ECN Capital Corp
TSX:ECN
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ECN Capital Corp
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Thank you for standing by. This is the conference operator. Welcome to the ECN Capital First Quarter 2024 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions]I would now like to turn the meeting over to Katherine Moradiellos, VP of Finance and Investor Relations. Please go ahead, Katherine.
Thank you, Sachi. Good afternoon, everyone, and thank you all for joining this call. Firstly, as you may have already noticed, I've taken over for John Wimsatt, heading up Investor Relations in addition to my financial planning and analysis role. I want to thank John for his assistance in this transition. He will continue as a strategic adviser for ECN.Joining us on the call are Steve Hudson, Chief Executive Officer; Jackie Weber, Chief Financial Officer; Lance Hall, President of Triad Financial; Matt Heidelberg, Chief Operating Officer of Triad Financial; Mike Opdahl, President of Source One; and Hans Kraaz, Founder and CEO of IFG.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, 2024, 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 websiteBefore 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 include references to 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 remarks, I will now turn the call over to our CEO, Steve Hudson.
Thanks, Kathy, and good evening. I believe everyone has seen 5 or 6 in the past, but let me just make a comment on the bottom of Slide 6, if I can, which is ECN is the only source at scale of approximately $3 billion per annum in attractive consumer and credit assets with very strong risk-adjusted returns. They are of interest to numerous investors, and we'll speak to that in a moment.Turning to Slide 7. I'm pleased to report flat earnings per share in the first quarter, which compares favorably to our previously provided quarterly guidance of $0.01 to $0.02 loss. I'd like to highlight 3 things both with respect to Manufactured Housing and RV and Marine. Regarding Manufactured Housing Q1, over $300 million was Lance's largest Q1 in Triad history, great result.Second point I would draw you to is the improved origination revenue margin went from 3.9% in the fourth quarter to 5.2% in Q1, and we're tracking to rates approximately 6% through the latter part of the year. And there is no fair value adjustments in the quarter.Third, we're overfunded in '24, banks and credit unions are increasing commitments, and we have extended and expanded agreements with our existing institutional investors.Turning to RV and Marine. At $166 million of originations, Source One was up 5% year-over-year. IFG was actually down a bit, but that was due to a couple of large transactions in March of '23. If you look to the run rate, they are up January and February at 4% growth. And as both Presidents -- all 3 Presidents will speak to in a second, their Q2 results are indicating even stronger acceleration in growth.Second, we're executing on -- Mike and Hans are executing on 2 strategies -- 2 take-share strategies, specifically expanding the geographic footprint and further dealer presentation (sic) [ penetration ]. And like Triad, they are overfunded for '24.Turning to Slide 8. Pleased to announce Kathy's promotion to include senior responsibility for IR. Kathy is a seasoned financial service executive and a member of ECN's senior management team for the past 7 years.Like to highlight 2 other announcements which add additional senior bench strength to ECN. And on Page 9, announcing Mike McCulley has joined Triad as General Counsel. Mike has over 18 years of senior experience in the U.S. mortgage industry, as well he served at the Financial Ombudsman for the State of New Jersey. We're happy to have Mike on board.As well Joe O'Brien is joining as Chief Operating Officer at Source One. Joe has over 22 years of senior experience in U.S. and consumer and specialty finance. These 3 additions add significant strength and underpin the growth of our businesses.With that, I'm going to pass to Lance.
Well, thank you, Steve. And as Steve said, we're excited about the first quarter that we had. It was the largest Q1 in Triad history. And while we're celebrating with the team right now, we're not resting because we do have an accelerating growth path for the remainder of the year, and our commitment is to achieve this committed path for the remainder of 2024.I want to point you to just 4 points on this Slide #12. First of all, while we were at 6% year-over-year in Q1 originations, I want to really focus on the originations growth in chattel at 17% year-over-year. Our business is segmented into 3 primary areas: chattel, land home and communities. And while the rebounding of land home and communities is a little slower than the chattel business, the fact that our chattel originations growth is ahead of plan has enabled us to achieve the results we did this quarter.Secondly, Steve mentioned it, but I think it's worth repeating that we had no fair value adjustment in Q1 as we believe the portfolio is now conservatively marked. The third thing I'd like to highlight is, again, the $350 million reduction in the held-for-trading asset portfolio. We had a very tremendous opportunity and moved that $350 million through the sales process in Q1, dramatically lower in the balance sheet.And then lastly, very important to note that our funding capacity is actually -- we've got an overfunded status. We have $2.3 billion worth of capacity now. Our banks and credit unions have rebounded sharply from last year. They're more than double where we were last year. And we signed a new Blackstone agreement in Q1, expanded that agreement. And we have a rental funding program that we actually will announce a little bit later this month.And with that, I'll turn it over to COO Matt Heidelberg.
Thank you, Lance. I'm going to start on Page 13, walk through a few of the trends that we're seeing in the business for the next few slides. Originations, like Lance said, were up 6% overall. But you all know that's just part of the story. The product mix matters. Lance also highlighted the core chattel products is up 17% year-over-year, which is ahead of pace for us to start out.Lance is going to speak more to land home later, but the material improvements that we've made in this division is going to lead to significantly more growth in the second half. You'll also see rental growing $25 million year-over-year. And silver and bronze, which are going to be benefiting from that expanded agreement with -- that signed agreement as well as a few more that we have coming. This is giving us an opportunity to further accelerate these products, which is going to be part of the growth story for us for the remainder of the year.Moving to Slide 14. Approvals are up 2% in units overall and 6% in dollars for the first quarter. Within this number, we see core also up 2%, but silver and bronze increasing over 50% each. One additional thing I wanted to remind people, the approval numbers are really just focused on our consumer loans, but the growth ahead for our commercial loans, in particular, rental, is not represented in these numbers.How the industry is doing on Page 15. The industry began the year as we expected, with shipments up 15% year-over-year. We continue to remain very positive on the industry and see it benefiting from long-term tailwinds as it is an ideal solution to satisfy the affordable housing demand.To move back to our loans, on Page 16, Triad's average loan rates are back near highs relative to market rates, as seen in the graphs on this page. This premium is benefiting our partners' returns and driving more demand for Triad loans.The other factor impacting returns for our partners, moving to Slide 17, would be our loan performance. You can see in the graph to the right that performance continues to stay well within expectations. Our partners are quite happy with the returns they are earning.To give you a quick update on our commercial business on Page 18. I want to shift you to start focusing on our total balance, that's $426 million. That's up quarter-over-quarter and year-over-year. We see this number as more relevant now as we continue to sell service commercial loans. Our floorplan flow portfolio is performing exceptionally well for our partners, and we see rental growth accelerating meaningfully as we convert this to a flow program in the second quarter.With that, I'm going to hand it back to Lance.
Thanks, Matt. Turning to Slide 19, just a quick update on our land home progress. In my first 10 months at Triad, much of my time in operations has been spent in the areas surrounding land home. During that time, I had 2 primary focuses. One was the reduction of risk in the portfolio; and two, was a very solid plan for growth. In order for us to address the risk, we had to get to a point of having higher loan rates and we had to improve our funding cycle times. And while we got some help from the industry as backlogs have normalized, we also have strengthened our systems and our people and our processes that have enabled us to cut our funding times dramatically.As you can see in the graph down towards the bottom of the page, our land home rates have increased steadily over 2023, now up more than 300 basis points since the low mark in '23. And our construction portfolio is down by more than $100 million, which has put us in a much more efficient position of capital.And lastly, it's very nice to note that we also have an additional partner to fund our land home loans. So it has now committed an additional $100 million in funding capacity for land home. So we're in a very strong position for growth going forward, and we do believe that the land home rebound is well underway.Switching to Slide 20, just a quick update on the Champion Financing update. We had a very successful launch of the program that we talked about last quarter at the Louisville show in Kentucky earlier this year. That resulted in what you see at the graph at the bottom, is a strong interest in our floorplan programs, where we have nearly $170 million worth of credit lines now in process.As a reminder, that floorplan income is not the only benefit to this partnership with Skyline Champion, but we also know that for every dollar of floorplan business that we get, it will translate into $3 of retail funding. And so much of that funding will also be flowing into the partnership with Champion Financing.Perhaps the most important thing on this slide, however, though, is the note down at the bottom referencing the National Retail Loan program. We were very excited that Skyline Champion and Triad have partnered to announce a retail loan program through all of their stores that provides customers some of the very best rates that Triad has with discounted rates that are going to drive more traffic and help us again to grow the activity level in this partnership.On Slide 21, it's just a little bit of information about our originations history. And as we have done in the past, I'll leave that with you.And with that, I'll turn it back to Steve.
Thanks, Lance. Turning to Slide 23. I'd like to introduce Michael Opdahl and Hans Kraaz in a second, but let me highlight a few things on these 2 slides. First and foremost, we've produced $0.5 million of income from the businesses, which is in line with management's forecast. As I mentioned earlier, originations are up 5% at Source One, and adjusting for 2 large transactions in March last year, up 4% in January and February for IFG. We're not finished the second quarter, but the growth rates in the mid part of the second quarter have accelerated significantly over those levels for both these businesses.And finally, at the bottom of Slide 23. As you know, Chris Johnson has joined our management team as Senior Vice President of Capital Markets. In addition to the hedging responsibilities and discipline, Chris is also launching expanded initiatives that will look very similar to the funding arrangements we have in place for Triad for Source One.Turning to Slide 24. If you look at the Q1 originations, I think it's fair to say we returned to pre-pandemic normalcy. And we have take-share strategies which are gaining significant national share as well as dealer presentations, which Mike -- dealer penetration, which I will now have Mike talk about.
Thank you, Steve. Good afternoon, everyone. Let's turn to Slide 25. For over 25 years, Source One has originated contracts that focus on prime to super prime consumers with high-value assets. As the graphs show, both Source One and our lending partners, RV and Marine portfolios, continue to outperform automotive loans, with a rate premium consistently over 2% and losses of 1/3 to 1/6 that of prime auto.Moving on to the next page. What I'd like you to take away from this slide is that the future is very promising for the RV industry. Over 90 new camp grounds and more than 18,000 camp sites are opening in the next 3 years, with an estimated 11 million potential new buyers in the next 6 years and over 4 million consumers annually aging into RV's key demographic. This ensures both demand and growth for years to come.Turning to Slide 17. I'd like to focus on how Source One continues to execute the proven ECN playbook to successfully scale our business. We believe that the RV and Marine origination model is 25 years behind automotive finance in terms of technology and efficiencies, and we are investing heavily to close that gap. We are now licensed in 48 states compared to the 13 states that Source One was operating in prior to ECN's acquisition. We continue to build out our sales team. In the first quarter, we entered the Pacific Northwest and Mid-Atlantic regions, and we look to enter the Northeast later this year. Additionally, we'll be doubling our presence in California and Texas in the coming months.While we currently capture approximately 2% of finance RV and marine originations, geographically, we are just getting started. We believe there is an opportunity to boost volume upwards of 50% this year alone through a combination of the expansion and incremental gains in our current dealerships.Moving on to Slide 28. Let's take a look at our accomplishments this past quarter. As Steve mentioned, quarter 1 originations were up 5% year-over-year, and early indications are that Q2 is going to be substantially higher. Our proprietary e-contracting capabilities have improved our capture rates. We are now entering peak season, and our inbound pipeline continues to grow.Keep in mind that while we have best-in-class technology, at our core, we are still a relationship lender, and the relationships with both our lending partners and our dealerships are incredibly hard to replicate. An example of the strength of these relationships was exhibited last month at the world's largest consumer RV show, where we had underwriters on site. This personal touch allowed us to capture 62% of our approved applications and double our monthly originations from this dealer group.Our investments have not been limited to technology as we are fortunate to have Joseph join Source One as COO. We are confident that with Joe's leadership and experience, the company's growth will be assured.I'll now turn it over to Hans to bring everyone up to speed on IFG's accomplishments and our cross-company initiatives.
Thanks, Mike. Please turn to Slide 29. Consistent with the ECN's playbook, Michael and I have been working to identify and execute on cross-platform synergies. Some of those include IFG and Source One can access each other's funding, materially expanding the financing option for its customers. Two, Source One dealers are able to access IFG's best-in-class title department. For example, we did a test pilot at our subsidiary, Epic, that successfully secured 100 mortgages and titles. Finally, combining credit report accounts, which will result in a 30% cost savings.Turn to Slide 30, please. IFG Business Update. As you can see in the origination volume chart on the right, 2004 year-to-date activity is trending positively based on total originations. We're seeing this trend continue into April with units financed up year-over-year. As you are aware, IFG originates loans through a diverse network. All channels are firing on all cylinders as we continue to add capabilities through our sales origination process. That said, we win our business through our people, infrastructure and industry-leading funding partner relationships.Our funding relationships have been built over 30-plus years. We offer a spectrum of solutions to our customers and are continually working to enhance and improve them. This source of funding provides us with virtually unlimited funding capacity.We are also investing in technology, which is displayed by a small acquisition of First Approval Source. Two key points on this deal. One, this will sharply reduce the time between origination and sale, maximizing profit per transaction. And number two, the acquisition brought 34 new dealer relationships that have been successfully integrated.And now I'll turn it over to Jackie.
Thank you, Hans. Turning to Page 33 for our consolidated operating highlights. I think what the highlights demonstrate here is that we've turned the corner in Q1 with adjusted EBITDA of $21.8 million and adjusted operating income of $1.4 million, reflecting significant improvements from Q4.Adjusted operating income improved from a loss of $14.3 million in Q4 to positive adjusted operating income of $1.4 million in the current quarter. I would also add that there were no fair value provisions in the current quarter and our held-for-trading portfolio is conservatively marked. Adjusted net loss was $0.3 million or $0.00 per share.Turning to Page 34. I think our balance sheet highlights are also reflecting our commitments from Q4. Our total assets and debt decreased substantially in the first quarter as a result of the sale of Red Oak and pool sales at Triad. We ended the first quarter with $400 million of capacity available on our senior line, and our businesses are fully funded for 2024.Turning to Page 35. I think what this slide shows is that we're on track to deliver our 2024 business plan. Loan origination revenues of $19.8 million reflect a significant improvement in margin from Q4. The turnaround in adjusted operating income reflects both the improvements in revenue and in operating expenses.On Page 36, year-over-year growth in business segment operating expenses reflect operational enhancements. Corporate operating expenses decreased to $2.8 million.And lastly, on Page 37, our held-for-trading portfolio decreased from $382 million at the end of 2023 to $227 million at the end of Q1, in line with our forecast provided in Q4. As I mentioned earlier, the on-balance sheet portfolio is conservatively marked and our exposure is hedged moving forward.I'll turn it back to Steve for his closing remarks.
Thank you, Jackie. Let me highlight 5 items on Slide 39. Based upon our return to historical origination revenue margins, we recorded 5.2% in Q1 up significantly over the 3.9% in the fourth quarter and a target of 6% for Q2, 3 and 4 on average as well as the increased servicing revenue, we're reconfirming our 24% guidance of $0.10 to $0.16. However, I would focus you on the higher end of that range given the results of this quarter.Second, there are no fair value adjustments in Q1 nor expected for the remaining part of 2024. We have conservatively marked our book and have effective hedging in place going forward. Three, land home processes, systems and personnel under Lance Hull's leadership have materially improved. And in H2, we will return to growth in the LH business line. Funding capacity has significantly improved. In fact, we are overfunded. And finally, MH Triad's Q1 originations over $300 million represent a strong start to the year as well as the $165 million at our Marine business. The business is in good shape.With that, operator, we'll open the call to questions.
[Operator Instructions] The first question is from Jaeme Gloyn from National Bank Financial.
Yes. Thanks. First question, just around on the Triad business, the origination yield, 5.2% improved. But I guess, still below the sort of run rate range of 5.5% to 6%. Maybe just talk through some of the factors that were at play to keep it below. And then I think the comment was that it was going to trend toward 6% through this year. So is that kind of the high end that we would expect as we progress through 2024 that will be more in the sort of 5% to 6% range as opposed to 5.5%, 6.5%.
Yes, Jim, I'm going to let Matt answer it. But I think in our last call, I guided everyone to an average for the year of 5.5% to 6%. We are on track to that average. If anything, based upon Q1, I think we would be the high end of that average for '24. Matt?
Yes. No, that's right. Jim, it's clearly a significant improvement that we had from the last quarter. In any quarter, it's going to come down to a bit of mix, too. Last quarter, we really tried to highlight for you the different yields across the different products. At the end of the day, we're still very confident with the number that we put out for the complete year, which would include this quarter. So we're expecting to see that number continue to move up and hit that average for the year.
And finally, I think that -- I don't think the fact that we are overfunded brings pricing discipline to the table, it's taken us several years to establish this institutional asset with investors across the spectrum and that overfunded position will provide pricing discipline as we go into the run up our '24 and '25 in.
Okay. Second question is still on Triad originations. Just looking at 2 data points here. First is originations in the quarter are tracking below the industry shipments, give a comment on that relationship? And then just looking at the trend, like March originations were lighter than a year ago, whereas January and February were plus. So was there anything going on in March this year. Does that suggest that we have a little bit of a weaker handoff on originations into the Q2 period?
Jim, it's Matt again. No, the first quarter is seasonally, it's always our slowest quarter for the year. We feel really good where we are. I mean if I kind of take you back to the guidance we gave, I believe we boiled it down into like 3 buckets, it was a little -- like a bit over $1 billion in chattel, around $500 million in community and a couple of hundred million of land home. Chattel, you've heard from us, we feel really good about. You saw the growth rates that we had there in the first quarter with that demand and approval growth coming in really fast behind in that silver and bronze category with those expanded agreements that we signed with our partners, that's giving us additional capacity there that's really giving us the opportunity to grow those channels even faster.In community in a similar way, we -- the rental program that we're going to be launching and turning into flow. We've been just sort of waiting for that partner to come around so we can really get that going. So we feel very strong about that growth as well. Community believe was up about 170% in that first quarter. And then land home was -- Lance touched on that before with the improvements put in place there, that was going to be a second half kind of story for us, but also the smallest bucket of the 3.
Okay. Understood. Last one on Triad for me. Just as you think about like the funding risk that came through last year and hedging noise, we'll call it, in a scenario where the Fed hikes rates, what should we expect from the Triad performance from financials?
Triad is hedged on its forward flow arrangements now, Jaeme. I think by the way, I think you're being kind on noise. But the reason that Chris Johnson here and his leadership and his substantial financial service experience in a couple of markets is that we now have board approved hedging policy and each hedge position is approved by the Board. So we feel good about in either a rising or a decreasing rate environment. And talking about rates coming down as quick, but either environment is fine for us.
The next question is from Tom MacKinnon from BMO.
Yes. Just a question with respect to the corporate segment. And looking at that on page, what is it on Page 13 -- or Page 16 of the MD&A. There's about $1 million in revenue here, and it seems to be from some legacy stuff is -- how should we be thinking of that? Is that kind of more of a one-off? Or what's the trend for revenue in corporate? I don't believe there was anything in the guide for that, but maybe you can help me.
Tom, it's Jackie. Corporate revenue, there's 2 components really built in there. One is we have some corporate investments. Those can trend up or down just a little bit because they're marked at fair value. So this quarter, there's a little bit of pickup there. There's also a little bit of FX that rolls into corporate revenue. So as the CAD weekend in Q1, you saw a little bit of FX revenue there as well. I wouldn't expect those amounts to grow or change materially throughout the year. They tend to just move up and down slightly.
So these would be legacy corporate investments. Is that correct? Like just help us think about what we should have for revenues in this segment going forward.
So I think -- I don't think of the old businesses as far as aircraft or rail legacy, these are more of fund type investments that we hold for purposes of gains.
And is there any -- how should we be thinking about that line going forward? Because it was up significantly.
Yes. I think the guidance, Tom, is to be plus or minus $500,000 from the $1 million, so. I don't know what chunk is FX, but.
Okay. That's fine. And then -- pardon me.
They tend to move a couple of hundred thousand dollars in each direction. It just happened to be up slightly this quarter.
Okay. So if it's plus or minus, is 0 the best way to think of it going forward?
That's fair, Tom.
Okay. And then with respect to the -- there seems to be some elevated transaction corporate development and strategic review costs that are below the line, still over 2 million granted running half the level they were in December and the quarter ended then. But is there still ongoing strategic review here? What would these 2 million costs be related to?
So Tom, the $2 million of transaction costs in Q1, there's a couple of different components there. I'd say the first was we did complete the acquisition of [ FAZ ] in Q1. And then we do obviously look continuously at improvements for our businesses and then the wrap-up of the strategic review as well.
Okay. And so going forward, we probably would anticipate that number to be lower as well?
Correct. It was down this quarter, and we expect it to be down going forward.
As there are no further questions registered, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.