In its Fourth Quarter 2023 Financial Results Conference Call, goeasy Limited (GSY.TO) reported a period of record growth, with a 24% increase in total revenue amounting to $338 million and a significant rise in loan originations. The company has issued over 250,000 loans in 2023, reaching a total of $2.7 billion in originations. With a strong capital position and a total funding capacity of about $900 million, goeasy announced a 22% increase in their annual dividend. Looking forward, goeasy provided a bullish three-year commercial forecast, aiming to grow their loan portfolio to approximately $6 billion by 2026 and unveiled plans for a new revolving credit card product.
Key Takeaways
- Record loan originations of $705 million in Q4, a 12% increase year-over-year.
- Total revenue for the quarter reached $338 million, marking a 24% rise.
- The company has served over 1.3 million Canadians, with more than 200,000 customers graduating to prime credit.
- A 22% increase in the annual dividend was announced.
- A new three-year commercial forecast predicts a loan portfolio growth to about $6 billion by 2026.
- Strategic initiatives include a new revolving credit card product, a digital mobile app expansion, and technology platform investments.
Company Outlook
- Expecting loan portfolio growth of 65% to around $6 billion by 2026.
- Plans to implement a maximum allowable interest rate of 35% and reduce rates for customers over time.
- Anticipates a net charge-off rate decline to between 7.25% and 9.25% by 2026.
- Aims to expand lending products, distribution channels, and geographic reach, alongside providing credit education products.
Bearish Highlights
- Acknowledged potential risks and challenges in achieving the $6 billion loan book target due to macroeconomic conditions and competitive landscape changes.
Bullish Highlights
- Strong balance sheet and capital position with approximately $900 million in total funding capacity.
- Confident in managing credit risk and maintaining strong credit performance.
- Interest in exploring portfolio acquisitions and M&A opportunities to drive growth.
Misses
- A decline in total yield is expected due to seasonal factors, with the loan portfolio forecasted to grow between $180 million and $200 million in the next quarter.
Q&A Highlights
- Discussed increasing minimum payment requirements on credit cards based on customer credit risk.
- Revealed plans for a transactional credit card for everyday expenses and potential partnership with Brim Financial.
- Operating leverage driven by a shift towards indirect lending and secured products, reducing operating expenses.
By focusing on organic growth and strategic initiatives such as the development of new credit products and investing in technology, goeasy Limited is positioning itself to capture a larger market share and improve its operating efficiency. The company's confidence in managing credit risk and its forward-looking dividend increase reflect its robust financial health and optimistic outlook for the future. Investors and stakeholders will be looking forward to the next quarterly results in May for further insights into the company's progress.
Full transcript - goeasy Ltd (GSY) Q4 2023:
Operator: Good day, and thank you for standing by. Welcome to goeasy Fourth Quarter 2023 Financial Results Conference Call. [Operator Instructions]. I would now like turn the call over to your speaker for 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. Thank you for joining us to discuss goeasy Limited's results for the fourth quarter ended December 31, 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 CEO, will review the results for the fourth 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 up the lines for questions from investors. Before we begin, I remind you this conference call is open to all investors and is being webcast at 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 their prepared remarks, the operator will poll for questions, and we'll provide instructions at the appropriate time business. Media are welcome to listen to the call and to use management's comments and responses to questions in 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 I 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 a lot and good morning, everyone, and thank you for joining the call today. The fourth quarter wrapped up another milestone year for the Company. We were proud to have met or exceeded all the metrics provided in our commercial forecast while producing record growth, consistently stable credit performance and improved operating leverage, further solidifying our position as a leader in the Canadian non-prime consumer credit market. With over 9 million non-prime Canadians, of which 72% have been denied credit by banks, we play an extremely important role in the financial system. In 2023 alone, we issued over 250,000 loans to help everyday Canadians tackle their household financial needs. This included paying for bills and emergency expenses, helping them purchase a vehicle to get to work complete renovations or repairs for their home or pay for an important health care expense with originations exceeding $2.7 billion in the year. We have now proudly served over 1.3 million Canadians. Furthermore, we've remained focused on providing our customers with a path to reduce their cost of borrowing when they have demonstrated consistent payment behavior by offering access to products with progressively lower rates of interest over time, we are proud to reduce the weighted average interest rate. We charge our borrowers to approximately 30% today passing on the benefits of our scale directly to the customer. Lastly, we have now helped over 200,000 customers graduate to prime credit so far and with many of our active customers acquired just in the last few years, the number of borrowers that we plan to help improve their finances is only going to grow 2023 was also another milestone year in building our high-performance culture fueled by dedicated and ambitious people that care deeply about the financial well-being of our customers. During the year, we were recertified as a Great Place to Work recertified as one of Canada's Most Admired Corporate Cultures named on the 2023 Best Workplaces in Ontario list and named on the 2023 Best Workplaces in financial and insurance services list, a true testament to our team and their inspiring passion and leadership. And turning to the results for the fourth quarter, it was another period of record volume of applications for credit at over 530,000, up 29% against last year. General consumer demand remained healthy while broader macroeconomic conditions continue to create a favorable competitive environment for those with scale. Loan originations during the quarter were $705 million, up 12% compared to $632 million produced in the fourth quarter of 2022. The organic loan growth was $215 million during the quarter, with our loan portfolio finishing the year at $3.65 billion, up 30%. All of our products and channels continued to perform well. Unsecured lending remained the largest product category, while health care financing more than doubled over the prior year. And automotive financing volume exceeded $100 million of originations during the quarter for the first time ever up nearly 50%. The overall weighted average interest rate charged to our customers during the quarter was 30.25%. Combined with ancillary revenue services sources, the total portfolio yield finished within our forecasted range at 34.9%. Total revenue in the quarter was a record $338 million, up 24% over the same period in 2022. We also continue to be very confident in the quality of our loan originations. Originations in the quarter were the second highest credit quality in our history based on future probabilities of default, thanks to the proactive credit adjustments made throughout 2022 and the increasing proportion of secured lending, which now represents 42% of our portfolio. The major portfolio level credit metrics continue to look very positive we have long maintained that managing the credit performance of the business is our highest priority. The decision to tighten credit criteria and focus on growing higher credit quality loan products has served us well during periods of economic stress. During the fourth quarter, the annualized net charge-off rate reduced to 8.8% from 9% in the same quarter last year. Commensurate with the improved loss ratio, our loan loss provision rate reduced slightly to 7.28% compared to 7.37% in the third quarter. We also continue to put emphasis on extracting further value from scale through investments in technology and automation that increase efficiency to drive more operating leverage during the fourth quarter. Our efficiency ratio specifically operating expenses as a percentage of revenue improved to 28.3%, a reduction of nearly 400 basis points from 32.2% in the fourth quarter of the prior year. As a function of receivables, operating expenses were 10.7% versus 12.9% during the prior year, producing over 200 basis points of margin to absorb lower yields and higher funding costs. After adjusting for unusual items and nonrecurring expenses, we reported record adjusted operating income of $141 million, an increase of 41% compared to $100 million in the fourth quarter of 2022. Adjusted operating margin for the third fourth quarter was a record 41.6%, up from 36.5% in the same period in 2022. Adjusted net income was a record $69 million, up 35% from $51 million in the fourth quarter of 2022, while adjusted diluted earnings per share was a record $4.1, up 31.5% from $3.5 in the fourth quarter of 2022. Adjusted return on equity was 26.7% in the quarter, an increase of 210 basis points from 24.6% last year. With that, I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our new outlook and issues.
Hal Khouri: In the fourth quarter, I highlighted the health of our balance sheet, the confidence of our bank partnerships and the cash-generating capability of this during the quarter, free cash flow from operations before net growth in the loan portfolio was $85 million, up 29% from $66 million in the fourth quarter of 2020 to at today's run rate, we can support funding over $250 million growth in the consumer loan portfolio, purely from our internal cash generation during the quarter, we also implemented several enhancements to our balance sheet. First, we increased our automated automotive securitization facility by $125 million and incorporated several key modifications, including improved eligibility criteria resulting in increased funding capacity. The maturity of the facility was also extended by year to December 16th, 2025. The lending syndicate for the automotive securitization facility consists of Bank of Montreal and Wells Fargo Bank. It continues to bear interest on advances payable at the rate of one month CD or plus 100, 85 basis points based on the current one-month CPR rate as of February seventh, 2020, for the interest rate on the facility would be 7.21%. We also continue to utilize an interest rate swap agreement to generate fixed rate payments on amounts drawn to assist in mitigating the impact of increases in interest rates. In November, we also refinanced our USD550 million senior unsecured notes originally due in 2024 with a new 5-year term and a coupon rate of 9.25%. Concurrently, we also entered into a cross-currency swap agreement to reduce the Canadian dollar equivalent cost of borrowing on the notes to 8.79% per annum. At quarter end, our weighted average cost of borrowing was 6.4% and the fully drawn weighted average cost of borrowing was 6.9%. With these recent balance sheet enhancements, we now have approximately $900 million in total funding capacity and remain confident we can raise additional debt financing to fund our organic growth forecast. Based on the 2023 adjusted earnings, the increasing level of cash flow produced by the business and the confidence in our continued growth and access to capital going forward, the Board of Directors has approved an increase to the annual dividend from $3.84 per share to $4.68 per share, an increase of 22% or a payout ratio of approximately 33% on the prior year's adjusted earnings. Furthermore, this marks the 10th consecutive year of an increase in the dividend to shareholders. I'll now pass it back over to Jason to talk about our outlook and new forecast.
Jason Mullins: So with over 9 million non-prime Canadians carrying over $200 billion in consumer credit balances, we are a vital part of a large and underserved market. We have a resilient business model that has proven to perform well during economic cycles. And we have an award-winning culture backed by over 2,400 incredibly talented team members that are inspired to help everyday Canadians. If not, for us, millions of hard-working Canadian families would lose access to credit and essential lifeline in today's credit driven economy, especially given the current cost of living we are truly proud of the work that we do in our release last night, we published a new three-year commercial forecast as we have done annually for more than 10 years. These commercial forecasts are built bottom-up using a detailed set of scenario-based assumptions about product mix, placing economic conditions, funding sources, credit risks, and expense requirements. We then stress test those assumptions to understand what a downside and upside case might look like before we ultimately decide in a range that we think captures the most probable set of outcomes. It is this process that has served us well as we have either met or exceeded nearly every metric with consistency for over a decade, we expect to organically grow the loan portfolio by nearly 65% to approximately $6 billion in 2026, driven by the growth and execution of our current suite of products and channels. Our outlook provides a range of guidance to account for unanticipated headwinds at one end and the benefit of our initiatives performing better than planned at the other. We have also embedded the implementation of the new 35% maximum allowable rate of interest alongside our own strategy to reduce the cost of borrowing for our customers by passing along rate reductions as we scale into the forecast as such our total yield, inclusive of ancillary revenues will gradually decline to approximately 30% over the next three years. Our disciplined approach to managing and prioritizing credit risk, combined with ongoing product mix and operational execution provide us confidence that the credit performance of our portfolio will remain stable. We expect the annualized net charge-off rate of our business to gradually step down from 8.5% to 10.5% last year to 7.25% and 9.25% in 2026. We also believe there are further benefits from scale and additional operating leverage in the business, inclusive of the declining risk-adjusted yield, we still anticipate the operating margin to gradually expand by approximately 100 basis points each year. Underpinning this outlook is the same four pillar strategy that has driven our business priorities since 2017. The first pillar of our strategy is to continue building and promoting a wide range of lending products that position goeasy to become the one-stop solution for all the borrowing needs of non-prime Canadians. The second pillar of our strategy is to expand our channels of distribution, making our products and services available easily and accessible in a convenient manner when and where consumers need credit. The third pillar of our strategy is to expand geographically, optimizing our retail and merchant network across Canada, then considering other markets where our business model could be successful. And the fourth pillar of our strategy is to help our customers improve their financial well-being through credit education products and services, improving their credit and gradually offering them a lower rate of interest and then serving as a bridge back to Prime in 2024 we will execute against three strategic initiatives that ultimately align to that four pillar strategy. First, we are thrilled to announce that we will be building a new revolving credit card product that we hope to begin testing in market by the end of the year. The various forms of this product will ultimately solve two significant needs in the marketplace. First, a secured or partially secured credit card product will enable us to extend credit to the many tens of thousands of applicants that based on the risk profile we are unable to serve today with an unsecured personal loan. This product will help them positively build a better credit history and enable us to gradually extend additional funds over time. Secondly, there remains a material void in the marketplace for a general-purpose nonprime credit card for the customer segment that we serve occupied by only one major market participant, non-prime borrowers that are unable to get a card product from a traditional bank are often left with few options. We believe we can build a superior solutions, one that will eventually have a loyalty and rewards component that helps our borrowers reduce their cost of borrowing over time. Second, we will continue to invest in our new digital mobile app, go EZ Connect after just launching nationally late last year, we already have over 100,000 app downloads as we are just getting started on promoting and cross selling our full range of products and services. Our mobile apps will continue to provide our customers with experience that provides them with transparency, preapproved access to credit and the tools and education they need to rebuild their credit over time. Lastly, we are continuing to prioritize investments in our technology platforms to enable greater efficiency through automating business processes, leveraging data and business intelligence to produce more meaningful insights and providing our employees with better frontline tools. We can continue to scale the business and drive cost savings. Turning briefly to the upcoming quarter, we expect the loan portfolio to grow between $180 million and $200 million while the total yield generated on the consumer loan portfolio, we'll decline to between 33.75% and 34.75% in the quarter, reflecting the typical seasonal decline we experienced in each first quarter period. We also continue to expect strong credit performance with the annualized net charge-off rate expected to finish between 8.5% and 9.5% in the quarter. In closing, I want to once again thank the entire goeasy team for their drive and passion that helped produce another incredible year for our company. Our team truly cares deeply about delivering high-quality financial products to our customers and merchant partners in a transparent and frictionless manner. Together, we are on a mission to put everyday Canadians on the path to a better tomorrow. And as I've said many times, we are truly just getting started with those comments complete, we will now open the call for questions.
Operator: [Operator Instructions]. The first question for today will be coming from Nik Priebe of CIBC Capital Markets.
Nik Priebe: Okay. Thanks for the question. I'm just wondering if you could expand a little bit on the idea of introducing a cash secured credit card product and just describe how the expected economics might look in terms the APRs and expected losses. I'm just wondering how as you'd expect, are you how you would expect to distribute and ramp that product and how the risk adjusted margins would compare to the rest of the products?
Jason Mullins: Yes. Great question. So from that, first of all, the anticipated benefits of the card product, whether it's the secured or unsecured versions are not contemplated or included in our forecast, our outlook. So any benefits from those products over the next three years would be incremental or certainly help ensure we we perform at the upper end of our ranges in terms of the plan. If you think about our history, launching and building products typically takes us six to 12 months to design and build something. We then generally spend six to 12 months, testing it in a smaller dollar limited capacity before we then get the comfort to be able to begin to scale. So in terms of thinking about when and how this might favorably affect the business, you're probably talking the end of 25 and into 26 before it becomes more meaningful, but that methodical and careful approach, it has always worked well for us and we think is the prudent way to go. In terms of the product, there's still a lot to be determined about the exact design, but it's safe to assume that the economics of those products, we anticipate to be consistent with our existing products in the sense that while the geography of the yield and the operating costs and the losses will vary product to product as well as does our existing products, we will only build products that ultimately meet our return threshold. So I would imagine that the total yields are not that dissimilar to our overall portfolio. Clearly, the secured product losses are much lower because they're secured by cash and you're using that as a way to build credit. The unsecured product losses will be more typical of an unsecured credit product. But net-net, both of them, we would expect to be additive and meet our return threshold.
Nik Priebe: Okay. That's good color. And maybe just staying in the same vein as items that would be incremental to your guidance, I think back in November, you'd alluded to the prospect of some portfolio M&A. And I guess as we get closer to the implementation date of the new rate cap, have you seen more activity on that front, but just an update on the M&A pipeline would be helpful, too.
Jason Mullins: Yes. So we have seen a few opportunities for us. Portfolio-type acquisitions of a smaller, more moderate nature in Canada, nothing that we have gotten overly excited about yet. So still still open-minded there and looking at opportunities as they arise. We definitely continue to see that as smaller-scale companies struggle, but that is a net benefit to us and the companies with scale from a competitive tension point of view. So that continues to remain true. In terms of M&A, more broadly, we are always looking at opportunities both here and in the other markets, particularly the US, as we've said for several years now. And we're very hopeful actually that we will find something that makes strategic sense and it is a good financial investment and accretive to shareholders. The challenge, of course, is the bar is high, and we have very high standards when it comes to strategic fit, cultural fit and certainly with a good organic growth profile, the financial hurdle rate is pretty high as well. So it's hard to say exactly when and where the opportunity might eventually come from. But we're hopeful and and we're rapidly exploring and hope to share something at some point down the road.
Nik Priebe: Okay. That's great. That's it for me.
Jason Mullins: Thank you.
Operator: The next question for today will be coming from Etienne Ricard of BMO Capital Markets.
Etienne Ricard: Thank you and good morning. To circle back on the new revolving card products, historically, goeasy is focused on installment loans that provide fixed predictable payment patterns to your customer base. Now with plans to introduce this new product, how do you take comfort, I guess, first in the underwriting and second, on the payment performance, have your customer base really in order to avoid that?
Jason Mullins: Yes. Great question, um. So two important points there. One, we had always long said that that the lower credit quality borrower, the more traditional subprime borrower if you will, that revolving products were not healthy for them. And that's why we built our business initially on the installment products because they forced a regular consistent payment requirement that kept customers progressively getting out of the cycle of debt as we fast-forward now 15 plus years later, building a very wide range of products that serve the entire non-prime credit spectrum we now have a very large growing population of near-prime customers, customers that are at or just below the credit quality of A prime borrower that would get credit from a traditional bank. And I think the near-prime customer customers with scores in the six hundreds or low seven hundreds is very different. And then the customers with scores in the high four hundreds or low five hundreds in terms of the products, the pricing and the credit risk that can work and make sense for those consumers. So first and foremost, putting aside the secured product for a sec because that's got a very different purpose, but an unsecured card would be met for the upper bands of credit quality of customers that we currently serve, which is, which is one area that we get comfort from. I would again point to, for example, in the U.S. OneMain, which would be a large market participant in our industry that serves that predominantly near-prime customer bill to launch the card a few years ago. And that continues to appear we've been monitoring carefully to be going well. The second thing I would say is that we would intend to design a card product that makes sense for our customer segment. And the biggest flaw in the traditional card product is the fact that the minimum payment requirement is so small that it becomes too enticing to make a very small payment and just allow the bulk of the balance to carry over one month to the next, we would intend to in our product, depending on the credit risk of the customer, increase the size of that minimum payments so that as the credit risk of the customer is greater. The required repayment to then be able to pay down a portion of that principal would be more requiring. And that will allow us to ensure that customer does demonstrate regular payer behavior and has a system designed to help them make sure they continue to get out of the cycle of debt, but being able to have a product that's transactional where they can use it for gas and groceries and earn some type of loyalty reward mechanism that can give them cashback work and help lower their interest rate in the future. And that can net-net actually end up being quite positive and beneficial to the customer as a follow up, we know we know demand for unsecured installment loans tends to be tends to be driven more by specific events such as unexpected expenses as it relates to this new product, for what purpose do you expect it to be used?
Etienne Ricard: And in the second part of the question, how will that influence the distribution strategy?
Jason Mullins: Yes. So two thoughts there. One, there are still lots of smaller dollar unexpected expenses and needs that our customers have that maybe a larger installment loan product like $5,000 loan might not be necessary. So there might be a unexpected expense that's 300 or 400 or $500 that if they had the access on a revolving card to be able to satisfy that might be all that's needed. So I don't think that's Tom. The use of the credit to deal with everyday household expenses would be any different in the purpose of that card. It would be very consistent in that way, but net for a very different type of smaller dollar, smaller dollar expense more than anything. The second reason why it's appealing is that it also allows us to capture more share of wallet and develop more ongoing relationships with the customers, our products today that are all installment driven and our very event driven financing products. So they get a loan for a very specific larger dollar expense. They get a loan to be able to repurchase a vehicle. So and that creates extended breaks in the relationship with the customer. We think that if, again, we can offer a value add product that is net beneficial to the customer. That's a critical bar that has to be met. We have to feel confident it can be a value for the customer, which we believe we can do that. The card allows us to then maintain a more continuous relationships to be able to communicate with the customer, provide financial literacy tools and education, maintain an ongoing dialogue with the customer, maintain the ability to monitor their credit on an ongoing basis today, for example, if a customer takes an installment loan once the loans been paid, we only have the ability to monitor their credit for a designated period of time following the last repayment before we then lose the capacity to monitor that customer's credit, maybe serve them something that is useful for them in the future, this product can allow for a more continuous relationship. So notwithstanding the unsecured personal loan needs, a big bulk of the credit demand and it's obviously a performing and largest product. There's still quite a number of additional reasons why this would make sense in our in our suite.
Etienne Ricard: Thank you very much.
Operator: [Operator Instructions]. The next question for today will be coming from Gary Ho of Desjardins Securities.
Gary Ho: Good morning. And maybe just staying on the revolving credit card product and how does your Brim financial partnership or investment helping that's the build out here. You don't get the product off the ground, perhaps maybe on the on the loyalty side of things.
Jason Mullins: Yes. So our premise is a card platform product provider. And as you've noted, we have an investment in so they would be one of the platforms that we would consider using our investment in the business doesn't require us to have to use their platform. But obviously, there's a natural fit for us to want to evaluate if they're the right partner. We have not finalized the selection of a partner to provide the platform to do the card products. They are one of a number of companies that were I'm looking at as potential partners, and we'll likely end up concluding on which partner we'll use in the next next couple of months. But there's some some great options out there where Park companies like Brim can provide the platform, a lot of the card technology out of the box. So it's not an overly significant investment to stand up or to maintain, which is great because there's a lot of sort of SaaS like products and bring would be one of them. So they'll be one of the companies will obviously look carefully at in determining who we want to partner with Okay, makes sense.
Gary Ho: And then while I have you here, you describe how rigorous the process is to put together your bottoms up kind of three year outlook, I guess, to achieve the $6 billion loan book target for 26. Can you walk us through kind of what are the some of the risks or potential challenges to your team season and hitting that number.
Jason Mullins: And I mean, it would be the usual things that could come along and create unexpected headwinds, a major shift in macroeconomic conditions, major changes in the competitive landscape, but I don't think there's anything and we see that would be sort of normal course, that should affect that trajectory. They would have to be pretty big, unexpected macro kinds of changes we've always built forecasts that are grounded in the data and the performance of the business that we have experienced to date. And we know, for example, that if we add incremental auto dealers approximately how much business we can generate in automotive financing volume for the dealers that we incrementally add. We know that if we put additional marketing and advertising spend into the market approximately what response rate that will generate. So we're using a fair amount of data and history to inform how the market will respond to our various actions. And then we have, of course, layer on the ranges that we think account for some downside and some upside potential. But the the range of themselves really represent a down the fairway a very reasonable set of assumptions that we feel good about. And as I said in my prepared remarks, we've essentially met or exceeded those ranges on almost every metric for for almost the entire full 10-year period that's up that we've used that approach.
Gary Ho: Okay. And then that makes sense. If I can just sneak one more in. And just on the 22% TV increase, just the rationale for such a big increase, why not retain more of that capital for organic growth?
Jason Mullins: Yes. So obviously, the dividend policy is reviewed by the Board every year. We have been pretty consistent now for the last 10-year period that we've done dividend increases with stepping up the dividend in proportion to the increase in the earnings as you may recall, last year we had stepped down the payout ratio slightly from 35% of the prior year earnings to 33. And this dividend increase is consistent with that 33% historical trailing payout ratio. So no change to the philosophy around the payout ratio approach. That's just reflecting the increase in earnings. And we look at very carefully our growth outlook, our liquidity and our access to debt and our leverage to garner a comfort in being able to implement a dividend increase. And when we do so it's on the basis that we can sustain that dividend, even if there is a series of unexpected headwinds that we might face because the business is now generating a fairly significant amount of free cash flow, and that's causing the business even at these growth levels to gradually delever every year this year included Tom, that gives us the capacity to be able to then still step the dividend up commensurate with earnings. And I feel confident that it's a level we can sustain as a way to contribute to the total shareholder return.
Gary Ho: Okay. Those are my questions. Thanks.
Operator: The next question for today will be coming from Geoffrey Kwan of RBC.
Geoffrey Kwan: Hi, good morning. I just have one question, Ken, you've got a much wider product offering.
Jason Mullins: You've got the omnichannel distribution strategy and what products or channels or even kind of combination of a certain product through a certain channel, will it have higher margins versus the overall book?
Geoffrey Kwan: Just trying to understand how the operating margin might change, depending on how the origination mix compares versus what you're modeling out in your guidance?
Jason Mullins: Yes. So I'll answer it a little bit generically, but then can drill down some if needed. So if you look across our range of products, there's one common denominator, which is that they all meet our target return hurdle rates, which again, as we've talked about before, as we take the target ROE threshold of a minimum of 20%. We reverse engineer into then our return on those receivables or assets that are necessary based on our standard leverage profile. And then that becomes the return on asset hurdle rate that needs to that needs to be produced when you then go above that hurdle rate on the return on the receivables, the geography across our products and channels, it differs vastly there are products where there are higher yields and higher losses and higher operating costs, but they get to that target return and others with lower yields, lower losses and lower operating costs, but take they get to that same approximate target return. There's, of course, some variability, some products, a little bit more, a little less profitable than others, but they all sort of meet that target returns. The examples I would provide is first on the credit side, obviously, higher APR products are tend to be given to higher risk borrowers that come with higher losses. So that what bridge sort of that explanation. And likewise, the inverse, that would be one example, second would be the secured products, but it's often paired with lower APRs because they're secured and have lower losses. So again, the geography would look different compared to unsecured. And then on the channel side, there's a really big difference between direct and indirect lending. And we have a very large presence in both channel categories, direct lending being you're going to spend the marketing and advertising dollars to promote your business and you're going to acquire the customer and do all the origination activity. And you're going to do it through many points of distribution call center or a large retail network that's direct lending direct lending comes with higher operating costs because again, you've got to spend the acquisition expense in the origination expense and you service those loans through a multi-unit operating model in indirect lending which is, again, automotive financing, powersports financing and point of sale. You don't really have any cost of acquisition that's being done by your merchant partner to sell their goods or service you don't really have origination costs are they're very small because most of the legwork and activities done by the retailer or the merchant to get the sale and use our technology and your servicing costs are all done generally from one or more call centers where your operating costs are, therefore more efficient as well. So depending on which dimension you're looking at whether it's credit quality, whether it's secured versus unsecured or whether it's channel of distribution, indirect versus direct, those will all influence what you would see in the makeup or the composition of yield losses and OpEx to get to the target return.
Geoffrey Kwan: Okay. Thank you.
Operator: The next question for today will be coming from Doug Cooper of Beacon Securities.
Doug Cooper: I just want to touch on the operating leverage opportunity. I'm just looking at are the 2023 overhead numbers versus the 2022. Obviously, you had a bit of an increase in salaries, but they've been fairly consistent over the past three quarters or so, but advertising in particular was actually down year over year. Does that have something to do with the is the level of competition or occupancy fairly flat as you're not really opening any new stores? And then the other bucket, maybe just talk a little bit about your expectations of the overhead expenses.
Jason Mullins: Yes. So some thought to two things that are driving kind of the operating leverage and the expense ratio in the business up. One is to link back directly to the point I made on the last question as the mix of the business continues to shift and grow toward indirect lending products and secured products to better quality credit customers. Those channels and products have lower OpEx ratios and so when you then aggregate the total business that gradual mix shift, just like the effect it has on our loss rate makes the effective operating costs to run the business continue to reduce. So in our expanding operating margins is the benefit of the sort of mix and shift towards thought channels and products that are generally less expensive to operate. Secondly, as we've talked about for the last year or two and then also in the prepared remarks. As far as the strategic initiative is concerned, we have been focused in a macroeconomic environment like the one we're in all companies are we've been focused on trying to be more prudent with expense management and make investments in technology that will allow us to become more efficient. So I'll give you examples. There are business processes involved in our lending and collection that we have automated and have removed the need for human involvement. There is technology we put in our call center that improve the efficacy of the amount of contacts we can make to our customers even in back office functions like our finance department. We've got some accounting and financial automation that will again reduce the amount of human labor to process transactions and to run financial reports. So there's all these areas where the investments are paying dividends in terms of making the business perform with less operating costs and as revenues grow. So those two things are really what's underpinning why we continue to see ongoing improvements in operating leverage and margin got from.
Doug Cooper: And then, can you just remind us how big a market the subprime or near-prime credit card market is maybe just in committees in comparison to the up the automotive market?
Jason Mullins: Yes. So it's not quite as large as automotive. If you break down that $200 billion of nonprime credit balances, auto is the single largest category at $60 billion. The card market, though, is about $40 billion. Now like all the categories, a big chunk of that is customers who got their credit from a major bank. And then they're they've hit a speed bump in their credits fallen down. So the balances show up as really having been held by banks, but the customers pretty much unable to then get incremental credit if they hit the next speed bump. So it's comparably comparable in size to the installment market, a little bit smaller installments, closer to $50 billion but if you think installments $50 billion in auto is past $60 billion card at $40 billion is still a big hurry, very significant size market. The bulk of our customers either have or would use a general-purpose credit card to manage everyday cost, especially if they can get a decent reward benefit. So for that, that loyalty, it's great data for me.
Doug Cooper: Thanks very much.
Operator: Thank you. There are no more questions in the queue. I would like to turn the call back over to management for closing remarks.
Jason Mullins: But thank you, everyone, for taking the time to participate in the conference call today, and we look forward to updating you at our next quarterly results in May. We appreciate your time. Have a fantastic day.
Operator: Thank you, everyone, for joining the conference. You may disconnect.
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