Good day, ladies and gentlemen, and thank you for standing by. Welcome to goeasy Limited's first quarter, 2018 financial results. At this time, all participants are in a listen-only mode to prevent background noise. If anyone needs assistance during the conference, press star zero for an operator. There will be a question-and-answer session later, and the instructions will be given at that time. And as a reminder, this conference is being recorded. Now, it's my pleasure to turn the call to David Yeilding, Senior Vice President of Finance.
Thank you, operator, and 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 our website. Today, David Ingram, goeasy's Chief Executive Officer, will talk about the highlights of the fourth quarter and some of our achievements thus far. Following his remarks, Steve Goertz, the company's Chief Financial Officer, will provide additional insights on the implementation of IFRS 9. David Ingram will then provide some insights into our strategic direction and outlook before we open the lines for questions from investors. Jason Mullins, the company's President and COO, and Jason Appel, the company's Chief Risk Officer, are also on the call.
Before we begin, I remind you that this conference call is open to all investors and is being webcasted to the company's investor website. While 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 to use management's comments and responses to questions in any coverage. However, we would ask that you do not quote callers unless that individual has granted their consent. Today's discussions 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'll turn the call over to David Ingram.
Good morning, everyone, and thank you for your participation on today's call. The first quarter of 2018 was very strong for goeasy. We continued to grow revenue, reaching almost CAD 115 million in the first quarter of 2018 , up 22%. The growth was driven by the accelerated expansion of our easyfinancial business and its loan book. We also experienced record levels of originations and loan book growth. Loan originations in the quarter reached an all-time record of CAD 202 million, almost doubling the originations in the first quarter of 2017 . The first quarter has historically been one of the lowest slowest, rather, quarters for loan originations.
The growth was a direct result of the strategic actions and investments that we made in 2017 , including the increased branch count, the maturation of our branch network, the increased penetration of risk-adjusted rate loans to qualifying borrowers, the launch of secured lending to homeowners, the launch of lending as an additional product within our easyhome stores, and the expansion into Quebec. These product extensions and the expansion of our branch network and geographic footprint were further fueled by significant improvements in brand awareness and additional investment in advertising and customer acquisition in the current quarter. We also delivered record loan book growth of CAD 75 million against loan book growth of CAD 16 million in the first quarter of 2017 . The growth was also aided by improved customer retention and an increase to the average loan size.
All of these factors translated to our loan book, reaching CAD 602 million by the end of the quarter, up CAD 215 million or 56% over the prior year. As we have previously communicated, the acceleration of our loan book growth would be accompanied by a decline in revenue and yields as the penetration of our risk-adjusted rate loans increased and a higher average loan size reduced the relative commissions earned in the sale of auxiliary products. The revenue yield generated by the loan book moderated somewhat in the quarter, declining by 640 basis points versus the prior year. The credit performance of our loan book was also very strong in the quarter. We experienced a reduction in delinquency rates and bankruptcy losses in the quarter.
As a result, our charge-off rate declined to 12.4% from 13.9% in the first quarter of 2017. Our ongoing investment in credit risk and collection tools, systems, and people has had the desired effect. These factors, coupled with the increased penetration of risk-adjusted rate loans to a more creditworthy borrower, drove this improvement to loan book performance. This quarter required that we report our bad debt expense in accordance with the requirements under the IFRS 9 accounting standard. While Steve will elaborate further, IFRS 9 resulted in an increase to the rate of provision for future credit losses to 9.3%, compared with the rate of provision of 6.2%, calculated under the old accounting rules.
To provide some perspective, our loan book grew by CAD 16 million in the first quarter of 2017, and we recorded a provision of CAD 1 million. In the current quarter, the loan book grew by CAD 75 million, and we recorded a provision of CAD 7 million, rate related to the higher level of growth and the adoption of IFRS 9. This translates to approximately CAD 0.31 per share. Our reported diluted earnings per share in the quarter was CAD 0.77. This compares to a diluted earnings per share of CAD 0.73 in the first quarter of 2017. The results for 2017 were reported under the old accounting standard for provisions for future credit losses, and so the bad debt expense was lower on a comparative basis.
We estimate that the earnings per share for the first quarter of two thousand and seventeen would have been reduced to CAD 0.64 per share if we had applied the current IFRS 9 methodology for determining the provision for future credit losses in the first quarter of 2017 . We're off to a great start in 2018 , with strong customer growth and record origination and loan book growth. While earnings growth moderated due to the adoption of IFRS 9, the significant growth experienced in the quarter has positioned our business for strong earnings through the balance of 2018 . I'll now turn the call over to Steve to provide some additional clarification of the impact of IFRS 9.
Thank you, David. As David indicated, the adoption of IFRS 9 had a significant impact on our financial statements in the current quarter. Rather than review the operating results, I thought it would be helpful to fully explain this impact. As required, we adopted IFRS 9 on January 1st, 2018 . Under the previous accounting standard, a collective allowance for loan losses was recorded on those loans where a loss event had occurred but had not been reported as at the balance sheet date. The standard prohibited recognizing any allowance for loan losses expected in the future if a loss event had not yet occurred as at the balance sheet date.
Under the new standard, IFRS 9, we are required to apply an expected credit loss model, where credit losses that are expected to transpire in future periods are provided for, irrespective of whether a loss event has occurred or not as at the balance sheet date. It is important to note that the adoption of IFRS 9 does not impact the net charge-off rate of the company's consumer loans receivable portfolio, which is driven by the borrower's credit profile and repayment behavior. The company will continue to write off unsecured customer balances that are delinquent greater than 90 and secured customer balances that are delinquent greater than 180 days.
Likewise, the cash flows used in and generated by the company's consumer loans receivable portfolio are not impacted by the adoption of IFRS 9, as the periodic increase in the allowance for loan losses as a result of growth in the consumer loans receivable is a non-cash item. IFRS 9 also requires that forward-looking indicators be considered when determining the impact on credit risk and measuring expected credit losses, and these forward-looking indicators must be incorporated in the risk parameters as relevant. Based on the analysis performed, we determined that the rate of inflation, the rate of unemployment, and oil prices historically have had an impact on the credit performance of our portfolio, and these were incorporated into our calculation of the allowance for loan losses.
For purposes of determining our allowance for loan losses at each balance sheet date, we have decided to utilize the average forecast of these forward-looking indicators from five large Canadian banks. IFRS 9 does not require the restatement of prior period financial statements. Companies can restate prior periods, but only if hindsight is not employed, which makes doing so very difficult. As such, the company, similar to all banks and lenders, made the decision not to restate 2017, but rather to apply IFRS 9 prospectively on January 1st, 2018, with an opening adjustment to retained earnings. The provision under the previous accounting standard as of December 31st, 2017, was CAD 31.7 million, which represented 6% of the loan book. Under IFRS 9, this allowance for credit losses increased to 9.3% of the book, or CAD 49.1 million.
As such, we reduced the net carrying value of our loan book by CAD 17.4 million, with a corresponding after-tax reduction to retained earnings of CAD 12.7 million as at the transition date. Ultimately, IFRS 9 will result in a reduction in reported earnings in periods where the company experiences growth in its loan book. Also, due to the inclusion of forward-looking indicators, the provision rate will likely be more volatile than experienced in the past. Although the company has decided not to restate the comparative figures as if IFRS 9 had been applied retroactively, it is important to understand the estimated impact of this change in accounting standards on the comparative financial results.
In our MD&A for the quarter, we presented the estimated impact on our financial statements if we were to calculate the applicable allowance for future credit losses using the methodology applied in the first quarter of 2018 under IFRS 9. This is presented as a non-IFRS measure. In the first quarter of 2017, we reported net income of CAD 10.3 million, or CAD 0.73 per share. On the modified basis that I just explained, net income would have been reduced to CAD 9 million or CAD 0.64 per share. On this basis, earnings increased by 20% during the quarter. Given the impact to income as a result of changing provision rates, we are introducing a new non-IFRS financial measure, pre-tax, pre-provision income, or PTPP income.
PTPP income details the financial performance of the company, excluding tax and the effects of the provision for future credit losses. PTPP income increased from CAD 28.7 million in the first quarter of 2017 to CAD 39.6 million in the current quarter, an increase of CAD 10.9 million or 37.9%. We feel that this measure, coupled with the net charge-off rate, provides useful non-IFRS data points to better understand the operating performance of the business between periods. Now I'll turn the call back to David.
Thanks, Steve. So our focus in 2018 will be on driving the growth potential that our investments in 2017 unlocked. Thus far, our growth in the quarter has exceeded our expectations. Although we had originally forecasted our loan book to reach between CAD 700 million to CAD 750 million by the end of 2018 , we now believe that due to the customer demand, we will achieve or exceed the high end of that range and will provide a fresh outlook on our three-year growth targets when we report in Q2. Our focus in 2018 will be on driving growth and capturing a larger share of the CAD 165 billion-dollar market for non-prime credit in Canada. While doing this, we will continue to plan for the future to ensure the sustainability of our growth.
We will continue to invest in our digital properties to improve the online experience for our customers, and in the third quarter of this year, we will be launching an enhanced digital loan application platform, which will utilize leading architecture to further streamline the customer experience while significantly reducing the customer's effort to get a loan. The new loan app will capture key data that will allow us to rapidly test and learn what application methodology, sequencing, and format delivers the optimal customer experience and optimizes the ratio of traffic to applications to funded loans. We believe that this investment will drive increased customer conversion and ultimately, loan origination. There are further opportunities to provide our customers with additional products and services that meet their financial borrowing needs and assist them on their journey back to a lower-cost prime financing.
In 2018, we will undertake in-depth consumer research and explore other lending products that can be added to our product suite in 2019 and beyond. We remain committed to building out a full suite of products that will ultimately serve all the borrowing needs of our chosen customer segment across the non-prime credit spectrum. We have a history of setting ambitious goals, but we also have a history of delivering on our promises. The investments we've made and the growth we've experienced in the first quarter gives us renewed confidence for the future. We believe strongly in our strategy and in our ability to execute on a growth plan.
With our strong balance sheet, robust infrastructure, expanded product offering, and coast-to-coast branch network, we are well positioned to continue to capture a much larger share of that CAD 165 billion non-prime consumer credit market and to deliver record levels of earnings in 2018 and beyond. Now, before I open up for questions, I wanted to make a few comments on our recently announced senior leadership succession plan. As an organization, we have always been methodical in our approach to succession planning to ensure that we're well positioned with the right people, the right culture, and the organizational structure to support the next phase of our growth.
The board and I are excited about Jason Mullins's appointment to President for the balance of 2018 , as he begins the leadership transition and assumes the role of CEO in January 2019 . I myself, I'm looking forward to moving into the role of Executive Chair to lead the company's corporate development, investor relations, and capital market initiatives, while also overseeing the organization's long-term strategy. While Steve will continue to work with us through this transition period, I also want to thank him for his nine years of service as CFO. Steve was instrumental in leading the introduction and development of the risk management function, overseeing the transformation of the technology group and systems, and advancing the company's corporate governance structure. In addition, Steve provided leadership and guidance to the business and the strategic planning process.
Steve operated with a high degree of integrity and passion while being a great steward of the company's finances and finally, he played an integral role in the recent recapitalization of the company's balance sheet, which will enable the company to continue to deliver record growth, so with those comments made, I would like to turn the call over to questions, operator.
Thank you. And ladies and gentlemen, if you have a question at this time, just press star and the number one key of your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Again, to ask a question, just press star and the number one. And our first question is from Gary Ho with Desjardins Capital Markets. Your line is open.
Thanks. Good morning. Maybe just first question, just on the forward-looking indicators. Is it possible to give us some earnings sensitivities to a change in each of these variables? So obviously, you know, these indicators fluctuate month to month. You know, it would be good if we can somehow track this and apply sensitivities to it, so we can adjust kind of our estimates going forward. And then the second part of this is, you know, how far out do you look in terms of these forecasts?
Hey, Gary, I'm gonna start, and then I'm gonna pass it over to Jason Appel. You know, we've communicated what the forward-looking indicators are. At this time, it's not appropriate or we're not able to provide the exact correlation and the impacts in the portfolio on a numeric basis. I think as we get more comfortable with IFRS 9 and the market gets more comfortable with IFRS 9, the disclosures could improve, and we could be talking about it more, but we're still in the early stages, so that's not something we can provide some context to today. Rather though, I'm gonna ask Jason to spend some time explaining the FLIs, how we came up with them, and what we believe at a high level, the impact on our portfolio could be as we move forward.
Thanks, Steve. Gary, it's important to note, obviously, I know you're aware of this, that obviously the allowance that we calculated is largely based on the performance or the underlying credit performance of the portfolio. The role of the FLIs is really as an overlay on top of that credit performance, which is done obviously at every quarter end, as required under the standard. We've spent a tremendous amount of time leading up to the actual deployment of IFRS 9 to look at the historical performance of our credit portfolio, with a particular focus over the last five years, as that is where we have the most robust amount of experience.
And based on that, we looked at a series of macroeconomic indicators, of which Steve has mentioned three, but we actually looked at a much larger set, and ultimately selected the three that he had mentioned, the forecast rate of inflation, rate of unemployment, and the forecast price of oil, as those were found to best explain the loss performance over the five-year analysis period that we had looked at. Now, based on this analysis, to give you some idea of how to think about the allowance going forward, we expect that those FLIs, in combination, could modify the allowance, plus or minus a swing factor of about 10% on either end. We would consider that to be a relatively modest or moderate impact.
The reason, once again, of why that is such, is because the underlying performance or underlying credit performance of the portfolio is largely what dictates how that portfolio will perform, as opposed to just the indicators themselves. So to think about it, as the portfolio has continued to shift over the last several years with the adjustments of our risk-adjusted loans and our lending to more creditworthy customers, we expect that the impact of those FLIs will also shift, but we can't measure them going forward as those analyses are looking back retroactively. We intend to look at those every quarter and make adjustments where necessary. But again, the way to think about modeling the impact on the allowance with the FLIs is a swing factor of about plus or minus 10%.
Okay, that's helpful. Maybe I can just stay on, maybe ask it another way, staying on the IFRS 9 topic. Like, when I look at the retroactively adjusted numbers from 2017, the allowance went from, I think, 8.5% in Q1 to 9.2% this quarter. That's a big swing versus the improving trend we saw using IAS 39. I know it is consensus forecast driven somewhat, but, you know, it'd be helpful if you can kind of give us some context. You know, when you back tested this model, like, what would that range have looked like through a cycle?
It's difficult for us to say through a cycle because our period of analysis was only the last five years. Throughout that time, I would say most of the forward-looking indicators trended to be more positive. The change in the rates from the old standard to the new standard and the different direction they traveled during 2017 was due to the FLIs, but was also due to the underlying calculations. Our old methodology, we were only looking at credit losses for the subsequent five months. Under IFRS 9, it's 12 months for performing loans and greater than that for non-performing loans. The change in methodology was also responsible for the changing rates throughout 2017.
Focusing on just the FLIs, though, you know, it was really the shift in those FLIs versus the actual indicators during the year that caused a lot of that transition. So it's not just the FLIs, it's also your starting point. So if you look at inflation, for instance, in FLI, it's where the forecasted inflation is going to be a year from now, but also where the inflation is today. So the movement in those FLIs is what derives the change in the provision, not the absolute forward-looking rate.
Okay. And you look at kind of one year out, is that the, where the.
Yeah, to do it, we've taken a numerical approach. Unlike a lot of entities that are using their own forecast and injecting management's assumptions and interpretations, we wanted to remove discretion. So we are simply, for each of those five FLIs, taking the average forecast of five large Canadian banks. And yes, we're looking at the forecast 12 months out.
Okay. That's, that's helpful. Maybe just moving on, my last question, perhaps for David. Just, you know, good loan book growth this quarter. I guess the flip side is, you know, the fast, you know, you also are using the cash faster. You know, I think you have CAD 110 million in your credit facility and CAD 50 million cash on hand. Can you update us on your capital use and financing plans looking out kind of 12-18 months from now?
It's Steve here. Yes, our use of capital has been greater than originally anticipated, given the strong loan book growth, but it's important to note when we put the new structures in place last November, we put structures in place that would allow us to continue to draw into the future, so if I look, our bank revolver always has the opportunity to go back to the lenders and increase the size of that facility. The high-yield facility, now that we're in the market, allows us the quick opportunity to go back to market for a follow-on offering or an additional issue of high-yield debt, if necessary, and ultimately, if we look at the markets right now, our high-yield bonds have traded very positively, so the yield to maturity is lower than when we issued.
So if we were to go, if we needed to, and were to go that route, it could be beneficial in our cost of capital. We're looking. You know, we're always looking at the capital planning, the cash needs of the business and our ability to secure that. And we're confident using either of those two sources going forward, we'll be able to continue to fund our growth.
Just one follow-on comment from Steve's discussion. One thing I'd say that was the most beneficial component of doing the refinancing in November was the fact that we were aligning with some of the biggest banks in the world. Having partners such as BMO, Wells Fargo, CIBC that allows us to have that level of support flexibility to continue to keep up with the growth and the demand for our business. I think the timing was great for us. As Steve said, the secondary market trades the bonds very well, so there is demand for the product, and we've clearly got higher than expected demand from consumers for their borrowing needs right now.
Got it. Gary?
Yep. It's Jason Mullins. Just wanted to build on the prior one on the provision on the allowance. So just to kind of close off on the points that Jason and Steve raised, although the FLI is layered onto the provision rate or the allowance, which is calculated on the underlying loss performance of the book, will have some volatility quarter to quarter, based on the difference between, as Steve said, the actual economic indicators and their twelve-month forecast. In the end, the credit performance of the book as a result of our credit strategy and the mix of the quality of the consumer through the different products and price points that we've initiated, will, in the long run, be the most dramatic thing that influences the long-term losses and therefore the long-term allowance.
So I just want to make sure that that's top of mind as you think about how to model this, long term in the future.
Yeah. Okay. Thank you. That's it for me.
Thanks, Gary.
Thank you, and our next question is from Stephen MacLeod with BMO Capital Markets.
Thank you. Good morning, guys.
Good morning, Steven.
I just wanted to follow up on just the previous line of questioning around the provision rate. You know, Jason, you just made a comment that, you know, over the long run, the portfolio performance is the biggest indicator of what that number will look like. You know, when you think about the elevation of the rate under IFRS 9, you know, it was roughly, call it, 300 basis points from last year to this year, and even on a revised basis. Is that a good number to use as a starting point going forward when we think about how to model this just on the underlying performance of the portfolio?
Well, I think it's a good starting point, but as we've seen with the charge-off rates, our charge-off rates continue to migrate down as we introduce further risk-adjusted pricing and larger loans to more creditworthy borrowers. So that would be a leading indicator of a decline or a change in the allowance rate. Since the allowance rate is based on more historical performance, it always will have a bit of a lag, so that, you know, the current rate's a good start. But as you see our charge-off rates move down, we would expect to see a decline in the rate of the allowance, albeit before the introduction of FLIs, forward-looking indicators.
Right. Okay. Okay, that's helpful. You know, and then as we think about the net charge-offs, you know, the number for Q1 was quite low, very good. I mean, was there something specific to the quarter that would have caused that number to be so low? And would you expect it to sort of trend closer to the mid part of that 12%-14% range as we head through 2018?
It's Jason Mullins. So, part of the loss rate, net charge-off metric, as you know, is the growth in the book itself, because that's the denominator. So when we have a period where we have accelerated growth, that also helps the metric. But by and large, the lion's share of the improvement is the underlying credit quality. So we still feel good, although we came in at the low end of the range that we guided for this year, we still feel good that that is the right range we expect for the balance of the year. So I would still use that range as you think about the net charge-off rate we'll report going forward in 2018.
Right. Okay. Okay, that's helpful. And then just, maybe just finally, as you think about, and David, you mentioned in your prepared remarks, just an expectation to, for potentially revised targets being released with Q2. When you think about, you know, how you expect the loan book to evolve over the next couple of years, can you just talk a little bit about some of the puts and takes that might move those numbers higher or keep them within the same range?
Yeah, I mean, if you look at the trend, 2016, I think we grew CAD 75 million, 2017, CAD 150 million, and in the first quarter, CAD 75 million, which traditionally has been our slowest quarter. So if you were to run that trend out, you can see that it's going to be a significant increase, potentially close to doubling year over year. So for us, as we have tested and introduced the new products or the extension of products that we carry, particularly risk-adjusted lending, which comes with bigger ticket loans for these better credit quality customers, which means also a longer retention cycle for that consumer as well. That will continue, I think, to have a big influence, and it will have an influence, clearly, on the credit quality as well.
The big unknown for us is what secured lending will do, because it's still relatively new for us. The book size is still relatively small. So I think the good news for us is that CAD 75 million came with very little participation, really, from a secured lending product at this stage. So that one is one that could surprise us nicely and go much higher, or it could stay relatively low. So that one we'll wait to see, and we'll give you a bit more clarity at the Q2 update. The other piece is what Quebec and what the maturation of our existing stores will do. So if you remember back two or three years ago, we guided that a mature store looks like a CAD 2 million dollar-sized book on average.
We can now see a CAD 2.2-CAD 2.3 million average book, and that's coming at a time that's before the five-year cycle. So we have now about four or five branches that are hitting CAD 6 million in loan book size, and many other branches growing at a fairly healthy clip. So again, one of the unknowns for us is what will the average loan book look like with a full suite of products at a mature state, year five, year six? So those are the kind of variables.
That we are managing. And when you then couple that with the marketing investment, which is now 50% digital, which is driving a huge amount of the origination channel for us, those are all things that we think will help, give us a healthy continuation of this growth throughout this year.
Okay, that's very helpful. Thank you.
Thank you. Our next question is from Jeff Fenwick with Cormark Securities.
Hi, everyone. Good morning.
Good morning.
I just wanted to start off just with a follow-up on the capital discussion there. So I take your point around the ability to upsize, but what about negotiating on the covenants there? When I look at your leverage ratio, you're not far off where the maximum would be under the revolver that you've laid out there. So anything we should be thinking about on that in that regard?
Yeah. One of the reasons that we're getting a little tighter against the covenants right now is they were set on a pre-IFRS 9 basis. The lending agreements allow for the recalculation and the reset of those covenants to the new accounting basis. Since we just completed our work against IFRS 9, though that reset didn't occur in time for the end of the quarter. So we're in discussions with our banking partners right now for a resetting of those covenants to reflect the new accounting basis. As we move forward, obviously, we look for the most flexibility possible under the covenant package we have with the banks. So all part of the discussion, whether there's additional capital available from banking sources versus high yield debt markets, we'll take into consideration the covenant requirements.
Okay, thanks. That's helpful. And maybe we go back to discussing the growth that we saw in the quarter, sort of one quarter into your three-year plan and already thinking about upsizing it there. So could you just describe, you know, the. You gave us a little bit of color in the MD&A about where the growth was coming from, but where were you surprised in terms of the level of uptake on the product?
Hey, Jeff, it's Jason Mullins. I think, as we look and dissect the growth, there isn't really one clear thing that is, that is driving the lion's share. It's very much an effect of all of the additive initiatives. So if you look at it, first is, as you introduced lower rate products and, larger loans to, higher quality customers, that results in an improvement in the retention of your portfolio. And therefore, as you originate new dollars, you don't have as much runoff in the underlying book, and that helps accelerate growth. So we're seeing through the increase in the better credit quality customers, an improvement in the retention rates, and that's helping drive, better growth.
We're then also seeing that the response from the market by being able to offer larger loans and lower rates is also deriving, when combined with the brand awareness through the ad spend, an increased demand from consumers looking at easyfinancial as an alternative. So it is very much a sum of the parts effect, as opposed to any one thing that is really contributing. I just think that each of them is, on an additive basis, adding up to even a bit more than what we had expected to be the case this quickly. So that's what gives us the confidence to revise the targets in the next quarter.
Okay. And within the mix of the new products there, obviously, you began to push on the secured secured loan product. Can you just characterize to us the approach to rolling that out? It's obviously a bit more distinctly different from what you've offered in the past. So how are you gauging the success there and the performance of that product?
Yeah. So the way we're branding that is really Loans for Homeowners. So it's to really specifically highlight that for the segment of our consumers who are homeowners, albeit it's a smaller portion, this is an opportunity for you to extend your relationship with easyfinancial by getting access to a larger loan at a lower rate as a result of being a homeowner, and therefore, looking at easyfinancial differently than you had in the past. Where in the past, we were looked at as just one product, and you would just fill one short-term unsecured credit need. Now, the customer can see an opportunity to extend their relationship with us before they eventually graduate back to being a prime consumer. Our approach into that product is consistent with the way we've approached anything new in the past.
It's to wade in very carefully and cautiously as we learn and test and optimize. So that's why you can see in the MD&A, where we break out the portfolio, it's still a very small amount of the total book, and we're continuing to get more comfort with it as we see more performance and get response from consumers. So we still think, as David said earlier, there's quite a bit of upside and growth potential in the product. We're just being really careful and smart about how we open the door of that product and promote it.
Okay. Helpful. And maybe just we can move on to expenses here as well. I mean, the expense level is actually a bit better than I had been modeling for the quarter. How should we be thinking about, you know, Q1 versus the expense for the rest of the year?
Yeah, I think, you know, the Q1 was a pretty clean quarter. No unusual expenses, no surprises. So, I think on a trend basis, it's probably a good place to start.
Okay, that's all I had. Thank you.
Thanks, Jeff.
Thank you. And ladies and gentlemen, as a reminder, to ask a question, just press star and one. And our next question is from Brenna Phelan with Raymond James.
Good morning, guys.
Hello, Brenna. Good morning.
I just wanted to go back to the IFRS 9 provision and maybe try to quantify a little better. So given the information that you have now and the improving underlying credit performance in the form of charge-offs, should we still expect to see a decline throughout the year in the allowance in the percentage of gross loans?
It'll. I'm gonna answer in two parts.
You can't even. Okay.
I'm gonna answer in two parts. The underlying allowance before the application of forward-looking indicators should continue to trend downward, but it will take some time for that to be built in because we're using a historical analysis to determine the rates. So there always will be some lag, but over a long-term basis and, you know, over the course of several quarters or a couple of fiscal years, yes, it will continue to trend down in lockstep with the decline in the charge-off rates.
Okay.
Forward-looking, the forward-looking indicators as the overlay, that's going to introduce the volatility and the variability because it really depends on where the banks think the economy is gonna go and how that's going to impact it. So those will move up and down quarter in, quarter out. So that will, unfortunately, introduce volatility that we're not able to forecast or predict.
Okay, so when you say the 10% plus minus window variability either side, what was that move due to the FLIs in 2017? If I take 9.3 over the starting point at the beginning of the year, that's roughly a 10% move. Is that the right way to think of that?
What we're saying, so it could be up to a 10% move over the period analysis that we've done. So if we've got a 9.3% charge-off rate right now, and that's the base number, as an example, I'm not saying that's what it is. But as an example, the introduction of FLIs could move that up or down 10%.
Okay.
So-
And that's the relative move that we saw through 2017?
Yes.
Okay. Okay, that's helpful.
So unfortunately, I know everybody's struggling with it, ourselves included, the FLIs are introducing significant volatility, and it's very difficult to forecast because forecasts for the future economic conditions continue to change, and there's a lot of variability, depends on who you talk to. I think as the market and the firms get more comfortable with IFRS 9, you'll see better predictability for that. But right now, we're in the early stages, so it's very difficult to say.
The other thing, just to add to that, Brenna, is, to build on Steve and Jason's earlier points, is that the application or the layering onto the FLIs is done by looking at the current actuals of those indicators versus the forecast. And so if, for example, the forecast was for one of them to go up, then by the next quarter, presumably the underlying actual would go up, and therefore, the delta from the actual to the forecast would be smaller, and the impact in the subsequent period would now be less or potentially credit back the other direction. And so it's really a matter of saying each quarter to each quarter, what is the current today versus that forecast? And then looking at the change from one period to the next.
So what has more of an impact on your forward-looking, on your current allowance? The current level of the forward-looking indicator or the forecast level of the forward-looking indicator or the delta?
It's the delta.
The delta is what impacts the FLI. The way to think about the current is that your current is inherently built into your underlying loss performance, which is your actual net charge-off rate.
Right.
So the FLI really just looks at the delta to the forecast. Your current portfolio is, and net charge-offs, accounts for what's going on in the world today.
Okay. And what's - which one, can you tell us which one your most important, which one it's most sensitive to out of the three that you gave?
No, we haven't given that level of disclosure. Right now, because there's interrelationships between the three, so if you were to break one out, it would change the relationships to the other ones. So we haven't disclosed which one's more prevalent and which one's not.
Okay. Then you referenced expenditure for your enhanced digital loan platform to come in Q3. Has this spending been undertaken? Have we seen this, or when, when's that gonna come in to intangibles and the amortization thereof?
So yeah. So the undertaking of the beginning of that spend on the actual technology has begun. The depreciation of that would happen when we deploy the new platform, which we expect to be, as David said, in Q3.
So think of it this way: the spend on its Q2, Q3. Depreciation will likely start Q3 and then continue thereafter.
What should we be expecting order of magnitude in Q2 for spend?
It's not that simple because we've got a lot of spending on different IT initiatives. Sometimes it's digital transformation, sometimes it's core-based systems, sometimes it's the other platforms. So in aggregate, our total spend over the course of the year, in capital, I think-
17.
CAD 17 million. Of that, roughly CAD 8.5 million is probably IT-type spending, and so it's relatively up and down throughout. I mean, relatively consistent throughout the year.
Okay.
Yeah, and of course, that's data gated by that we'll have other technologies that are reaching the end of the depreciation schedule, so it's not purely just an additive measure. There's also depreciation that runs down and off as a result of other technologies from past.
Sorry, I got some updated numbers. It's not CAD 17 million. It's about CAD 14 million over the course of the year, total capital spend, split roughly half and half between intangibles and hard assets. We were a little bit light in the spend Q1. That'll be caught up Q2 and Q3.
And does this maybe, looking forward, take some expense dollars from advertising away?
Not that significantly, no. Because a lot of the advertising, as you know, is geared towards online advertising, search keywords, as well as television.
What it does do, Brenna, is if as a result of improvements in our digital performance, we're able to increase the throughput of the funnel of our web traffic.
Mm-hmm.
That allows us to simply drive more velocity with the same spend because we're getting a higher conversion of the traffic that we do drive. So this is an initiative to actually help accelerate growth, and be more effective, as opposed to trying to find a way to then replace the spend differently, it's rather a way to drive growth. So, the new digital platform, will, A, help us remain relevant and current and competitive because consumer demands continue to increase for the flexibility and convenience of digital, as well as it give us the flexibility to hopefully drive a better conversion from our web traffic. That's the ultimate goal.
Brenna, just to finish out the answers to questions around spends. Advertising spend at this point looks to be around CAD 18.5 million this year versus CAD 16.5 million last year. So there is an absolute dollar cash increase in spend, but the efficiency rate is greater because the revenue is much stronger. So around 3.8% of revenue versus 4% of revenue a year ago. On the actual digital part, Steve said a lot of it can be kind of commingled. So you've got the CapEx spend, which is half for these stores and the tangible investments versus the investment in new stuff. On the digital platform for the customer experience, that's probably going to be around about CAD 1 million for that total investment for us getting more customers to the business.
So ultimately, what both are doing, though, is driving down your acquisition cost per customer or.
Absolutely.
Per dollar value of loan. Right.
Absolutely. So as we have-
Okay
S aid in the last two years, we're looking to increase the margin and the return on equity as we continue to scale the business, and if you put IFRS aside, that's what you'll see the core business doing.
Have you ever disclosed an acquisition cost per customer? Do you estimate that?
No. There's so many different ways to calculate it.
Mm-hmm.
And so many different channels, that we just don't do that.
Okay, and then switching to the revenue yield and easyfinancial. So if I take out the interest income left with a sort of fee-based yields in percentage terms, it looks like that's down 13% year on year. Can you just give a breakdown of how much of that is being driven by the fact that that commission spread over a larger loan lowers the yield, and how much is a function of lower take up as you're moving into secured loans and risk-adjusted loans and maybe even Quebec?
Yeah, the majority is the first point mentioned. So when the loan term is extended, then the relative commissions earned on those products decreases. As we move to a better credit quality customer, the relative pricing of those ancillary products decreases. And then there is a smaller piece that is related to a better quality customer has a slightly lower purchase rate of ancillary products, but it's more the former points that you highlighted.
So those are the two big drivers.
Yeah. If you look on a comparative basis, remember, in the first half of last year, our commission earned on the sale of ancillary products benefited from a one-time switch in providers.
Mm-hmm.
You know, you look towards the back half of the year for a more normalized basis.
Okay, and last one for me. Anything on your radar election year in Ontario, anything meaningful coming out of the changes to payday lending or discussions that are interesting coming up as a result of any of those factors?
No, nothing material at this point that's changed since the last update. We haven't still yet heard anything follow on from Ontario since the initial consultation, so, presumably, there'll eventually be another one, but we don't know. We continue to be in discussions with the other ministries that are working through various consultations, and, and as we said, the last quarter, nothing new that we can share about those and their impact to our business.
Okay, great. Thank you very much.
Thank you.
Thank you. And our next question is from the line of Doug Cooper with Beacon Securities. Your line is open.
Hi, good morning, guys. Just want to focus on the geography for a second. Ontario grew CAD 36 million sequentially. Quebec was up CAD 7 million, BC up CAD 10 million, and Alberta up CAD 9 million. What, why. You know, maybe you can just why the overperformance in Ontario, I guess, in particular, versus BC—Quebec? Is it just a question of setting up the branches in Quebec first?
I think the best way to answer that is that we were generally in the past underpenetrated in the GTA market in particular, and that's been an area of focus for us in the last kind of year or two, with the introduction of where we've put new locations, and those locations have performed really, really well for us. So, it's also generally got less competition from our major direct competitors than what we've seen. So, that's really the only thing that would drive overperformance in Ontario that I could think of. The rest of the business, you know, the distribution of ad spend and those types of things is generally quite proportionate.
The other thing, just to add to that, Doug, is that as you'd expect, because of the population densities in Toronto, they overindex in average loan books. So not only is it the addition of more stores, but it's the overperformance of those stores because the size of the audience.
Okay. And just in Quebec, what, where is the, what's the store count in Quebec stand right now?
I think we're at seven or eight locations now.
What's the plan sort of 12 months from now?
So I think long term, we've said that we think there's capacity for, call it, 30 to 40 in the market, and we'll probably open those fairly linear over the next kind of three to four years. So call it, you know, 10 to 15 a year in that market, fairly linear.
Okay. And I think you touched on maybe just a little bit about, you know, the acceleration of the loan book, David, which you referred to earlier in the call. What does it say about the competition? Can you maybe just obviously continue to gain share? Are you gaining, you know, share, or is this just, you know, uncovering new pockets of demand that haven't been, you know, uncovered at all before?
So, I think, I think it would be the last point that you focused on, which is we have said that the market is quite wide open for business. And, there was only really a sizeable competitive set that was back in 2009 and 2010 with HSBC, Wells Fargo, and CitiFinancial. So, as we have said, I think quite consistently, that the supply side has been soft and weak, and the demand side has remained consistent. It's been growing at an average rate of 3%-4% a year, and there hasn't been the supply side to fulfill those needs. So as we've introduced product expansion, we've been able to get attraction to more of those customers.
And we're less focused on what the others are doing and more focused on what we're doing. And what we've been doing is expanding the credit box, and that's been inviting many more new customers in, and it's serving us very well. So when you think about it, compared to other mature countries that have lending options, we're still under-penetrated with options for customers to go to. So there is really only two of us here operating in Canada that can offer a full suite of product for the installment lending. And if you went to the U.S., you might find a hundred.
So, part of it is just the dynamics of this environment, and part of it is looking after our own, strategic plan and getting on with the job of, growing the book to a much, much more sizable, number.
Right. And my final just comment question, just on the leasing side, EBITDA was looks like about CAD 16 million, which is, and I think the capital expenditures in that segment was 7.5 or so. And the corporate overhead for the entire company is sort of 9.5. So EBITDA almost covers the entire corporate overhead for the company, inclusive of its own capital requirements. How long. Just in the performance in that segment seemed to be much better than it was in Q4. Anything in particular, you know, going there, you know, how is it a steady state now? You think those margins are sustainable at sort of 15.5, 16%?
Yeah, within, if you notice, if you go to the segment reporting, you notice that, the easyhome segment now has interest income. So we're able to offset the decline, the continuing declines in revenue associated with the leasing portfolio, with that group of stores and that business unit now issuing loans. So, I think, it looks, you know, we, we've had a decline in EBITDA for the last several quarters, and now that the lending is starting to get a little bit of traction within that business unit, we're seeing that stabilize and in fact, improved a little bit this quarter.
Okay, great. That's it for me. Thanks, Jason.
Thanks, Doug.
Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to David Ingram for his final remarks.
Thank you, operator. So since there are no more questions, I wish to thank everyone for their participation and support for goeasy. And for those of you that will be at our AGM in Toronto this afternoon, I look forward to seeing you all there. And for everyone else, we'll be updating you in August for our Q2 results. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.