Q3 2021 ECN Capital Corp Earnings Call
Thank you for standing by this is the conference operator welcome to the you see an capitals third quarter 2021 results conference call.
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I would now like to turn the conference over to Mr. John <unk>. Please go ahead, Mr winds up.
Thank you operator.
Good afternoon, everyone.
First I'd like to thank everyone for joining our Q3 earnings review call joining us today are Steve Hudson, Chief Executive Officer, and Michael Lepore, Chief Financial Officer.
The news release summarizing. These results was issued this afternoon and the financial statements and MBNA for the three months period ended September 30th 2021 has been filed with SEDAR.
These documents are available on our website at Www Dot ECM capital Corp Dot com.
Presentation slides to be referenced during the call 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 I refer you to the cautionary statements section of the MD&A for a description of such risks uncertainties and assumptions.
Management believes that the expectations reflected in these statements are reasonable we can't obviously give no assurance that the expectations of any forward looking statements will prove to be correct.
You should note that today's.
The company's earnings release financial statements and MD&A and today's call include references to a number of non <unk> measures should believe helped to present the company and its operations in ways that are useful to investors. A reconciliation of these non <unk> measures to iff's measures can be found in our MD&A at all.
Fingers as always are presented in U S dollars unless explicitly noted.
With these introductory remarks complete I'll now turn the call over to Steve Hudson Chief Executive Officer.
John turning to slide seven.
The service finance sale. The truest is scheduled to close in early December shareholder meeting has been called for December 2nd to approve a reduction in capital.
And as you mentioned earlier no no approvals required for the service finance transaction, just the form of dividend.
The distribution will be paid to shareholders prior to the year end.
Turning to page eight we had an exceptional quarter. We're pleased to repeat a report six cents of earnings per share.
Service Finance has now been reported as a discontinued business in the third quarter.
We are reiterating our 'twenty, one and 'twenty two guidance, which will be updated at Investor day, you see in what has obviously exceeded this quarter and will exceed expectations in the fourth quarter.
Originations for triad were 48% quarter over quarter increase strong we remain on track for $1 billion, plus here and originations operating income.
$16 million in Q3.
Backlog. It is continued builders are continuing to to turn on that.
Additional or idled plants I would reference for you. The recent call from Skyline, which is a publicly traded U S.
Matter of fact, you're at home participant where they announced the opening of several new Idaho, sorry, not new but several idle or ball fault manufacturing plants.
Shadow and C. O P originations remained strong and our pipeline continues to expand.
Handheld pipeline is at a record 185 billion.
Finding new funding partners year to date or 12, new funding partners kg reported solid adjusted operating income of $12 2 million, we launched a significant new multi year co branded partnership program. We're pleased to announce the kg has entered into a partnership a strategic partnership with specialty lending company.
Affiliated with Blackstone and the first step in that relationship, let's say $450 million portfolio purchase with kg acting as the originator and manager.
Consistent with this new partnership E. C N exited its credit card investments, which were also sold especially lending company John will speak to this in a moment. We believe that this initiative validates E C Ns investment and our credit card investment management business.
Turning to page 10.
I mentioned $16 2 million of operating earnings this quarter originations up 48%.
We've added one new fart funding partner in the quarter industrial back industry backlogs have nellix and its a nine nine months plus.
We're maintaining our guideline or guidance of 1 billion plus of originations and 21.
Turning to page 11 strong growth in both approvals in origination during the quarter. We've also continue to.
And our new and improved product launch is so called make sure that we use is the term we use throughout our business and where that will drive incremental growth in 'twenty two and beyond.
Slide 12 shows you a slide of our menu.
Of of services and products that we offer. This was also in the Q2 deck I think it's interesting to note.
That over half of this these initiatives have been I've been launched since D. C. N has made this investment in triad.
Turning to the chattel update the docs up which are deals that have been approved signed in and and are waiting delivery of a home remains elevated.
Elevated levels, both this backlog and backlog and approved land home.
[noise] gives adding credence and strength to our 2022 guidance page 13, sorry, 14, do you think with the land home update.
We continue to see record approvals, both in volume and a growing pipeline and we officially launched the FHA product in 'twenty, one which will also drive our.
Our higher originations you know what we will guide you at Investor Day to the high end of our 1 billion five for originations for this business.
Turning to page 15 assets held for trading remains a very modest level. You can anticipate that this level will remain in the $30 million to $50 million range.
On 16 portfolio credit trends remain exceptionally strong both in delinquencies and charge offs.
Bodes well for 22 seven.
17 of the slide you've seen before it shows the the growth quarter over quarter over the last the last five years.
On page 18, the triad outlook.
We're we're reiterating our guidance for 'twenty one at 43 to 46, obviously, we're gonna be above the 46 slightly kantar.
We continue to expect originations in excess of $1 billion, our core market is growing and our new products are fully launched.
We are reiterating our guidance for 'twenty two of 57 to 65, we will be at the top end of that and when we visit with you at Investor Day in early 'twenty two.
As I mentioned our guidance for originations is 1.25 to 1.5 I would guide you to the high end of that range.
And look forward to having that and and Mike present to you at Investor Day John.
Thanks, Steve.
As we did with the service finance last quarter as part of our ongoing commitment to ESG, we engaged sustain Olympics to evaluate triad's manufactured housing loan program.
It's analytics, specifically look to try its contribution to affordable housing goals, specifically are they certified that tried to originations finance the purchase of affordable homes and that the majority of Tri Ed's loans satisfy bank CRA requirements under the community Reinvestment Act.
Ah trial program creates clear positive social impacts by serving low and moderate income populations.
And finally these characteristics contribute to the United Nations Sustainable development goals a copy of the report is available on our sustained Linux web site at the link provided here on the page and will be up on the <unk> website under the presentation section.
That I will turn to page 20, and then move on to a to K G. SIB.
Did you reported a solid Q3 with adjusted operating earnings before tax of $12 2 million, which is up around 6% year over year revenue was effectively flat with improvements in marketing services and transaction services and to a lesser extent interest another offsetting a year to year decline in the partnership services area.
Partnership services decline is largely due to lower C. C. I am AR balances year to year as our initial investments were largely in runoff portfolios.
Marketing services continue to ramp to around three and a half million for the quarter, which is up about 30% compared to last quarter as the rebound in marketing spend continues.
As you'll see a lot of new activity has occurred since the end of the.
Third quarter and Q4, we added a significant new co brand partnership with a major Canadian Bank. We also launched a multi year CCI in partnership with S. L C.
And closed on a $450 million card portfolio as part of that in addition, we sold our existing credit card investment staff's LC, completing our transition to a fully asset asset light business and validating ECM investment and building out the platform.
Page 21, Q3 saw a bit of a decline in the part of our partnership services income as stated before our partnership services decline is largely due to lower the lower revenues as a result of lower CCI imbalances ear to ear as our initial investments were largely run off portfolios.
The actual traditional core partnership revenues are up year to year.
Right.
And that.
The volatility that occurs in the partnership services spaces is largely from from two things. One is renewal opportunities are within the core partnership area, which can can obviously be fees that earned more on a one time nature as well as some of the variability around C. C I M assets, which specifically.
It can move up and down depending on the nature of the underlying portfolio.
Accordingly between the partnership with SLC in our current healthy pipeline. We continue to continue to believe C. C. I am will be a nice contributor and grow a well over the next several years.
Finally, we look to we continue to view the be a SaaS or banking as a service opportunity favorably and we are well along with our initial launch partner and looking to add other partners in 'twenty two.
Moving on to page 22.
After spending the time and capital to build the business CCI EM as an important growth area for kg going forward. The SLC partnership will should accelerate that growth.
We think that there is an opportunity to add in the range of $1 billion to $3 billion of assets annually across the platform management fees are generally between 7500 basis points or three to six times larger than traditional partnership services arrangements at 15 to 25 basis points.
Asian kg Aaron's performance fees, which are typically a percentage return over our hurdle rate that can materially enhance revenues overtime.
So adding a dollar in CCM assets is the equivalent of adding $10 or more traditional partnership apps assets, which is obviously quite attractive for kg.
Page 23, we recall the timeline of the CCI M. Buildout kg kg recognized early that the market was changing and some typical bank to bank transactions, we're no longer tenable, largely due to regulatory change or changes in capital charges kg that pioneered the bank institutional investors structure, which was.
Unique and allowed kg to continue to try to transact for competitors to not easy and worked with kg to build the platform by investing in its first four transactions alongside institutional investors as well as in acquiring a platform and team.
You can't put up capital to incubate new business inside one of our portfolio companies. This is exactly what we've done across service finance and try it.
In the fourth quarter, you can successfully exited our initial credit card investments and the transaction with SLC, while this validates our process.
And generated meaningful returns the goal of creating a new business platform has been successful.
Finally on page 24, we are reiterating our previous guidance from last quarter for 'twenty, one and 'twenty to visit our 'twenty two guidance at our upcoming Investor day.
With that I'll turn it Michael.
Thanks, Sean turning to page 26 in the Q3 consolidated operating highlights.
As noted earlier our service finance operating results are now presented as discontinued operations and its assets and liabilities are classified as held for sale on the ECM balance sheet effect of Q3.
[noise] triad originations of 299 million were up over 48% compared to the same prior year quarter, reflecting continuing strong growth in our manufactured housing business segment.
Q3, adjusted EBITDA of $26 8 million was up almost 46% compared to the prior year quarter again, primarily driven by the strong growth of triad.
Q3, adjusted net income applicable to common shareholders was $19 4 million or six cents per share compared to $12 5 million or three cents per share in the prior year quarter.
Turning to page 27 in the balance sheet key highlights for the quarter of the total assets and total debt were both down compared to the previous quarter. So unless it's down about $59 million in total debt down by approximately $90 million and the decrease in both assets in debt were primarily driven by the sale of held for trading assets service finance.
Both assets and debts decrease subsequent to Q <unk> quarter in Q2 as noted in our Q2 call as a result of the sale of $173 million in held for trading assets at service finance.
Managed and advisory assets on a continuing basis were approximately $30 1 billion comprised of a three.
$3 billion managed loans at Triad, and then and $27 1 billion in managed and advisory assets at kg.
So turning to page 28, and the income statement.
I think again as noted Q3 2021 adjusted EPS was six six cents per share, which was above analyst consensus for Q3 or five cents per share in.
In Q3, 2021 adjusted EBITDA was $26 8 million compared to the $18 4 million in Q3 2020.
Again, a 46% year over year increase primarily driven by growth of triad.
I'm turning to page 29, and operating expenses key highlights are higher business segment operating expenses were primarily driven by the growth in originations managed assets of new products at triad.
Corporate expenses of $4 6 million are down compared to the previous quarter, primarily due to the allocation of corporate G&A attributable to SSC to discontinued operations.
The legacy business expenses of $1 3 million were offset by legacy business revenues of approximately $1 3 million.
And then finally, turning to page 27 in discontinued operations as noted SFC operating results are now reported.
Discontinued operations.
And adjusted EBITDA of 20 point 25, 1 million attributable to asset SFC includes approximately $4 5 million of corporate and transactional costs were still up compared to the $17 8 million in the previous year, reflecting the strong year over year growth of service finance.
Just the service finance business remains strong and its overall performance remains in line with the original 2021 guidance range with that ill pass it back to Steve.
Thank you Michael on on Slide 32, like the highlight five things.
First obviously is that we are on track to to close the service finance transaction and to pay a dividend before year end second six cents as Michael noted was a was a beat and we have continued strength going into the into the fourth quarter.
Third is the launch of our partnership with S. L. C affiliated with Blackstone, that's an important.
The important strategic development for Scotch on want to reach out and thank <unk>, Scott and his team for taking that on.
Co terminus with that was the sale of our remaining credit card assets to two S O see big step forward.
Number four is that you see N was active in repurchasing common stock in Q3 on the N. CIB you can assume that we will continue to use the N CIB to create additional value for our shareholders.
And Michael and his team successfully issued with Randy.
6.25 billion of senior unsecured which is what it's going to be used to to retire the preferred shares a portion of preferred shares coming due at year end.
And with that operator, we're ready for questions.
Certainly.
We will now begin the question and answer session.
Two questions from the phone lines.
Have a question. Please press Star then one on your telephone keypad.
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Using a speakerphone please pick up your handset before pressing any keys.
To withdraw your question please.
Yeah.
Our first question is from Stephen Boland with Raymond James. Please go ahead.
Oh, Hi, guys two quick questions.
Yeah.
And the progression.
Another 17 basis points this quarter on.
So I'm just wondering what.
Is that going to continue what's driving that obviously, it's probably a mix of business. Maybe you can just explain that.
Yeah, Steve I think you're.
If I if I understood. The question, you've got increased revenue or or increased margin on our on the sale of our loans is that the question.
Yeah, Yeah. So we we we've had a we've been able to with the with the institutions buying loans. The demand is unprecedented for a loan product, we're able to get better deals. So I think you can assume that will continue into 'twenty two.
If we had if we had two and a half 3 billion of.
Loans from triad in 'twenty, two which we don't unfortunately, they all be sold this evening, so we'd been able to use that competitive tension to get a modest improvement in terms and higher margin.
Okay. So when you when I look at total revenue versus your average managed portfolio. That's really the driver of that increase ratio is just the the game, while the gain on sale, but the margin on sale.
Correct, Yeah, Yeah, Steve, but I was going to say if you look at revenues are made up.
Three components right so origination revenue in.
In the quarter represented about 7.73%, which is up a decent chunk year over year, it's sort of flattish maybe down even a little bit from last quarter, but it's still elevated overall, that's what keeps talking to theres just a lot of demand for these assets are the servicing servicing income running annualized around 53 basis points.
Flat with last quarter, and yes floor planning income is higher than it has been previously so.
Balances are up and it's something you know we've turned it over a little bit faster so.
That's what accounts for the revenues in the quarter it actually looks kind of in line to meet to where it was where it was last quarter, though revenues still are accelerating faster than expenses. So you saw the EBITA margin.
6% for the quarter.
Okay.
And then just a question on your.
Your guidance for for Triad on 2021.
Like Q4 was doesn't have to be you know.
I guess, not say well below but certainly below Q3 to get to that even to the top end of the range.
You mentioned, it's already in the comments, but so far.
We're expecting it to be down sequentially in terms of the already weak.
We expect to have a strong fourth quarter for triad.
Okay.
Hence my comments, Steve that we will beat expectations in the fourth quarter.
Okay.
Yeah.
Obviously, obviously you look at the guidance and what we've reported year to date, it would imply something like six months $6 million to $9 million for the third quarter just to get to the guidance range. We.
You clearly expect to be above that at this point.
But we we updated guidance last quarter and we got the Investor day on January 21st So, we'll readdress all our guidance now.
Okay. That's all for me thanks, guys.
Our next question is from Vincent <unk> with Stephens. Please go ahead.
Hey, good evening, Thanks for taking my questions first on triad, it's nice to see that.
Origination growth in it.
So it really high backlog gross.
Wondering when you think about.
Maybe some of these delays.
To hear that.
The plants are coming back online but.
How much have the delays may be impacted business and if you would maybe have normalized.
Some of those.
Originations.
And.
Okay.
Alright.
Could you just come back on line.
Okay.
Most of the delays are caused by the lack of labor as opposed to supplies.
It's been a challenge to get carpenters and electricians.
Electricians and plumbers back into the plant, depending upon the particular state and that states unemployment.
Assistance at the SIB.
As you know it's been a state by state issue some of the states have turned it off sooner than others.
That's what's driving the idle or the mothballed plants to come back online.
Hard to say.
What how to normalize it.
Yeah, I think I think these additional plants coming back online I referenced Skylines conference call for your raw material impact and I think that's the the.
The driver to our 1.5, the high end of our guidance next year.
Not being as Chris says I shouldn't be but that's that's.
That's the information we have in front of us right now.
I would say that we've started to see potentially some ease on labor side as you've seen a number of the stimulus programs start to start to end around the country.
Certain areas of the country you you've started to see some labor statistics that are looking a little bit better.
Obviously the <unk>.
Plants that are coming online either these are plants that weren't online previously its not like they were made previously on and went idle. These are older plants or in some cases, new plants, but this is to expand capacity because demand is still running a very very high so.
I don't know exactly what it would've been had all this stuff's been running full out but.
We still think we feel pretty good about where we are and where we're going into next year.
Okay. That's helpful. Thank you and yeah, it's sort of like with different types of products. It seems like sometimes demand gets squashed alongside with supply so.
So that's helpful. Thank you I guess switching to kg now so a very interesting C. C. I M partnership I just wonder if you could maybe talk about the economics in more detail.
Not sure if.
ECM has equity indices, all seek partnerships that I guess, that's one and then the loan sales.
$450 million do you get gains as you contribute those loans to sell those loans into the partnership.
And then.
The appetite for you talked about one to 3 billion I'm not sure. If that's just with this one partnership or if theres more opportunities more demand from other funds.
To grow that thank you.
Okay. Thanks, Vincent so.
Yeah, we're really excited about this partnership with.
And we did do a we closed on a portfolio of about $450 million of assets as part as part of the launch of this as well as sold or a previous assets. We the terms arent disclose we can't talk about exactly what.
Our economics look like in this business, but as you can imagine and as some of the slides say if you think about it from a generic perspective, we think management fees looks something like 75 to 100 basis points and on top of that there's a performance fee, which is kind of structured like a typical fixed income fund type performance C, where there's a hurdle rate of return and above that you are sort of percentage.
On that rate of return so we hope to have more information and be able to talk some more at investor day.
Oh and yeah, It's you think.
Think about it as like a traditional sort of asset management type relationship or just getting paid for used to be the manager of that or all of that.
That process, where we're not making any investment here, there's no capital so.
Pretty pretty straightforward very exciting partnership.
Perfect very helpful.
Yes.
Sure.
Yes.
Once again, if you have a question. Please press Star then one.
Our next question is from Tom Mackinnon with BMO capital. Please go ahead.
Yeah, Thanks, very much and thanks for taking my call or my question here.
Okay.
464 in the quarter.
We're thinking about.
Perfect for that would be gone what should we be looking at sort of looking into next year with respect to the corporate expenses.
And then while you're at it maybe you can talk a little.
Any preliminary thoughts you can tell us about where you think you might be positioning the Durban.
Common dividends going forward as well.
Hi, Tom and Steve we were on the record last quarter, saying the guidance for corporate expenses going forward next year was $12 million and that remains unchanged.
And then we've also on the record, saying that we would we will have a dividend.
Going forward, we will review that dividend policy and payout ratio at Investor day, but there will be a dividend.
Got it Tom My whole life has been three things in the last 60 days close close close.
So we're you know we're on track to get this transaction closed in I think it will be able to give you clarity on your further depths on your questions. When we see you in January.
Is there any reason why the corporate expenses were so much higher I seem that corporate line.
The service finance business why was that.
Higher than the run rate of 3 million, you're talking you're looking out for next year.
Tom It's Michael.
Well, it's it's the overall run rate its been consistent since all year, we obviously still in the we're still managing service finance right now.
And those that are focused on closing the business. So that the run rates are generally been consistent and is not reflective of our planning for 2022.
Okay. So when you talk about any legacy there that's not associated with any of the service finance. So really these are the 4.6. It goes down to a run rate. It's really just strictly as we lose the service finance and business is that is that the way to think that.
Well that's it as we go through the planning exercise to reduce our overhead yes. That's that's the number that will go down to three.
Oh, okay.
Alright, so even though we ex discontinued operations corporate expenses or not really.
Continued operations is that correct.
Well those are the ones that are in there are by definition going to go away when.
Service closes.
Okay, Alright, so you still standby 3 million a quarter looking forward on that okay. Thanks, so much Dan.
Yeah.
Our next question is from Jamie Glynn with National Bank Financial. Please go ahead.
Yeah, Hi, good evening.
I just wanted to confirm I heard this correctly.
So the partnership is with with Blackstone and and yourselves is there any other partners involved at this time do you expect to get more demand from other partnerships into that.
Into that S. L C partnership or is that just going to stay in the two of you at this time.
It is yeah S. L. C is affiliated with Blackstone you heard that right. We're the only two partners at the table are us and SLC, we see it as a very deep partnership as you know our relationship with Blackstone started at service finance with a.
Billion dollar plus program to purchase our loans for service I think it's safe to assume you can assume this partnership is expanding.
Yeah.
Okay, great and today, its $450 million of credit card loans in the in the presentation.
Stated that there could be other unsecured loans as well.
Can you give us a little bit of color as to maybe what youre thinking about on that front then.
The potential timing for either one of us getting into that relationship.
Yeah, I guess as you'd appreciate Jamie that we do have an active pipeline I'm not going to get into the site to see because it is a competitive process and some of these transactions. We think we've got a ah.
Great partner and and S. L C.
So, we'll we'll give we'll give a little more color on pipeline when we see you at Investor Day right now it's the right. Now. This is what this is what's been approved by our partner to say.
Okay, Great. That's a that's good for me then thank you very much.
Yeah.
As there are no further questions registered this concludes today's conference call. You may disconnect. Your lines. Thank you for participating and have a penny.
Good day.
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