Q4 2024 Pagaya Technologies Ltd Earnings Call
Ladies and gentlemen, greetings and welcome to the <unk> technologies fourth quarter and full year 'twenty 'twenty four earnings conference call.
This time, all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
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Speaker Change: It is now my pleasure to introduce your host Josh Vegan head of Investor Relations. Please go ahead.
Speaker Change: Thank you and welcome to the Guy is fourth quarter and full year 'twenty 'twenty four earnings conference call. Joining me today to talk about our business and results are Gal <unk>, Chief Executive Officer of Guy. So G dos President and Evangelists Perez Chief Financial Officer, you can find the materials that accompany our prepared remarks.
Speaker Change: A replay of today's webcast on the Investor Relations section of our website at Investor <unk>, The Guy who dot com.
Speaker Change: Our remarks today will include forward looking statements that are based on our current expectations and forecasts with respect to among other things our operations and financial performance, including our financial outlook for the first quarter and full year of 2025, our actual results may differ materially from those contemplated by these forward looking statements factors that could cause as yours.
Speaker Change: To differ materially from our expectations include but are not limited to those risks described in today's press release, and our filings with the U S Securities and Exchange Commission, we undertake no obligation to update any forward looking statements as a result of new information or future events. Please refer to the documents we file from time to.
Speaker Change: Tom with the SEC, including our 10-K 10-Q and other reports for more detailed discussion of these factors. Additionally, non-GAAP financial measures, including adjusted EBITDA adjusted EBITDA margin adjusted net income fee revenue less production costs or F. R. L. P. C. F. R. L. P C as a percent of that.
Speaker Change: With volume and core operating expenses will be discussed on the call reconciliations to the most directly comparable GAAP financial measures are available to the extent available without unreasonable efforts in our earnings release and other materials, which are posted to our Investor Relations website. We encourage you to review the share.
Gal: I'll do letter, which was furnished with the SEC on form 8-K today for a detailed commentary on our business and performance in conjunction with the accompanying earnings supplement and press release with that let me turn the call over to Gal.
Gal: Thank you for joining us today for a discussion of our fourth quarter and full year 2020 full results as well as an update on our business.
Gal: Until 2025, all the strongest overall, putting in our company's history.
Gal: You will see from our press release. This morning that we closed out 2024 with an annual revenue of more than 1 billion.
Gal: Up 27% year over year.
Gal: If our LPC of 407 million.
Gal: Up 54%.
Gal: Year over year.
Gal: Adjusted EBITDA of $210 million.
Gal: Up 156% globally.
Gal: All of our key reported metrics were at record levels and beat our prior guidance.
Gal: As we close out 2024 and is part of our regular quarterly grocers, we have updated the fair market values for our risk retention securities tied to 2021, 2022, and 2023 loan vintages.
Gal: We noted during the third quarter of 2024 earnings that we expected to have taking the vast majority of expected impairment charges associated with our 2020 through vintages, along with prior vintages by year end 2024.
Gal: The 2023 risk retention securities, which totaled at $275 million at the end of the third quarter were marked down by $145 million this quarter, which impacted our P&L.
Gal: Even with the vast improvement in credit performance the values of these securities as mentioned in the past, we're extremely sensitive to even small changes in underlying credit and prepayment assumptions because of the challenging funding environment that existed during 2023.
Gal: We believe that we are now poised to generate consistent growth going forward that is profitable and as such we are providing our first ever GAAP net income profit guidance as part of our 2025 outlook.
Gal: AP will provide more detail on our financial results later in the corn.
Gal: I want to take a step back and revisit where per guy evolution, one is that our product and company apart and underscore the value that we bring across our network, our ecosystem and to our shareholders.
Gal: We created for Gaia to enable lenders to provide more credit products and services to more customers customers, who has traditionally been excluded from the financial ecosystem.
Gal: These are good global is hard working mainstream America.
Gal: And the country's biggest lenders are increasingly leveraging our guy is differentiated product value proposition to do exactly that.
Gal: Offering more credit products and services to more customers.
And when they do they retain and add more customers and more valuable deposit their accounts, they maintain and enhance customer lifetime value and they boost return on marketing spend.
Gal: All without bearing the balance sheet costs.
Gal: Recently several of our lending partners have extended the use of our unique solution to further engage existing customers to boost cross sell and further solidify relationships.
Gal: As important as the unique value proposition our product offer is the deep level of integration within our pulp mills internal lending funding.
Gal: This enables <unk> to seamlessly add.
Gal: And serve with customers all the households, these lending partners.
Gal: The best evidence of our solution.
Gal: Is the industry demand and usage with over $2 six trillion of loan application running through across our network, resulting in a $28 billion of loan originated provided two 2 million people.
Gal: To put things in perspective, that's nearly 1% of all adult Americans.
Gal: And with this demand and success the flywheel is only getting stronger.
Gal: Each application across our network provides for Gaia more valuable data, which is used to make our underwriting technology even stronger.
Gal: This in return enhance the value we provide to our partners.
Gal: And when our partners drive.
Speaker Change: That's right.
Speaker Change: The timing has never been better for Gaia to help our 31 lending partners in the fast changing environment.
Speaker Change: Momentum on the funding side of our network is just as robust and truly underscores the support from several of the largest institutional investors in the financial investment warrants.
Speaker Change: Look no further than our recently announced forward flow agreement with funds managed by Blue our capital to purchase up to $2 $4 billion in.
Speaker Change: Tumor loans throughput Gaia network.
Speaker Change: Over 24 months.
Speaker Change: This is the second large forward flow agreement announced in just less than six months.
Speaker Change: Testament to the demand for the high quality consumer loan originated on our network in.
Speaker Change: In addition to that we have raised $27 billion in our ABS program across 66 transactions with over 130 institutional funding partners.
Speaker Change: We closed our sixth AAA rated ABS transaction in the fourth quarter and executed our third pass through securitization of the year in December $400 million.
Speaker Change: We expect that all of our funding program will continue to experience strong growing in almost a strike demand as <unk> becomes a one stop shop for big institutional investors that are looking to get exposure to the space in the form of personal loans.
Speaker Change: Total loans or point of sale loans.
Speaker Change: Our current management team is highly experienced having navigated challenging credit visited through various cycles.
Speaker Change: This management's job has been to drive the maturity of our operating model and financial structure to amplify and maximize the value. We can provide not only to our pulp mills, but our shareholders as well.
Speaker Change: Over the last year, we have built the strongest and most efficient funding mechanism in <unk> history.
Speaker Change: We have restructured our balance sheet enhanced our liquidity profile and that means we are now fully self funded.
Speaker Change: [noise] invest only one bill if we need to raise equity capital to support the business given the quarters outside GAAP net loss.
Speaker Change: The answer is simple.
Speaker Change: It's no.
Speaker Change: We do not expect to need any.
Speaker Change: New equity capital moving forward.
Speaker Change: Our sales and T is drive from the optimization of our team achieved on our funding and operating model in 2024.
Speaker Change: We will tirelessly to increase our net fees reflected in Srs MPC by 55% equal to.
Speaker Change: To four 5% of our volume while at the same time, reducing our net cash requirement to fund our volume from 3% to almost one 5%.
Speaker Change: And along with high quality liquid securities on our balance sheet. This paves the way to positive cash flow and eliminating any need for an equity raise.
Speaker Change: We believe that we now have the operational and financial momentum balance sheet strengths maturity and deep institutional credit skills.
Speaker Change: To manage through various environments.
Speaker Change: We expect that our growth will be disciplined and while credit impediment will always be part of any credit related business for Gaia their impact is expected to be far smaller.
Speaker Change: This is reflected in our inaugural <unk> GAAP net income guidance.
Speaker Change: Which we will discuss later in the call.
Speaker Change: We are entering 2025 at this pivotal point, where we believe that we have achieved the scale operating and structural efficiency to be GAAP net income positive by the second quarter of 2025.
Speaker Change: In closing I could not be more excited standing here today in front of you.
Ahead of what we deliver to the investment community.
Speaker Change: And partners throughout this year and going forward.
This inflection point is an important one.
Speaker Change: We will continue on our mission to boost financial inclusion to bridge mainstream in Wall Street and at the same time showcase our ability to generate powerful and consistent EPS growth for our shareholders.
Speaker Change: We look forward to demonstrating the benefits of all of our hard work and investment to maximize the value of one of the country's most unique and in demand lending networks.
Speaker Change: With that let me turn the call over to our President and gives us to provide an update on our product and growth strategy.
Paul: Thank you Paul.
Speaker Change: I'd like to start with God left off by reiterating that we believe that our business is now the strongest it's ever been.
Speaker Change: Our solutions has never been adds in demand as they are currently and our business has never been as well positioned to service that demand sustainably maximizing the impact for our shareholders.
Speaker Change: In terms of our lending partners growth from existing partners and our new partner pipeline remains extremely robust.
Speaker Change: We expect that we will continue to boost monetization among meeting institutional partners, adding.
Speaker Change: Adding new products to better penetrate their existing customer basis.
Speaker Change: While seeing the ramp for more recently added relationships.
Speaker Change: In fact, we anticipate at least.
Speaker Change: Lending partners will each generate $500 million of more of network volume during 2025.
Speaker Change: I wanted to take a moment to review our momentum across our three core products personal loans auto and point of sale loans.
Speaker Change: These three product lines are at different stages of maturity and monetization within our business.
Speaker Change: Which drives the mix of strong stable growth from longer standing products, along with more rapid growth trends from newer product fuel and consistent long term growth from both volume and monetization.
Speaker Change: Starting with our most mature product personal loans.
Speaker Change: Partner demand remains robust as we look into 2025.
Speaker Change: Growth here is disciplined as we continue to see strong and stable consumer performance among loan vintages that have seasoned over the last 12 to 18 months.
Speaker Change: In terms of monetization personal loan fr LPC is robust at six 3% versus four 5% overall.
Speaker Change: Despite the relative maturity of this product on our network.
Speaker Change: Volumes this quarter grew by 24% on an organic basis to $1 6 billion.
Speaker Change: Turning to auto lending here too we are focusing on disciplined and judicious growth as we ramp back up to leverage improving sector trends.
Speaker Change: Here too we have seen strong and stable credit performance with 2023 vintages markedly better than particularly two peaks.
Speaker Change: <unk> will discuss these trends in detail later in the call.
Speaker Change: After an uncertain macroeconomic backdrop, we focused our efforts during clinically for an improved credit underwriting and are positioned to benefit from substantially improving funding efficiency and notable improvement in returns and margins.
Speaker Change: We completed the on boarding of Onemain financial and expect to start generating more volume from recently on boarded partners.
Speaker Change: Our European auto volume annualized run rate was nearly $1 billion with fourth quarter sequential growth of just under 40%.
Speaker Change: Okay.
Speaker Change: Our <unk> product the newest and fastest growing vertical is set to be the most powerful contributor to medium term growth.
Speaker Change: Leveraging very strong demand for our product.
Speaker Change: Here, we are pushing forward with existing partners, Florida and U S banks Elevon, while discussions continue with many major central banks and global payment brands.
Speaker Change: Already we are seeing robust growth in this vertical.
Speaker Change: With over 170% sequential growth in our Prs volumes in fourth quarter.
Speaker Change: Our year end exit rate represents a run rate of more than $1 billion.
Speaker Change: Network volume with strong returns.
Speaker Change: Turning to our new partner pipeline demand remains extremely robust.
Speaker Change: Among our potential new partners I would like to highlight several late stage discussions among U S regional banking institutions and look forward to sharing more progress through 2025.
Speaker Change: Okay.
Speaker Change: As we gain more traction with new and existing partners. We have evolved our product strategy to help partners solve their customers' needs outside of the second look product.
Speaker Change: Our pre screen product for instance.
Speaker Change: Which is in testing with three existing partners has enabled lenders to drive engagement with substantially lower customer acquisition costs.
Speaker Change: And we believe that over time will drive increased conversion.
Speaker Change: As a reminder, the pre screen product is truly innovative.
Speaker Change: It Leverages, our access to lending partners customer data combined with our own data to provide recommendations.
Speaker Change: For additional lending products to customers, who deserve them and would benefit from them.
Speaker Change: By helping our partners to offer additional products and opportunities to engage with qualified customers.
Speaker Change: The prescreen product enables our partners to drive further growth without additional marketing costs, not only boosting return on investment but retention.
Speaker Change: We look to scale this product further through 2025.
Speaker Change: We're also focused on helping our partners leverage customer acquisition products across asset classes outside the traditional channels.
Speaker Change: For instance, we are testing affiliate expansion with several existing partners.
Speaker Change: And see promising customer acquisition trends, which is another avenue to help our partners drive customer and revenue growth engagement and returns on investment.
Speaker Change: We believe that the best way, we can measure the value we provide our partners.
Speaker Change: As to the Fr LTC regenerate on network volume.
Speaker Change: After all as our partners benefit so do we.
In fact, our fr LPC grew by 55% in the fourth quarter of 'twenty 'twenty four.
Speaker Change: <unk> and a record for 5% of network volumes the top of our guidance range.
Speaker Change: Our quarterly application volume of $197 billion.
Speaker Change: Helps illustrate our deep integration across many large lending institutions.
Speaker Change: And the fact that we have funded under 1% of those loans peak to our extremely prudent underwriting standards.
Speaker Change: As I turn over to EP to discuss our financials in more detail.
EP: I'll leave you with the understanding that we expect our growth will be a balanced and disciplined as ever.
EP: We are extremely robust demand trends from both new and existing partners.
EP: And opportunities to expand the ways in which we help them engage and monetize their customers across their enterprise offerings.
EP: With that I will now pass it over to EP.
EP: Thank you Sanjeev 'twenty 'twenty four was a solid year for <unk> from a financial perspective, as we turn the corner to a new chapter in our company's history in the beginning of 'twenty 'twenty four will shape out too aspirational goals to become cash flow positive and to set ourselves up to become GAAP.
EP: Net income positive in 2025.
EP: And while it's early to get there has been very challenging the team readily embraced it and successfully execute towards achieving these goals.
EP: We are ready to leverage all of the hard work tough decisions instructive learnings from our disappointing past performance and deep management experience to truly demonstrate the earnings power of our business in 2025 and beyond.
EP: Throughout 2024, we're enlightened by our experience dealing with legacy issues and the adverse impact from our 2021 for 2023 performance, but still remained laser focused on building a disruptive business that can withstand all cycles and create long term shareholder value.
EP: <unk> has been tested as has our sector U S consumers and our lending partners and we have persevered and emerged from a series of macro and other factors with a strong fee generating engine improved capital structure and liquidity profile and significant operating leverage.
EP: I am very pleased to be here today and provide our inaugural launch of positive GAAP profitability guidance, which we expect in the second quarter of this year, while executing on our business plan that is self funded.
EP: This is no small feat for a company of our size and short history.
EP: Our results for the fourth quarter were better than our guidance demonstrating strong monetization of robust network volume and continued operating leverage leading to 88% EBITDA growth.
EP: We are publically guiding to GAAP net income profitability for the first time, which I will discuss in more detail later.
EP: Before turning to detailed results I'd like to highlight several achievements, which reflect consistent execution of our financial strategy.
EP: FRE, which we see as a percent of volume at a record, 405% increased 25 basis points quarter over quarter, and 130 basis points year over year. The truest measure of the value we provide to our network partners.
EP: Core operating expenses were 49% of our fr efficacy the lowest in our public history and a testament to the operating leverage in our model and the trends, which will persist going forward.
EP: Our funding program has been further optimized with diverse funding sources such as the recent forward flow from blew out and improvement we've seen our ABS program.
EP: Net cash required to fund our volume has declined two 2% to 3% for personal loans and one and a half to two 5% for all network volume.
EP: This is a step function improvement in our risk exposure in absolute terms as well as cash flow characteristics.
EP: Our interest expense and access to liquidity have improved meaningfully as we completed our previously announced balance sheet restructuring and refinancing.
EP: Lastly, and importantly, we no longer expect to face material headwinds to profitability from securities on our balance sheet associated with 2021 'twenty two 'twenty three vintages.
EP: This allows us to demonstrate the true earnings power of our operating model our stable recurring growth in revenue is expected to drive profitability.
EP: Turning to network volume, we saw 9% growth in the fourth quarter to $2 6 billion of which we funded under 1% of the flow through our network relatively in line with the trend over the last several quarters.
EP: Part of the increase was attributable to CRM and higher than expected conversion versus what we expected with our previous guidance.
EP: Arsenal loans remain the largest contributor to volume up 24% year over year organically at approximately 60% of total <unk>.
EP: Total revenue and other income of $279 million grew by 28% from the year ago quarter with fee revenue up 31%, primarily due to personal loans.
EP: Fr and proceed grew 55% to a record $117 million in the quarter and was a record four 5% of network volume.
EP: This was at the high end of the three and a half to four and a half range. We provided for the second half of 2024 and was up 130 basis points from the year ago quarter.
EP: Once again lending product suite made up the majority or 71% of total revpar ABC up from 63% one year ago, and 32% two years ago.
EP: This is an important and purposeful shift towards more sustainable and predictable revenue growth through the cycle.
EP: Our adjusted EBITDA grew 88% year over year to a record 64 million with margins up 730 basis points to 23%.
EP: Incremental margins of 49% in the quarter reflect the strong operating leverage a trend we expect to continue going forward.
EP: Net income attributable to <unk> was a loss of 238 million and was primarily impacted by fair value adjustments at rates that we have highlighted during our third quarter earnings.
EP: The losses ended up higher than we expected.
EP: Overall fair value adjustments net in our overall portfolio were a loss of $156 million versus $101 million in the prior quarter.
EP: Approximately 90% was attributable to 2023 vintages.
EP: In addition, previously recorded market driven losses of $79 million in other comprehensive income on our balance sheet were reversed and reported as other expenses net on our P&L.
EP: This reversal is attributable to our fair value estimates, assuming we will exercise our optional redemption rates on several of our investments as the most likely scenario compared with prior estimates.
EP: We believe we have taken the majority of our losses related to historical were introduced in the last quarter and we do not expect them to have a material impact if any to our performance in the future.
EP: I want to highlight a few things and emphasize what I mentioned before.
EP: Losses in any consumer lending business are to be expected, but the outcome of our execution over the challenging 2021 to 'twenty to 'twenty three period is still deeply disappointing.
EP: Throughout 2024, we have taken significant actions to effectively navigate similar outcomes in the future.
EP: Select examples include our scale and expanded flow access improved credit underwriting and risk management overlay funding optimization and diversification cost of capital improvement all of which have been validated by third parties, such as rating agencies corporate funding partners and institutional investors.
EP: Looking to gain access to our production.
EP: In addition, introducing GAAP net income guidance is one step towards driving visibility and accountability.
EP: Continuing with our results interest expense was $26 million in the quarter why share based compensation expense of $16 million was towards the lower end of our expected range of $15 million to $20 million per quarter.
EP: Adjusted net income was positive for the sixth consecutive quarter up $13 million, excluding share based compensation and other noncash items, such as fair value adjustments.
EP: Our credit performance remained strong with continued improvement over the past three years driven by enhancements of our underwriting models.
EP: Our personal loan cumulative net losses for first and third quarter 2023, vintages are 20% to 35% lower than peak losses in late 2021 at the same month on book.
EP: Auto cumulative net losses for first and third quarter of 2023 vintages are trending approximately 30% to 50% lower than peak 2022 vintages at the same month on book.
EP: Turning to funding the team has driven meaningful improvements in diversification and efficiency of our funding channels in our ABS program as of the end of 2024, we have issued 26 billion across 64 transactions with more than 130 partners, including our six.
EP: AAA rated transaction, which closed in the fourth quarter.
EP: We expect net risk retention levels in our personal loan pay DBS program to remain in the 4% to 5% range of notional size of the deals.
EP: Last week, we announced our second large forward flow agreement with funds managed by Blue our capital to purchase up to $2 4 billion in consumer loans through the <unk> network over 24 months period.
EP: This is a clear testament to the attractiveness and demand of consumer credit originated across our <unk> platform and our focus on funding loan origination in a capital efficient manner.
EP: We have further diversified on the back of our third possible securitization of the year in December for 100 million.
EP: As a reminder, possible transactions not only helped to diversify our funding sources, but the net risk retention requirement is at a minimal 1% of the notional size of the deal. We will continue to leverage strong demand from investors for this product.
EP: We currently expect all non ABS funding channels to represent 25% to 50% of our 'twenty to 'twenty five funding sources. These will lead to continued reduction in required risk retention and we will continue to consider holding more securities when and if it makes economic sense.
EP: Before turning to guidance I want to review, our balance sheet and provide more details on fair value adjustment for the quarter.
EP: We ended the year with $227 million in cash and cash equivalents and $764 million in investments and loans and securities.
EP: In the fourth quarter, the fair value of the overall investment portfolio net of non controlling interest and prior to any new additions in the quarter was adjusted downward by $156 million versus $101 million last quarter.
EP: 90% of those adjustments were driven by the 2023 vintages as a result of the meaningfully higher cost of capital at which these transactions were executed leaving minimal to no cushion against changes in muscle loss assumptions, we still ended up being higher than expected at the time of pricing.
EP: Additionally, we reverse the previous loss of $79 million in other comprehensive income in our shareholder's equity, which was a reclassification to other expense as I explained earlier.
EP: Our 2025 guidance, which includes positive GAAP profitability and trying to quantify it reflects multiple illustrative scenarios related to future impairments, if any as laid out in our earnings supplement.
EP: In the fourth quarter, we also added $17 million of new investments as loan and securities net of Paydowns from prior investments inclusive of an $8 million gain on sale.
EP: As of year end the mix of our investments was 31% notes and 68% certificates versus 13% notes and 87% certificates a year ago.
EP: The improvement in mix and quality of our assets is an additional source of potential liquidity for Buckeye here as we head into 2025.
EP: Yes.
Turning to our outlook.
EP: Our full year 2025, and Q1 2025 outlook reflects the current momentum and resilience in our business and while we see improvement in the macro environment. We remain cautious the focus remains on profitable growth and we expect to generate positive GAAP net income profitability in the second quarter of the year.
EP: We expect continued growth across personal loan auto and tos products, while FY <unk> reflects the full year impact of the improvement in fees in 2024, and the change in funding mix.
EP: Given the investments to date in operating efficiencies, we do not expect any material investments in that business in 2025.
EP: GAAP net income profitability will be driven by these factors along with lower fair value adjustments, if any as well as lower interest expense. All the result of our relentless execution in 2024 to get the company to be cash flow and GAAP net income positive.
EP: For the first quarter of 2025, we expect network volume in the range of two five to $2 7 billion total revenue and other income in the range of $280 million to $295 million and adjusted EBITDA in the range of $65 million to $75 million.
EP: We expect first quarter GAAP net income in the range of negative $20 million to breakeven.
EP: For the full year, we expect network volume in the range of 10, five to $11 75 billion total revenue and other income of $1, one five to $1 $2 75 billion and adjusted EBITDA in the range of 265 to 310.
EP: $15 million.
EP: We are guiding to GAAP net income for the year in the range of negative $10 million to positive $40 million.
EP: With that let me turn it back to the operator for Q&A.
EP: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: If you would like to ask a question. Please press star and one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
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Speaker Change: All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Ladies and gentlemen.
Bob: Can I ask you to restrict to one question Bob participant.
Speaker Change: The first question comes from the line of John Hecht from Jefferies. Please go ahead.
John Hecht: Good morning, guys. Thanks, very much for taking my questions and all the details.
Speaker Change: That you provided.
Speaker Change: And I guess, Mike My question is you've done something you've given us some details around the fair value marks in the quarter the marks for a little bit bigger than prior quarters.
Speaker Change: Maybe can you give us a little bit more detail on kind of what framework you use to make the.
Speaker Change: Fair value marks.
Speaker Change: It's baked into them now and what gives you confidence that there won't be ongoing fair value marks as we go through 2025.
Gull: Sure John Hi, its gull here. Thank you so much so I will take the sales pace and then we'll hand it over to JP to speak more specifics about the framework and where the loss is coming from and Sanjeev to speak about what it means for the business.
Speaker Change: So.
Speaker Change: First let me let me, let me say that as we think about the impediments and as you mentioned now the last three quarters, where an outsize losses versus what we used to having the boss and what we expect to having the future.
Speaker Change: Most of them.
Speaker Change: Where are the things that are driving full 2023, if you recall in our last earning call that we stood here in November we actually said that we are going to have another quarter.
Speaker Change: <unk>.
Speaker Change: Losses coming through.
Speaker Change: Most of the losses and EPA will speak specific numbers are related to the 2023 vintages that throughout the years.
Speaker Change: Seasons, and therefore this is where they are marked on our balance sheets with the actual data coming in and took the fair market value.
Speaker Change: And all of that in 2023, it was because the funding conditions were so challenging that in order to support the network the funds.
Speaker Change: And the best stores et cetera, when we needed to put up these plant. These teams that we knew could have some.
Speaker Change: <unk> losses in the form of the level of sensitivity to it but.
Speaker Change: But really the biggest question that you're asking is how should we see comfortable that this will not be happening again, so first and foremost let me share that the guidance that we provided for 2025 is including any potential credit related impairments we have built.
Speaker Change: In the last two or three quarters of very robust infrastructure and capabilities to be much more predictive about these type of outcome as it relates to the losses in the different parts and if you'll remember we repeatedly said that as we think about the 2024 deals and transactions that we have on the balance.
Speaker Change: She'd because of different environment, they were producing plus how we know the performance of the credit is performing and it's performing well.
Speaker Change: We are in the very strong belief and we have the visibility to know that the meaningful over magnitude likelihood of losses in out of the question.
Speaker Change: That comes to the last piece, which is when we are thinking and speaking about the 2024 trends and where we are spending today is the business and what the businesses underwriting today is a very strong production that is consistent both on the credit on the income side, but a lower cost of capital and a bad.
Speaker Change: Structures on the other side that is translated into nor more future losses.
Speaker Change: Meaningful on the 2020 full in the future and when we did the <unk>.
Speaker Change: Full fair market value add in our regular process to bring these down the trial 24 vintages should not have any material drag on our performance and hence we are today, having the ability to provide the GAAP net income guidance inclusive of any potential credit related development I will.
Speaker Change: Over now to repeat to speak a little bit more about the specific of the numbers and the things behind and then Sanjay will close it out with understanding of the business impact.
Speaker Change: Thanks, John and thank you for your question.
Speaker Change: Just wanted to give a little bit more context, as well a little bit more details and more importantly highlights what we have done to mitigate such outcomes in the future.
Speaker Change: In the last quarter, we did highlight that we expected to have more losses on the 2023 vintages where were the challenging vintages. We had indicated that we had a mark on the dose of $275 million and we did take a $144 million impairment against those this quarter out of the total of $1 50.
Speaker Change: Six.
Speaker Change: Overall credit related impairments were $229 million net of.
Speaker Change: Noncontrolling interest.
Speaker Change: <unk> included a $79 million reversal.
Speaker Change: Or previously accumulated losses on our balance sheet.
Speaker Change: That were moved into other expense.
Speaker Change: 90% of those losses as I pointed out are driven by the 2000 Twenty's reason, they're asked from the 'twenty, one and 'twenty two vintages.
Speaker Change: As a reminder, these were executed during very challenging funding environment, where the cost of capital.
Speaker Change: Who was higher than the actual expected return so even small changes in credit.
Speaker Change: Was exposing us to potentially large losses.
Speaker Change: I still want to highlight that despite that the credit performance of the 2023 vintages are.
Speaker Change: Significantly better and improve relative to the 'twenty, one and 'twenty two peaks in the range of 20% to 50% relative to those and you can see a lot more of the details in our supplement.
Speaker Change: And the second piece I want to highlight is that based on what's the Max that we currently have on the 2023 days in the prior businesses, we do not expect any material impact on this.
Speaker Change: Performance relative to those vintages.
Speaker Change: All of that gives us confidence obviously together with all the other factors driving our guidance in our ability to deliver that GAAP net income positive for the year.
Speaker Change: We are providing more visibility in our supplement on what we are assuming in terms of potential impairments if any for 2025 in our supplement I'd encourage you to.
Speaker Change: Look at that for more details.
Speaker Change: Now to your question around.
Speaker Change: The approach on the on the on the.
Speaker Change: Valuation for those as you know fair value is effectively based on a range of all different relevant assumptions that drive the changes in projected cash flows.
Speaker Change: These securities.
Speaker Change: Now Susan if you're thinking about the 2020 threes right. They're seasoned 12 to 18 months now approximately which is basically the point, where we can really start being predictive about end stage losses, an assumption that we would have to make city to four years out.
Speaker Change: So while we have some some transform the earlier vintages in 2023, we did warn about this into the queue, but we have to go through the whole process and get significantly more data at the end of the year to conduct the full testing assessments.
Speaker Change: What's more important I think is here to highlight the actions we have taken to.
Speaker Change: Basically mitigate similar outcomes in the future and those are driven by three things.
Speaker Change: The optimization of our ABS structures.
Speaker Change: Diversification of our funding sources and obviously some improvement in the macro environment on the ABS structures. The structural improvements that we have validated by a AAA rating in our tail portfolio and doubling our auto all of that has lowered the cost of capital and thus a permanent improvement in the structures in.
Speaker Change: In addition, 25% to 50% of our funding is expected to come by non ABS.
Speaker Change: Vehicles, and therefore put does require basic Canadian capital to be put at risk.
Speaker Change: All of that lowers the absolute amount of capital we put.
Speaker Change: To use to fund our volume, which is significantly lower than it would have been relative to the 2023 and obviously the macro environment has improved has been a tailwind even though we do remain cautious about that.
Speaker Change: And interest rates are still at a very high level relative to historical levels.
Speaker Change: But all of that allows us to have a buffer in terms of the cost of capital that we're currently seeing relative to the expected return of the assets.
Speaker Change: All of that gives us very strong confidence and this is why we are here today guiding to positive GAAP net income.
Speaker Change: As it relates to try and quantify performance.
Speaker Change: I'll pass it over to <unk> CFO, maybe some additional remarks.
Speaker Change: Yes, I mean, basically EPS just to close it out.
Speaker Change: Briefly but very importantly.
Speaker Change: The way I think about the John as the benefits of having leaned into grew and developed.
Speaker Change: Really solid operating business.
Speaker Change: Through a challenging funding period are quite clear.
Speaker Change: We see that we stood by our lending and our funding partners through the cycle with very good returns.
Speaker Change: We've now grown RSR LTC to very very strong levels as you saw at four 3%.
Speaker Change: We gained our AAA rating through this process Cigna.
Speaker Change: <unk> significantly improved our ABS structure.
Speaker Change: We've strengthened the pipeline of potential partners, who have heard about U S Bank, Florida Onemain.
Speaker Change: And all of this was done as a result of leaning in.
Speaker Change: <unk> entered new asset classes that significant pay off like Pos as we noted last quarter and this quarter.
Speaker Change: And finally diversified our funding sources beyond ABS to forward flows in pass throughs with huge institutional partners on both sides and blue oil and gasoline.
Speaker Change: And of course net net what this has done to the operating business that we're generating today is very strong and so now we are able to focus on growing it to 25%.
Speaker Change: Yes.
Thank you.
Speaker Change: The next question comes from the line of David <unk> from.
Speaker Change: From citizens empty. Please go ahead.
Speaker Change: Yes. Good morning, Thanks for thanks for taking my questions.
Speaker Change: Obviously demand and the pipeline remains good.
Speaker Change: Very strong so I'll just follow up with that.
Speaker Change: Couple of follow on credit questions.
Speaker Change: First is.
Speaker Change: I just wanted to make sure I understand the.
Speaker Change: Guidance correctly, because I'm looking at the slide.
Speaker Change: That has the slide 21, which has the scenarios.
Speaker Change: About.
Speaker Change: Write downs.
Speaker Change: And impairments in the loan portfolio.
Speaker Change: It looks like scenario.
Speaker Change: Driving your guidance it might lead to believe that if expected cash flows actually perform in line with your forecast.
Speaker Change: Sure.
Speaker Change: That will have $100 million to $150 million more pretax income and then tax affected for gap is that how we're supposed to interpret slide 21.
Speaker Change: This represents that inherent in the GAAP guidance.
Speaker Change: Some very conservative.
Speaker Change: Assumptions around our expected cash flows.
Speaker Change: Hi, Thank you for the question no I think I think I would let me provide more clarity.
Speaker Change: If we expect it any more losses on our existing portfolio without have obviously taken that so the base case is what drives and effectively our expectation for 2020 for what we are doing is in our guidance together with everything else. We're just using that scenario, which provides an additional 100 to 150.
Speaker Change: Potential impairments, if any and that's what's basically driving our guidance.
Speaker Change: And that's just to be clear, it's on the full year guidance for 2025 not <unk>.
Speaker Change: <unk>.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Sundance Suck Ronnie from <unk>. Please go ahead.
Speaker Change: Hi, This is actually Steven Kwok filling in for Sanjay. Thanks for taking my question.
Speaker Change: Just wanted to follow up around the network volume growth. It seems like there's a pretty wide range of crops.
Speaker Change: Guidance for 2025 could you just talk about what the current operating environment look like and what are the factors that we should consider.
Speaker Change: In terms of how you get to either end of the range.
Speaker Change: Sure so so.
Speaker Change: Thank you.
Speaker Change: I'd like to take your question to a little bit of a bigger question.
Speaker Change: I think that will frame exactly what I'm trying to.
Speaker Change: Oscar.
Speaker Change: I think the question is how <unk> thinking about growth.
Speaker Change: And there is a very important piece that lending to that debt is actually building them.
Speaker Change: The budget or the guidance as you see now and giving us the north star of our solving for over the over and over over the cycle. So the long story short of it is that we perceived our self as a network when you're perceived youll sensors, a network and not in <unk>.
Speaker Change: While we are actually providing all the way we grow is easier to get more customers, our lending <unk> or to sell to our lending partners more products such as the prescreen that Sanjay is shared over the phone call and there are many more.
Speaker Change: When you take these top of the funnel type of growth activities, which are not driven by.
Speaker Change: Changes so much in macro we're trying to build an over the cycle business that will provide product and services that are relevant to lenders.
Speaker Change: In any environment.
Speaker Change: And that we think about it as a steady state of growth 20% CAGR.
Speaker Change: Over the cycle, regardless of the different pieces and will not bore you on this phone call, but there are many other factors that in different environments are balancing them self out to make sure that only the relevant piece is the increase of the top of the funnel, which is how much we are solving for our pulp mills.
Speaker Change: In our in the different products to our platform.
Speaker Change: Inside of that de lever resolved the way you can think about it all the pools in the bush or how good our models all and therefore, we are progressing them. How good are the products and how much we can sale of them how good the team is executing into getting more <unk>.
Speaker Change: Cheap our cost of capital in so we can actually later sell the loans.
Speaker Change: In a more profitable way or in the same time could approve more more loans because our cost of capital is.
Speaker Change: Is it is lower.
Speaker Change: But I think the more interesting piece in that I would I would love studies you have to take is is how our customers needs has changed there is really talking to the maturity of the company at this stage is suddenly if you want to take it.
Speaker Change: Sure.
Speaker Change: I'll just say a couple of things goes it's pretty much addressed it but I'll just say a couple of additional tanks.
Speaker Change: Number one our partners today are Lee.
Large public companies.
Speaker Change: We are a large proportion of what they do on the Pls side predictor.
Predictability to our partners is extremely important to our partners. So instead of.
Speaker Change: Going all in insurance spikes and troughs in growth, we show predictability in our growth and that has been one of the reasons why we have given the outlook that we have that's number one.
Speaker Change: Number two I will say just from an operating environment standpoint.
Speaker Change: You asked about the operating environment and why the range, we see that.
Speaker Change: Consumer cycles are relatively stable in 2024, compared to 2023, and 2020 five seems to be pretty stable as well.
Speaker Change: Personal loan delinquencies are down our auto delinquencies are largely stable and so we've taken all that into consideration.
Speaker Change: <unk>. The fact that we don't we have not accounted for any rate drops.
Speaker Change: And so we've been in our opinion somewhat conservative but extremely responsible.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Pete Christiansen from Citi. Please go ahead.
Speaker Change: Good morning, Thanks for the question.
Speaker Change: I think you mentioned in your prepared remarks.
Speaker Change: It was just it was just hoping you can.
Speaker Change: Reiterate it.
Speaker Change: I think you were able to overcome some redemption issues that you've had.
Speaker Change: Potentially with these months and then.
Speaker Change: Follow up.
Speaker Change: Just curious how you see the mix of network volume.
Speaker Change: <unk> this year I would assume.
Speaker Change: A higher degree of point of sale could translate.
Speaker Change: Translates to lower risk of on the risk retention. So just some thoughts there would be helpful. Thank you.
Speaker Change: Sure just to clarify a little bit on your first point was highlighting is that in the valuation that we did for a fair value for Q4.
Speaker Change: Some of that is timing through early redemption rights that we have on some of those securities.
Speaker Change: We didn't have any issues or is it just provides some clarity but moving on to the important question as we think about the volume guidance again as we have been doing in the past you need to.
Speaker Change: I appreciate the fundamentals of our model, we don't grow by <unk>.
Speaker Change: Chase in credit growth from trading conversion will grow by adding more partners to the network. So when you think about the higher end of our range on the volume side effectively that would imply that some of the newer partners have announced will accelerate more than we would versus the lower end of the range, which means we would take a little bit more time for those relationships to mature.
Speaker Change: Sure.
Speaker Change: That's a little bit how to think about the volume growth.
Speaker Change: And then in terms of areas of investment as you think about the different asset classes personal loan will continue to grow but most of the investment and call. It high ROI and growth potential that we see is in our auto platform in Pos and maybe since you can add a little bit more color too sure I mean in the last quarter.
Speaker Change: We gave some indication of how much we would grow our U S business as you can see we have delivered that.
Speaker Change: The exit rate on our U S.
Speaker Change: Let me focus on your year on year growth and 176% sequential growth demonstrates the fact that we will deliver on what we are seeing.
Speaker Change: And right now, we don't like talking to a bunch of large Pos.
Speaker Change: Players, both amongst regional banks as well as leading <unk> lenders.
Speaker Change: I should emphasize that we have also got <unk> in addition to Florida and <unk>.
Speaker Change: We've been very very conservative on the <unk> numbers in 2025, we will grow with them. They are a very successful partner and so we've been somewhat conservative on our numbers, but extremely bullish on the U S.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Joseph <unk> from Canaccord Genuity. Please go ahead.
Speaker Change: Joseph If you can please on mute your line from your end and ask your question.
Joseph: Sorry about that.
Speaker Change: Thanks, guys.
Speaker Change: For all the color and nice to see the outlook for 2025, just wondering if it's too early to have.
Speaker Change: Maybe kind of a more normalized fair value adjustment.
Speaker Change: Margin or.
Speaker Change: Percentage of Fr LPC or network volume.
Speaker Change: As we move forward and maybe if we've gotten past.
Speaker Change: Some of these rough bumps how to think about that on a normalized basis over the medium term. Thanks.
Scott: So Joe it's Scott here.
Joe: I think I think within the numbers there is some base.
Joe: Assumptions that are relatively stable numbers that you saw in the past.
Joe: Multi yet in the place to characterize the TNF receptor et cetera, we are working through that but you should assume that in the GAAP net income full year guidance.
Joe: There is some some part of it and then close the call we can take it to the different pieces to see what extent.
Joe: Thank you.
Speaker Change: Ladies and gentlemen that was the last question.
Speaker Change: I will now hand, the conference over to <unk> for his closing comments.
Speaker Change: So thank you everyone for coming I'm going to hand, it over to EP to say a few closing remarks for this session. Thanks Kyle.
Speaker Change: Allow me a little bit to take you a little bit.
Speaker Change: Longer journey that we have delivered this year.
Speaker Change: This has been a very challenging growth with a lot of surprises tough decisions and highly instructive in earnings.
Speaker Change: We delivered major accomplishments throughout the year and with a new management team in place, but the same vision of building a disruptive business that can deliver.
Speaker Change: Sustainable growth through the cycle.
Speaker Change: Let me walk you through what we have accomplished this year.
Speaker Change: And whilst we have delivered in Q4, we did warn about the impairments. We said is 2023 vintages will be behind us with no future expected material and we strongly believe we are delivering that to date.
Speaker Change: And at the beginning of the year, we set two goals.
Cash flow positive and GAAP net income positive and the pillars for that work through higher fees more operating leverage and capital efficiency.
Speaker Change: We delivered 100 and 170 basis points of improvement in FY <unk> that is a 130 million more profit on our $10 billion of volume on.
Speaker Change: On operating leverage in <unk>, we took action and deliver $25 million of annualized savings.
Speaker Change: With core operating expenses as a percent of apparel, we see it coming down from 67% to 49% a year ago.
Speaker Change: In two to earnings we indicated that there is room for improvement on our interest expense and we delivered again $30 million in savings sort of refinancing transactions that we executed in <unk>.
Speaker Change: On the capital efficiency and diversification and we <unk>. We said we will get forward flows in pass throughs, and we delivered over $3 billion in forward flow programs and robust pass through program as well in.
Speaker Change: In addition, we optimized our ABS structure all of that.
Speaker Change: Basically led to cash required to fund our volume down by 200 basis points versus <unk> 2023 that is a $200 million less cash required for $10 billion of volume and still with a buffer.
Speaker Change: On the business side, we said, we're going to add new lending partners and we delivered relationship with Onemain and <unk>. We also launched new products, we expanded existing relationships with into new asset classes all of that coupled with our strong pipeline of new partners, we delivered the seeds for future.
Speaker Change: Our sustainable growth.
Speaker Change: We delivered positive cash flows we improved our balance sheet and created more access to liquidity to eliminate concerns for future equity raise needs.
Speaker Change: Now, we're giving you guidance on GAAP net income positive and we are here again to deliver.
Speaker Change: Thank you everyone for joining us today.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, the conference with Buckeye of technologies has now concluded. Thank you for your participation you may now disconnect your lines.
Speaker Change: Okay.
Speaker Change: Yes.