Good morning, ladies and gentlemen. Welcome to the first quarter 2019 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. David Wilden. You may begin.
Thank you, operator. Good morning, everyone. Thank you for joining us to discuss goeasy's results for the first quarter ended March 31st. 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 Chief Executive Officer, will talk about the highlights of the first 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 poll for questions and will provide instructions at the appropriate time.
Business media are welcome to listen to this call and use management's comments and responses to questions in any coverage. 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 statement, but I will direct you to the caution regarding forward-looking statements included in the MD&A. I'll turn the call over to Jason Mullins.
Thanks, David. Good morning, everyone. Thank you for joining today's call. It was a strong start to the year, piloted by disciplined loan growth, stable credit performance, and record financial results. As we outlined in the last few quarters, we set out in the back half of 2018 to implement several proactive credit adjustments to improve the long-term credit quality and performance of our portfolio. While the consumer demand remains strong and loan applications from new customers in our retail and online channels increased 23% year-over-year, these deliberate credit adjustments served to moderate the growth of our loan originations in the quarter. Total loan originations in the quarter were CAD 219 million, up 8% from the CAD 202 million in the first quarter of 2018.
Overall, these originations were issued to better quality risk segments, 63% of the credit we advanced was issued to new customers, up from 58% in the same period last year. In addition, our secured lending product accounted for 12% of our loan originations in the quarter, up from 4% in 2018, demonstrating the strong growth potential for this product. Secured loans now represent CAD 68.4 million, or approximately 8% of our total loan portfolio. The increased originations led to growth in the loan portfolio of CAD 45.6 million, which reached CAD 879 million, up 46% from CAD 602 million at the end of the first quarter in 2018. We continue to see great improvements from our new digital lending platform, which is now converting our web traffic into loan originations with a 30% improvement over our prior site.
With the proportion of loan application volume coming from digital continuing to hover at 40%, and over 70% of that web traffic coming from a mobile device, investing in digital technology and online marketing capabilities will continue to be key to enhancing the customer experience. Total company revenue was CAD 140 million in the quarter, up 22%, driven by the growth in the consumer loan portfolio. The total yield in the quarter was 50.1%, down from 56.1% in Q1 of 2018. As we've shared in the past, the gradual decline in the yield is part of our long-term strategy to increase our use of risk-based pricing and expand our product suite, which increases conversion rates, lifts the average loan size, and extends the life of our customer relationships. This approach is a true win-win and supports our vision of helping everyday Canadians improve their credit and graduate back to Prime.
It also provides consumers with wider choice and access to lower cost borrowing while producing greater long-term profitability for the organization. Turning to credit, the net charge-off rate for Q1 remained consistent with the fourth quarter of 2018 at 13.1%, and within our targeted range for the year of 11.5%-13.5%. The overall delinquency as of the final week of the quarter closed at 4.4%, down slightly against the 4.5% at the end of the first quarter in the prior year. We are also making great strides in Quebec. In addition to seeing another sequential decline in the loss rate in that market by almost 300 basis points in the quarter, we also successfully introduced the second phase of our new custom credit strategy, which will help deliver further improvements and sustainable performance in the future.
With a new credit strategy in place, we have begun to increase our focus on growth in that market, which will be aided by a French language media campaign that was introduced this April. In the quarter, our provision rate increased by 18 basis points to 9.76% from 9.58%. Most important, the provision rate associated purely with the underlying credit quality of the portfolio improved slightly. However, this was offset by the impact of the forward-looking indicators, which served to result in a modest increase. 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. I will also take a moment to comment on our easyhome business. In 2017, we expanded the offering of our leasing stores by adding consumer lending.
Since then, the loan book associated within the easyhome stores has increased over CAD 24 million, the effect of which has been an increase in revenue, operating income, and operating margins. Overall, we expect a steady improvement in this business unit as lending becomes a more meaningful part of easyhome's portfolio. For the total company, the revenue growth and stable credit performance led to continued expansion of the operating margin, which reached a record 27.7%. Net income for the quarter was a record CAD 18.3 million, up 65% from CAD 11.1 million in the first quarter of 2018, resulting in a record diluted earnings per share of CAD 1.18, up 53% from CAD 0.77 per share in the first quarter of 2018. The strong earnings growth also lifted our return on equity to a record 24.4%, up from 19.8% in the prior year.
Turning briefly to the balance sheet, we highlighted during our last call that in the first quarter we made an amendment to our existing senior secured revolving credit facility that served to increase the limit, extend the term, and reduce the cost of borrowing. This balance sheet enhancement helped increase our financial liquidity while reducing our fully drawn cost of funds to 6.8%. Based on the cash on hand at the end of the quarter and the borrowing capacity under the amended credit facility, we had approximately CAD 265 million in funding, which enables us to fund our growth plans through the third quarter of 2020. During the quarter, we also continued to exercise our normal course issuer bid to repurchase 283,500 shares at a weighted average share price of CAD 41.75.
Since implementing the NCIB last October, our total repurchases now exceed 682,000 shares bought at a weighted average price of approximately CAD 39. In closing, as we outlined last quarter, we continue to expect growth to build gradually throughout the year, resembling a similar cadence in years prior to last. Prior to 2018, we typically experienced between 15%-20% of our full-year growth during the first quarter due to usual seasonal trends. In 2018, we had the effect of several new initiatives launched in late 2017, which resulted in a greater proportion of the growth in the year happening in the earlier half of the year. As such, we remained well-positioned to achieve our targets for 2019 and beyond.
Most important, we continue to focus on gradually improving the credit quality of our originations through risk-based pricing and product expansion while delivering stable long-term performance that strikes the optimal balance between growth and disciplined credit risk management. As indicated earlier in the year, we expect the net charge-off rate to be in the upper end of our target range for the first half of 2019, gradually decline throughout the back half of the year as our credit adjustments begin to influence the overall portfolio. We have a proven track record and confidence in responding to changes in the business and making the necessary enhancements to deliver consistent results over time. In addition to producing industry-leading financial performance, we are driven by a goal to provide everyday Canadians with access to the credit they need as we help them on the path to a better tomorrow.
With an ever-broadening set of products, ancillary services, and free education to help our customers improve their financial health, we are proud to see our vision brought to life with one in three easyfinancial customers graduating to prime credit and 60% increasing their credit score within 12 months of borrowing from us. These results give us confidence that our strategy is working while producing benefits for our customers and our shareholders. With those comments complete, we will now open the call for questions.
Ladies and gentlemen, if you have a question at this time, please press the star and then the number 1 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. Thank you. Your first question comes from the line of Nick Priebe from BMO Capital Markets. Your line is now open.
Okay, thanks. Good morning. I just want to start with a question on commissions earned from ancillary products. I think in the MD&A, you'd alluded to the fact that certain commissions earned on those products are generated based on new loan originations rather than being earned on something akin to a trailing basis. I guess just for my own understanding, what proportion of the total commissions earned, say, in the easyfinancial segment, would be considered sensitive to transaction volumes in a period as opposed to the overall size of the portfolio?
Hey, Nick, it's Dave. Nick, we don't disclose the breakdown of the individual ancillary product revenues. I can tell you that qualitatively it's our home and auto product that is a traditional roadside assistance and various other ancillary services associated with it that is sold when a new loan is originated. One of the things you've seen is the loan book growth was a little bit lower in Q1 of this year than last year. Our opportunity to sell H&A in the current quarter declined, and that's reduced the ancillary revenues as a proportion of interest in the quarter.
Okay. Got it. Just on the topic of loan growth, I know that you had attributed that slightly lower amount of loan growth in the first quarter relative to the past few quarters just to some of the credit modifications you made in the second half of last year. I also wanted to ask to what extent weather patterns might play a factor in volumes as well. I'm just wondering, in the past, if you've seen some variability in consumer lending activity that could be explained by abnormally good or poor weather in the period in question.
Hey, Nick, it's Jason. I would not say that weather in general has much impact on the business. We have usual seasonal trends quarter to quarter, which are more a function of the state that people are at in their life cycle throughout the year. For example, in the spring, they're preparing for summer. They've got extra expenses like putting summer tires back in the car, preparing for kids' camps as they get out of school. In the fourth quarter, we experience seasonal trends due to, obviously, the holiday season. If you break down a quarter, you might have weather-related matters on a particular day or a particular week. By and large, that's not going to be material on growth in the quarter.
The growth for us was really a function of things you mentioned, one being the credit adjustments we made, which we felt were the right prudent choices to make. While it was still a healthy growth quarter, it was a bit more moderate. It's also, of course, compared to 2018, where we mentioned we had a number of initiatives all collide at the same time that made the seasonal pattern that we typically saw a little bit more abnormal. This year would look more similar to years of past in terms of how that growth would build throughout the year.
Okay. That's helpful. Then it looks like if I'm looking at marketing spend, it looks like it was a little bit lower on a sequential basis, arguably a bit higher than it typically would've been for the first quarter of the calendar year. Just wondering, is that reflective of a change in the size of the budget relative to revenue, or were there some other considerations that maybe factored into the decision to direct a little bit more of that marketing spend into the first quarter?
By and large, the total marketing spend will continue to hover at around 4% of revenues as it has in the past. Obviously, with the growing book, a growing revenue base, the absolute spend will continue to climb in the proportion of revenue. This year, the only thing I think that shifted the spend difference between the first and second quarter is to be slightly different than last year is a little bit of our mass media campaign that we typically run in the spring, started a little bit earlier. Hitting at the very end of the first quarter, that put a little bit of that mass media spend into the first quarter, even though it's really a broadly speaking spring campaign. Whereas I think last year some of that mass media didn't actually quite begin until the second quarter.
There's a little bit of timing difference between when it hits between those two quarters. On amalgam, we'll still be in line with around the 4% that we've always targeted.
Okay. That helped clarify. Thanks very much.
Sure.
Your next question comes from the line of Gary Ho from Desjardins Capital Markets. Your line is now open.
Thanks, good morning. Maybe just to start off on the loan growth as well after Q1. Maybe Jason, what gives you confidence that you will be able to hit your 2019 target? Would that entail some trade-offs perhaps on the credit quality going forward?
No, I think if we look at the plan we have for the balance of the year in terms of sales and marketing initiatives, we look at the years prior to 2018 and what was the normal seasonal trend and build and growth throughout the year. All of that, in our view, conspires to still give us confidence in the ability to hit the target. We prioritize the discipline around credit risk management. In no time would we envision loosening credit quality and stepping backwards from our plan to progressively improve the credit performance of our book at the sake of just driving incremental growth. No, if we were concerned about falling short of that target, we would not make the trade to sacrifice credit in exchange to purely hit the growth number.
We feel we have a plan where we can not only deliver improvements to the credit performance in the back half of the year, we can also achieve the target. Of course, as the next couple of quarters unfold, we will provide more clarity as we get more comfort. The plan we have built is to very much still achieve all of those commercial targets.
Great. That is very helpful. Maybe just on Quebec specifically, what would be the loss rate for Q1B? Did I hear you correctly that the sequential change was down 300 basis points there?
That's right. We don't provide the loss rate details at the provincial level. What we can tell you is, as you know, at the third quarter, we first indicated that we didn't see performance in line with what we were comfortable with. We had mentioned then that it had hit around 20%. We mentioned that Q4 we saw a sequential decline. Then, yes, you heard that correctly. In Q1, we saw another sequential decline by about 300 basis points. I can tell you that the Quebec portfolio is still performing higher than the portfolio average. There's still some work to be done.
The fact that we've seen several quarters of sequential decline on the back of the first round of credit changes we made, coupled with the new changes we've just implemented that we feel quite comfortable with, we continue to believe that that book can and will perform at the average of the portfolio and does provide still very good prospects for growth.
Great. Okay. Just lastly, maybe more of an industry question. Saw that Fairstone recently completed an ABS deal in the Canadian market. I think it was just over CAD 300 million. Is that something management would entertain, is that something you've studied? I imagine that would lower your cost of funding.
Gary. Hi, it's David. We were actually very enthused by seeing the success of that issue that Fairstone completes in the last few weeks. We have also been looking at other types of securitization vehicles. The structure way in which this one was done was quite unique to us here in Canada. I think it's certainly given us more encouragement to see that there are some options that are available here in the market. There's clearly now a market for that type of structure. We'll continue to have ongoing dialogues with our bankers and look at options that we can pursue later this year.
Okay, perfect. Those are my questions. Thank you.
Thank you.
Your next question comes from the line of Richard Ross from TD Securities. Your line is now open.
A quick follow-up on the advertising expense question. Is it still safe to assume that going forward, Q1 and Q3s will be the trough quarters for this line item?
Yes, I think that's correct, Richard.
Yeah. Yeah. I would speak the same.
On loan yields. We've seen another decline, and I understand your explanation about increased risk adjustment loans and secured loans and higher dollar loans. This all sort of appears to be systemic in nature. If I sort of run this out to the end of 2019, it seems to suggest that you're going to come in at best at the lower end of your guidance range on loan yields. Is that the right way to think of things?
Yeah. The yield, I think, for the target range this year is 49%-51%. Although the first quarter coming in at just above 50% is already at the midpoint, I do think based on the way we built the plan this year, you'll see the yield decline be far more slow and moderate than in the past. By and large, I would suspect the yield will be more flat for the next couple quarters, and then for the full year, probably finish, yeah, somewhere between the low end and the midpoint of the full year's yield target.
Okay. Thanks for that. On loan growth. As you mentioned, it was a bit more modest this quarter than historically. Given your guidance range, this implies that Q2 is probably going to be a very strong quarter for originations. Is that correct? If so, do you see things panning out thus far in Q2 consistent with that?
Yeah. So far, Q2 is off to a good start. It absolutely needs to be a bigger quarter for originations and specifically net loan growth. We believe we're off to a good start, so yes.
Okay. One final question on buybacks. I was looking at your most recent buyback activity, and you're still active within the, call it mid to maybe slightly upper 40 range. Do you sort of have an internal cap on where you see the value proposition sort of diminish from a buyback perspective? Like what price point?
Yeah. Richard, David. We stopped the buying just as we went into a closed period. We could be back in the market next week for continued purchasing. For us, we look at the intrinsic value of where we think the stock should trade, and we look at, obviously, where we did the issue. It's at CAD 50.50. We had put in a self-imposed cap at around CAD 46, CAD 47. We're going to continue to reassess that over the next week or so. There's still a gap between what we've purchased so far and what the bid allows us to purchase to. I think there's about 200,000 shares to go. If you take the aggregate of everything we've bought during the just under 700,000 shares repurchased is around just over CAD 39. We're comfortable with where we've been buying.
It's about a 20% difference to where we had issued stock. Our self-imposed cap has been at CAD 46-CAD 47.
Okay. Thank you for that. Appreciate it, guys.
Thanks.
Your next question comes from the line of Brenna Fallon from Raymond James. Your line is now open.
Hi, good morning.
Hi. Morning.
I wanted to start with the bad debt expense recorded in the quarter. The charge-offs trending in the right direction looked good, very consistent with your guidance, but the forward-looking indicators required modeling adjustments. Can you just walk us through what specifically revisions to forecasts had the greatest impact? From here, are you now less sensitive to a quote-unquote, "deteriorating degree of forecasts"? How are you thinking about the overall provision comprised of the charge-offs and that FLI-driven model as you think of your bad debt expense coming throughout the year?
Hey, Brenna. Maybe just one overview comment, then I'll turn it over to Jason Appel as it relates to the FLIs. If we looked at the actual provision rate in the quarter, it did go up around 18 basis points. If we look at the provision rate before the FLIs, it actually came down a little bit. The FLIs ultimately drove the increase in the quarter. I'll turn it over to Jason to give a little more color on the specifics on that.
Yep. Good morning, Brenna. The major change quarter-over-quarter, if we look at how Q4 came in, was the run-up in the price of oil. As you know, the way the FLIs work in our provisioning model, as we disclose in the financial statements in MD&A, it's the change in the actual price of, in this case, the price of oil versus the one-year-out forecast. What transpired in the quarter is we saw a fairly significant run-up in the price of oil, but the one-year forecast effectively that we use from the average of the five Canadian banks really didn't change all that much. Oil is a positively correlated variable in the model. Increases in the price of oil tend to be positively impacting provision in a good way.
Since the vast majority of that delta between the actual price of oil and the forecasted price of oil effectively nullified, that took a fairly significant hit in terms of our overall impact on the FLIs. Now, to your comment around how we think about the FLIs going forward, we've been now doing IFRS 9 reporting now since 2018. When we built the FLI model that we used, we looked at a historical period of how our portfolio performed along a variety of different Canadian economic indicators, three of which, as you know, that we landed on being unemployment, inflation, and the price of oil.
We will likely revisit that model construct in Q2 with a view to understanding whether or not those variables, and indeed whether or not other variables should be revisited or even swapped in to understand how impactful they are in truly measuring the default risk in the portfolio, seeing as how we've had another 18 months of performance accrue since we built the original model. I think going forward, you can expect this, and I think other lenders in Canada will follow a similar suit, that they will continue to tweak and revisit how they build their FLI models because.
Like them, we are also subject to quarter-to-quarter volatility swings, and that just wreaks a little bit of havoc in terms of how we think about the portfolio going forward. In the quarter, we anticipate coming up with a new FLI model that we think will be just as predictive, but perhaps smooth out, if you will, some of the volatility that we've seen over the last couple of quarters.
I think the other thing I'd add, Brenna, is we do take a look at all the disclosures from the banks, from the various non-prime mortgage lenders, Home Capital, et cetera, and we understand the FLIs they are currently using. We'll embed that in our thought process as we go through Q2.
Okay, that's very helpful. Just following on a little bit, is there any differentiation in how you model and reflect those FLIs based on geographic locations? Like, is your Alberta forward-looking indicator-driven model more sensitive to the price of oil?
The answer is no. It's based on the book on block, we apply the FLIs.
Okay.
Yeah, I think, Brenna.
Sorry, go ahead.
Sorry, Brenna. Just to add one quick thing in terms of the way the FLIs work. The other important thing to remember is the FLI influence is based on the delta between the actual and the forecast.
Right.
When there is a gap between the actual and the forecast, if the actual rises towards the forecast or declines towards the forecast, that delta ultimately shrinks. In some periods where that delta rises or the gap widens, there is an expense associated to that. Then in subsequent quarters, as the gap narrows because the actual gets closer to the forecast, then you get the reverse effect. That is part of what creates the volatility.
Right.
Generally speaking, when the actual is rising or declining towards the forecast, unless the forecast continues to move outward at the same rate, you are going to see some of the give-back effect of those FLIs. We really do not know.
It ultimately reverses.
That's right.
Yeah.
We really don't know exactly what will happen each quarter, but that is what creates some of that bumpiness.
Yep. Understood. Then, turning to the origination composition in the quarter, so pretty significant step up in the originations of the secured lending product. You're still really happy with the credit quality. I think last year you referenced it outperforming actually your initial expectations for credit losses there. Can you tell us how you view the outlook for that asset class going forward?
Yeah. We continue to feel very good about that product. As you said, we've started to increase the emphasis on the growth of the product. We made a number of credit enhancements to the way we manage and underwrite the portfolio mid last year. Those continue to perform well. The loss rates still are better than our expectations and continue to show great trends. We feel very good. I think our plan is to continue to see that product slowly and steadily become a more meaningful part of the portfolio. Obviously, the fact that we only have about 20% of our customers that are homeowners means that puts a bit of a governor on what that can represent in the long term. But.
Right
It can still be very meaningful, and it's a very good-performing, high-quality book.
Do those loans generally come with associated ancillary fees? No.
Yeah, they do. The yield on those fees is lower than the yield on the unsecured product. Because they are larger loans and better quality customers, the effective cost of them is smaller, but they're still healthy and produce good contribution to the margin of the product.
Okay. Just as you turn your focus to some of the new initiatives that you've discussed, like the point-of-sale, auto, healthcare, how do you think about your advertising targeted spend? What's your customer acquisition strategy? Are there any differences? Do you think the consistent credit adjudication models apply? How should we be thinking about you entering those somewhat new channels?
A couple of comments. There's a few questions there, I think. First of all, the plan in terms of how we will execute marketing is to continue to invest 4%, roughly, of our revenues in marketing and brand awareness. As we have done for the last long number of years now, we believe that's the right and optimal level of investment in marketing and creating brand awareness, particularly in major advert campaigns. While some of those campaigns don't always lead to an immediate response, they do create long-term, very healthy increase in brand awareness, and then produce part of our long-term growth. We think about the point-of-sale channel. While those channels will create acquisition, that doesn't really come with marketing and acquisition spends. They really just come with the origination. Usually, the economics on the originations from point-of-sale generally are a little bit thinner.
However, you benefit from the fact you acquire a customer a little bit cheaper on the front end and then have them for their full life, where you can then cross-sell and up-sell them into other products. It will over time, while it's still very tiny today, we think become a very helpful and additive way to acquire customers. In terms of your other part of that question around, well, how do we deal with credit in that space? We promote the in-store point-of-sale solution we built and the one we are in the progress of building, which is to be able to offer that same offering in e-commerce. The credit strategy is very similar. We leverage our own internal custom proprietary scoring models.
What we've done is started with a slightly higher hurdle rate for credit tolerance, being a bit more conservative with the credit risk we're prepared to take as we wade into that channel. That is also part of why the growth from that new channel, like it has with other new products we've introduced, is generally at the beginning slower and takes more time, is it's consistent with our philosophy of wading in slowly, testing, gathering data, and getting comfort. While we use all the same credit modeling techniques and strategies around evaluating credit affordability, we will be more conservative at the beginning till we get more comfortable. Then it'll lead to more meaningful growth in the future thereafter.
Okay. Very helpful. Thanks. I'll requeue.
Ladies and gentlemen, if you have question at this time, please press the star and then the number one key on your touchtone telephone. We have a question coming from the line of John Sartz from Viking Capital Corp. Your line is now open.
Thank you. Good morning. I was just wondering, can you explain to me the I saw the delinquency ratio is 4.4 versus 4.5, I'm just wondering how do you neutralize for growth in the loan book?
The delinquency rate measure doesn't really neutralize for that. The delinquency measure really is just an in-period snapshot of what is the proportion of loans that are more than one day past due but not yet charged off as a function of the average loan book. It's really just a snapshot of a point in time. What we do track internally, which we don't put in our disclosure, but we do carefully monitor, is the vintage performance. Actually looking at cohorts of loans and how they're performing over time. That's the measure that primarily informs how we manage credit. To your comment around delinquency, it's not really adjusted for any change in book growth. It's just a snapshot measure at a point in time.
Generally speaking, over the last number of years, we've trended between that 4.5%-5% range in terms of the proportion of loans that are past due at any point in time.
Yeah, of course. Given the fact that it's difficult to be delinquent within the first month, the growth obviously tends to reduce the delinquency number.
Yeah. That is true. Although I would say that if you look at the growth in our book as a percentage, as the book has gotten bigger over the last few years, it does mean that the percentage change of growth slows. As the percentage of the growth in the book is slowing, a steady or declining delinquency and loss rate actually indicates you have to perform better in terms of credit quality. Otherwise, to your point, you would otherwise see that metric rise.
Okay. Thanks. Fair enough. Have a great day.
Thanks.
If there are no questions at this time, please continue.
No other questions, moderator?
If there are no questions at this time, you may continue.
Thank you. Okay. Thank you. Since there are no more questions, I want to thank everyone for participating in the conference call, and we look forward to updating you that are attending the AGM later this morning. Thanks, everyone.
This concludes today's conference call. You may now disconnect. Thank you and have a great day.