Earnings Call: Q2 2021

Aug 6, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the GoEasy Second Quarter 2021 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 session. I would now like to turn the call over to your host, Farhan Ali Khan. You may begin. Thank you, operator, and good morning, 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 GoEZ Limited's results for the Q2 ended June 30, 2021. The news release, which was issued yesterday after the close of market, is available on GlobeNewswire and on the GoEZ website. Today, Jason Mullins, GoEZ's President and Chief Executive Officer, will review the results of the Q2 and provide an outlook for the business. Hal Khoury, the company's Chief Financial Officer, will also provide an overview of our capital and liquidity position. Jason Nattel, the company's Chief Risk Officer is also on the call. After the prepared remarks, we will then open the line 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 to listen to this call and to use management's comments and responses Today's discussion may contain forward looking statements. I'm not going to read the full statement, but I 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. The 2nd quarter was highlighted by a significant increase loan originations, continued strength in the credit performance of our portfolio and the expansion of our point of sale lending channel through the acquisition of LendCare. First, I'll provide a brief update on the overall integration of LendCare before delving into the commercial and financial performance of the 2nd quarter. The acquisition closed successfully on April 30, resulting in a partial consolidation period this quarter. GlenCare's founders, Ali and Mark, Have joined our senior leadership team and continue to oversee the day to day operations of the business. Furthermore, various functional and project teams across GOEZY I've already begun collaborating with their new colleagues and efforts to unlock several revenue and cost synergies are underway, remaining on track to delivering the benefits we envisioned when we contemplated this partnership. Although we continue to maintain the Lettin Care brand, Within our financial disclosures, we will operate the business as an origination channel within the existing Easy Financial Consumer Lending operating segment. Given the homogeneous nature of the product range and the migration and cross selling of customers, this allows us to seamlessly allocate resources, Leverage technology and make decisions that are best for the growth of that overall consumer lending business unit. Turning now to 2nd quarter results. While the 3rd wave of COVID-nineteen continued to weigh on demand for direct to consumer credit early in the quarter, things began to improve as stay at home orders were lifted in early June. Furthermore, our point of sale financing channel, which is now the fastest growing part of our business, continued to produce a steady increase in volume, aided by our partnership with Affirm and the contributions from LUNCARE. Despite supply chain challenges, demand for online buying activity And several core point of sale categories such as powersports continue to benefit from robust financing volume. During the quarter, we formed new partnerships with Massimo Motors and Segway Powersports in addition to a handful of smaller partners. Between our partnership with Affirm and all other direct merchant relationships, our point of sale channel produced a record level of new customer At 34% of all new customers acquired during the quarter, we were also pleased to soft launch 2 new products in the quarter. 1st in June, we began the pilot of our direct to consumer auto loan product under the EZY Financial brand, which we will begin marketing to new customers through our digital channels in the coming weeks. This product will be gradually and carefully scaled, consistent with our test and learn philosophy, while we also complete building out the ecosystem of dealerships and the online car buying journey. Secondly, within our point of sale channel at Lendcare, we launched an automotive repair financing product designed to allow non prime consumers to use their vehicle as security when applying for financing for an automotive repair. This product, which is now available nationally, will be gradually offered to auto repair shops across Canada. All combined, total loan originations during the quarter For a record $379,000,000 up 122 percent over the $171,000,000 produced in the Q2 of 2020 and a sequential increase of nearly 40% from the $272,000,000 in loan originations in the Q1 of this year. The combination of the acquired $445,000,000 consumer loan portfolio and $74,000,000 of organic growth in the quarter Resulted in the consumer loan book finishing at $1,800,000,000 up 58% from $1,130,000,000 as at June 30, 2020. When we combine the predominantly secured and near prime nature of the acquired LendCare portfolio with our direct to consumer Strategy to progressively reduce the cost of borrowing for our customers, we experienced an evolution in the key portfolio metrics of our business, including the yield, loss rate and the balance sheet provision for future credit losses. For the Q2, the weighted average interest rate in our portfolio declined To 33.7 percent with the total portfolio yield including all ancillary product revenue finishing at 42.8%. The acquired and organic growth in the loan book coupled with strong customer retention in our leasing business led to an increase in revenue, which was a record $202,000,000 in the quarter, up 34% over the same period 2020. We also continued to experience structurally strong credit performance within the portfolio aided by the high proportion of secured loans within the LendCare book. At quarter end, nearly 33% of our loan book was secured by real estate, automotive equipment or personal property. Upon amalgamating the acquired loan book, the annualized net charge off rate for the quarter was 8.2%, down from 10% the Q2 of 2020, given the more near prime nature of the acquired portfolio, the overall credit profile of our book Has structurally lower level of allowance for future credit losses. During the quarter, we increased our loan loss provision To build the necessary reserves related to the acquired loan portfolio by $14,300,000 $4,600,000 due to organic growth, which was then partially offset by a reduction to our existing portfolio provision of $3,100,000 due to improvements in the underlying credit quality of our existing portfolio. After updating the probability weighted economic scenarios in contemplation of a gradually improving economy, our new allowance for future credit losses Reduced from 9.88 percent to 7.9%. Using historical probabilities of default, Our credit analytics suggest this is a provision rate that fairly reserves for the future losses of our portfolio, while providing sufficient coverage for the remaining uncertainty in the economic environment. After adjusting for the non recurring and unusual items related to the acquisition of LendCare and the fair value adjustments related to our investments in the quarter, Adjusted operating income was a record $79,900,000 up $25,900,000 or 48% over the Q2 of 2020. Adjusted operating margin for the 2nd quarter was 39.5%, up from 35.8% in the prior year. Adjusted net income was a record $43,700,000 up 50 percent from $29,100,000 in 2020, Resulted in adjusted diluted earnings per share of $2.61 up 38% from $1.89 in the Q2 of 2020. Return on our assets was 8.6% on an adjusted basis, producing an adjusted return on equity of 26.9% and an adjusted return on tangible comp on equity of 38.5%. 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. The 2nd quarter was highly productive with the execution of a major capital raise to support the acquisition of LendCare, coupled with the upsizing of our securitization warehouse facility to help fund our ambitious growth plans. On April 30, we closed on the Lincare acquisition, Paying a final purchase price of $323,700,000 which included $11,800,000 worth of GoEasy shares to the LendCare founders. To finance the transaction, we completed a highly successful bought deal equity offering, which was 3 times oversubscribed and produced $172,500,000 of proceeds. Shortly thereafter, we issued $320,000,000 of new 5 year unsecured notes. The unsecured notes were also well received by the market and oversubscribed, producing approximately CAD400 1,000,000 at a fully swapped coupon rate of 4.8%. In addition to financing the purchase of the business, we used the proceeds from these fundraising initiatives It extinguished 2 of LendCare's pre existing debt facilities of approximately $240,000,000 Reducing the cost of capital for that portion of our debt stack by over 400 basis points, leading to a significant financing savings. Subsequent to quarter end, we also negotiated a commitment from National Bank to increase our securitization warehouse facility From the current $200,000,000 to $600,000,000 of total capacity, while also incorporating improvements to eligibility criteria and the advance rates, while also expanding the facility for a fresh new 3 year term. Furthermore, we experienced an attractive improvement in the rate on the facility, which dropped by 110 basis points to the 1 month Canadian dollar offered rate plus 185 basis points. Based on the current 1 month SEDAR rate of 0.42 percent as of August 4th, the interest rate on draws would be 2.27%. We will also continue to utilize an interest rate swap agreement to generate fixed rate payments on the amounts drawn and mitigate the impact of interest rate volatility. Cash provided by operating activities before the net growth and gross consumer loans receivable in the quarter was 48,300,000. Based on the cash at hand on hand at the end of the quarter and the borrowing capacity under the company's existing facilities, Including the recent upsides, we now have approximately $870,000,000 in total funding capacity, which we estimate is sufficient to fund our organic growth plans through Q4 2023. We We also estimate that once our current available sources of capital are fully utilized, we can continue to grow the loan portfolio by approximately $200,000,000 per year solely from internal cash flows. At quarter end, our assets neared $2,500,000,000 while our net debt to net capitalization was 64%, remaining well below our target of 70%. Lastly, our fully drawn weighted average cost borrowing reduced to 4.8%, down from 5.1% in the prior year with incremental draws on our new securitization facility bearing a rate approximately 2.3%. With a well diversified capital stack, nearly $900,000,000 in total funding capacity and our lowest cost of borrowing in company history, Our balance sheet is well positioned to fund our ambitious growth plans. I'll now pass the call back over to Jason to update you on our outlook. Thanks, Hal. As we cross the halfway mark of 2021, we are pleased with our progress this year and more excited about the future than ever. We remain focused on our strategy to develop a full suite of lending products offered through a wide range of distribution channels While helping everyday Canadians improve their financial health, the addition of LendCare helps rapidly expand our point of sale financing channel Through 3,000 merchants across numerous high ticket financing verticals, while new products expand our addressable market, enabling us to capture a greater share of wallet. In conjunction with our quarterly results, we are pleased to release a new 3 year commercial forecast. During that period, we expect to organically We grow the loan portfolio by roughly 60% to between $2,800,000,000 $3,000,000,000 in 2023, almost $1,000,000,000 higher than our prior outlook. In 2021, we expect to finish this year with a consumer loan portfolio of approximately $2,000,000,000 We also plan to continue our accelerated retail expansion plan with a specific focus on the Quebec market and urban centers with the opening of 25 to 35 more locations over the next 24 months. While we continue to place focus on investing in and enabling our digital platforms, the local community stores and branches still play a critical role and establishing brand credibility and serving certain segments of our consumer base. Given the evolution of our business to capture a wider share of the non prime Consumer lending market with more near prime price products, the total annualized portfolio yield will continue to gradually decline as we attract and retain higher quality And reduce the cost of borrowing for our customers. In 2021, we forecast the total portfolio yield to finish between 40% 42%, Our portfolio is forecasted to be below 30%. We have also lowered our forecast for credit losses given the portfolio shift previously noted. We expect the net charge off rate of the portfolio will be sustainably stronger going forward with a loss rate of between 8.5 Scale as the operating margin and corresponding profitability expand, producing high single digit returns on assets And adjusted return on equity above 22%, leading to long term returns for our shareholders. Turning to the near term period and the upcoming Q3, With the economy continuing to reopen and consumer spend lifting, we will begin to re ramp up our investments in marketing with $8,000,000 in spend to During the Q3, we expect the rising demand and increase in advertising spend and the contribution from our point of sale channel to lead Total growth in the consumer loan portfolio of between $100,000,000 $120,000,000 in the quarter. We expect the total yield generated on the consumer loan portfolio To be finished between 40% 41% with a net charge off rate of between 8.5% and 9.5%. With those prepared remarks complete, I want to thank our 2,200 plus team members that have continued to navigate through challenging times, We're taking great care of our customers and merchant partners. Our team is collaborating well with our new colleagues at Lendcare and they continue to do a remarkable job achieving their objectives Well, adapting to the GoEasy culture. While we are proud of our strategy, the strength of our business model and the impact we have in our communities, none of this is possible without our people. They are the ones that execute the plan, bring it to life and deserve all the credit. We have an incredibly diverse workforce that represents over 75 nationalities And we will continue to invest in them. Over the last quarter, we've extended our income supplement for those that are displaced by COVID-nineteen, Penn's an educational partnership with the Canadian Mental Health Association to provide added resources for mental wellness and signed the BlackNorth Initiative pledge to further strengthen our commitment to diversity and equality. So with the strongest balance sheet we've ever had ready to support our growth, we We remain well positioned to capture more of the $200,000,000,000 non prime consumer credit market on our journey to be the largest and best performing lender in our sector. We'll now open the call for questions. Okay. Our first question comes from Atian Kumar from BMO Capital Markets. Thank you and good morning. Good morning. I appreciate the new degree or for With the ongoing integration of Landcare, could you share progress on revenue synergies both from Underwriting and cross selling perspectives. Yes, we certainly intend to I'd like to provide regular updates on that. To date, we have begun the process To start to capture some of those synergies, main two activities are we're working on consolidating the point of sale platforms That's that EZ Financial had previously developed and that LendCare obviously has as their core capability. So our objective is to merge them onto one common platform and create the true full spectrum frictionless point of sale solution. And that will allow us to combine the credit model expertise of the 2 businesses into one platform and therefore, we believe capture more overall volume. And then the second opportunity we previously noticed is cross selling opportunities. So We're starting now to begin to map out what that will look like, whereby we'll be able to offer some of our existing Easy Financial products To LendCare customers and prospects and vice versa, and we anticipate we'll start to run some of those cross marketing campaigns over the next couple of months. So things are underway and we'll certainly provide updates as we go on how effective those plans are working. So specifically on cross selling, what percentage of LendCare's customers would have Installment loans with another lender. I don't know how many that would have Installment loans today, specifically, I can tell you that at least 2 thirds Of the customer base they serve is deemed in the non prime segments that would mirror The typical customer profile of the products we offer at EZ Financial. So, We know from our own internal experience that the customers we acquired through point of sale through our partnership with the firm have a very good Cross sell rates, I think we've shared in the past that somewhere between a quarter to 1 third of them end up borrowing additional lending products from us within the 1st year. I think it's still be too to be determined as to exactly what that specific cross sell rate is going to be. But certainly, we know that the lion's share of that customer base And some of the prospects that are applying for credit with them each day certainly fit the profile and we believe have the propensity to borrow the types The products that we have are developing with the Easy Financial. Okay, great. And one number that This past quarter was credit extended to new customers at 65%. What percentage of LendCare's originations are to new customers and how does that impact the opportunity for you To drive increased customer loyalty over time. Yes, it's a great question. So Most of LendCare's origination, the vast majority for that matter, are done to brand new borrowers, Brand new customers. So the addition of the customers acquired through their verticals helps lift The mix of new customers that we're lending to, and to your point, it's now back to and above pre pandemic levels in terms of the proportion of Our business that's being originated by brand new customers. Historically, the LendCare portfolio has not Executed a ton of lending to existing customers. There's been a heavy focus and emphasis on just building out new merchants and new verticals to acquire New customers and frankly that's one of the reasons why we think the cross marketing opportunity is so attractive as there's been much less Offering of credit to their existing customer base. So certainly with the fact that over 1 third of all the new customers we acquired In this past quarter, we're coming from point of sale and the fact that through point of sale, those are really all brand new customers. That's what really makes that one of the that channel really effective for us is it's just a great way to acquire brand new customers, Bring them into the ecosystem and then offer them the full range of products that are available. Great. Thank you for your comments. Our next question comes from Jeff Fenwick with Cormark Securities. Hi, good morning everybody. So Jason, just wanted to continue on with the LendCare line of questioning there. Could you speak to just the nature of the relationships that they strike with the merchants? Specifically, are they typically exclusive? We've seen some commentary about larger players like Apple getting into the buy now pay later space. So what do you how do you view the competitive moat for LendCare with its merchants. Yes. So most point of sale Merchant relationships in the industry are non exclusive. They usually have some period of contractual term, but even when there's some type of commitment, there's often a way that merchant or the lender can Exit the arrangements or reduce their origination volume if they were so inclined. So these partnerships are predicated on Having a great product, a great merchant experience, a great customer experience, and really building and Strengthening the relationship that way, they're not partnerships where you can just pen a contractual arrangement and then lean on that. You have to deliver a great program. In the case of LendCare and their particular verticals, They have a combination of arrangements that extend from specific merchants or retail distributors themselves Right through to the actual manufacturers and the OEMs that produce the product who then push and extend those financing Offers down to their distributors and down to their retailers. So they have a variety of partnerships across both types. The average tenure of those relationships is many years. They typically stick around for a long time. If you're continuing to provide a great product, a great service, once those retail merchants and distributors have Brought the program into their stores and branches, launched it on their e commerce platform, trained all their people, marketed it to their customers, It's not it's quite painful to then have to switch. So you definitely have to be competitive and maintain a great program, But it's not the kind of thing that merchants are going to bounce around and switch regularly. They're typically quite long standing partnerships. In the verticals that we're in, if you think about retail, powersports, health, home improvements In automotive, powersports is certainly the category that LendCare has built the strongest business in and has the greatest presence. We've got a pretty good solid retail business, particularly with the combination of what we'd already built at Easy Financial. We've got a really budding and early stage, but growing healthcare and home improvement vertical as well. So quite a bit of still runway Some of those verticals, but certainly, powersports would be where the largest mode, as you referred to it, is probably developed. So I guess, it sounds then like merchant churn isn't necessarily a big concern for you. And I guess in terms of Encouraging merchant utilization and training and promotion costs. I mean, how is that split, say, between like an OEM versus What GoEasy or Venkat would be on the hook for? So generally, the way the programs work is The customer bears some portion of interest and periodically the merchant or the manufacturer We'll contribute what's called an MDR, merchant discount rebate or effectively contribute some small portion of their margin on Product helps subsidize the rate if they want to run some type of promotional incentive. But for the Type of categories that we're predominantly in and the type of segment of customers we're predominantly in, most of the time the consumers are bearing the interest and paying for the cost of borrowings. There are instances in where we'll run incentives with certain dealerships or merchants where they'll actually earn an incentive as a result of promoting the financing and driving more volume. But it's really one of those things where there just has to be a great partnership Between the lender and the retailer, it's they have to work hand in hand. You have to be in sync, give to provide great merchant support, and be aligned in terms of how you market and promote the product to the Our next question comes from Jamie Glenn with National Bank Financial. Yes, thanks. Good morning. Yes. I wanted to touch on the customer acquisition and the point of sale channel. You mentioned in your remarks 34% of new customers coming from point of sale. Can you break that down in terms of Firm versus LendCare and then how does that compare to say last quarter or even this time last year In terms of the customer acquisition contribution? Yes. So we had highlighted in recent quarters That's in the neighborhood of 20% to 25% of the new customers we were acquiring were coming from Point of sale, that will be partnership we have with the firm and the prior existing direct Orchard relationships we have established. That number obviously now has climbed to the 34% referenced and you can think of that step up As being as a result of the contribution from LendCare and all of the new customer volume that's now flowing Through the verticals and the merchants that they've established. So that means on a combined total company basis, onethree of the new customers we now acquire Come from one form or another within that point of sale channel. Okay, great. And are you able to Provide us with any indication as to their revenue contribution from the point of sale Channel, I mean, I guess, LineCare is now a sizable chunk of the assets, but I'm just trying to get a distinctive to The profitability of point of sale customers coming on board in recent quarters. Yes. So we don't provide or we're not providing the breakdown of specifically things like revenue. We're merging it with our consumer lending operating segment and that's really because the journey of the customer That we're aspiring to deliver is that a customer who's acquired through any one particular Point of sale channel or vertical is going to over time accumulate an inventory of other lending products It's from us and could have multiple products at a time. And so as a result of the customers' propensity to move across multiple products, Trying to then maintain 2 separate loan portfolios and report on the metrics of them, doesn't necessarily become incredibly instructive. What I would tell you though in terms of trying to understand for the 1 third of those customers that we're acquiring coming through point of sale and how to think about the economics, The economics of Lendcare, as you would have seen from our disclosures at the time of the acquisition, are not that far off Of the economics we had previously disclosed was what our point of sale channel looked like, a little bit lower, but not all that dissimilar, which is That their program has total yields in the mid-20s. They again offer loans ranging from 9 point 9% to 34.9%, so they aggregate to a weighted average total yield with ancillary revenue in the mid-20s. You would have seen that their loss rates, thanks to that many of those products are secured, is in the kind of mid single digits. Hence why it brings down the overall loss rate of our combined portfolio now. And then as those customers migrate into our other products, The yields that they'll produce in those other products we anticipate will look more similar to the yields we've historically reported within the Overall, Easy Financial portfolio. So, what we've tried to do in the commercial guidance is really give everybody a sense of What we think that combined portfolio looks like as we contemplate the growth from the different channels, as we contemplate The amount of migration and cross selling that we expect to experience, that all kind of gets combined into the projections that we shared for the loan book And the evolution of the yield and the loss rate of the portfolio. Okay, great. Still in this And this theme, can you just remind me how what percentage of Easy Financial customers would opt to select the ancillary services, The loan protection plan and then how does that compare to LendCare? And are there any strategies to increase or maintain the up Or the take up rates on ancillary products with LendCare? Yes, sure. So Within the direct to consumer Easy Financial business, it varies by ancillary product. We have Three different ancillary products. If you just were to average them all out, it would be just around half the customers or maybe just over half the customers Optionally decide to purchase 1 of those 3 or a combination thereof of those 3 optional ancillary products and services. The LendCare's program also offers additional ancillary products, Including a creditor insurance product very similar to the one we've offered at EZ Financial, and then they also offer some other warranty GAAP Insurance Products. The attachment rates and the take up rates are much lower within the point of sale channel. That's consistent with what all point of sale lenders see ourselves included in the work we did prior to working with LendCare. And that's typically just because at the point of sale, it's being offered by the merchants, it's at the time of checkout. There really is, it's always the opportunity for a really rich discussion About the value of those ancillary products, what LendCare does is to then reach out to the customer subsequent to the sale And invite them to then optionally purchase some additional products. That's a strategy that is working fairly well. It's something that's Fairly new for them to do and we believe there's quite a bit of opportunity and upside for It's to continue to offer those customers new value added ancillary products and services. So if you think about the mix Of their book that is represented by ancillary products and services revenue, it's much smaller today Than what you've historically seen within EZ Financial, but it's also, therefore, an area of growth and opportunity for us. Okay, great. And last one for me and then I'll requeue in is on the auto products. So if I just I might have misheard the prepared remarks. So the auto lending product that we've talked about over the last Several quarters. That's now going to be originating loans in Q3 or I guess in H2 2021. And then the automotive repair financing product, do you have a repair shop and dealers? Are they similar dealers As the where you have relationships as well that you would expect to roll that through initially? Yes, that's right. So to delineate the products there, so the one that we've just soft launched And it's now live, but we're not yet marketing. We're making sure that the production environment is working correctly, but we will start to market To customers in the next few weeks, we're launching actually a new ReSkin Easy Financial website in the next couple of weeks And that's when we'll then begin to start marketing that direct to consumer auto loan. That product is the one we've talked about Over the last year or so where a customer can go online or phone into our contact center and actually apply and get pre approved for an auto loan And that will enable them to go shopping for a vehicle. Over the balance of this year, our plan is to then Keep building out and establishing a dealer network of dealerships that we've collaborated with and feel are certified and provide our customers a good experience and we'll then refer the customers to those particular set of dealerships. And we're also planning to enable them the ability to, through a third party relationship, link directly to an online car inventory where they could then shop for a vehicle. So those are part of the additional streams of work we want to get done with that product, but we'll start marketing it in the next few weeks. Customers can go online and get preapproved and then be able to go shop and buy a vehicle from wherever they like. On the auto repair financing product, That product ends up often in the same dealerships where customers would go to buy vehicles as a lot of dealerships, particularly those That sell used vehicles also do maintenance and repairs. And so that product is going to then be offered to many of those same Auto Repair and Dealerships, and that's a product whereby a consumer can use the vehicle that they already have as security To be able to obtain financing for an automotive repair and then with a mechanics lien on the vehicle, that vehicle that access security for the financing. So 2 different products sort of designed for 2 different purposes, 1 to get pre approved and buy a vehicle, Wanted to use a vehicle that you have in order to be able to finance an automotive repair. Great. Thanks. Our next question comes from Doug Cooper with Beacon Securities. Hi, good morning guys. Congratulations on a great quarter. Just on the Brim Financial, Jason, you want to just describe your relationship with them? What do you think it will amount to? And obviously, you've had good luck in doing this kind of thing before. Yes. So Sabrim Financial, it's a Canadian Toronto based FinTech That we got to know over the last year and a bit, and we quite like their technology. They have a platform, Financial platform that enables 3 different functional capabilities that can then be offered to Other financial services organizations and other lenders, one is that they have a revolving card platform. So any institution that wants to launch a revolving card product of some kind, a secured card or a credit card, they have the platform technology to enable a lender to do that. They have the technology to offer a white label digital mobile app that they can white label a brand for a third party To give their consumer access to their financial products through a mobile app experience. And then they also have a loyalty program they've developed Using the credit card network to be able to patch in any retailer that accepts credit card as a payment and to be able to allow that retailer to then issue and redeem Points for the consumers. They've got these 3 very kind of cool pieces of technology that are highly relevant to the Fintech sector that They enable 4 third party financial services organizations. We got involved because, first of all, we really like the business and the technology. We think it's a great platform and I thought it was a great investment opportunity for us, but much like our other investments we've done in the past, we also use those as a way to obtain Preferential commercial terms for us. So because some of those parts of the platform and the technology we envision we will use in the future By being an investor in the business, we're also able to get use of the platform on preferential commercial terms as well. So Early days in working together with them, but certainly, I think they've got a great business and we're proud to be an investor. Okay. Can you say you have an under 10% ownership? We haven't disclosed the haven't disclosed the exact ownership, but it's a minority equity Stake at this point, yes. Okay. And I guess the last question for me, just on the operating margin, I It's a little different this time as opposed to operating margin for Easy Financial is across the company as a whole. Is that correct? So should take the If you're looking at the net op margin, you should be looking at the revenue associated with the loan book, both LendCare and EASI Financial Plus Leasing, is that correct? Yes, that's right. We switched to providing guidance on the total company operating margin in the last set of We had put out at the beginning of the year before the LendCare transaction and have continued with that trend given the Consumer lending business and revenues represent now such a significant portion. Breaking out JustEasy Financial operating margin discretely, We just felt it was becoming less relevant and it was actually more relevant to now show total company operating margin. So That's correct. This is revenues from all the lines of business, less the total operating expenses from all the lines of business, Including our Corporate and Support Center to produce then the actual company's operating margin before its interest expenses and taxes, etcetera. Our next question comes from Gary Ho with Desjardins Capital Markets. Thanks and good morning. Sorry I jumped on the call late. I'm not sure if you've been asked. So first question, when I think about LendCare and the legacy financial, that represents a Quarter of the loan book. Just curious within your 3 year outlook out to fiscal 'twenty three, how much will the Landcare business evolve 2, if you can provide some segmentation, I imagine the growth rate for LendCare being a bit higher than the legacy business. So, I guess it depends on what your definition of that loan book is again because When we acquire a customer through point of sale, including through the verticals at LendCare, the intent is to then offer those consumers other products. If you were to allocate those loan receivables to the LendCare because the customer They are very different than if you said, well, those loans are and that's why the combination of this under the 1 consumer lending segment makes So much sense. What I would say is that in our projections when we roll forward our outlook, the contribution From a point of sale and from the verticals that LendCare brings to the business, if you look at it as a portion of our total portfolio today as Probably maybe have a little bit more room for growth as a proportion, given that it's an earlier stage area of the build, so smaller earlier stage portion The portfolio, but we're expecting and forecasting still quite robust growth within our core Easy Financial business as well. And of course, given now that we have this new channel of customers that can fuel through cross sell growth of those other products, The growth of those other products now look even more strong than they would have previously when we didn't have the new source of Customers from one point of sale, that makes sense. Yes, it does. Thanks for the color. And then my second question, Jason, when you and your team were working But these kind of 3 year outlook together, were there maybe 1 or 2 areas where you might have debated A while before coming to consensus, whether that's the auto loan book growing, the LendCare book growing or the evolution of the net charge offs over the next 3 years. Is there certain areas where you thought it might take a long time to Can I come check your sentences there? So there's really healthy debate that goes into The underlying assumptions and projections that roll up to these consolidated numbers, it's a lengthy multi month long process of bottom up Projecting everything from how much demand do we think exists in the market, the application volume, what do we think the mix of the book is going to look like, what do we think the cross sell rate How many new merchants do we think we're going to add? It's a pretty complex process that has lots of rich debate. What I would say is to try to categorize The overall set of projections and where we landed, these projections are similar to the philosophy we've applied in the past, which is This forecast is the if things go reasonably well, kind of down the fairway Set of forecasts. Obviously, if there's a massive unexpected macro headwind that we don't anticipate, like COVID, for example, that came along, this doesn't fully account for that, but it equally does not account for the upside potential that we think exists If things go really well and the business performs really well, this is the practical, realistic down the fairway set of projections. And the idea with the ranges that we provide is so that we're providing some level of tolerance for a bit of a shift In external factors, if the economy gets a little better or struggles a little longer than we anticipate, the ranges account for that. If Some of the products don't go exactly according to plan. The ranges account for that. So Yes, I think when it comes to things that are new things, new products that are just about to launch or new verticals that we've not yet really scaled up, We're certainly a little bit more conservative there. I think that's the right approach for things we don't have as much data on, whereas things like direct to Consumer unsecured lending, where we've got much more history and experience, we can be a lot more ambitious with what we think that Produce. So that's how I think just to frame the overall projections. I was also thinking in terms of kind of competition Yes, I mean, we certainly factor in the competitive landscape and we look at who are the current competitors, what products and verticals are they in, What are we seeing in current marketing and digital advertising trends where we can actually track the amount of impression share And the amount of ad spend that other competitors are currently investing in at the actual product or keyword level, so we can see what are they actually trying to go after. In point of sale, we know where they're trying to operate and play as a result of talking to prospective merchants They will tell us that they've spoken to these other potential competitors. So we use all of that to try and get the best read on the current competitive landscape. I don't think the competitive landscape today has changed much in the last couple of years is any more intense or less intense. There's a small healthy group of competitors, but it's but there's not many of them. It's still a fairly limited representation. And more than that, it is a very significant market. And from our perspective, that $1,800,000,000 of total receivables in a $200,000,000,000 marketplace, we still consider ourselves a very small company At the very early stage of our long term growth. So notwithstanding there will always be some competitive tension here and there, We're operating in such a significant market that by itself has a healthy rate of growth. That alone is what in our view fuels the opportunity for us And then just lastly, just a numbers Question, the Affirm equity piece that's hedged, has that been monetized in July yet? And maybe just a point of clarification, those Proceeds and the Affirm contingent consideration, how are those reflected in the adjusted ROE and the net debt to total cap metric in your 3 year outlook? Hey, Gary, it's Hal here. So yes, we were able to crystallize And unwind the hedge at the beginning of August. And so those cash proceeds will be effectively We used to pay down some existing debt. And in terms of the outlook within our forecast, The contingent proceeds from the contingent shares are not reflected In our balance sheet and our outlook from an overall cash flow perspective. But the cash proceeds from the monetization in August was reflected? Yes, absolutely. Yes, that was Certainly, contemplated. And remember, Gary, the cash proceeds related to the non contingent portion and the hedge that Hal I just spoke to that's being or just was unwound and the cash brought back into the business. From an impact on the financials and book equity perspective, that was already taken as an unrealized gain in prior quarters. So that's sort of already In the financials and balance sheet, this is now just the realization of that gain, if you will. But as Hal said, future, the contingent shares That are eligible to be earned at the end of this year and then again at the end of next year. We've not embedded an assumption in yet for the cash flows that would come from those. We're still mark to marketing those investments each quarter and we'll continue to do so. But what's not in the model is What the value of them is going to be at the end and then the benefits of bringing that cash in at that time, if that makes sense? Yes, Perfect. Okay. Thank you. That's it for me. Our next question comes from Jamie Glenn with National Bank Financial. Yes, thanks. I just wanted to touch on another theme or 2. First is, Looking at the U. S. Players, they're seeing an uptick in online Applications and approvals and originations from the online channel, I would assume, partly driven by The restrictions in place, but is that something that you're also seeing? Is that a trend that you would expect to remain permanent? And based on comments previously that, that is a lower credit quality channel, are you seeing any changes or shifts And how the credit is performing from the online segment? Yes. So certainly over the COVID period, much more business certainly shifted online. And prior to COVID, we had started the process of beginning to shift Gradually certain segments of customers toward being able to transact fully digital and online with support From a local branch if they needed it, but being able to actually transact without necessarily physically visiting a store or branch. COVID accelerated that. We ended up, obviously, for an extended period there, doing much more lending digitally. As a result of the impacts on consumer trends caused by COVID, that has meant that the overall credit quality Online traffic now is much more proportionally distributed than in the past where that online traffic represented Typically a lower credit quality. It still today is on average slightly lower quality than the Profile of the consumer that walks into a branch, but not as distinctly different as it was before because there's been more shift to online. In our model going forward, as we noted, we still plan to open more locations. And the way we think about the relevance of the branches in the local communities In a couple of ways. One, our locations are placed very strategically in the highest traffic strip plazas within the communities we operate. So they themselves are great brand aids. They're actual marketing channels themselves because they act as billboards, but they also have a lot of credibility To those that do shop online because they've seen a physical presence, so that's one thing. 2, we found that When a customer that's transacting digitally or online needs support and they need to speak to someone, when they're speaking to someone who's in a local branch Our local store, psychologically it has a difference in the way they perform from when they speak to someone in a contact center in some other major city In some other countries, they I think appreciate the fact that they're speaking to someone locally who they can go in and visit if they need to. And so it actually favorably impacts the consumer performance even if they didn't physically go into the location. And then lastly, as I mentioned in my prepared remarks, there are certain customer segments. And think of the customer I think of the customer segments in 2 ways. 1, there are certain segments where they just still prefer and like to deal With financial affairs face to face, if you think about the type of lending we're doing, in some cases, it's a $25,000 or $30,000 home equity loan. There are certain transactions like that where certain consumers, and certain demographics actually still want to come in and sit down with someone and have a wholesome conversation face to face. And then the other way to think about the segments is we can use the physical presence to manage credit risk because we know when we bring a customer in face to face, It reduces fraud. It improves the relationship. It reduces delinquency. That means for certain higher risk segments of customers, We can perhaps lend to them as a result of being able to see them face to face that we might not be able to otherwise. So it really widens the credit spectrum for us as a result. So Certainly, COVID has accelerated the shift to digital. We're making significant investments in digital and digital platforms. It's our number one source of marketing is through digital advertising and we certainly anticipate in the future more consumers will transact digitally than in the past. But the relevance of the branch network and its role in our ecosystem is certainly just as strong as ever. Great. Thank you. The next question comes from Jeff Fenwick with Cormark Securities. Hi, there. Just one small follow on here, just clarification around the change in the rate of the securitization facility. Is that on the net new dollars going in or is the facility overall going to be repriced lower? Hey, Jeff. I'm happy That's on the full facility in terms of the rate movement. Great. Excellent. And then I guess that sort of feeds into the question on your target leverage ratios. When I look at the high profitability and cash flow It seems like it's going to be tough to have a level of debt that touches the level that you've got in your guidance. So Maybe you just talk about prioritization of use of excess capital. Do you have a list of prospects out there in terms of Back to out there in terms of tuck ins, are you thinking about maybe a higher payout ratio for the business or the prospect of Maybe future buybacks, although given where the stock price is, I imagine that's not at the top of the list. Yes. So you're right. You can clearly tell based on our projections that given the business is and will continue to generate a significant amount of cash flow. The business' leverage stays fairly steady. In fact, it Starts to continue to decline in the outer years and we're certainly well below the target level of leverage. You're thinking about it correctly. 1, although the Board reviews the dividend and the payout ratio every year, That payout ratio has been consistent and we would expect to stay fairly consistent and therefore The dividend as a result has risen each year as the earnings have risen. So that piece we have in place and is fairly predictable. Buybacks are used as a tool when we think the share price is trading below its intrinsic value and it's a good use So as we did in 2020, if there is any type of market disruption that makes buying our own shares back attractive, This lower level of leverage and high cash flow generation gives us that tool to work with. But otherwise, in the absence of that, The fact that the business is at a lower leverage and continues to delever is really what provides the capacity for future investments And additional acquisition opportunities in the future. I think as we've said before in the past around our strategy, We anticipate acquisition will be one of the tools for growth for us in the future. We don't anticipate LendCare to be the 1 and only one we ever do. And so, well, right now we're focused on organic growth and focused on executing the LendCare partnership today. In the future, This just means our balance sheet is now better prepared to do additional investments than ever before with the amount of liquidity we have And the leverage position. So we're quite happy to just see the leverage hang around the hoop where it's at because that just means we've got Capacity for future investments when the right ones come along. Okay, great. Thanks for that. And I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks. Okay. Thank you, Will. Since there are no more questions, we'd like Thank you everyone for participating in the conference call today and we look forward to updating you again next quarter. Have a fantastic day everyone. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.