Hey, good afternoon, everyone. I'm Matthew Lee, the Financials analyst with Canaccord Genuity. Today, I have the pleasure and honor to sit here with Clive Kinross, CEO, co-founder of Propel Holdings, a name that I started covering at $8. You know, today it's $30 and change, maybe $33, $34. It's been a tremendous name in the last couple of years. You know, Clive, I always tell you this, but it's one of the best returning businesses as long as it's working. When I say it's working, I mean credit is in check. Maybe let's start there. Tell us about how you've been able to beat the credit cycle.
Yeah, first of all, thanks for the warm words. So nice to hear that. I wish you would say that to me when it was one-on-one instead of in front of a big room like this. In any event, I really appreciate it. I'm not sure that we've necessarily been able to beat the credit cycle as much as we just happen to be operating in a good credit cycle. We've got a best-in-class underwriting module that was developed by one of my co-founders, Dr. Jonathan Goler. We've been using AI machine learning for the last several years. We're able to look at an excess of 80,000 applications each and every day and render a decision in six seconds or less. More than how impressive that is, is the credit quality that comes out of our engine.
If you were to bifurcate the market, I think we're in a cycle right now where you are starting to see more delinquencies with some of the higher income earning consumers. If you look at consumers earning $150,000 or more, delinquencies are up about 20% in the last couple of years, which maybe sounds a little bit higher than it should. It is a big delta, but it's a big delta off of a very low number. What that's leading to, it's leading to banks and credit unions tightening their underwriting a lot because they lend to a lot of those consumers otherwise. The New York Federal Reserve came out and said that rejections from banks are at 24% in Q2 of this year. That's up from 21% in Q1 of this year, which is probably the highest rejections have been since about 2014.
If you were to look at consumers who have been rejected with FICO scores below 680, that's at about a 57% rejection rate, up from 49% in Q2. Again, one of the highest rejection rates since 2014, signaling that banks and credit unions really, because of how their customers are performing, have tightened underwriting a lot. Consumers who might otherwise be funded by banks and credit unions aren't, and they're dropping into our segment of the market. As a consequence of that, not only is our demand increasing significantly ahead of our expectations, mind you, but at the same time, credit performance is really stellar because consumers who might otherwise be funded prior to us are now dropping into our segment of the market. In addition to that, you're seeing in the U.S., probably about 90% of our business is in the U.S., the remainder in the UK and Canada.
If you were to look at the underserved consumer in the U.S. and look at where the jobs are being created today—transportation, healthcare, and so on—more and more of those jobs are going to underbanked and underserved consumers. We're in a little bit of a Goldilocks moment at the moment where we're seeing strong demand coupled with credit performance right in line with our expectations.
I'm kidding. It must be really tempting then. You know, you have all this demand coming in, tons of applications coming in every day. It must be tempting to just turn the tap on and let everything come in and, you know, get the rate that you want, return on equities, you know, 35%+. You know, why don't you do it that way?
We're very, very conservative. We and our bank partners are very, very conservative with our underwriting. We like to leave a big margin of safety always because we're always living in uncertain times. I was going to say we're living in uncertain times. I think last year, Matt, when we had this discussion, I said we're living in uncertain times. The year before, I would have said the same thing. We don't know what the future has in store for us. As a consequence of that, when we underwrite, we leave a big margin of safety to the extent that there can be any challenges. Nobody ever went out of business by growing a little bit slower than they otherwise might do. In the lending business, where lenders have often gone into trouble is when they lose discipline, they try to grow too quickly and loosen their underwriting standards.
We're able to produce 40% top-line growth organically and in excess of 50% bottom-line growth organically by being very, very tight with our underwriting. Where we're not tight and where we're incredibly aggressive is on the business development side, on the partnering side. That combination has allowed us to grow our revenues from roughly $100 million LTM leading into 2021 to roughly $620 million at the midpoint of our guidance this year. About 90% of that growth has happened organically with a small piece happening through acquisition.
Which we'll get to in a second. I want to talk about something that isn't getting talked about a lot here, but scale. A customer who comes to you for the very first time, they have a certain credit profile. You assess the risk using AI. The second time they come to you, the credit metrics change. The view on that customer changes. Tell me about how you graduate customers up, how it affects yield, and again, how it affects return.
Yeah, I think it's a great question. It's another key differentiator for Propel Holdings. Look, a lot of businesses are constantly going out and trying to build their new customer base. It is critically important. You can't grow the business ultimately unless you're bringing new customers all the time. It's even more imperative to look after returning customers. In the context of what we do, our biggest cost associated with a loan is delinquency rates or provision for credit losses. Our second biggest cost is our marketing and underwriting costs associated with onboarding a new customer. To the extent that a new customer could become a return customer, you don't need to pay those marketing and underwriting costs again. In addition to that, when they are return customers, their default performance tends to be lower. Keeping customers with us for longer is imperative. How do you do that?
You do that by having the best products available to those consumers on a risk-adjusted basis. We strive to do that all the time. We're able to deliver that because of our operational excellence, as well as our AI-powered underwriting engine. We know on a risk-adjusted basis they're getting the best product. Bear in mind, our customers' credit profiles, to the extent that they're paying back, are improving all the time. We report to the credit bureaus. As a result of that, they're able to access better credit than the credit they come on board with us initially. As a consequence of that, so that they don't leave and go get better credit elsewhere, we graduate them to better products. By better products, I mean lower APRs, I mean higher loan amounts.
Not only does it work for them as they stay with us indefinitely, it works for us too because we're getting the best customers maturing with Propel while we're constantly improving the products for them. It's a key driver of our success.
There's a point where they might graduate out of your products, right? That's kind of maybe where the partners kick in. We'll talk about the partners in a bit. You know.
There's certainly a point. We've been at this for 14 years now, and what we've constantly done over the 14-year period is we've expanded our products. We've constantly upgraded our products, if you will, so that we could meet the consumer on their credit journey. The hope ultimately is that they stay with Propel indefinitely until, as you say, they do get to a point where they graduate to a product that we're no longer able to offer them.
Which is a win-win for both of you.
Yeah, it certainly is. We're a mission-based organization. You know, there's 90 million underbanked and underserved consumers in the U.S., the UK, and Canada alone. These are more and more consumers living paycheck to paycheck. In the absence of companies like Propel , and I'll just speak about Propel in this context, their options are terrible. They could go to get a payday loan. They could go get a pawn loan. They could go get a loan from a tribal lender. The characteristics of those loans are exceptionally high APRs with very low loan amounts. At the end of the day, we're a mission-based organization insofar as we want to give them the best products available to them in the market based on where they are in their credit lifecycle. If ultimately that translates to them qualifying for a product that we don't offer, we're only too happy.
Right. So, you've started to achieve scale in the U.S. markets you serve. You just did an acquisition in QuidMarket. Now you're in the UK market. My understanding of that is it's very fragmented. The regulation has turned over. Many companies in that business have gone out of business. The ones who have survived can understand how the game works. There's a chance to win a lot of market share there. Maybe talk about what you're seeing early game in QuidMarket and what you see that business looking like in two or three years.
Yeah, no, I appreciate it. There are 20 million underserved consumers in the UK. It's fascinating when we speak about consumers living paycheck to paycheck. When you actually go and speak to these consumers, you could do it here in the U.S., in the UK as well, there are more and more people that just say, "I'll just work to live." I mean, there's a huge segment of the population that literally is holding down two, sometimes three jobs just to survive month to month. It's absolutely fascinating. The UK is no different. When we did that deal, we said that we think we could grow that business by 40% top and bottom line. We did what was led by Canaccord . We did a board deal, a $115 million board deal in October of last year. To do that transaction was also two times oversubscribed. We said 40% growth.
Sheldon’s our CFO over here. He said that on our earnings call last week that he expects that growth to now exceed 50% this year. If anything, we're already tracking at 50% with the back half of the year. We'll demonstrate more growth in the front half of the year. You could figure out where that's going to land. I could tell you we're going to grow that business in its first year north of 50%. If anything, even as the dollars get greater and even as the revenue numbers get greater, so too does the acceleration of the growth of that business continue. We expect that business, we haven't put out official guidance yet. I wouldn't be surprised if that business grows by 100% in 2026, both the top and bottom line.
How do you scale that business, maintaining kind of the judicious credit? I mean, you talk about in the U.S., you want to be careful about who you kind of work with, the customers you have. How do you get to that level in the UK without opening up the floodgates, so to speak?
Yeah, to understand that, a part of it is understanding the background of that business to begin with. That's a business that's best in class in the UK. Candidly, before we acquired it, it's a business that was undercapitalized. Because it was undercapitalized, they were meeting the demand based on the size of the balance sheet. After we went and acquired the company, from their perspective, we had an unlimited balance sheet. All of a sudden, we could fund based on the market demand rather than our own constraints. What we've been doing is building out the infrastructure to be able to handle the incremental volume. Market demand is there. Credit quality is there. Those two variables don't come into play. Neither does our balance sheet anymore. What now comes into play ultimately is the infrastructure and our ability to scale.
We've been doing a lot of that by building the overhead and the people side of that business as we move through the year. At the same time, been automating more and more of the processes, getting ready to implement our machine learning AI algorithms over there, which won't only accelerate the growth, but it will do so in a more efficient basis as well. You've often heard me, Matt, speak about the fact that our bottom line is growing faster than our top line. Our CAGR since 2021, revenue CAGR is around 50%. Profitability CAGR is closer to 60%, which really demonstrates the operating leverage of the business. We didn't say that that would be the case in the UK because there's more and more manual steps involved in that growth. As we move into 2026 with more of the automation, you'll actually see the operating leverage there.
I've mentioned what I expect will be close to triple-digit top line growth, but the bottom line growth will be even more than that.
It sounds like the strategy or, you know, the framework is you can acquire something in a good market, undercapitalized, maybe doesn't have the technology aspects to it. You can come in, add your technology, improve the return profile, add capitalization, and take market share. Do you need anything else in the UK market in terms of M&A, or do you think you can grow that market organically?
Two things. First of all, for the first part of your comment, that's entirely accurate as it relates to the UK. We're in a global industry. If this is a big market in the U.S., in the UK, and Canada, you can imagine how big it is across the globe. It certainly is. There are acquisition opportunities everywhere. We don't necessarily look for those elements when doing an acquisition. The elements that we look for are a jurisdiction that's favorable to us. The acquisition would always have to be accretive. We've told investors that and would stick to that. The third thing is that the culture and the team need to match the Propel culture. I know that companies speak about this over and over again, but the key to our success is our people and our culture. We're a business that was started 14 years ago by four co-founders.
We're all together today, driving harder than ever, more experienced than ever, more connected than ever within our industry, which is fueling the growth. We've got a 20-person executive team. We've never lost a single executive. That comes because of an incredibly special culture that's driving the company. We would never compromise that in the context of an acquisition. Those are the three criteria that we look at. In terms of the UK market, we've got an incredible engine over there and an amazing team that's in place on the ground that fit perfectly with us. We supplement that with best practices that we suggest from our side to the UK. Oftentimes, they've got best practices that we implement in our business on this side. Ultimately, that's what's driving the future success. We don't need any more acquisitions or anything else to fuel the growth in the UK.
Okay, let's turn it around. Let's talk about Lending-as-a-Service. Lending-as-a-Service is an interesting storyline because it doesn't use your own balance sheet, right? You're using someone else's balance sheet. You're originating loans for them. Maybe let's talk about your first partners now. What's the feedback you're getting on Lending-as-a-service? Are they getting the return profile that they like? Are they rushing to put more capital in? How do you see that business growing?
Just taking a step back over here, most of our growth and most of our revenues come from risks that we're taking in the loans that either we or our bank partners originate. From a regulatory perspective, there are certain states or certain jurisdictions where we can't be both the servicer of the loan and purchase the economic interest in those loans. What we do is we find a third party, an unaffiliated third party who purchases the economic interest, and we're just doing the Lending-as-a-Service. That's where the terminology comes from. As you can imagine, we're not using our balance sheet. We're therefore not taking financial risk. We are taking financial risk insofar as if these loans don't perform, the purchasers won't come back and keep purchasing the loans.
Right
The return profile that we demonstrated to the purchasers before we got started was very impressive. I could tell you that. Like everything that we do, we underpromised and overdelivered. The returns that these purchasers are seeing are even higher than what we mentioned to them. As a result of them, all of them, without exception, have increased their capital commitments to the program. At the same time, more and more bigger institutions are also coming on board and purchasing those receivables as well. That's taken a little bit of time because it's still in the earlier phases. Up to this point in time, the market opportunity and the demand and credit performance have been much stronger than the capital that we've been able to attract. That was always going to be a timing exercise. The capital is finally catching up to the market demand, which makes it a lot easier to predict the growth of that business on a go-forward basis.
That's another business that grew 60% in Q2 of this year. We expect the growth to continue throughout the remainder of the year. While this isn't yet official guidance, that's another business that I would expect to grow in the triple digits in 2026.
Right. What's the end game of that business in that context? What is scale in Lending-as-a-Service? Let's just use my estimates, 2025 numbers, $20 million- $25 million of revenue, 100% growth in 2026 or plus, 2027. At what point in time would you be satisfied to say this business is operating at a scale we like? Can you just continue going forever?
That was good math over there. That's similar to the math that's going on in my brain over there. What we've done, I think, quite successfully over the years is we've enhanced our product set. By product set, I mean lower APRs, higher loan amounts, increased our addressable market. As we increase the addressable market, be it for the stuff on our balance sheet or Lending-as-a-Service, the opportunity grows and grows and grows. The higher the APR, generally speaking, the riskier the consumer, the less dollars that can be put to work at that segment of the market. As you move into a lower APR, the loan amounts increase and the addressable markets increase as well. All of which is to say, as we increase the products, the opportunity increases. It is certainly, like any market, finite in terms of what the opportunity is.
I think Lending-as-a-Service on our balance sheet today, we've got a CLAB, Combined Loans and Advanced Balances, sorry for the acronym over there, of around $500 million for the stuff that's on our balance sheet. I think the Lending-as-a-Service can grow to that in a fraction of the time. As we are expanding our product set, it will just grow from there. I don't expect the growth of the Lending-as-a-Service business to slow down, certainly beyond 2026, even as the revenue numbers grow. The law of large numbers means at a certain point in time, the absolute dollar growth will continue to accelerate, but in percentage terms may slow down a bit. I don't have any, over the next three to four years, I don't expect that to be the case with that piece of business.
It's incredible. I have like 25 more questions, but I figured I'd open up to the room in case there's anything people wanted to ask. No? No, no. Okay, I'll keep going. I can go all day.
I can.
There you go.
Can I.
I hope there's no presentation next. Canada, I mean, you know, a lot of investors I talk to, they say your U.S. business makes so much sense. It's growing at this great rate. The UK, you know, also a favorable jurisdiction for you. It feels like the Canadian jurisdiction is a little bit less favorable, but there is interest for you to go into it and you have some partners there. What's the logic behind the Canadian market? How much money are you willing to deploy there?
Yeah, Canada, Canada just being candid, it's a little bit more challenging. I mean, we're doing great there. We're improving all the time. Our KPIs are improving all the time. We did an exclusive deal with KOHO recently. We're their exclusive lending partner. I think, as we mentioned on our call last week, so I'm not speaking out of turn, you should expect other exciting partners also to come on board in Canada. What makes Canada challenging in this environment is two things. Number one is it's got the highest unemployment rates, 6.9% compared to 4.2% in the U.S., 4.6% in the UK. That's quite a bit higher. The rate cap that the government enforced last year is just silly, bluntly put, 35% APR cap for this segment of the market. We said to the government at the time, hopefully no one hears from the government.
If you are, then listen to what I'm saying because I was right then and I'm right now. You can't all of a sudden take customers who are funding at 47% and all of a sudden fund them at 35%. It's just not a profitable business and it's not sustainable. As a result of that, there's a whole host of consumers who would have previously been funded at 47% APRs can't anymore and are now being pushed into the payday market in Canada. One of the fastest growing segments of financial services in Canada right now is the payday loan market specifically because of that dynamic. That means at 35% APRs, it's just a tight market with very, very risky consumers. Now, we could do it and grow and do it profitably, but by the same token, the margins over there make it tight.
We need to think really carefully about how much of our resources we commit to Canada relative to these other markets. What you're going to hear me say, notwithstanding what I'm saying, is expect that also to grow in triple digits, but the caveat to that is that it's coming off a really low base.
Right. I mean, would regulatory change have to happen for you to become a more meaningful player in Canada, or can you work in this environment?
I think we can work in this environment, but it just depends on what your definition of a meaningful player is. You know, we've got, I don't know if I should be speaking about competitors, but I will speak about competitors. You know, goeasy came out with their report last week. Their whole business has shifted.
Yeah.
They used to be an unsecured lending business. They've now become a secured lending business. The whole portfolio has shifted. When you're looking at comparing their loss rates today compared to their loss rates a while ago, you're comparing loss rates of completely different products. This is a secured loan book versus an unsecured loan book. I say that because they are operating at scale, and they're very, very good operators. You could see the shifts in their business model, all of which is to say at 35% APR, we could build a good business, but it's going to be limited in size. The question then is, would we consider getting into the payday loan market and use that regulation to develop products that are otherwise better than available in the market? I would never say never. I don't think so, but I would never say never.
That's a segment of the market that's going to grow. All the while, the very people that the government purports to protect, which are the Canadian consumers, are going to be the losers in this equation.
Yeah, absolutely. Okay, final question. This is the one I like the best. When you and I are having this conversation in five years, sitting in these same chairs in the Wheeler Room, which we've been in, I think, the third year in a row now, what are we going to talk about? What's going to be different about the business? How is Propel going to look?
Yeah. Five years ago, I think we did $60 million in revenues. We were in the U.S. market. This year, we're on track to do $620 million U.S. in revenues. We're a very, very aggressive, ambitious team. We've got a lot of inside ownership, about 50% inside ownership at Propel. I mention that just to say this is an aggressive team that is hungry, A, to do the right thing for the market and B, to grow incredible shareholder value. Having that intersection of youthfulness, I'm going to exclude myself from that, but I'm going to include the rest of the team, coupled with experience and enthusiasm, means that there's the energy of the team to grow a huge business.
Sure.
We're in a global market. We want to prove that in Canada, we could create world-class global businesses. The plan over here is to keep building this business, to keep compounding our earnings, and ultimately to turn this into a global business. We do not have, neither does any business I don't believe, certainly at this stage, have the ability to do multiple acquisitions every year. We want to be able to carefully digest our acquisitions, just like we've done in the UK. We've got a full pipeline of organic growth initiatives that we'll be announcing to the market over the coming months. Certainly, between now and five years from now, expect more acquisitions, expect us to be in more jurisdictions, expect us to roll out greenfield operations in other jurisdictions.
I certainly think we've only started to scratch the surface of the current products and current markets that we enter. Expect that to grow as well. All of which is to say, Matt, I would be very disappointed if our business isn't an order of magnitude larger and more global five years from now than it is today.
Plus 4,000% dividend growth, right?
The dividend growth is going to continue. We've done now, I think, eight or nine consecutive dividend increases. We told the market that we would pay up to 50% of our adjusted earnings in the form of dividends. I think we're at 23% year to date. There's lots of room to go. At the same time, profits are increasing. All of which is to say, for those of you that like dividends, expect the dividends to grow. For those of you that don't like dividends, just put the dividends in your jeans while the share price grows.
Just buy more shares. All right, Clive, that's all the time we got. Thank you very much for having us.
Thanks, everybody. Thank you.