ECN Capital Corp

TSX:ECN

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the ECN Capital Second Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded.

[Operator Instructions] I would now like to turn the meeting over to Katherine Moradiellos, Vice President of Finance and Investor Relations. Please go ahead, Katherine.

[Katherine Moradiellos, executive]

Thank you, Jen. Good afternoon, everyone, and thank you all for joining this call. Joining us today on the call are Stephen Hudson, Chief Executive Officer of ECN Capital; Jackie Weber, Chief Financial Officer of ECN Capital; Lance Hull, Co-CEO and Vice Chairman of Triad Financial; Cody Pearce, Co-CEO of Triad Financial; and James Barry, Chief Financial Officer of Triad.

A news release summarizing these results was issued this afternoon, and the financial statements and MD&A for the three-month period ended June 30, 2025 have been filed with SEDAR+. These documents are available on our website at www.ecncapitalcorp.com. Presentation slides to be referenced during the call are accessible in the webcast as well as in PDF format under the Presentations section of the company's website.

Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties.

I will refer you to the cautionary statement section of the MD&A for a description of such risks, uncertainties and assumptions. Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectations of any forward-looking statements will prove to be correct.

You should note that the company's earnings release, financial statements, MD&A and today's call include references to non-IFRS measures, which we believe will help to present the company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in our MD&A. All figures are presented in U.S. dollars unless explicitly noted.

With these introductory remarks, I will now turn the call over to Steven Hudson, Chief Executive Officer.

[Steven Hudson, executive]

Thank you, Kathy, and good evening. Welcome to our second quarter call. Turning to Slide 5, I'd like to reference four highlights for you. The first is to report $0.04 of adjusted per share income, which is in line with consensus. The second highlight is in the second quarter, originations of $436 million reflect the best quarter ever in Triad history at a 40% year-over-year increase.

The third highlight is managed assets, our service business, grew to over $6 billion, a 15% increase in Q2. Just by background, our servicing business was at $1.9 billion when we acquired Triad. Today, it's at $6 billion, which represents a 16% CAGR over the past 7 years. Servicing revenue, as you know, is a source of strong recurring revenue and now represents 20% of the company's total revenue.

And finally, the fourth highlight is in mid-second quarter, we commenced with Source One, an upgrade strategy mirroring the similar successful Triad upgrade strategy. The early results of that Source One strategy are encouraging with $60 million of originations in July for Source One.

Turning to Page 6. Since mid-'23, we have implemented a four-phased upgrade strategy at Triad. The first was Lance Hull being hired as President. Lance, as you know, has 25 years of industry experience. He is a proven leader, including experience with 21st Mortgage. During the past 2 years, and actually this afternoon, the scene represents Lance's second anniversary. Congratulations, Lance.

[Lance Hull, executive]

Thank you.

[Steven Hudson, executive]

He has implemented successfully improved systems and processes with several successes. One I'd like to call out is the application to funding ratio, which is impressive with an 18% growth rate, well done.

The second phase was Lance Hull was promoted to Triad Co-CEO and Vice Chairman. His scope includes operations, servicing, technology, human resources and corp development. Two additional successes under Lance's leadership include the $6 billion servicing business I just referenced and $2 billion of incremental funding capacity.

Third phase is Cody Pearce has been hired as Triad's Co-CEO. He has 25 years of industry experience like Lance. He is the founder of Cascade, and most recently, the Senior Officer of YES Communities, the second largest U.S. manufactured housing REIT. His scope includes sales culture, loan origination, product menu and corp development.

The final phase, now that we have a battle-ready back-end business, is to complete building the fortress on our front-end business under Cody's watch and leadership, which is a review of sales culture, strategy and go-to-market team.

First is improved sales team structure and culture. We've recruited a very recognized and successful Chief Growth Officer. We've enhanced reporting to track and manage sales representatives as well as providing better sales tools, incentive structures and a warrior attitude.

Second phase is product and underwriting enhancements. And I'd call out two major product additions, our 240-month amortizing product as well as our seasonal incentives. We also have dramatically improved our decisioning time. Our turnaround time used to be 2 to 3 days. It's now 2 to 3 hours while the customer is still in the dealer.

The third phase has been an aggressive marketing push to land new dealers, which we've successfully done as well as tailoring loan campaigns and extended promos for these dealer groups as well as increased visibility at RV shows. And the final phase is improving flow programs, which are optimizing origination margins in the second half of 2025.

With that, I'll pass to you, Lance.

[Lance Hull, executive]

Thank you, Steve. If I could have you turn to Slide 10 for the Manufactured Housing highlights. There's a lot of information on this slide, but I want to focus on three successes in the quarter and then provide some clarity regarding origination revenue margins and adjusted operating income.

First, as Steve highlighted, our origination growth in the quarter resulted in an all-time record at $436 million. Second, we've grown our managed assets to more than $6 billion.

As a result, our diversified business model continues to strengthen with recurring revenue from servicing alone representing 28% of our total revenue in the quarter. And based on our progress at $17.2 million in adjusted operating income, Triad now represents more than 80% of the total revenue of ECM.

Now pointing to revenue margins and operating income. Origination revenue margin was slightly below target for the quarter and the lighter growth relative to top line originations is primarily attributed to just two factors.

First, in the quarter, we had a lower mix of sales to our higher-margin bank and credit union partners, in line with our plan. And second, performance through the Champion Financing JV continues to outperform relative to plan. As a reminder, while Triad's reported originations include both Triad and JV loan production, our pro rata share in the JV is recorded in other revenue and not origination revenue.

While Q2 margin came in slightly below target, we are tracking to 6.3% on a year-to-date basis, and we are maintaining the 6.5% guidance for the second half of the year based on the outlook for mix, sales channels and JV performance.

And lastly, the lower adjusted operating income in Q2 2025 versus last year is partly due to the allocation of public company overhead costs in connection with the previously announced corporate simplification plan.

Turning over to Slide 11. Chattel originations continue to exceed plan. We first broke through the $100 million in a single month in March of this year and since then have broken monthly origination records for Chattel in each of the last 4 months with July setting the high mark at $133 million. Chattel comprised 85% of originations in Q2 versus 70% in Q2 of last year.

In line with our plan and as a result of our expanded flow arrangements with our institutional partners, bank and credit union sales accounted for just 17% of our total sales in Q2, down from 30% in the prior quarter. And with the prior 2 years dedicated to upgrading our platform and building a solid foundation to support growth, we are now actively pursuing more aggressive go-to-market initiatives and key resources for H2 and the years ahead.

And to lead that effort, as Steve mentioned in his opening remarks, we've had the opportunity to have Cody Pearce join us as our co-CEO. I've known Cody for more than 15 years and his 26 years of experience in the industry and success in building strong sales teams and effective results is unparalleled. We are certainly glad to have him in the company. I've known him as a competitor and as a friend and now as a partner.

And with that, I'll introduce Cody. Cody?

[Cody Pearce, executive]

Thank you, Lance. I'm truly excited to join the Triad team. As mentioned, Lance and I have known each other for many years, and I have tremendous respect for his leadership, values and integrity that he brings to the organization. I'm looking forward to working collaboratively to continue growing both the business and the team.

Turning to Slide 12, our Chattel loan originations. Chattel originations continue to show strong momentum, increasing 71.5% in Q2 and 72% in July. Applications, approvals and fundings are all trending ahead of plan. This performance reflects the strong foundation that Lance and his team have built.

Since Lance joined Triad, application volume has grown by 38%, signaling significant market share expansion. Additionally, our applications to funding ratio has improved by 18%, reinforcing our confidence in future growth and supporting our guidance. These are all strong leading indicators for continued performance and a testament to Triad's ability to capture market share.

Turning to Slide 13 for a commercial update. I was brought in to complement this retail growth with a dedicated focus on commercial expansion. In Q2, commercial balances totaled $446 million, which is relatively flat compared to the $452 million in the prior year.

However, we are still gaining floorplan market share despite overall inventory levels declining across the industry. As part of our commercial upgrade strategy, we are implementing targeted initiatives to reignite growth and to expand our footprint in the space.

Now turning to Slide 14. Our joint venture with Champion Homes continues to perform ahead of plan. We're seeing increasing penetration at captive stores, which reflects the strength of the partnership and the alignment of incentives between Triad and Champion.

With that, I will turn it back over to Lance.

[Lance Hull, executive]

Thank you, Cody. If you turn with me to Slide 15, please. Taking a look at our portfolio credit trends. Our credit performance remains within plan with core delinquency falling and net charge-offs holding steady. And as mentioned previously, our managed assets grew to just over $6 billion in the quarter. And I want to take this time to thank Eric Lammons and the entire servicing team at Triad for their hard work leading to this strong performance.

On Slide 16, we are confirming our guidance for the year. And then if you would flip with me to Slide 17. This is a slide that we've included most every quarter, and it's a picture of historic originations. And normally, we just pass through it. But today, I do want to just take again a moment to thank the origination team at Triad for all their hard work and congratulate them on a record quarter.

And with that, I'll turn it back to Steve.

[Steven Hudson, executive]

Thanks, Lance. Turning to Slide 19. The second quarter adjusted operating income for RV & Marine was approximately $3.1 million. Industry headwinds reduced volumes and delayed -- and there was a delayed sale of assets for Source One in the first half of '25 which impacted income. IFG, however, was not impacted and is in budget and has successfully completed its upgrade strategy under the strong leadership of Hans Kraaz.

Turning to Source One on Page 20, three highlights I'd like to make. First is that June originations and July originations have rebounded and are evidenced in the early results of Source One's upgrade strategy. Second highlight is year-to-date has been impacted by lower volumes and budget, a slight compression to margins and the delayed sale of an asset -- delayed asset sale I referred to just a moment ago.

There are four specific components of Source One's upgrade strategy I'd like to call out. The first is a sales team structure, the second is product and underwriting enhancements, the third is an aggressive marketing push to dealers and the fourth has been improved flow programs. All four of those components will drive increased profitability in the second half of '25 and into '26.

Turning to IFG's business, four highlights I'd like to reference. First, our June originations are up 24% and July up 26%. IFG continues to take market share through strong relationships and regional expansion. This is all in the light of a new U.S. boat registration, which are down 12%, yet the business originations are up 12%.

That 24% gap is due to the leadership and execution of Hans Kraaz and his team, congratulations. The fourth item is the growing industrial headwinds that the industrial -- sorry, that the upgrade strategy has been completed by IFG.

Turning to Slide 22. Let me recap RV & Marine 2025 guidance. As I mentioned a moment ago, H1 was impacted by industrial headwinds and the delayed sale of assets at Source One. 2025 adjusted operating income before tax ECN share of $14 million to $18 million was from the original $16 million to $26 million. The $5 million -- the average $5 million of earnings reduction was due to the lower volume and the related reduced asset sales. Jackie?

[Jacqueline Weber, executive]

Thanks, Steve. Turning to Page 25 for our consolidated results. Total originations were $804 million for the second quarter with adjusted EBITDA of $31.5 million and adjusted operating income of $17 million. Adjusted net income to common shareholders was $10 million or $0.04 per share.

Turning to Page 26. Our total asset and debt levels remain consistent with the first quarter of 2025 and down from the prior year quarter as we've continued to maintain total finance asset balances below $450 million for the first half of 2025.

Turning to Page 27. Total adjusted revenue increased to $62.2 million, up from $58 million in the prior year quarter, which was driven by higher originations revenue and higher servicing revenue at both business segments. Interest income and interest expense each decreased as a result of lower on-balance sheet finance assets in 2025.

Operating expenses increased year-over-year to $30.7 million, which we'll visit on the next slide, and adjusted operating income increased to $17 million, up from $14.5 million in the prior year quarter.

On Page 28, Manufactured Housing operating expenses of $22.7 million were up modestly from Q1 with the growth in the business. RV & Marine operating expenses increased to $7.9 million from $7 million in the first quarter of 2025, which was due to the growth in origination as well as investments in the upgrade strategy that Steve previously spoke to.

Turning to Page 29. We continue to maintain held-for trading assets below $250 million with the second quarter ending at $240 million (sic) [ $242.2 million ].

And lastly, turning to Page 30. As Steve previously mentioned, we're updating our RV & Marine guidance, and we expect adjusted operating income for RV & Marine to be in the range of $14 million to $18 million. As a result, our consolidated adjusted EPS range is now $52 million to $64 million or $0.18 to $0.23 per share.

Back to Steve.

[Steven Hudson, executive]

Thanks, Jackie. Turning to Slide 32. I would like to comment on three items in closing. The first is 80% of the company-wide upgrade strategies have been successfully completed and the remaining 20% will be completed in the second half of 2025. The company has been materially improved.

The second, on guidance, we're reaffirming the MH Finance guidance of $78 million to $90 million, we are narrowing the RV & Marine guidance to $14 million to $18 million, and we are tightening consolidated EPS guidance to $0.18 to $0.23.

Finally, notwithstanding Q2-specific RV slowdown, Triad has met or exceeded my expectations and the RV business is accelerating as we start the third quarter.

With that, operator, we will take questions.

[Operator]

We will now take analysts' questions from the telephone lines. [Operator Instructions] And our first question will come from Stephen Boland with Raymond James.

[Stephen Boland, analyst]

Steve, could you just provide any update on discussions with Champion and the standstill and any possible corporate development there?

[Steven Hudson, executive]

Our joint venture is meeting or actually exceeding both parties' expectations on the operating side, Steve. I can't comment on the Investor Rights Agreement, as you know, it's end date is the end of September. I have to leave it at that, Steve.

[Stephen Boland, analyst]

Okay. And then, I mean, I understand the RV & Marine, the changes, this upgrade you're talking about, Steve. I mean, is this the management changing sales? I think you added Krimker as the Head of Sales there. Is that part of the -- like I'm just wondering what the operating leverage or expense growth there? Like what's the impact of doing all these changes?

[Steven Hudson, executive]

Yes, I think -- it's a good question, Steve. Thanks for it. Mike Optel has done a great job steering this business and he's there besides -- you mentioned Joe Krimker. Joe Krimker has got a very established and proven record of turning around sales finance businesses in the specialty finance sector. So we're happy to have him as the Chief Revenue Officer.

I would say his impact, Steve, in the last 2 months has been dramatic. We've landed two new large dealer groups that we didn't have before. He's spent a lot of time rejigging the sales team. In fact, the turnaround time I referred to of 2 to 3 days to 2 to 3 hours is Joe and the people around them that we brought in.

So I've been very impressed and they know the proof will be Q3, but the July start of $60 million was a number that almost met our budget. My budget was aggressive for this business. So I'm happy with his enhancement to the sales team, his product development, his execution on process, i.e., decreasing the [Technical Difficulty] ratio is up.

So things are moving in the right direction. As you know, Steve, in downturns, I think there's some really great competitive teams you can hire like we have done at IFG and we have done at Triad, and we're doing the same thing here.

[Stephen Boland, analyst]

Okay. That's good. One more, sorry. And maybe it's probably for Jackie. I asked this quarter about this -- on the cash flow statement, this change in retained servicing rights. And I thought it had something to do with discount rates and maybe interest rates, something to that, I can't remember, I apologize, but it looks like the number went up again. So can you just remind me what impacts that number because it does go into income, right?

[Jacqueline Weber, executive]

It does go into income, and there are two components. There you have your cash -- servicing revenue in total, you have cash and then you have your intangibles for your servicing rights. If you're looking specifically at the cash flow statement, Steve, the increase in the current quarter is really just the higher volume at Triad. So as they have higher asset sales and servicing rights related to those, it will tend to tick up. There have been no changes to any assumptions underpinning how those are recognized in the current quarter.

[Stephen Boland, analyst]

Okay. So we should expect this to be a -- like this should be an ongoing -- like it's recurring basically at this point. Is that what we should expect? I'm just thinking about modeling this out a little bit more.

[Jacqueline Weber, executive]

Yes, you will have a noncash revenue item in there each quarter.

[Operator]

[Operator Instructions] And we'll move next to Jaeme Gloyn with National Bank Financial.

[Jaeme Gloyn, analyst]

Question on Triad and looking forward to seeing some of the results of the Co-CEOs. Just curious on the sales side, the origination side, I mean, the results have looked pretty good over the past few quarters here. So just wondering now where are the gaps? Where do you see inefficiencies, I guess? And what are you looking to implement here in the near term? I guess this question is for Cody.

[Cody Pearce, executive]

Well, I've been in the seat for 30 days. What Lance and team have built is impressive. We're seeing tremendous growth on the retail side. I see great opportunity on the commercial side, and that's what I'm going to be heavily focused on.

[Steven Hudson, executive]

I think, Jaeme, it's Steve. I don't think it's a single person who's happy with the flat growth in the commercial business. And Cody has a deep expertise in that both at Cascade and YES Communities. So I think there are a series of initiatives coming on that specific business to turn back on the growth.

[Jaeme Gloyn, analyst]

Okay. And then with respect to the Blackstone relationship, it looks like it was renewed this quarter. Can you give us a little, I guess, more color on that deal in terms of like size, the maturity of the deal? Maybe a little bit more color too, as to your discussions with your other key funding partners here for the Triad business.

[James Barry, executive]

Sure. So this is James. So all our funding agreements are substantially similar, and we don't go into details on the specifics. But effectively, we're offering kind of these bespoke investment portfolios that meet their targeted returns. So they vary slightly in terms of the product mix and also on the program side. But there's -- they're materially similar, especially from a margin standpoint, and they typically have terms of 12 months to 24 months.

[Steven Hudson, executive]

I would add one thing to James' comment was that we are having started these flow programs approximately -- we're now in [ BX4 ], so 4 years ago. We're now in a position of being overfunded by approximately $1.5 billion. So we have -- it's a nice position to be in.

So now we're faced with decisions on how to allocate our product flow. I think it's fair to assume that we will get better pricing going forward given the excess demand for home improvement.

There is only one platform to buy home improvement loans -- sorry, manufactured homes and MH loans in the U.S. and that's from the Triad platform. All the Clayton stuff from 21st and Vanderbilt flows into the Berkshire Hathaway family. So it's nice 4 years later to see this strong excess demand and having established a new asset category for U.S. lifecos.

[Jaeme Gloyn, analyst]

Okay. And staying in Triad for one more, just looking at the origination revenue margin below 6%. I get the full year is close to the 6.5% guidance. But it seems to have been mix driven, which on a separate slide seems to indicate that the mix in Q2 was more in line with forecasted mix. So I guess the question is like what shift or what change should we see in the second half to bring that 5.8% back closer to the 6.5%?

[Steven Hudson, executive]

So I think the bigger driver was more the sales channel on a year-over-year basis. So like there was slightly more sales to institutional partners in Q2 '25. And then as Lance was explaining, the outperformance of the JV also has an impact on margin.

So I think when we look at the second half of the year, and we're looking at product mix, sales channel and also where we see the JV going, I think we're comfortable with the 6.5%.

And the other data point that I would share is like we're just wrapping up our July reporting cycle and the margin for that month was 6.4%. So again, it's recalibrating back to the 6.5% on a full year basis.

[Jaeme Gloyn, analyst]

Okay. That's helpful. And then just last one, going to the RV & Marine upgrade strategy. I'm not sure if you disclosed it in the MD&A or somewhere else, but the costs associated to launching that strategy and implementing that strategy, that seems to be the biggest driver of the operating income before tax in the business line in Q1 and Q2. Can you quantify those costs? Are those costs disappearing in H2? Or should they continue? Yes, maybe just a little bit more to help us on that side.

[Steven Hudson, executive]

I would put the cost of the program at between $750,000 and $1 million. A chunk of that has been incurred in H1, approximately 60% of it. The rest will be incurred in H2. But the H2 stuff will be offset with increased originations and margins. So it will have less of an impact in H2 than it did in the first half of the year.

[Jaeme Gloyn, analyst]

Okay. So not -- actually not as much as I would have expected if we're going to go from about 4 -- just over $4 million of AOI in the first half of '25 to about $14 million or more of AOI in the second half?

[Steven Hudson, executive]

Yes. Well, you do have a bit of seasonality in this business. The third quarter is always the strongest. The first quarter is, very little happens in the winter. It's -- we had a volume miss that was significant in the first half. And the other part -- when you have a volume miss, it also impacts the -- you have less assets to sell through, which impacts that as well as there's less servicing rights. So it's a multiple impact on when you miss volume. The good news is the start of H2 is strong.

[Jaeme Gloyn, analyst]

Great. And then the last one, and I'll turn it over. Thanks for being patient here. The asset sales from Source One that have been delayed, like are they just deferred? Or are they gone? Like you're not able to sell them or you're going to have to sell them for pennies of dollar, let's say, in terms of like an origination fee?

[Steven Hudson, executive]

Yes. There's -- when I say delayed, Jaeme, maybe that's the wrong term. So we had less originations in the first half, so we had less assets to sell. That impacted the asset sales. We have about $40 million on our balance sheet that will move in H2 at better margins. We have a new funding partner coming on, which will help. But less originations begets you less sales.

[Operator]

And our next question will come from Tom MacKinnon with BMO Capital.

[Tom MacKinnon, analyst]

Yes. My question was asked and answered as part of Jaeme's laundry list of questions.

[Operator]

[Operator Instructions] 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 great day.