ECN Capital Corp

TSX:ECN

Earnings Call Transcript 2021-Q1

[Operator]

Welcome to the ECN Capital First Quarter 2021 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]I would now like to turn the meeting over to Mr. John Wimsatt. Please go ahead, Mr. Wimsatt.

[John B. Wimsatt]

Thank you, operator. Good afternoon, everyone. Thank you for participating in our conference call to discuss ECN Capital's first quarter 2021results announced earlier today. Joining us are Steven Hudson, Chief Executive Officer; and Michael Lepore, Chief Financial Officer.A news release summarizing these results was issued this afternoon and the financial statements and MD&A for the 3-month period ended March 31, 2021 have been filed with SEDAR. These documents are available on our website at www.ecncapitalcorp.com. Presentation slides to be referenced during the call are accessible in the webcast as well as in PDF format under the Presentations section of the company's website.Before we 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 will refer you to the cautionary statement 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 includes 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. 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.

[Steven K. Hudson, CEO & Executive Director]

Thank you, John. Good afternoon and welcome to our first quarter call. Turning to Slide 7. We are pleased to report adjusted operating earnings per share of $0.08 per share, which is at the high end of our invest -- guidance provided at our Investor Day. Service finance had a strong first quarter, including Big Box Retailer and all-in-one, which I'll discuss shortly. Approvals in the first quarter were up year-over-year 45%, originations up 28%, and as you see shortly, that trend has continued into the second quarter.We've also launched our partnership with Sam's Club and All-in-One, I'll be speaking to those in a moment.Fully funded in the '21 and '22 and we've been begun discussions on our 2023 commitments. Triad as well had a strong first quarter and has accelerated approvals into March and April, boding well for the second quarter for both businesses. Q1 approvals at Triad were up 15% but accelerated in March and April, Q1 originations up 38% and it continued in April at 55%. Land home is on track. I'll speak to that in a moment.We are fully funded in '21 and '22. We have 5 new funding partners who have joined year-to-date in '21. KG had strong partnership income, marketing services as it returns to growth in the first quarter. The first quarter results were in line with management expectations, with an EBITDA margin of 60%. Strong pipeline continues to drive return to growth in '21.Turning to Slide 8 on guidance. We are reiterating our 2021 adjusted EPS guidance of $0.46 to $0.51 as announced at Investor Day, with a growth of approximately 50% year-over-year. And our first quarter results and early results in the second quarter give us increased confidence in our targets for 2021. We are reiterating our growth for '20 -- our EPS target for 2022 at $0.55 to $0.64. We are, as stated in our Investor Day, will update this guidance on our Q2 call in August. At this point, we will have better visibility on the growth opportunities launched in 2021 like Sam's Club and others.Turning to Slide 10, Service. Adjusted operating income in the quarter were $80 million, up 20% year-over-year. Originations up 28%, managed portfolio up 27%. As I mentioned earlier, fully funded in '21 and '22, discussions underway on '23. Demand for Service Finance and Triad loans has never been higher as a result of liquidity in the financial services system and the performance of our portfolios, which I'll speak to in a second. We continue to experience above average dealer growth in the quarter and year-to-date, including -- and they are by Big Box Retailer All-in-One, an effective take-share and make-share strategies.Turning to Page 11, a slide you've seen before. We'd like to put in the deck, because it shows the consistent origination portfolio and under 12-month look back as well as the servicing book. I think the key illustration here is very effective, take-share and make-sure on March -- take-share and make-share at a March purchase operation.Turning to 12, a little bit on Home Improvement industry. In March, the Home Improvement Research Institute made significant to its revision to its projections from '21 to '24, now expect incremental $254 billion of Home Improvement spending through '24, including $100 billion within the professional contractor segment. While we begin to see post-COVID or the end of the COVID pandemic hopefully, this demand is increasing from homeowners focusing on larger projects that require professional contractors in the home. There was a reluctance by consumers to invite contractors in the home that is now updating.Turning to Page 13, I want to make 2 highlights from those page. I want to make reference to the growing month-over-month increases, which is our increased confidence in the high end of our range for Service and even with COVID adjustment numbers, the approvals are still strong in the high 30s to low 40% range. It's strong across the board, whether it's HVAC, windows and doors and others. As you know, we made a strategic call to exit -- effectively exit solar, we still do some for customers. But that is now becoming such a significant -- it's far less of our business on a go-forward basis.Turning to Page 14, backlog is significant March '21 -- as at March '21, the backlog is up 107% year-over-year across all product segments. This equates to $275 million in originations that are expected to close, that backlog stood at $311 million in April '21.Turning to 15, we're happy to announce our Big Box partnership with Sam's Club that was announced in '21. The image on the right hand side of the page comes off the link that's referenced on the left hand side of the page. Service Finance has entered into an agreement with Sam's Club, to administer a nationwide home improvement service program. There were 2 core distinct parts of that program. Obviously, there is the loan services to service club -- Sam's Club members by Service Finance off their dealers, and as well the marketing and sale provision of home improvement products inside the home. Service Finance will leverage is existing dealer network to fulfill members request for a myriad of home improvements, such as age HVAC, roofing doors, windows and doors, with those doors expected. You can expect the Sam's Club announcement in the near-term.Turning to Page 16, new program update. This quarter saw several large home improvement dealer networks, a continued take-share on behalf of Mark and his team. I want to draw, one which is Daltile. As you know, Daltile is a subsidiary of Mohawk Industries, the world's largest flowing company -- flooring company. It's interesting to note that 1 out of 3 tiles sold in America is a Daltile product. This exclusive partnership with Daltile even give us further confidence in our 2021 projections and Mark and his team continue to hit it out of the park. As well as previously announced programs, the All-In-One is now launched. We're encouraged by the results, early results of this, we'll update you on the August call or at second quarter call. Commercial is launched. We expect, sorry, effectively launched and you expect an update as well on our second quarter call. All of this leads us to a strong sense of confidence in the 2021 originations at the high end of the range.Turning to Slide 17, held-for-trading assets updates. As at the end of the quarter, we had $152 million of assets held for resale. We had an SFY [sic] SFC sale, just after the quarter in early April for $137 million, as you know these are loans that qualify but are sold in bulk to existing partners. We expect those bulk sales to move, to flow arrangements shortly. This lumpiness of sales can create quarter-by-quarter differences and our servicing revenue -- you'll see servicing revenue this quarter was at 1.7% and will return to over 2% in the second quarter, as we earned management fees on these assets that were sold of $152 million. All in all, a great result.Turning to portfolios that we manage on behalf of our partners. We're happy to report 53 basis points in 30 plus delinquencies in March, is the lowest since August '18, that's at the low end of historical ranges. There are immaterial COVID deferrals remaining.19 is a chart you've seen in the past, which continues to show our monthly originations on a year-over-year basis. Turning to the 2021 guidance. As I mentioned earlier, we are confident in our forecast and are now referencing the high end of our range.Turning to Slide 21 on Triad. Triad's adjusted operating income for the quarter was $7.1 million, up almost 30% year-over-year. It's important note that that operating income number includes $1 million of expenses for the land home build, which is now complete. The revenue from that build out will occur in the second, third and fourth quarter.Q1 originations were up 37%. Floorplan was at $127 million and floorplan is on pace for $150 million to $200 million originations in '21. Floorplan plan is a strategic expansion of our product menu. As I mentioned earlier, 5 new bank and credit union partners added in the first quarter.Turning to Page 22, I'd like to highlight 2 things for you, as with service, the continuing improvements in month-over-month, notwithstanding some weather in February that hit Texas and related areas, which the second highlight is obviously the increased confidence in our forecast for Triad as well.Turning to Page 23, Chattel loans. We have Chattel and we have land home loans. Chattel loans were up 125% in the first quarter, docs out is effectively the backlog where someone has committed, has been adjudicated and has signed the document. We are waiting for delivery of the home to the site. These have a 99% historical close rate. The backlog is at 6 months or more, there are really 3 reasons for that backlog, increased demand, reduced staff and manufacturers, many U.S. firms are having to deal with U.S. government paying people to stay home, which is a short-term challenge, and extended supply chains that we're all facing.Turning to 24 on land home. We've had the substantial build out costs, which come through in this quarter of approximately $1 million with revenue in Q2, Q3 and Q4. Then we've implemented Black Knight mortgaging service system, which is the gold standard in the U.S. industry for mortgages. We've also incorporated the origination, pricing and adjudication systems of Freddie and Fannie. We are now approving mortgages land home at $45 million a month, up from $25 million in the fourth quarter of last year. We are highly confident that our forecast of $150 million to $200 million. As I mentioned to you in earlier call, we believe that land home can be as big as the Chattel mortgage business and Triad bodes well for 2022.Docs out are approximately $135 million as at the end of April awaiting delivery. We are on pace for our target of $150 million to $200 million.Turning to 25, assets held for trading. These are bank eligible loans, which are held and sold and periodic sales which are not on flow. This has been moderating down to $50 million. We expect further reductions to come in Q2 and Q3.Like Service Finance on Page 26, the credit trends are very favorable for Triad, 30 plus day delinquencies have returned to a normal rate of 1.6%, net charge-offs are at a cycle low of 20 basis points and there are no COVID deferrals remaining at Triad.Originations on 27 is a month-by-month, year-over-year chart we provided for Service.Turning to the guidance for Triad, originations are projected to grow by 50% at the midpoint. Floorplan at $120 million to $140 million and a midpoint. We feel highly confident about the forecast tending towards the upper end as we deal with Service.Finally, turning to KG, adjusted operating income of $11.3 million, which is in line with management expectations and now reflects a return to growth. Partnership revenue was up 8% -- almost 9% year-over-year reflecting solid partnership year-over-year, reflecting solid partnership relationships and increase fees from our credit card investment management business. As we referenced in the third quarter of last year, we've been able to close portfolio transactions without committing ECN Capital. We are working on similar transactions, we expect to be successful during 2021.Marketing services are continue to rebound from COVID related levels in '20. We expect this company, this business to hit its forecast.Turning to 30, growth in core business. It's important that we've also, as you know have had a strategic shift, moving KG away from transactional revenue into the annuity-type business, that shift is continuing and success is bearing fruit. We've seen a 9% increase in partnership revenue as well as increased revenue and profit from the credit card investment management business. Client marketing spend continues to recover to post-COVID levels and new verticals are bidding average. I mentioned, as referenced here, the marketing service revenue was up from $2.9 million to $1.8 million reflects that we continue to grow, that business was $1.1 million in the fourth quarter of 2020.We also continue to roll out new programs which is banking as a service, which is a BaaS, through a client where we're providing a comprehensive solution for their credit card business. We've also in our credit card investment management business, which is officially launched, our asset management -- and as asset management services. We have received a technical term PCI-DSS, which means we are now certified to receive credit card information and manage it on behalf of our partners.Highlights on Slide 31 for KG. You see revenue increases at 19% at the midpoint. EBITDA growth of 17% compared to that of 2020 and we see adjusted operating income increasing at 21%. We are confident in this forecast as well.Michael?

[Michael Lepore, Chief Financial Officer]

Thanks, Steve. Turning to Page 33 in the Q1 consolidated operating results. Total originations for Service Finance and Triad Financial Services of $662 million in Q1 2021 were up 30% compared to Q1 2020, reflecting a 28% increase at Service Finance and a 37% increase at Triad. That origination growth drove Q1 adjusted net income applicable to common shareholders $19.7 million or $0.08 per share compared to $14.5 million or $0.06 per share in the prior year quarter. As discussed at Investor Day and our Q4 call, we have eliminated results from our discontinued operations. We have or we continue to show legacy assets held for sale separately on our balance sheet.Turning to Page 34 of the balance sheet. Key highlights on the balance sheet are the total assets and total debt were both up over the previous quarter, with total assets up about $72 million and total debt up about, by approximately $45 million. The increase in total assets and total debt was primarily driven by the increase and held for trading assets at Service Finance and floorplan loans at Triad. With total assets and debt decreased subsequent to quarter end, as a result of the sale of approximately $137 million and held for trading assets at Service Finance. Managed and advisory assets are now approximately $33 billion, comprised of $3.4 billion in servicing assets at Service Finance, $2.7 billion in assets Triad and managed and advisory assets of $26.9 billion at KG.Turning to Page 35, of the income statement. Q1 2021 adjusted EPS was $0.08 per share, at the top end of our guidance range and in line with analyst consensus. Q1 2021 adjusted EBITDA was $35.5 million compared to $27.7 million in Q1 2020. The increase was driven by growth at all 3 of our business segments. In Q2 -- in Q1 2021, our effective income tax rate was 17%, which is in line with our guidance range for the year.Turning to Page 36 and operating expenses. Key highlights are higher business segment operating expenses were primarily driven by the growth in originations and managed assets at Service Finance and Triad, as well as the build-out of Triad land home business. Excluding the approximately $1 million expenses related to land home, Triad operating expenses increased by less than the percentage increase in revenues, demonstrating the operating leverage from that platform.Corporate operating expenses of $6.2 million reflect a return to normal activity levels for business development, professional services and travel expenses. We continue to expect corporate expenses to be in the range of $22 million to $23 million in 2021. Legacy business expenses were $1.9 million in Q1 2021, which were largely offset by legacy business revenues of $1.6 million.Finally, just a quick point on share-based compensation, which is not included in operating expenses, but does receive some attention. You will note our Q1 expense is lower than Q4, and as noted in the MD&A, about half of the expenses related to 5-year retention agreements for our operating unit heads. That vest over 5 years is based on meeting of specified operating income targets but get expensed on an accelerated basis due to the accounting rules. We expect share-based comp to continue to trend lower in Q2 through Q4.With that, I'll pass it back to Steve.

[Steven K. Hudson, CEO & Executive Director]

Thank you, Michael. In closing, turning to Slide 38, we are pleased to report $0.08 of adjusted operating earnings per share for Q1, high-end of our range as stated in Investor Day, Service Finance originations of 28% and 52% in April, give you a sense of how strong that business is and confident in guiding you to the high end. We believe the Big Box, the Sam's Club partnership, and the All-in-One will help drive significant growth for all parties in the coming quarters. Triad's Q1 originations at plus 30% and 55% in April, give us a similar confidence in the remaining Q2 and the remaining part of 2021. Land home is going to be very successful, $135 million in docs out, we are on track for our $150 million to $200 million of incremental program. As I mentioned, that business will be as large as our Chattel business which should approximate $400 million to $600 million in '22.KG is in line, first quarter strong partnership, business continues and pipeline is strong. As I mentioned, we will update '22 guidance on our Q2 call, as we get further evidence on our significant growth initiatives launched this year. Capital, we are happy to report our dividend which increased. We announced the increase, we laid it out this quarter at $0.03, and as you note in the MD&A, we've been active in repurchasing stock.Finally, just thought I comment on the market today and interest rates. Some of you have asked, but if you look at Service Finance from 2016 to 2018, during that period, U.S. 10-year treasuries went from 1.4% over 3%, our originations grew at 50% per annum. The management team at Service is very accomplished and is able to manage interest rate risk through increasing rates and menu. Similar experience to that of Triad. I think it's also important to point out that our funding costs are really that of bank deposits as opposed to treasuries. If you look to bank deposits, they are -- and that's flat to down over the last 3 months. There's tremendous amount of liquidity in the U.S. and the Canadian, but the U.S. financial services system. So we are confident that we will be able to manage rising interest rates when it happens.John, over to you.

[John B. Wimsatt]

Thanks, Steve. Just update on our ESG slides. Not a lot to update here in the quarter other than that we expect to announce a number of different initiatives in Q2. We have engaged with a number of different rating agencies to review our various lending programs for ESG certification. We expect to have some results from that process when we're ready to report in Q2 as well. I just wanted to reiterate our commitment overall to ESG policy, impact and disclosure, and I want to make sure we stand for our stakeholders.With that, we'll open it up for questions. Thanks, operator.

[Operator]

[Operator Instructions] The first question comes from Nik Priebe with CIBC Capital Markets.

[Nikolaus Priebe, Research Analyst]

Just wondering if I could ask you to expand a little bit on the nature of the arrangement with Sam's Club now that it's public. So how does that model work? So if I understand it correctly, the member would come in with a home improvement project, they would be connected with a dealer from your network, and then you would provide the financing where required. What does Sam's Club get out of it? Is there a referral fee from either you or the dealer? Just some insight on the economics of the arrangement will be helpful there.

[Steven K. Hudson, CEO & Executive Director]

Yeah Nik, we appreciate it. It was -- we're happy to have been selected as Sam's Club's partner that's a -- it's a significant step for Service Finance and for ECM at Service. We are prohibited under our confidentiality arrangements, Sam's Club will be speaking to shortly. I would love to go walk you through it, but we have to wait for Sam's Club. But I can tell you this, that the early results are encouraging and we think it will be very successful, but we have to wait for Sam's Club.

[Nikolaus Priebe, Research Analyst]

Okay, fair enough. And then staying at Service Finance, 1 thing that stood out to me, looks like there continue to be a little bit of variability on the servicing fee line. So, I think last quarter it was a bit of a positive surprise, then it steps down sequentially despite higher managed asset balances and we have to sell the roll off of the temporary fee concessions that were granted last year. Can you just help us understand how that line travels, whether there is a seasonal element or anything else that would account for some of the quarterly variability that we've seen?

[Michael Lepore, Chief Financial Officer]

Nik, it's Michael. There is a timing in a mix component that sometimes you get a little bit of variability in the quarter. So, as Steve noted, I think in Q1, we had a in large percentage of complementary flow loans in the balance sheet, those didn't get sold to Q2. So Q2, you'll see a tick upwards and overall we expect it to come in around 2% for the year of managed assets.

[Steven K. Hudson, CEO & Executive Director]

Yes, we don't get paid back on the loans that are accumulating for our client. And given the growth in service, which has been very significant continues to be -- it's a market, but we know right now that will be about 2.1% for the second quarter in servicing fees.

[Operator]

The next question comes from Geoff Kwan with RBC Capital Markets.

[Geoffrey Kwan, Analyst]

First question is, I know you talked a little bit on the Triad side, but my question I guess more broadly was some of the issues that we've seen with stuff like lumber prices or materials, constraints and semiconductor chips and then stuff like that. Are you seeing much of that and how would you kind of quantify the impacts on the business and whether or not it's at Service Finance or Triad?

[Michael Lepore, Chief Financial Officer]

It's -- like everybody else, we're seeing or hearing different sort of price increases across various different verticals, both under sort of home improvement or in manufactured housing more of the inputs to manufactured housing then sort of the end result of pricing of homes for example at this point. We haven't seen any impact whatsoever on originations or income-to-date, but I suspect we would -- we'll continue to monitor it and see and see over the next couple of quarters.

[Steven K. Hudson, CEO & Executive Director]

I just have one follow-up. If you look to the originations of 37% growth in Q1, we're able to get the loans of the door, whether it'd be Chattel are now land home. So it hasn't stopped us from loan. I would also comment that the average ticket size is up both and Triad and Service, there is no doubt that inflation has returned. Inflation drives higher ticket prices, which produces higher fees on both originations and servicing.

[Geoffrey Kwan, Analyst]

Okay. And just my second question, I just wanted to clarify, when you gave your guidance before with respect to 2021 and 2022, the Sam's Club and All-in-One, like those programs would not have been included and hence why -- but in Q2 update, you have some bit more visibility and probably included in there, is that the right way to think about it?

[Steven K. Hudson, CEO & Executive Director]

Well, yes, I mean, look we -- when we did our Investor Day guidance, we knew that there was a number of significant programs in the pipeline, whether it was the real land home launch and rollout at Triad or a number of the programs that you're aware of today and some of the other ones that we're working on at Service Finance, and we knew a number of those things are going to get launched in the spring. As you know, looking at these things, it takes time to roll these programs out nationally. It takes time to train sales people, et cetera. to really get selling these things and then ultimately grow those programs. So you got to get them launched and up and running, see how they're operating for a couple of months before you can really get an idea on guidance. So our view is always let's get a couple of these things launched and then we can revisit it as we have some better data. We thought Q2 would be would be a good time for us there.

[Michael Lepore, Chief Financial Officer]

They were not included, Geoff. So let me back up. The importance of a Sam's Club without, I mean we'll have to stop, to wait for the Sam's Club announcement, but the importance of that is that we're now seeing the benefit of our dealer network. We can now provide a guarantee like we do to our bank partners where all those loans that are originated, the consumer is happy, it's on time, it's on budget and it works. And we can now do that for Sam's Club members. That's a powerful guarantee. We've never been able to use that, we are now using it for Sam's. The policing and the oversight in all the work we do in our dealer group, the annual reviews, the receiving tax returns, making sure people are compliant, making sure our complaint levels are unresolved complaints, and the CFPB are zero. Now we've got power through our network and I think that will accrue some benefit to Sam's Club members. So think of that as an additional business service that we are now bringing to the marketplace.

[Geoffrey Kwan, Analyst]

Okay. And sorry, just if I can -- maybe just maybe ask a different way of them. So with land home, Sam's, all-in-one, what else would not be included in the current guidance that you have?

[Steven K. Hudson, CEO & Executive Director]

No, land home was included in the guidance.

[Geoffrey Kwan, Analyst]

Is there anything else?

[Steven K. Hudson, CEO & Executive Director]

No it is just -- I mean I think the overall thing is the market tends to be very strong. You're seeing all-time highs in originations and all-time highs in approvals and increasing ticket price, we don't think that's going to slow down. You see industry research groups, increasing the forecast through 2024, it's very strong, and I think that -- I think you'll have positive -- a positive update on August.

[Operator]

The next question comes from Vincent Caintic with Stephens.

[Vincent Albert Caintic, MD & Senior Specialty Finance Analyst]

I have another one about the Sam's Club and All-in-One. So exciting additions. I was wondering, are they -- do Sam's Club and the all in one partner already have somebody else that they're working with, and if there's maybe any volume you can share or is this completely new? And where, I don't know if there is any way that you could frame the current size on the upside?

[Steven K. Hudson, CEO & Executive Director]

I can't, Vincent. But it's an exclusive arrangement with Sam's Club that we won through a competitive process, and I'll -- we'll wait for Sam's. In terms of All-in-One, All-in-One is just selling referring through the lower credit deals through the people, we don't put those credits on our balance sheet, and they're getting sold through, and then John, will provide an update on the all-in-one program in August as well, but it's being -- it's working.

[John B. Wimsatt]

Yes, it's launched, it's up in running, really got launched in April. We've added hundreds of dealers at this point, and we expect to continue to roll that out nationwide throughout the balance of the year. We're super excited about it. The early results have been fantastic, but it's still early and we want to make sure we have some good information for you guys from Q2.

[Steven K. Hudson, CEO & Executive Director]

You can imagine Sam's Club is guard their membership and their members very, very closely and the due diligence that Mark Berch and his team, and Steve Miner and others went through for complaints, compliance, product was significant, and over several, several quarters. And I think that that is alone and being awarded for this partnership, this relationship, it reflects, is a good housekeeping stamp of approval on Service Finance and dealer work. We're not Angi's List, we don't have 140,000 dealers, which is great for Angi's List. We have 14,000 dealers, which are heavily policed. So when -- if we're lucky enough to become your partner, we know when that dealer walks into your home, you're going to have a great experience and we're going to guarantee it.

[Vincent Albert Caintic, MD & Senior Specialty Finance Analyst]

Okay. Great, that's helpful. And I'll ask that again next quarter, I appreciate that. Switching...

[Steven K. Hudson, CEO & Executive Director]

Fair enough, fair enough.

[Vincent Albert Caintic, MD & Senior Specialty Finance Analyst]

I appreciate it. So switching gears to the Kessler Group, so interesting to see these new marketing programs that are outside, kind of the -- seems like outside the existing scope of what we think about with credit cards. Maybe if you could talk about what -- like can you give us an example or an idea what kind of marketing programs and services these are? And when you think about the verticals that you could serve, you highlighted telecom, but sort of maybe what are the opportunity sets for KG there?

[Steven K. Hudson, CEO & Executive Director]

Yes. So, Vincent, if you look at Kessler, their historical business has been really helping to build and attract customers to affinity credit card portfolios and relationships. That's what they've done that for 40 plus years. As part of that you had to build sort of core competencies, et cetera, in terms of marketing, consumer marketing through various different channels, a lot of targeting, segmenting, data, et cetera. What -- we always thought they had what they had some exceptional process and data, et cetera, that you could mine and use to generate new relationships on the marketing side. We may want to do that successfully across credit cards and financial services over time. We talk to you about the telecom opportunity last quarter as you can imagine -- you imagine a large consumer cellular type company is doing typical consumer type marketing trying to generate new customer accounts. That's the kind of thing that we're working on. If you can imagine other consumer-facing marketing opportunities out there, like a wealth management, identity theft, subscription services, there is a number of different verticals that we're looking at and exploring, and we expect to have a number of different pilots in the market here in 2021.

[Operator]

Our next question comes from Tom MacKinnon with BMO Capital.

[Tom MacKinnon, MD & Analyst]

Just the couple of questions with respect to the corporate segment, a little bit of noise in there, there seems to be some higher than expected corporate revenue. I don't know if there is gains or losses on some legacy sales, there was a modest loss in legacy, just looking for some guidance as to how to be looking at that going forward? And the corporate expenses of $6.2 million, I mean if we annualize those, we're closer to the $25 million which is above your $22 million to $23 million guide for the year. So is there anything seasonal or how should we be thinking about that? So those 3 questions in that, if you wouldn't mind tackling them.

[Michael Lepore, Chief Financial Officer]

Tom, it's Michael. So I'll start with the last 1. I mean obviously quarter-to-quarter, you can have a little bit of variation in the expenses. We still think $22 million to $23 million that's we're going to come in. So it's a bit higher in Q1, expect it will come back down in Q2, Q3, so it -- but it will vary plus or minus $500,000 a quarter. In terms of the corporate revenues, we did have some mark-to-market gains and some legacy portfolio investments. So, probably a little bit higher than normal. We generally expect $500,000 to revenue for corporate somewhere in that range, and we had a bit of visibility that was going to be some, I think, minor FX gains and losses as well, so we had some of that in this quarter. But generally it's - we expect it to be $500,000 positive in quarter. I'm sorry, what was the third question?

[Tom MacKinnon, MD & Analyst]

Yes, to the legacy business, there was a modest loss there, how should we be thinking about that going forward?

[Michael Lepore, Chief Financial Officer]

Yes, I mean one of the reasons why we are accelerating the weighing down was to do exactly that, was to reduce the call in Q1 last year is probably closer to $3 million in the loss. So we've worked hard to reduce the burn rate on the legacy business, now got it down to $300,000 was largely material, which is why we're not even segregating it anymore. So we expect to manage it accordingly. But it's definitely under $1 million a quarter.

[John B. Wimsatt]

I think, Tom, it's good steward to incumbent upon us to recover all the capital legacy assets and recovery of capital can include outside advisers, lawyers and other people. So it's -- I wouldn't focus too much on the $300,000 of net expense here, I would focus on the recovery of capital and Algis, as our Chief Credit Officer had some great success, particularly in the aviation book and others on making sales as we now get out of the COVID period. So we want to -- we want all that $100 million of assets sold and as much capital as recovery.

[Tom MacKinnon, MD & Analyst]

Okay. And sorry, just one more number's question. Just the -- in Service Finance, there was a -- the depreciation expense is about $1 million and it's generally been closer to about 1/3 of that. Was there anything unusual on the quarter there or and...?

[Michael Lepore, Chief Financial Officer]

And yes, so in conjunction with Sam's, we launched a marketing service and lead management platform that we've built out over 2019 and 2020. So now that is up in running, we've started to depreciate that asset.

[Tom MacKinnon, MD & Analyst]

So, Q2 would be similar to Q1 with respect to that?

[Michael Lepore, Chief Financial Officer]

Correct.

[Operator]

The next question comes from Cihan Tuncay with Stifel.

[Cihan Tuncay, Director]

Just wondering Steve and team, if you can give an update on your funding pipeline and how it looks for 2022? I know you've got a couple of new partners, I think it was 5 for Triad. I'm just wondering what the appetite is? Are you looking at new partners, perhaps extending funding with existing partners? If you could give us a little bit more color on the appetite funding partners?

[Steven K. Hudson, CEO & Executive Director]

Good question. If you look to, as you know, we announced a new funding partnership with CPPIB last year at $1 billion, and that really has opened the door to a number of similar type organizations, which is all have appetite in that $1 billion plus range. We are -- we don't have enough loans at either Service or Triad to satisfy the demand. So we could have done 2 things, we could have -- 1 of 2 things, we could have increased origination and servicing fees, we elected not to, we'd gone for longer commitments. As you heard my reference earlier, we're now into 2023 funding discussions. So we -- make a long story short, we've taken that demand which is unprecedented and increasing commitments in the 2 to 3-year period, and we're working through that. So I think that's a good -- my fishing boat is called liquidity to modest fishing boat, and it's all about liquidity. So I think the longer we can push out those funding commitments the better. And we certainly have got -- you'll hear more announcements about organization similar in nature to that of CPPIB. Not saying that we're moving away from our bank or credit unions and our life co-partners because they are an important part of this, but we are funding a significant growth at both Service and Triad.

[John B. Wimsatt]

Cihan, I just want to add, if you look at Triad, you mentioned the 5 that we added this year, remember, we added 12 last year as well and it has been -- we have been expanding that list away from just the banks and credit unions to our core great partners to ours, but we've added some life insurance companies as well inside of Triad especially around some of these special and newer program. So we've been very, very excited not only on the sort of Service Finance side but also on the Triad side as far as our funding relationships go.

[Steven K. Hudson, CEO & Executive Director]

And we've been able to turn all these relationships into hell or high water which is that you as an institution, when you provide that commitment are now required to buy up to that limit. We're not required to sell to you what we will, but we want the ability to manage it. So if you're putting our commitment up your fill is likely $800 million to $900 million as we sort of manage across our round-robin funding. So, in fact at Triad situation, they turn them into perpetual funding relationships. So we've used this. There is about $4.1 trillion in the U.S. and the U.S. banking system, looking for a home and we've used that liquidity to expand the term on these funding commitments.

[Cihan Tuncay, Director]

Appreciate the color there. Just with respect to the Sam's Club agreement and without getting into any nitty-gritty details, but assuming that it go successful, you've got a really good retailer partnership program. Is there anything, if you can speak to it or not, I don't know, but is there anything with the current agreement with Sam's Club that would prevent you from offering additional -- reaching additional partnerships with other retailers in the U.S.?

[Steven K. Hudson, CEO & Executive Director]

It's --what's on the page that we present is what the Sam's and Wal-Mart's accounts. As you know, Wal-Mart is -- as Sam is a subsidiary of Wal-Mart. That's what's been approved for disclosure. So we have to live with disclosure. So we have to live with what you've got. I think there'll be further announcements here by Sam's in the short term. We're not going to finance a competitor to Sam's. We have a Lennox relationship. We're not going to finance something to compete with Lennox. There are other forms of distribution that we're looking that don't compete with Sam's. I'll leave that to latter part of August, but there are other forms of distribution out there. I don't -- I can't emphasize enough that Mark Berch and his team have done a phenomenal job of creating this exclusive network of dealers, who can enter your home and not -- a lot that will allow a number of participants in the U.S. to now go past the door still opened as opposed to dropping a box off on your doorstep, you'll now be able to go in the home and I have to leave it there until we report -- we discuss in August.

[John B. Wimsatt]

And Cihan, just to highlight the other one we talked about the Daltile relationship, I mean that's a subsidiary Mohawk, which is the largest flooring company in the in the country. They do 1 in 3 of all tile sold in United States, so it's going to be a great relationship for Mark and his team. And frankly, there is a whole number of other relationships that we ended up, that we did sign in the quarter with dealer networks, et cetera, and we're looking at other manufacturer relationships as well. So Sam's is obviously a huge deal for us. We're very, very excited about it, but just don't want to forget about all the other things that Mark and his team are getting done.

[Operator]

[Operator Instructions] Our next question comes from Jaeme Gloyn with National Bank Financial.

[Jaeme Gloyn, Analyst]

I actually want to hear more about this modest boat name liquidity.

[Steven K. Hudson, CEO & Executive Director]

You're going to wet, you're going to get wet. I said a fishing boat.

[Jaeme Gloyn, Analyst]

Okay. So first question, John, I got kicked out for a second, so maybe I missed it, but on the Daltile, is there anything you can tell us about what your expectations are in terms of dealer growth penetration and the size of that relationship? Maybe -- like maybe compare to like how Lennox has performed over the last several years, is that something that we can think about?

[John B. Wimsatt]

No, I mean I mean look, we'll see. It's a great relationship. Obviously they sell a tremendous amount of tile to contractors all over the country. We will be exclusive with Dal and -- with Daltile and obviously very much value our relationship with Mohawk and hope we can continue to expand that. We'll come back to you with more details around size of the program, et. cetera, over time. I suspect it'll take a bit of time to ramp, just like we've seen with other programs that we've launched like a Beacon or Owens Corning, but there is no reason why a very large flooring brand like Daltile can't be a very significant originations contributor over time.

[Jaeme Gloyn, Analyst]

More on that later, I guess. And then second question from me, just in the Service Finance, you guys already talked about it on the servicing yield, and I get that as the bulk of it is probably coming -- or is coming from years holding higher held for trading assets. But that doesn't explain everything, at least like from what I can tell based on running through some of the numbers here. So is there anything else that would cause variability from quarter-to-quarter outside of just that higher held for trading assets?

[Michael Lepore, Chief Financial Officer]

Yes, that's the -- that is the biggest reason for the year, the variability. So it's -- the timing of the sales and how much you're building up without putting your balance sheet without selling. If you have a 4, 5 months of originations going through in a single period, it's going to skew the servicing margins.

[John B. Wimsatt]

And somewhat on -- it also depends somewhat on your mix. In the beginning of quarter, remember we've got something like 50 or, I think it's like up the 65 different products at this point. Those products do have different pricing and whatnot to them, it typically blends to about 3% gain on sale, and 2% servicing, but if -- your mix is a little bit different from one quarter to the next, it could skew 10, 20 basis points 1 way or the other on the given quarter. If you combine that with asset sales, like Michael has been talking about, that's the bulk of the change. It's really just a timing and a mix issue. Like we said before, we expect that for the full year, you'll be back -- it will be about a 2% number on your sort of average servicing assets, and we would actually expect it to be above that in the second quarter as you get back sort of what you lost for some of the sales that occurred in Q2. So yes, I mean, there is some variability about it. If you go back and look at it over the last couple of years quarterly, you've seen it up and down 20, 30, 40 basis points over a couple of quarters, multiple times, even if you are not even looking at last year where you had some concessions.

[Steven K. Hudson, CEO & Executive Director]

I think, Jaeme, what I asked for which, John can walk you through is quarter-by-quarter forecast of the servicing revenue, so we'll be able to track it better. So why don't we follow up with that post the call.

[Jaeme Gloyn, Analyst]

Great. Yes, it sounds like mix is the second component there. And then last one is still on that mix, is there -- what can you tell us about the underlying loan demand from consumers? Is there a particular loan that they're looking to select at this stage? And how do you see that affecting origination fee incomes, is it positive or negative in terms of those types of loans?

[Steven K. Hudson, CEO & Executive Director]

Yes, origination fee income is at an all-time high, so we can walk you through that. I think the 1 thing that's temporary in nature here, to me is that, we've seen as every other participant in U.S. financial services have seen, we've seen a prepayment speeds that have increased and that's temporary, that's driven by all the incentive checks and my reference to the $4.1 trillion that needs to get digested here. So the prepayment speeds have increased by everyone. We believe that's temporary in nature, as the incentive checks are spent.

[John B. Wimsatt]

And just a follow-up on what Steve said, I mean just to recall, I mean, -- so again, it's a mix issue. In the first quarter, we had a gain on sale margin which was at the highest we've had in the last at least 8 quarters going back, and again that's just the product of the mix of different products that are going through. As you can imagine we're somewhat indifferent product-by-product, what the mix looks like, whether it's coming from a servicing fee or coming from a gain on sale, we're more interested in the net present value of the economics to Service Finance.

[Steven K. Hudson, CEO & Executive Director]

Going back to your earlier question, Jaeme, if you look to the servicing revenue was a function of that large asset loan in April and also we've had promotional loans due this prepayment issue that payback quicker, so we don't get all the servicing income, that is starting to slow down. But that's not unique to us, that's -- we're seeing prepayment speeds increase that mortgage books, consumer lending books, pick any 1 of them, but it is starting to abate.

[Operator]

The next question comes from Mario Mendonca with TD Securities.

[Mario Mendonca, MD & Research Analyst]

Steve, if we could just sort of a conceptual issue here. I'm looking at Service Finance for the last 4 quarters. The revenue growth has lagged the expense growth, and I suspect that relates to all the initiatives that are in place, the 1 certainly Sam's Club, they're going to want a bunch of expenses that have gone on, I would imagine that haven't yet resulted in the revenue assuming I've got that concept about right. This clearly have turn 1 day and the operating leverage has to kick in. What I'd be interested in hearing from you is when that might be? Could it happen as soon as next quarter or is this something we probably should wait until 2022 to see the revenue goes really outpacing expense growth in Service Finance?

[Steven K. Hudson, CEO & Executive Director]

Yes, it's a very good question, Mario, and I think we're going to start to see some of it. In the second quarter of Q3 and Q4 you'll see significant operating leverage. Michael made the reference to the lead management business that we created over the last 2 years has now come through the lead management business being able to provide leads and the Sam's relationship was critical to winning that contract. We're now paying for that and I know you didn't ask for Triad, but it's the same thing at Triad, where we spent $1 million this quarter on launching land home. So I think in both of these companies will see significant improvement in the efficiency ratio.

[Mario Mendonca, MD & Research Analyst]

And that could be as early in the second half of '21, is that fair?

[Steven K. Hudson, CEO & Executive Director]

Correct.

[Michael Lepore, Chief Financial Officer]

I was going to say just for 2020, obviously we had the fee concessions, so that impacted the margin ratio.

[Mario Mendonca, MD & Research Analyst]

So the fee concessions, investment spending all of that drove the negative operating leverage and that's essentially where I'm going. I would imagine we're going to see that churn at some point when it does, it's going to be -- it might be meaningful. I wanted to return to a different type of question, and forgive me for being sort of detailed in its nature, I think everybody's asked about gain on sale margins and service margin. The 1 that I haven't been able to really reconcile yet in my mind is, the gain on sale to originations in Triad, it declined a fair bit this quarter on a sequential basis, it's really not that big a deal relative to other quarters that I see. But is that really a result of the home and -- the home and land product or land and home product or is that not really having an effect yet? We'll see the gain on sale margin deteriorate later?

[Michael Lepore, Chief Financial Officer]

Mario, so we had some effect. We are closing some originations in land home, it's a relatively small number. But what you've seen over time is the mix has changed somewhat from core to managed only. Managed only has a bit of a lower margin than core to us. If you look over a long period of time, it's about a 7% average and if you actually take that quarterly, it jumps between say I don't know 6.5% and 7.5%, 50 basis points either way. And I think in this quarter, it was around 6% to 8%, 6.7%, 6.8%. And so, to me it's pretty normal. You can see that kind of fluctuation depending on mix in any given quarter, but it has tended to about 7% most annual, for a full year over the last several years.

[Mario Mendonca, MD & Research Analyst]

I think, John, am I right in saying that you guided us to a lower number over time as land and home increases?

[John B. Wimsatt]

Yes, I mean we should see -- look, I think we believe that the land home business is going to be as big as the Chattel business. When that happens, Mario, remember land home is a lot closer to a mortgage, so therefore the pricing on it is closer to a mortgage. We get, in our Chattel business, what you've seen is over a long period of time, the pricing on that is roughly 300 basis points of over equivalent 30-year treasuries, I'm sorry, 30-year mortgages, which is pretty consistent over time. We can generate a lot of fees off that. The mortgage product is going to have a lower spread to those 30-year mortgages, as it's a full land home, which means there is a little bit less gain on sale that can be built into that. Again it's all incremental, very little expenses are associated -- incremental expenses are associated with this business beyond the build out because we're running through the same distribution network that we do on the Chattel side. So, yes, you're going to see lower margin gain on sales, but a lot more dollars running through that business.

[Operator]

There are no further questions at this time. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a great day.