TORONTO, Nov. 7, 2022
/CNW/ - Chesswood Group Limited ("Chesswood" or the "Company")
(TSX: CHW), a publicly traded North American specialty finance
company providing commercial equipment leases and loans, automotive
loans, home improvement financing, and asset management, today
reported its results for the three and nine months ended
September 30, 2022.
Q3 2022 Highlights
- Strong origination volumes of $379.9
million in the equipment finance segment and $33.1 million in the automotive finance segment,
resulting in record gross finance receivables of $2.7 billion as at September 30, 2022.
- Utilized off balance sheet funding with a third party
institutional investor for US$66.9
million of net investment in finance receivables under the
asset management segment's first forward flow arrangement, which
provides Chesswood with origination, management, and servicing
fees.
- Earnings of $12.3 million
($0.58 per fully diluted share) and
free cash flow generation of $12.01 million ($0.571 per fully diluted share).
- Return on equity for the quarter of 22.6%.
- Increasing dividend to $0.05
per share per month (or $0.60 per
year), a 25% increase, effective January 31,
2023.
"Chesswood generated strong earnings and free cash flow in the
third quarter of 2022. Each of our operating companies
maintained strong origination volumes despite pricing increases
that occurred during the quarter to offset the impact of rising
interest rates" said Ryan Marr,
Chesswood's President and CEO. "Our teams remain conservative
with their underwriting, as evidenced by the strong credit
performance in the quarter" added Mr. Marr.
"Our asset management group continues to work with investment
partners to sell U.S. Equipment Finance Segment receivables.
In the quarter, we observed increased concern by investors
regarding the future economic environment. We are, therefore,
particularly pleased with the performance of our receivables
assets, as they continue to be some of the best performing within
the specialty finance industry," said Mr. Marr. "We continue to
expand conversations with new partners to further scale our
off-balance sheet programs at Chesswood," added Mr. Marr.
"As we draw closer to the end of 2022, our teams can celebrate
the tremendous success we have had throughout 2022. With our
portfolios having experienced tremendous growth this year, we
believe it is prudent to shift our focus towards enhancing
liquidity in response to the changing economic environment," said
Mr. Marr.
"I am pleased to announce that Chesswood's Board has approved an
increase in the annual dividend rate from $0.48 per share
to $0.60 per share, a 25% increase. This increase
reflects Chesswood's strong free cash flow generation," said Mr.
Marr.
Summary of Q3 Results
The Company reported consolidated net income of $12.3 million in the three months ended
September 30, 2022 compared to net
income of $9.1 million in the same
period in 2021, an increase of $3.2
million compared to the same period in the prior year. The
increase was primarily the result of the addition of Rifco National
Auto Finance Corporation ("Rifco"), which was acquired in
January 2022 and which contributed
$1.5 million in the three months
ended September 30, 2022.
The U.S. Equipment Financing Segment reported aggregate interest
revenue and ancillary and other income on leases and loans in the
quarter of $38.4 million
($32.4 million interest revenue and
$6.0 million of ancillary and other
income), a total increase of $11.1
million compared to the same period in the prior year.
The increase is the result of the growing finance receivables
portfolio and off balance sheet funding.
The Canadian Equipment Financing Segment reported aggregate
interest revenue and ancillary and other income on leases and loans
in the quarter of $19.6 million
($17.2 million interest revenue and
$2.4 million ancillary and other
income), a total increase of $10.0
million compared to the same period in the prior year. The
increase reflects the expansion of the Canadian Equipment Financing
Segment.
The Canadian Auto Financing Segment reported interest revenue on
leases and loans in the quarter of $10.5
million and ancillary and other income of $0.4 million.
Overall operating costs were up $13.4
million compared to the same period in the prior year, to
$30.1 million. A majority of the
increase relates to costs associated with personnel, collections,
marketing, and other operating costs.
Other expenses from the equipment financing segments were up
$3.3 million compared to the same
period in the prior year, mainly consisting of costs attributable
to originations as a result of scaling the businesses. In addition,
the growth of the equipment financing segments and their
originations required an 36% increase in the number of employees
since September 30, 2021, increasing
personnel costs by $4.9 million.
Free cash flow2 for the period was $12.0 million, up $1.8
million from Q3 2021. The increase in free cash flow
is the result of growing revenues (including revenues from Rifco,
which was acquired earlier in 2022).
Outlook
Our teams are working diligently to adjust pricing to reflect
the impact of rising interest rates. At the current levels of
inflation, it is difficult to determine when the interest rate
hiking cycle will end. We are therefore fixing funding costs
along with new originations to manage profitability.
If history is any gauge, a recession is almost certain to occur
as central banks continue to increase interest rates. Our
teams have considerable experience navigating these difficult
environments successfully. First, our average portfolio term
is short, thereby producing significant cash flow during periods
where origination volumes decline. Second, most of our
funding is fixed, reducing the overall impact of rising
rates. Lastly, our portfolio of receivables is largely made
up of prime borrowers with strong credit profiles.
Based on previous cycles, we expect that funding markets will
become progressively more challenging as evidenced by recent
activity. We therefore believe the decisions made during the
third quarter position our businesses to capitalize on
opportunities going forward.
Financial
Highlights
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For the Three
Months
|
|
For the Nine
Months
|
(in CDN $000's, except
EPS)
|
Ended September
30
|
|
Ended September
30
|
|
2022
|
2021
|
|
2022
|
2021
|
Revenue
|
$73,054
|
$37,007
|
|
$199,289
|
$93,840
|
Interest
expense
|
(17,284)
|
(8,835)
|
|
(46,504)
|
(22,469)
|
Net recoveries
(charge-offs)
|
(5,542)
|
1,410
|
|
(9,039)
|
(2,500)
|
|
50,228
|
29,582
|
|
143,746
|
68,871
|
Expenses:
|
|
|
|
|
|
Personnel
|
(17,127)
|
(8,667)
|
|
(47,477)
|
(21,606)
|
Other
expenses
|
(11,849)
|
(7,249)
|
|
(32,790)
|
(17,508)
|
Depreciation
|
(477)
|
(290)
|
|
(1,342)
|
(789)
|
Adjusted Operating
Income(1)
|
$20,775
|
$13,376
|
|
$62,137
|
$28,968
|
Decrease/(Increase) in Allowance for Credit Losses
|
(3,542)
|
(1,830)
|
|
(24,928)
|
2,761
|
Amortization – intangible assets
|
(660)
|
(546)
|
|
(1,844)
|
(1,240)
|
Operating income
(loss)
|
16,573
|
11,000
|
|
35,365
|
30,489
|
Mark-to-market adj. on swaps/caps
|
-
|
86
|
|
-
|
344
|
Other
non-cash items
|
(549)
|
1,249
|
|
(1,003)
|
1,517
|
Income (loss) before
taxes
|
$16,024
|
$12,335
|
|
$34,362
|
$32,350
|
|
|
|
|
|
|
Net income
(loss)
|
$12,296
|
$9,148
|
|
$23,626
|
$23,273
|
Earnings Per Share –
Basic
|
$0.64
|
$0.49
|
|
$1.27
|
$1.29
|
Earnings Per Share –
Diluted
|
$0.58
|
$0.45
|
|
$1.14
|
$1.19
|
|
|
|
|
|
|
Free Cash
Flow
|
$11,956
|
$10,188
|
|
$42,909
|
$22,087
|
Free Cash Flow Per
Share – Diluted
|
$0.57
|
$0.51
|
|
$2.04
|
$1.15
|
(1) - See
"Non-GAAP Measures" below.
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NON-GAAP MEASURES
Adjusted Operating Income and Free Cash Flow are not recognized
measures under International Financial Reporting Standards and do
not have a standard meaning. Accordingly, these measures may not be
comparable to similar measures presented by other issuers.
1 "EBITDA" is Net Income (Loss) as presented in the
consolidated statements of income, adjusted to exclude interest
expense, income taxes, depreciation and amortization, and goodwill
and intangible asset impairment. EBITDA is included in one of the
Company's significant bank agreements where it is used for
financial covenant purposes.
"Adjusted EBITDA" is EBITDA as further adjusted for inclusion of
interest on debt facilities as a deduction from net income (loss),
and further removal of other non-cash or non-recurring items such
as (i) non-cash gain (loss) on interest rate derivatives and
investments, (ii) non-cash unrealized gain (loss) on foreign
exchange, (iii) non-cash share-based compensation expense,
(iv) non-cash change in finance receivable allowance for credit
losses ("ACL"), (v) restructuring and other transaction costs, and
(vi) any unusual and material one-time gains or expenses. Adjusted
EBITDA is a measure of performance defined in one of the Company's
significant bank agreements and is the basis for the Company's Free
Cash Flow calculation as defined below. Adjusted EBITDA is
therefore included as a non-GAAP measure that is relevant for a
wider audience of users of the Company's financial reporting.
"Adjusted Operating Income" is Operating Income (Loss) as
presented in the consolidated statements of income, adjusted to
exclude amortization of intangible assets and the change in ACL.
Adjusted Operating Income is intended to reflect the recurring
income from the Company's businesses. Amortization of intangible
assets, which includes the expense related to broker relationships
and non-compete clauses, is a function of acquisitions. The cost of
maintaining the broker relationships after acquisition, being
internally generated intangible assets, cannot be measured and is
therefore not recognized as an asset, meaning that once these
acquisition-related intangibles have been fully amortized they are
not replenished, and the amortization expense will cease. The
change in the ACL can be calculated from continuity of the ACL in
Note 6(c) - Finance Receivables in the unaudited interim condensed
consolidated financial statements as the difference between the
provision for credit losses and the net charge-offs during a
period. The change in ACL is a non-cash item and reflects our
creditor approved formulas for Adjusted EBITDA and Free Cash Flow
that drives our Maximum Permitted Dividends, both relevant measures
for users of the Company's financial reporting.
"Free Cash Flow" or "FCF" is defined as Adjusted EBITDA less
maintenance capital expenditures, tax effect of the non-cash change
in the allowance for credit losses and tax expense. Cash receives
significant attention from primary users of financial reporting.
Free Cash Flow provides an indication of the cash the Company
generates which is available for servicing and repaying debt,
investing for future growth and providing dividends to our
shareholders. The FCF measure provides information relevant to
assessing the resilience of the Company to shocks and the ability
to act on opportunities. Free Cash Flow is a calculation that
reflects the agreement with one of the Company's significant
lenders as to a measure of the cash flow produced by the Company's
businesses in a period. It is also management's concurrent view
that the measure significantly reduces the impact of large non-cash
charges and/or recoveries that do not reflect actual cash flows of
the businesses and can vary greatly in amounts from period to
period.
"Free Cash Flow per diluted share" is defined as FCF divided by
the weighted average number of shares outstanding during the period
for income attributable to common shares and Exchangeable
Securities (as defined below in the "Statement of Financial
Position" section) on a fully diluted basis.
ABOUT CHESSWOOD GROUP
LIMITED
Through three wholly-owned operating subsidiaries in
the United States and five
operating subsidiaries in Canada,
two of which are wholly-owned, Chesswood Group Limited is a North
American specialty finance company publicly traded on the Toronto
Stock Exchange. Colorado-based
Pawnee Leasing Corporation, founded in 1982, finances a highly
diversified portfolio of commercial equipment leases and loans
through relationships with over 600 brokers in the United States. Tandem Finance Inc.
provides financing in the U.S. through the equipment vendor
channel. Vault Credit Corporation, which through its predecessor
corporations, has been originating and servicing commercial
equipment leases and loans in Canada since 1996, specializes in equipment
leases and commercial loans across Canada, allowing for customizable financing
solutions while catering to a wide spectrum of credit tiers,
equipment types and sectors by offering industry-leading service
levels, experienced underwriters and account administrators. Vault
Credit operates through a nationwide network of more than 60
brokers. Vault Home Credit Corporation was launched in September 2021 and focuses on providing home
improvement and other consumer financing solutions in Canada. Rifco National Auto Finance
Corporation, with the mission to help Canadians own automobiles,
seeks to create sustainable long-term competitive advantages
through personalized partnerships with dealers, innovative
products, the use of industry-leading data and analytics, and
leading collection practices. Through Waypoint Investment Partners
Inc., a Toronto-based investment
manager and exempt market dealer, and Chesswood Capital Management
USA Inc., Chesswood Capital
Management provides private credit alternatives to Canadian and
U.S. investors seeking exposure to lease and loan receivables,
including those originated by Chesswood subsidiaries.
Based in Toronto, Canada,
Chesswood Group Limited's shares trade on the TSX under the symbol
CHW.
To learn more about Chesswood Group Limited, visit
www.ChesswoodGroup.com.
The websites of Chesswood Group Limited's operating businesses
are:
www.PawneeLeasing.com
www.TandemFinance.com
www.VaultCredit.com
www.VaultPay.ca
www.Rifco.net
www.WaypointInvestmentPartners.com
This press release contains forward-looking statements that
involve a number of risks and uncertainties because they relate to
events and depend on circumstances that will occur in the future.
Many factors could cause actual results and developments to differ
materially from those expressed or implied by these forward-looking
statements (including the ultimate duration and severity of the
COVID-19 pandemic, the impact of the military conflict in
Ukraine and related multinational
sanctions, the successful growth of Vault Home, the successful
integration of Rifco and Waypoint, and the successful growth of
CCM). By its nature, this information is subject to inherent risks
and uncertainties that may be general or specific and which give
rise to the possibility that expectations, forecasts, predictions,
projections or conclusions will not prove to be accurate, that
assumptions may not be correct and that objectives, strategic goals
and priorities will not be achieved. Additional information about
the risks and uncertainties of the Company's businesses and
material factors or assumptions on which information contained in
forward-looking statements is based is provided in its publicly
filed documents, including the Company's annual information form
and management's discussion and analysis of financial condition and
performance, which are available electronically through the System
for Electronic Document Analysis and Retrieval at
www.sedar.com.
NO STOCK EXCHANGE, SECURITIES COMMISSION OR OTHER REGULATORY
AUTHORITY HAS APPROVED OR DISAPPROVED THE INFORMATION CONTAINED
HEREIN.
SOURCE Chesswood Group Limited