Operator: Good day, and thank you for standing by. Welcome to goeasy’s Second Quarter 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation there will be a question and answer session. [Operator Instructions] I would now like to hand the conference over to your host today, Farhan Ali Khan.

Please go ahead. Farhan

Ali Khan: Thank you operator and good morning, everyone. My name is Farhan Ali Khan, the company’s Senior Vice President and Chief Corporate Development Officer, and thank you for joining us to discuss goeasy Ltd.’s results for the second quarter ended June 30, 2023. The news release, which was issued yesterday after the close of market, is available on Globe Newswire and on the goeasy website. Today, Jason Mullins, goeasy’s President and Chief Executive Officer, will review the results for the second quarter and provide an outlook for the business.

Hal Khouri, the company’s Chief Financial Officer, will also provide an overview of our capital and liquidity position; and Jason Appel, the company’s Chief Risk Officer is also on the call. After the prepared remarks, we will then open the lines for questions from investors. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company’s investor website and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our investor site. All shareholders, analysts and portfolio managers are welcome to ask questions over the phone after management has finished the prepared remarks.

The operator will poll for questions and then provide instructions at the appropriate time. Business media are welcome to listen to this call and to use management’s comments and responses to questions and any coverage. However, we would ask that they do not quote callers unless that individual has granted their consent. Today’s discussion may contain forward-looking statements. I’m not going to read the full statement, but will direct you to the caution regarding forward-looking statements included in the MD&A.

I will now turn the call over to Jason Mullins.

Jason Mullins: Thanks, Farhan. Good morning, everyone and thank you for joining the call today. The second quarter was the strongest in our history, characterized by record originations, stable credit and record earnings. I will start by describing some of the underlying trends that are producing the continued strength and performance for the company.

First, as we have suggested during the last few quarters, a difficult macro environment benefits those with scale. As inflation affects operating expenses, wage growth affects salaries, higher borrowing costs compresses margins and economic concerns require credit tightening, smaller subscale companies struggle. As a result, those with scale are often in a position to capture a greater share of the market and take advantage of that market disruption. goeasy is currently benefiting from these dynamics today. But we have example, the number of companies bidding directly against us within Google Pay search during the quarter was down nearly 40% year-over-year.

Furthermore, the majority of prime lenders, specifically major banks, tightened their credit when they are concerned about macro conditions. As a result, we are continuing to experience high-quality borrowers using our products. Secondly, the business initiatives we have executed over the last few years continued to perform well. During the quarter, we added a nearly 1,000 new merchants within our point-of-sale financing division, including a recently announced partnership with 123Dentist, a national network of supported dental practices that provide a wide range of dental care to more than 800,000 Canadian patients and over 2.5 million patient visits annually. We also added over 200 more automotive dealerships to our auto network leading to a record automotive financing volume in the quarter.

Lastly, we continue to increase the use of targeted pre-approved lending campaigns to existing and former borrowers, which use our most advanced and predictive scoring models to assess risks, 50% of our unsecured loan originations in the quarter were from these cross-selling efforts. The combination of less competition and strong performing strategic business initiatives produced nearly 42,000 new customers, a company record for a single quarter. As a result, it led to the highest proportion of credit advanced and new customers, and more than five years at 71% of all net lending volume. Combined, we received a record number of applications for credit at nearly 500,000, up 25% year-over-year. The elevated level of applications led to record originations in the quarter of 667 million, up 6% over the second quarter of 2022.

Organic loan growth was above our forecast at 210 million. At quarter end, our portfolio finished at 3.2 billion, up 35% from the prior year. We also continue to execute on our strategy to pass all the benefits of scale to our consumers by offering them progressively lower rates of interest. Although the level of decline in average rate has moderated, given the realities of higher borrowing costs. During the quarter, the overall weighted average interest rate charged to our customers declined slightly to 30.1%, down from 31.7% at the end of the second quarter last year.

Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 35.4%. Total revenue in the quarter was a record, 303 million, up 20% over the same period in 2022. With healthy levels of consumer demand, less competitive tension, and our business initiatives performing well, it allows us to continue to be more selective with the credit we underwrite, which contributes to higher quality loan originations. By way of example, year-over-year, we are funding about 20% less applicants with an easy financial than we previously had. This selection process leads to better performing and more profitable loan vintages.

The credit profile of our business remains strong as our secured portfolio has risen from 36% to over 41% of our book, and based on our internally generated custom credit models, this quarter saw the second highest quality loan originations in our history. So while we continue monitoring vintage level delinquency and loss rate trends closely, the loan portfolio continues to perform in line with our expectations. Thanks largely to the combination of credit tightening and product mix. Furthermore, our consumer segment remains resilient, as we have described in the past, our borrowers have limited exposure to real estate and mortgage rates with a home ownership level of less than 20%, and they carry 55% less total debt than the typical prime borrower. During the quarter, the annualized net charge-off rate continued to remain stable at 9.1%, down 20 basis points from 9.3% in the second quarter of last year.

Our loan loss provision rate also reduced to 7.42%, compared to 7.48% in the previous quarter, reflecting the improved portfolio mix and loss rate performance. With a strong level of demand for loan growth, we are also focused on initiatives that reduce expenses and increase operating leverage. During the quarter, our efficiency ratio, specifically operating expenses as a percentage of revenue reduced to 31.2%, an improvement of 300 basis points from 34.2% in the second quarter of last year. After adjusting for the non-recurring items, we reported record adjusted operating income of 114 million, an increase of 28.5% over the 89 million in the second quarter of 2022. Adjusted operating margin for the second quarter was 37.7%, up from 35.3% in the same period last year.

After adjusting for the after-tax effect of the non-recurring items, including mark-to-market gains recorded in the quarter adjusted net income was a record $56 million, up 20% from the same period of 2022. Adjusted diluting earnings per share was $3.28 up 16% from $2.83 in the second quarter of 2022. While adjusted return on equity exceeded our target levels at 24.2%. With that, I will now pass it over to Hal to discuss our balance sheet and capital position.

Hal Khouri: Thanks, Jason.

During the quarter, we successfully extended the maturity of our existing 1.4 billion evolving securitization warehouse facility through October, 2025. The amendment incorporates modifications that improve eligibility criteria resulting in increased usable funding capacity. The lending syndicate for this facility continues to consist of RBC National, Bank and BMO and bears interest based on one month CDOR plus 195 basis points. Based on the current one month CDOR rate of 5.37% as of August 4, 2023, the interest rate on new draws would be 7.32%. It is important to note that nearly 90% of our existing debt balances have interest rate swap agreements in place in order to generate fixed payments on the amounts drawn and assist in mitigating the impact of future increases in interest rates.

At quarter end, our weighted average cost of borrowing was 5.6%, while a fully drawn weighted average cost of borrowing increased to 5.9%. Equally important, the business continues to generate meaningful levels of free cash flow from operations. For the net growth in the loan portfolio, free cash flow in the quarter was $76.5 million, up 34% from $56.9 million in the second quarter of 2022. Based on the cash at hand at the end of the quarter and the borrowing capacity under existing credit facilities, we had nearly 900 million in total funding capacity. While we have a strong balance sheet today, we are also continuously seeking new forms of funding that will diversify our balance sheet and optimize our flexibility and cost of capital.

As such, we remain confident that the capacity available under our existing funding facilities combined with our ability to raise additional debt financing is sufficient to fund our organic growth forecast. I will now pass it back over to Jason to talk about our outlook.

Jason Mullins: Thanks, Hal. With the positive level of momentum in the business, we are now confident that we will meet or exceed the high end of our loan book forecast of $3.6 billion in 2023 while remaining on track to achieve all other metrics of our forecast through 2025. In the upcoming quarter, we expect the loan portfolio to grow between $205 million and $230 million.

As we continue to optimize our pricing, we also expect to maintain the current total annualized portfolio yield, which should finish between 34.75% and 35.75%. We also continue to expect resilient and stable credit performance with the annualized net charge off rate expected to decline to between 8.5% and 9.5% during the third quarter. The upcoming quarter will also mark the official national rollout of our new goeasy Connect mobile app. After a successful pilot with many learnings over the past several months. As we shared before, this transformational industry first digital solution will provide goeasy customers with a one-stop access to all of our credit products across our brands, through a simple and easy to use digital interface.

More importantly, the app will gradually become the vehicle to provide our borrowers with personalized pre-approved loan offers as we look to extend our customer relationships by meeting all of their future borrowing needs. The launch of this first version represents an exciting time for our business, as we continue to build and evolve our full suite financial services offering. As always, I want to thank the entire goeasy team for another record result. In May this year, we held our company national conference providing us the opportunity to celebrate and recognize all of the incredible talent across the organization. I’m more convinced than ever that we have a winning team who are deeply passionate about our vision and supporting our customers.

Despite the success we have had, including generating the highest total shareholder returns in 2001, of all other financial stocks on Bay Street and Wall Street, we are still just a small fraction of the large and underserved $200 billion non-prime credit market. In our view, it is still just the beginning of our journey. And as I have said many times before, we are truly just getting started. With those comments complete, we will now open the call for any questions.

Operator: Our first question comes from the line of Etienne Ricard with BMO Capital Markets.

Etienne Ricard: Thank you, and good morning. In your remarks, you mentioned that, favorable competitive conditions are helping you to acquire new customers. Do you believe this is more related to a challenging financing environment or more about the regulatory overhang from the 35% of rate cap?

Jason Mullins: I think it is a combination of both. I mean, in today’s environment, where the rate cap change has not yet been implemented, it is clearly going to be more heavily influenced by inflationary environment, cost of capital, credit risk concerns. But I think that, all companies know with that pending regulatory change, that they have to, try to adapt.

And therefore, they are probably starting to try and test and figure out whether or not they can make the economics work, whether or not they can officially acquire customers at an appropriate affordable CPA. So I do think the regulatory factor is a bit of a contributing element, but today, it is probably a little bit more of the macro conditions.

Etienne Ricard: Okay. One metric that stood out to me from the quarter is that, new customers accounted for 71% of loan advances. So that is significantly above your 60% long-term average.

So I guess, first part of my question is, is there a particular product or distribution channel explaining this dynamic? And the second part is, what is giving you the confidence to deviate from the historical 60%, from a credit standpoint?

Jason Mullins: So it is pretty well distributed across all of our products and channels. Although if we would slightly index in some of the newer, younger product categories, such as automotive financing, for example, simply because it is earlier stage in our development, but all products and channels experienced strong new customer growth. And the reason we are so comfortable and confident with that is that, the quality of the new customers that we are acquiring today are better than our existing portfolio average and better than the quality of the new customer we would acquire historically. So for perspective, the average generic credit score, albeit again, we don’t always use that in making a lending decision, but it is a good market proxy. The average score of those new customers is almost 30 points higher than what it was for the new customers we acquired this same time, say two years-ago.

And that just shows the gradual evolution of as we continue to attract and retain better quality customers through lower APR offers and the introduction of additional products that continues to allow us to attract and retain a better customer. So, we are quite happy with the new customer growth, particularly because of it is of a good quality nature.

Operator: Our next question comes from the line of Gary Ho with Desjardins Capital Markets.

Gary Ho: Just first question, maybe going back to your three year outlook. I think in those numbers, you guys budgeted it in Jan 1, 2024 for the rate cap implementation date.

Just wondering if you have gotten any updates from the regulators on when that will be put into place, and if it is delayed, how should we think about the sensitivities to revenue yield range for 2024 that 33% to 35%?

Jason Mullins: Yes. So what we note at this moment is that they will be publishing a new set of regulations by the end of the year. We would expect sometime between fall and early winter. So by the end of the year, a new set of regulations will be published. In those regulations, it will contain the effective date of the new rate cap, so the implementation date as well as any potential exemptions from the new lower rate cap that they might consider.

We believe that the assumption of an early 2024 implementation date is a conservative one. One would expect and hope that there is more time given for implementation. So it is certainly possible that the implementation date is sometime later in 2024. But we have always taken a more conservative approach to uncertain matters of this nature. In the event, to your question it is deferred and does not get implemented until later in the year, clearly that will mean that the rate of decline in the portfolio yield in 2024 will be slower than what is otherwise in our current forecast.

And that will be net accretive to next year’s earnings. So, consider, I think the version that we have published as being the more conservative model and then as we get more information, we will be able to update everyone accordingly.

Gary Ho: And then second question, just on the price increases, I think in the last call you mentioned 200 basis points increase right after the rate cap announcement. Were there any subsequent increases in the quarter after that initial one? And maybe just comment on the pricing environment overall what are your competitors doing?

Jason Mullins: Yes. So we saw another sequential quarter-on-quarter increase in the weighted average coupon of our originations.

Particularly focused on the lower priced products that are already well below the future 35% rate cap. As we said, that was one of the pricing opportunities that existed to try to offset some of the future pressures associated to the reduction in the higher end APRs. As a result, that is why you can see our quarter-on-quarter decline in total portfolio yield was quite modest. And as I noted earlier our expectation for the total portfolio yield in the upcoming quarter and perhaps even beyond, is to be quite stable. We are not, as a result expecting much decline.

So the net benefit of the lesser level of competitive tension, of course, is not only does that generate additional demand, allowing us to be more selective from an underwriting perspective. It also allows to have a little bit more freedom from a pricing perspective as well. And to be clear, that is not solely us doing something, that to take advantage of the circumstances. All lenders, banks included, are clearly putting up the APRs that they charge, given all lenders are facing a higher cost of capital. So we are really just falling in line with what would be market norm, but in our case, it is quite helpful to the total portfolio yield and the economics of the business.

Gary Ho: And what would you say would be the cumulative price increase so far? It’d be greater than that 200? Is it like 250, 300 so far?

Jason Mullins: Well, I wouldn’t think of it that way because we are constantly adjusting pricing in every credit tier and every product. And there are some credit tiers and some products where we are still bringing pricing down. I would think of it as that the portfolio mix shift would otherwise be moving the yield down and the pricing increases, we have been able to implement on the below 35 population has held that portfolio yield in amalgam flat. So we have been able to generate enough pricing increases to essentially prevent any further portfolio decline for the time being. There will be an additional spare step down as provided in our outlook when we have to move all lending to no more than 35.

But I would suggest there is still some additional pricing opportunities there as well. So again, I would think of our current outlook, that we have provided as being a little bit more not conservative and reasonable and may have some further upside.

Gary Ho: If I can just sneak one more in Jason, just good results here. Sounds like very robust demand. With the rebound and share price would you consider an equity raise to help grow the platform even faster? I know last time when you did the smaller equity raise, you mentioned the net debt adjustable tangible equity calculation that the credit agency look at.

Maybe give us an update where that stands.

Jason Mullins: Yes, no leverage is in a very, comfortable spot. We are comfortably below where we were late last year. So there is no need for equity and no plans for equity at this time. Our leverage is not only in a good spot today, but even inclusive of the growth in our business and our growth forecast.

We are expecting to continue to delever, so we can achieve that organic growth forecast that we have provided without any additional equity and just continue to use the free cash flows and additional sources of debt. So, no need for equity at this point. The growth that we have got in the business today was fully what we contemplated when we did the last round last year. So we are in a very good spot.

Operator: Our next question comes from the line of Jamie Glyon with National Bank Financial.

Jamie Glyon: First question is on the competitive environment and you called it out the press release, a couple other spots about challenges that many companies in the industry are facing. are facing. Can you provide a little bit more color as to, what some of those specific challenges are and how you are better positioned against those competitors? And is it isolated to a type of competitor? Maybe you can add to that as well.

Jason Mullins: So you should think of it in a fairly simple and generic sense, which is that, the less scale that a company has from our view the more difficult operating environment is. And so when we look at the competitive landscape, it isn’t any one specific company or any one specific product.

We see evidence of smaller scale companies in unsecured lending, automotive lending, powersports lending, where if they don’t have a high degree of operating leverage because they haven’t achieved scale, and they don’t have a deep extensive list of bank relationships for some efficient sources of capital, that it is just much more difficult to operate. You layer on the fact that, then you have to tightened credit because of economic concerns, which means that, your funding ratios dropped and therefore your cost of acquisition is higher. And therefore, it makes it very difficult to operate. And so those companies are now having to preserve more capital. They can’t afford to spend as much on marketing and advertising.

They maybe have to moderate their level of operating expenses than investments in new business initiatives. So those are the kinds of basic operating challenges that you have, when you are in a position of less scale. So scale in an environment like this clearly, means a lot. And as we have talked about before, if you looked at our competitive landscape, in most of our product categories, there are a couple of large companies we compete with, that do have scale, that would be the likes of Firestone. That would be some of the non-prime positions of the banks of the automotive category.

But there are also in every one of those product categories, half a dozen smaller companies, with which we compete directly for customers. And those would be the ones that appear to be having a little bit more difficulty. And then I think that drives some of that debt volume to those like goeasy.

Jamie Glyon: Okay. Great.

And with the stress, I guess, the question is like how long do you feel like they have been dealing with this environment? Obviously, there is a bit of runway here in terms of the backdrop that we are operating in, that can further support some of these net volume wins for goeasy. So organically, there is -- it seems like there is some runway here. But also on the inorganic side, have you noticed an uptick in any of the those types of conversations for these businesses struggling? And I’m thinking not in Canada specifically.

Jason Mullins: So I think the environment, as we all know, has been getting progressively more difficult over the last year or plus. And so it is been gradual I think that these companies have found it more difficult to operate.

And I would suspect based on the current out economic outlook, it is probably a little while longer that it is going to be some choppy your waters and more difficult for them as well. So any incremental benefit that we are experiencing from less competitive tension it might ebb and flow month to month quarter to quarter, but I certainly would expect it will continue at some level for a little while, certainly until rates start to subside, concerns about the economic environment start to subside. Until then, I think most companies, especially, again, those with smaller balance sheets, are going to inherently be more conservative and be more risk adverse, so then that benefits us. Yes, we have had conversations inbounds and kept relationships active. As it relates to new investment opportunities both in Canada and abroad.

Again, nothing, that is imminent today. Our focus continues to be on the very healthy organic loan growth that is where we are allocating all our capital at the moment. But as we have always said, we are always opportunistic keeping our eyes and ears open for interesting opportunities in Canada as well as nurturing relationships in other markets where it may make sense for our business in the future. But nothing in the near-term. Right now it is just keeping our eyes and ears open and focusing on executing our Canadian operation as we have been.

Jamie Glyon: And then last one, just in terms of the pricing environment and the question Gary was going down the path, in terms of pricing increases on some of those lower rate products. The question is, I guess how far along that path of price increases are you, your history is typically to sort of like test and learn and move slowly on these, on some of these initiatives. So I’m just wondering, where are we in that process of potentially raising rates? Is there opportunity to continue pushing that, pushing those rates higher forward demand doesn’t seem to be too affected. So, really, I guess it is just maybe around the credit performance. So what are some views on that runway as well? Thanks.

Jason Mullins: Yes. Still more opportunity. Our philosophy hasn’t changed in our approach. So we have been implementing pricing adjustments in a gradual nature where month by month you make some small adjustments, monitor the application demand, monitor the conversion rates, monitor the impacts on the competitive environment learn from it, and then make additional changes. Optimizing the pricing of any given loan product at any given credit tier is really a never ending process, because the environment’s always changing, the competitive landscape’s always changing.

So it is not as though you can derive one optimal price for any given customer and then just count on that to be the optimal price forever. So it is an ongoing exercise, but as it relates to opportunities to optimize price as a way to account for the higher cost of borrowing as a way to account for the future regulatory changes, I think we are still fairly early in that process and there are additional opportunities ahead. And the benefits of that competitive dynamic and that healthy demand that really serves that journey well. Because not only can we make those pricing adjustments, but we can be a lot more selective with the credit that we underwrite as well. So it is an ideal situation for us to be able to kind of make these tests and learn from them.

Operator: Our next question comes from the line of Marcel McLean with TD Securities.

Marcel McLean: So first one, just on sort of following up on ATM’s question. Can you just talk about new customer metric, can you remind us how it is measured like are these? Customers that are brand new goeasy or could it be a cross-sell customer that falls into that bucket or if they had a loan previously with goeasy, and now are back for a new one after having previously paid off a loan? The reason I’m asking this is new customers are typically the riskiest of customers and the allowance ratio to stick down. So I’m just trying to take through that. I really want to understand how that metric is calculated?

Jason Mullins: Yes.

So new customers are either brand new individuals we have never served before or there are former customers that have not been active borrowers for a period of time. I don’t recall the exact amount of period of time that we used to classify them as such, but they would’ve not been an active borrower for some period of time. So these are essentially not customers that have loans today. They haven’t had loans very recently, and therefore we consider them to be new to the business which is different than when we talk about lending to an existing customer where they already have a loan today, or they just recently had a loan they paid out. We would classify them as existing customers.

Your point is a valid one in which in general new customers carry higher credit risk than lending to existing customers. The existing customers for us, the ability to do more sophisticated credit decisioning and underwriting. However, why in this instance that mix shift to more toward more new borrowers doesn’t present the same concern that it might normally is because of the fact that those new customers are being onboarded at higher credit tiers and better products than the underlying existing back book. And so if you were operating in an environment where the mix shifted toward more new customers, but the credit quality in the product mix was the same as the existing portfolio you have had. You would actually be accepting slightly more credit risk.

But if the mix of new customers is offset by the fact that they are of a better credit quality or a better product mix, then that shift toward new may actually derisk the portfolio. And so that is what gets us quite comfortable about that level of new customer volume.

Marcel McLean: Then secondly, with the strong demand that, that we have been seeing here, like, record of applications record, new customers, record originations, all that. Now you have listed out a number of factors that have sort of contributed to that. I think more customers are falling into the subprime bucket, maybe being declined from other places, maybe some pandemic savings are, have sort of come down and need for credits increasing, you have new verticals, you have higher average loans per customer, decreased competitive, all those factors.

Is there maybe one or a handful of them that are driving the majority of this loan growth while the others are maybe are contributing, but not to the same degree it, are you able to sort of point to a few that would be or is it more balanced, I guess is the question?

Jason Mullins: No. I think that the two greatest drivers, which were kind of the two that I touched on in some of the prepared remarks would be one. We have implemented over the last several years a number of business initiatives with the introduction of some new products and new channels such as automotive financing and point of sale. Those existing products and channels are a lot of it, a lot of cases just early stage in their development. And so when you now have this more diversified business, your sources of acquisition and your sources for growth compared to a year ago compared to the year before, that are much greater.

And so it is simply a case of the natural maturation cycle of more products and more channels. It is very similar to 10 years-ago, a major driver of growth was just simply the maturation of the existing branch network. As you open a new branch, that branch goes through a five-year or 10-year period where simply the existing branch in that existing market is going to continue to grow, as it creates more brand awareness. So the largest driver continues to just be the execution of the existing business initiatives and existing products and channels. The second probably greatest contributor at the moment is, it is being accelerated by the macro conditions.

Those macro conditions, as I say, have really two prongs. One, less competitive tension from primarily subscale companies that we talked about. And two, prime lenders that sit above us in the credit spectrum, tightening credit, and pushing some near prime borrowers into our product categories. So think of it as primary drivers or the business initiatives, and then the macro conditions are simply acting as a further accelerator. And I think as we have talked about before, when we provide our loan forecasts and we provide a range, these are the kinds of things that we account for when we talk about the upper and the lower bounds.

We talk about how if things go generally according to plan, we would expect that we would travel roughly at the midpoint of any given range of any given metric. But if things go well and there are some additional factors at play that are either headwinds or tailwinds, that would be the kind of thing that would push us to the upper or lower bound. This is a great example of that. The macro conditions as it relates to demand and growth are a tailwind, and hence why we are now projecting to finish out or above the high end of the growth range. So those would be the primary ways to think about what is driving loan growth.

Marcel McLean: Okay. That is helpful. Good to know. If I could just sneak in a third on the, efficiency ratio. We did see a 300 basis point improvement year-over-year.

Tracing that back, at 31.2% now, that was 40% plus just two years-ago. I just wondering where you see that ratio sort of heading over the next two to three-years. Like, are we going to get to a point where it rep platforms or obviously the platforms highly scalable, but, just curious your thoughts of how that trends over the next few years.

Jason Mullins: So I think we can confidently say based on the way we have communicated the operating margin expansion that, you have at least a couple of hundred basis points of additional efficiencies to be gained each year going forward. I think as that, OpEx ratio gets down into the mid 20s, you start to get closer to the point where you are operating almost at your variable contribution margin.

And you are at a meaningful level of scale, where you will continue to some level of leverage, but the rate of improvement will slow. We are in that period right now, where the business is experiencing sort of its maximum benefit of operating leverage because we have spent the last 15-years building out what is now a fairly mature branch network, building out what is now a fairly mature corporate office, building out what is now a fairly mature technology infrastructure. And so we are really at that stage, that ideal stage in a company, where the majority of the investments you need to make in your business platform and your distribution network have already been invested. And therefore, all of the incremental growth comes at a high margin and is quite accretive. And that is what is just driving that reduction in OpEx ratio.

So you should expect that for the next few years, there is still 100, 200 plus basis points of annual improvement in the efficiency ratio. And then as you get maybe 3 or 4 years out, depending on the rate of growth of the business, that rate of improvement might start to slow a little bit as we inch closer to more meaningful scale.

Operator: Our next question comes from the line of Stephen Boland with Raymond James.

Stephen Boland: Just one question guys. The growth in auto financing and the point of sale, you are continue to add dealers, add merchants.

What is the value, I mean, auto financing, very competitive access record, some of the bank dealers. What is the value add that you are bringing to the dealers, especially on auto finance that some of the more established players that have not been able to do? I presume you are taking market share there as opposed to adding dealers that don’t have a financing option. So I’m just wondering what you are doing better as a technology service combination. Maybe you could just explain that, please.

Jason Mullins: So, I think we have talked a little bit about this before.

We kind of, I would break it down into five very specific and simple things. And I think we believe you have to do all five of them well at some level. And if you can do all five very well, then you can acquire and steal market share and grow a very good business. First of all, your approval rate has to be highly competitive. A dealer has to believe that when they submit an application for credit, that based on your credit and underwriting algorithm, there is a good chance their borrowers are going to get qualified or you just won’t receive an application.

To the APR you offer, the customer has to be competitive. If the dealer does not feel like the interest rate can be competitively offered to the customer and that they are going to get a lower APR elsewhere, they are not going to present your offer. Third, the speed of that credit decision and the capability of your technology to turn the deal around quickly is going to be a meaningful factor, because it is a sales environment and they want to try and get the sale closed. Fourth, you have to have great merchant support. They have to be able to pick up the phone and call someone and get ahold of them during all operating hours during the week and on the weekend, and know that if they have got questions and they have got problems working on a potential customer loan, they get ahold of someone that can help them and get through the situation.

And then fifth, you have to have a competitor dealer reserve. Lender financing is a key part of the economics of most used car retailers. The average used car retail profit comprises of the markup of the vehicle, which is about 50% of the gross margin. And then one quarter comes from the additional sale of additional products such as warranties. And one quarter comes from the commission that they earn from a lender through financing.

So that financing commission has to be competitive in the market as well. So I think, we have obviously leveraged 15-years of experience through LendCare, building the powersports network, knowing how to assess onboarded support merchants. We have benefited from 15 plus years of underwriting the non-prime borrower and understanding how to manage and think about credit risk. And all of that has contributed to the success. But as it relates to the specific things you have to do in that channel, in that product to be successful and win market share.

If you can do those five things and execute them all very well, which is much more difficult to do than to say, then you can have a great business there. And we have really tried to do all of those things well and so far it is worked to our advantage. I would also highlight that, and we have talked about this before, automotive financing is the single largest product category in that 200 billion non-prime credit market at 60 billion. So you are also talking about a market that is 20%, 30% larger than the installment loan market where all of our other products all operate combined within that market. So just inherently given the size of the market, your opportunity’s even that much greater.

Operator: That concludes today’s question-and-answer session. I’d like to turn the call back to Jason Mullins for closing remarks.

Jason Mullins: Great, thank you. Well, since there are no more questions, again, we just want to thank everyone for participating in the conference call and we look forward to updating everyone next quarter. Have a fantastic rest of your day.

Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.