Earnings Call: Q4 2020

Feb 18, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the GoEC Fourth Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference may be recorded. I would like to hand the conference over to your speaker today, Farhan Ali Khan. Please go ahead. Thank you, operator, and good morning, everyone. My name is Farhan Ali Khan, the company's Senior Vice President of Corporate Development and Relations and thank you for joining us to discuss Cozy Limited's results for the Q4 and full year ended December 31, 2020. The news release, which was issued yesterday after the close of market, is available on GlobeNewswire and on the Goeasy website. Today, Jason Mullins, Coezy's President and Chief Executive Officer, will review the results for the Q4 and provide an outlook for the business. Al Khoury, the Company's Chief Financial Officer, will also provide an overview of our capital and liquidity position. Jason Appel, the Company's Chief Risk Officer is also on the call. After the prepared remarks, we will then open the lines for questions from investors. 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 and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our Investors site. All shareholders, analysts and portfolio managers are welcome to ask questions over the phone after management has finished the prepared remarks. The operator will poll for questions and will provide instructions at the appropriate time. Business media are welcome Today's discussion may contain forward looking statements. I am not going to read that full statement, but will direct you to the caution regarding forward looking statements, including the MD and A. I will now turn the call over to Jason Mullins. Thanks, Farhan, and welcome to today's call, everyone. We had a strong finish to 2020 and a year that highlighted the resilience of our customer, our team and our business model. During the Q4, we continued to experience an improving level of demand for consumer credit as provincial stay at home orders remained at more moderate levels through most of the quarter A typical seasonal trends began to emerge throughout the holidays, further fueled by our integrated media campaign. The step up in overall demand led to an increase in both originations and growth in our loan portfolio. After being down 38% in the 2nd quarter and then flat to 2019 in the 3rd quarter, loan originations in the 4th quarter lifted to a record resulted in loan growth of $64,000,000 bringing our total portfolio at year end to just shy of $1,250,000,000 in consumer loans. Our omni channel business model has allowed us to continue originating and serving customers digitally when regional health and safety protocols limit our in branch activity. As we highlighted last quarter, we have also experienced continued growth in the proportion of new customers being acquired through our point of sale channel. Whether through our frictionless full credit spectrum offering with Affirm, formerly PayBright or directly through our own platform, Over 22% of the customers we acquired in the 4th quarter came into the business through financing an in store or online purchase. Our next generation credit models, which leverage consumer banking data have also helped us issue over 1500 loans Since September to consumers without qualifying credit files. Serving the new Canadian and student segments is just another way for us to fulfill our purpose of helping those that are unable to access credit from traditional banks. Revenue for the Q4 was a record 173,000,000 an increase of 5% over 2019. As Canada continued to adjust to life in a pandemic, more of our consumers returned to work And the volume of loan protection plan claims wound down further finishing the year close to pre COVID levels. As a result, we Another sequential lift in the total portfolio yield to 46.6%. As closures and restrictions continue to come and go across various Regions and Industry sectors, we are leveraging our ability to dynamically adjust our credit tolerance and underwriting practices. As time has passed, this has led to an improving mix in the quality of our originations, which will bode well for the long term performance of our portfolio. The weighted average credit quality of our customers continues to gradually improve supported by over 12.5% of the portfolio now being secured. The improving credit mix combined with a moderate use of the loan protection insurance program, continued government support and reduced overall living expenses have contributed to another quarter of strong credit performance. The net charge off rate for the 4th quarter was 9%, down from 13.3% in the Q4 of 2019. As noted earlier, while loan protection continues to act as a resource some of our customers, claims levels have continued to return to more normal levels. During the Q2, total loan protection claims payments on behalf of borrowers was $21,700,000 declining to $14,600,000 in the 3rd quarter, which was followed by a further decline in the 4th quarter to 8.1 As of year end, the proportion of insured customers on an active claim was down over 90% from the peak of the pandemic. We are incredibly proud that over the course of 2020, this valuable ancillary product served to help over 15,000 of our customers maintain their credit with over $50,000,000 in payments having been made on their behalf by the 3rd party insurer. Consistent with the past Few quarters, we've also experienced the proportion of customers utilizing our borrower assistance programs such as payment deferrals or loan extensions And the payment performance on our loans remain at or better than pre COVID levels. We believe these trends highlight both the stability of our customers' cash in the current environment as well as the improving credit quality of the portfolio that we are carrying out of this recession. While we have continued to experience improvement in the underlying credit performance of the portfolio, we also acknowledge that there remains uncertainty about another wave of the pandemic, The speed of vaccine distribution and the timing and pace of the economic recovery. As such, we have further refined our use of probability weighted economic As a result, our allowance for future credit losses was held broadly flat at 10.08% compared to 10.03% in the previous quarter. As the business grows, we continue to benefit from the scale and operating leverage of our platform. Operating income for the Q4 was $61,300,000 up 32% from $46,500,000 in the Q4 of 2019, while the operating margin for the business was 35.4%, up from 28.1% in the prior year. As previously announced, we also completed the sale of our minority equity interest in PayBright becoming an investor and commercial partner with the firm who is regarded as one of North America's most innovative and consumer focused buy now pay later platforms. The genesis of this transaction began in September When we entered into a strategic partnership and made a $34,000,000 investment in PayBright, after several years of exploring and testing a variety of potential Prime focused point of sale lending partnerships, we felt PayBright was the platform with the strongest technology, best management team and greatest potential for While our investment was fueled by the commercial benefits of offering a second look non prime financing offer through their platform, We have confidence in the future value of the company. In December, PayBright announced that its shareholders had reached the definitive agreement to sell 100% of the Shares to Affirm, which subsequently closed on January 1 this year. Under the terms of the sale, we received consideration of CAD 23,000,000 Canadian in cash, 655,000 common shares on a firm subject to a customary lock up agreement and 468,000 common shares held in escrow subject to revenue performance achieved in 2021 2022. After considering the likelihood of achieving the contingent equity, We recorded a total consideration of $56,000,000 as of December 31, 2020, resulting in a total unrealized fair value gain of $21,700,000 during the year, of which the impact in the 4th quarter was an after tax gain of $13,900,000 With an estimated $30,000,000,000 of originations occurring at the point of sale for everyday purchases each year, we remain enthusiastic about our partnership and investment in Affirm And we believe we offer the leading frictionless full credit spectrum point of sale payment solution in Canada. In total, net income in the 4th quarter was a record $48,900,000 up from $6,700,000 in the same period of 2019, which resulted in diluted earnings per share of $3.14 up from $0.46 in the Q4 of 2019. Return on equity was 45.8%, up from 8% in the Q4 of 2019. After adjusting for the 13,900,000 $15,000,000 after tax charge associated with the refinancing of the company's notes completed in the Q4 of 2019, Adjusted net income was a record $35,000,000 up 55 percent from $22,600,000 in 20 19, resulting in adjusted diluted earnings per share of $2.24 up 55% from $1.45 in the Q4 of 2019. Adjusted return on equity was 32.8% in the quarter, up from adjusted return on equity of 27% in 2019. While 2020 was filled with unexpected adversity, our team rose to the challenge and I'm incredibly proud of their efforts. For the full year, we funded just over $1,000,000,000 and better than most of our peer group in North America. Revenue for the full year, which was partially impacted by lower commissions related to higher levels of loan Protection insurance claims was $653,000,000 up 7% compared with $609,000,000 in the same period of 2019. Operating income for the full year was $216,000,000 compared with $169,000,000 in 2019, an increase of 47,600,000 or 28%. Adjusted net income for the full year of 2020 was $118,000,000 Adjusted diluted earnings per share was $7.57 increases of 47% 46% compared to the adjusted net income of $80,300,000 and adjusted diluted earnings per share of $5.17 in 2019. Based on the 2020 adjusted earnings, the increasing level of cash flow produced by the business and the confidence in our continued growth and access to capital going forward, The Board of Directors has approved an increase to the annual dividend from $1.80 per share to 2 point $0.4 per share, an increase of 47%. This marks the 7th consecutive year of an increase in the dividend to shareholders. I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our outlook. Thanks, Jason. During the Q4, we continued to strengthen our balance sheet and liquidity position, while currently investing in our business and returning capital to shareholders. To help simplify and highlight the free cash generating capability of our portfolio, we have begun to publish a new non IFRS measure on our disclosures, which is the cash provided by operating activities before the net growth of the consumer loan portfolio. In essence, This figure represents the amount of free cash we produce each period. If we were to hold loan portfolio flat, from this figure, We can then invest that free cash into incremental growth in consumer loans, invest in new businesses or initiatives, Reduce our debt or return capital to shareholders through dividends or share repurchases. The cash Provided by operating activities before the net growth of consumer loans receivable portfolio in the 4th quarter was 40,900,000 an increase of 89% from the $21,700,000 in the Q4 of 2019. For the full year, the cash generated before net growth was $211,000,000 an increase of 74% over the $121,000,000 in 2019. Looking to our funding, we also made additional enhancements to our balance sheet with the addition of a new securitization facility structured and underwritten by National Bank. The new facility, which will be collateralized by our consumer loans, We'll have an initial term of 3 years and interest on advances will be payable at the rate of 1 month SEDAR plus 2 95 basis points. Based on the current 1 month SEDAR rate of 0.43% as of December 31, 2020, The interest rate would be 3.38%. As usual, we also intend to establish an interest rate swap agreement Based on the cash at hand at the end of the year and the borrowing capacity under our 2 revolving facilities, We had approximately $403,000,000 in total liquidity, which we estimate would fund the organic growth of the business through to the Q3 of 2023. Given the cash flows I highlighted earlier, we also estimate that once our existing available sources of capital are fully utilized, We could continue to grow the loan portfolio by approximately $150,000,000 per year solely from internal cash flows. With the launch of securitization, we have also lowered our funding costs. At year end, our fully drawn weighted average cost of borrowing reduced to 4.8%, down from 5.5% in the prior year with incremental draws on our revolving credit facilities currently bearing rates of approximately 3.6 As Jason noted earlier, the sale of our minority equity interest and Tabright to a firm Closed subsequent to year end in which we received a combination of cash and shares in Affirm, a portion of which are subject to a standard lockup agreement and a portion that are held in escrow subject to PayBright's revenue performance. In early January, Affirm then listed on the NASDAQ And our shares became public equities. It is our common practice that when we have exposure to market volatility, such as currency or interest rate risk, We enter into hedging arrangements. Following the IPO of Affirm, we entered into a 6 month total return swap agreement, Substantively hedge our market exposure related to the 655,000 common shares, which represent the non contingent portion of the equity consideration we received were approximately 58% of our total investment in Affirm. The total return swap effectively results in the economic value for that portion of our shares being settled in cash at maturity for a fixed price of US108.87 dollars per share, net of applicable fees. As was noted, we continue to remain enthusiastic Our partnership in Affirm and the prospective value of our remaining investment. When factoring in the gains recorded in the quarter and the cash produced by the business, We've continued to reduce our leverage position. As at year end, our net debt to net capitalization declined 64%, Comfortably below our target of 70% and the equity on our balance sheet improved to over $444,000,000 With a lower level of leverage Lastly, as we've previously mentioned, we continue to use a portion of our free cash to invest in repurchasing our shares when we believe that $5,500,000 to repurchase 80,000 common shares at a weighted average price of $68.44 This brought our total share repurchases year to date through our normal course issuer bid to 768,000 shares at a weighted average price at $55.18 were a total of $42,000,000 worth of stock. When compared with the $24,000,000 in dividends paid throughout the year, We returned approximately $66,000,000 in capital to shareholders. I'll now pass the call back over to Jason for some comments on our outlook. Thanks Hal. We are incredibly proud of the work our team did in 2020, but we continue to believe we are just getting started. It is still early days in the execution of our plans to become the largest and best performing non prime lender in our industry. We continue to be guided by the 4 and delivering a best in class customer experience that has helped over 60% of our customers improve their credit score and 1 in 3 graduate Prime credit within 12 months of borrowing from us. While 2020 presents a new round of challenges as we navigate through the second and possibly 3rd wave of the pandemic, we remain optimistic about the growth prospects in store and the expectation of vaccine distribution and a gradual economic recovery. In our release yesterday evening, we provided a new updated outlook, which contains a forecast for the next 3 years. During that period, we expect to organically grow the loan portfolio by roughly 60% to approximately $2,000,000,000 in 2023. In 2021, we expect to finish this year with a consumer loan portfolio of between $1,450,000,000 $1,550,000,000 by year end. We also plan to reignite our accelerated retail expansion plan with specific focus on the Quebec market and urban centers with the opening of 20 to 25 more locations this year. The total annualized portfolio yield in 2021 It's forecast to be between 44% and 46% then continue to slowly decline over the next several years as we diversify our product range, Expanded to Quebec and progressively lower the cost of borrowing for our customers. We are also pleased with the improvements we have made to the credit quality of our business. We expect that as the environment normalizes, the net charge off rate of the portfolio will be sustainably stronger going forward than it was pre COVID with a loss rate of between 10.5% and 12.5% on an annualized basis. The strength of our internal cash generation will lead to a gradual delevering of our balance sheet, while the business continues to reap the benefits of scale and the operating margin and corresponding profitability expand. To drive this growth, we will continue to invest in our business. During the year, we will spend approximately 4% of our revenues on marketing and advertising we aim to build the most well known and trusted brands in the nonprime lending market. Including our real estate expansion and technology enhancements combined, We will invest approximately $25,000,000 in capital expenditures to strengthen our platform and provide new sources of growth that will help sustain our long track record of performance. We will remain focused on 3 key strategic initiatives. First, we continue to focus on developing our point of sale business In partnership with the firm and directly with select retail merchants, we'll work to onboard new partners, further optimize the technology platform and expand in the new verticals. We expect the contribution of new customers from this channel to continue building and we are experiencing our direct to consumer auto secured loan product. We estimate that there is over $13,000,000,000 of non prime auto loan originations annually, We think there is an opportunity to create a better car financing experience for these consumers. By allowing them to get preapproved for financing and then guiding them to a network of prescreen dealers or online auto inventory, we will seek to give the customer more control and a less stressful and confusing car buying journey. Further, we can allow customers with existing vehicles to provide them as leading to a larger loan and a lower interest rate. We plan to issue our first auto loan by the end of the second quarter, then use our test and learn philosophy to trial and optimize the product before we begin to scale it up. 3rd, we remain on track to launch our new cloud based core lending platform we've named Fusion. We believe new technologies allow us to innovate, improve our customer experience and operate more flexibly. The introduction of a best in class fully cloud based SaaS lending solution will provide us with a platform to scale the enterprise for many years into the future. We expect to complete the configuration and migration to the new platform for testing and rollout over the course of the summer months. Lastly, while our published forecasts only contemplate the organic growth of our business With our multiproduct omni channel lending platform and a very well capitalized balance sheet, we will continue to seek strategic acquisition opportunities that can drive revenue synergies, earnings accretion and long term value to shareholders. So with 2020 now well underway, our portfolio is continuing Although the 2nd wave of the pandemic met the return of stay at home orders, many of those restrictions have already begun to ease. With sales volume steadily building, we expect to grow the consumer loan portfolio during the Q1 between $25,000,000 $40,000,000 We expect the total yield generated on the loan portfolio to step down slightly to between 44% 45% in the Q1, then step back up slightly in Q2. And turning to credit, we continue to expect credit losses to gradually normalize to the long term rates provided earlier. However, our consumer payment and default trends continue to perform very well in the meantime. Based on the current collection, repayment and delinquency trends, 2,000 passionate team members that are inspired to help everyday Canadians improve their credit and get back to prime rates. The fundamentals of our business and the confidence in our strategy are stronger than ever. With those comments complete, we will now open the call for questions. Our first question coming from the line of Gary Ho with Deutsche Jones Capital. Your line is open. Thanks and good morning. Maybe first question is for Jason Mullins. Can you give us an update on that auto loan product launch And the other one that you mentioned, the point of sale expansion, as well as how much of these is attributable to the loan book growth for 'twenty one And 'twenty two? Yes, sure. Thanks, Gary. So as we've done in the past, Once we have communicated and plan to proceed with the launch of a product, we do assume some contribution From those new products, once they're being prepared to be launched in our plans. However, as you also know, we use a fairly methodical test and learn strategy We're much more conservative and modest about our growth expectations, particularly in the early years. So we've got some assumptions that it is forecast, But we've certainly not been aggressive with how much we expect to come from a brand new product that still is to be trialed and learned from. As I suggested, we're well on track to having the product live in test by the end of the second quarter. So we'll be doing at least Some lending of that product by then. I suspect that from our past experience with new product launches, it will be quite slow for at least the first 6 to 12 months relative to the size of our book that is, while we tweak and adjust and learn about the experience, and then we'll be able to make it More meaningful hopefully in the following years. Point of sale is a little bit different. We're already well tested there. So we're moving Much more quickly. I think the thing to note about that point of sale that was highlighted, I believe, in the last quarter as well was the average Loan size of that point of sale loan is often very small much, much smaller than our other products. And so as we noted, it contributes quite a healthy proportion of new customers. It just doesn't necessarily show up as a big dollar originations or big loan book. It really shows up in the assumptions for the growth of these other products So the customers often convert into other loans. So that's how we built the plan. Got it. That's helpful. And then The other one on M and A that you just mentioned, what are you seeing in the landscape? Anything that's interesting? Are valuations still reasonable on Yes. So I mean we've continued to keep our eyes and ears open. We know we've got a very focused strategy for what we would consider in that it has to be complementary, has to be strategic, Has to be something that would allow us to leverage our platform, has to be something that would allow for revenue synergies. We're not looking to just Cut some back office cost and merge another business of a similar nature. We're looking for something that we can actually cross sell and And drive real revenue synergies too. There are opportunities out there, but like we said before, We remain quite disciplined about making sure it's the right opportunity and we're paying the right price and it's truly accretive to our business. And so As you noted, with valuations being higher, it just requires that much more work and that much more discipline to make sure that if you are going to pursue an investment through an acquisition, that is Absolutely the right deal. So continue to keep our eyes and ears open. There's some choices in Canada, albeit they're more limited. And As we said in the past, we're also always keeping our eyes open for something that could be very strategic potentially in another market as well. So we'll continue to keep everybody posted As we move forward. Okay, perfect. And then my next question is maybe for Jason Appal. Just on the 3 scenario model that you used for assessing your allowance. Can you walk me through whether there were changes in the probability weights In the quarter, so from Q3 to Q4. And second, what are the indicators you need to be able to move to a more neutral or optimistic bucket? Yes, great question, Gary. Thanks. So I mean part of the fundamentals of how the provision uses the information has not changed. I think it's just important to ground And produce the baseline in that respect. We still rely on the 4 macroeconomic indicators of changes in unemployment, inflation, GDP and oil. And we see those quarterly forecasts now through a series of models that then we wait as you indicated. In terms of whether or not the weighting moved from quarter to quarter, I would say the weighting changes were very modest. We tend to maintain a fairly conservative As you would appreciate toward the future loan loss provision, if only because we're not out of the pandemic, we're in the middle of a second wave, the prospect of the third wave is still upon us. And as a result, we made very modest changes to the weightings and that's primarily the main reason why the overall provision rate didn't sustainably move. It only moved 5 bps quarter on quarter. And I'd say that as we start to emerge out of this second wave and hopefully if there's not a third wave, by all other things being equal, we would expect the provision to start to improve with time And that improvement would likely be gradual as we continue to normalize our loss performance. So bottom line, while overall weightings did not change appreciably, Only modestly, and we continue to keep a very close eye on that as we head into the next quarter. Okay, great. That's helpful. If I can sneak one more in, Hal, thanks for the new free cash flow metric. Just curious, the $211,000,000 for 2020, Why would that number be the same for fiscal 2021 when I look at your 3 year outlook? When that slightly increase given The higher loan book, can you kind of walk me through the puts and takes? Yes. I mean, it's really a product of the cash flow that's Being generated on the book, Gary. And the payments that we're experiencing on the book Continue to be quite strong. The premise on this one here in terms of that key statistic Is that it actually incorporates a view prior to issuance of New gross receivables, so you've got to contemplate that effectively as a flat growth trajectory as well in those numbers. Yes, Garrett, I would just add to that. In terms of looking at it on a year on year basis, 2020, as you know, was buoyed by the fact that we had an unusually lower level of loan losses, A full point or so below the commercial forecast we provided. We also, as you know, spent less on marketing and advertising because there was period time with less consumer demand. So as you think about this year where we're going to be more ambitious about growth and making more investments in the business to fuel that growth, That just means that the rate of growth of the actual operating cash flow from the business doesn't step up as much in comparison to the prior year. So it's a little bit more of 2020 being a little bit more abnormally inflated from the strong cash generation Due to lower growth as opposed to any change in the performance of the business. Okay, Perfect. Okay. Those are my questions. Thank you. And our next question is coming from the line of Itin Richard with BMO Capital. Your line is open. Thank you and good morning. First one On credit quality, could you provide an update on how your underwriting standards have changed Since the start of the pandemic and sequentially during the last quarter, and what percentage of the portfolio It's been originated since March of last year. It's Jason. I can take that one. If I think about the changes we've made on the underwriting front, Those have been dynamically changing now since back in March where we modify the degree of supporting documentation and validation that we do all the way down to an industry sector level. So for example, as you can appreciate, just to take 1, certain industries particularly affected by travel, we are obviously much more stringent when it comes to our approvals and the type of information and support levels we would see in order to grant a loan or an increase on top of an existing loan. And as various provinces or even regions within provinces have We have tailored those underwriting protocols at the industry sector level within those regions depending on the severity of those lockdowns. And that will really be a function more of the types of businesses, whether or not they were closed outright, available for things like curbside pickup, Available for things where their capacity limits would allow. And like I said, we have those varying now by province and in some cases, let's take Ontario as an example, Within various regions, within provinces at various levels. To answer your second question, in terms of the percentage of the book that's been originated since last year, That number probably sits at about 65% to 70%, give or take a few percentage points. That's obviously owing to the fact that we've seen a robust That's turned about 65% of our originations since the start of last year. And Tim, I would just add to that. I think Trying to maybe understand your question a little deeper and sort of what are some of the drivers that cause the credit quality of the book to be Better coming out versus going in. The way to think about it is a few dynamics that are at play here. As the loan portfolio has turned over during that period that Jason Described, because we've had much tighter employment verification underwriting in place, the remaining book that we now have is going to Largely in the hands of the consumers that are in the most stable jobs and in the most stable industries where they experience the least amount of Potential unemployment, simply because all of those areas that were more exposed, we were not lending to during that period because we were more cautious Based on their industry sector, so that's one reason. The second reason is that over the course of the economic downturn, Prime lenders almost always tighten their credit criteria, which means the credit quality of the customers that you bring in, if you look at them by mix of credit quality, Usually are progressively better during an economic downturn such that when you exit it, the overall credit quality of the customer and the book is also Better. And we've seen that in the past when we look at historical recessionary events in our peer group that the losses usually in the years Subsequent to a recession are usually quite strong, thanks to that turnover in the portfolio and the credit quality. So those are some of the factors as to why as you turn over that portfolio During a period where you're being tighter on credit quality as are your prime lenders that sit above you in the spectrum, the non prime lenders portfolio overall tends to improve. I appreciate the details. Coming back on the auto lending opportunity, I'm wondering how much overlap is there between your average unsecured borrower And the target market you have in for auto loans and how easy or more complicated Could that make marketing for you? Yes. So we don't have absolute perfect data, but We estimate that between 70% to 80% of our customers have cars and have car financing At a given point in time. So the way we think about this product is it's a very, very natural extension Of our suite, because as far as potential new products are concerned, it's really the next one in line where the Existing customer that we market and service and acquire is going to be most commonly using. So I don't think we're going to see a ton of cannibalization, if you will. Customers, like I said, that come to us for those other products Still finance their vehicles separate and distinct from the other products they borrow from us. Inevitably, there will be some level. Presumably, there are some customers who may borrow an unsecured loan from us and did use it to go buy a vehicle, for example, or A private sale car. So we think there will be a little bit, but we think it's fairly minor just because of what we know about Our existing customers that hold those other products and their propensity to still finance cars. So and the second part of your question around marketing, We're going to continue to drive forward our strategy of promoting our business as a full suite financial institution, Promoting it no differently than a bank would promote their business to a prime borrower, which is that we are a lending institution Where you can come for access to any of your borrowing needs. What's a little bit unique and different about this product is that The market and the consumer is most often familiar with getting their auto financing when they go to the dealer to go shopping. So the subtle nuance here is that we will be in our marketing campaigns promoting the fact that you can come get preapproved for your financing and then go buy your vehicle and that will put you in a better position. You have more time to consider the financing transaction, more time to Which vehicle you buy, more choices to where you buy it from, more ability to negotiate the best deal for yourself, more ability to neglect Taking add ons that you don't necessarily want from the dealer. So we're really just trying to transform the experience of the non prime borrower. It's a little more appropriate for their circumstances. And so it's just a matter of continuing that strategy of promoting our entire range of products as we build out that full suite financial All right, perfect. One last question on my end. From an industry perspective, it seems that installment lending has outpaced Credit cards, for example, or lines of credit. So I'd like to get your thoughts The different drivers of this trend as to why installment loans are gaining traction relative to other options. Yes. So I mean, I'll tell you some of what we think is behind that. So What we've seen is a couple of things. 1, some of that installment loan trends relative The other revolving products has been driven by the rapid growth in the buy now pay later point of sale finance market. If you look at that particular form of financing, those industry participants like Affirm, like a PayBright That have offered an installment product, a pay as you go, buy now, pay later program has in that Sub sector, the greatest growth and success globally and especially within North America for the last number of years. So that's a big driver of installment. When we look at the demographics of the customer, the younger demographic tends to prefer installment products as opposed to revolving products. We've seen that in surveys we've done that they have a bias towards Fixed payments, where they can build an easier to manage budget, and they have a lot of fear of having The risk of getting trapped into a cycle of debt from the attractiveness and appeal of a minimum payment on a credit card. So It's not that credit cards and revolving products don't still serve a key purpose. They do and they may be in the future of our product We are part of that offering for certain customers, but by and large, I think a combination of point of sale And demography have driven more of an appetite towards installments. The last thing I would add is that the other kind of just overall Consumer trends that I think we've all seen is the subscription model. We've seen it in Television, seen it in radio, seen it in fitness. And so the consumer is progressively becoming more conditioned To the idea of simply putting all of their life's obligations on regular and frequent installments that they can build into their budget. So I think You also end up with some of the cause of the trend being a byproduct and what they experienced in the other parts of their life outside of their purely financial transactions By way of those subscription trends as well. So those would be some of the things we think are part of the drivers behind what creates a different trend for installment than perhaps say some Just to add to that, Aitan, it's Jason here. I think the other thing we would add is that installment products offer a certain degree of predictability when it comes to payment certainty. It's not that you can't get that on credit cards, but credit cards don't force you to pay anything other than the minimum payment, which is often a very, very small fraction What is actually outstanding? The beauty of an installment product is, is it obligates the customer to a fixed payment that progressively pays down the loan within a Periodic duration of time, whereas in the revolving products, be they credit cards or line of credit, while they give customer tremendous flexibility and serve a purpose, They don't necessarily enforce a certain payment type or frequency and for the consumer who is in some cases caught off guard and not in a position to have full control over their finances, That's where that product can sometimes lead them astray and put them in that so called cycle of debt. And I think into the current circumstances, having that finite fixed payment set up for them in Our next question coming from the line of Steven Bellin with Raymond James. Your line is open. Good morning, everyone. Just two quick questions. The first one is just on the loan protection plan. Your partner I just I guess I'm trying to get an idea of the tenure of your partnership with the insurance company because obviously it's been a difficult year for them in terms of paying out claims And I believe it comes out of sort of a shared pool, but I mean is there any renegotiation anticipated there or is that An annual policy or a multiyear policy that you have or an agreement with them? Yes. So it's a multiyear agreement. We still have some time left on that agreement and we regularly speak to our partner about The renewal of those programs, the relationship is incredibly strong. The insurer is doing incredibly well. If you look at the latest Quarter and annual financial release by Assurance, they saw a substantial increase in overall profitability in 2020 To the extent that they were very active themselves with dividends and buybacks and other things of that nature, so they're Financially very sound. Our program is built with the expectation and anticipation That it's going to be a long term arrangement and that within that long term arrangement, there will inevitably be some type of economic shock or event that is likely to cause periodic Pressure on unemployment, but that's overall expected and therefore embedded into the commercial terms. As of all of the Conversations we've had with them progressively throughout this entire period, at no point have they or we felt there's any need to change pricing Nor have they or we felt there's any need to not renew and extend our agreement with them when it does come up for its next renewal. So We feel very confident in that partnership and that program and it is really well built to be quite resilient through events like this. Okay. That's good news. And just going back to the auto loan product, I know it hasn't been launched yet, but I understand the front end of the program. I guess the part I'd like a little bit more information on is What if there is a delinquency after the person purchases the car or there is even a default where they're not paying you back at all? Do you have recourse to repossessing the vehicle or what's the back end of the product, I guess? Yes. So we would follow a very typical servicing arrangement. So Once the customers purchase the vehicle, as you've noted, we would register a lien on that vehicle so that it does act as security. In the event we're unable to work with the customer to find an appropriate way for them to handle any type of financial challenge they run 2, then they have the opportunity to surrender the vehicle and surrender the security, possibly have it sold and be able to move themselves into Another vehicle and in the most unfortunate circumstances, it does potentially require that we actually have to recoup the vehicle. Much like we do with our unsecured legal practice, our home equity secured recovery practices, We employ a very customer centric model. We don't, in this example, intend to put Switches in vehicles that will turn them off or those kinds of things, just like on our home equity product, we very, very, very rarely I ever have to actually go do a foreclosure or power of sale on a property. We have found that we're usually quite successful in working with the customer to find an arrangement that It's suitable, but the reality is that there are times where you have to exercise on your rights to the security and you will have to recollect the vehicle from the customer. Having said that, what I would say is having done collections and unsecured products like this for a long time, The vast majority of the time, the customer is quite cooperative and voluntary in surrendering, if you will, The security that's been pledged on a loan product, it's more cooperative than often people might think it But it does happen. Okay. And will that lien be put on at the time of purchase? I mean, they buy it one day and it gets they sell it The next day, take the cash and not pay you back. Like is that part of the will that be done upfront or if the person goes into delinquency? Yes. No, the lien on the asset is put on it right upfront. So they won't be able to change ownership of the vehicle based On a lean that we've applied. So as soon as it's purchased, it would be just like the way the Same from that perspective, car buying experience that if any of us would have had in the past, which is at the time that you are buying the vehicle, If you are using financing to make the purchase, then there is a lien applied on the vehicle at the time that the ownership is transferred. Okay. Our next question coming from the line of Jaeme Gloyn with National of Bank. Your line is open. Yes, thanks. First question is related to the advertising spend in the quarter. And if you could talk about how you're approaching advertising in the upcoming quarters? Should we expect to see a little bit higher there? And what does this say about customer acquisition costs in this environment? Are you seeing any shifts in that aspect of the business? Yes, sure. So as noted in the prepared remarks, We intend to spend approximately 4% over the course of the year of our revenues on marketing and advertising. That's pretty consistent for the most part with the past. We'll obviously choose to increase that discretionary Spend set times if we think it's worth spending additional marketing dollars because we believe there is further demand we can capture At a good cost of acquisition that generates a sufficient return, the pace of that advertising spend will look Fairly similar to past years in which we generally tend to spend more in the second and fourth quarters As the spring and holiday season tend to be when we see demand spike and then softer level of spend in the first The 3rd quarters, particularly the Q1 of this year given the current pandemic environment. Ultimately, when demand is lower, your cost of acquisition is higher unless you choose to just spend less and accept less growth. So naturally, at the moment when we're dealing with a lower level of overall demand, it's That was more important, we get our ads and our brand in front of the eyeballs of the consumers that do need access to credit. And so often we are willing to pay a little more to get a customer at that moment in time. We're in a fortunate position where We've got a healthy lifetime value. We can afford to periodically spend a little more to get a customer. And we know very much what each loan and each customer So we're able to self impose our own guardrails as to how much it makes sense to spend to acquire a customer In order to still remain appropriately profitable and generate an appropriate return, I suspect that if you think about our commentary on the forecast, We should hopefully see that as we hit the Q2 and the spring months, there will be a combination of The benefit of lockdown measures, there'll be a combination of the benefit of warming weather. And hopefully, if things fall through, the benefit of a progressive Distribution of the vaccine and we should see demand and growth really start to pick up in a more meaningful manner at that time. And if it prolongs, then it might be We've tried to create a set of projections that we think have some guardrails and some boundaries that hopefully Adequately capture the varying potential scenarios that we might see unfold with respect to demand. Great. And then with respect to the point of sale and buy now pay later market, When do you expect you'll be in a position to or can you disclose the share of the total book today, share of originations, What you're baking into your forecast with respect to point of sale and buy now pay later With the relationship with the firm. And is there anything with respect to U. S. Based originations that's baked into the forecast at this point given that relationship? Yes, great question. So we have not yet and don't have any near term plan to break out origination dollars or the loan book at that level. However, there's a couple of reasons for doing that beyond just The normal answer of it being more disclosure and more for our competitors to pry at. Beyond that, the other Primary reasons is that I don't think it necessarily is incredibly instructive. We have disclosed, as mentioned in the prepared remarks, that about 20% or so of our new customers we acquire are coming from point of sale. So that's a very important and helpful reference point, I think. We've disclosed that of our point of sale business, the mix between what we do through our partnership with the firm and what we do directly with Other merchants and other verticals that they may not be in is pretty proportionately split. So we've shared that as well. The reason it's not necessarily super instructive beyond that is that today when a customer takes a point of sale loan, we then offer them shortly thereafter those other products. And so in some cases, you have a customer who is taking a very small point of sale loan and then within A few months, sometimes even a few days, they are retiring that loan and converting over into another product. And therefore, the origination dollars and the consumer loan book on that point of sale product Would appear very inconsequential. However, that acted as a very meaningful source of customer acquisition. We'll probably continue to as this channel builds progressively provide incrementally more information that Helps people understand how it's going, but those are some of the reasons why we sort of chosen to provide what we've provided so far. And as I said before, it is embedded into our assumptions that it will continue to grow and expand, but we think we've been very reasonable with those assumptions. To the last part of your question, no, we have not embedded in an assumption for any growth outside of Canada Nor any acquisition assumptions for that matter. We're early days in working with Affirm as a new partner. Things are going well. We hope to continue to build that relationship. And certainly, in the event we were to go to another market, They would be a great partner to perhaps work with in other countries as well. And we know that they've got an ambitious international growth plan. Canada was their First acquisition in an international market, they plan to go into other countries including expansion of Europe. And That partnership obviously then will just lend itself well for those opportunities down the road. Okay, great. Just One quick follow-up. The customers that are acquired through the point of sale channel, do you what level of conversion Is typical that you've experienced so far in that channel? So what we're seeing is that over the course of a year, we would expect about a quarter to a third of them To convert into at least one other product. Great. Thank you very much. I'm showing no further questions at this time. I would now like to turn the call back over to our speakers for any closing remarks. All right. Thanks, everyone. Well, if there's No formal questions. We appreciate you joining the call today and we look forward to updating you on our next quarterly release when we release Q1 results in May. Have a fantastic day everyone. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.