Q2 2022 ECN Capital Corp Earnings Call

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Thank you for standing by. This is the conference operator. Welcome to the ECN Capital 2nd Quarter 2022 Results Conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. I'd now like to turn the conference over to Mr. John Wimsatt. Please go ahead, Mr. Wimsatt.

Thanks, Kayleen. Good afternoon, everyone.

First off, I want to thank everyone for joining this call. Joining us today from the company are Steven Hudson, Chief Executive Officer, and Michael Moray, Chief Financial Officer.

A news release summarizing these results was issued this afternoon, and the financial statements in MDNA for the three month period under June 30, 2022 have been filed to CDAR.

These documents are available on our website at www.ecncapitalcorp.com. Presentation slides to be referenced during the call are accessible in the webcast as well as in PDF format under the presentation section of the company's website. Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties.

I'll refer you to the cautionary statement section of the MDNA for description of such risks and certainties 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 company's earnings release, financial statements, MD&A, and today's call include references to a number of non-IFRS measures, which we believe helped to present the company and its operations in ways that are useful to investors.

The reconciliation of these non-IFRS measures to IFRS measures can be found in the mDNA.

All figures presented in US dollars are less explicitly noted and with these introductory remarks complete I'll now turn the call over to Stephen Hudson

Thanks, John . John's about to review an exciting growth opportunity with you, Intercoastal Finance Group. I'd like to make just two comments before John walks you through this. Intercoastal is consistent with our business model of originating and managing both super prime and prime credit assets for our funding partners. And second, it utilizes our proven systems, processes and strategies of TRIAD. With that, John , over to you.

Thanks, Steve. We'll start on page six. As you guys all know, we've been pursuing a tuck-in strategy and we're thrilled to announce CCN's second tuck-in investment in Intercoastal Financial Group, or IFG. IFG was founded in 1987 by Hans Kras, a proven industry leading entrepreneur and is headquartered in Fort Pierce, Florida. IFG is a premier marine and RV finance company with more than 30 salespeople nationwide, having more than $550 million in expected originations in 2022.

Combined with Source 1, ECN's marine and RV vertical will now produce more than $1.1 billion of originations for our lending partners. We expect IFG to earn between $12 to $14 million of adjusted operating income in 2023, and ECN paid a total consideration of $75 million, with $55 million paid at close and $20 to be paid over a couple of years.

So on 2023 earnings at the midpoint, ECM paid around six times 2023.

On page seven, this is sort of a format you guys have seen before, it's just some highlights. As you can see, this is really super prime production with an average FICO score of 785 and a down payment of around 25%. Ticket size is a bit bigger than source one at $120,000 and 100% of production is sold through to 15 long-term lending partners without recourse.

Page 8, we've included a list of the senior management team led by Hans Krause and Nikki Bates, president of IFG.

page 9 highlights the footprint compared to ECN's footprint with only source 1. As you can see we are now nationwide with loans generated in all of the lower 48 states

Page 10 expands on that footprint, highlighting the expanded coverage in key states. We significantly expanded our presence in the top five states for marine and RV lending. California, Florida, and New York are added to Texas in the top five. Florida becomes our number one state from having limited presence with Source One. Finally, 75% of combined originations now come from the top 15 states.

Page 11, we go through some of the loan characteristics of IFG.

compared to Source 1. Highlights include a bit larger ticket size, combined with higher FICOs and down payments. In addition, very low chart racks at just 5 basis points with only a 6 month look back.

Page 12 looks at originations. Page 13, weighted average FICO. Page 14 is the distribution of FICOs. And I'd just like to highlight that more than 50% of originations boast that 800 are higher than the FICO score.

Page 15 runs through your average down payment. Page 16 is product mix. As you can see, IFG primarily focuses on marine finance, only about 12% in RVs.

Finally, on 17, there is very little dealer concentration with the top 10 dealers, making up just 13% of originations.

As with all of our transactions, we have identified numerous growth opportunities. On page 19, we believe, just like Source One, there's a low-risk path to three to four times earnings at IFG over several years.

As we said,

As we said before on an earlier slide, we expect 12 to 14 million in adjusted operating income in 2023 which has grown in a category of almost 16% since 2018.

You've seen this slide or something like it before. We believe that all of these things

Sorry, here on page 20 we outline the ECN playbook, which highlights some of the opportunity we discussed with Source One. We will pursue all of these opportunities with IOG as well, including floor plan servicing and licensing, improving and adding funding partners, enhancing processes and systems, and building our expanded loan menu.

There's an opportunity to enhance IFG capabilities geographically as well. While they're currently national in scope, certain areas such as the midwest or northwest could be augmented to improve volumes.

Finally, on page 21.

We lay out some of the programs that will be additive. Some of this nomenclature we used before, specifically progress pay and complementary flow. We see opportunity to build these new programs which can significantly enhance retail flow. Whether floor plan or any of these programs, we believe they will contribute meaningfully to growth in the coming years.

With that, I'll turn it to Steve to run through the quarter. Great. Thanks, John . Turning to slide 23, a small recap on the tuck-in strategy that John has spoken about in the past. In addition to today's important IFG announcement, the company is pursuing a number of modest tuck-ins of both super prime and prime credit originators. Four things I'd like to highlight for you on slide 23. First, we have four additional platforms that are currently under executed LOIs.

with several others in early stage. In terms of operating scope, these smaller tuck-ins will fit as part of Source One and IFG.

Second, these transactions are consistent with the ECN's proven business model, and we set the criteria for that.

Third, all of these opportunities leverage Triad's extensive funding partner network, successful platforms such as floor plan and servicing, as well as its very successful take share and make share strategies. And finally, the current environment is presenting prime credit origination platforms at attractive valuations and attractive structures to ECN.

Turning to slide 25 on the second quarter, a few highlights. Nine cents, which is a high end of investor day guidance of eight to nine. Very proud of that.

Our 22 guidance remains at $0.29 to $0.31 with higher tri-added source 1 and slightly lower KG.

Specifically on Triad, Q2 origination is up 45%, approval is up almost 30%. We are raising guidance for 22 to 70 to 75 million.

and third under Triad, the housing affordability crisis is driving record shipments, both at Triad and through the full industry. On source one, originations are up 33%, approvals up a very significant 83%, which bodes very well for H2 and into 23. We're raising guidance.

on Source One to $13 to $15 million. And we're quite proud that we've added four new funding partners, including M&T Bank, which we have a significant relationship with.

On Kessler, we're lowering our guidance primarily due to slower credit card investment management activity. The KG pipeline remains robust and is expected to track well in the latter part of 20, early part of 23.

We're reducing our income guidance from 46.

246.52 from 55 to 60 million.

Turning to Triad, I challenge the management team to think that they're Eagles here and they've soared past their expectations.

with income for the quarter up at 19%, a 45% increase year over year. Origination is up by a similar 45%. Floor plan assets at $280 million, as you remember, we've talked about this in the past, but our floor plan dealers have three times the growth in our retail originations than non-floor plans. The $280 million bodes very well for originations for the latter part of 22N into 23.

and I mentioned earlier guidance up.

Turning to page 28, a couple of observations on program updates.

that fourth bullet on the page, that we've added up 530 new communities.

year to date. That's significant. That's a 30 percent growth in communities that can now access our full menu of products.

It's a strong indication of what's going to occur in late 2022 and into 2023. As I mentioned to you, floor plan at 280 with a yield of 9%, most floor plan dealers will have three times the growth at our core retail business than non-floor plan.

Turning to the affordability crisis, you know, it's the combination of the impact of rising costs and prices on traditional site-built homes, combined with the higher

with higher interest rates, which have created this unprecedented demand for manufactured housing. You see it on the left-hand side of this page with year-to-date manufactured housing industry shipments up 14% and both May and June up over 20%. That compares favorably to existing traditional home sales, which are down 15% year-to-date.

And then finally on the latter part of this slide, in 22 shipments are up 16% year over year, the fastest shipping rate growth since 1994.

Some industry commentary, all of which is robust, but on Skyline's recent call from Skyline's CEO , it's a combination of rising rental rates combined with higher interest rates and inflationary pressures have created this unprecedented demand for affordable housing, and we see no abatement of that. Turning to CAVCO, manufactured housing is now an option not considered by traditional site-built homes. Here's another scenario where it Cracken market in

electing manufactured homes over site bill simply because it's affordable and it lasts a longer life of the asset.

Turning to page 31, our managed credit portfolios, our strong credit performance continues both in delinquency and in losses.

32 are originations I spoke to earlier. They give you the monthly and quarterly breakdowns, strong and robust.

And on page 33.

We're reading our origination guidance of 1.6 to 1.4 to 1.6.

originations are projected to grow at 44% at the midpoint of that range.

We've increased our floor plan balance as part of our take-share strategy in the marketplace.

That floor plan balances do not include the rollout of inventory or floor plan finance in the marine and RV business.

We've raised guidance to $70-75 million and EBITDA margins have improved to 54% due to better mix more core loans.

With that, John , I'll pass it back to you.

Thanks Steve. On page 34 we'll review Q2 for Source 1. Adjusted operating income of $5.3 million for the quarter was ahead of budget. Our origination growth of 37%, which compares to 35% for the first six months since we acquired the business.

We continue to add new lending partners to that strong progress on growth initiatives such as floor plans, licensing and servicing.

After a solid first half, we are raising our 22 origination guidance to $550 to $625 million and our adjusted operating income before tax guidance to $13 to $15 million.

On page 35, we give a program update. As you can see, momentum is strong with approvals up 76% and originations of 37% in Q2.

In addition to new reps that we added in Florida and Southwest earlier in the year, we've now added a rep in the Northwest in Q2. We expect to have a Northeast rep here before the end of the year, and we should have full coverage across the entire United States before year end, which was one of our goals early in the year. Our servicing project is on track to be completed here in Q3, and licensing is moving forward and we'll make substantial progress before year end.

We've launched our Marine and RV4 plan initiative with several Source One dealers and continue to add underwriting and process personnel to handle growth.

As with last quarter, we added some industry comment from Brunswick One Water and Four on page 37.

As you can see, retail demand remains strong. Marine inventory is still a challenge, but RV inventory is basically returned to normal. In addition, fuel prices still do not appear to have much of an effect on customer behavior.

Page 38 reviews originations just like with Triad. And finally on page 39, we're raising our guidance from Investor Day for a fantastic first half. Originations are now expected to be 550 to 625 million and are more than 15% ahead of plan through June . Adjusted operating income is now expected to be 13 to 15 million up from original guidance to 12 to 14 and EBITDA margins are an exceptional 66%.

On page 40 we move to the Kessler group. Q2 adjusted operating income before tax was 12.9 million, which is down a modest 4% year over year and frankly a bit below budget.

Revenues were up 28% year to year primarily as a result from increased pay for performance marketing. Partnership services were largely in line with forecasts and up 23% year to year.

CCIM, however, had lower revenues from portfolio runoff of legacy portfolios and delayed transaction closings due to current market environments.

On page 41, we discuss CCIM a bit more.

We've seen the timing of transactions delayed in the current environment. Our current expectation is a deferral of portfolio closings largely into 2023, but it not lost opportunity.

performance of existing portfolios remains exceptional and is driving strong investor demand. And as the environment calms down over the coming quarters, we expect activity to pick back up.

I would.

On page 42, we look at 22 guidance and as a result of the delay in CCIM revenues primarily, we are lowering our KG guidance from 55 to 60 million to 46 to 52 million for 2022. If you look at the various segments of KG, the partnership services business is largely on track to hit guidance for the year. The marketing business, while a bit behind guidance in the first half, saw material pickup in the second quarter as you would expect given activity you might have read about.

in terms of credit card marketing. We feel really good on that for the year. It's just the CCIM business and closing those portfolio transactions. Today we're gonna have to see how it comes together in the back half of the year, but we're really looking for 23 for a resume pickup in that business.

And with that, I'll turn it over to Michael to run through the consolidated financial summer.

Thank you John . Turning to page 44. Q2 is another solid quarter for each of our operating businesses.

Total originations in our secured consumer loan segment were $613 million compared to $262 million in the same prior year quarter. This includes $232 million in originations from Source One.

The growth and originations drove adjusted EBITDA to $38.9 million from $23.4 million and adjusted operating income before tax to $28.5 million from $16.4 million in the prior year quarter. The growth and originations drove adjusted EBITDA to $38.5 million from $16.4 million

Turning to page 45. Key balance sheet highlights are an increase in total assets of over $160 million compared to Q1, primarily driven by an increase in floor plan loans and help for trading finance assets at Triad.

Debt was up over $450 million from Q1, reflecting the increase in finance assets at Triad, the funding of the IFG acquisition, and the payment of the accrued tax liability from the gain on the sale of service finance.

Subsequent to quarter end, we increased our capacity in our senior revolver to 900 million from 700 million previously.

Turning to page 46.

Key income statement highlights are Q2 adjusted EPS was $0.09 per share at the higher end of our investor day guidance range and in line with consensus for the quarter.

Key P&L items to note, growth in loan origination revenues was driven by the growth in total originations. Lower asset management and servicing revenues was driven by lower CCIM revenues at KG due to the impact of the sale of our portfolio investments in Q3 2021, which is partially offset by higher servicing revenues at Triad due to the growth in managed assets there.

The increase in marketing revenues is driven by the growth in KG's paid-for-performance marketing programs, as noted by John earlier.

Finally, higher interest income was driven by the increase in floor plan loans on balance sheet.

Turning to page 47, higher business segment operating expenses were largely driven by the higher revenues at each of our businesses.

corporate operating expenses of $4.4 million compared to $6.5 million in the prior year quarter, reflecting our cost reduction efforts subsequent to the sale of service finance.

With that, I'll turn it over to Steve for the closing summary. Thanks, Michael. So, we're on slide 39, which is three observations. The first is...

the IFG investment.

It results with Source One in a nationwide super prime and prime originator with over more than one billion in annual originations. A significant step forward for these companies and ECN strategy. Second, we're reconfirming our 22 guidance as well as our 23 guidance. We will update 23 guidance on our Q3 call. And finally, second quarter was extremely strong at $0.09 ahead of our budget and at the high end of our range provided on investor day.

with Source One in a nationwide, sub, super prime and prime originator with over more than one billion in annual originations. A significant step forward for these companies and ECN strategy. Second, we're reconfirming our 22 guidance as well as our 23 guidance. We will update 23 guidance on our Q3 call. And finally, second quarter was extremely strong at nine cents ahead of our budget and at the high end of our range provided on investor day. With that operator, we'll open the call for questions.

Certainly. We'll now begin the question and answer session. If you have a question, please press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please lift your handset before pressing any keys. To withdraw your question, please press star then two.

Our first question is from Nick Preeve with CIBC Capital Markets. Please go ahead.

Yeah, okay, thanks. First of all, congratulations on the transaction. Just a point of clarification and apologies if this has been covered, I'm still digesting a lot of this, but if I caught that correctly from Michael's comment, the $75 million purchase price that was financed using a draw on the senior credit facility. So where does that take your pro forma leverage? I know that the credit facility is a bit of a hybrid in the sense that it finances both floor plan assets as...

you know, as well as acquisitions. And so what does your pro forma leverage look like? Or how much availability do you have remaining post transaction here?

Thanks for the question, Nick. If you turn to the MD&A, the liquidity section, it will take you through what's available subsequent to quarter end and subsequent to this acquisition on the senior line. It's effectively about $260 million.

Okay, and then I think I also caught in the prepared remarks that there are four additional platforms currently under a letter of a 10. Are you referring to potential bolt-on acquisitions that you would expect to announce that are similar in scale to Source One and IFG? Did I catch that correctly? There's only three of us here. Okay, let's do this.

Well, I would say that we have four different transactions that we're currently under LOI. We have several others that are in earlier stage in the process. I wouldn't necessarily characterize them all as the same size as IFG and Source One. Some could be smaller, but they could be sort of fill-in type things. Like think about a geographic situation where they've got some teams or some origination capability or some new products.

Okay. I will take one last one. The 2023 EPS guidance was not changed but I think you signaled the acquisition is expected to be $0.06. The 2023 EPS guidance was not changed but I think you signaled the acquisition is expected

a creative, why defer the update to the 2023 EPS guidance? Is there anything that you're waiting for to update until next quarter? Just looking for a bit of clarification on that. Nick, it's Steve, we've got four transactions under LOI. We will have other stuff to announce.

We're going to do it all at once.

Okay. All right. Fair enough. That's it for me. I'll pass the line. Okay.

Next question is from Jeff Kwan with RBC Capital Markets. Please go ahead.

Hi, good afternoon. Just was wondering about those transactions at Kessler you said are kind of getting pushed out to 2023 and credit. What exactly I guess is driving....

with the lane in terms of getting those done until next year.

Jeff, you know,

Over time, what we've seen is that Kessler's business was, say, more affected by COVID than Triad and Service Finance at the time. And what we've seen is just with the overall market environment, you've just seen some difficulty settling on valuation and some other things in certain transactions. And what we've seen is just a push out in terms of where, when we think things might close. We're trying to be prudent about...

thinking about how the rest of 22 is going to look as we get into 23. We still think the pipeline is quite strong. At this point, we're not seeing things fall out of the pipeline, so it just feels like deferrals to us. But once the environment calms down a little bit and pricing can become a little more transparent, I think we can move forward with some of these transactions. I just can't tell you with any degree of certainty that they're going to close here in the next quarter or so.

Sorry, were these deals where you had previously announced them, but there was some sort of, I guess, turbine the agreements.

that the buyers

And

I guess we're able to renegotiate or? This would be additional portfolios that we have yet to announce or close. So this is pipeline, this is true pipeline. Like, you know, we've said in the past, we think that this business can do 1 to 3 billion in a normal year. What we've seen is the market environment has caused a situation to delay a lot of transactions. And we're just, you know, we're waiting to, waiting through it. And who knows, maybe we'll get some stuff closed towards the end of the year, this year.

Things look better, but until we start feeling like that's going to happen, we're going to push this out to 2023.

Okay got it got it got it. And then my other question, same thing on Kessler, is the marketing program, you know, economy is still reasonably okay but there's concerns about the direction that it's going. Are they seeing...

any changes in terms of their client's interest and appetite for those services.

I don't know, there's been a bunch of articles recently in the Wall Street Journal talking about how the credit card businesses are out there pretty aggressively marketing for new customers. We saw obviously a big jump quarter over quarter in marketing spend and marketing revenues. I think that's reflective of what's going on out there in the marketing world. I guess if you saw a situation where the economy turned down or took a meaningful turn one way or the other, that could change, but as of right now, we think the appetite for marketing is still pretty strong.

articles recently in like the Wall Street Journal talking about how the credit card businesses are out there pretty aggressively marketing for new customers. We saw obviously a big jump quarter over quarter in marketing spend and marketing revenues. I think that's reflective of sort of what's going on out there in in the marketing world. If that I mean I guess if you saw a situation where the economy turned down or took a meaningful turn one way or the other that could change but as of right now we think the appetite for marketing is still pretty strong. Okay thank you.

Thanks, Jeff. The next question is from Tom McKinnon with BMO Capital Markets. Please go ahead.

Yeah thanks very much. Just continuing on with Kessler, if I look at page 15 of the MD&A, where it looks like revenue is actually for Kessler is up year over year but it's the OpEx that seems to be a lot more elevated here and that's forcing both the EBITDA on the adjusted operating income before tax to be.

generally flat to down. So can you help me understand what's happening with respect to that? And is it just because of the business mix? Thanks.

Hi Thomas, Michael, thanks for the question. As we noted at investor day, our new pay for performance marketing program is a bit of an accounting difference compared to our historical accounting programs. Whereas under the old marketing programs that were accounted for on a net revenue basis, the pay for performance, we recognize the gross revenues and the expenses. So that's why you see the increase in revenue and also the increase in operating expenses. And the margin...

obviously gets compressed as a result of that. We're still making money, but any expenses, gross accounting's gonna give you a lower margin than net accounting. If we were stuck with net accounting, you'd have similar margins as you had in the past. It's just we're now, the accounting changed to gross accounting.

Okay, and I mean, you've tried different programs. You've announced new portfolios with respect to Kessler Group, but it still just seems to be a bit of a stalled car here. Is it strictly the environment or what's the aptitude for clients to take on some of these additional services that you have? Is there any execution issues here? Just trying to dig down a little bit deeper into the...

before we get them going. And I think the macro environment is really affecting the CCIM business really only. If you look at the year to date in the partnership services business, you're right on track to where we guided for the full year. And while the marketing business is a bit slow, you've seen a material pickup in the second quarter over the first, and it still looks really good for the year. So it's really just the CCIM, and that's really in our view a macro environment. The pipeline still looks strong. I would add just two more things I think if you reflect upon.

portfolios going.

Great, and just a couple quick number questions. On IFG, I think you're talking about 12 to 14 in OpEx, or pardon me, adjusted operating earnings in 2023. This thing closed July 1st, and I think the increment in 2022 is just 4 million. So why is it so much lower in 2022 than what you're telling us for 2023? Tom, it's just like all...

There are other boat business, it's their seasonality. You earn more money in the first half than the second half because the selling season is really that April , May, June , July period that starts to slow down in the back half. So we expect that IFG will make somewhere close to $10 million for the year in 2022, and we'll get somewhere between four and five, but we're just being a little bit conservative at four right now. So we'll have to see how it plays out and what the volumes look like in the back half of the year, but we feel pretty good about that four number, so that's where we are. For more information, visit www.fema.gov

Sounds good. And the corporate expense guide, I think it was 12 to 14 for 2022. Is that changing? Is that increasing?

Hi Tom, obviously given our year to date Spence we're going to be a little bit over that, but we've also performed in our businesses so we're not updating the line by line guidances. We still think we're going to be in the overall EPS range.

Okay, thanks for taking my questions.

Thanks Tom.

Our next question is from Vincent Kantic with Stevens. Please go ahead.

Thanks for taking my questions and congratulations on the acquisition. So first, just on that acquisition and pipeline, you mentioned the four LOIs.

Maybe if you could talk broadly how the market is looking for acquisitions, I'm guessing valuations maybe have rationalized a bit. And if you could put a framework on how you're thinking like.

What's your size appetite for total acquisitions?

So, you know, as we stated from the beginning, one of the things we think is so interesting about the marine and RV space, it is quite fragmented. There's a lot of smaller players that are out there. That lends it two ways. One, you see valuations come down overall, but just smaller players, typically we can negotiate, probably even better valuations on average. We feel pretty good about that sort of five to seven times kind of range for acquisition prices on current year earnings.

And remember, we're always looking at these businesses, you know, through ECN's lens of what we can do with them. We're typically looking at something where EPS can grow quite a bit. So over a relatively short period of time, we think that multiple that we paid can contract meaningfully. So from a valuation perspective, I think we feel pretty good about that. Typically, when we're talking to a target, we're right up front with exactly how we think about how to value these things and the conversations move forward from there.

We're not surprising anybody and it's worked well for us here to date. In terms of total appetite. We're not surprising anybody and it's worked well for us here to date.

Like I said, I think there's a pretty significant opportunity in the marine and RV space. We continue to look at different kinds of tuck-in acquisitions. Again, there's lots of capabilities, there's lots of different products, there's lots of different geographies that we can attack, and hopefully over the next couple of quarters we can really round out this platform at ECM.

I think the key here is that we've had a track record of investing with strong, proven entrepreneurs.

Service Finance, Triad, Source One and now IFT and I think that these entrepreneurs have been looking for a stable.

source of capital, whether it's floor plan or complimentary flow or other proven make or take share and deeper funding basis. Or yeah.

bank partners who are broader, deeper and better on terms.

And I think that when they meet us and we chat through it, they can see the value greater than they have. You know, you look at the IFG, this continuing financial interest by Hans Gross, it's of a significant nature.

So he will continue to enjoy Upside with us.

I'm quite excited. I think that the numbers we put out there for IFG are conservative with respect to 23.

and look forward to outperforming on them.

Okay, great, thanks. And yeah, I think that rule of story makes a lot of sense. Secondly, and on the other side of it, the funding side, if you could talk about maybe the discussions you're having with your funding partners, you know, the banks, the credit unions, insurance companies, and so on, and what their appetite has been, you know, as maybe interest rates have risen, and we were talking about inflation and other things that we could talk about.

How have your discussions have been on the funding partner side? Thank you. On the pricing issue, as you know, we're a price taker, so we've been able to...

in both businesses push through 150 base points of price increase.

So that's just fine. We continue to be, maybe John can speak to Source One, but at Triad we're oversold and there's no available loans.

in 23, so you're now at a 24. You know, but the performance of the manufactured housing loan portfolios has been exceptional. I think our partners at Blackstone have commented that the best risk-adjusted assets in our portfolio. Maybe John , you wanna provide some color on Source One? Yeah, so in the Source One business, you know, on the prime and super prime side, or IFG and Epic side, we kind of have unlimited funding because you're talking about the biggest banks out there, and they just, yeah.

you can present paper that meets their criteria, they're going to buy it. On the Source One side, where we're dealing with more smaller banks and credit unions, we continue to add capacity there, continue to add new credit unions, and all things considered, we feel pretty good about where we are on the funding side, but we're going to keep looking and keep adding more funding partners over the coming quarters.

Okay, great. Very helpful. Thanks very much.

Great. Very helpful. Thanks very much.

The next question is from Jamie Gloine with National Bank Financial. Please go ahead. Yeah,

Thanks.

Yeah, just want to get on a little bit more here just to make sure I understand the, the push out. Is it.

Is it that investors, third-party institutional investors, are just not interested in the space at this point, given the market backdrop? Or is it that you can't find the right valuation to go purchase, uh, purchasing portfolios, which like, where does the breakdown happen? It's not the investors. It's not the investors. We still have strong demand from, from our, from our investors. It's really more things like settling on valuation with portfolios.

It's the sellers of the portfolios. We see this frequently or we've seen this frequently. Whenever there's, you know, challenging market environments, whether it's COVID or it's this or whatever, you've seen a lot of activity just kind of slow down, especially when you're talking about transaction activity within the credit card space. And I think, you know, the first half of this year into the summer, you know, with interest rate changes and thoughts around whether we're having a recession or we're not having a recession, I think there was a lot of

Lot of the sellers were sitting back trying to figure out what they wanted to do and You know we had some things that we thought we'd get closed here in the in the second or third quarter And it just looks like it's going to be pushed out so

It's not so much demand from investors. Like I think investors still like the product. Most credit cards are floating rate products. So it's not so much an interest rate issue directly. It's really more.

where the sellers are sitting today and where, you know, what portfolios we can actually shake loose and close, what the timing looks like around that.

So, you know, we still feel pretty good that we'll get a lot of those deals closed to just

probably not going to be on a time frame in the next quarter or so.

Yeah, yeah, understood. And my takeaway from the good revenue growth number and operating income decline is that CCIM is a pretty high margin business. And so when you shift maybe more to marketing, which is lower margin business, that's what's driving the impact here. Yeah, it's also like Michael said, it's a bit tricky because we had to change some of the accounting around the marketing because the programs changed a little bit..

which makes the marketing business a bit lower margin than it would have been otherwise, even though we're generally speaking making the same amount of money on the dollar capital, similar type return. We just now print everything gross. That said, yeah, CCIM is quite profitable. The margins are really exceptional. So to the extent that we have, uh,

issues there, it just gets trickier from an EBITDA margin perspective. But even so, I mean the EBITDA margin in the quarter was kind of in line with where we sort of guided for the year. It's really just...

You know, when we see those things pick back up again, you'll see some of that growth look more normal.

Great. Switching to the M&A story, I understand the dry powder is at 250 million. You could do a couple of these IFG transactions and Source One transactions. And I think that's...

That's quite crucial to drive the attractive accretion that you're generating on these deals. So I just want to confirm that.

Like the four LOIs that you have in place now, maybe some more like the likelihood of of seeing any dilution on an equity basis is what it would be fair to characterize that as very very low.

We can fund these four deals from our balance sheet as is.

Yeah, actually we can fund these four deals and several others that...

We may or may not do they're still way early stage, but like the deals that we're talking about doing here I would characterize them as

small, not bigger than say IFG and Source One. These are really the incremental platforms that we need to round out the product set, round out the geographies, round out what we need to do to then take this business and do all the things that we can do with it, whether it's the floor plan, whether it's the progress plan, the comp rank, all the different things that we're talking about doing licensing and servicing, et cetera, which is gonna help us grow these businesses like we have with, say, Triad or Service Finance before it.

We'll be in really good position to do that after we finish buying some of these things, but we're, I don't see a situation where we're anywhere close to going through our capacity on what we have right now on the pipeline.

Okay, great to hear. And last one for me, M&A expenses in the quarter, is it to close the IFG and to pursue others? 5.6 maybe for Michael. What's the outlook for M&A expenses over the next couple of quarters as you're closing out a few more deals here?

It's obviously hard to say depending on the transactions, but that was for those expenses related to IFT as well as the others that we're looking at for sure.

I mean it's obviously hard to say on depending on the transactions but that yeah that was that was for the those expenses related to IFT as well as the others that we're looking at for sure. On the M&A side I would

As John said, the pipeline activities are generally a bit smaller, but the number of them as well.

you know, getting around that area is probably...

In around that area or less is probably, if we close, that will be around that number.

Okay, thanks very much.

Once again, if you have a question, please press star, then 1.

The next question is from Steven Bowland with Raymond James. Please go ahead.

Thanks. Maybe you could just remind me what the materiality threshold is for your tuck-in deals in terms of press releasing. Because IFG is, you know, based on your guidance and what they expect to add next year is going to be adding like 15% to your operating income. Is it based on assets? Is it based on some other metric? Because I would have thought that was kind of material to basically press release..

I'm not, I'm not.

I'm not exactly sure what the rule is, but we check with obviously our attorneys on these kinds of things. We did the same thing with Source One. Remember we acquired Source One and then announced it at Investor Day.

You know, we have...

Good advice on what we would need to do, what we don't need to do from a materiality perspective? It's a long time since I've printed practice accounting, Steve, but I think $4 million on 22 earnings is not material. It's about a share, a lesson. Okay, so it's current earnings, not future, like guidance earnings kind of thing that's basically right now. Okay. For guidance, it's not really considered. It's whatever your...

doing that. It's 50 million on a $1.4 billion balance sheet. Yeah, I mean, if it's a balance sheet metric, I get that. It just seems like it's moving the needle on your future earnings, which seems material to the stock, in my opinion. But anyway, you've obviously done the test. There's a number of – I apologize if you've addressed this. On slide 39, when you talk about originations of source one, and it says, IFG to add 4 million in 2022, I apologize for the longumbles of $2. architecture to the stock. Oh, no. Mountain. Yup. Gold euro trim from the Polls Union in 2022.

I don't know if you addressed that. That's not... It's under the origination tab.

Unfortunately, I think that bullet ended up in the wrong place. It was $4 million worth of adjusted operating. I'm not sure.

I believe what was supposed to happen that was supposed to be an origination number. Steve I'll come back to you with it. It shouldn't be that material. Okay I just thought it was weird. So now you've got these two milliming RV financing businesses.

But I haven't heard anything about integration, about synergies. Source one, you're still adding reps, adding states.

So is there any thought about integration in terms of the operational side? I mean, are reps gonna be competing with different dealers in the same states? I'm just trying to get an idea of what kind of integration plans are for these two businesses. Well, I think, first of all, we're using the systems and processes of Triad, so even though floor plan's being introduced to both source one and to IFG, it's off the Triad system.

and processes. You know, expanded menus off triads, so it's more injecting those expanded menus and services into those two businesses. I think the overlap has been modest. You saw the Source One and IFG overlap, it's really been incremental to territory, so we don't see a lot of.

and redundancy. These are very modest sized businesses so Michael just plugs his accounting systems in. There's no need to integrate the accounting systems. So I think the integration.

costs and benefits are extremely modest.

I'm very wary of large, of any sort of synergistic savings.

So we simply don't go into those transactions.

Okay, I appreciate that. Thanks very much.

We have a follow-up question from Jamie Gloien with National Bank Financial. Please go ahead.

Yeah, I was actually going to ask on something somewhere as Steve's question there. Just in terms of the sales staff that were added in Florida and California, I believe at source one, are they currently funding new loans at this point? And to Steve's point, or Steve Boland's point, would you expect to maybe...

pause on further sales staff hires given the exposure that IFG is providing to SourceOne. So yes, our Florida rep has done fantastically. She was the first one we added. She's added significant originations in Florida to SourceOne.

Our Southwest rep we added I believe in May so he hasn't been around for quite quite as long but he's up and running now and had a really nice month of July and then our Northwest rep we just added at the end of July so he's just going finishing up training So I wouldn't say that he's actually bringing in any originations at this point. We would expect him to here in the coming weeks or months.

We would like, we're going to find a northeast rep for source one here coming up.

There's some differences in the business model with Source One and IFG, for example. IFG is a bigger correspondent lender. They deal with dealers as well, but they deal with bigger transactions. They're in hold of big, and Source One is a bit different. They're dealing with sort of smaller transactions. They're directly on some of the dealer systems, directly through to the banks. There's some differences here. So...

adding a Northwest Northeast sales rep or Northwest sales rep is not a conflict versus what IFG is doing. I think the simplest way to think about this is that source one is freshwater boats.

So they, for the most part. And then IFG is principally saltwater boats. And there's a little bit of overlap, but not a lot. Hence the difference in price points.

Okay, great. That's a good color on that front.

In terms of the other question on IFG and just to get a sense as to potential risks and a downturn, the chargeback data that you provided and you can answer this question for both IFG and Source One, how much of a track record or how far back does that go? Would those chargeback rates of five basis points and 60 basis points apply during let's say the global financial crisis?

Yeah, I mean, I have to see.

you've got quite a long track record. I mean it was founded in 1987. Charge back rates are not such a big deal there because it's only a six month look back. So you're talking about a six month look back for either a prepayment or a loss, a credit loss. Within six months of the origination, you would owe the fee you earned back. Not, you don't have any principal risk, right? So that one I don't.

I don't think it will be materially different in almost any environment. Maybe you see it go up a couple basis points or down.

Source One is a little bit longer, so they have a little bit more exposure. But it's been pretty consistent for quite a long time. So we feel pretty good about it. Remember, we're not taking credit losses in a true sense. There's no principal risk here. We don't have any recourse to the boat or the boat loan or anything like that. It's really just the fee that we earned.

Got it. Understood.

And again, it's designed to protect the bank because the bank is paying a premium for that asset, right? If they get prepaid or take a loss in the first six months, they lose the entire premium that they paid.

Yeah, understood. That's good. Good call, thank you.

Thanks, James.

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 pleasant day.

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