Good day, ladies and gentlemen, and welcome to the goeasy second quarter 2018 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone requires assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. 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 ended June 30, 2018 . The news release, which was issued yesterday after the close of market, is available on GlobeNewswire and on the goeasy website. Today, David Ingram, the company's Chief Executive Officer, will talk about the highlights of the quarter and then provide some insights into our strategic direction. Jason Mullins, the company's President and Chief Operating Officer, will then review the company's outlook before we open the line for questions from investors. Jason Appel, the company's Chief Risk Officer, is 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 is 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 in responses to any, any questions they may have. However, we would ask that they do not quote callers unless that individual has granted their consent. Today's discussion may contain forward-looking statements. I'm not going to read the full statement, but I will direct you to the caution regarding forward-looking statements included in our MD&A. Now, I will turn the call over to David Ingram.
Thank you, David. Good morning, everyone, and thank you for your participation on our call today. The second quarter of two thousand and eighteen was extremely productive for us. We obtained access to growth capital at a significantly lower cost of borrowing, delivered record growth in active customers, loan originations, and loan book, while continuing to show improvements in the credit performance of our loan portfolio. All of this translated into record net income and diluted earnings per share in the quarter. Revenue grew to CAD 123 million in the second quarter of 2018 , up 26%, driven by the expansion of easyfinancial.
We introduced a new multimedia brand and marketing campaign across TV, radio, and digital to drive awareness for our mission of providing everyday Canadians with access to the credit they need, while putting them on a path to a better financial future. Through the success of this campaign, we've seen a 30% increase in web traffic and a 54% increase in total loan applications, which resulted in a record quarter for net customer growth. The strong customer demand, coupled with a 23% increase in the average size of our unsecured loans, resulted in record loan originations of CAD 234 million, up almost 70% from the second quarter of 2017, and record loan book growth of CAD 85 million, up 121% from the second quarter of 2017.
The growth was also fueled by the contribution from the strategic initiatives we launched last year. Now, given the growth, the strong growth in the first half of 2018, we have also provided an updated and more ambitious three-year look that Jason Mullins will review shortly. We also saw continued strength in the credit performance of our portfolio in the quarter, with a reduction in delinquency rates and improved collection performance. This resulted in our net charge-off rate declining to 12.4% from 14.8% in the second quarter of 2017. The business results and revenue growth led to a record diluted earnings per share for the quarter of CAD 0.82, an increase of 30% versus the second quarter of 2017.
The results for 2017 were reported under the old accounting standard rather than under IFRS 9, and so the bad debt expense was lower in the prior period on a comparative basis. We estimate that earnings per share for the second quarter of 2017 would have been reduced to CAD 0.52 per share if we applied the current IFRS 9 methodology for determining the provision for future credit losses in the second quarter of 2017 . On this comparable basis, diluted earnings per share increased by 58%. We were also able to secure additional growth capital at a lower price than before. The North American capital markets have shown their confidence in our business model and our strategy.
Through the recent increase to our revolving credit facility and the follow-on bond offering, the weighted average cost of our total debt at full utilization has been reduced from 7.2% to 6.9%, while the adjustments to the covenants have provided even greater flexibility. When combined, these balance sheet enhancements have provided CAD 268 million in additional capital to fuel our growth through the second quarter of 2020, while keeping us within our optimal net debt to total capitalization target of 70%. Turning to the regulatory environment, you may recall that three provinces, Manitoba, Quebec, and Alberta, have either enacted or tabled proposed legislation regarding high-cost lending. This legislation requires enhanced disclosure and transparency for borrowers relating to their cost of borrowing and compliance with certain customer servicing activities.
As we have always run our business with these principles in mind, we do not expect that these new regulations will have a meaningful impact on our business. Over the past year, we have engaged with many provincial regulators and have had the opportunity to provide feedback on their proposed laws or regulations and will continue to do so in the future. With respect to the cash flows of our company, when we raise capital, those cash inflows are treated as cash flows from financing activities. However, when we advance funds to borrowers, those cash outflows are treated as cash used in operating activities. Now, for a high-growth lender like goeasy, cash used in operating activity is positive proof of our ability to grow our loan book and our business.
goeasy reported cash used in operations in the first half of 2018 of CAD 127 million. However, CAD 202 million related to the investment in growing our loan book. If we were to exclude this investment, then cash flow generated by operating activity would have been positive CAD 75 million over that same period. We choose to invest in our loan book in order to grow future cash flows, revenue, and net income. It is the right strategy to build our business, and it has resulted in total shareholder returns of over 4,500% since 2001. The journey of continuously focusing on our customers to ensure they have the best-in-class borrowing experience across every touchpoint is heavily tied to one of our biggest assets, our people.
As we continue to grow and scale the business, we have invested in evolving our organizational culture to help attract and retain top talent that would enable us to realize our growth, future growth ambition, especially in key areas such as digital, analytics, and IT. Year-to-date, we have seen employee retention improve by 14% over the prior period. In the fall, we will be moving into a newly redesigned office space that will create flexibility and more collaboration for our employees. In addition to building a new physical workspace, we'll continue to drive key corporate programs around training, leadership development, and ensuring that our employees have all the tools and support they require to be successful.
Now, before I turn it over to Jason to run through our outlook and revised targets, I want to thank the entire team, particularly those at the frontline, that work tirelessly each day to take care of our customers and execute the goeasy strategy. As all our managers are shareholders, they are very aligned to the company's vision and success. Now I'll pass the call over to Jason.
Thanks, David. The strengthening of our balance sheet, the strong growth we've experienced in the first half of 2018, and our plans for the future have given us the confidence to revise our targets. We've taken a careful look at our portfolio and built a detailed bottom-up forecast that considers expected consumer demand, the evolving product mix, a changing yield profile, and our expected loan loss performance. We now expect to reach a loan book of between CAD 825 million and CAD 875 million by the end of 2018, between 1.1 billion to 1.2 billion in 2019, and ultimately reach 1.3 billion to 1.4 billion by the end of 2020.
These growth targets will be primarily achieved through building our brand and meeting strong customer demand for our existing lending products, while being augmented by a series of new initiatives. First, we expect to see continued robust demand for our core and risk-adjusted unsecured loan products. Risk-adjusted rate loans will drive the majority of our projected growth in the future. Secondly, we have only scratched the surface of the opportunity in the Quebec market. Quebec represents 23% of the Canadian population, but only 5% of our loan portfolio today. We will continue to optimize our lending strategy in that province so that we can successfully scale. Third, we continue to be very optimistic about the growth potential of our secured lending product.
This product is an ideal way for the 20% of our existing customers that are homeowners, to graduate to a larger loan at a lower rate, as well as attract more of the seven million Canadians with non-prime credit scores that are seeking alternative forms of credit. Lastly, we believe that several new initiatives will aid in driving accelerated growth. Later this year, we will launch our enhanced digital loan application, which will enable us to further optimize web traffic and provide our customers with a streamlined and personalized experience. Our application process will be faster and easier for the customer, and more importantly, will provide us with a platform to optimize our online sales funnel and drive increased conversions across every stage of the process. This platform will be foundational to our ability to test and introduce new and innovative technologies, such as artificial intelligence.
Secondly, we continue to drive innovation in our credit model and underwriting strategies by incorporating enhanced analytics and alternative data sources using the latest techniques in machine learning. These activities will enable us to further optimize our proprietary scoring models so that we can extend credit to a greater number of borrowers without an increase in risk. Third, the upcoming launch of our white label starter loan product through a third-party partnership will provide a vehicle for customers that do not currently have sufficient credit criteria to begin building a history with easyfinancial, so that they can be graduated to other lending products in the future. Designed for new Canadians or those with poor credit, the consumer will be able to take a loan where proceeds are directed to a savings account.
Each payment is then reported to the credit file so that they can effectively improve their credit score. We will monitor that behavior and convert them to an unsecured loan as soon as they have demonstrated a stable history of payments. Lastly, we are actively researching other potential loan products that can be added to our suite in 2019 and beyond. Our recent research and analysis of data provided by TransUnion tells us that our market continues to grow at a compound rate of 3% plus per annum and now sits at over 185 billion in total consumer balances, presenting new, numerous opportunities. The increase in the expected loan book will also produce higher revenue growth and expanding operating margins as we benefit from greater scale and efficiency...
In 2018 , the net charge-off rate will be within the originally guided range, and we expect to see an improvement in 2019 to between 11.5% and 13.5%, with a sequential improvement in 2020 to a targeted rate of 11% to 13%. The revised net charge-off rate targets show the improvement occurring at a slightly slower pace than our previous guidance, given the stronger demand for our higher core unsecured lending products. Lastly, we are confident that we can continue to finance industry-leading growth within our targeted leverage ratio of 70% net debt to total capitalization, and sequentially grow return on equity to 21%+ in 2018 , 24%+ in 2019 , and 26%+ in 2020 .
We have never shied away from ambitious or lofty goals, and we have never set targets that are not attainable. We have a team that believes strongly in our business and our goals, and we have the capabilities, market positioning, and the capital structure to make those goals a reality. I'll now pass it back to David.
Thank you, Jason. With those formal comments complete, operator, we'd now be happy to take questions from the callers.
Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, to ask a question at this time, please press star then one. And our first question comes from Jeff Fenwick from Cormark Securities. Your line is now open.
Hi, good morning, everyone.
Good morning, Jeff.
Just want to start my line of questioning here, maybe with a bit of an operational discussion. I guess, you know, when you see a company such as yours growing at that kind of rate and the amount of volume coming in the door, you know, how comfortable are you or how have you approached designing your operational capacity in terms of, you know, the underwriting team that you've got, the credit collections team, and your ability to manage that effectively and execute well?
Yeah, Jeff, it's Jason. Great question. So, I guess a couple of comments. One, as we've built out, for the most part, our store network, the majority of the growth in terms of how we will originate and service those customers will reside within our existing store base. So, we'll obviously need to add existing or add new labor to those stores as we add incremental customers, but the platform is there to do it. And, with the growth we've seen in the last several years, we feel confident we can add the personnel needed within the store network to support that growth. Within the centralized functions, if you think about credit risk, we continue to add complement to our risk and analytics team.
While most of all the credit decisioning happens fully centralized and through the platform, it has the capacity to scale and handle the volume, without a burden on labor. And then within our call center operations, we've been building that complement and that team for a number of years now. So we will, of course, add incremental labor to support that growth. But a lot of the work we've done is to invest in the technologies and the capabilities that allow us to be able to handle more volume without necessarily adding more people. So within collections, for example, we've got dialer technologies, automated text messaging technologies, email technologies. So a lot of the technology that we've invested in also makes the business platform much more scalable as well.
So, certainly, we're mindful of making sure that we grow at a pace we feel we can comfortably manage, but the outlook we've provided is within the range that we feel good about.
Just two points I would add, Jeff, is, if we go back in our history from two thousand and one to two thousand and eight, we almost tripled the size of the leasing business. So we're able to look back with some experience on how to build and scale an organization, albeit slightly different products, but we've been through the process successfully once before. So I think that gives us some history to work from in terms of building the second growth platform through easyfinancial.
And then the second point I'd make is with the new office changes and restructure and reopening in September, we've expanded the space sufficiently, and we have a call on extra space that we can expand into in 2020 that will allow us to reach our loan book targets over the next five to 10 years. So we have the resource and the capacity. We've been always planning for a much, much bigger loan book, and with that comes the plan to make sure we've got the right space with the right people and the right tools to do the job.
Okay. Why don't we move on to credit quality and performance there? I mean, the numbers you put out continue to look quite good. Can we just discuss that on how does it look on a static pool basis versus what we're seeing here, when the growth is so strong? When you talk about a 12% charge-off rate there, is that what it should get to at a, I guess, relatively steady state basis?
Hey, Jeff, it's Jason Appel here. Static pools generally have been quite consistent year on year. As you know, we've been gradually increasing the loan size within the book through so periodic changes to our credit underwriting. So granted, our loss rate in the quarter is certainly being aided by the accelerated growth. But when we eliminate the impacts of those growth and simply look at the static pools on a year-over-year or quarter-over-quarter comparison basis, we're at where we need to be. We're not seeing a sequential increase. If anything, we're flat to somewhat under the year-over-year performance, which is how we've generally engineered the credit models to perform.
As I said before, we've generally been very mindful about how we go about doing that as we continue to test and roll out these new models and modify them over time. Our overall goal is not to increase the risk to the business. If anything, it's to do the opposite. So the way to think about it going forward, as you think about our new three-year targets, is we would expect our standard run rates to be in and around the 11-13 to 14 range as we continue to scale out the portfolio and change the mix. But, as we had guided at the outset of the year, between 12-14, obviously, we're at the lower end of that range, and some of that is being driven by the continued expansion of risk-adjusted pricing.
But that's generally how we feel the rest of the year should come in, generally within that twelve to fourteen range.
...And then as you're moving along here, I mean, you're obviously extending the product set, you're extending duration and upping the size a bit. You know, kind of maybe give us a little bit of color around how you're assessing the performance there and your ability to course correct as you're bringing in some fairly sizable incremental chunks of loans onto the books here.
Yeah, it's a good question. One of the things that we certainly do in the business on a monthly basis is we do plot on a very detailed level, how our losses are performing relative to how the models are expecting them to perform. So that exercise goes on monthly. And invariably, if we were to see some variances outside of where those expectations would lie, we do have the ability to course correct relatively quickly. These models are structured in such a way that we can recalibrate them literally within a couple of days. And if need be, if we find that those models themselves are not performing up to speed, we can effectively take them out of production, if you will, within a couple of days.
And since we employ multiple models in any one given strategy, we never rely and put all of our eggs in one basket. So our ability to course correct historically as it is going forward, is relatively strong. And again, since we do monitor the portfolio at quite a detailed level monthly, we feel quite confident that were we to see any abnormal behaviors, we have the ability to get out in front of it before being surprised at the back end.
I would just add to that, Jeff, as we've talked about before, we've employed a fairly rigorous test and learn philosophy. So if you think about the average loan size, that's something that's been a very gradual and steady increase over an extended period, because we've made small adjustments, watch those static pools over time. When we get comfortable with their performance, we make another incremental adjustment, and that's really just the philosophy we've embedded into our risk management practice. So it's very similar with the secured loan product. While you can see that even after kind of eight to 10 months in market, it still represents a fairly small portion of our business.
A good portion of that is just being more cautious with the way that we make changes and adjustments, so that we only make them once we feel really confident in the way things are performing.
All right. Those are, those are helpful answers. Thank you. I'll queue.
The next question comes from the line of Doug Cooper from Beacon Securities. Your line is now open.
Hi, good morning, guys. Just a couple of things I want to focus on. The secured product line. Can you talk about how big an opportunity you think that could be? What kind of rates are you charging? And, who's the competition in that space for you?
Yeah, sure. So, certainly the size of the opportunity is significant. It represents a decent share of the CAD 185 billion non-prime consumer market space that we highlighted earlier. Today, it's about a CAD 32 million portfolio at the end of the quarter. As we think about the targets that we put out going forward, it will increase its share of the total portfolio. But long term, we don't see it increasing to much more than probably 10%-20% of the total portfolio targets that we've published. So, it'll be a meaningful piece, but not, certainly not the lion's share. That'll continue to be the unsecured product.
In terms of competition, some of our traditional direct competitors, like Fairstone, would offer a product like that, but because it is leveraging the customer's home equity as the backup security, there are also other lenders in the space that cater to products like that, such as Capital Direct and Alpine Credits. Those are the other two that are sort of in what you call the near prime space, offering customers that have home equity access to loan products that they can borrow.
So it does expand our competitive set somewhat, but we do have a very different distribution model from all of those lenders, which is the branch-based lending model, where we build and establish relationships and graduate customers into those products over time, as opposed to some of those other alternative competitors who are really relying purely on a mortgage broker channel for acquiring and originating customers. So I don't think that they certainly have the brand and the customer loyalty and retention philosophy that we would have. So that's where we think we can be different and we can win and compete.
Okay. Just on the, I wanna make sure my sort of numbers are right on the availability of cash. So the revolver, you have CAD 175 million available, which you've drawn, I think, 50 as of June 30. You've got the 200 Canadian of the notes that you just did, and then you had 19 million in cash on the balance sheet. So that's 344 million, by my math, of availability. To get to CAD 1.1 billion, sort of year-end 2019, that leaves about a CAD 150 million dollar gap versus where you're at today. So that can be filled in that you're confident that can be filled in from cash flow from operations? And second, if my numbers are right.
Yeah. So, Doug, your numbers are right. There's obviously a growth to retained earnings, so that will fill the gap. And if you look at the revised guidance, we've obviously built our cash flow projection on those new revised targets.
Yeah.
So we feel very good where we are getting into the second quarter of 2020.
Second quarter of 2020. Okay.
Yeah.
Okay, perfect. Thanks very much, guys. That's it for me.
Thanks, Doug.
The next question comes from the line of Brenna Phelan from Raymond James. Your line is now open.
Hi, good morning.
Good morning.
Good morning.
In your MD&A, there's now a disclosure that a loan is classified as non-performing if you think it's likely to charge-off, i.e., delinquent for thirty days. I just wanted to verify that's just new disclosure that's consistent with Q1 when you adopted IFRS 9?
Hey, Brenna, it's Jason Appel here. Yeah, that is not a new disclosure. That is consistent with how we classified under IFRS 9, beginning in Q1.
... Okay, I just think the disclosure is in that paragraph of the MD&A is new. And then following on that, as your charge-offs are being helped by improved collection policies, are you getting relief from better, more effective collections in your IFRS 9 provisioning methodology?
So, I'll answer that in a bit of a roundabout way. So ultimately, the lion's share of the provision, as we've talked about in the past, is a function of the historical loss rate performance. And given that improvements in collections will drive down the loss rate, as we get better at collections, that in and of itself can help aid the historical loss rate, and therefore, the provision, even all things being equal, credit adjustment or changes. So the answer is essentially yes. Both the credit and the collections collectively contribute to the historical loss rate. The historical loss rate represents the lion's share of the provision.
Okay. Fair to think of it as yes, but on a lag, because it has to actually show up in your credit performance before you can model it out on a go-forward basis.
That's exactly right. That's right.
Brenna, it's Jason here.
Okay.
Just to clarify, your original statement, again, the methodology that we use to classify loans as non-performing is the same methodology that we did use in Q1.
Okay.
The disclosure that you're referring to is new in the Q2 MD&A, because we provided a little bit more info to the market about how we classify the three buckets.
Okay, perfect. Thank you, and just could you give a little bit more color on this white labeled agreement, maybe who the partner is and how much this is expected to contribute to the growth?
Yeah, sure. So, it's actually a partnership that we've had for a number of years now. We've talked about it in the past. It's with a company called Refresh Financial. Historically, we've always had a partnership where we've operated on a purely referral basis. So when we have customers that are declined for access to our products, we've referred them to them as an alternative way to go get something that would allow them to build their credit. We're now expanding that partnership in a capacity that allow us to white label the product, and then that allows us to have a bit more control over the customer experience, the brand, the pricing.
Really, its contribution to the growth is by way of the fact that when a customer subscribes to the product and uses it as a form of building their credit, we now can monitor their payment history and cross-market them those other traditional unsecured and secured products when we've seen their payment history improve and when we've seen their credit improve. The way to think about it is we get 10-20 thousand declined applicants every month where we're unfortunately unable to offer them one of our other lending products. This is a very good way for those customers to have an opportunity to build credit so that they can build history with us, and then we can migrate them over.
So that's why when I talked about in the commentary earlier, the majority of our future growth coming from our existing core products. Other new initiatives like that will help lead and fuel the growth of those core products because they are cross-sold opportunities.
Okay, so you're not. This is not your capital, but you're just now, by white labeling it, having more involvement with monitoring the performance versus fully sending it off to Refresh?
That's exactly right. Yep, it'd still be ultimately their loan that they'll carry. We're just making the relationship more deeply integrated and white labeling it so that it's more of an easy branded solution, and we have more access to the data.
Okay. And, so in the breakdown of net credit extended to new versus existing customers, looks like there's some seasonality in Q2 of more loans extended to existing customers.
Mm-hmm.
Is that a seasonal trend, or... And looking forward, what would you expect the breakdown to be of net new to existing customers versus net new customers?
Jason again here, Brenna. There would be some seasonality in those numbers. Clearly, there would be an impact deriving from the very strong Q4 originations that occurred in Q4 2017. So we typically find that customers borrow in that front timeframe and then sometimes come back for an adjustment or an increase in their borrowings with easyfinancial. So we do see a somewhat of a skew in Q2. The way to think about it going forward is that we would expect that to normalize more around what we saw in Q1 as we look to Q3.
But since we've had a very strong period of net new customer growth, certainly in the first two quarters of the year, we would expect probably two to three quarters from those points to see an increase in those customers' ability to borrow again. If only because by that point, they would have demonstrated some stable credit performance and history with us, allowing us to then consider them for a future increase to their existing facility and/or a rate adjustment on their borrowing amount. So it is a trend that we expect to see more or less consistent as we look out going forward, but it is being fueled by the stronger new customer growth that we saw in the latter part of last year and in the early part of this year.
Yeah, I think
Okay
... the key takeaway there, Brenna, although there'll be some small seasonality adjustments, quarter to quarter, as Jason highlighted, on a year-over-year basis, the loan originations to new customers has held and/or slightly increased as a percentage of-
Mm-hmm
... the total net advances. So for us-
Yep
... that's the way we really look at it and monitor it, is ensuring that the majority of the growth continues to come from the addition of new customers. And as you saw in the release yesterday, it was a record quarter for net customer additions. So that's what-
Mm-hmm
... gives us real confidence in the health of the business.
... Great. And then last one for me, and then I'll re-queue. Just on your leverage ratio, the new covenants published. Looks like that consolidated leverage ratio, lots of room now. Is that now less restrictive than what you would view the rating agencies as required to keep your access to the high yield markets open? Which one of those is a tighter covenant right now, or guidance?
There's a lot of variables, Brenna, to that piece, because as you're probably aware, the different rating agencies have slightly different methodologies of doing the calculation. So, one of them uses net versus gross, one uses gross versus net, and then they have some slight adjustments to that. Based on the conversations we've had with both S&P and with Moody's, we feel very good with where the rating agencies are with their outlook and their rating. It is fair to say that one of those rating agencies is very close to the same leverage ratio that we got from the banks on the change to the covenants.
So all three stakeholders that are really key to us preserving that rating and getting access with that rating are pretty much aligned, and that's what's keeping us targeted to keep within 70% on the debt to capitalization leverage. So for us, that's telling us how we should manage the cap structure going forward. And we feel very good looking forward over the next, at least the next 18 months, that we'll stay within the 70% target ratio.
Okay.
As long as we do that, we feel pretty good with the rating agencies that there will be no negative change to their outlook.
Okay, great. Thank you. I'll re-queue.
Thank you.
Our next question comes from the line of Gary Ho from Desjardins Capital . Your line is now open.
Thanks, good morning. Just first, just on your, going back to your three-year outlook, I wanted to dig deeper in your assumptions. I know that we're in a late economic cycle. Just wondering how you've stress tested maybe a recession scenario within your three-year timeframe. Would you get to the lower end of your guidance, or how should I think about that?
Yeah, sure. It's Jason. So as we've talked about before, we do quite a bit of research analysis on our consumer set and looking at a combination of credit data and research analysis they've built, as well as looking at prior peer groups and what their performance looked like through different economic cycles. And we generally feel strongly that our consumer is fairly stable during periods of economic shock. Now, granted, that may result in some tech impact, and as you said, could put some pressure on being in the lower end of our guidance versus the mid or the high point.
It could certainly have some pressure, but we feel pretty good that the way we've modeled this, that a economic condition change shouldn't create a material adverse effect on our ability to perform and achieve these targets, and I think that's also evidenced by the work we've done to, in this release, show you some of the sensitivity analysis through the provision model as to what impact things like changes in unemployment and inflation have on our particular portfolio, which, as we showed in the MD&A, is consistent with what we said, which is it's fairly minimal in terms of its impact on our consumer.
The model is built on the assumption that all things stay equal, and there's no material change, but in the event that there is, we think our customer remains fairly stable.
Got it.
Sorry, Gary. Gary, just one thing to follow up on that. As we've gone through, obviously, lots of different presentations over the last number of months as we've refinanced the debt structure, one of the key takeaways from that analysis that Jason referred to was, when we look at the debt-to-income ratio of our existing customers at the easyfinancial business, that's approximately half what the ratio is for the average Canadian in Canada today. So the 171% that's referred to commonly, when we use the same calculation for the easyfinancial consumer, that number is about 86%.
There's a lot of data that tells us and suggests to us that our customers are doing very well at the moment, and even in an environment where they get into a very difficult economic challenge, as we've said in the past, they're quite resilient, and they hold up pretty good and certainly better than the average Canadian.
Got it. That's, that's helpful. And then, Jason, just going back to you, just on the new product side, you mentioned some product launches in your prepared remarks. Can you elaborate maybe which ones are more meaningful? And, you know, can you give us an update on, you know, what other products you're looking at and perhaps timeframe on when you'll be rolling that out? And maybe just to summarize, you know, what is or is not included in your 2019, 2020 guidance.
Yep. So I'll be a little bit vague in that we're still doing the research and the analysis and certainly haven't made any decisions yet. So let me maybe frame it this way. If we look at that full non-prime credit market and you break it down by product category, it really represents kind of four major products: traditional installment loans, auto loans, credit cards, and lines of credit. Those would be the kind of four major product categories that fit within the space. So those are obviously all the options we have to consider and the ones we're doing the research and analysis on. Obviously, installment lending is the one we're in today.
So the thinking that we're putting into that is looking at which ones over-index within our specific non-prime consumer set, qualitative research and understanding from the customer, where they see the availability for these products and what products they feel that they need to manage their everyday financial life. And then also layering on top of that, which products are actually good, healthy products for our customer. So we know, for example, things like credit cards and lines of credit, those can be challenging products for our customers, given their non-prime profile. So we're being cognizant and aware of that when we consider which products we might pursue.
So, all of the research is happening to figure out which ones are most appealing to our consumer set, which ones do we feel good about that we can build and execute well. In terms of the assumption built into the forecast, we've put in very, very little contribution from the introduction of a new product to the targets. The majority of the targets, as I highlighted in the prepared comments, are built upon our existing product set, and then the new initiatives that will drive growth of those products.
As I highlighted earlier, if you look at secured lending launch, for an example, it takes a good while when you launch a new product to introduce it to the market, create awareness, and then follow our philosophy of test and learn before we get more ambitious with the product growth. And so we would follow that same approach. And so if you think about us launching a product sometime in 2019 or 2020, as it relates to the next three years, it'll represent a fairly minor share of that.
Okay, that's, that's helpful. And then just a last question, maybe for David Yeilding. Just on the corporate expenses, CAD 11.3 million this quarter-
Yep.
A bit higher versus last year in Q1. Were there anything unusual that's grouped in that line? And, if you can help me out, what's a good run rate to use going forward?
Yeah, sure, Gary. You know, in terms of the driver behind the increase in the corporate costs, it's really a couple of factors. One, we've been bringing in additional management head office to help us continue the growth of the business, expand into new delivery channels, develop new products, and the like. And the second piece is that the accrued but not paid incentive compensation's been a little bit higher, given the growth and the financial results of the business have exceeded our internal expectations and budget. You know, in terms of run rate, you probably want to use over the next few quarters, probably looking at around, you know, call it 12 to 12.5 for the next, call it two, three, four quarters.
It's probably a reasonable way to model this out.
Perfect. That's helpful. That's it for me. Thank you.
Our next question comes from the line of Stephen MacLeod from BMO Capital . Your line is now open.
Thank you. Good morning, guys.
Good morning.
Good morning. I just coming back to the sort of long-term growth guidance, and you know, you mentioned some of the new initiatives, and I think just correct me if I'm wrong, but I think there were four in terms of digital loan applications, improving your credit model underwriting, the white label product, as well as new loan products heading into 2019. Can you just talk a little bit about you know, how those, each of those factors is sort of driving your expectation for loan book growth? Or is it more coming from you know, the sort of the core business at this point, plus the secured lending?
Sure. So if you think about the core business being our unsecured loan, including the risk-adjusted pricing feature, the expansion into Quebec, the secured lending products, and then the investments that we've made in creating brand awareness throughout Canada for easyfinancial, those collectively absolutely drive the majority of the growth. And so, when we've built this, we've done a very concentrated bottom-up forecast that looks at the very most granular level, what do we expect in terms of web traffic, online application volume, retail application volume? What do we expect funding rates and approvals to look like, and built it month by month from the bottom up in a very deliberate way.
These new initiatives are the things that we feel add to our optimism and our confidence because we know that they will contribute to the performance of the business. So for example, we know what our historical funding rate is for an individual that visits our website, and how that traffic converts into a customer. The enhancements we're making to our digital platform give us confidence that we will be able to do a much better job at optimizing that traffic and then driving incremental growth. So we've built in some small assumption for improvements as a result of those new initiatives. So that's how you would think about each of those new initiatives. They've been layered on with an assumption that they will drive some contribution, but the contribution from them represents a much smaller part.
The majority is from the continued growth of those new initiatives, which still today, you know, represent a fairly small piece of the portfolio and have quite a bit of runway for growth.
Right. Okay. That's helpful. And you know, you mentioned obviously higher increase in web traffic and I think online loan applications. Like, when you think about it over the next couple of years, do you believe that you'll see the majority of your growth coming from online loan applications or in store?
So, we've been tracking the mix of our applications for you know a number of years now, and I would say that over the last few years, the mix fluctuates one quarter to the next, but it generally stays pretty consistent. And so I think given that more and more consumers are moving towards using digital applications as a way to get speed and convenience, that share of our application pool is certainly not going to decline. If anything, we may see some increase, but we'll still follow our philosophy of using web to drive traffic and capture application velocity, and then using our store network to send those customers in to originate and service and manage their loans.
So I think that the way we've modeled the business is that that mix will remain broadly similar to what we've seen in the last few quarters, with perhaps a slight increase in the velocity coming from online.
Just to give a little bit more context to that, Jeff, I think if you were to take the application flow that comes from our indirect partners, so the merchant partners and the online, and put those two together, you have the majority of the funding or the application pool coming through those sources.
Right.
Therefore, while retail will do the heavy lifting at closing the transaction in the majority of the cases, the majority is gonna come through as we expand our indirect channel and our online component. Those two combined will probably give us the majority, so well over 50% of the application funnel.
Right. Okay. So, does the customer still need to go to the store to finalize the completion of the loan?
Yeah. So, Stephen, that's always been our philosophy and approach, and it will remain to be so. As you saw, our same-store revenue at the existing branches went up quite nicely in the last two quarters. So we believe that philosophy of driving everything online and pushing the customer to experience the relationship side at the stores has served us well for the last number of years, and we believe that's the right ingredient to success for the future as well.
Okay. Yeah. I just wanted to make sure it hasn't changed materially.
No.
Which is great. And then just finally, you know, just to, just when I think about, sort of some modeling going forward, and you gave some good color for the run rate for corporate expenses for the next two to three quarters. Beyond that, do you expect that the corporate costs would increase from that to support loan book growth into 2019, 2020? And then secondly, how do you, how do you look at some of the other non-operating items like amortization moving over the next couple of years as you increase the loan book?
I mean, picking up the first part of that question, there absolutely will be a need to increase resources to support the scale and the size of the business. I think the key for us and the discipline that we've used for the last eighteen years is to ensure that while the absolute dollar investment will continue to rise with the growth of the business, the scale and the efficiency should improve, and therefore, we should see some leverage.
I think what you should expect to see from us over the next couple of years is that the relative cost as a ratio to the revenue of the business will see some decline, and we'll get more efficient as we expand the size of the book and obviously the management of the business. I think a lot of that is what's informing our confidence in the return on equity measures and the operating margin measures, as you've seen all those go forward in our three-year guidance.
Okay. That's great, and then just on the, maybe the D&A.
Yeah, sure. I mean, it's Steve Hildon here. Let me touch on that briefly. So if we looked at the CapEx back in 2016, I think we came in around CAD 7 million-CAD 8 million. 2017 was around CAD 12 million. For 2018, for the first half of the year, we are around CAD 6 million. We anticipate spending more in Q3 related to the office redesign, as David indicated. So the total CapEx in 2018 will come in at around CAD 19 million with approximately CAD 13 million of that being recurring CapEx, and refurbishing the branches, IT, things like that. For modeling purposes, I think you can likely use that run rate of CapEx going out the next few years.
I'd call it 12-13 of recurring CapEx and model D&A accordingly.
Okay. Okay, that's great. Thank you very much. It's very helpful.
Then we have a follow-up from the line of Brenna Phelan. Your line is now open.
Hi, could you just give a little bit more color on in your targets, you increased modestly the net charge-off assumption, but the revenue yields stayed constant. Is that just if you're looking within the bands, maybe slightly higher revenue yields, or is... should I think of this as building a bit of a buffer into your charge-off assumptions?
Yeah, good question. It's really just a matter of that when we remodeled the business and added in the stronger demand for the unsecured product, we felt that the bands we had previously established were still appropriate and didn't need to change while we had to make some small adjustments to the bands on the losses. So given that, I think we provided a two full point band range for both numbers. That gives us the ability to feel comfortable that even though the product mix has evolved slightly in our latest set of targets, we'll still fall within both of those ranges.
Okay. Thank you.
At this time, I'm showing no further questions.
I wish to, on behalf of the management team, thank everyone again for their participation and interest in our company, and we look forward to updating you for the Q3 results in November. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.