M&A Announcement

Apr 12, 2021

Ladies and gentlemen, thank you for standing by, and welcome to GoEasy's Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Farhan Ali Khan. Sir, you may begin. Thank you, operator, and good afternoon, everyone. My name is Farhan Ali Khan, the company's Senior Vice President of Corporate Development and Investor Relations, and thank you for joining us to discuss GoEasy's announced acquisition of LendCare. The news release, which was issued this afternoon, is available on GlobeNewswire. Both the news release and a supplemental investor presentation can also be found on the company's investor website. Today, Jason Mullins, Goeasy's President and Chief Executive Officer, will provide some comments and detail on the announced acquisition of LendCare. After the prepared remarks, we will then open the lines for questions from investors. Al Khoury, the company's Chief Financial Officer And Jason Appel, the company's Chief Risk Officer, are also on the call. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website. All shareholders, analysts and portfolio managers are welcome to ask questions over the phone After management has finished their prepared remarks, the operator will poll for questions and will provide instructions at the appropriate time. Business media are welcome to listen to this call and to use management's comments and responses to questions in any coverage. However, we would ask that they do not Quote callers unless that individual has granted their consent. Today's discussion may contain forward looking statements. I am not going to read the full statement, but I will direct you You have cautioned regarding forward looking statements included in the press release. I will now turn the call over to Jason Mullins. Thanks, Farhan, and welcome, everyone. We are thrilled to have announced earlier today the acquisition of LendCare, one of Canada's leading point of sale financing platforms. The transaction is subject to customary closing conditions and regulatory approvals, and we are aiming to close by the end of the second quarter. During the call, we will provide a brief overview of LendCare, a summary of the key strategic benefits and highlights of the acquisition and review the terms of the transaction. Before I begin, on behalf of the company, I want to welcome LendCare's founders, Ali Mattel and Mark Schell, Who will continue to remain with the company and manage the daily operations of the business, along with their 185 team members And all of their merchant and business partners to GoEasy. We truly look forward to working together. LendCare was founded in 2004 by Ali and Mark to fill a gap in the market for financing consumers everyday large ticket purchases. Over the last 15 years, They have built one of Canada's leading point of sale financing platforms in the powersports, retail, healthcare and home improvement verticals. Through approximately 3,000 merchants, LendCare offers a convenient and consumer focused loan origination platform That enables their partners to process installment loans quickly and easily for their customers with rates between 9.9% and 34.9%. The company has deep and long standing relationships with retailers, dealers and major name brand OEMs such as Bombardier Recreational Products And CF MOTO. Lend Care consumers range across the entire credit spectrum with 2 thirds in the non prime segment where they have especially deep expertise in credit and underwriting in their respective verticals. As at year end 2020, The company had over $400,000,000 in consumer loans, approximately 50,000 active customers. And during the last 3 years, They have compounded the growth of their loan portfolio at over 47%, resulting in compound earnings growth of over 50%. The acquisition of LendCare is a significant strategic fit for GoEZ. It is directly in line with our existing strategy and will help accelerate our growth plans. First, it is a highly complementary and meaningful in market acquisition, which increases our scale and extends the product line for customers. The first of our 4 key strategic pillars has been to expand the range of products for our borrowers. Together, products offered by LendCare and GoEZ will Expand the non prime credit spectrum with rates as low as 9.9%, lowering the cost of borrowing for our consumers And providing everyday Canadians the ability to improve their credit and graduate to progressively lower interest rates has been core to our vision since the inception of our lending Secondly, LendCare expands our point of sale channel into 3,000 additional merchants and new industry verticals such as powersports, healthcare and home improvement. This supports the second of our 4 key strategic pillars, which has been to expand the channels through which our customers can access Credit, a main component of which has been growing our point of sale channel since launching our first major brand relationship with Leon's 5 years ago To our successful investment and prime partnership with PayBright, now Affirm, we've been building a market leading offering in the buy now, pay later channel. LendCare will help accelerate this growth by launching us into new categories that have been on our roadmap for future development. Lastly, the transaction improves and diversifies Goeasy's overall risk profile with higher quality near prime borrowers and secured loans. On a pro form a basis, the credit quality of our average borrower will improve, the weighted average interest rate charged to our consumers Will decline from approximately 38% to 34% and the proportion of our loans secured by assets will increase From approximately 12% to 30%. In addition to the attractive high growth and profitability of LendCare, The acquisition also produces meaningful and achievable revenue and cost synergies. The most important of these is the revenue synergies. The transaction presents the opportunity for LendCare to leverage GoEasy's credit and pricing optimization models to lend to more non prime borrowers by increasing the approval rate for its merchants and producing increased originations and loan growth. Secondly, Both LendCare and GoEasy will have the opportunity to cross market their respective sets of products to the large consumer base of each firm. Goeasy's consumers will benefit from offers to finance purchases at a lower cost of borrowing through Lendcare's merchants, while Lendcare customers will enjoy access to Goeasy's unsecured and home equity installment loans, a true win win for both businesses. On the cost side, The transaction presents the opportunity to leverage GoEasy's mature and developed balance sheet to refinance a portion of LendCare's debt at a lower cost, while ensuring the business has all the necessary low cost capital it needs to fund its ambitious growth plans. Lastly, there will be the inevitable benefits to scale through which we can obtain better pricing from vendors and suppliers and gradually combine back office functions for greater efficiency. Together, we expect these synergies to generate approximately $9,000,000 in run rate annualized after tax income at year end 2022 And approximately $19,000,000 in run rate annualized after tax net income in 2023 continuing to grow each year after. We will use that as a segue to the financial consideration and aspects of value creation. The total purchase price of the transaction is 320,000,000 which represents approximately 13 times the anticipated 2021 IFRS adjusted earnings of LendCare, excluding the impact of any synergies realized, which represents a discount to the current GoEasy trading multiple. In addition, we will also inherit approximately $415,000,000 of liabilities, a portion of which we will refinance and a portion of which we will assume and utilize for future funding needs, making the enterprise value of the purchase approximately $735,000,000 The transaction will be funded through a combination of equity and the issuance of new unsecured notes similar to those we carry on our balance sheet today. As such and concurrent with announcing the transaction, we have completed a $130,000,000 bought deal equity financing of subscription receipts led by BMO Capital Markets. We are also pleased that LendCare's founders, Ali and Mark, have jointly elected to take $10,000,000 of their total consideration in the form of GoEasy common shares as a signal of their confidence in our outlook. We will then assume approximately $170,000,000 of existing funding facilities On the LendCare balance sheet, leaving the balance were approximately $425,000,000 and an additional approximately $20,000,000 in transaction costs To be funded by the issuance of new unsecured senior notes. Based on the strength of the transaction and pro form a balance sheet, The entire financing package was also 100% fully committed by BMO. While the transaction will temporarily re lever our business, Our net debt to net capitalization will remain below the targeted 70% we have historically optimized for and the strong free cash flow of the business will result in a natural and gradual deleveraging, just as we have seen in our business to date. Furthermore, we continue to have an open dialogue regarding our operating strategy and financial policies, and we feel confident that our corporate credit ratings will remain maintained. The ability of GoEasy to use its strong balance sheet and capital position to invest in a profitable high growth business, Combined with the highly complementary nature and strategic fit of the acquisition, enables us to produce both new revenue growth And cost synergies leading to a compelling financial transaction that creates long term value for shareholders. On a true discounted cash flow basis, the investment is an excellent allocation of capital projected to comfortably exceed our required rate of return. It is also immediately accretive to our adjusted earnings per share after normalizing for the one time acquisition related transaction expenses, an upfront IFRS provision and the amortization of acquired intangibles. We expect the accretion of the investment on adjusted earnings to then climb to Approximately 10% in the 1st full year following the acquisition in calendar 2022, then rising further to approximately 15% in 2023. 3. Lastly, the economic profile, attractive valuation and synergies will assist in continuing to produce a long term return on equity of 25% plus for our business. As we have outlined in the past, our strategy has been to expand our range of products, Grow our channels of distribution, widen our geographic reach and deliver a best in class experience for our customers, one that helps give them access to the credit they need today, while gradually lowering their cost of borrowing and helping improve their credit. We have also shared that while we have an attractive organic growth plan, we would also be seeking acquisition opportunities that could accelerate the execution of our strategy and contribute to our 20 year track record of growing earnings at over 30%. We believe LendCare is the ideal opportunity, Meeting all of our key investment criteria for strategic fit, return on capital, overall size and long term value creation for shareholders. We look forward to closing the transaction in the coming months and working with the LendCare team as we continue on our journey to become Canada's leading non prime consumer lender. With those prepared remarks concluded, we will open the line for questions. Thank you. And telephone. One moment please for our first question. Our first question comes from Jeff Fenwick of Cormark Securities. Your line is open. Hi, good afternoon, everyone. Hi, Jeff. Hi, Jason. So maybe I haven't Wasn't able to get the presentation open. Could you just give us maybe a bit more detail on the loan mix there today? You gave us a few different, I guess, verticals that they're in today, like what portion of that book would be secured? And is there one area That dominates or how balanced is that mix? Yes, sure. Happy to. So the if you look at the distribution of their portfolio by the verticals that we outlined, the presentation doesn't provide precise distribution. What we would say is that the predominant representation is in the powersports category in particular, where LendCare has been particularly strong at building their position. If you look at the difference between our portfolio and theirs, given that they are Lending in the majority of verticals where they are secured by some form of assets, where today our portfolio, as you know from our last set of disclosure, about 12% is secured and the majority unsecured, their portfolio would look almost to be identical inverse to that. And so when you put it together on a pro form a basis, that's where you get to about 30% of the portfolio would now be secured By the various assets and the verticals that they currently led to that I outlined. Okay. And you mentioned OEM relationships We're part of this as well. So is this a situation where someone like a Bombardier Recreational Products would have a direct relationship with LendCare and run sort of Vendor finance programs for them? Yes, that's exactly right. They have a myriad of relationships. They range from actual retailers and distributors themselves All the way through to the OEMs, as you've highlighted, where they work directly with the OEM to help put in place a financing program that then gets Passed down through all the distributors of those OEM products as a way of law for their consumer financing. Oftentimes, those OEMs We'll have their own very prime like financing program that they may offer. And then of course, LendingCare has been well positioned right behind To pick up the balance of the consumers looking for financing for purchases. Okay. And maybe you could comment on technology. I know How central that is to GoEasy? So how complementary is the technology here? Is it something where you can migrate their platform over in a reasonable period Time or are they going to continue to run on their technology for now? Yes, great question. So we think the technology is We would intend to continue to have the LendCare business operate on its own platform, certainly for a period of time. And then as we get more familiar with the way that 2 operating platforms work, we'll then look for ways to start to combine and leverage the mutual technology Both platforms, the platform that they've built over many years, we think is very robust, provides the merchants Within their network, a really easy and intuitive platform to be able to take and process applications. And they're in the process of enabling that technology so that a consumer can actually go online to their various merchant relationships And actually get pre approved for financing before they even go shopping with those particular merchant relationship. So we think quite highly of what they've built and our intention would be to leave it intact for a period of time. And then of course, when we find ways we can leverage the best of both technologies. We'll start to think about putting the pieces together down the road. And maybe just one last one on the debt financing. What are you seeing in that market today? I mean, the funding costs have been very attractive of late. Is this going to be something in the range of where we saw your recent EBS issue or any color you can offer there? I guess you can't really speak to it until you've done the offering, but Yes. I mean, I would say we feel very confident about the Conditions in the market and our positions issue into that market, our existing notes have been trading at a premium For the last long while now, so on that basis, we would expect that a new issuance would garner A rate below where our previous one was issued. So certainly, we would expect that we would have a good response to the market and we would have an attractive cost Capital that would be superior to the last issuance that we did would be how we think about it at the moment. Great. Thanks for that color. I'll requeue. No worries. Thanks. Thank you. Our next question comes from Stephen Volund of Raymond James. Your line is open. Good afternoon, everyone. Congratulations on the deal. Maybe just my first credit or question is on credit. What's been the performance of LendCare's credit performance over the past couple of years? Yes, great Maybe I'll pass it over to Jason Appel, as he's done some good work on looking at the credit. Jason, do you want to make a couple of comments Sure. Happy to. Thanks. Hey, Steven. Just really briefly, we've done a pretty thorough analysis of the limb care book over the last several years, both Internally and also using independent third party assessors, I would have you think about their loss rate over the last couple of years as being in the Low to mid single digits, and that's mostly a byproduct of the fact that a good chunk of their portfolio, as Jason Mullins has already indicated, is secured. And they've maintained that stable and attractive loss rate over the last several years. So a high degree of confidence in their ability to manage both the credit and the underwriting of the business they're Okay. And sorry, I'm still going through this presentation. Is The breakdown of the book is obviously 3,000 merchants. Is there a concentration in one segment Or OEM like Bombardier, does that make up an unusual proportion of the book? No, it's although powersports represents the largest share, it would be the largest portion. The balance is actually quite Well distributed across all of the different categories, powersports just being the largest of the group. And if you look at their total portfolio And all of the originations across all the merchant relationships, there is no one that has a high and material degree of contribution. So Certainly, key relationships, like the ones noted, are meaningful, but nothing that is material. It's a nice widely distributed network of relationships Across all the categories and all the categories contribute a reasonable share to their overall business. Okay. And maybe to just sneak one more. Just your relationship then with PayBright and Affirm, does anything change there? I presume these those LungCarran and PayBright are somewhat as competitors. Do you anticipate anything changing there? No, we don't I think if anything, there are perhaps opportunities to even think about ways we might work together. I mean, I think The reason why we don't see it as impacting those relationships are, if you look at PayBright Affirm, there's a couple of key This is one, they are much more very specifically a prime lender, whereas you can see, As we noted, LendingCare is 2 thirds non prime, so they're a different credit segment, but they're primarily focused on 1st and foremost. So perhaps complementary in that respect. And then secondly, the PayBright Affirm company is focused More heavily on the traditional core retail products, furniture appliances, fashion, household goods. That's not to say that they might not be keen to And in other channels before as a prime lender, but that's been the area they've definitely been primarily focused and continue to be focused on and where we work with them versus if you look at LendCare, again, very different, predominantly powersports, home improvement, those kinds of categories. So no change to the relationships. These are complementary businesses. Lending Care looks much more like a GoEasy than at a firm or a pay grade. And so we think there's Good opportunity is to continue working together with all those partners. Okay. Thanks, Jason. Thanks very much, guys. No problem. Thank you. Our next question comes from Gary Ho of Desjardins Capital. Your line is open. Thanks and good afternoon. Maybe first question is for Jason Mullins. Can you maybe talk about the competitive landscape and I guess, in particular, kind of Lincare's primary competitors there, their market share. I didn't go through the slide yet, but any geographical mix that you can share with us. Yes, sure. So from a competitive landscape, fairly Similar to the competitive landscape we've discussed in the past, on the non prime lending segment, You're going to have would have been GoEasy as a predominant competitor. Fairstone still is a large and predominant competitor there. As you move Up the credit spectrum and into the more near prime categories, then you're going to have a little bit of overlap with lenders that are already doing buy now, pay later point financing in Canada, some Flexity, some little bit of PayBright. In some other categories like home improvement, You're going to have companies like Simply Group and Finance It. So it differs depending on where exactly you are in the credit Segment and where at which verticals that you're in, but there's at least a couple of other competitors in each of those categories, but it's not an overwhelming number. It's certainly not a crowd space. It's just a good healthy amount of competition within each of those categories. Okay. And then the other one is, can you talk, I think, a little bit about The revenue synergies, can you talk about any overlap in customers between MenCare and Goeasy and perhaps touch on maybe the average duration of the book? Yes, sure. And maybe just as a bolt on your last question, I didn't touch on around geographic distribution. Their distribution is also national, so good representation in all the provinces. The distribution at the provincial level is A little different than population, but not dramatically. So a fairly a nicely widespread national distribution. In respect to your question on the kind of overlap, Limited overlap in the existing actual customer base today, given that together we collectively still only have a few 100,000 out of 9,000,000 non prime Canadians. So naturally, we're still on a combination basis, still a very Small company in a significant market, so very little actual customer overlap, but great overlap in terms of the complementary nature of the portfolio. So as I mentioned in the prepared remarks around where some of the synergy opportunities lie, the revenue ones being most important, This is a great way for both companies to be able to offer a wider range of financial products to their customer base. We have not been in the Predominantly not been in the categories they're in. So our customers have ever seen financing offers for the types of categories that they're in. Likewise, they've really done very little, if any, traditional direct to consumer lending for unsecured loans and the type of secured loans that we do. So again, very complementary in that respect. And then again, on the pricing Because the combination of their more near prime portfolio and our more non prime portfolio crosses down the entire pricing spectrum, It just means that collectively as a team, we're going to be in a better position to acquire as many customers as possible and price them at the exact Appropriate rate that optimizes the conversion and the lifetime value of the customer. And then any color on the duration Yes. So they have on average a higher loan size. You can denote from the earlier prepared comments About a $400,000,000 portfolio and the 50,000 approximate customers that we're acquiring. So that puts the average loan size around $8,000 just simply put. The average tenure of their loans is going to be in the kind of 5 to 8 year range because they're going to be generally larger and longer term loans given the So very somewhat similar, I would say, to the upper echelon of our unsecured customers and the way we've done Larger term larger duration loans at lower price points to them, to our best customers who are more near prime, that would be very similar to how their portfolio would given the credit profile. Okay. And then just last question. You provided some earnings Accretion numbers in your prepared remarks. Can you maybe walk us through kind of some of the assumptions that's Built in particularly on the loan book growth side, are you assuming kind of similar growth that they have seen in the last couple of years? And or it sounds like you're benefiting some of the from the refinancing costs, also kind of net charge offs. Are you expecting that Decline or stay flat flattish from where we are? Yes, sure. So, I would say the way to think about the assumptions that underpin the The outlook and the accretion. First of all, our base business upon which we apply the impact of the accretion, We've got a base organic projection that's similar to what people have heard us talk about before is a set of what we feel are very Reasonable projections that are based on the product categories we're in today, The initiatives and the projects that we already have live or underway, we've not been overly bullish about the outlook or including an impact of things we haven't done or haven't built yet. So a really good set of, we think, quite solid and reasonable projections. And And as you would note from our prior GoEasy standalone projections, those are that organic plan is still quite attractive on its own merits. The LendCare business has its own projections and through our process, we work with the data and the information we had To build our own set of projections about their business and looked at all the categories they're in, the size of the market, The recent origination trends, the growth outlook for each of the categories they're in within Canada, we're able to then build our own set of what we think is Very reasonable and realistic projections. Obviously, as you heard me mention, their growth profile because of their earlier stage of their company is very attractive. So when you put those things together, you get a natural accretion that just comes from the fact that we're using GoEasy's balance sheet to purchase A profitable high growth business. So a portion of that accretion just comes from purely and simplistically the transaction itself. And then another portion comes from the benefit of those synergies, which the way I would think about those is they're about Half revenue related and about half cost related, putting the financing into the cost side of the lender. So again, a nice healthy contribution To accretion coming from just buying a profitable business with the GoEasy balance sheet and the other portion coming from the synergy and then that synergy portion being broken down Split roughly proportionate between revenue benefit and cost benefit. Last thing I would say, which I think is consistent with the way GoEasy has always historically managed over a long period. We think when we build our projections and our outlook that they're quite reasonable and that certainly there's Upside opportunities to our projections if things go well and we really execute and us and Limb Care find more and more ways to work together. Okay. And if I can just sneak one more in for maybe Jason and Paul. Just last year through the COVID environment, can you comment how the book Performed and any numbers on deferrals or things of that nature? Sure. Great question. In And a testament, I think, to the power that Mark and Ali have brought to their business. They, much like we did, experienced some very strong performance over the last, call it, 12 to 15 months. And praise you should go to them because on balance, they did a quite a modest level of What you would call customer modification type programs. In fact, they did it on a much lesser amount than we did comparably over the same period. And I think that's largely a function of Two things. One would be the stronger relative credit quality of their book when compared to ours that Jason Mullins talked about. And the second one is the fact that a vast majority The book is secured by hard assets. And as a result, there is a strong compulsion on the part of their customers to maintain ongoing payments, not just in good times, But also in terms of economic uncertainty. So I would say their performance on balance over the last 15 months has been quite strong. They have not seen a meaningful increase in their overall loss performance. And we would expect them to follow our portfolio insofar as the directional movement of loss rates over time, but on a much smaller basis because they've just seen less movement overall. And do they have an insurance product as well, similar to what, I guess, GoEasy's Lumber does? They do have a similar product. They have a couple of ancillary products. You could think of the categories they're in, they're going to have A few different products, some that are more like a warranty products on the products that they actually are having consumer finance. They do have an insurance like product to ours. It's a little less mature, a little much less penetration. So that's an area where I think they've done a good job and we think we can also be quite helpful to the business and the experience that we've got. Okay. Got it. Okay. Those are my questions. Thank you. Thank you. Our next question comes from Jamie Gloyn of National Bank Financial. Your line is open. Yes, thanks. Good afternoon. First question is on the prime customers. Can you just you mentioned it in the prepared remarks and I didn't quite catch it. Is the expectation that prime borrowers are going To roll off and you'll use the that capital to further growth in your prime and subprime? Yes. No, great question. So, no, that's not the intent. As you noted, There is about a third of their portfolio that on a credit score definition basis is prime. And certainly, that's an important part of their offering to some of their merchants is that When there is a prime lender in front of them, especially if, for example, it's an actual OEM financing offer that they're able to still serve a segment of borrowers that are More prime like. I would think of the customers in that prime segment as being more on the lower end of what you would define as Prime, as evidenced by the fact, as I noted earlier, the rates kind of start at around 9.9%. So they don't quite have the same sort of very prime like low single digit, highly subsidized type rates that you would see in A very traditional prime portfolio. But being able to serve a segment of those prime customers Does create a really good full spectrum offering for their merchant partners. And more importantly, it actually then opens the door to being able to Acquire and serve that large share of non prime customers. So, over time, obviously, we're going to look to work with them to figure out how we continue to find ways to optimize the Auto optimize the customers that we lend to, but no plans to view to make any changes to the business. We think the mix Of their business by price, the mix of their business by customer segment is really strong. It's profitable. They underwrite and do the credit pretty well. And so, our job is going to be to continue to be there to support them and just find ways we can bring GoEZ's For Tease to bear to help us make it even stronger. Okay, great. That's helpful. And second question is related to the automotive Vertical and the point of sale option there, how does that complement or help or further the expansion Of your direct to consumer auto loan program that you would just start this year? Yes, it's a great question. And we didn't Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Jason Mullins for any closing remarks. I think operator, we may have lost Jason on the line here. Are there any further questions, operator? I'm showing no further questions at this time. Paul, did we get the full answer to Jamie's question on auto? I just want to it seemed to have cut out on my side. Maybe I missed it. I believe it may have cut out there. Do you want to go ahead and address that particular point? Sure, Jamie. It's Jason Appel here. Just to sort of answer what Jason Mullins would have said, in terms of how we're thinking about Their auto product, they've looked at distribution on their side and very much rely on their merchant partners as a means of distribution. So Auto for them is a natural bolt on to their business. As we look to the offering that we're bringing to market later this year, it is a direct to consumer offering, Where we at this point are still primarily looking at the end consumer as our focal point with a secondary focus on the distribution side, I think what remains to be seen as we bring the 2 businesses together is how those 2 distribution platforms work in partnership with one another, because I think we have the option of either enhancing The good folks at LendCare have already built with the work that we've done and also learning how both businesses can be further optimized. So I'd say at this early stage of us coming together, We have the opportunity to be active and even stronger in both of those distribution channels, both the direct to consumer channel and let's call out what's known as the indirect automotive channel, which Which LendCare is already operating in. So hopefully that gives you a bit of a flavor of how we're thinking about the 2 businesses at this point. Thanks, Jason, for covering me off there. I Apologize, I think I got disconnected, but I'm back. So thanks for stepping in. I'm showing no further questions. I'd like to turn the call back over to Jason Mullins for any closing remarks. Yes, great. So thanks everyone for joining today's call. We appreciate your time And we look forward to updating everyone on our Q1 release next month, where we'll provide further updates on the progress of the transaction and our full final Q1 results. Thanks, and have a fantastic day. Bye now. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect. Have a great day.