Earnings Call: Q3 2019

Nov 5, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Financial Results Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Hal Curry. Thank you. Please go ahead, sir. Thank you, operator, and good morning, everyone. My name is Hal Curry, the company's new Chief Financial Officer. Thank you for joining us to discuss Goeasy Limited's results for the Q3 ended September 30, 2019. The news release, which was issued yesterday after the close of market, is available on GlobeNewswire and on the GoEZ website. Today, Jason Mullins, GoEZ's President and Chief Executive Officer, will talk about the highlights of the Q3 and review our financial results before we open the lines for questions from investors. David Ingram, the company's Executive Chairman and Jason Appel, the company's Chief Risk Officer, are also on the call. 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. All shareholders, analysts and portfolio managers are welcome to ask questions over the phone after management has finished. The operator will poll for questions and provide instructions at the appropriate time. Business media are welcome to listen to this call and use management's comments and responses to questions and any coverage. However, we would ask that they do not pull callers unless the 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 cautions regarding forward looking statements, including in the MD and A. Now I'll turn the call over to Jason Mullins. Thanks, Hal. Good morning, everyone, and thank you for joining today's call. As this is Hal's Q1 as our new CFO, I'd like to publicly welcome him to the team as he will be valuable in helping support our ambitious growth plans. Looking first at the results for the Q3, it was another productive period for our company as we delivered strong loan growth, improved credit performance and record financial results, while concurrently making significant progress against our strategic plan. During the quarter, we invested in the development of our new branded media campaign, which focuses on authentic and relatable moments for our customers and the inspiration for a better tomorrow. With 1 in 3 of them graduating to prime credit and 60% increasing their credit score within 12 months of borrowing from us, we truly believe we can make a positive difference in their lives. The integrated campaign, which includes new TV and radio spots, as well as new digital print and out of home creative, helped drive a 105% increase in web traffic year over year, lifted our aided brand awareness to 84% and produced a record level of loan application volume, which was up 25% over the Q3 of 2018. As consumers continue to gravitate towards a digital experience, we had another quarter with 46% of our total application submissions originated online, up from 37% a year ago. The lift in application volume translated into a record level of loan originations at over $286,000,000 up almost 30%. Most notable was that we experienced another quarter of record new customer growth and issued 65% of the credit we advanced to new customers. We believe this highlights the strength of the consumer demand for non prime lending alternatives and that Easy Financial continues to be a trusted and reliable source for the 9,000,000 Canadians that cannot access traditional prime credit. The increased originations led to growth in the loan portfolio of 76,000,000 dollars up 20% from the growth during the Q3 of last year and lifted the average loan book per branch to 3,500,000 dollars At quarter end, the consumer loan portfolio reached $1,040,000,000 up 38% from $750,000,000 at the end of the Q3 in 2018. Total company revenue in the quarter was $156,000,000 up 20% from the Q3 of 2018, driven by the growth in the consumer loan portfolio. As we highlighted last quarter, the strong growth in the proportion of online applications and new customer growth has resulted in a moderation in the expected rate of decline for the total portfolio yield and the annualized net charge off rate. During the Q3, the total annualized portfolio yield reduced sequentially by 30 basis points to 50.1%, which was consistent with the yield reported back in the Q1 of this year. In tandem, the annualized net charge off rate improved with a sequential decline of 30 basis points as well from 13.5% to 13.2%, holding the risk adjusted yield flat for the 3rd straight quarter. With the strong performance we have seen in online acquisition and the record level of new customer growth, we continue to make enhancements to our credit strategies that will produce a gradual improvement in the credit quality of our portfolio and a structural and long term decline in the loss rate. Most important of all, we are focused on striking the right balance between growth, yield management and credit quality to maximize the long term performance of the business. In the quarter, we also recorded an incremental $2,700,000 of bad debt expense related to the loan loss provision rate, which increased by 26 basis points from 9.38 percent in the Q2 of 2019 to 9.64%. This change served to reduce earnings in the quarter by approximately $0.12 per share. As we've experienced in the past under the IFRS 9 accounting standard, the provision for future losses, much like the in period net charge off rate is susceptible to some fluctuations from quarter to quarter, but expected to be quite stable over the long term. The loan originations generated during the quarter had improved mix of credit quality, while we saw a slight downward shift in the credit mix within certain segments of our active portfolio. This was the result of a combination of both seasonal shifts and improved collection results on our higher risk segment customers. Overall, the degree of change in the provision rate in the 3rd quarter was a more moderate adjustment compared to both the comparable quarter of 2018 and the prior quarter of this year. In addition, despite the natural fluctuations, the rate remains within 3 basis points of 1 year prior, demonstrating its longer term stability. The revenue growth and improved operating leverage produced an operating margin for the total company of 27.3%, up from 25.3% in the same quarter of 2018. Net income for the quarter was a record 19,800,000 dollars up 38% from $14,300,000 in the Q3 of 2018, resulting in record diluted earnings per share of 1.28 up 32% from $0.97 per share in the Q3 of 2018. The strong earnings growth and stable financial leverage also helped produce improved return on equity of 24.1%, up from 23.8% in the prior year. Over the last several months, we have also made great progress against our strategic initiatives as we continue on our journey to become Canada's top non prime consumer lender. First, we are making great strides in our ongoing expansion into Quebec and secured lending. In Quebec, we've opened 2 new locations this year with an additional 4 new branches scheduled open in the Q4, finishing the year at 23 locations in that province. The loan book there has climbed to $64,000,000 representing 6.4% of the total portfolio. Furthermore, the loss rate in that province continues to improve and is trending just above the portfolio average, giving us confidence that our custom credit strategy is having the desired effect. Our secured loan portfolio crossed over $100,000,000 in outstanding loan balances this quarter, now representing just under 10% of our total portfolio and double the prior year. The product continues to perform exceptionally well and prove that consumers are responding well to our strategy to develop a full suite of lending products for the non prime borrower. Secondly, during the quarter, we made significant progress in our plan to develop our omni channel business model through the expansion into point of sale financing. In September, we announced a strategic partnership and $34,000,000 equity investment in PayBright, a Canadian fintech platform focused on instant point of sale consumer financing and installment payment plans. Through this new strategic partnership, Easy Financial will become the primary provider of non prime financing within PayBright's point of sale payments platform. Each year in Canada, there is estimated to be more than $30,000,000,000 of credit extended to consumers through financing and buy now pay later programs offered at the point of sale. PayBright has partnered with over 5,000 merchants, allows them to offer payment plans to their Canadian consumers and equip and easy digital experience through both e commerce and in store. By partnering with PayBright, retailers provide their customers with additional spending power and experienced increased sales through higher checkout conversion, increased average order value and greater customer loyalty. By integrating goeasy's non prime installment loan product into the PayBright platform, the companies together now offer Canada's leading instant point of sale payment solution that serves the entire credit spectrum of Canadian consumers in a single seamless user experience. Each consumer purchase is paid for with a straightforward, easy to understand installment payment plan. Our e commerce integration with PayBright will be completed by the end of November of this year, and then new merchants will be gradually added to the non prime program. We will also aim to introduce the in store platform in the first half of twenty twenty, so together we can offer the ultimate omnichannel solution to retailers. In addition to the strategic partnership, we also acquired a minority equity interest in PayBright. This investment serves to strengthen the commercial arrangement for GrowEasy and provides the opportunity to share in the value creation of PayBright's business in the long term. Lastly, we were privileged to receive further acknowledgment of our accomplishments during the quarter as we ranked in the inaugural TSX 30, a listing of the top 30 companies on the Toronto Stock Exchange based on cumulative 3 year dividend adjusted share price appreciation and were included on the report on businesses list of top growing companies in Canada as a result of our 3 year revenue growth. This recognition highlights the hard work and dedication demonstrated by our passionate employees who take great care of our customers and support them on their financial journey. I'll now pass the call over to Hal to briefly review our balance sheet and liquidity position. Thanks, Jason. Subsequent to quarter end, we are pleased to announce an amendment to our senior secured revolving credit facility, which increased the maximum principal available by $120,500,000 borrowing capacity, raising the limit from $189,500,000 to $310,000,000 In addition, the interest rate on advances from the credit facility was also reduced by 25 basis points from the previous rate of Canadian Bankers Acceptance Rate, BA +3.25 basis points to BA +3 100 basis points. There was no change to draws where we select the lenders' prime rate. With this amendment, our weighted average interest rate when our facilities are fully drawn reduces from 6.8% to 6.5% and our liquidity to fund growth is suspended. Based on the cash at hand at the end of the quarter and the borrowing capacity under our amended revolving credit facility, we had approximately $215,000,000 in funding capacity which will allow us to achieve our growth targets through to the Q1 of 2021. We also estimate once our existing available sources of capital are fully utilized, we could continue to grow loan portfolio by approximately $150,000,000 per year solely from internal cash flows. We will now turn our attention to exploring the opportunity to refinance our high yield notes, which became eligible for renewal on November 1. With our bronze trading at a premium of approximately 104% par, we will carefully assess the market conditions and the economics associated with an early refinancing to determine the best path forward for the business. In addition, we will we continue to believe there are opportunities to explore a securitized funding facility in the future as the next natural stage of evolution in our capital structure. We will also continue to run the business at or below our targeted leverage ratio, 70% net debt to total capitalization. Cash provided by operating activities before the net issuance of consumer loans receivable and purchase of lease assets rose to $80,900,000 this quarter, bringing the year to date total to 225,000,000 dollars up 32% over the prior year. During the quarter, we also continue to exercise our normal course issuer bid to repurchase 79,260 shares at a weighted average share price of $52.81 Since implementing the NCIB last October, our total repurchases now total 856,712 shares bought at a weighted average price of approximately $41.98 I'll now pass the call back over to Jason. Thanks, Hal. With the final stretch of the year in front of us, we are proud of our accomplishments, but even more excited about the future. We are operating in a healthy economic environment with record levels of consumer demand and stable credit performance, complemented by a well capitalized balance sheet that is ready for growth. We remain on track to achieve all of our stated targets for 2019 and beyond, and we continue to be confident in our strategy and the strength of our team and our culture. Most important, we believe strongly in our vision of giving everyday Canadians a path to a better tomorrow today. We are truly just getting started. With those comments complete, we will now open the call for questions. Our first question from Nick Priebe with BMO Capital Markets. Your line is now open. Okay, thanks. I want to start with a question on understanding the increase in the provision rate sequentially. Jason, I think if I caught it correctly, you mentioned in your prepared remarks, there was a bit of a shift that occurred within the existing portfolio that contributed to the higher ratio and it may have had less to do with the actual mix shift of new originations toward new borrowers and digital channels. But if I look at the proportion of loans in the stage 1 bucket, it actually looks very consistent sequentially. I was just wondering if you could expand on that a bit for us. Yes, sure. So as you know, the provision rate is a function of multiple factors. We have the inbound quality of the originations. We have the historical loss rates. We have the credit quality of the customers on the portfolio today, and we have the forward looking indicators. All of that goes into a multi dimensional formula. So there is a number of factors at play. Essentially, what we saw was the quality of the originations coming through the door continued to improve and was right in line with as we expected to be based on our credit risk tolerance. So that was very, very positive. On the flip side, as you pointed out, we did see a slight shift in the credit mix of the existing portfolio we have active on the books. And essentially, what you saw is about 0.5 percent of the portfolio moved from a low to the high risk segment. And as we look at the contributing factors to that compared to other periods, what's actually what we saw is a little bit of what we believe to be some seasonality. As you know, we saw a similar increase in the Q3 of last year. I think it makes sense coming out of summer months and how our customers would expect to be performing from a credit point of view. And then the other thing that we saw is as we've increased effectiveness in collections on our higher risk segment customers, that allows those customers to have more of an opportunity to try and improve performance. And so we saw a little bit of a shift as a result of that as well. So it's good for the net charge off rate and for the performance of the book, but the counter effect is it does have a minor shift in the underlying credit mix. Got it. Okay, that's helpful. That's good color. And then just shifting gears, I also wanted to ask about the future evolution of the funding model. You kind of alluded to this in your opening remarks as well. But I think last quarter you talked about exploring a potential ABS facility as well. Looking at Fairstone's inaugural facility, I think that was over $300,000,000 I was wondering if you could just kind of speak to that in terms of how big a potential ABS transaction would have to be for GoEasy, how cost competitive that type of facility might be compared to alternative funding sources? And just what type of loans will be included in that, whether it's skewed towards like secured lending or risk adjusted, etcetera? Yes, sure. I'll make a couple of comments and then I'll pass to Hal if you have anything additional to add. So it continues to be the type of facility we're exploring. That warehouse spending a lot of his time is looking at what forms of securitization are available, could include a bank warehouse type facility or could include an ABS in the public markets. In terms of the type of business we would envision fits into a securitized portfolio, you hit it right on the head. It's essentially a combination of our secured lending product and the customers within our unsecured that are risk based priced, I. E. There are better credit quality customers. As for the size of the facility, I think similar to other forms of debt, somewhere in and around the $200,000,000 level, give or take, tends to be the right entry point, where it's sizable enough to be worth doing the work, but isn't too significant. So I think at this point, we believe and feel confident there's some opportunity there. We don't have exact line of sight as to what or when, but we are working on it. As for the rate, it's really hard to say because it's conditional on number of market dynamics. But clearly, you would expect that a securitized facility would, of course, be priced better than the unsecured high yield notes and the traditional senior secured revolving facility. So that's how we think about just in terms of reducing borrowing costs. Okay. Great. And then one last one for me. I also wanted to ask a question about the PayBright transaction. I mean, you've committed a pretty significant investment to that platform. I was wondering if you could just help us size the potential market opportunity afforded by that new partnership. Yes, sure. So I think the way we look at the investment, just to touch on that briefly is, I'll just provide a further background context, I think, is important. So we've been in point of sale lending now for a couple of years through easy financial offering non prime point of sale loans. As you know, we've got some really great partnerships like our loan with Leon's that's been ongoing now for several years and have great have and it's not integrated with the prime offer that they have, the friction creates a substantial amount of drop off in the transaction. And so about a year ago, our focus on our quest was to work on what are all the options and the best fit option for how we could integrate directly with a prime lender. And so we explored bank relationships, private company relationships, companies in other markets that might have an appetite in Canada, looked at a whole variety of sources and concluded PayBright was the company we thought was the best fit for success in Canada. A great management team, a great platform, and they'd already subscribed a number of major brand partnerships like Wayfair and Samsung and so on and so forth. So we decided to work with them. As we got into those discussions, it became clear that the opportunity for an equity investment would not only strengthen the quality of the commercial arrangement for goeasy, but it would also mean that because we would be working together to help make the full offering and therefore by default pay rights business successful, being an equity holder would allow us to participate in some of that value creation over the long haul. So it's not a speculative thing for us. We see it as a long term investment whereas we work together and build the platform, there might be some additional upside for Goeasy in the long run. We built the investment pieces purely around the funnel of We see that as purely the upside. In terms of the market potential, I think, We see that as purely the upside. In terms of the market potential, I think a couple of points of reference. We talked about the size and the magnitude of the originations we see in Canada, their app point of sale, dollars 30,000,000,000 plus. So there's a big proportion of originations available and up for grabs. I think if you look at another reference point, as far as we understand it, Fairstone, our primary competitor who's also in point of sale and has been doing it for much longer than us, they would have about 10% to 15% of their loan book that would be point of sale originated consumers. Of course, they also have the opportunity, as will we, to then cost sell those customers into other loans. So, I think we'll probably be as we normally are a little bit more slow and cautious in the early months. But as far as the long term potential, it can certainly be a fairly significant contributor to the future of business. Got it. Okay, that's great. Thanks, Jason. Our next question comes from Gary Ho with Desjardins Capital. Your line is now open. Thanks. Good morning. Jason, maybe just continuing on with that point of sale discussion. You mentioned Fairstone around 10% to 15%. Can you disclose where you guys are at right now with the point of sale channel with the penetration either loan book or in terms of originations? Yes. So in our investor deck, we do show the amount of application volume and originations from indirect, although that includes a combination of both point of sale and 3rd party partnerships where we're taking referrals from other providers and online resources. If you narrow it down to just point of sale, today it's very small. It would be like single digit percentage small. Of course, that is focused on just the point of sale book. We then, of course, cross sell those customers and then they just show up as part of our regular unsecured secured portfolios. But the other part of sales is still quite small. A, because of the challenge that I mentioned we had experienced around integration with Prime, but b, once we realized that that was the gap we had to close, we didn't spend over the last year a lot of effort to try and build new relationships and to really sell the product because it just didn't make sense until we locked in on that partnership. So today, it's still quite small. And as I say, when we think 1, 2, 3 years out, we think it can be more material and look more in line with how our competitor would look. Got it. So you think over the next, call it, like 3 to 5 years, you guys can get to that 15% to 20% loan book that Fairstone is that currently? I think that's reasonable. I mean that certainly is the appropriate reference point for how we should think about it. Okay. And does your equity investment in PayBright prevent you from partnering with someone else? Is there any clause in there that you can't partner with someone else? So as it relates to the Canadian market, it doesn't preclude us from going directly and partnering with the merchant for offering non prime if they have an alternative prime provider. But our relationship and our exclusivity to them is reciprocal and that we won't go integrate with other prime lenders. And it really wouldn't make sense for us to do that given the amount of work, time and effort that goes into building the full integration and of course layering on our equity investments. So we have and will continue to have retail relationships where we're the non prime provider behind somebody else that's already prime. But as far as working together and doing a full integrated offering, we'll be working in the K mark with just PayBright. Got it. Okay. And then, I guess the second question, just on the credit migration, you kind of gave some good color on what happened. But just wondering anything to read through there? Is there anything that's trended that you think could be more permanent in terms of the credit migration or is it more of a seasonal shift that you mentioned? So a couple of comments and I'll see if Jason calls in to add. So from our perspective, as we deconstruct it, no, nothing that we have concerns over. The things that we watch to tell the health of the book are the through the door origination mix. So what is the credit quality of the customers of the loans we're booking? That's a significant indicator for us. 2nd one is the vintage loss rate performance. So tracking each vintage of historical originations to see how they're trending. Those continue to look stable and or improving. And so, although we spent a lot of time to deconstruct what influences the mix in the provision, knowing that it is susceptible to a number of factors that can create those fluctuations, those other metrics really give us the best indication of the credit quality of the book. So nothing that we saw in this that we consider to be anything other than normal quarter to quarter shifts. Anything to add to that, Jason? Yes, Gary, it's Jason. The only other comment I would say and it was mentioned in the opening remarks is you're going to see fluctuations from quarter to quarter. That's just a natural byproduct of the fact that the provision is made up of data from the past, the present and the future. But I'd suggest the key takeaway from the quarter is we saw 26 point adjustment in the quarter, which was quite significantly lower by comparison to the 47 basis point adjustment we saw in Q3 2018. And I think generally I would view that as a part of the sign because we prefer less modification than more. And I would say that's more a reflection of the fact that as we continuously improve that through the door quality of the origination coming in, we would expect to see those modifications continue along the path that they're going down. So that would be the other key takeaway we leave you with. And what drives that seasonality? Can you elaborate on what you guys said it a couple of times, kind of what drives that? Yes. So I think it's a couple of things. Obviously, there are different periods throughout the year where the customers face different types of cash flow expenses, summer periods, back to school periods as an example. The other factor that when we refer to seasonality is really just the way in which the quarter ends. So as you will have noticed over the last couple of years, when we provide our financial disclosures and we report the delinquency rate, one of the things that we did was showed the average delinquency as on a typical Saturday. So a weekend close versus just whatever the actual calendar day is at the end of the quarter. And because our customers get paid biweekly, we debit all their payments biweekly, and those are typically on Fridays. And so the typical cycle for us is customers pay on a Friday, and then if they do miss a payment, we would find out the Tuesday, Wednesday. And so the delinquency throughout the week kind of goes through peaks and valleys, in which case, depending on the day that the quarter ends, that can also create a little bit of noise in the staging of the book and the provision. So I think there's a couple of things that we're referring to when we talk about seasonality, and we saw the same thing as Jason said the Q3 of last year. Okay, great. That's it for me. Thank you very much. Our next question comes from Jeff Fenwick with Cormark Securities. Your line is now open. Hi, there. Good morning, everyone. So Jason, I just wanted to focus in on the 2020 targets as we're heading into the next year here before too long. And maybe the one that stands out to me that you've maintained here is the operating margin for Easy Financial moving up to that 44% to 46% range. Could you just run us through what we should be expecting or what are the levers that we should be watching for you to move in the business, just begin to move to that level? You've been running, give or take, between 39% and 40% for the last few quarters. How should we expect that movement to begin to play out here? Yes, sure. So we do expect an increase in the operating margin in the Q4 over the trend we saw in the last two quarters. That will lift the full year operating margin and move us into the guided range that we provide provided us the revised targets a few quarters ago. We do expect to continue to see the operating margin elevate as we grow more efficiency and more scale. At this moment, we feel fine and comfortable with the target range that we've provided. As we get to February, when we provide the new fresh 3 year guidance, we'll be able to then see where the buck finishes at year end, look at the guidance around both yields and losses and margin and see if we need to make any adjustments. But at this point, based on the fact that we will continue to see scale leverage, we will see the margin expand and we'll provide a more narrow and updated range at the next quarter end. So this really is the view that the store footprint is largely built out now, so there's not a lot of incremental spend there. The marketing campaign laid out in terms of spending around where you're going to be without a big step function from here. So really it's just that top line growth driving some operating leverage for you. Yes, that's right. The primary leverage that we generate in our business is from the growing loan book in the existing store base. So we had we're just at 2 50 locations today. We think there's capacity for north of 300. So we'll continue opening kind of 10, 20 a year, but the vast majority of the growth we experience now is coming inside the existing store footprint, where essentially the only incremental operational expense variable wise is just some small additional labor for extra financial services representatives. But otherwise, it's a fairly significant amount of operating leverage from that base. Okay, great. And then I just wanted to shift over to the secured loan product. I mean, it's now a pretty sizable percentage of the total for you. Can you give some comments about, do you have a large enough sample size of running through the process of loans falling into arrears and dealing with them versus looking at how those are performing ones play out just to have a good level of comfort now around the expectations for how that product should be Thad here. Yes, we're pretty pleased with how the secured loan has been performing. As you know, we went into that market very conservatively, choosing to obviously modify the underwriting of that product as we began to see experience. Obviously, as you know, we're sitting at just over $100,000,000 as of end of Q3. So, I think we see it's quite healthy. It's probably significantly below where you would see the unsecured book. The answer to your book would be at around the 4 to 5 range. Your secured book would be in and around the 1 to sub-one range. And I'd say the loss rates, we've been again quite pleased by them, extremely low, if not slightly below the very lowest of single digits. And we would expect that to obviously rise over time, but obviously significantly below where the average portfolio is trending as we continue to build that book. We think that there is some opportunity for some future growth and expansion in that portfolio. But obviously, with most things, we're going to tread carefully as we grow that book over time. But I'd say, by and large, you're spot on. We've been very pleased with the book and not using the opportunity with where the market is at to get too aggressive because we're still pretty tight when it comes to our LTVs and how we price. So overall, we're pretty pleased with how it's performed. Okay. That's helpful. Thank you. And then maybe just on Easy Home and the rollout of the kiosks, for the lending kiosks within those stores, looks like you've sort of slowed the expansion of that there. So are you in terms of footprint across the store locations, are you around where you want to be? And are we seeing what you think is a relatively representative run rate of how that segment is going to perform going forward? Yes. So I believe we have maybe about a dozen of the prior older Easy Financial kiosks that we still need to move to their own dedicated stand alone. As we do that, that allows the Easy Home store to then also begin to offer lending as part of its product range. So there is still a little bit more expansion to come with rollout within EasyHome for the lending offering, although relative to the base we have now, just over 100 locations actively lending, it's the amount of growth there is still going to be minimal. But as far as the actual four wall profit contribution, we still have high degree of confidence we will see a slow and steady rate of growth in revenues and operating income as a result of the fact that the loan growth of the lease portfolio winds down, generally speaking, without running that decline. So net net, believe we'll continue to see slow steady expansion there. Our next question comes from Richard Roth with TD Securities. Quick question on the charge off ratio. So given your guidance for 2020, my expectation, is it safe to say that in Q4, you're going to start to see another drop, another decline of maybe 30 plus basis points in the charge off? So I think the charge off rate decline is going to be a bit longer term more so than straight linear. So we are continuing to see a gradual improvement. To the degree of change that we would expect in the Q4, I think, would be more minor than that. But as far as we get into 2020, we definitely expect that the full year's loss rate is going to come in within the guidance that we provided. Because of the various factors we've already highlighted, it will probably be more on the mid to the upper end of the reduced guided range, which still, of course, means a year on year reduction. But it may not be a perfectly linear story the entire way, but the full year will come in on that expectation. Okay. And on the secured loan side of things, so I guess it's that 10% give or take of the total book now. Embedded in your guidance for revenue yield, presumably you have a assumption of what that secured loan book is going to make up in your portfolio in 2020 2021. Can you give us sort of ballpark numbers as to kind of percent basis what your target is for that? Yes, sure. So we're at 10% today. 1 of the upper boundary figures that we've quoted before is that about 20% of our customers are homeowners. And so that would be if all of the eligible homeowners borrowed. And of course, we still screen a number of those out because of various credit affordability factors. So we will expect the 10% to continue to grow, but it's not going to be a significant shift. So maybe it goes from 10 to 12 to 15 or so as opposed to it jumping to 20 or 30 because of just the natural mix of our homeowner base. Okay. That's very useful. And last question for me. Do you guys have a target mix for Quebec now that seems like you sort of sorted out all the growing pains and you're going to really focus on originations in that province. Do you have a target mix in terms of is this going to make up its proportionate share for Canada for your book or is it still going to be a little bit under penetrated in the next year or 2? I think because we have still set a slightly more conservative credit tolerance given the experience we've had and that we're trying to make sure we're really building healthy originations. We'll probably see Quebec still under index its population proportion. But given that it's 22% of the population, even if it under indexes, obviously, it continues to become a very healthy and profitable part of our business. So for right now, I would say, our view would be we want to continue to grow it, but it will under index population. Over time, as we get more and more history and we refine and fine tune the credit models, one day, our hope would be that if they are as accurate predictive as the models we built everywhere else over that longer period, in which case we might get to an exact proportion of distribution. But for right now, we would be expecting it to still under a sense. Our next question comes from Brenna Vanlem with Raymond James. Your line is now open. Hi, good morning. So I wanted to start with loan growth and just how we should be thinking about your decision to incrementally add there. Are you looking at the risk adjusted yield and sort of managing to a target of charge offs versus the revenue yield you're getting? And just in the context of record origination quarter, record applications, really big increases in online applications, but the net loan growth on an absolute basis was not your biggest quarter? Yes, I think that so yes, those are the right observations. As for how we're managing the business, yes, the key takeaway is we are managing the relationship between yield, losses, growth and then ultimately long term profitability. So as part of our strategy to continue to evolve the mix of the portfolio and given the headwinds that we have highlighted in the past about the higher proportion of online applicants and new customers, we're, of course, making ongoing credit enhancements to ensure that the quality of the originations that we take in are really healthy and being quite disciplined about that. So as we said before, we could certainly take on more velocity at the expense of a higher loss rate or we can manage the growth to a level where we get the right mix of yield and losses for long term value. And so that process is an ongoing analysis. And so right now, we believe we have the dial set at the point where the originations we're taking on are strong. They'll improve the overall credit quality of the book in the long term. And we continue to have to reevaluate that right tolerance every single year. So that's kind of how you think about the growth we had in the quarter. So is that something that you're analyzing and trying to manage as well as optimizing the ratio of approved loans to online applications? That's right. The process of evaluating what credit tolerance you want to accept of your through the door applicant pool in order to draw out a certain mix of originations that will come in and be onboarded at a certain price point that you expect them to deliver a certain loss rate and what influence that has on the existing book that you have is an ongoing process. We analyze and study those relationships every single month and then make the appropriate adjustments that we think we need to make. And so as we looked at the higher proportion of online applicants and new customers, which as you know, meant that it would produce a slightly higher loss rate, albeit also with a slightly higher yield. Hence, while the risk adjusted yield held flat, we've set the appropriate dials and tolerance to maximize long term profitability and to achieve the guidance of the target range that we've provided. Right. Okay. So I guess what I was getting to with my next question is that ratio of applications to successfully originated loans that's in turn almost a function of your ad spend. So in the context of the operating margin expansion that you're guiding to next year is I'm just curious how you think about the absolute dollars of ad spend versus what you're actually on boarding? And at a certain point, those applications, that volume growth is great, but you have to be converting those? Yes. So I think, maybe just I'll try and summarize how we're thinking about it. So first of all, our approach to invest about 4% of our revenue into marketing and advertising remains consistent a consistent philosophy. So each quarter this year, we've run on average just a bit above 4%, and we would continue to use that level of investment as our guiding philosophy going forward. What we're also always trying to do is improve the efficacy of that spend so that we can get the most application volume through the door for every dollar we invest, and that gives us more choice around which customers we want to originate book based on the price, the loss rate and the growth that we're trying to achieve. The scale and the operating leverage comes from primarily the revenue on a fixed cost base as opposed to reducing the ad spend as a proportion of revenue. We're going to continue to invest that ad spend in growing brand awareness and attracting applicant volume and then setting what tolerance we want to accept from a credit point of view. Obviously, the one thing that we then look at is the mix of the applicants that's coming in. If the mix of the applicant coming in is slightly lower credit quality, we adjust for that. If the mix of the applicant coming in is a better credit quality, we adjust for that. Okay. That's helpful. Thank you. Next question, is there any early results you can share with your partnership with Mogo? So we've had the pilot going with Mogo for 30 days or so. We've as we do with every process embedded a fairly conservative test and learn strategy. So hence why it's a pilot. So we've done a bit of business there, a few 100,000 originations or so. So far, it looks good. So far, it makes sense to us, performing well. Customers look good, loans look good. But it's a small amount of business and it's early days. So like any other third party partnership we've got or have done, start slow, look at the quality of what you're booking and then adjust from there. But so far, the Mogo is going well, and we think that could still be a good partnership for the long haul. Okay. And would you expect there to be a noticeable impact from the relationship with PayBright going live at the end of the month in just 1 month of Q4? No, no. It's going to be a longer term play than that. We'll turn the integration on at the end of November. But again, we will approach it the same way we have everything, start out a little bit slower, onboard merchants slowly to make sure we're happy with the performance, make sure quality is good, credit mix is good, bugs are working, customer experience is working, and then we'll slowly add merchants. So we've not embedded any significant assumption for growth into our estimates. We believe it will be a more meaningful contributor, primarily if you think about the back half of twenty twenty and beyond versus the 1st 6 to 9 months. Okay. And then last one for me, just going back to that increase in the provision rate, any little bit of further clarity you could provide if you're saying like you saw an actual decline in the net charge offs and increased effectiveness in collections, what is causing that analysis or conclusion that there's a bucket that's being deemed higher risk? So maybe just to connect the dots there, what I think we're really saying is that if you are more effective than collections on higher risk segments of your customer base, by default, those customers now remain on your portfolio because you're now extending their life and you're improving the rate of collection of those customers. They're ultimately paying you back more than they otherwise would have if you weren't as effective. And so as we've improved the collections effectiveness in those segments, you get the effect of the charge off rate declining, but you see a small shift in the mix of those customers as a proportion of your portfolio. So we believe that part of the minor shift that we saw in the staging and the credit mix would be how we would attribute that. But again, that is the right thing for the business and positive for the long term because you're ultimately generating a better return and collecting more of your capital. Okay. So that shows up as a proportionate or percentage decline in your level of gross charge offs? Correct, exactly. Right. Exactly. Okay. If those customers had charged off, they would no longer be in your active portfolio, So they would no longer show up in your mix, but you would have taken the actual charge off. If you prevent the actual charge off and the customer continues to pay you, then they're now going to be within your portfolio mix and those customers are, as we can by default, the higher risk segment. So you're ultimately aiming for the maximum collection rate on your book over the long term, But these are the kind of moving parts that you experience quarter to quarter when you're focused on the right long term. Okay, great. Thank you. And our next question comes from Jaeme Gloyn with National Bank Finance. Your line is now open. Yes, thanks. Good morning. First question is on PayBright, which I see is held on the balance sheet as fair value through profit and loss and that factors such as equity market risk and interest rates will drive a change in fair value that will run through the income statement. I'm just wondering if you can put some magnitude around the volatility that we can expect with PayBright. It's Tal here. So in terms of the overall investment, it's $34,000,000 just north of $34,000,000 We would continue to evaluate that investment from a fair value standpoint, as you've alluded to. However, certainly within the short to mid term, we would not expect any material sort of volatility in the fair value of that asset on the balance sheet. Yes. I guess what I'm getting at is, if interest rates are moving up 100 basis points over the next 12 months, what could be the impact of the value of PayBright or let's say equity market prices like the TSX declines 10%, is there an impact on PayBright in the next 12 months? Is that how I should be thinking about this? Well, certainly market conditions could affect valuation. But in this case, we would really see that as a valuation based off of looking at a revenue multiple on this particular book of business. So therefore, we would not see any material sort of fluctuation associated with broader macroeconomic conditions having a substantial or material effect on our valuation. Yes, Jamie, I'll just add to that. The way to think about PayBright's business as a prime lender, they're generating a combination of yield from the consumer for the prime loans that they lend as well as these very sizable portion of their income coming from the discount rates that the retailer contributes to the economics of the program. And because they're a prime lender and do have quite a decent amount of history behind them, they have access to quite an attractive level of and cost of funding. And so if you roll forward their business model, it seems very unlikely there's going to be any material macro change that's going to really impact them. And then if you flip to the value, we looked at the valuation of them and priced it in accordance to the way the market historically, globally for that sector was priced. And then, of course, got credit and value for the fact that we're bringing additional value to their business. So we don't know obviously, we will adjust the value of that investment on our balance sheet and record the change in that. But we're we think of this very long term and not what the quarter to quarter change is going to be. So in the long haul, if they do what we believe they will and we contribute to that success in the way we think we will, we just would expect that, that value rises over time. Okay, great. Thank you. Clarification question on the ad spend, holding the expense at 4% of revenue. That would suggest that Q4 is going to come down quite a bit, but historically the ad spend has been in Q4. So should we expect that 2019 is going to have ad spend sort of in like that 4.5% range and we'll see it come back to the 4% range in 2020? Is that do I understand that correctly? Yes, I think yes, so one comment that you noted, in the past year, we had spent marketing dollars in a bit more of a peak and valley manner. We saw lower levels of ad spend in the 2% to 3% range in Q1 and Q3 then higher levels close to 5% in Q2 and Q4, resulting in the full year coming in around the 4% level. This year, you'll see that the ad spend has been a little bit more consistent at around 4% to 4.5% each quarter, And that's what you saw in Q3 and what you would also expect in Q4 as well, bringing the full year in and around just over 4%, 4.2%, 4.3% range kind of thing. So that's kind of how we would expect it. And then that same trend would continue next year. Whether or not we choose to revert back to a more quarterly specific ad spend strategy or be a bit more consistent throughout the year as we did this year. That's part of our assessment as we look at this year and the prior year and decide how do we think is the most effective way to spend those dollars. Great. Appreciate that. And just about going back to the increase in the provisioning rate, did any macroeconomic factors have a plan that related to the forward looking indicators? Was that at all a factor? Or is it just related to this better collections and seasonality impacts? Hey, Jamie, it's Jason Mittal here. You hit it spot on. The FLIs really have a fairly large role to play this quarter. They were pretty benign. Most of the changes were for the reasons you've outlined, seasonality impact and the shift to the higher risk groups as a result of improved coex. Okay. Thank you very much. And at this time, I'm showing no further questions. Okay, great. Thank you. So with questions now closed, I'd like to thank everyone for participating in today's call. I would look forward to updating you in February when we release our year end results and share more of our plans for 2020. Thanks, everyone. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.