.
Recovery of capital can conclude outside advisers lawyers.
Other people, so I wouldn't focus too much on the $300000.
Net net expense here I would focus on the recovery of capital.
Allergists as our Chief Credit Officer had some great success.
And particularly in the aviation book and others on making sales as we now get out of the COVID-19 period. So we want we want all of that.
$100 million of assets sold in as much capital as required.
Okay.
Sorry, just one more numbers question.
Finance.
Depreciation expenses about $1 million and it's generally been closer to about a third of that was there anything unusual in the quarter volume.
Yeah.
Yes, so conjunction with.
Sam's, we launched a marketing service and lead lead management platform that <unk> built out over 2019 and 2020 net.
Now that is.
Up and running we've started to depreciate that asset.
Hello.
Q2 would be similar to Q1 with respect to that.
Correct.
Okay. Thanks for.
Thanks for that.
The next question comes from Kian <unk> with Stifel.
Please go ahead.
Hey, good afternoon, everyone.
Just wondering Steve and team if you can give an update on your funding pipeline and how it looks for 2022.
While there were a couple of new partners I think it was five for Tri Ed.
I'm just wondering what the appetite is are we looking at new partners perhaps.
Pending funding with existing partners.
If you could give us a little bit more color on the appetite from funding partners.
Good question and thank you.
If you if you look to as you know we announced.
New funding partnership with CPP IB last year.
At $1 billion and that really has opened the door to a number of similar type organizations.
Which is all have appetite in that $1 billion plus range.
We are we don't have enough loans at either service or triad to satisfy the demand. So we could have done we could have done two things we could have one or two things we could have increased origination.
Servicing fees, we elected not to and we've gone for longer commitments as you heard my reference earlier, we're now into 2023 funding discussions. So we make a long story short we've taken that demand which is unprecedented.
An increase in commitments in the two to three year period, and we're working through that so I think thats a good.
My fishing boat is called liquidity.
<unk>.
It's a modest fishing boat.
It's all about liquidity, so I think the longer for longer we can longer we can no longer we can push out those funding commitments for better.
And we certainly have got.
Youll hear more announcements about organization similar in nature to that of CVP EIB.
Not saying that we're moving away from a bank or credit unions, and our life co partners because they are an important part of this but we are funding significant growth at both.
Service and training.
Yeah.
How are you I just wanted to add if you look at Tri Ed you mentioned the five that we added the share remember we added 12 last year.
Well it has been we have been expanding that list away from just the banks and credit Union to our core great partners to us, but we've added some life insurance companies as well inside of inside of triad, especially around some of these special and newer programs. So we've been very very excited not only on the service and add side, but also on the triad sided as for.
As our funding relationships go and we've been able to turn all of these relationships into hell or high water, which is that you as an institution. When you provide that commitment are now required to buy up to that limit we're not required to sell to you what we will but we want the ability to manage it. So if you are putting in place our commitment up youre fill is likely eight.
<unk> million dollars to $900 million as we as we sort of manage across our round Robin funding.
So in fact that triad situation that would turn them into perpetual funding relationships. So we've used this.
About $4 one trillion in the U S and the U S banking system looking for a home.
And we've used that liquidity to expand the term of these funding commitments.
Excuse me.
Any color there. Thank you.
Just with respect to the Sam's club agreement.
Getting into any nitty gritty details but.
Assuming success.
Successful you've got a really really good retailer partnership program is there any flow.
If you can speak to it or not I don't know, but is there anything with the current agreement with Samsung.
Sam's club that would prevent you from offering additional reaching additional partnerships with other retailers in the U S.
It's what's on the page it represented as what Sam's and Walmart accounts as you know Walmart and Sam's a subsidiary of Walmart. That's what's been approved for disclosure. So we have to live with what you've got I think there'll be further announcements here by Sam's in the short term.
We're not we're not going to finance a competitor to Sam's we have Atlantic we have a lennox relationship we're not going to finance some of that competes with Lenox. There are other forms of distribution that we're looking at that don't compete per cent.
I'll leave that to latter part of August but there are other forms of.
Distribution out there.
I don't I can't I can't emphasize enough that.
Net mark Birch and his team have done a phenomenal job of creating this exclusive network of dealers we couldn't enter your home.
That will allow a number of participants in the U S to now go past the door still a book.
As opposed to dropping a box off on your doorstep. They will now be able to go into home and I have to leave it there Tobey reported we've discussed in August.
And Chad just to just to highlight.
Other one we talked about the Dell tile relationship I mean debt, that's a subsidiary of Mohawk, which is the largest flooring company.
Indeed in the country. They do one and three of all titles sold in United States Thats going to be a great.
Relationship for Mark for Mark and his team and frankly there is.
A whole number of other relationships that debt. We ended up that we did sign in the quarter with dealer networks et cetera, and we're looking at other manufacturer relationships as well so.
Sam's is obviously a huge deal for us we're very very excited about it but just don't want to forget about all the other things that mark and his team are getting done.
Great I'll pass it on from here, thanks very much.
Thank you.
Once again, if you have a question. Please press Star then one.
Our next question comes from Jamie <unk> line with National Bank financial.
Please go ahead.
Yes. Thanks.
Actually want to hear more about this modest bolt named liquidity.
Okay.
Yeah.
Youre going to get worse again.
I said I said I said, a fishing boat.
Yeah.
Okay. So first first question John I got kicked out for a second so I mean, maybe I missed it but on the on the Dal tile is there anything you can tell us about what your expectations are in terms of that.
Dealer growth penetration and the size of that that relationship maybe like maybe compare it to like how <unk>.
Formed over the last several years is that something that we shouldnt think about no I mean look we'll see.
Great relationship obviously, they sell a tremendous amount of tile to contractors Oliver all over the country.
We will be exclusive with Dell and with Dell tile and.
Obviously very much value our relationship with Mohawk and hope we can continue to expand that.
Well, we'll come back to you with more details around size of the program et cetera over time I suspect it'll take take a bit of time to ramp just like we've seen with other programs that we've launched like a beacon our aura Owens Corning, but there is no reason why.
A very large flooring brand like Delta can't be a very significant originations contributor over time.
Okay.
More on that later I guess and then second question for me just.
In the.
The service Finance you guys already talked about it on the on the servicing yield and I get that the bulk of it is probably coming grades coming from yes.
On the back of the year is holding higher held for trading assets.
<unk>.
But that doesn't explain everything at least from.
What I can tell based on kind of running through some other numbers here. So is there anything else that would cause.
Variability from quarter to quarter outside of just that higher held for trading.
Assets.
Yet.
No.
That is the biggest.
Reason for the variability.
So.
The timing of the sales and how much you've been building up without putting the balance sheet without selling as you have.
For five months of originations going through in a single period, it's going to skew the servicing margins.
Got it okay and somewhat on it also depends somewhat on your mix and income quarter remember, we've got something like.
50 years, I think it's like up to 65 different products at this point that those those products do have different pricing and whatnot to them. It typically blends to about 3% gain on sale and a 2% servicing but but if.
Mix is a little bit different from one quarter to the next to could skew 10 to 20 basis points, one way or the other or any given quarter. If you combine that with.
Asset sales like for like Michael has been talking about that's the bulk of the change it's really just a timing and a mix issue.
Like we said before we expect that for the full year youll be back it'll be about a 2% number on your sort of average servicing assets and we would actually expect it to be above that in the second quarter as you get back sort of what your loss for some of the sales that occurred in Q2.
Yes, I mean theres some variability bad if you go back and look at it over the last couple of years quarterly you've seen it up and down $20 $30 40 basis points over a couple of quarters multiple times, even if you are not even looking at last year, where you had some concessions I think Jamie what I asked for which John can walk you through his.
Quarter by quarter.
<unk> forecast of the servicing revenue to be able to track it better. So why don't we follow up with that post the call.
Okay, great, yes, it sounds like Mexico.
Second component there and then.
Last one still on that mix is there.
What can you tell us about the underlying loan demand from consumers as they are in particular loan that there that there.
<unk> two.
Select at this stage and how do you see that.
Affecting origination fee income is it positive or negative items like that.
The types of loans.
Yeah origination fee income is at an all time high.
So we can walk you through that I think the one thing that's temporary in nature here to me is that we've seen as every other participant in U S. Financial services has seen we've seen a prepayment speeds that have been increased and that's temporary that's driven by all the incentive checks.
My reference to the $4, one trillion that needs to get digested here.
The prepayment speeds.
Have have increased by everyone. We believe that's temporary in nature as the incentive checks are are spent.
Yes.
Just to follow up on follow up on Steve's sentiment just recall I mean, so again, it's a mix issue in the first quarter, we had a gain on sale margin, which was at the highest we've had in the last at least eight quarters going back and again, that's just a product of the mix of different products that are that are rolling through as you can imagine.
We're somewhat indifferent product by product for what the mix looks like whether it's <unk>.
Coming from a servicing fee are coming from a gain on sale, we're more interested in the net present value.
The economics to service finance going back to your earlier question. Jamie If you look for the servicing revenue was a function of that large S. FY loan in April and also we've had promotional loans.
Due to this prepayment issue that payback quicker. So we don't get all the servicing income.
That has started to slow down, but that's not unique to us that's to your series seeing prepayment speeds increase mortgage.
Mortgage book consumer lending books pick any one of them.
But it is starting to abate.
Got it thank you very much.
Question comes from Mario Mendonca.
TD Securities.
Please go ahead.
<unk>.
Steve if we could just kind of a conceptual issue here.
At service finance for the last four quarters.
Our revenue growth lagged expense growth and I suspect that relates to all the initiatives that are in place.
For one.
Certainly Sams club Theyre going to want a bunch of expenses that have gone on I would imagine that haven't yet resulted in the revenue.
<unk> got that concept about right.
This clearly asset turn one day and the operating leverage has to kick in.
Interested in hearing from you is when that might be could it happen as soon as next quarter or is this something we probably should wait until 2022 to see that revenue growth outpacing expense growth in service line.
Yes.
It's a very good question Merrill or but I think we're going to start to see some of it in the second quarter Q3, and Q4 Youll see significant operating leverage Michael.
Michael you made a reference to the lead management business that we created over the last two years.
It has now come through the lead management business being able to provide leads.
And the and the Sam's relationship was critical to winning that contract.
Paying for that.
I know you didn't ask book Triad, but it's the same thing of triad, where we spent $1 million.
This quarter on launching land home. So I think in both of these companies will see significant improvement in the efficiency ratio.
And that could be as early interest.
Second half of 'twenty, one is that fair.
Correct.
Okay and then for.
Sorry go ahead.
I was going to say just for 2020, obviously, we had the fee concession so that impacted the.
The margin ratio.
So the fee concessions investment spending all of that drove the negative operating leverage.
And Thats, essentially where I'm going I would imagine we're going to see that turn at some point when it does it might be meaningful.
Turning to a different type of question and forgive me for being sort of detailed in its nature.
I think everybody's asked about gain on sale margins and service margin. The one that I haven't been able to really reconcile yet in my mind is the gain on sale to originations in triad. It declined a fair bit this quarter on a sequential basis, it's really not that big a deal relative to other quarters that I see but is that really a result of the home and the home and land.
Our land and home product or is that not really having an effect yet we will see the gain on sale margin deteriorate later.
Hey, Mark so.
It has some effect and we are closing some originations in land home.
I would say.
It's a.
Relatively.
Small number but what you've seen over time is.
The mix has changed somewhat from core to managed only manage only has a has a bit of a lower lower margin.
Then core to us if you look over a long period of time, it's about a 7% average and if you actually take that quarterly it jumps between say I don't know six and a half from seven 550 basis points, either way and I think in this quarter. It was around six to eight.
6768, and so.
To me, it's pretty normal you can see that that kind of fluctuation depending on mix in any given quarter, but it has tended to about 7%.
Most annual.
Full year over the last several years.
I think John Am I right in saying that you guided us to a lower number over time as land and home <unk>.
<unk>.
Yes, I mean, we should we should see.
I think we believe that the land home business is going to be as big as the channel business when that happens Mario remember land homes, a lot closer to a mortgage so therefore the pricing on it is closer to a mortgage we get in our channel business. What you've seen is over a long period of time the pricing on that is roughly 300 basis points of over equivalent 30 year treasuries.
I'm, sorry, 30 year mortgages.
Which.
It's pretty consistent over time, we can generate a lot of fees off that.
Mortgage product is going to have a lower spread to those 30 year mortgages as it is a full land home, which means there's a little bit less gain on sale of that can be built into that again, it's all incremental very little expenses are associated incremental expenses are associated with this business beyond the build out because we're running through the same distribution network that we do on the channel side.
So, yes, youre going to see lower.
Margin gain on sales, but a lot more dollars running through that business.
Okay. Thank you.
There are no further questions at this time.
That concludes today's conference call.
You may disconnect your line.
Thank you for participating and have a great call.
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