Earnings Call: Q2 2019

Aug 8, 2019

Good day, ladies and gentlemen, and welcome to the goeasy Ltd. second quarter 2019 financial results. At this time, our participants are on a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will follow at that time. If anyone should require operator assistance, please press star and the 0 key on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, David Yeilding. Sir, you may begin. Thank you, operator, and good morning, everyone. Thank you for joining us to discuss goeasy's results for the second quarter ending June 30th. The news release, which was issued yesterday after the close of market, is available on GlobeNewswire and on the goeasy website. Today, Jason Mullins, goeasy's President and CEO, will talk about the highlights of the second quarter and review our financial results before we open the line 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 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 hold for questions and will provide instructions at the appropriate time. Business media are welcome to listen to this call and use management comments and responses to questions in coverage. However, we would ask that you 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 safe harbor statement, but I will direct you to the caution regarding forward-looking statements included in the MD&A. Now, I'll turn the call over to Jason Mullins. Thanks, David. Good morning, everyone, and thank you for joining today's call. The second quarter was highlighted by strong loan growth, record financial results, and solid progress made against our strategic imperatives. Our fully integrated spring media campaign, consisting of TV, radio, print, and digital, helped drive a 70% increase in web traffic and aided brand awareness to sit at 83%, the highest in Canada for dedicated non-prime consumer lenders. Combined with the ongoing optimization of our new digital lending platform, we experienced record level of total application volume, which was up 18% year-over-year. The proportion of applicants applying online also reached a new high of 46%, up from 37% a year ago. Elevated traffic and application volume produced a record level of loan originations at CAD 276 million, up 18% from the second quarter of 2018. The increased consumer demand could also be seen within the composition of our loan originations, with 66% of the credit we advanced being issued to new customers, the highest level since 2012, which led to a record level of new customer growth in the quarter. With over 7 million non-prime Canadians looking for a reliable and trustworthy source of alternative credit, this is a strong testament to the credibility we have built in the market. New customers are the lifeblood of any organization, and in a multi-product portfolio business, they will help fuel profitable growth for many years into the future. The increased originations led to growth in the loan portfolio of CAD 80 million, almost double the first quarter of this year and the third highest level of quarterly growth in our history. At quarter end, the consumer loan portfolio reached CAD 960 million, up 40% from CAD 687 million at the end of the second quarter in 2018. Total company revenue in the quarter was CAD 148 million, up 20% from the second quarter of 2018, driven by the growth in the consumer loan portfolio. With the higher proportion of online application volume and new customer growth over the last several quarters, we also saw a moderation in the decline of the total portfolio yield, which was an annualized 50.4% in the second quarter, a sequential 30-basis point increase over the first quarter of the year. While we continue to optimize for a gradual decline in the yield as part of our long-term strategy to increase our use of risk-based pricing and expand our product suite, we expect this customer mix to result in a moderation in the rate of decline in the yield for the next few quarters. The net charge off rate this quarter was 13.5%, up from 12.4% in the second quarter of 2018, and in line with our previous expectations and our targeted range for the year. The overall delinquency as of the final week of the quarter closed at 4.3%, broadly flat against the 4.2% at the end of the second quarter of 2018. As we've highlighted in the past, borrowers acquired online tend to have a slightly higher charge-off rate than customers acquired through our retail network, while new customers tend to have a slightly higher loss experience than when we lend to an existing borrower with whom we already have an active relationship. These customers also produce significant volume, generate excellent lifetime value, and contribute strong risk-adjusted operating margins. We believe we are striking the right balance between loan growth and credit risk management. We continue to optimize our credit strategies for a gradual improvement in the credit quality of our portfolio and a structural and long-term decline in the loss rate. With the higher proportion of online applicants and the healthy new customer growth, we expect the rate of decline in our net charge-off rate to moderate slightly and to still operate within our targeted range for both the balance of 2019 and beyond. Providing us further confidence in the long-term improvements is the performance we've seen in the Quebec market and the strength of the economic environment. Following the introduction of the second phase of our new custom credit strategy, the loss rate in Quebec has further reduced, now operating just above the portfolio average. With the opportunity for additional credit model refinements in the future, there remains great potential for future growth in this province. Meanwhile, we also continue to operate in a positive economic environment, supported by wage growth that exceeds the level of inflation and unemployment that is at all-time lows. Our consumers, who carry much lower levels of debt than the average Canadian, are in healthy financial conditions. In the quarter, our loan loss provision rate decreased by 38 basis points to 9.38%, from 9.76% in the first quarter of 2019. The decline in the rate was attributed to both improvements in the underlying credit quality of the portfolio and the impact of the forward-looking indicators. Under the IFRS 9 accounting standard, the provision for future losses, much like the in-period net charge-off rate, is susceptible to some volatility from quarter to quarter, but expected to be quite stable over the long term. Since adopting IFRS 9 on January 1st, 2018, the provision rate today is within five basis points of its original rate from six quarters prior. In the quarter, the revenue growth and increased operating leverage produced an operating margin for the total company of 27.7%, up from 21.7% in the same quarter of 2018. Net income for the quarter was a record CAD 19.6 million, up 66% from CAD 11.8 million in the second quarter of 2018, resulting in a record diluted earnings per share of CAD 1.26, up 54% from CAD 0.82 per share in the second quarter of 2018. The strong earnings growth also continued to lift our return on equity, which reached another record of 25.2%, up from 20.9% in the prior year. Turning to an update on our key initiatives. This year we have focused on making enhancements to the customer borrowing experience, developing our point-of-sale solution, and enhancing our data and analytics capabilities using new technologies and alternative data sources. During the second quarter, we enhanced our customer experience by introducing e-transfer as a new funding method for our borrowers, providing them a convenient way to quickly receive the loan proceeds directly into their bank account. In parallel, we have also been actively preparing our non-prime point-of-sale financing offering for launch in e-commerce. By partnering with a leading prime point-of-sale lender, we will be able to provide consumers denied access to prime credit a second chance to finance their purchases. With a growing proportion of retail sales migrating online, we are invested in developing a true omni-channel model, and this new capability could become a meaningful source of customer acquisition in the future. Lastly, we have been continuing to invest in our use of alternative data sources and machine learning, along with conducting extensive research on new artificial intelligence software that has the potential to become a powerful tool in enhancing the way we underwrite, service, and collect our loans. The past several months have also been a very rewarding time for our company, as we have received recognition for our culture and the engagement of our team. After being named one of Canada's Most Admired Corporate Cultures in 2018, we were recently named one of North America's Top 50 Most Engaging Workplaces for 2019 by Achievers, and one of Canada's Top 50 Fintech Companies in 2019 by the Digital Finance Institute. These awards are a testament to the passion and dedication that our entire team has for helping our customers improve their financial future. Our team is inspired to improve the lives of everyday Canadians by helping them graduate to prime credit and providing a path to a better tomorrow, today. I am incredibly proud of their work, and we are honored to be part of an outstanding group of companies. Looking to the balance sheet, our business remains well capitalized and prepared for growth. Based on the cash on hand at the end of the quarter and the borrowing capacity under our revolving credit facility, we had approximately CAD 200 million in funding capacity, which will allow us to achieve our growth targets through to the third quarter of 2020. We also estimate that once our existing available sources of capital are fully utilized, we could continue to grow the loan portfolio by approximately CAD 150 million per year solely from internal cash flows. This past quarter, the cash provided by operating activities before the net issuance of consumer loans and purchase of lease assets was CAD 67.3 million, an increase of 81% from CAD 37.2 million in the same period of 2018. As we begin to utilize our lowest cost form of debt through our revolving credit facility, our average blended cost of interest has now declined to 7.1% for the quarter, down from 7.6% a year ago, reducing our effective borrowing costs while also remaining below our targeted leverage ratio of 70% net debt to total capitalization. During the quarter, we also continued to exercise our normal course issuer bid to repurchase approximately 95,000 shares at a weighted average share price of CAD 44.90. Since implementing the NCIB last October, our total repurchases now exceed 777,000 shares, bought at a weighted average price of approximately CAD 40. In closing, and consistent with the past, we have republished our three-year commercial targets and remain confident in achieving them, including ending this year between CAD 1.1 billion and CAD 1.2 billion, en route to CAD 1.5 billion to CAD 1.7 billion in 2021. As we enter the back half of 2019, we have much to look forward to. We continue to experience strong consumer demand and are now only days away from achieving CAD 1 billion in consumer loans, our most significant milestone to date and one that has been 13 years in the making. We look forward to updating everyone on this accomplishment when we officially cross the line very soon. As we approach the fall season, we are also preparing to launch a fresh and updated brand campaign, including a new TV spot that will be supported by print, radio and digital media to help drive awareness and growth during our busiest months of the year. Lastly, we look forward to welcoming Hal Khouri to the team, who will join as our new Chief Financial Officer in the next few days. Hal brings a wealth of treasury and capital markets experience that will prove valuable in optimizing our balance sheet to support our ambitious growth plans. Upon joining, Hal will begin to pursue new forms of lower cost financing as we look to secure additional capital in advance of its need. The confidence we have in our strategy to become the largest and best performing non-prime lender in Canada by providing everyday Canadians with a path to a better tomorrow, today, is stronger than ever. We are experiencing improving consumer demand, elevated brand awareness, and an award-winning culture of engaged and passionate team members. With one in three easyfinancial customers graduating to prime credit and 60% increasing their credit score within 12 months of borrowing from us, our strategy is a true win-win. Our customers gain access to lower cost borrowing and a means to improve their credit and get back to prime rates, while also producing sustainable and long-term profitability for the organization and our shareholders. With those comments complete, we will now open the call for questions. Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, ladies and gentlemen, if you have a question, please press star then the one key on your touchtone telephone. Our first question comes from Gary Ho of the Desjardins Capital. Your line is now open. Thanks, and good morning. I just wanted to start my questioning on the net charge-off rate. At 13.5% this quarter, at the higher end of your guidance. I think the expectation was for this to come down in the second half of the year. I guess, is this still what you guys envision, and then, what gives you confidence you'll see that tick down? Maybe talk about some of the initiatives that you've put in place so far. Yeah, sure. Yeah, as we said in the past, we expected we would be at the upper end of our range for the first half of the year, given the shift in mix that we described earlier, particularly the growth of new customers and online applicants. As a result of the credit changes we've made, we would then start to see a gradual decline in the back half. We still expect that to be the case. As we look at the credit model enhancements we've made, the vintage performance of our loans, we still feel quite positive that our long-term strategy to gradually decline the loss rate is still continuing to play out and perform well. We just noted that the rate of decline for the next few quarters will slow slightly as a result of that positive mix shift that we've seen that I mentioned earlier. Yes, we have now fully crested, and we are confident we'll see a gradual decline going forward. Great. I guess you kind of touched on my next question. Just wondering kind of the magnitude of the step down. I guess the reason I ask is because the midpoint of your 2020 target is around 12%, and that's 150 basis points different versus the 13.5% this quarter. How comfortable are you with that 2020 target that you have out? I think we'll begin to decline, as I say, going forward, albeit that the rate of decline slowing will mean we will still be in the upper end of our range for the balance of 2019. Then, as you pointed out, there is a stairstep down in our target range, but we also feel good that we will continue to decline such that we will be within our targeted range in 2020 as well. Okay, that's great. Just last question, just on the product launch side. Can you give us an update there? You highlighted, I think, a few opportunities in your last investor day around non-prime auto, credit cards, and line of credits. Yeah. We've been working to do heavy amounts of research in all of the product categories. Doing market studies, understanding what consumers are looking for in the non-prime segment, studying the competitive set that operate within those other product categories. We don't have anything to report yet around an initiative to launch a pilot. We are getting close to completing our research, and at that point, we will then have a clear path to begin to prepare for the pilot of testing a new product. I'm not sure if it'll be right by the end of 2019 or it'll roll a little bit into next year, but we are well on route to being prepared to test a new product at some point in the not too distant future. Okay, great. Thanks for the update. That's it for me. Thank you. The next question comes from Jeff Fenwick from Cormark Securities. Your line is now open. Hi. Good morning, Jason. I just wanted to dig back into the charge-off question a little bit there and maybe just help understand the dynamics a bit better. When we look at a company growing its loan book at the rate that goeasy has been, and the charge-off rate is going higher, I guess there's a bit of concern that if the growth were to slow a bit more in terms of the rate of growth, on a static pool basis, it seems like maybe the loss rate is actually higher. If you slow down, then that charge-off rate could push out beyond the top end of your range. I know there's a number of moving parts there, and you've articulated some of them, but how should we be thinking about that? Is it really contingent upon continuing on the growth trajectory here, and are you baking in some higher charge-off rates on some of the products that you're having to manage right now? Yeah. Great question. To your point, the reality is that the rate of growth has been slowing in the book for quite some time, for the last kind of four to six quarters, just as a function of as the book gets bigger, even though the absolute dollars of growth is strong, that rate slowly declines. That's already been true and embedded in the portfolio performance for some time. In terms of how we look at things going forward, we made a number of credit adjustments late last year, and as we look at the quality of the business that we have been bringing on for the last several quarters, we feel very confident that the quality of that business is absolutely better. The performance at a vintage level continues to look very strong. What has slowed the decline in the rate on a go-forward basis is simply a function of mix. We have seen such great and strong growth in new customers, which we're very happy about as it will inevitably fuel great growth into the future, those customers do put some upward pressure on your loss rate. However, we are confident that the changes we've engineered will see that rate begin to gradually decline into the future and still feel very confident we will be operating within the range that we've targeted going forward. While, as I said, the mix shift does change the trajectory slightly, the overall environment, the overall change, still continue to allow for that structural decline that we've engineered as part of our strategy. Okay, great. That's very helpful. In terms of the new customers you're bringing in, maybe a bit of color there around like are you attracting, I would assume, a bit of a different customer cohort, given that you're pushing into the secured lending product and are you seeing a shift towards a different type of customer than you would have in the past, and how that's really contributing to the mix there for you? That's a good question. Yeah, we're seeing a slight improvement in the quality of the customer we're now lending to. It's not too significant yet. We're still fairly early days in our journey in launching products like Secured. That portfolio has about CAD 90 million portfolio. It's still only under 10% of our book. As we introduce more risk-based pricing and more products like that, it does definitely begin to attract a slightly better quality borrower. More importantly than that, it also allows us to retain our best quality borrowers because they now have a pathway for graduation into better rates and into better products. However, as we said before, the first time we lend to a customer, irrespective of the rate, irrespective of the product, the very first time you lend is always riskier than when you do those subsequent loans. In a period of high new customer growth, that creates a bit of upward pressure on your losses. As those customers season and you begin to then graduate them through the rest of your product categories and they reborrow from you, that then helps create a tailwind benefit for losses because you're relending to your best borrowers. In terms of marketing the Secured solution, are you doing that as a distinct product or a distinct target for your ad spend? Or is it something that you're maybe promoting within the existing customer base, to your point, the guys you're trying to retain, where are you advertising there that might be different than your sort of broader goeasy campaign? Yeah. It's a little bit of both. If we look at the mix of customers we've seen take up the Secured product, it's pretty close to 50/50 in terms of customers that are new borrowers directly entering that product, and we're acquiring them because of the product. The other half, customers that were good performers with us, were homeowners, and used the opportunity to graduate into a larger loan and a lower rate of interest. It's a little bit of both. In terms of how we position the product in the market, we've really just made it very clear that it's a loan distinctly for homeowners that gives them access to more credit and a lower interest rate as a result of that characteristic. We do some very specific advertising for it, like we'll do targeted digital ads and banners and things of that nature. At a mass media level, it's really just about showing the customer that there's a full range of products and that our product suite is evolving as we add these new features. Okay, great. Thanks for that color, Aubrey, to you. Thank you. The next question come from Richard Roth from TD Securities. Your line is now open. Good morning. I have a question on your IFRS 9 stage allocations disclosure. I noticed that stage 1 high risk loans went up about 30% sequentially. What sort of definition do you use when you're determining whether it's a low, medium, or high risk? I've seen your financial statements. You say that high risk was typically something which is a loan which is more likely to generate higher expected losses. Sort of can you quantify or give some more color around that? Yeah, Gary, it's Jason Appel here. Let me answer the question in two parts. You are right in your observation that the percentage of high-risk loans in stage 1 did increase quarter-over-quarter. I would point out the actual total number of loans that are in what we call the stage 1 bucket, which represents the performing segment of the book, actually had a sequential quarter-on-quarter increase of over 200 basis points and now stands as the largest percentage since we began reporting on IFRS 9 two years ago. I think you have to look at it first and foremost in terms of how the stages are breaking out. Obviously the lowest provision expense that we take, the rate is the lowest of those that fall into buckets for stage 1. As it relates to the high, medium, and low, we've categorized that based on the TransUnion risk scores that we get on the portfolio that we purchase every month. The definition that we use is that the customers that fall into the high-risk bucket generally tend to produce loss rates that are above the portfolio average. We don't give an exact number because obviously there would be a range. If you figure what our current portfolio loss rate average is, these particular customers would throw off a probability default that would be in excess of that range. I wouldn't necessarily look at just the percentage of high-risk customers belonging to the stages as a trend. I would suggest you want to consider the total percentage of customers that fall within the entire provision group, in this case, the stage 1, because they command a much lower overall provision rate relative to customers that fall into stage 2 and stage 3, regardless of the actual risk category that they fall into. Yeah, Richard, it's David Ingram here. Just one bullet on it is if you also look at the overall mix of the book between low, normal, and high, the actual proportion of the high-risk loans sequentially from Q1 to Q2 is actually down. Fair enough. My next follow-up question would be, when I look at gross charge-offs broken down by stage, I noticed that your stage 1 gross charge-offs at just under CAD 9.6 million is materially higher than the CAD 5 million-CAD 6 million that we've seen historically. Is this at all related to the increasing proportion of high-risk loans within the stage 1 category? I think there'd be some obvious relation because obviously some of those charge-offs are going to come from customers falling into those buckets. Again, I think the way to think about it from the provisioning standpoint is concerned is when an account moves to charge-off, obviously they're no longer in the staging. All that that staging represents is the probability that those customers will go bad over an expected given timeframe. I think the way I would have you think about it is that as we continue to improve the overall underlying credit quality of the portfolio through our product mix, through our ongoing credit adjustments, the thing that we pay most attention to overall is the distribution of accounts that fall within the staging groups. It's not that we don't take into consideration their risk ranking within those groups, but the most important thing that we consider, considering that the provision rates across those 3 stages are very different, is how they distribute across those 3 stages first and foremost. Again, as I said before, that is the trend that we have been, if you will, engineering the portfolio to continue to perform at as we move forward. We feel fairly confident we will see that trend continue in the coming several quarters. Yeah, absolutely. I was just thinking, today's stage 1 high-risk loan is probably more likely to become tomorrow's stage 2 or stage 3 loan. Granted, the movements across stages is more important than allocation between 1 stage's risk ratings, but it's sort of potentially a future indicator of what performance will be down the road. My gross charge-off question was more focused from the perspective of if you see an increase in charge-offs within stage 1 relative to previous quarters, wouldn't that indicate that your assessment of performance was potentially less accurate or less predictive this quarter than previously? That is to say, you had people within the stage 1 category that you had to charge off rather than migrating them into stage 2 or stage 3 and then charging them off. That's sort of why I asked it that way. Yeah, I think, Richard, we'll take away and look at that a little more closely. I think that sometimes you're going to see there are pockets of time when a customer could jump from stage 1 directly to a charge-off because they could file bankruptcy, for an example. So the patterns of charge-off that exit each of the stages aren't necessarily going to be perfectly stable and linear. They're going to probably also be a little bit volatile depending on day weighting and seasonality and a few factors. That's why, as Jason said, we don't look too carefully into the mix moving back and forth between the stages because that can be volatile, but rather at the overall proportion in the stages and in the risk group segments over time. I don't know that I would say what that particular data point concerned us at this point. Okay. Thank you very much, and best of luck, Dave. Thank you. Thank you. Our next question comes from Doug Cooper from Beacon Securities. Your line is now open. Hi, good morning, guys. I just have a question on the geography mix of the portfolio. If I just look at it, say Ontario, for example, and you correct me if I'm wrong in thinking this way, but the average per capita of the loan book's CAD 31, give or take, in Ontario. It's much as the Maritimes are higher and around CAD 60. Quebec is CAD 6.70. How should we think about the opportunities on a per capita basis to reach maturity of the loan book across various products? I think generally speaking, our view is that over time, each of the proportions of the book in the provinces should gradually move towards the proportion of the population. You're inevitably going to have a few provinces that'll under index and a few that'll over index. By and large, they are not going to look that dissimilar, i.e., if you disaggregated the mix of non-prime and prime customers of the total population within each province, you wouldn't see material differences. Really what's going to change the proportion by province is the fact that Quebec is still young and in its early days. Only just under 6% relative to its population of, I think, 21, 22. As that grows, the other proportions will redistribute. If you think about the business long term, 5+ years out, when they're all at a more mature state, it'll look pretty close to the population distribution. I guess I'm just trying to get an idea. Could the Ontario book grow to, on average, on a per capita basis, CAD 100? Just as an example. You know what I mean? I'm just trying to think of it that way. Well, I think what you're going to have happen is that the population distribution is how the book will play out. Right. Then, of course, as we continue to do more risk-based pricing and secured lending, the average loan per consumer will also slowly rise. That will result in the, I guess, in the metric you're referring to. We don't take a look at it that way, but the average dollar per capita would slowly rise as well. I think that would be true for all provinces. It doesn't affect Ontario any differently. No, I get that. I'm just trying to think of how big the book could be in each province, I guess, at the end of the day, right? If it's CAD 420 million in Ontario, just for example, in your goal to get to CAD 1.5 billion-CAD 1.7 billion in a couple of years, does Ontario have to get to CAD 700 million of that to reflect its proportion- Yeah of the population? That's right. Yeah. Ontario will end up being around 40%. That's right. Is the market there on the subprime, or does it necessarily have to get into the other product to get there? No. The total non-prime consumer set of 7 million, which is the segment that their collective credit balances that they carry are close to CAD 200 billion. As we think about scaling the business from CAD 1 billion today to CAD several billion years into the future, that is all still going to come from those 7 million non-prime Canadians. We will, of course, see that customer quality within that will slightly graduate up the spectrum with the expansion of our product range, but we're still talking about serving the population within the non-prime segment. Yeah. I think this is the first time I've seen you mention, I guess, the qualitative perspective of the graduation of your clients to whatever was one in three to prime and 60% seeing an improvement in their credit scores. Is that something you can use in advertising? Maybe can you give us an idea of what the other players in the subprime, what they experience, and how much of an advantage is to show new customers that through you there is that pathway to improving their credit scores? Yeah. We published that metric at the beginning of this year. I think the first time we shared it publicly was in our annual report at our call, and then the last couple of quarters as well. Yeah, we had always anticipated as we built up this strategy, at some point we would be in the position to actually quantify and share the data on the impact that we're having on the consumer. We're quite happy and proud about the fact we're able to demonstrate that our strategy is working. Customers are seeing the benefit of credit score improvements and graduation. Yes, we are beginning to weave that into marketing and advertising. You're right, it's important that a non-prime customer understands what they gain is the ability to help go down the path to graduate back to prime. That's certainly what I would say the majority if not all of our customers will aspire to, is that they see their credit improve, and they're able to get low-cost credit from prime lenders such as a bank in the future. We'll continue to update those metrics over time. They're longer-term measurements, so they don't change quarter to quarter, but over a course of several years, they will. Our goal is to keep pushing those numbers up because they're great for our customers and great for our business. Yeah, 100%. I think the negative press sometimes you've had in the past around the predatory lending, presumably this speaks to what you're really trying to do. That's absolutely right. Yep. It's a message that all stakeholders, I think, benefit from. It's a win for the customer. It's a win for the business. It's a win for the PR credibility of the organization. It's a favorable message and effect on the customer all around. Right. I guess as just my final, just on this point, the payday lenders just as an example. Do you have any idea what their metrics would be on this kind of scores relative to anybody's? We don't see any other non-prime lenders publishing or sharing metrics of this nature. I think we are distinctive that way. With respect to payday lenders, they would have no effect on graduation because payday loans don't report as a trade line on the credit file. That is one of the many downside pitfalls to the payday loan product is in addition to how expensive it is, it doesn't give the customer any benefit to their credit. It's a very distinctive differentiation between our product and that product. Okay. My final question, just on the CAD 150 million of internally generated cash flows you could sustain growth even if you don't get a new credit facility. Does that take into account, that's excluding dividends? No, that's including dividend. That's running the business pretty much exactly as we currently do but growing the book CAD 150 a year. That's what I mean. That's taking into account the dividends that you pay out. That's CAD 150 is left after you pay the dividends. That's right. We would continue the ongoing dividend policy. Correct. Okay, great. Thanks very much. Thank you. Our next question comes from Ronan Phelan from Raymond James. Your line is now open. Hi. Good morning. Hi, Ronan. I just want to go back to the mix of your products and tie it into the revenue yield you're seeing and then correspondingly the charge-off. If we're looking at the net loan growth in the quarter, looks like CAD 12 million-ish in Quebec, CAD 20 million-ish in secured lending, and then the rest I would imagine would be digital channel, new customers with associated higher charge-offs. Is that right? Sort of, yes. Let me just maybe restate that slightly. Yes, of the CAD 80 million in growth, 12 from Quebec, 21 from Secured lending, and 47 from other provinces or product categories. There's looking at the mix first from that lens. Within all of those categories, you then have two other forms of mix. You have new increase or new existing customer mix. That's true whether it's for Quebec or Secured loans or the core rest of our business. You also have the channel through which the customer is acquired, whether they are an applicant online and funneled into a branch, or whether they walk into a branch directly. You've identified the mix correctly in that regard. The mix we've highlighted is that across those dimensions, we've also seen a record level of new customer growth and a record level of applicants applying through online in those other two dimensions. To connect that to your point, because those customers have higher risk profile and they're new to our business, they are also priced initially at a higher point in our pricing scale, waiting until they perform to then earn the graduation to the lower rates. That's why, while the net charge-off rate increased by the 40 basis points, you also saw an almost equivalent increase in the yield, and the yield moderation slow or decline slow, resulting in essentially a flat risk-adjusted margin. Because the same effect that is driving the net charge-off is the same effect that's driving the pricing of the business. If you're charging off loans that are greater than 180-day delinquent, isn't that a bit of a lagging indicator? Like you get the higher revenue yield upfront, but you don't necessarily charge off until the next quarter? Yes. The effects we're seeing in the quarter are not related just to the mix of originations in this quarter. Right culmination of what we've been saying, I think, since the summer or fall of last year, which was, since that time, we've continued to see great strength in those new customers, and particularly the mix of our applicants online. The mix shift that we're referring to is the same mix shift we've seen emerging for a little while. It's just this quarter was just even more pronounced, hence our guidance on how we think things will unfold for the next few quarters. Okay. That ongoing mix shift is what's driving your outlook for a slower decline than perhaps initially envisioned in charge-offs throughout the year. Yield as a result of pricing. Correct. I think if you look, the yield increased by 30 basis points sequentially. I think is the actual first time we've seen a quarter-over-quarter yield increase in several years. While our strategy to continue to leverage risk-based pricing and product expansion to gradually decline the yield and gradually decline the net charge-off rate is still true and is still how we are engineering it during that journey with this change in the mix, it's just going to slow those gradual declines. What gives us excitement and confidence is that because it's great new customer growth and because it still holds a really strong risk-adjusted margin, that is very important for fueling growth of this business into the future. Okay. That's very helpful. Switching gears to your balance sheet leverage, how are you thinking about where you see the commentary on your internal cash flow generation? What's, for now, where you're at in the current evolution of the business, what you see as optimal leverage on the balance sheet? I think we're still continuing to operate with a view that the 70% net debt to total capitalization is the max target leverage that we want to run the business with. I think in the last quarter, we were just a few points below that, 67% or so. As we go forward, we're going to continue to think about building the balance sheet, first and foremost from diversifying the sources of funding. Secondly, for bringing down the cost of borrowing, but attempting to do so all within that max target leverage ratio. Hey, Brent, it's Dave. One other point of color I'd add to that. When we look at some of the members of our peer group, they come out on average around high 60s or 70s as well. One maybe is a little bit higher, around 80%, but a lot of the other players are sort of in the 65%, 68%, 70% range as well. We benchmarked against them and felt that that's sort of an optimal level. Okay. That's helpful. Actually just going back to my first question, so that increase in the revenue yields that you're expecting, so we should expect that to be in the higher end of your guidance range for the back half of the year? How do we think of the higher revenue yield as broken down from each of just a higher rate and/or are these new customers just as equally likely to sign up for the ancillary products like insurance? The total yield will continue to, like the charge-off rate, begin to see a steady decline. I don't anticipate that the trend of a rising yield is a new expectation. I think we will see both those metrics begin to gradually decline, just the rate of decline is going to be much slower. For example, if you look at the rate of decline in the yield in, say, 2018 or 2017, where we were seeing on an annualized basis the yield drop by a full point or more often quarter to quarter. We're not seeing that. We saw a 30 basis point increase this quarter. We'll see a subtle decline in the next couple of quarters. For the full year, should finish in and around the midpoint of our guided range and then continue on thereafter. In terms of how the real mix is priced, it's all of the things you've highlighted. It's a combination of whether customers are new borrowers versus existing customers. They get priced differently. When the customer applies online, if they're a slightly higher risk profile, we price for that risk. It's that effect. It's also the mix of the portfolio between, say, Quebec Secured lending and unsecured that impacts pricing as well. We've built a pricing optimization strategy that prices both the customer, the channel, and the product, all for risk and all for maximizing the long-term profitability. As the mix shifts, that's what ultimately results in the total consolidated yield beginning to trend the way that we've articulated. Okay. Thanks very much. Thank you. Our next question comes from Jaeme Gloyn from National Bank Financial. Your line is now open. I want to talk about the balance sheet and the strategies that you're continuing to work on to stagger maturities looking out and also to, I guess, get that Q3 2020 threshold dealt with sooner rather than later so that funding for growth is open for a longer period than, let's say, the next 12 months. Just wanted to get some more color from you on that side. Yeah, sure. So in terms of the evolution of the balance sheet, I think we believe that the next ideal form of funding for us would be to look at an ABS facility, tagging on what we saw with our primary competitor, Fairstone, and their inaugural ABS transaction done just a number of months ago. We've obviously had to wait until we have the size of portfolio and the right portfolio mix before that form of funding is available to us. We believe we are now at or getting very close to that point. That, of course, will take a little bit of time. There's structural work that has to be done in preparation for going to market for a facility like that. We do have a bit of work in front of us. We do feel like that is the next logical facility in our structure. It will give us the combination of diversified sources of funding, a combination of allowing our funding sources to have staggered levels of maturities, and also help bring down the overall cost of borrowing. We'll continue to work on that. Meanwhile, we also keep our eye on the other markets to ensure that if it gets to a point where we need to access additional capital and we are not in a position to do an ABS facility, we still believe that there's opportunities in the bond markets that we've tapped in the past as well. That's kind of how we're looking at how we're working on it. As you know, we also continue to focus on raising capital in advance of its need. While we have till October next year, as you pointed out, a runway today, we're actively always beginning to work on the next form of funding so that we can obtain the capital well in advance of its need. Okay, great. Over onto the revenue yield that was posted in the quarter. A little bit lighter on the commissions, obviously, just given mix. I'm wondering if you can give us a little bit more color as to whether that was in line with where your expectations would've been if I'm looking at commissions and charges and fees as a percentage of gross loan originations. Is this a level that you would think is sustainable, or was it artificially low this quarter just given the mix? The total yield as a whole is a little bit better than we originally would've modeled. As I highlighted earlier, that's a function of the mix to new customers and online applicants that has had the other dynamics we've already discussed. Yield a little bit buoyed from that. With respect to the underlying mix of the revenue composition, the distribution between interest and other ancillary commissions and fees is about where we expected it to be, and I don't expect that mix to change much going forward. Even though the overall total yield will slowly decline a little bit, I think the mix of the revenue composition within that should stay fairly stable. Okay, great. If we fast-forward a couple of years through the guidance, risk-adjusted yields or risk margin, however you want to call it, that's going to trend lower. Obviously this quarter-over-quarter it's fairly stable. I guess at what rate would be a normal progression? Then if we go beyond that guidance, where would you expect risk of margin to level off, let's say? A couple of comments. In the commercial targets we've given, we've made an assumption around a certain evolving mix of our portfolio with the expansion of risk-based pricing, growth in Quebec, growth of secured lending, and an assumption that as a result of that mix, the total yield will decline. You will get a little bit of benefit in the reduction of the charge-off rate. Even though the risk-adjusted margin over that period will slowly decline, because we're getting a better quality customer with a higher average loan size, that ultimately does produce better net cash profit and greater lifetime value. The gradual decline in the risk-adjusted margin does still lead to overall better long-term profit of the business. In terms of where we see the risk-adjusted yield going beyond our targets, I wouldn't want to give that commercial guidance at this point, and we'll update the targets for a further period out beyond that. What I would say in just directional sense is that I don't see the total revenue yield for the business declining too much further in the few outer years. Of course, will depend on product mix, will depend on customer mix. There may still be some decline, but I think that we'll be starting to get to the point where we're getting near an optimal level for the type of non-prime borrower we cater to. We'll update all of our modeling and then provide additional outer years as we go into 2020. Okay, great. As it relates to the Quebec portfolio, I believe I caught this in the MD&A or maybe in the press release that losses were in line with the broader portfolio. Is that what you would have expected, or is that just a reflection of the growth in the province, just given that we would normally expect Quebec to produce a little bit higher losses than average? Hey, Jaeme, it's Jason Appel here. I would say that we were expecting the loss performance of the Quebec market to be where it ultimately ended up. It was just slightly above that of the average portfolio. We had indicated back in Q3 of 2018 when we reported that number being a much larger variance to where the book was. It was our express intent to bring that number down to be at least at or near where the portfolio was trending. With a longer-term goal of actually seeing it trend underneath as we continue to refine our credit models. I think we also mentioned, or Jason mentioned in the comments that we've since deployed sort of two next-gen models to improve our credit quality and our predictability of being able to engineer the credit. We just recently put in place our third generation two weeks ago. This is an ongoing iterative process with an ultimate goal of bringing that loss rate, at the very least, to where the portfolio sits, and over time, eventually to bring it underneath where the portfolio sits as we begin to develop more proprietary experience with the borrowers in the province. Okay, great. Thank you. Thank you. Our next question comes from Stephen Boland from INFOR Financial. Your line is now open. Good morning. Just one question. Jason, you mentioned a new brand campaign going forward. Maybe you could just talk about what you've learned since the last campaign in terms of where you're going to emphasize dollars focus, and then maybe just tie that into a little bit into credit where maybe some specifics that you got some bad pockets of applications or credit that came from certain parts of that campaign that maybe you're going to de-emphasize this time. Sure. I try and really tackle all those questions. I think in terms of the evolution of our brand campaigns, we continue to make sure that each new brand campaign that we do really does two things. One, continues to elevate the way in which we speak to the fact that we are trying to help Canadians that are non-prime borrowers today improve their credit and graduate back to prime. The evolution of the campaign is to make that message much more clear and pronounced that the customer understands that we are here to not just solve and provide for a need today, but to try to actually help them improve their long-term financial health. That's one part of the evolution. The second part of the evolution is to make it clear that we are a full suite non-prime lender offering a full range of products, both with risk-based pricing, additional products such as secured lending, and clearly in the future, we'll have a range of other products as well. Those would be some of the main attributes that we are looking to come through in the messaging as we keep iterating and evolving the easyfinancial brand. In terms of how we deploy those dollars, we've gotten into a pretty regular cadence now of using both the spring and fall mass media campaigns, where we use a combination of TV and radio. Those are very, very good at helping build brand awareness, create good visibility for easyfinancial in the market. Then they also have a benefit of a spillover effect in the amount of traffic and volume we see in the digital channel when we go to market with mass media as well. We're going to continue to leverage that type of marketing spend allocation given the success that we've seen. In terms of your points and tying that back to credit, ultimately what we have seen in the effects of both new customer growth and the proportion of customers coming online, those things we consider to be quite healthy. I don't think we're trying to specifically change that trend. We are going to, of course, have to optimize our credit strategies to account for the trend, but we're not necessarily trying to actively change it. New customer growth for us is a very critical measure. We put a ton of weight and emphasis on that, and we're very happy when we see high levels of new customer growth that fuels the business into the future. For customers that are now migrating to choosing online as a source of how they want to apply for credit, whether it's their desktop or mobile, that is a consumer trend change. I just don't think trying to push water uphill and change consumer trends is a good use of effort. Instead, I want to focus on building the digital competency, optimizing our credit strategies for that online mix, and enjoying the benefits of that extra online traffic. That's how our kind of campaigns are evolving. I think the spend mix is going to be consistent with what we've seen. We're just going to keep optimizing Thank you. Our next question comes from Jeff Fenwick from Cormark Securities. Your line is now open. Just one follow-up here. We didn't discuss easyhome. I'm trying to get a sense of what the right operating margin should be in this business. It's moved around a little bit with the growth of the in-store lending kiosk, and we had a quarter at 20 operating margin down towards mid-teens this quarter. What are some of the moving parts there? What do you think the right sort of margin profile should be? Will it be volatile from here? Yeah, I don't think there's going to be a ton of volatility. I think ultimately, if you were looking to model this out, I'd probably look at it do probably in the mid to high teens, increasing a little bit over time as the financial or consumer lending business starts to or continues to increase and the leasing portfolio continues to modestly decline over time. Okay, great. That's all I had. Thanks. Thank you. Our next question comes from Gary Ho from Desjardins Capital. Your line is now open. Thanks. Just one quick follow-up. Just on the competitive landscape and particularly your biggest competitor, Fairstone. There's not a lot of stats out there, but maybe anecdotally, how has your loan book growth been versus theirs? Have they been rational in pricing? Maybe lastly, kind of more theoretical question. I know they're owned by a PE firm, but if they ever do come to market one day, is that something that you guys would look at again? Gary, David, just briefly on that. Obviously, there's not much public data. There is information if you had access to the ABS, you can see some recency in terms of the loan book change. I would say that their loan book growth has increased over the last two or three years as the focus has changed under new ownership. The rate of the growth is somewhat slower than the rate of growth that we continue to experience here at goeasy. We obviously start from a lower base. They start from a higher base. In absolute dollars, our rate of growth is higher. In percentage, the rate of growth is higher. Their pricing has generally looked to lift their yield, it's not crazy. I think there's the intention to reduce rates. I don't think that's a huge factor. Given that they are really the only other installment lender in the same space as us, dwarfed by that 7 million file of customers, I don't think there's a huge amount of compression available in the market today to change our strategy or anyone else's strategy on how we price the books. From that perspective, I think everything there looks quite controllable by everyone that competes in the market. In terms of what they may or may not do in the future with their PE ownership, it's obviously somewhat speculative. There's a couple of options. There's the IPO option, and then there's the sale option. Those are really the two choices at some point in the next few years. From our perspective, the thought of looking at them as a potential asset for us is very unlikely given that we have a really strong roadmap here for ourselves organically in Canada. I think that's where our focus will continue to be, and it serves us extremely well. Our strategy is going to be built about can we build a much, much bigger book than we have using the techniques and strategies and practices that we're using. Okay. That's helpful. Thank you very much. Thank you. I'm showing no further questions. I would now like to turn the call back over to Jason Mullins for any further remarks. Thank you everyone for joining the call. We appreciate it, and look forward to updating you on the next quarter. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.