Q2 2023 ECN Capital Corp Earnings Call

Thank you for standing by this is the conference operator, welcome to the easterly and capital second quarter 2023 results Conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

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I would now like to turn the conference over to Mr. John <unk>. Please go ahead and that's one that.

Thanks, Kelly and good afternoon, everyone first I want to thank everyone for joining the call joining us today for me see honor, Steve Hudson, Chief Executive Officer, Michael <unk>, Chief Financial Officer, Lance Hall, President tried financial Matt Heidelberg, Chief operating officer of Triad as well.

The news release summarizing. These results was issued this afternoon and the financial statements and MD&A for the three months period ended June 30th 2023 have been filed with SEDAR. These documents are available on our website at Www Dot you spend capital Corp. Dotcom presentation slides for reference during the call are accessible on the website as well.

PDF format under the presentations section of the website.

Before I begin I'll 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.

The M DNA 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 company's earnings release financial statements MD&A and today's call include 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 hyper fs measures can be found in our in C&I.

All figures presented are in U S dollars unless explicitly noted these introductory remarks complete I'll turn the call over to Steve Hudson CEO , Thanks, John and good evening, turning to slide six as everyone knows on March 7th we launched a strategic review in response to interest.

And the company.

During that time, we've evaluated all alternatives, including the outright sale of the company we've.

We've determined the best way to maximize shareholder value is through strategic industry partnership not a financial investors.

Four key deliverables of ECM strategic review first.

T G investment from Skyline will create the greatest value for shareholders and customers relative to other options review by U C N <unk>.

Second we've adopted a simplified operating structure, where we will focus on manufacturing housing.

C N corporate to be renamed Tri Ed you see Ns parent will be eliminated in an integrated and RV and marine alternatives will be under active consideration.

Third we've expanded our important funding partnerships, we built upon the existing and improved and expanded them and you'll see that discussion on slide 17, and 18. They now total.

1.3 billion with insurance capital, which has accelerated the transition to institutional investors.

And fourth.

[noise] triad operating enhancements as John mentioned, Lance Hall, who will speak with us and in second line is joining us this evening.

The role as president of Triad.

We've strengthen the operating culture and the drive to lead by service over price.

Turning to slide eight.

I'm very pleased to announce a strategic investment with skyline. The financial component of that deal is an investment split, 55% common and 45% mandatory convertible shares.

Stock will be issued at $3 and four central premium to market and that's been assessed by a sophisticated.

Since sophisticated industry investors sorry.

Yeah cash proceeds net cash proceeds will be used to both fund triad's independent dealer channel as well as skylines affiliated dealer channel.

The convertible shares carry a 4% coupon rank Parry pass through with E C and other perhaps skyline can convert these shares to common anytime with a mandatory conversion on the fifth anniversary.

Key terms of Skyline strategic investment include a committed corporate simplification plan, which I mentioned a minute ago, including the integration of ECM pairing to the triad Board representation.

Standstill for 24 months, including a right to match unsolicited offers enjoying decision, making on future acquisitions during the standstill.

You see any corporate simplification plan provides an opportunity for skyline to require to acquire the remaining 80% over the next 24 months.

Turning to page nine.

The partnership the triad.

The my little sorry, I would just back up a little bit of background on triad and skyline as we have an existing strong partnership with skyline already employed and place. This strategic arrangement will deepen and strengthen that partnership which will benefit not only skyline triad, but also more importantly, the customers.

You look at this in the context of the industry.

If you look at 'twenty first and Vanderbilt part of the Berkshire Hathaway family. They represent 42% of the market Triad is 12%. We currently up till this evening only had an offering in the independent channel with the creation of this partnership and specifically a joint venture Finance program with Skyline we.

Believe we'll be able to address significant share at all.

Speak to that in a moment.

Turning to slide 10.

As I mentioned, a moment ago, we have a strong partnership with skyline.

Triad was formed and 1959.

Skyline partnership includes retail as well as floor plan funding.

The opportunity on the right hand side, we're going to capture significant incremental share by offering comprehensive dealer and customer solutions, we're going to enhance the customer experience and generate strong dealer loyalty.

As background over my 30 years in creating captive finance companies, including Dell financial services manufacturers with captive finance subsidiaries demonstrate higher profitability greater market share and lower sales volatility. We're quite excited by this partnership turning to page 11.

We have a two channel strategy in partnership with Skyline. The first is the existing dealer channel that you're well aware of which is triad.

Offering financing both on the retail floor plan side to independent dealers this evening or announce announcing a skyline affiliated dealer channel.

Working name as Skyline financial that will address 1700 incremental dealers in this channel is.

This captive finance company. It will be owned 50 149 by the partners. It will offer both tailored retail loan programs as well as branded floor plan offerings.

The captive will will run on the same model is try it in a capital light basis.

And then the captive will utilize leverage will leverage our utilized triads best in class originated servicing infrastructure as well as it's proven and existing funding capabilities services provided by triad, including a capital charge will be recovered on a cost basis.

Profits will be split on a 50 149 basis.

And for the Canadians know called Skyline has a significant business in Western Canada, We hope to replicate a program and financing program for those customers.

Turning to slide 12, a lot of work done on what does the joint venture mean.

This is the forecast for 2024.

It's anywhere from $12 million to $24 million that is tri Ed share of the joint venture.

To put this in context for you our current sales finance penetration rate with skyline is approximately 13%.

Once we move that target up to a 20% penetration will be about 24 million dollar number.

25, or sooner, we would want to move that penetration rate to 30% that would represent 40 million of income for triad.

In terms of an industry standard standard Theres, an industry leader, where their penetration rate is 50% I believe that the 20 and 30% penetration rate rates are achievable in the short term.

Turning to the operating structure on page 14, we have agreed with skyline to integrate easily incorporate into try its operating structure.

C N capital as I mentioned earlier will be renamed Triad financial that will be subject to a shareholder vote.

It will focus primarily on manufactured housing both in the independent channel as well as the skyline affiliated dealer channel.

We will be reducing overhead.

The first phase has been to reduce expenses by $6 million.

And the second phase, we will see the elimination.

V C N capital, bringing out a further $6 million of cost savings you see in corporate will be eliminated.

H, one 'twenty 'twenty four.

On the RV and Marine business, we will continue to access to assess strategic alternatives for that business at the same time, improving the operations further reducing cost.

And as well we will begin to replicate the successful institutional flow Graham flow program, we put in place for a manufactured housing business. That's expected to be launched in the third or fourth quarter of 'twenty three.

Provide a little more color on corporate expense reductions of 15.

Leave that with you to review.

Turning to page 16, [noise] during the strategic review process, we're happy to announce that.

We have added.

Of new and expanded flow programs with both Blackstone in Carlisle.

As you're aware the Blackstone arrangement.

Arrangements go back for three years now in excess of 3 billion, we started with our home improvement flow program at service Finance.

Although by Kessler group's credit card portfolios and now an expanded program with manufactured housing. It's a relationship that is extreme extremely extremely strong and we expect to grow it in the near term.

It's split between retail and floor plan.

All the loans are serviced on triads platform as I noted in an earlier slide last quarter Triad recently, we had its ratings it's investment grade ratings improved under the servicing business.

Turning to Carlyle that as a new program and entered into post the quarter.

It starts with $150 million program for retail loans.

And structure to the Blackstone retail program, we are in discussions shortly.

Short term discussions to expand at 150 <unk>.

As well as adding flow two are with both of those partners to our RV and marine business.

Turning to 18, you'll see the significant transition our funding model.

The credit unions and banks are important partners of our business, but the way that we have chosen the institutional flow model to support the significant growth of triad, hence the shift to 65 35 year to date and the split there are at least two or three others I believe Matt institutions, who would like to enter into.

The.

Until these arrangements as well.

Turning to page 20.

Good picture of Lance Hall called the right hand side.

Lance is as iconic and and a proven leader in the MH industry and I think the best thing I can do now is have lance speak a little bit about his background. Thank you Steve I'm in my 25 years with the industry I've had the privilege and experience in leading growing companies in the MH space while at Clayton.

We took our market share from 10% to 50% through a series of acquisitions and brand strategy and integration as well as building strong retail alliances.

As I joined 21st mortgage by focusing on innovation and process improvement and customer experience, we took our market share from 15% to 30% in the last 10 years I have a history of creating programs that drive growth. The communities effort that I developed at 21st mortgage remains an industry leading program today.

And we plan to change that at triad as we will improve on that and do everything we can to create the very best programs for our partners you know.

I joined triad to lead a good company to be a great one and my primary focus will be to improve origination cycle lifetimes are life cycles improve responsiveness in all areas of the company and create the industry's best customer experience.

For the years that I've been in the industry tried has always been a great competitor in fact, they've been a real tying them up but for the last few years and I look forward to changing that.

To make sure that we're paying on everybody else's, but it's going to be a great ride and I look forward to leading this company for many years to come.

But just before I pass to Michael I, just want to recap the last five years, we've last five months, we covered a lot of turf.

And then strategic investment with skylight is the highlight of the last five months I wouldn't diminish the simplified operating structure, which has been approved by our board is now being implemented the expanding funding partnerships with both Blackstone Carlyle are very significant important that as a proof of concept is now now the other.

<unk> two <unk> to two approaches those discussions are ongoing.

And finally with Lance hauls leadership, Matt Heidelberg, and others, we believe that triad is in great hands.

Hum.

Thank you Steve.

And I think it turned to page 22.

Our preliminary 2024 guidance ranges.

Just some key highlights this preliminary guidance reflects a triad.

Triad share of the scale of the captive that we're about to form.

And key assumptions in terms of the the growth reflects a 15% growth in originations from Tri Ed's existing business.

And then assumes that we'll realize average gain on sale margins of approximately six 5%.

2024, and it also includes as noted triad share of the expected a captive finance income.

Assumes RV and marine income recovers with new funding commitments in programs as Steve noted that are currently in process, which will drive increased originations.

Operating expenses reflect the elimination of ECM corporate overhead as noted earlier and our expected annual tax rate in 'twenty 'twenty four is expected to be 26%.

All that drives a.

Our base range of base EPS of <unk> 21 to 27 cents per share or fully diluted unaffiliated diluted basis, 19% to 25 per share.

Okay.

I'm turning to page 24, I'd just for an overview of key developments in Q2, some of which we covered already or will cover in the following section.

Sections are the key highlights.

Obviously, you've just heard from Lance.

Is it enough triad, which was tremendous.

Acquisition for triad.

In Q2.

Other items to note new programs or continue to drive growth with land home silver bronze and rental all up more than 80% year over year in the first half of 2023.

Let me just take a one time fair value adjustment at the end of Q2 of approximately 12, and a half million, which reflects the impact of higher rates on our gain on sale margins. We're currently realizing.

And as Steve noted, we continue to review various strategic alternatives rollout relative to the RV and marine business.

And finally Andrea.

Tori finance side inventory finance, we entered into a flow program with Blackstone to flow up to 300 million of Manny.

Manufactured housing inventory finance assets and sold $130 million in the quarter.

To date under this structure.

With that I'll turn it over to Matt Heidelberg.

Thanks, Michael.

Turning to page 26.

Triad reported adjusted operating income in the second quarter of $9 7 million.

Our quarter was impacted by lower pooled gain on sale margins of approximately $5 8 million.

Following the fair value Mark taken in the quarter and.

And in line with our first quarter communication, we expect to return to normalized margins in the second half.

We're pleased to see the managed portfolio grew 29% year over year to $4 8 billion, that's continuing to add to try and recurring revenue stream.

And as Steve mentioned, we're really excited to announce both our increased forward flow commitment from Blackstone and happy to welcome Carlyle as a new partner to the tried family.

These partnerships combined with our existing partner base positions us exceptionally well for the future growth.

Moving to page 27.

Second quarter originations were down eight 6% in the quarter.

With first half originations flat year over year when excluded.

The portfolio purchased in the prior year.

This compares to an industry shipments that were down about 30% in the same period.

And you'll see in the bottom pie charts that our product mix has shifted to include an additional contribution from our newer product offerings, such as rental silver and land home.

We expect these product offerings to continue to grow at higher rates and become a source of additional.

Growth for us in the forward looking forward.

Yeah.

Moving to page 28.

While the second quarter approval approval growth was down 25, 6%.

We're really pleased to see an improvement in the recent months we've.

We've seen an increase in the approval growth for each of the last four months and much more so with our largest product offering in core chattel.

CT Shadow was back to plus 18% and plus 15% in the prior two months.

And it's also a very high revenue yield product for us.

Which will contribute to our revenues and income in the fourth quarter.

Moving to page 29.

As we mentioned previously tried to performance year to date has significantly outpaced that of the industry shipments as you see here on the chart to the right.

On page 30.

Tried sold a $149 million of pooled loan portfolios had a one 8% gain on sale.

This impact as we communicated in our last quarterly call, which was pricing compression from rising rates combined with slower loan sales of land home loans than we originally expected.

Following these sales and the fair value Mark we're positioning triad to return back to normalized pricing in the second half again as we communicated last quarter.

Moving to page 31.

The timing of the land home launch has been the primary reason for pricing compression year to date.

At that time back we had backlogs to complete homes extending out beyond 12 months.

With market rates, increasing at a frequency that we had not experienced previously in the combination led to delayed loan sales with pricing compression in the first half of this year.

We price for that now and looking to go back to normalized pricing for the rest of the year.

In response to that.

Try it has now had forward pricing commitment added for our land home products as we closed loans, we're gonna locked down pricing looking forward.

That will minimize the interest rate risk.

We've also strengthened processes and put in place a new EVP of land home operations with deep experience in the mortgage operations industry.

With these improvements complete land homes prepared to scale and we see the land home opportunity as being two times that size of channel.

Matt This is Lance Hall again, Matt if I could just add to that I've had the opportunity over my career to fund over $3 billion in land home loans and I'm completely confident that we now have the right team and the right processes in place of triad to late Atlanta home business.

Thanks.

Yes.

Well I think everybody to page 32.

The yield impact in the first half will return to normalized yields in the second half we said a few times.

Current land home loan approvals aren't full fees with Ford pricing commitments now.

We don't see or we don't foresee the unique macro environment environment being repeated today.

Increased and expanded funding commitments are going to support our future growth.

And the land home operational and personnel changes have now been completed.

Yeah.

On page 33, you've seen this slide before I'm pleased to say Theres really nothing changed are the performance we're delivering for our partners is as expected.

Yeah.

Okay.

Moving to page 34 for our commercial department.

We've begun flowing floor plan loans through our partners.

This partnership provides tried significantly more capital to grow its floor plan as well as grow our recurring like managed service income stream.

The floor plan revenue yield you see on the bottom left continues to increase as we pointed out before that that's floating monthly with market rates.

The reduction in our balance do you see on the top right is primarily driven by the $130 million of Floorplan loans, we sold to our partner in the quarter.

Yeah.

Lastly on page 35, another chart, you've seen in the past lays out our quarterly originations and percentage growth year over year.

And with that I'll turn it over to John .

Thanks, Matt.

I mean this is the operator, we're not able to hear you any longer presenters.

Sorry is that better yes. It is.

Thank you very much okay, I'll start over where on page 36, just want to remind everyone that our our marine and RV segment consists of both source one anti F J a.

Operating income in the quarter was $3 $3 million on originations of 274 million combined Q2 results continue to reflect the materially slower operating environment than we had anticipated earlier in the year well both originations and earnings have been below anticipation both source one in Iowa. She continued to be the top source for marine and <unk>.

V loans virtually all of their banking credit Union partners. We've continued to see so so as a result, they they've continued to maintain or in many cases take share. It's just been a slower environment. We continue to see the industry weakness overall due to due to multiple reasons.

Reasons, such as you know just overall economic higher interest rates inventory shortages higher percentages of cash buyers and some normalization of seasonal buying patterns.

We have added another 200 dealers in our national rollout. So we now have actually north of 3700 dealers that's up about.

About a third of over 1000 dealers since since we bought the company.

Expenses continue to reflect investments to build the premier platform in the space.

And like Michael and Steve mentioned before you're seeing continues to review various strategic alternatives related to the business.

Page 37 were just highlighting again, all the groundwork that you see and as laid to date in these businesses were still in sort of the early stages in the first year, we were able to get licensed in 46 states established servicing capability and and build out our geographic expansion with over 700 dealers actually closer to.

Dealers at this point and.

And over 3700 total.

<unk>.

We were also able to launch the inventory finance business here and there.

There's a lot of work on our systems are planning your two was to add some significant new funding partners as you know.

The year has been.

Adding those partners has taken a bit longer than we expected. We initially expected to watch some in Q2, it will now be launching them in Q3 and Q4.

Once we get those launch we'll be able to launch some of our alternative products like silver and bronze.

And that should result in some significant growth.

In originations as we've told you before we have over $1 billion of turndown applications with which to launch some of those some of those products.

On the Q2 program update on page 38.

Approvals are down almost 10% for the quarter and originations were down almost 34% year over year, it's been a very slow quarter, but it's actually in line with what we've seen sort of across the industry.

You didn't see a solid attendance at at.

You know most of the shows RV and boating shows that we've seen year to date.

And we.

We continue to expect.

To see that new flow partner really help launch the growth going into next year.

Page 39.

It's just as the the originations a chart that we that we typically typically include and with that I'll turn it over to Michael to go through the consolidated financial summary.

Thank you John .

Turning to page 41.

Operating highlights.

Total originations in the quarter was $622 million.

Third to 613 million in the prior year quarter and include $348 1 million of originations from our MH finance unit and $274 million from RV Marine and finance.

Those originations drove adjusted Q2, adjusted EBITDA to $24 5 million compared to $25 7 million.

Q2 2022.

Q2, adjusted operating income before tax of $2 6 million compared to $15 6 million in the prior year quarter. The decrease in adjusted operating income, it's probably primarily driven by lower originations revenue driven by the lower gain on sale margins as noted earlier.

Q2, adjusted net income available to common shares was <unk> 7 million or zero per share compared to $11 3 million or five cents per share in Q2 2023.

Turning to page 42 on the balance sheet highlights are not much change compared to Q Q1, total assets down slightly to $1 3 billion that reflects the sale of the $130 million in inventory.

Finance assets to Blackstone in the quarter.

Try and managed assets up to $4 8 billion at the end of Q2 as noted earlier.

In total total debt consistent with with Q1 now.

A key to note the pro forma balance sheet with E.

Over $130 million and equity capital that we raised as part of the strategic investment.

<unk> significantly strengthened the balance sheet and lower debt and at the end of Q3.

Yes.

Turning to page 43 of the income statement highlights on.

Key items to note.

Hum.

Kris.

Triad.

Interest income and interest expense are both up significantly reflecting the higher on balance sheet finance assets and higher interest rates compared to the prior year.

Finally, turning to page 44 operating expenses.

Operating expenses were down slightly compared to Q2 2022.

Primarily driven by lower variable expenses.

Triad is a result of lower originations.

We took a $7 3 million charge in the quarter.

It was primarily related to severance of about $4 million and $3 million related to the disposal of our remaining corporate law.

See aircrafts.

With that I'll turn it over to Steve for a summary.

Thanks, Michael on page 46 of my closing comments I'd like to add a two two points that are not there.

First and foremost we have a very successful.

Hardener ship with Skyline, which this evening has been expanded into a comprehensive strategic relationship.

If I had to put a few words around that it would be the right home with optimal financing for customers of both independent and Skyline dealers. We think is very powerful and we look forward to executing on that strategy and second with Lance has proven leadership our good to great plan Lance is good to great.

Plan is 100 day plan I think will prove will.

Will yield great results for us.

And we look forward to a lot accomplished in the last five months and operator.

We're happy to open the call to questions.

Thank you.

We'll now begin the question and answer session.

If you ask a question. Please press Star then one on your telephone keypad, you'll hear a tone acknowledging your request.

Using a speakerphone please pick up your handset before pressing any key.

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My first question is from Geoff Kwan with RBC capital markets. Please go ahead.

Hi, good evening.

Okay.

My first question was just that.

Have you considered a range of alternatives for the strategic view and would it be fair to assume you've considered options where E C and would not.

So having the boat and RV business and so five months later and if a sale of the boat and RV business was considered so far nothing has come to fruition.

Does that put that at the less likelihood that there might be some sort of sale or divestiture either that or like are there other options that you're considering for that business or what would be somebody other considerations.

Thanks, Jeff.

I assume you can hear me, Okay. We had interest in both our both businesses. We didn't have investors are interested in the two together we had investors that were specific on manufactured housing and specific in RV marine.

We focused on manufactured housing first.

Because of its size and because of the flow arrangements. We think we still have work to do but RV marine we are now into the flow arrangements, we think that.

John made a reference to a couple of billion dollars of originations that were unable to do it.

And RV and marine.

We want to prove that up in the third and fourth quarter to maximize values. So we.

We focused on on MH first in our review.

And I know and we've concluded that and now we're gonna turned our attention to RV and marine but two separate groups of investors Jeff Okay.

Okay on the kind of emerging at the corporate into Tri Ed and you know.

We'll see what happens with the boat and RV business.

I'm just trying to understand I guess of the extra 6 million.

Opex reduction.

How much of that is coming from say like personnel.

Redundancies, if there was any change to compensation plans as well as the non personnel and non comp expense.

So we've been maybe second part first which is we've been building out a very senior team.

Triad with with Lance and with Matt knew how to land home, we intend to build a standalone.

The management team at at at Triad.

Don't need a lot of people have used in my case my compensation is capped at $500000 I'm.

I'm here for the upside on the shares.

So a lot of work done with the board on how to how to dramatically juices I think if you go back to.

You have to the business back when ECM had service finance in Kessler.

They were upwards of 35 employees inside of E C N.

By the end of this year, you'll have five or six.

A very strong standalone team at Oh.

Try it anyone left it at P. C N will have modest modest compensation.

Okay. Thanks for that and maybe if I can sneak in one my last question just on the what the pro forma debt looks like after the private placement in other words is.

Is the plan to take the proceeds and use it to pay down debt initially and obviously you can pull it later trying out later for whatever you need it for.

Yeah.

Hi, Jeff It's Michael Yeah. So that's exactly ranked initial use will be to pay down debt and then as Steve noted, but we believe theres going be a lot of opportunities to invest in triad going forward and the growth from both captive and independent channels, but pro forma when you would expect that.

To be.

A little over 800 after the.

Equity raised compared to $9 50 at the end of Q2.

Jeff I'd, just add one more item to that we now have a $300 million flow program for floor plan.

With with Blackstone, So that will become more active here in the third and fourth quarter. So that'll be used for debt reduction as well.

[noise] targeting to have $400 million of capacity and the senior line by the fourth quarter.

Okay. That's helpful. Thank you very much.

Yeah.

The next question is from Steven <unk> with Raymond James. Please go ahead.

Ah thanks, everyone.

Just the first question about <unk>.

Skyline, when when you put them in there or another strategic investor.

You know what's the reaction from.

Other builders coming to try add finance does it cannibalize that that channel at all.

Educate me a little bit more on the manufactured home finance industry, maybe it's normal but they they need as much financing they can get so this wouldn't impact them.

Yeah.

Thanks for the question this is Lance Hall.

When you look at the opportunity that we have now with skyline.

It is going to lift the whole industry that what everybody realizes in order for us to return to the percentage of single family housing that we all want to see where we become a much more significant portion of single family housing.

All of the larger players need to get larger they need more capacity and this helps to open that up we will continue to support the independent retailer network. As we always have this will do nothing but make us stronger both for the captive that we'll have with Scott on financial but also for the independent retailers, who rely on our financing today.

Steve if I could just add one more comment I'm on slide nine.

We look at Berkshire, Hathaway, which as you know Clayton Vanderbilt and twenty-first notwithstanding the common ownership by by Berkshire twenty-first has not suffered any competitive losses, they've been able to maintain and grow their independent dealers.

Even though their sister company is aligned with Clayton.

And we believe that'll continue here, we don't see a material loss of of share in fact, we see the opposite we think that we had an opportunity to prove this up through regional homes, that's a customer of ours.

And we created a dedicated sales finance program for them.

We went from doing 13% sales finance penetration to over 20.

And that was a case study over the last 12 months. So we're confident that.

20th will go to 30 and triad share in 2025, I believe will be at least $40 million.

Earnings out of the JV without loss.

Sure.

And then my second question is still related to skyline.

I mean, they try it it's been doing prime Super Prime.

As is the goal to take more of Sky lines, you know I'll say subprime, but not prime or sub you know.

<unk> yeah.

Is that going to shift over time as well and you just try it.

The ability to still say, yes, or no to depending on the law, yes. That's a good question, Steve If you look at.

Our programs today with Blackstone in Carlisle, they are 80% prime and 20% near Prime what we referred to as silver and bronze.

We are in the midst of.

Mr arranging with other flow partners the mix would be 60 40.

With other flow problems I not institutions.

Insurance institution. So I think we will have that mixed on in the fourth quarter Steve.

So between those institutional programs as you know.

The the Genesis the the the history of of Triad was prime Super Prime Chattel loans, and we've now been successful or not.

Adding near Prime at 20% of the mix, but we're comfortable we can get that to 30% of the mix.

We never want to lose that we never want to lose that core.

Subprime Prime which is a which is really important to our our credit our debt investors buying the loans.

Right right, Okay, I got that and then some sort of jump off three I'll ask or.

The move.

I know its presentation adjusted revenue and revenue.

Moving to fair value adjustments can you just explain that a little more simply to me in terms of what's what's the mechanical when does that fair value adjustment is it up sale that you're ignoring it not ignoring it maybe you could just spend 30 seconds on that maybe you don't want or Mike. Thanks, Steven. Thank you Stephen it's Michael So the adjusted revenue.

We took a provision on their balance at the end of the news on the balance sheet at the end of the quarter.

That was the 12 and a half million so that didn't we didn't adjust the well we actually sold through in the quarter.

<unk> noticed that it was about what it would've been about a $5 million eight.

$8 million impact, but we did take up our fair value Mark on the remaining book at the end of the quarter and that's what it was adjusted for.

Going forward that will continue to happen.

What no. There was this was a one time.

Clean up on the balance sheet.

So we we don't intend to take.

Any more remarks on the on balance sheet portfolio.

Okay I appreciate that thank.

Okay.

Okay.

The next question is from Jamie Glynn with National Bank Financial. Please go ahead.

Yeah.

Yeah. Thanks.

Just two.

To understand that that last point about the the Mark So is it that the loans originated.

Previously they've all been sold off now and then anything that's held for sale today or are available for sale is done that more adequate rates and therefore, you don't expect any marks on that is that I want them to understand.

Yeah, Jamie it's Steve Yeah in in the introduction of <unk> as you know land home is twice the size of chattel a billion dollar of travel you should be doing 2 billion of land home as a proxy.

When we've introduced the profit product. It was obviously price I would say below market today, that's no longer the case the pricing now reflects market.

Flex our funding relationships. So there was some price introduction.

And there for sure and we've also moved to a rate lock program with or institutional investors buying the flow. So when we sign up for a.

Land home today, which takes three to four months to build because you're actually building a home we.

We can walk that right upfronts were not exposed to interest rate.

<unk>, So I would say the combination of those two are the learnings.

And launching the product no one likes to lose money.

Especially me, but you know it we've now got a successful product, we got leaders and Lance the new head of land home, who are extremely experienced and I'm confident that this.

This is behind us.

Okay.

Going to the captive finance.

Guidance, the $12 million to $14 million pretax.

Is that like any.

Net of any operating costs are or interest costs that go into building that platform.

That is a clean 12 to 14 million that got.

Correct dropped straight to the bottom line and that is that the same do I understand that the same for skyline.

Skyline have other.

And I'll eat to compensate triad for.

No. That's that's a clean number that is fully loaded with the with the cost too to acquire originate the loan to cost of service alone and the associated interest cost and you have split the income 50 149, the operating income so it's fully loaded.

And then you I think you're referring to the 12.

$24 million the big variable there is the sales finance penetration I mentioned earlier.

At 20% sales finance penetration, you'll be at $24 million 12, I'm highly confident we'll be at 20.

And in 25, I think we can hit 30, maybe 40%, it's a big delta because at 30% and sales finance penetration and twenty-five our share isn't 24, it's 40 million. So it's very sensitive to increase sales finance penetration.

I know the teams capable of up because we have a large competitor that's at 50%.

I'm not suggesting we're going to 50% this evening.

But I'm confident that we can step into 20%, which is $24 million and 24, and 30% and 25, which is the $40 million or share there'll be an equal share.

Skyler.

Okay. Okay. So just just bear with me here and correct me if if any of this is if any of this is wrong. So if I look at.

The guidance on page 22, our adjusted net income after preferred 69 to 76 million, let's focus on the $76 million. So.

Skyline owning 20% of the company would earn 20% about $76 million plus you.

24 million from the captive.

As well and then we will talk to the fact that so.

So effectively we're going to generate skyline get.

Our claim to almost 33 million.

Adjusted net income in this scenario and they're only paying 138 million for that.

So it's like four times earnings is there anything off and what I'm, saying here or I mean, it seems like there are getting a pretty good deal here with you guys.

Yeah.

Well, where we're getting to rent the skyline rent, we get to use $1700.

The 1700 dealers for free.

I'm thinking like it it's it's it's it's perpetual access to those 1700 dealers.

They have all the cost of supporting those 1700 dealers. So I think you'd have to put some some costs against the cost of running that 17, another dealer network.

Okay.

Got it alright, thank you.

Okay.

Once again, if you have a question. Please press Star then one.

Our next question is from Mario Mendonca with TD Securities. Please go ahead good evening.

Maybe if we could take a step back the.

$12 $5 million I think I think I know, where you're coming from us you're saying that the $5 8 million is what could've been earned.

But it wasn't because of because of this dynamic.

What I'm trying to understand is.

It was apparent I'm sure everyone that rates were going to move materially higher.

Was this a case, where the company just didn't it didn't position didn't hedge the business for higher rates or is there something really unforeseen that played out and caused margins to compress the way they did.

Yeah.

Oh, Hey, Mario how are you doing.

So so you know I would say a couple of things. If you look back at that time, you know while a lot of people thought.

Rates are going to go higher if you had hedged your typical hedging would've been towards like the forward curve.

At any period of time back then the forward curve was off massively right like it was it was it turned out to be much higher much faster than anybody expected and in addition to that you'd have to have a the length of the hedge are done properly, which got difficult because.

The backlogs extended we you know at the time were looking at backlogs that we thought were four to six months and they turned out to be a year or more.

So a lot of the hedges that we had put in place became an effective and then ultimately trying to hedge became extraordinarily expensive. So you know.

In an environment like we saw in 2022, especially the back half of 'twenty two with the ultimate movement in rates.

You know we had some unfortunate timing we ended up launching a business with with you know just just to call. It out probably the wrong people in place and it led to some mistakes in terms of operating the business and some of the process and product development.

We've obviously since corrected that and we think we have some very very strong people in place to date, but between the fact that we launched the business and the losses that we've taken to date that you've seen in the last two quarters.

It had been entirely in inland home are they haven't been in our channel or in our core businesses are really really where you know for lack of a better way to describe it. Some mistakes that were made when we first launched the business and we got caught in a extraordinary macro environment.

So can I just yeah, it's clear that that our hedging strategy was ineffective full stop.

We've done two things to address that we have new leadership at the company. In addition to the team we have and second of all our flow partnership with Blackstone provides an interest plate block at the time that mortgage has entered into not when its funded but the time at inception.

And I wish we had got there in an easier way Mario but that's where we're at Tonight.

When the when the company. When this is all sort of unfolding early on in this more of like the Genesis of ECM. This was supposed to be a very asset light business.

There wasn't supposed to be much on the balance sheet, which is one of the reasons why there wouldn't be a lot of interest rate risk.

So how did the balance sheet why did the balance sheet grow the way it did which ultimately drove these losses.

Yeah No I.

I don't I don't I.

I don't I'm not in the habit of corrected you, but if you go back to look at at service Finance before we entered the solar flow program, which became successful we had a $500 million on balance sheet portfolio in order for us to launch a product we have to build a portfolio land home is now part of the flow arrangements where institutional.

Investors. So we created the product like we have in our other businesses we.

We had to prove it to our investors we've done that is now on the floor.

Mario remember this wasn't.

Really a problem or something sitting on the balance sheet. It was a problem that when we originally launched the product we effectively took the risk from the time alone was approved till the time the house was delivered.

Right. So it wasn't sitting on our balance sheet because it hadn't been originated but we took that that interest rate risk. So we set an interest rate went alone was approved by the time it hit US we thought it would be three or four months later it turns out to be 12 months later because of the backlog when it hits rates have moved up quite a bit and we've locked in a rate and the difference today is the new program locks in the rate up.

Front.

So now the now the rate is locked in we don't have that period of time, where we're exposed. So it was never a situation. So much that the assets were sitting on our balance sheet. It was that we took the exposure from the period of time when the loan was approved when the loan was actually closed.

Alright, and the hedge ineffectiveness, Steve you're referring to is that extended period of closure of that.

You just weren't hedged at that point.

Correct Okay.

So I I. The reason I asked those questions I kind of need to understand what went wrong. So we can kind of think about going forward.

What you're telling US now then is that the gain on sale margins that the company enjoyed prior to the last two quarters and I think everybody has their own way of calculating it but we're look at gain on sale margins.

Hi, 788% plus.

Are you, suggesting that those margins are doable.

As it really is next quarter.

Good thing Barry that our gain on sale guidance is at six and a half.

That's seven or eight had significant credit union a composition, it's credit unions small banks.

We made the strategic call to shift.

Our institutional our funding mix institutions. So we gave up a little bit of gain on sale in exchange for long term commitments from much higher credit much higher rated counterparties.

The credit unions can play a role in this so maybe six and a half goes to seven.

But I would guide you to six 5% the same thing the other the other component to that Mario There's really two components is what what what Steve talked about which is our new funding partner mix more on the institutional side, we heard a little bit less.

But we have longer term commitments with with larger commitments on the.

The other side of it is mix overall, if you look at it in the past year, even though the last couple of quarters have been slower we've still seen extraordinary growth from a land from silver from bronze from rental from a number of new products. Those are lower margin products in our core chattel products. So like we said all along as we introduce these new products, it's going to matter right.

Mix is going to matter for what the overall margin is so when you're used to looking back at 7.5% you know sort of gain on sale margins. The company that was almost when we were almost entirely core channel, which is also our highest margin product and just maybe one one I don't want to belabor the point, but that six 5% includes the interest rate protection given by the <unk>.

Buyer of the loans.

So there obviously would be a number inside that six and a half where blackstone is doing the hedging for us or for themselves.

Our content then that this mismatch can't happen again, yes.

Yes, I'm I'm content, it will not happen again.

Okay.

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Yeah.

Is there no further questions. This concludes today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.

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