Propel Holdings Inc

TSX:PRL

Earnings Call Transcript

[Operator]

Good morning, everyone. Welcome to Propel Holdings Fourth Quarter and Year End 2021 Financial Results Conference Call. As a reminder, this conference is being recorded on March 21, 2022. [Operator Instructions]

I will now turn the call over to Sarika Ahluwalia, Senior Vice President, Corporate Affairs and Chief Compliance Officer. Please go ahead, Sarika.

[Sarika Ahluwalia, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us today. Propel's fourth quarter and year end 2021 financial results were released this morning. The press release, financial statements and MD&A are available on SEDAR as well as the company's website, propelholdings.com.

Before we begin, I'd like to remind all participants that our statements and comments today may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions and management's plans for future operations or similar matters, which are subject to certain risks and uncertainties. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. The company's actual results could differ materially from those projected or suggested in the forward-looking statements due to several important factors or assumptions, many of which are beyond the company's control, including those risks and uncertainties described in our Annual Information Form for the year ended December 31, 2021 filed on SEDAR today.

Any forward-looking statements we make today are only as of today's date. Except as required by applicable securities laws, we undertake no obligation to publicly update or review any forward-looking statements. Additionally, during the call, we may refer to non-IFRS measures. Participants are advised to review the section entitled Non-IFRS Measures and Industry Metrics in the company's Management's Discussion and Analysis for the quarter and year ended December 31, 2021, for definitions of our non-IFRS measures and reconciliation of these measures to the most comparable IFRS measures.

I am joined on the call today by Clive Kinross, Founder and Chief Executive Officer; and Sheldon Saidakovsky, Founder and Chief Financial Officer. Gary Edelstein, President of Propel, and I will also be available for the question-and-answer period.

I will now pass the call over to Clive.

[Clive Kinross, executive]

Thank you, Sarika, and welcome, everybody, to our Q4 and year ended 2021 conference call. I will start today's conference call with a quick overview of our operations. I will then move to an overview of our recent financial performance. Sheldon will provide a detailed analysis of our financial results. I will introduce our operating and financial targets for 2022 and 2023. And then we will close with an update on Propel's strategic direction.

Propel is a consumer-focused FinTech lending platform operating at scale. Our primary objective is to facilitate access to credit for millions of underserved consumers with our focus currently in the United States markets. Since inception, we have facilitated over 800,000 loans and lines of credit for Propel and our bank partners, which totals over $600 million in total originations funded.

We have a cloud-based, mobile-first proprietary technology stack, built with an open architecture that uses artificial intelligence and processes thousands of attributes to provide credit opportunities to underserved consumers who are otherwise shut out of traditional credit options. Our technology allows us to provide automated credit decisions very quickly, most often in under 10 seconds.

We are also an institutional grade operator. Today, we offer direct lending products, and we also partner with 3 U.S. banks to facilitate lines of credit in 28 unique states. Our technology also allows us to seamlessly integrate with 28 marketing partners that help drive originations for our direct lending and bank partner offerings.

In fiscal 2021, on top of completing our IPO, Propel delivered exceptional financial performance, achieving records in total originations funded, which increased 123% in 2021, ending combined loans and advance balances increasing 115% over the prior year and revenue which increased 76% in fiscal 2021. Propel also delivered a record adjusted EBITDA in 2021 of over $25 million, which is a 27% increase over fiscal 2020, and recorded adjusted net income of $12.9 million, a 40% increase over fiscal 2020.

These record results were driven by several factors. First, we added one new bank partner program in 2021. Second, two of our bank partners rolled their products out in 10 new states each, expanding our collective product and service offerings geographically. Third, we have added marketing partners to our platform and expanded existing marketing channels, notably our direct channels, which includes direct mail and paid search. And fourth, on a macro level, we have seen a strong return to consumer demand in the U.S. as well as an accelerated movement from brick-and-mortar to online.

Another growth driver which made a significant impact was the introduction of new variable pricing and credit regulation capabilities on our platform. In brief, credit graduation allows us to facilitate the graduation of consumers to lower cost of credit products once a proven repayment history has been established and variable pricing allows for lower cost products at origination to consumers with better risk profiles from the outset. We are very excited about the potential of these programs for our consumers as well as for our business as they significantly expand the addressable market for Propel and our bank partners. The programs help to retain our customer base as their financial situation improves, and they help fulfill on our collective values of providing lower cost of credit products and the right products for the right consumers.

As we highlighted in our operational update back in February, originations attributable to variable pricing and graduation have significantly exceeded our expectations. We are very excited about the long-term potential of these programs as they will help accelerate growth and contribute to profitability in a significant way.

Sheldon will provide more detail on our financial performance later in this call. But it is important for us to highlight that the rapid increase in our originations in the second half of 2021 led to record quarterly revenues and a record ending combined loan and advance balances for the year. This level of growth also impacts profitability in the short term due to the recognition of noncash provisioning charges that are required with IFRS.

As a reminder, in periods of high growth we recognize the cash cost of acquisition and data, and we also book significant noncash expenses related to provisioning on new originations. In quarters like Q4, we incur both the cash and the noncash cost of an origination with very little attributable revenue. Despite these dynamics and corresponding accounting treatment in the short term, growth in the loan book ultimately leads to growth in revenue and increased profitability.

With that, I will now pass the call over to Sheldon.

[Sheldon Saidakovsky, executive]

Thank you, Clive, and good morning, everyone. Propel delivered record revenue in Q4 2021, increasing 84% over the prior year to $41 million and increasing 76% to just under $130 million for fiscal '21.

There were many drivers to this record revenue growth in 2021, as Clive highlighted earlier, including a new bank partner, increased geographic coverage by our bank partners, new and maturing marketing partner relationships and channels, a favorable macro environment and the launch of our variable pricing and graduation capabilities in Q3. All of these drivers are expected to sustain growth through 2022, '23 and beyond.

We realized an annualized revenue yield of 141% in Q4 and 148% for fiscal 2021. Our revenue yields are decreasing due to lower rates on incumbent programs and lower rates on variable pricing and graduation originations. Again, over the long term, we expect these programs to drive elevated growth and sustained profitability through lower provisioning and charge-offs, lower customer acquisition costs and through improved operating efficiencies.

Turning to provisioning. In Q4 2021, you can see that provisions as a percentage of revenue and net charge-offs as a percentage of total originations funded have both increased over the comparable periods in the prior year. A similar dynamic was presented in Q3. Essentially, provisioning and net charge-offs were abnormally low over the course of 2020 due to lower consumer spending, government stimulus and a cautious stance to underwriting driving enhanced credit performance. Consequently, we entered Q4 2020 with a more mature book that was performing exceptionally well which, in turn, drove lower provisioning and net charge-offs for the quarter.

Q4 2021 was a more normalized period from the start and had especially high growth. In periods of growth like Q4 and fiscal 2021, provisions as a percentage of revenue tend to be higher for 2 reasons: first, new customers have higher default rates relative to those in a mature portfolio; and second, under IFRS, we are required to book expected credit losses on new originations and accounts in good standing, which drives provisioning higher.

Looking at net charge-offs as a percentage of funding. You can see that our trend is towards lower-risk consumers. Although 2020 was atypically low at 22% due to the factors I just discussed, 2021 decreased further to 18% reflecting a significant shift in the composition of the portfolio towards lower risks.

While we achieved record originations, ending combined loan and advance balances and revenue, net income decreased in 2021 to $6.6 million from $7.3 million in 2020. The change in net income is attributable to 4 factors: first, the record originations recorded in Q4 2021 and for fiscal '21 require upfront costs in the form of cash customer acquisition costs and noncash provisioning that is further increased with IFRS accounting; second, we have incurred additional operating expenses as we transition from a private company to a public company; third, we realized nonrecurring costs relating primarily to our IPO of $1.6 million for the year; and lastly, fiscal 2020 was an atypical year in terms of growth and credit quality due to the pandemic-related factors.

As we have indicated previously, profitability metrics were elevated in 2020 due to lower demand, government stimulus and our cautious approach to underwriting and expense management.

Today, we are also introducing adjusted net income in addition to adjusted EBITDA. Adjusted net income removes nonrecurring items such as transaction costs and noncash provisioning against accounts that are in good standing on an after-tax basis. We believe adjusted net income is a better representation of the business' core profitability.

Adjusted net income increased to $12.9 million in 2021 from $9.2 million in 2020. Adjusted EBITDA increased to a record $25.4 million in '21 and from $20 million in 2020. These fiscal year increases are mainly attributable to the record revenue we achieved in 2021, which outpaced the growth in operating expenses. In Q4 2021, adjusted net income contracted by $200,000 relative to Q4 2020 and adjusted EBITDA decreased to $2.6 million as compared to $4 million. The upfront costs associated with the 84% growth in originations as well as increased costs associated with being a public company were the primary drivers to variance in earnings in this period.

Before I pass the call back to Clive, I'll provide an overview of Propel's financial position. We have a very strong balance sheet and a lot of capacity to fund future growth. As of December 31, we had over $93 million of undrawn capacity under our credit facilities, and our cost of debt has been steadily decreasing as well.

With the CAD 70 million of proceeds from the IPO and the exercise of our over-allotment option, we have invested in supporting the rollout of bank programs to new states, we have invested in portfolio growth and we have temporarily paid down debt. As our other key growth initiatives materialize, we will deploy the remaining proceeds accordingly.

Our debt-to-equity ratio was approximately 0.6x as of December 31. Given the structuring of our senior debt facilities, which, when utilized, provides us the capacity for well over 4x leverage, we have significant existing financial capacity to execute on our growth plans. We plan to draw down on these credit facilities to fund our future growth.

I will now pass the call back to Clive.

[Clive Kinross, executive]

Thank you, Sheldon. Our previous operating and financial targets covered the 12 to 18 months following June 30, 2021. We think it is more constructive to provide annual targets. And as such, we are introducing new annual operating and financial targets for fiscal 2022 and fiscal 2023.

As you could see on this slide, we continue to expect very high growth rates in our ending combined loan and advance balances, increasing between 80% and 90% in 2022 and between 45% and 55% in 2023. We think these growth rates are achievable given the momentum we have established with expanding the geographies we serve, the addition of new marketing partners and expansion of existing channels, the continued transition from brick-and-mortar to online lending and the traction we are gaining with new programs such as variable pricing and graduation, which have been performing well ahead of our expectations. These targets also assume that consumer demand will reflect the continued opening of the economy in the United States.

With the high growth realized in 2021 and expected in 2022, you will note that our profitability metrics, adjusted EBITDA margin and net income margin are low in these periods as compared to our target for 2023. These profitability targets reflect higher upfront costs to grow our loan book, including the noncash provisioning charges.

We firmly believe that the acceleration of our variable pricing and graduation capabilities is in Propel's best interest over the long term. We believe that our addressable market has significantly increased. We are fulfilling our mission to help more underserved consumers, and we expect to increase profitability over time through lower provisioning and charge-offs, lower relative customer acquisition costs and operating leverage from our established infrastructure.

Before we open up the call to Q&A, I will revisit our strategy for growth. As I've highlighted, variable pricing and graduation capabilities will continue to be important strategic growth drivers. We also have many opportunities to enter new geographies and add adjacent products both organically through partnership or through acquisition. Our business development pipeline is very deep and has significantly expanded, with Propel becoming a public company last year.

As we have said before, part of our strategic road map is comprised of geographic expansion across the United States and into new countries, including Canada. We are continuing to evaluate and prepare for an entry into the Canadian market and we are very keen to share more details with you all in the coming months. I do want to note that the financial and operating targets we have shared today do not include any of these future opportunities and growth initiatives.

That concludes our prepared remarks, operator. You may now open up the line to questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Scott Chan with Canaccord.

[Scott Chan, analyst]

Appreciate the guidance for 2022 and 2023. When I look at 2023, the operational margin guidances are much higher than '22. And then from an operational cost perspective, which items have the most operating leverage to kind of achieve that higher target in '23?

[Sheldon Saidakovsky, executive]

Yes. Thanks a lot, Scott. It's Sheldon here. So I think 2022 is a significant growth year as well as we're expanding within our existing bank programs and a lot of the states that we just rolled out in over the course of 2021. So there's quite a lot of growth as we're continuing to penetrate in those existing states and across all of our bank partner programs. So we're growing by 80% to 90% off a much higher base. We're coming into the year at just under $135 million in combined loan and advance balances. So quite a lot of growth in absolute terms and on percentage terms. So as we discussed in our business, margins do contract when you're in an especially high growth period. And you're seeing some of that in 2022. And then we really get to that scale and see that expansion and operating leverage in our business as we turn the corner and go into 2023.

In terms of where we're getting most of that operating leverage, when you build this book, and these are mostly line of credit products that we have, and consumers are being graduated to better and better rates, so these consumers do stay with us for their credit needs. And that's the intention to help them over the course of their credit journeys to provide them better and better rates. So as you're building this loan book, you're incurring less originations costs and acquisition and data costs, but your loan book continues expanding in the future. Furthermore, a lot of the fixed costs and a lot of the infrastructure that we've built enable this over 100% growth last year and the 80% to 90% growth in 2022. We won't be adding cost to our infrastructure at that rate moving forward either.

And then finally, I'll mention that as the portfolio matures -- and we've spoken about this to try to explain the dynamic, but eventually, as your portfolio does mature and you're adding less new customers as a percentage of your total portfolio, your provisioning and loss rates start to come down and your gross margins start expanding with a more mature portfolio. So you're getting that operating leverage in all of those areas when the growth starts slowing down a little bit as you get to that higher and higher base.

[Scott Chan, analyst]

And maybe on the growth side, you talked about geographic expansion, 10 new states in 2021 and then kind of run room for further growth on those existing geographies. But are there any plans on expanding into further states over the next 2 years in terms of the guidance that you provided?

[Clive Kinross, executive]

So Scott, let me, first of all, speak to what's inherent in the guidance that we provided, and there's very, very little geographic expansion in the U.S. that's built into that model. So from that perspective, it's conservative. And as I said as well during my prepared remarks, there's also no additional growth built in for all the new initiatives that we will be launching, including ultimately the launch into the Canadian market. So let me say that from the outset.

On the other hand, if you were to say to us, do we actually expect to launch into additional states? The answer to that is yes, absolutely. We're in discussions with several different banks and other partners about launching new products that are, broadly speaking, focused on two things: number one, continuing to move up the credit spectrum and target still underserved consumers, albeit less risky consumers on the one hand; and also focus on further geographic expansion. I'm hopeful that we'll be able to announce some of those developments in the coming months over here. But just to reiterate, none of that has been baked into the forecast and targets that we've provided today.

[Scott Chan, analyst]

And just lastly, one of the questions I get often over the last 3-plus months is just on the credit side. And you talked about normalization of credit. But are you seeing anything year-to-date, like any cracks with U.S. subprime consumers that could be concerning? Or any metrics that you track or trend that could be helpful for the audience?

[Clive Kinross, executive]

Yes, it's an excellent question. It's something top of mind for us, too. There's certainly some negative news right now, inflation, rising interest rates, there's obviously a war that creates lots of tension and also obviously fuels inflation, particularly with oil prices and food prices, amongst other things. So that's in the negative column. In the positive column is you've got a U.S. economy that's opening up rapidly. You've got employment growth that's again returning to the pre-pandemic norms. In addition to that, you have wage inflation, particularly in our segment of the market, that's outstripping the consumer price index.

So there's certainly positive and negative takes. And I think human psychology, being what it is, we tend to be more drawn to the negative stuff even though, at the end of the day, in our business, what impacts credit quality is more all of those variables than just the negatives or just the positives. So let me say that at the outset.

And let me also say that in these kind of uncertain times, we need to keep a very, very close watch on credit quality and everything in the business. And I'm certainly not an economist and I'm not a forecaster, and while I may have an opinion as far as that's concerned, what's more important in terms of how we run the business is that we have all the controls and all the levers to make sure that whatever circumstance we happen to run into, good or less good, we have the mechanisms to be able to control that. And we certainly do. So let me just say that as my opening comments as far as that question is concerned.

Let me also say that government stimulus, as you know, has stopped in the U.S. So that is certainly, from a credit quality standpoint, I would call it a little bit of a negative. The other thing, in the back half of last year, certainly from July to December, there was a Child Care Tax Credit that families were getting that they would typically get in tax season. The impact that, that had on the back half of 2021 was to dampen demand a little bit, even despite our outstanding growth, obviously, and also to improve credit quality.

So as you move into 2022, currently, neither of those are in effect. In other words, there's no Child Care Tax Credit that's paid monthly. And the impact of that relative to the back half of 2021 is twofold: number one, you'll see higher demand in light of that no longer being around; in addition to that, it impacts credit quality as well. All of that, Scott, has been taken into account in our forecasting. And as far as that's concerned, the numbers that we provided, contemplate all of that. In other words, it contemplates increases in credit risk and in default rates. That's baked in.

In answer to your question, is credit quality in line with what we were expecting, it's absolutely in line with what we were expecting. However, what we're expecting is there to be some degradation because of all of the variables that are provided over there. We're not seeing any cracks or any heightened credit risk relative to our budget and relative to our forecasting. But once again, we know in these kinds of times that it's possible, there could be shocks, particularly if there's more big inflationary swings like we've seen in oil in the past few weeks. And if that does happen and we see any heightened default rates, we certainly have the levers and the mechanism to be able to control that.

[Operator]

[Operator Instructions] At this time, there are no further questions. I would like to turn the call back over to Mr. Clive Kinross for closing remarks.

[Clive Kinross, executive]

Thank you again to everybody for attending this morning's call. I would like to send a very big thank you to the Propel team for helping to achieve record results we delivered this quarter. I would also like to thank our shareholders for your continued support.

I encourage all of you to reach out to our team if you have any questions about the quarter or our long-term growth plans. Have a great day and a great week. Operator?

[Operator]

This concludes today's conference. You may now disconnect.