Good morning, ladies and gentlemen, and welcome to the goeasy Ltd. First Quarter 2017 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 should require assistance during the call, please press star then zero on your touch-tone phone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. 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, 2017 . The news release, which was issued yesterday after the close of market, is available on Marketwired and on our website. Today, David Ingram, goeasy's President and CEO, will talk about the highlights of the first quarter. Following his remarks, Steve Goertz, the company's CFO, will discuss goeasy's financial results in greater detail. David Ingram will then provide some insights into our strategic initiatives and outlook before we open the line for questions from investors. Jason Mullins, the company's Chief Operating Officer, and Jason Appel, the company's Chief Risk Officer, are also on the call. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website.
All shareholders, analysts, and portfolio managers are welcome to ask questions over the phone after management 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 and responses to questions in your coverage. However, we would ask they do not quote callers unless that individual has granted their consent. Today's discussion may contain forward-looking statements. I'm not gonna 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, and thank you for participating on our call today. We had a strong start to 2017, with both revenue and earnings expansion. Overall revenue increased by 15%, reaching CAD 94.5 million for the quarter. The company's revenue growth was again driven by easyfinancial, as it grew its loan book to CAD 387 million by the end of the quarter, a year-over-year increase of 27% and on track to reach our stated goal of CAD 475 million-CAD 500 million by the end of the year. The growth in revenue contributed to increased earnings. Diluted earnings per share for the quarter increased by 35.2% to CAD 0.73 from CAD 0.54 on a normalized basis in the first quarter of 2016.
Before Steve reviews the detailed financial performance for the quarter, I want to touch on some of the highlights from the quarter. Originations in the quarter of CAD 106 million continued to be strong, increasing 30% against the first quarter of 2016. The growth in originations was aided in part by the expansion of our risk-adjusted interest rate loans. We launched risk-adjusted pricing in 2016, where we provide our best and most creditworthy customers with access to larger dollar loans with reduced interest rates. This product extension was consistent with our mission of helping our customers improve their credit profile and graduate back to lower-cost prime lending. The customer benefits from the reduced rate of interest, and we benefit from the lower charge-off rates and greater lifetime value.
While we continue to require a stronger credit profile for these customers obtaining a lower interest rate loan, we expanded the availability of this product from 10% of total originations in 2016 to 20% in the current quarter. Consumer demand has been strong, and the early results suggest an improvement in charge-off rates and an increase in the lifetime value of these customers. In addition to the strong growth in originations during the first quarter of 2017, we also achieved a significant reduction in our annualized net charge-off rate to 13.9%. While this rate did benefit from a seasonal reduction in the first quarter, it was also reduced by several measures that we have put in place over the past few quarters.
First, as I indicated, the introduction and subsequent expansion of risk-adjusted interest rate loans to a larger, more creditworthy population has reduced the risk profile of our portfolio. Second, bankruptcies and consumer proposals were reduced on a relative basis during the first quarter of 2017 , aided in part by our deployment of a new internally developed bankruptcy model. And finally, our efforts to improve our collections practices through the use of advanced analytical models and enhanced collection tools targeted in high-risk customer populations within the portfolio began to positively impact our loss rates. We continue to expect our net charge-off rates throughout 2017 will remain in our previously guided range of 14%-16%. The increased growth and scale, strong yield, and lower charge-off rates allowed the easyfinancial business to deliver a record operating margin of 41% in the quarter.
Now, looking to easyhome, same-store sales were down 1.7%, due largely to the portfolio decline experienced in 2016 . Generally, the changes in the size of the leasing portfolio are seasonal, and the portfolio typically declines in the first quarter of the year. While the leasing portfolio did decline in the current quarter, the amount of this seasonal decline was the lowest we have seen since the first quarter of 2008 . As a result, easyhome's operating margin remained solid at 15% in the quarter and in line with our expectations. Our goal remains to maximize the profitability of this mature business, which will likely see a modest but steady structural decline. Ultimately, we were pleased with our financial results for the quarter.
We achieved improvements in all of our key financial statement metrics, including a reduced net charge-off rate during the quarter. Now I'll turn the call over to Steve to review our financial results for the quarter in far greater detail.
Thank you, David. The gross consumer loans receivable portfolio grew by CAD 16.5 million in the quarter, driven by our strong originations, which increased to CAD 106 million from CAD 82 million in the first quarter of 2016. The growth of easyfinancial contributed to improved financial results for the quarter. Total revenue was CAD 94.7 million, an increase of CAD 12.4 million or 15%, compared with CAD 82.3 million in the first quarter of 2016. Same-store sales growth was 17.9%. Both revenue and operating income for the quarter were increased by CAD 1.5 million due to the transition of our creditor life insurance product to a new provider, offsetting the CAD 1 million reduction in revenue and operating income due to this transition reported for the fourth quarter of 2016.
easyfinancial's operating expenses before depreciation and amortization were CAD 33.8 million for the first quarter of 2017, an increase of CAD 6 million or 21.7% from the first quarter of 2016. The increase was driven primarily by the additional CAD 1.2 million in advertising and marketing spend to support the growth in originations, higher operating costs of the maturing branch network, incremental costs to develop and launch new products and expand distribution in 2017, and increased bad debts expense due to the large portfolio. easyfinancial's bad debt expense increased to CAD 14.1 million for the first quarter of 2017, up CAD 1.7 million or 14%. This rate of increase was below the 27% rate of growth for the loan book.
Net charge-offs as a percentage of the average gross consumer loans receivable on an annualized basis were 13.9% in the quarter, down from 15.2% reported in the first quarter of 2016, and for the reasons that David provided. Corporate expenses before depreciation and amortization and transaction and advisory costs were CAD 9.1 million for the first quarter of 2017, compared to CAD 6.7 million in the first quarter of 2016, an increase of CAD 2.4 million. The increase was driven by three key items. First, while the company has largely exited the U.S. market, it continues to generate fees and have certain receivables from its remaining U.S. franchisees and business partners. Given the difficult market conditions in the U.S., the company recorded an 800,000 provision against these receivables.
Second, corporate expenses for the first quarter of the prior year included a CAD 800,000 gain on the sale of stores to a franchisee. No such sales took place in the first quarter of 2017 . Finally, corporate expenses for the first quarter of 2017 increased by CAD 800,000, related to higher salary and administrative costs to support the larger business and the strategic initiatives designed to drive additional growth in future periods. Operating margin was 21.6% for the first quarter of 2017 up from 18.5% re-reported in the first quarter of 2016 on a normalized basis. Operating income in the comparable period of 2016 was negatively impacted by CAD 500,000 transaction advisory costs, which were nonrecurring and unusual in nature.
The improvement in operating margin was driven by the higher operating margin in the easyfinancial business and a large percentage of earnings generated by that business. The improved operating income translated into higher net income and earnings per share for the quarter. Net income for the quarter was CAD 10.3 million, and diluted earnings per share increased to CAD 0.73 in the quarter, compared to normalized net income in the first quarter of 2016 of CAD 7.6 million and normalized diluted earnings per share to CAD 0.54. On this normalized basis, both net income and earnings per share increased by 35% in the quarter.
As I previously indicated, net income in the first quarter of 2017 was positively impacted by CAD 0.08 due to the transition to a new provider of the company's creditor life insurance product, and negatively impacted by CAD 0.06 due to the aforementioned provision against our U.S. receivables. Our overall financial position remained strong at the end of the quarter. Our debt to total capitalization was 0.58, less than many of our industry peers. CAD 280 million was drawn against our CAD 300 million committed credit facility. As at March 31, 2017, the company had CAD 44.2 million in cash and committed facilities available to support future growth. Based on our remaining borrowing capacity, cash on hand, and the cash flows generated by operations, we have adequate capital to continue executing our growth plan through the third quarter of this year.
Additional financing will be required to meet our long-term growth objectives. We have historically retained much of our earnings to support our asset base. We also believe that the company's leverage ratio is low compared to most industry players and has room for expansion. As such, we do not intend to raise additional equity to fund our growth strategy. We have established relationships with many providers of debt financing and continue to explore funding alternatives that represent an optimal balance between interest rates, term, flexibility, and security. We are confident that we will be able to access the necessary capital to continue executing on our plan. Finally, given recent market events, I think it's important to highlight that goeasy does not fund any of its consumer loans receivable or its operations from consumer deposits.
We currently have a long-term funding structure that was originally put in place in 2014 and has been expanded and enhanced on several occasions since that time. Our current credit facilities consist of a CAD 280 million term loan provided by a syndicate of U.S.-based debt funds and a CAD 20 million revolving operating facility provided by a large Canadian bank. Details of the terms of these facilities are disclosed in our financial filings. Now I'll turn the call back to David.
Thanks, Steve. As we discussed last quarter, throughout 2016, we completed an in-depth strategic review, gaining a greater understanding of available opportunities within the non-prime market for consumer lending in Canada. This review confirmed that our corporate strategy continues to be appropriate and identified several opportunities for our future growth. The market for non-prime lending in Canada, excluding mortgages, is approximately CAD 165 billion. The supply, however, is fragmented by both product and credit segments. It is satisfied by a large number of diverse lenders, each focusing on a relatively narrow range of products. Opportunities for growth exist for those lenders who are able to effectively offer multiple products spanning the non-prime consumer credit spectrum across various distribution channels. We continue to believe that direct personal relationships with our customers are essential to achieving optimal results.
Such relationships are best achieved through a physical location where our customers live and work. In April of this year, to provide greater access to a physical location to our customers, we began offering our easyfinancial loan products within our easyhome retail stores through an initial rollout to 33 of our easyhome locations. These easyhome stores are in areas that service easyfinancial's target market, have existing relationships with customers that are likely consumers of the products offered by easyfinancial, and are staffed with dedicated employees that have significant experience in managing the relationships, including collections, with non-prime consumers. This rollout will continue during the second quarter of 2019 .
We will make easyfinancial loans available through an additional 33 easyhome stores in May and another 34 easyhome stores in June, so that by the end of the second quarter, 100 easyhome stores will be offering easyfinancial loans as well as their traditional consumer leasing product. While it's early days, the rollout of lending to our easyhome stores has been strong and in line with our expectations. In April of this year, we also expanded our easyfinancial footprint by launching easyfinancial in Quebec. The launch commenced with one branch in Laval, as well as offering loans online. The customer response to our launch of lending in Quebec has exceeded our expectations, and the growth of the first branch was the fastest launch ever experienced by an easyfinancial location.
While we have only just launched in Quebec, we are confident that this new market will significantly contribute to our growth in the years to come. We will therefore open 10 additional branches in Quebec this year and expect to reach 40 branches in this market by the end of 2019 . Last year, we rolled out risk-adjusted pricing to our highest credit quality customers. As I mentioned earlier, we recently expanded this program and believe that there is a strong appetite for lending products at this lower price point for a better credit quality customer. While we'll give up some yield, we benefit from reduced charge-offs and a greater customer lifetime value. We are now looking forward to our next new product launch. In the third quarter of 2017 , we will introduce a secured installment loan product to our retail distribution channel.
These installment loans will provide our customers with access to a larger loan size with lower interest rates. Our risk will be reduced as these loans will be secured by real estate, while our decision to lend will also be based on the creditworthiness and affordability of the consumer. The reduced yield we achieve from this type of product will be offset again by lower credit losses and lower relative cost to administer. As you can see, we are taking significant steps to expand our geographic footprint and product offering over the next few quarters. To support these activities, we plan to make a significant incremental investment to our advertising. We have budgeted our advertising spend to increase by CAD 2.2 million in the second quarter of 2017 when compared to the first quarter of 2017.
This incremental spend will support our launch of easyfinancial into our easyhome stores, introduce the easyfinancial products into Quebec, and introduce our new secured loan product while investing in TV and testing other media to continue to build brand awareness, and finally, enhance our digital and mobile capability to improve the customer experience. The initiatives that we have launched today have exceeded our expectations, and we remain confident in our ability to achieve our stated 2017 targets. Given the growth of our loan book to date, as well as the strength of our launch in Quebec, we are well on track to reach a loan book of CAD 475 million-CAD 500 million by year's end.
As we have previously indicated, the growth in our overall average loan size, the increased penetration of our risk-adjusted pricing loans, and our launch of easyfinancial into Quebec will continue to reduce the overall yield that we achieve on our portfolio. Although our yield in the first quarter was high at almost 63%, this was elevated due to the one-time CAD 1.5 million impact resulting from the transition of our creditor life insurance product to a new provider. We anticipate that our yield will moderate slightly for the balance of the year to a guided range of 60%-62%.
In conclusion, our financial results were strong in the first quarter, and our growth initiatives have exceeded expectations. We have launched a suite of products that very much align with our vision of helping our customer segment improve their credit standing and take control of their financial future. We have a sound and consistent strategic plan. We have set ambitious but achievable goals, and we have a history of delivering on our goals and doing what we say we will do. 2017 will be a record year for our company, and I look forward to updating you further on our progress in the coming months. So with our formal comments complete, we will now open it up for questions.
Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Jeff Fenwick with Cormark Securities. Your line is open.
Hi, good morning, everyone. Just, I want to start my questioning on your debt capacity here. I appreciate the comments that you offered at the beginning of the call here, but I guess the concern that I might have here is just it's a timing thing. So Q3 is not that far away. You're clearly opening the taps on what could be some pretty meaningful incremental growth here for the business. You know, when do you feel like you need to have that solution in place so that you're confident that you can accelerate your activity today and be able to deliver on that from a funding perspective going forward?
Yeah. Hey, Jeff, it's Steve. As we've said, our current facilities and cash on hand, plus the cash flow generated by the business, gives us ample cash flow to meet our growth objectives till at least the end of the third quarter. Obviously, we want to get a solution in place before that point in time. We're confident we could put a solution in place today, but want to make sure we're putting the optimal solution in place long term for the company. So we're taking a little bit more time exploring all of the options, and then we'll get something done that provides us with a long-term structure that makes sense for us in the years to come. For that reason, we haven't done anything quickly. We haven't, you know, finalized any facilities. We're still exploring a few different options.
All of them appear to be doable. It's just finding the one that makes sense for us. You know, sometime in the upcoming months, we'll have more to talk about there, but I don't want to disclose that until we've got something locked up.
Okay. Thank you for that. And I guess we can move on then to the growth, and you're mentioning opening up a greater proportion of the risk-based product within your mix. You know, how should we be thinking about that interest revenue yield sort of gradually moderating as you bring more of that into the mix? When I look at the last two or three quarters here, I mean, it looks like the 50 basis points-100 basis points on that, just on that interest revenue yield movement quarter by quarter. I mean, is that the order of magnitude that we should be thinking of? Or, well, you know, how should we be framing our thoughts on that?
Yeah, that's, that's probably about the right way to think about it. The, the range we provided, 60 basis points- 62 basis points, still is in line with our expectations at this point. It'll generally trend slowly down throughout the year within that range. Once we get to the end of the year and we introduce the new secured lending product, which will contribute some growth in the back half of the year, but not, not meaningful, it'll be more significant next year, then we'll be able to provide more guidance beyond 2017 and what the yield implications are. But certainly, we're doing other things, like obviously trying to improve the penetration rate of ancillary products and things that help buoy the yield that will offset some of that interest.
But otherwise, the range we provided of 60 basis points-62 basis points, we still feel comfortable with, and that'll be how it'll trend for the next few quarters.
I guess within that, you benefited by this change in your creditor life product. So that, I assume, was largely a one-time item in the quarter, and going forward, the relative contribution to revenue will be similar to what your prior provider was generating for the business.
Yeah. It'll be roughly the same. The CAD 1.5 billion in the quarter really offsets the CAD 1.5 million, excuse me, offsets the million-dollar charge we had Q4 last year. So you know, once those you offset those together, you know, we'll trend more towards normal rates going forward.
And then within the risk-based pricing, and again, the contribution to the profile of the book here, how should we be thinking about it from a duration standpoint? Are these loans going to be offered? Do you think the relative duration of the mix of that or of that portfolio would be similar to your existing product or maybe a bit longer?
It's Jason here. Jeff, it would be a bit longer. Obviously, by giving these customers the opportunity to borrow at a lower rate, we're able, based on affordability, to give them a larger dollar size loan. Those loans tend to be amortized over longer terms, which is why overall, we see an increase in improved lifetime value. So obviously, it buoys the portfolio on a short-term basis, both in terms of loan size, but it does position us quite nicely for growth as those loans obviously take longer periods of time in which to pay down.
Okay. Makes sense. And, let's move on to credit then. Interesting to see the movement there in the first quarter being so positive, but you're not really changing your outlook for charge-off. So what was it that was this really something that was just atypical, that surprised you, or is there something in the macro that you're seeing, maybe in Alberta, that's helping here? And why would it not sort of carry forward, particularly as you're shifting the mix to a higher credit quality borrower?
You know, we had gone over what the primary factors were that were driving the change. Q1 obviously is typically among the best of the quarters seasonally for overall charge-off rates in any lending business, certainly in ours, and that pattern has continued year-over-year. We did see lower charge-offs in the bankruptcies. Some of that, obviously, was due to the fact that we had deployed a new model in the latter part of Q4, which we're beginning to see in terms of our bankruptcies. But we also did see an unexpectedly large seasonal year-over-year drop in the number of bankruptcies in totality. Some of that, I think, is being manifested in the broader macroeconomic environment.
So we did get a bit of an unanticipated lift, which is why, quite frankly, we were just slightly outside of our previously guided range of 14%-16%. I don't necessarily expect that seasonal drop year-over-year to precipitate going forward, which is why we're pretty confident with the impacts of the model, plus the adjustments on risk pricing, as well as our continued expansion and use of analytical scoring and enhanced collection work that we've done, that will still put us comfortably within the range of the 14%-16% guidance that we've given in the past.
Okay, great. Thank you for your answers.
Again, to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Stephen MacLeod with BMO Capital Markets. Your line is open.
Thank you. Good morning.
Morning, Stephen.
Morning. Just wanted to talk a little bit about or get a little more color around, I guess, the, you know, the sort of moderation in the operating income growth you expect in easyfinancial in Q2. And I just wanted to get a sense of how, you know, how the loan book growth is distributed through the balance of the year. And I guess maybe a little bit more color on how the margin profile is expected to evolve between Q2, Q3, and Q4 to get to your 35%-37% range. Just with all the initiatives that are happening and, you know, how you expect that all to roll out.
Yeah, I can touch on that. It's Jason. So as David said, we're making some concentrated investment in Q2, particularly in marketing, to help prepare us for the acceleration of the loan book growth in the back half of the year and to match suit with the new initiatives, Quebec, easyhome, and then eventually our secured products. So you'll probably see margin moderate in Q2 in the easyfinancial business, somewhere in the kind of 35%-37% range. So a little bit more traditional to what we've seen in quarters of the past year, as those extra investments are made. You also generally see a more accelerated loan book growth in Q2 than you do over Q1.
So you'll probably see growth in the quarter will be 30 or 40% more in absolute growth dollars than what we saw in Q1 for loan book growth. So when you combine that and the extra provision we take on that higher accelerated growth, combine that with the extra marketing spend that David mentioned, that's what's going to moderate the margin in the quarter. Then as we move into the back half of the year, that margin starts to expand again till we finish the year with the original guided range we gave.
If we look at the growth, given that a lot of the initiatives just launched, our secured lending is not going to launch till the third quarter, a lot of that growth is back-ended to the final quarter of the year, which seasonally is always the strongest quarter for us, so a very heavy portion of the growth will be in Q4.
And that's for loan book growth, you're talking about specifically?
Yes.
Okay, great. And so Jason, just to clarify-
Stephen, just to finish off the marketing piece. The additional spend is going to be, it's all going to be incremental to easyfinancial, and it's going to be... In terms of magnitude, it's going to be roughly CAD 2 million year-over-year and CAD 2 million quarter over quarter. It will be the highest period we've ever spent in our history, and it will then moderate and come back down in Q3 and go up a bit more in Q4. But the highest spend that we've ever made is coming through in Q2.
Okay, I see. Okay, so I guess the expectation really is, and just, just to clarify, I think you were saying the margins will moderate in Q2 below the 35%-37% range. Is that, is that right?
Yeah, into that range. Yep.
Pardon me, sorry?
Yeah, into that range of 35%-37%, roughly.
In Q2?
For Q2, yeah.
Okay, that's helpful. And, can you just talk a little bit about, you know, the performance you've seen from the loans that you've been extending through your initial rollout into your easyhome stores, just how those have performed and the relative profitability, if anything, if there's any meaningful differences?
Yeah, it's Jason. So we only introduced that rollout just in the last few weeks, so it's really far too early to provide any commentary. At the end of the day, we're using the same risk model and the same lending criteria, so we don't generally expect the performance of those loans to be any different than we would the rest of our book. A lot of our easyhome stores are generally found in similar type you know pockets of the community, similar type strip plazas. So although there's a slightly different consumer set, it's not material enough that we expect any major impact on the portfolio.
Okay. And then in terms of Quebec, is there anything... You know, maybe your commentary probably answers the question, but I just wanted to get a sense as to whether you saw any challenges in sort of building the brand or having this new offering in the Quebec market, a market where you previously haven't had the easyhome, I guess, the goeasy brand generally?
Yeah, I mean, so obviously, we've had the easyhome leasing business there for a little while, and so there's a little bit of carryover of the awareness of that brand into the easyfinancial and goeasy name, but you're right, otherwise, easyfinancial was new there, as David mentioned, that market has done very well for us so far. There's less supply and less competition in that market, so that makes it a little bit more attractive because we're able to attract the consumer demand more quickly through specifically digital advertising and digital marketing, so for us, you know, obviously, we believe that that market will contribute its proportionate share of business related to the population that it contributes to Canada.
So we're on the way to eventually accumulating the business there at the same ratio we would anywhere else.
Okay. And then, just finally, just for Steve, I just wanted to get a sense as to what you expect for corporate expenses and the tax rate through the year.
Yeah, the corporate expenses, if we were to normalize Q1 for the reasons that we disclosed, you know, the provision against the U.S. franchise business, remove that, that's probably a pretty good indicator of where it's gonna be going forward. It's elevated from last year a little bit because of the additional expenditures for the new initiatives. But as you remember, last year's corporate expenditures continued to rise quarter over quarter, so we've kind of reached that run rate. On the tax rate, you know, abnormally high for the quarter, given the unusual items. The normalized tax rate's about 27.5%. So that's where it should be for the balance of the year.
Okay, great. Well, thanks so much.
There are no further questions in the queue at this time. I will turn the call back over to the presenters.
Well, thank you. As there are no more questions, I want to thank everyone for their participation on the call, and for those of you that can make it, we look forward to seeing you in person at the AGM at 2:00 P.M., so once again, thank you, and we look forward to continuing to update you. Thanks.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.