ECN Capital Corp
TSX:ECN
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
1.61
3
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
ECN Capital Corp
You don't have any saved screeners yet
Thank you for standing by. This is the conference operator. Welcome to the ECN Capital First Quarter 2018 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. John Wimsatt. Please go ahead, sir.
Thank you, operator. Good afternoon, everyone. Thank you for participating in our conference call to discuss ECN Capital's 2018 first quarter results and our strategic investment in the Kessler Group, announced earlier today. Joining us today are Steven Hudson, Chief Executive Officer; Jim Nikopoulos, President; and Grier Colter, Chief Financial Officer. A news release summarizing the first quarter results was issued this afternoon, and the financial statements and MD&A for the 3-month period ended March 31, 2018, have been filed with SEDAR. A news release summarizing the Kessler transaction was also issued this afternoon. Documents are available on our website at ecncapitalcorp.com. Presentation slides to be referenced during the call will be available in the webcast as well as under the Presentations section of the company's website. Before I begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I'll refer you to the Cautionary Statements section of the MD&A for a description of such risks, uncertainties and assumptions. Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectations of any forward-looking statements will prove to be correct.You should note that the company's earnings release, financial statements, MD&A and today's call include references to a number of non-IFRS measures which we believe help to present the company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in our MD&A. You should also note that as of January 1, 2018, the company changed its presentation and functional currency from Canadian dollars to U.S. dollars. Therefore, all figures are presented in U.S. dollars unless explicitly noted.With these introductory remarks complete, I'll now turn the call over to Steven Hudson, Chief Executive Officer.
Thanks, John, and let me start with Slide 6. This afternoon is an exciting day in ECN's history. We are pleased to report that with the Kessler partnership, which you'll hear more about in a few moments, this marks the end of ECN's 2-year strategic transition. During the past 2 years we have harvested capital through 5 separate sales, realized a 2% premium on book assets and a 10% premium on equity and we've entered into 3 strategic partnerships in the prime consumer credit space in the United States. As a result, on the bottom of Page 6, I think it's safe to say that we have transitioned ECN from what was an asset-based lender in the past to what is today a significant U.S. business service provider to over 90 U.S. financial institutions.Turning to Page 7, there are 4 components of our strategic plan, the first of which is the transition from an asset-based lender to that of a leading business service firm. I would say that we can mark that complete. You'll note in the right-hand column a chart that shows 82% of our revenue in 2019 coming from those services. That's 78% in Q3 and 79% in Q4. We are now, with the closing of Kessler Partnership, will be a manager, adviser and servicer on approximately $30 billion of prime consumer credit assets on behalf of 90 customers.The second part of this journey has been to redeploy capital from our legacy businesses, and I would say that's 65% complete. We have harvested $775 million to date, and we have a remaining $450 million to be done. We expect substantial completion of that on or before the end of 2019. That capital is being deployed in these strategic platforms within their organic growth and tuck-ins as well as the repurchase of stock when it makes sense, the payment of dividends and maintaining our investment-grade credit.On Page 8, the third component of the strategic plan is to right-size capital operations and expenses, and I would say that we're substantially underway on that initiative. We have returned over CAD 217 million of capital to our investors, representing 15% of our shares. NCIB remains a valuable tool for our company, and you'll see further activities and commitment on expense reductions on Slide 25 in a moment.And the fourth component, so that we're not a passive holding company, has been to drive value between our platforms. I would say that's underway. In fact, let me turn to Page 9 and give you some examples.With respect to the Kessler Group again, which we'll hear in a moment much more about, they've been able to land a Canadian bank client from our senior line, and I think that's a great start to Kessler's risk-based marketing. Other bank partners from ECN are in conversations about joining Kessler Group.With respect to Service Finance, they are substantially complete, a U.S. bank from our senior line joining them as a bank partner. Canadian banks continue their due diligence process. And I want to thank Donovan's team at Triad for opening the door to the credit union community for Mark and his partners, and they are in the process to bring their first credit union into the partnership. We think that's a significant step forward.And finally, last but not least in Triad, they've had a successful collaboration with Service Finance. They will be duping out parts of their back office and moving it to Jacksonville so that they can drive further efficiencies from Service Finance's paperless back office.And then finally, the launch of the Floorplan, as you know, which is a very, very modest use of our capital but is driving our core business of originating and managing assets on behalf of U.S. banks and credit unions.Finally, on Page 10, I want to highlight the alignment between management and shareholders, that 11% of this company on a fully diluted basis is owned by management and directors. We think that's a significant hallmark. We are aligned; we do listen to our shareholders as we move forward.On Page 11 I'd like to chat a bit about the operating highlights from the core business service components as well as the legacy business. Turning to Page 13, I want to talk about the phenomenal results coming out of our partners, Mark Berch, Ian and Eric Berch as well as Steve Miner, and I know I'm missing many names in their Boca Raton head office. It is an exceptional business. We saw originations, new loans, increase 79% over Q1 of '17. That includes additional solar programs originating on behalf of our bank partners. EBITDA was just a snick under $9 million, which is up 66%. Everything is on track, as I mentioned earlier. Some of the new channel assets have lower yields but substantial income on management as we build the management revenue book. Operating expenses were a little elevated during the quarter as we experienced temporary expenses for the significant rollout of these new retail programs. I do want to reiterate our 2018 guidance for this business. On Page 14 shows the originations at $242 million for the quarter. I won't get into Q2 and Q4, but the following 3 quarters look exceptionally strong. Jim?
Thank you, Steve. If I can turn you to Slide 15, I'd like to talk to you about our manufacturing housing vertical, which initiated with the closing of Triad Financial Services at the end of the year. Triad funded originations of $94 million in the quarter, which remains on pace for our full-year origination guidance of $530 million. Originations that were funded in the first quarter were impacted by the short-term -- I repeat, short-term -- industry impact from the Federal Emergency Management Agency, called FEMA, absorbing industry capacity to assist with the recovery of recent Hurricanes Harvey and Irma. The Defense Protection Act allows the organization priority for manufacturers' shipments to assist with recoveries. As a result, Triad finished the quarter with $22 million of fully documented, committed contractual loans awaiting delivery. This is about double their historical average. This temporary impact has now passed and the backlog will add to originations in the following months as it normalizes.Despite this, Triad's national presence and flexibility to originate both super prime loans and provide servicing for partners helps provide stability to their business. We remain focused on implementing plans to further increase the growth profile such as the recently launched Floorplan program. The on-balance-sheet Floorplan program was successfully launched a few months ago in January. Triad has already signed up 77 dealers and continues to receive applications. We closed the quarter with a balance of $12 million and saw continued growth through April. We remain highly confident in realizing our year-end target of $65 million. These fundings also contribute to increased originations.Additionally, Triad is also benefiting from increased penetration by providing full service for the outstanding loans. We've already seen an improvement to 27% from our last update of 24% of outstanding loans, and Don and team will continue to treat this as a high focus within their organization. Continued improvement with additional stable, fee-generating income going forward. The combination of all these efforts has resulted in a very strong April in which there was significant pretax operating income generated in the month, approximately 50% higher than April of 2017. So as mentioned, the backlog is beginning to loosen up, shipments are increasing and we in turn remain highly confident that Triad will achieve its full-year guidance.If I can now turn you to the 2 of our legacy businesses, rail and aviation, I'll start with Slide 18 dealing with the rail vertical update. We continue to be focused on the operations of our rail business while optimizing portfolio quality through disciplined origination and opportunistic syndication activity. Originations of $13 million in the quarter were comprised entirely of freight cars as we continue to transition the rail portfolio away from tank cars, consistent with our strategy and with recent quarters. At this time we don't expect any origination volume during the second quarter and we anticipate some modest growth in the second half of the year.No syndication income was realized in the first quarter per plan and in line with expectations, and we should expect some modest syndication activity for the second quarter that will generate additional income.The portfolio income and operating expenses were in line with the previous quarter, and the lower yields are primarily the result of our 2017 railcar dispositions. That being said, and I do repeat from prior quarters, these railcars dispositions allowed us to de-risk our rail portfolio by shifting the balance of our portfolio from higher-risk, higher-yielding tank cars to lower-yielding freight cars.Although the challenging operating environment in the North American railcar market persists, we've seen fundamentals have trended positively over the last several quarters, driven by rising carloads and momentum in industrial production, lower railcar velocity and a reduction in OEM backlogs. The number of railcars in storage across the entire North American fleet is currently at a 3-year low as excess capacity continues to be absorbed by the market and asset activities improve.If I turn you to Slide 19, I want to give a brief update on aviation. Consistent with prior quarters, there was no originations during the quarter. The wind-down of the aviation book remains on target, and we are confident that we will meet our previously stated 2018 year-end target of CAD 500 million in assets. We experienced an increase in inventory in the first quarter due solely to an end-of-lease return of a single fixed-wing aircraft. I'm happy to report that we are in the process of selling that aircraft and will have that completed in the second quarter.I will now turn the call over to Grier.
Thanks, Jim. So turning to Page 21 and first looking at the Q1 consolidated operating highlights, originations for the quarter were $349 million versus $249 million in the prior quarter, reflecting a full quarter of results from our manufactured housing segment and higher originations from our home improvement segment. Adjusted EPS was $0.02 including the results from our discontinued C&V business sold at the end of January and $0.01 exclusive, both in line with our guidance. Book value of $3.58 per share was in line with $3.56 per share in the prior quarter.Turning to Page 22, we have provided a summary of our balance sheet. Total assets were down versus prior quarter as a result of the C&V business divestiture and accordingly, our leverage declined as we used proceeds to delever the balance sheet. A 4.5% increase in managed assets to approximately $3.2 billion is the result of home improvement and manufactured housing originations in Q1. Shareholders' equity has declined as a result of share repurchases made during the quarter under our normal course issuer bid of approximately CAD 58 million. Moving to the income statement on Page 23, origination and servicing income were up versus prior quarter due to the first full quarter of manufactured housing results. Interest income and net rental revenue, which is primarily from our rail and aviation business, was consistent with prior quarter. As Jim mentioned, other revenue was down due to lower syndications in our rail segment. Operating expenses were higher, primarily as a result of the first quarter of our manufactured housing operations.Moving to Page 24, we've provided a breakdown of our operating costs similar to prior quarter. In addition to comments already made, corporate operating expenses remain elevated as a result of M&A activity, and we anticipate these costs will decline beginning in Q3 when we wind down the M&A process, which was reflected in our original guidance. As in prior quarter, we have shown a base corporate line which is representative of ongoing corporate costs.Turning to Page 25, we have produced a waterfall going from our current corporate expense run rate of $7.5 million in Q1 to $6.25 million in Q3 2018 through the elimination of M&A-associated costs and reductions in executive compensation and SG&A costs, including a 20% reduction in CEO compensation, which has been approved by our Board. Consistent with what we communicated with our Q4 results, we believe our ongoing corporate cost run rate to be in the low $20 million range.In addition, we are also committing to reduce the size of our senior credit line from $2.2 billion to $1.5 billion by the end of the third quarter, resulting in a reduction in standby fees of approximately $2.4 million on an annualized basis.Now I'll pass it back to Jim to speak about our newly announced partnership.
Maybe before Jim speaks about the Kessler Group, I'd like to add a few introductory comments if I can. This marks my 32nd year in financial services. I'm definitely the oldest person in the room, and I want to -- in that 32 years, I've never encountered a company like Kessler Group. And I know I said that when it came to Service Finance and Triad, but Kessler is of that caliber. Kessler Group Founder, Chairman and CEO is the visionary Howard Kessler that if not a household name to many, but it is in the U.S. financial services community, particularly in the bank community and the payment network community. Howard was the creator of the Affinity card, which was launched through MBNA. It has gone on to even further successes. And we know that Howard Kessler and his team had many choices to pick a partner in growing this business, and I want to be very clear that this is not a sale of the business, but a partnership in which we've invested capital in the business and are looking to bring elements of the business, like the Canadian market and resources and infrastructure. But we're happy that -- very happy that Howard picked us as that partner, and we look forward to growing the business with Howard and Scott Shaw and the other members of senior management, and particularly their customers. Jim?
Thank you, Steve. I echo that. I had the privilege of being with the Kessler people, really, the last several months, and this is a very hard-working, hospitable, very driven and focused organization, so we're happy to be a part of that through our strategic investment.If you look at Page 28, Steve's already described that we've entered into a definitive agreement to make a strategic investment in the Kessler Group. Closing is expected to occur by the end of the second quarter. Our transaction, this transaction doesn't result in the need for many regulatory approvals, unlike other transactions, so we think the end of the second quarter is a proper target that we're all now working hard to achieve. We'll get into some highlights later, but the transaction's going to be immediately accretive to our adjusted EPS and our ROE. Much like prior deals, we've set up a management incentive plan to make sure that we are fully aligned with our partners at Kessler as we grow together the business in the years and decades to come.If I turn to Page 30 of the deck, I just wanted to provide a few highlights. In our minds, the Kessler Group really is a one-of-a-kind and unbelievably unique industry leader that has essentially shaped and transformed the payments industry for almost 4 decades. Howard Kessler's pioneered co-branded credits and launched by launching the first Affinity credit card with MBNA. That program has in turn resulted in the sale several years later to Bank of America for $35 billion. So for us, investing in a company that we believe is the premier manager, adviser, and structuring partner to credit card issuers, banks, credit unions and payment networks makes us super excited.If I could turn to page -- the next page -- I think it's important to note that the Kessler Group is not an investment bank; it's not a consultant. What it is, is a premier business services platform that was created and established and continues to be successful based on its deep relationships that drive very long-term annuity contracts based upon value-added managing, advising and structuring consumer credit card portfolios. It's a very trusted relationship that spans across many customers I will get into in just a second.I think the other unique feature of the company is that if you look across the board through its executives and employees, there's tremendous industry experience and very long-term tenure at Kessler. So once a person starts, it's a very long-term relationship there. So the business itself, for people to know, is situated in Boston and it's approximately 80 people across the board.I won't spend too much time on the next slide. It's just a chronology of the history of the Kessler Group and the visionary behind Howard Kessler's dream over 4 decades ago. And under his leadership, the Kessler Group has become, again, the leading manager, adviser and structuring partner within the U.S. financial industry. This is an unparalleled business model, from our perspective, that has spanned over 4 decades.If I turn to the next page, Slide 33, again, we were super thrilled and cannot say enough about the exceptional team that has been established. We've talked about Mr. Kessler's role as the Founder, Chairman and Chief Executive of the company, Scott Shaw, assuming the role of President. But this organization goes extremely deep across the entire organization, and we're extremely thrilled to be partnering up with this exceptional team.If I turn to Page 34, I just wanted to give you kind of a snapshot of the typical customers. Obviously, we have restrictions on names, but we thought we'd bucket the customers into a few classes. If you think about the largest banks in the U.S. by assets, Kessler clients represent half of the top 12 banks. If you look regionally, which we do across our business here and our other businesses, they occupy -- clients -- almost at the same 50%. And if you look to the right and you think about the top U.S. credit card issuers represented by balances, Kessler has represented these clients, in some cases for decades, about 2/3 of the representation of the top 15%. So we think that this is an outstanding slide and wanted to just give the people on the call kind of a view into their client base.35, if I just spend 1 second on, it's another glimpse into the counterparties and the customers. I think it's safe to say that the Kessler Group's clients are predominantly large, federally regulated financial institutions with very strong investment-grade ratings.Page 36, Steve touched on this a little bit, but we obviously enter into these partnerships looking to bring value and also looking to diverse value contributions to our partnership in other companies. So early days in the transaction, but we've already had Kessler customers referred over to Service Finance and to Triad for opportunities to become funded partners with our other portfolio companies, and that's already underway with some initial traction, so we're very happy about that. If you think we've just announced the transaction today, in the spirit of partnership, we've already been talking a lot about these potential opportunities.And the other way we've been looking to, as Steve mentioned, help the Kessler Group go and add some of our strengths with our Canadian lenders has resulted in success already with one of our Canadian financial institution partners being introduced and signing up to some Kessler Group products around the risk-based marketing piece that I'll explain in a minute. So early days, but we think this is a good snapshot of how we look at opportunities, and we're already starting to see a semblance of that.If I turn to Page 38, I just wanted to spend a couple of seconds discussing the business protocols. This is illustrative for purposes of everyone on the call. I think it's safe to say that these business units often work in a collegial fashion, and the Kessler Group personnel do not kind of look at these as fixed silos in which they stop.So if I think about what they do, these business units work together to develop end-to-end solutions for banking clients. If I could take just a quick example of each one, starting from the left, if you think about strategic partnerships, the Kessler Group's been the industry leader in managing, advising and structuring a multitude of partnership programs. In fact, if you go to their website, much like we have on this page, they've established over 6,000 such partnership programs through the team over the last 30-plus years. So that's quite impressive for the organization.If you think about these programs also, they tend to be relationships and contracts that tend to be long-term in nature, long-term annuity-type contracts under which Kessler provides services and establishes introductions and continual management of programs over life cycles. So this is obviously a very big part of their business and will continue to do so on a go-forward basis.If you think about the portfolio advisory business, this is where Kessler kind of provides experience in advising partners, their partners in negotiating transactions -- credit card portfolio transactions, for example. And if you look at Page 40, you'll see that they have negotiated over 500 such credit card portfolio transactions.In these buckets, these are a multitude of services. We tried to list some examples of some advisory-type services that they provide, some transactional services and some restructuring services, so you can see that all laid out on Page 40.If you turn to Page 41, risk-based marketing is one of the newer areas for the company. This is where the Kessler Group offers risk-based marketing solutions for a range of products. This is not just credit card based. This is everything from credit cards, helping a banking partner get deeper penetration on marketing programs for credit cards, HELOCs, DDA accounts. It often starts with one particular product, but given the success and the experience and the dedication and the drive of the Kessler team and the banking partner realizing that with them as a partner, their marketing programs become much more effective for every dollar spent, it often starts with one product, then continues into a multitude of other products. So we look at this, as does Kessler, as a big growth area for the company on a go-forward basis. That group is led by Scott Shaw, and I think they've done a phenomenal job growing that business over the last decade or so, so we're extremely excited about what the future offers for this particular area.So with that, I will turn it back to Steve maybe to talk about the strategic fit and some other areas.
Thanks, Jim. Let me turn to Slide 44. It's, I think, safe to say that ECN, through its partnerships with Kessler Group, Service Finance and Triad, is now the leading provider of management, advisory and structuring services for the U.S. and now Canadian institutions. In fact, Page 45 probably does a better job in terms of illustrating that. If you go back to February 2016, our customers were shippers who wanted to lease a freight car or a tank car, construction firms who wanted a front-end loader -- a very traditional commercial finance company making money by producing net interest margin, managing expenses, managing credit losses and producing profit. Today, that's switched around. As I mentioned earlier, 80% of our revenue now comes from managing, advising and structuring on behalf of over 90 institutions. Our business now is driven by fee-based income. The most important part of the fee-based income, the substantial majority has an annuity turn to it so we can sleep at night.If you look to the assets that we advise on, there is a commonality and there is a strategic focus. It is on prime consumer credit assets in the credit card unsecured consumer loan space and the secured loan space in the U.S. and now in the Canadian space. We'd like to be able to walk into that head of the retail bank and offer that individual solutions for their portfolio mix.I turn you to Page 46, some of the financial highlights. I think it's safe to say that we've taken, since 2016 to this evening, we have a business with improved growth, capital-light model, and higher returns. We think this is a pretty substantial accomplishment. I want to take a moment and thank the entire team and the employees and the directors and the shareholders of ECN. This has not been an easy process to transition $6 billion of assets in the public eye, but I wouldn't say mission accomplished, but we're there and I want to just note for the record, again, my thanks to all the effort, the commitment, the lost nights and time away from your families.If I turn to Page 47, I've already highlighted this slide on Slide 9 earlier, so I won't revisit it. I just want to leave you with the strong impression that we are not a passive holding company, that this entire team works every day and every night on how do we introduce a bank, one of our banks at ECN, into the Service Finance Group? How do we help Don open the door with Mark into the credit union market? How do we help Howard and Scott call upon Canadian banks and sell their product? It's a very strategic push to cross-market all of these businesses.On Page 48 I just want to take you to the bottom box again, which is 80% of our revenue coming from 90-plus U.S. and now Canadian institutions, and we hope to grow the mandate, working within that prime consumer credit space on behalf of our clients.On Page 49, just to summarize on Kessler, and Jim did a much better job than myself, but it is the trusted manager, adviser and structuring partner to credit card issuers, banks, credit unions and payment networks for almost 4 decades. If you think about what Kessler does, if a bank this evening decides it's going to trade its credit card portfolio, Kessler will help structure that business for a very modest fee. What they'll do for the bank purchasing the portfolio is actually come in and manage that book for them -- co-manage it, produce profitability. They will tie their fees to performance-based improvements, success fees on that portfolio improving, and hence the 75% to 80% of their revenue that is recurring.Asset-like model -- sorry, an equity-like model like the other 2 businesses, strong fee income and synergies growing between it. The rating agencies have deemed this transaction. We expect confirmation of our investment-grade rating, and we think we're on our way to closing out the strategic chapter. Grier?
Thanks, Steve. Turning to Page 51, we've provided projections for the Kessler business through 2019. We anticipate EBITDA of $45 million in 2018, growing by over 20% year-over-year to $55 million in 2019. Adjusted return on average equity in the business is expected to be in the midteens, growing from 13.7% in 2018 to 15.2% in 2019. Turning to Page 53, a transaction overview, ECN is investing $221 million in Kessler Group and we expect this transaction to close in the second quarter, as Jim had already mentioned. The investment is being made at a 6.1x 2018 EBITDA multiple and will be immediately accretive to ECN earnings and return on equity.Looking at Page 54, we have provided the impact of this investment on our EPS. We expect this transaction to contribute $0.03 to our EPS in 2018 versus our original guidance, representing 23% accretion. And including the impact of the SIB, this equates to 25% overall accretion from original guidance. In 2019 we are expecting the transaction to contribute $0.07 to our EPS, and versus consensus estimates represents 32% accretion to our 2019 EPS.Now I'll pass it to John, who will gave an update on our intrinsic value view.
Thanks, Grier. Page 55. I've put this slide out before. It's just a view on intrinsic value as we try to think about it. So this side captures our view on valuation of the transformation of ECN from an asset-based lender to a business services provider with scalable capital-light platforms, expressed by applying a business services multiple to the 2018 earnings we expect from our core business and adding the net book value applied to our legacy operations. You can see the result of this slide, or our view of intrinsic value is substantially higher than the current share price.On the last page we have a list of business services comparables, which you're free to take a look at. Obviously, they trade at pretty high multiples as well. With that, operator, we can open the call for questions.
[Operator Instructions] The first question comes from Vincent Caintic with Stephens.
So 2 questions, both on Kessler. I was just wondering if you can share your thoughts about the view on Kessler's growth and maybe the pipeline they have for some of their activities. So we've been seeing recently a lot of demand for card growth by banks, a lot of the changing of hands of [indiscernible] and credit cards. Just looking at the website, Kessler was involved with, I think, Capital One's and Cabela's changing of hands. So when we hear about some of the other guys, like there's been copious turnover at American Express under several upcoming renewals from the likes of Synchrony and Alliance Data, I'm just kind of wondering, if you think about that card backdrop, where should we see Kessler growing from here for the pipeline?
The reason why we put up the business kind of verticals page is to show that this is not a kind of one-trick pony type company. Between the strategic advisory work and the portfolio advisory work, a lot of those relationships run deep across different partner programs, so they're not reliant on any kind of one particular customer or one particular product for the success of the company.I think Howard Kessler and team have done a phenomenal job branching across kind of a multitude of different product sets, and I think it goes without saying that to the extent that there are kind of credit card transactions in the U.S. marketplace, given the relationships that they've established, they're front and center in virtually every one.If you think about some of the growth, some of the additional growth over and above the credit card programs, I think the capital business that they refer to as marketing is also a bigger area. As you know and read about, there's a lot of banking customers that are looking to grow their product sets, and it could start from a credit card program trying to get further penetration in with credit cards, trying to get further penetration in with HELOCs, trying to get further penetration in with DDA accounts. And I think what they've done a great job on is deploying capital, providing marketing services and expanding the scope of product sets to that list that we've laid out for you in the deck.So I think if you think about the growth going forward, I think you'll continue to see growth on the partnership side of the business because that's been front and foremost the key tenet of the business for the past 4-plus decades. The portfolio advisory will always be there because, as you know, there's always a multitude of transactions that occur. And we think with the addition of the marketing capital business as a good growth vehicle that the company's well situated for growth on a forward basis.
If I can, Vincent, just to add to Jim's comment, this is just not a credit card story, that Kessler Group does offer a series of prime credit services to banks. As we mentioned in the deck, there's $1 billion of unsecured consumer loans that they co-manage on behalf of banks, and hence the interest by their banks to come into the Service Finance relationship. Kessler is also an adviser to the U.S. Payment Network under contract.And as you know -- I know you follow this space -- U.S credit cards have returned to the pre-recession level. There is a transition underway from branded, from co-branded to branded by some of the larger institutions, but as that transition occurs, one of the transactions you mentioned, there's a multi-hundred-billion-dollar opportunity to move co-branded credit cards to some of the super-regionals and others. And I think it's safe to assume that Kessler Group is in the middle of all those transactions.
Okay, great, that's very helpful color. And secondly, and maybe this is just taking a step back, when we think about the capital structure in ECN, firstly, does Kessler need more capital to grow in any particular capital structure? And when I think about ECN specifically, as you're becoming more of a business services company, it doesn't seem like you really need a balance sheet. So I'm kind of wondering what sort of excess capital that you have and what kind of funding size.And part of that, when we look at your results, just the 2 businesses you have already posted $80 million of EBITDA. Now maybe annualize that to $320 million plus the $39 million that Kessler posted last year -- it's supposedly $360 million of EBITDA, usually you get that at 10x multiple without a balance sheet and on equity. And we're thinking we're seeing your stock trade at $1.2 billion market cap, so I'm just kind of wondering how to think about your capital structure going forward. Thanks.
Let me answer the part about capital for the business, and I'll turn it over to Grier to the more macro question. So on the capital side, on their marketing side of their business, currently they provide capital to fund marketing initiatives on behalf of banks that have a marketing program, and they're paid kind of under a multiyear, performance-based fee arrangement. They have been using their own capital for those purposes.We, as one of our value contributions in connection with our strategic investment into the company, have offered to use modest kind of capital on our end to further ramp the capital business beyond their current capital needs. So that is a growth area for the business. We have stood behind it, we believe in it and we said that we would use kind of modest capital to help support more expansive ramp-up growth for the capital business under Scott Shaw. So we have committed to do that on the -- that's part of the deal. I'll turn it over to Grier for the other part of your question, Vincent.
Yes, so as we look at excess capital, I think earlier in the deck we talked about extracting $775 million from our divestitures. And if you look at what we've done, the combination of the 3 investments and our share buyback programs, we have reinvested this capital. So I'd say in terms of excess capital today, we've got appropriate capital to run these businesses, invest and help them grow. I wouldn't say we have excess capital at this point.Now that said, we'll continue to work with these legacy businesses. As Steve said, we're kind of 65% through this process. We'll continue to go through that and we'll continue with our disciplined approach to capital allocation, and we'll look at everything in front of us, whether it be organic or acquisitions or returning capital to shareholders.
I think, Vincent, just a little more color with respect to the credit capacity or the debt lines, Grier's announced a step-down from $2.2 billion to $1.5 billion. We'll look at that once we close the Kessler deal. We have a commitment from us to go to $1.5 billion. That doesn't mean it couldn't be $1.2 billion or $1.1 billion or $1.3 billion, but that's the first step.The second part with respect to equity, we still have significant equity within the rail and the aviation book, and you can assume that notwithstanding this transition process, there's been an entire another team, partners like Elegis who have been focused on realizing on that equity. So as we build the EBITDA business, you'll see further reduction of those on-balance-sheet assets.
Great, that's helpful. And as your capital structure looks more like a business services company, I look forward to giving you a multiple on EBITDA like the other business services guys. Thanks very much.
Our next question is from Geoffrey Kwan with RBC Capital Markets. Please go ahead.
I just was looking at Slide 53. You mentioned it's an 80% stake that you're taking. But then it makes reference to 10% for sale to senior management. Can you clarify -- does that mean that you could potentially go down to 70%? And then similarly, is the remaining 20% going to be retained by Mr. Kessler, then?
Our transactions, so our transaction impact show us 70% holding. That 10% that we have funded that with our approval -- more importantly, Howard's approval -- will be allocated to staff up to 10% over a period of time. But the modeling we show you show a 70% position in the forecast and the transaction in that.
Okay. On the aviation side, you talked about trimming the portfolio a little bit. Is there anything realistically that you can do to be able to exit out of that vertical quicker, or is it truly going to be really having to wait for the next, call it year and a half, to be out of the portfolio?
Geoff, we have gone from $1.1 billion down to a forecast of about $400 million and change by the end of this year, so I think that we've done a pretty heroic effort at reduction. We continue to look at opportunities to sell portfolios. As you and I have talked about in the past, it is important that as we build EBITDA that we can come off, and then the income in the short term is still dependent upon that NIM income to a degree. So we'll continue to look at opportunities as we continue to harvest that book.
Okay, and just the last question I had was as you eventually exit the aviation, if you found a business services kind of in the consumer space type acquisition, one where there might be a balance sheet involved, or even if it's kind of consumer finance, is that an acquisition or investment you'd consider doing and potentially divest of the rail business? In other words, is it more important to simplify the business to be more consumer focused, or is it the tax benefits from the rail is more important?
The tax benefits are nice, but they're not as important, Geoff. We're not going to compete with our 90-plus customers who look for us to bring them assets and management on behalf. We're not going in competition with those banks, so we are not going to buy a consumer finance business with a balance sheet, even if it's prime or near prime. It isn't going to happen. Banks have to feel comfortable that we are the trusted adviser and our only interest is in their credit card, unsecured and secured loan books. So it simply isn't going to happen. We can't play both roles of being an agent and a principal. We'll be in conflict.
And so is there a way for you to be able to keep the credit rating and not necessarily be in the rail business and be kind of more consumer focused?
Absolutely. You can have a 3x or 4x leverage on EBITDA going forward and still maintain an investment-grade rating, which is what we're working towards.
[Operator Instructions.] Our next question is from Brenna Phelan with Raymond James. Please go ahead.
So I wanted to start with Kessler. Can you just break down the revenue growth rates implicit in the forecast by the 4 different verticals? What's -- are these newer businesses growing more quickly? Where's that growth coming from?
We don't want to break down the growth between the verticals. When Kessler looks at their business and looks at their opportunities, they look at it holistically across their entire business. And in any given year, any one of these verticals can be performing better than others. So they've done this similar model over the last 40 years. Their newer entry point into capital, on a percentage basis, will grow the quickest because it's the smallest. But I think they look at all areas as growth vehicles, so I'll stop there with that answer.
So are some customers utilizing services across all 4 verticals? Is there cross-sell opportunity?
Yes, again, for them it's usually a life cycle on a relationship. Sometimes they'll be involved with a bank on a partnership, co-branded card type program that runs through its term and they'll help with the origination and development of that, continue to help them oversee and manage it during the life cycle and kind of roll out through the other end on a divestiture opportunity for that same card program, as an example. So when we set up these units, Brenna, we kind of do it more for explanation purposes. It's not really a model internally that they kind of stop in one bucket before they move to the next, if that makes any sense. Their key avenue is to make sure that their end customer, the bank who wants a multitude of these services, is serviced properly across different product sets, different cycles with different services along the way. So that's the real value proposition for this company and why, kind of as a manager and trusted partner to these institutions, it flows through various verticals.
Okay, and an estimate of acquisition costs coming on the close of this one?
I think we'll wait until Q2 to let all the dust settle. This is pretty fresh, so we'll be back to you after Q2 with that information.
Okay. Switching gears to Service Finance, so GreenSky looking like they're going to go public pretty soon. Does a large competitor going public in a likely very high-profile IPO impact the competitiveness of going with Service Finance? Are you finding potential bids are talking about that? Anything to report there?
Yes, it's obviously, as you noted, that they've filed their S-1, and it's in the marketplace, and I think we would expect them to be public here in the near term. If you have a company that does home improvement finance or on behalf of banks -- the model is the same as Service Finance -- you'll probably want to do it when you're in a seasonally strong quarter, which would be Q2, but who knows their exact timetable? We have been receiving questions on behalf of it, though I never -- I always wish competitors well, and I hope they have a successful IPO. Lots of talk on valuation, which is significantly higher than ours. We'll wait and see.I would comment that our model is a little more focused in that we just do home improvement. As you read through the S-1 for GreenSky, you'll see that they do healthcare financing, online retailing and some other stuff. That's not a model. Those are great areas for GreenSky, but not for us. Mark and his team are experiencing very strong growth in the core home improvement market, and we're going to stay there.
Okay, and solar originations in the quarter? Can you give an estimate of how much they contributed to total originations? And then news out yesterday, California is now requiring many new homes to do solar panels. Is this -- did this all of a sudden get growth year for you guys?
Yes, it's an interesting observation, and you're spot on. Our originations in 2017 in solar were approximately 12%. This year we'll be tracking a little under 20%, so we have had growth. We got one bank partner that is putting their hand up for more solar product, so we are doing that. Our caveat in solar is that we're not willing to degradate our credit underwriting standards, that these are longer-duration loans, so higher FICOs are appropriate. The average FICO on a solar loan is 780 versus our average book of 760.So to your point on the regulatory change in the solar market is good for us, particularly in California, I think the other comment on regulatory change I would make is that PACE, which is a loan product that was offered in various states is a product that has been -- has received a fair amount of press. We offer a consumer secured and unsecured loan product, so we're happy that PACE has started to wane a bit. And we've seen an impact in our core loan book, not the PACE book.
Okay, so just to make sure I got that. So 12% of your total originations are solar, but what percentage is with a bank partner?
Well, they're all -- if you looked at the 12% in 2017, all of our banks bought solar. There wasn't anyone that didn't buy solar. We had a bank put their hand up in '17, saying, "We would like more solar, just solar," in addition to their regular commitment. So that's what we've been -- the reason we've gone from 12% to 18% has been to fill that one bank's order.
Okay, so that delta.
Yes.
And then the last one for me, manufactured housing. You've spoken before a little bit about some tuck-in M&A portfolio opportunities. Anything on the radar there still?
We did a small tuck-in in the Floorplan side, Brenna, in the first quarter, and we continue to look for additional portfolio acquisitions. So we think that's going to be part of our strategy going forward, and maybe what we'll do is as some of them come in within the quarters, we'll just provide an update on the quarterly calls about the composition of any of those that occur along the way, Brenna. If that's something that you guys want, we can certainly do that.
Okay, thanks a lot.
Our next question is from Jaeme Gloyn with National Bank Financial. Please go ahead.
First question just around the competitive landscape for Kessler. Can you talk about who they run into on a regular basis in any one of these verticals? What is the competitive -- do they have a significant market share? Just some commentary around that, please?
Yes, I think on the -- certainly on the strategic partnership piece of it, they have very long-term relationships, and kind of run like a -- we were going to -- it was important for us to say, Jaeme, unlike the investment banking model or consulting model, they approach the marketplace and their partners and the deals very differently, which makes them actually quite unique. So if you think about the portfolio advisory business, obviously, there's local banks and investment banks and others that represent certain parties on certain portfolio transactions, for example.But unlike those, there really isn't one direct competitor that we would say they see a lot of on transactions. And the basis for that, again, is being the trusted kind of manager, adviser and structuring services partner that looks through the life cycles of these partnerships is what makes their relationship very unique. And if you talk to them, for example, on a transaction that comes up, they don't help the parties bid on RFPs or things of that nature. What they do is work for the transaction to make sure that on a, for example, disposition of a credit card portfolio balance, given their expertise and their knowledge within the marketplace, they're aware, typically, of transactions that need to occur. And they insert themselves in a way that benefits the buyers and the sellers on the transactions to get the right transactions, to get the right assets moving from the right party to the right counterparty in a way that's efficient for both of them and makes them both feel good.So long story short, I can't point you to kind of one direct competitor. We think, like our other businesses and how unique they are, it's tough to say there's a multitude of direct competitors. And that's exactly what's resulted in them actually being so successful over the 4-plus decades that they've been in business.
I think, Jaeme, just to share, I think, the numbers that Jim shared with you on customers by large bank, by regional bank and credit card issuers, we can look at the percentage that are Kessler clients, and it's pretty significant. Most of these relationships are over 20 years and in fact, a couple are over 30 years that, once you become a trusted adviser as Kessler Group has become, you tend to stay in that position.
Okay, and just following on the Kessler here, it sounds like it's a pretty solid business, significant barriers, good relationships. And I look at your purchase multiple on it at 5x to 6x forward EBITDA versus some of the comps that you've provided on Slide 56. Why is it so cheap?
Well, Howard Kessler wasn't selling to me. He wanted capital to -- yes, he sold some shares, but he really wanted capital to grow the business. So we have committed to grow the business in Canada. We've put up a modest amount of capital to grow the risk-based funding program. Howard has an ability to participate in that future growth as an equity holder, which will be very significant to him. So it wasn't, quote-unquote, a sale of 100% interest.
Right, okay. And then maybe just shifting back to service, then, any update on new relationships in the retail network such as Abbey Carpet or other new manufacturing relationship wins? What can you tell me on the service, growth in the service side?
Yes, that's a good question. We are aggressively rolling out Abbey Carpet. We're now in 100 doors. The rollout takes time because you're training all the salespeople in the door to use the app and to book. We're getting good results, but it is a nationwide rollout that does cost money. We have signed an additional new vendor. We're not able to release that name to you, at least today, but we have got another partner in that channel. I think that if you look at the originations quarter-over-quarter, Q1 of '17 versus Q1 of '18, and it reflects the quality of that growth. We're extremely happy with the growth of the business, and we've been able to look into the approvals. The approvals are what we get fundings, or originations. The approvals are strong and at record highs. So I think you can expect the same in quarters to come.
The next question is from Tom MacKinnon with BMO. Please go ahead.
A couple of questions here. In looking at the Kessler business model, what would be the best way of just kind of modeling it? Do we just look at -- is there sort of a revenue per AUA that we look at and then work with the EBITDA margin that you provided?
I think, Tom, you have to look to the historical revenue, the margins that have been given to you and the assets under management that I refer. Each contract is unique in terms of the basis points they retain as performance fees. It really is the menu that you select as a bank selling -- or, sorry -- a bank purchasing a portfolio, so I can't give you a specific basis point per managed portfolio. It's not an off-the-shelf menu. It's very deep and very comprehensive and very straight.
I don't know if you've given -- have you given us revenue projections with this, or has it just been net income and EBITDA?
Yes, it's just -- we've just given operating income and EBITDA, Tom.
So I'm not sure how we can get -- are we sort of just taking your word for this, or is there a way we can -- do you have asset growth projections here in revenue on this? Or how do we -- how can we sort of back-check what you've got here?
I guess if you look at Page 38, there is some information. We haven't provided it on a go-forward basis, but there's maybe some basis in the revenue numbers that are on that page.
We could provide a little color, Tom, on the historical revenue growth.
Okay, okay. And talk to me, what could go wrong with this model?
Well, the model is -- it's a good question on risk. The model is dependent upon the individuals. There are 80 professionals, 80-plus professionals, in Kessler Group who go up and down the elevator every day. Those individuals need to be committed to the business. The commitment in Kessler's case are long-term incentive arrangements. We've reinforced those with a program that looks a lot like Service Finance and Triad, where you'll get a participation in the pool above a certain measure in ROE, similar metrics as the other 2 businesses. And then, Tom, I think the important point here is that 10% of equity set aside by us and Howard for employees will be hugely important because that will bind the top 10 to 15 people into the company on a long-term basis.The other mitigant here, Tom, is that the revenue flow here is some 8 years under contract. We may lose 1 or 2 people; that has not been the case historically at Kessler. But if that person will walk out the door, the revenue remains with Kessler Group.
So the contracts are for credit card AUA, and they're several years' contracts?
Correct. I'll use -- Jim used an example where Bank A is selling a portfolio today. The Kessler team gets a modest fee for structuring and executing that sale, but the bank purchasing it will typically enter into an 8-year-plus relationship to have Kessler manage that portfolio, and management fees are a function of performance, i.e., value improvement in that underlying book.
Okay. Now the question with respect to what you deem to be equity firepower. I think before you've talked about after the SIB it might have been CAD 460 million, so maybe in the area of, say, $360 million. You've spent $221 million now, so are we kind of in the $100 million to $150 million equity firepower? Or do you need to -- or has this capital now been allocated to businesses?
The best way to think about it, I think, and again, going back to that $775 million of capital that was extracted from divestiture of those businesses, that's been entirely redeployed. The number that you're talking about, you're right, that was a Canadian number that we gave. So if you convert it to U.S. and then subtract this investment and factor in the SIB, you're back to a level not too far off what you described. And this is capital that we'll use to run and organically grow these businesses.
Okay. And then when you talk about intrinsic value in that intrinsic value slide, I think now we're putting a 15 multiple on Slide 55? You're putting a 15 multiple on these businesses? I think before, we were putting 12. What's driving this higher multiple for Service Finance and Triad?
I think, Tom, that you're going to see a business come to the market, as the Raymond James analyst foreshadowed, you're going to see a business come to market, GreenSky, with a multiple substantially higher than 15. And I'm going to suggest to you that the Service Finance model is a better model than that of GreenSky.
Okay, so you're going by the GreenSky comp that's significantly higher and as a result?
And to be fair, Tom, to your point, it hasn't happened yet, right? A lot to see it happen, but we do know the valuations on GreenSky because we have watched private investors like Wellington and TPG and Fifth Third Bank buy equity at multiples substantially higher than that 15 that we're quoting here for our business.
Okay. And then in the MD&A for the quarter, Page 19, under the corporate segment, now we've got more detail on the corporate segment where there's actually revenue and interest expense. And even before operating expenses, the corporate segment's been losing money. What are these -- what's going on here, and where were these corporate revenue and interest expense items in your previous statements? Because it seems like they've been extracted out now.
Yes, so, Tom, you might recall when we announced the divestiture of the Canadian C&V business, there were some assets that we had classified in that business that were not sold. And so some of that revenue relates to that. And then this would be other small investments that we have at corporate. But the answer really is that the majority of that revenue used to sit in the C&V segment.
Oh, so are these discontinued operations?
Yes, we're talking about a very small number at this point, but other investments. They're not C&V investments, but they were in that category before.
Okay, but in the first quarter of 2018, are they -- what are they? Because these things have been divested.
Yes, Tom, one investment in particular is we had made an investment in a private HVAC business in Canada. It looked like Service Finance. We had made an equity investment in that company and had provided secured financing to it. We have subsequently decided in conversations with the Service Finance team that the growth opportunities in the U.S. are stronger than those in Canada, so that equity investment is in the midst of being sold for a profit.
So in terms of the net financial income of a loss of $3 million in corporate before the operating expenses, should we assume that that's just going to be 0 going forward, now that you've exited it? Or how should we look at that thing going forward?
I think for the -- well, we still have these assets, Tom. So for the immediate future, you can expect that to remain. But at some point, I think we've identified these assets as noncore and not a separate segment. So in the long run, these won't be strategic investments for the company.
Yes, because just in the quarter, that wiped out almost all of the Triad earnings, or earnings pretax.
But Tom, you have to realize that Service Finance and Triad have a hugely seasonal year. You're not putting up manufactured housing in the winter. You're not opening up your house to home improvements. So Q2 and Q3 will be substantially higher for Service Finance and Triad based upon the historical cyclicality.
I understand. So we should just sort of model these extra drag in earnings outside of expenses in the corporate segment as just being sort of flat for the rest of the year and then -- you've given us a track record as to how the corporate expenses are going to be going down, but I don't know what to do with this other drag here.
You're talking about other revenue, Tom, still?
Well, I'm talking about $2 million in other revenue and nearly $5 million in other -- in interest expense in corporate.
Yes, Tom, maybe in the interest of time, why don't we -- we can take this offline and have a conversation about that line item. No problem.
There are no questions registered at this time. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.