Good morning, ladies and gentlemen. Welcome to the two thousand and sixteen fourth quarter and year-end financial results call. I would now like to turn the meeting over to Mr. David Yeilding, Senior Vice President of Finance of goeasy Limited. Please go ahead, Mr. Yeilding.
Thank you, operator, and good morning, everyone. Thank you for joining us to discuss goeasy's results for the fourth quarter and year ended December thirty-first, two thousand and sixteen. The news release, which was issued yesterday after the close of markets, is available on Marketwired and on our website. Today, David Ingram, goeasy's President and CEO, will talk about the highlights of the fourth 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. 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 the 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 However, we would ask that they do not quote callers unless that individual has granted their consent.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.
Thank you. Good morning, everyone, and thank you for the participation on our call today. The fourth quarter of two thousand and sixteen, and all of two thousand and sixteen for that matter, were strong for our company. We reported record revenue and earnings and met all our stated targets. This solid performance, coupled with our optimizing for the future, gave our board the confidence to reward shareholders by raising our dividend. Before Steve reviews the detailed financial performance for the quarter, I want to touch on some of the highlights from the quarter. Overall, revenue increased by 10%, reaching a record of CAD 91 million for the quarter. The company's record revenue growth was again driven by easyfinancial, as it grew its loan book to CAD 371 million by the end of the quarter, a year-over-year increase of 28%.
The growth in revenue contributed to increased earnings. Diluted earnings per share for the quarter increased by 11% to CAD 0.60 from CAD 0.54 in the fourth quarter of two thousand and fifteen. During the quarter, we launched a point-of-sale financing platform within Sears Canada. This launch was an important milestone as it was the first time a retail customer could apply for and receive point-of-sale financing across the credit spectrum, using a single, streamlined electronic application process. Depending on the customer's credit profile, either Sears Canada or easyfinancial extends credit to complete the purchase of point of sale. Our tablet-based proprietary application system provides the back-end support system and loan servicing needed, making the in-store process smooth and straightforward for the customer. Throughout two thousand and sixteen, our focus was on growth and leveraging the scale of easyfinancial.
In addition to delivering strong financial results, we met all our stated targets. We targeted a closing loan book of CAD 370-CAD 380 million and ended the year at CAD 371 million. We targeted total revenue growth of 14%-16% and delivered revenue growth of 14%. We targeted easyfinancial operating margins of 35%-38% and delivered 37%. And finally, we opened 17 new branches against our stated goal of 10-20. We also made significant progress on our strategic initiatives. In particular, I want to focus on two achievements. After having conducted market testing throughout 2015, we introduced risk-adjusted pricing early in 2016, offering lower rate products to new and existing qualified customers. We also increased our maximum loan size from CAD 10,000-CAD 15,000.
Both of these product enhancements benefited our customers by providing them access to needed financial resources that were not available from traditional providers and assisting them in their journey back to bank financing. So overall, 2016 was a very productive and a record-setting year and continued a strong track record of sustainable growth. Over the past 15 years, we have delivered compound annual growth rates of 11.7% in revenue, 22% for operating income, and 19.3% for earnings per share. 2016 also continued the company's trend of 62 consecutive quarters of positive net income and 27 quarters of positive same-store sales growth. As importantly, we saw improvements to employee engagement, customer satisfaction, and brand awareness.
A strong financial performance and our outlook for the future, combined with our strong balance sheet, has given our board the confidence to increase our quarterly dividend by 44% to CAD 0.18 per share. Now I'll turn the call over to Steve to review our financial results for the quarter in greater detail.
Thank you, David. The gross consumer loans receivable portfolio grew by CAD 27 million in the quarter, driven by our strong originations, which increased to CAD 118 million from CAD 111 million in the fourth quarter of 2015. The growth of easyfinancial contributed to improved financial results for the quarter. Total revenue was CAD 91.3 million, an increase of CAD 8.4 million, or 10.2%, compared with CAD 82.9 million in the fourth quarter of 2015. Same-store sales growth, which includes easyfinancial, was 12.6%.
... Both revenue and operating income for the quarter were reduced by CAD 1 million due to the transition of our creditor life insurance product to a new provider. Ultimately, this one-time impact reduced earnings per share for the quarter by CAD 0.05, but the company will benefit from improved commissions and better levels of customer service in future periods. easyfinancial's bad debt expense increased to CAD 15.9 million for the fourth quarter of 2016, up CAD 2.4 million or 18.3%. This rate of increase was below the 28% rate of growth for the loan book.
Net charge-off as a percentage of the average gross consumer loans receivable on an annualized basis were 15.8% in the quarter, up slightly from 15.5% reported in the fourth quarter of 2015, but within our targeted range of 14%-16%. Operating margin was 18.8% for the fourth quarter of 2016, up from 18.1% reported in the fourth quarter of 2015. The improvement in operating margin was driven by the higher operating margin in the easyfinancial business and a larger percentage of earnings generated by easyfinancial. The improved operating income translated into higher net income and earnings per share for the quarter. Net income for the quarter was CAD 8.3 million, and diluted earnings per share increased to CAD 0.60 in the quarter.
As previously stated, the results for the fourth quarter of 2016 were reduced by the transition of our creditor life insurance product to a new provider. Excluding this impact, earnings per share would have been CAD 0.65, compared with CAD 0.54 reported in the fourth quarter of 2015, an increase of 20%. Our overall financial position remained strong at year-end. Our debt to total capitalization was 0.57, less than many of our industry peers. CAD 267.5 million was drawn against our CAD 300 million committed credit facilities. With the remaining borrowing capacity and cash on hand, plus cash flows generated by operations, we possess sufficient capacity to fund the expected loan book growth through the end of the third quarter of 2017. Now I'll turn the call back to David.
Thanks, Steve. Throughout two thousand and sixteen, 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 key insights. Firstly, 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, which each focusing on 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. Second, competition within the non-prime consumer lending market is in a state of transition.
While many large participants have exited the market in recent years, new competition from non-traditional sources, such as payday lenders, online lenders, and marketplace lenders, has emerged. Third, with the non-prime market, the company has traditionally focused on relatively higher-risk consumers and offered a product with higher interest rates that was commensurate with that risk. Greater opportunities exist for a lower rate products, where the reduced yield can be offset by lower credit losses and servicing costs. Fourth, the opportunity for a secured lending product is large, with significant unsatisfied demand. This demand is likely to increase in the future as the regulations impacting mortgage applications in Canada continue to change. The reduced yield for this type of product is offset by lower credit losses and lower cost to administer.
Finally, a significant opportunity exists to provide point-of-sale financing alternatives to customers of traditional retail organizations, many of which do not have financing options for customers in the non-prime credit segment. While the opportunity for non-prime retail financing is large, with few suppliers of scale, even more significant prospects exist for companies that can provide retail financing across the entire credit spectrum that minimizes or eliminates the level of credit friction in the customer application process. Taken together, these insights have validated that our corporate strategy continues to be appropriate, with an opportunity to accelerate and refine our tactical plans in order to achieve our goals. Over the past several years, we have made significant investments in our processes, systems, and infrastructure to support long-term, sustainable growth.
Although these investments will continue, we are now well-placed to take advantage of positive market conditions and accelerate our rate of growth. To achieve this, we have identified several specific initiatives that we intend to pursue in two thousand and seventeen. First, 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. Beginning in two thousand and seventeen, and to provide greater access to a physical location to our customers, we will significantly expand our easyfinancial footprint by offering consumer lending products through our easyhome stores.
These easyhome stores are in areas that service easyfinancial's target market, having 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 begin in the second quarter and will be completed by the end of the year. Second, since its launch in two thousand and six until two thousand and sixteen, we have focused on developing our easyfinancial business across Canada, with the exception of the province of Quebec. Although we have a long and successful history of operating in Quebec through our easyhome stores, the Quebec market for non-prime lending created additional complexity for us due to a different legal and regulatory environment.
We always believed that Quebec represented a large opportunity for non-prime lending, and now that easyfinancial has been firmly established across the rest of the country, we will expand our easyfinancial footprint into Quebec. Although our product offering will differ somewhat from the product offering across the rest of Canada, our focus in Quebec will be consistent with our overall goal of being a leading full-service provider for alternative goods and financial services that improve the lives of everyday Canadians. We have received our Quebec lending permit, and we'll begin the rollout in the second quarter. Third, our mission continues to be helping our customers improve their credit risk profile and graduate them back to lower-cost prime lending. Our launch of risk-adjusted pricing in 2016 provided our best customers with access to larger dollar and lower rate products.
In two thousand and seventeen, we intend to further expand these offerings, which reduce our relative acquisition, origination, and servicing costs and tend to be of longer duration with lower charge-off rates. In addition to helping us retain our best-performing customers, these lower rate products have also attracted new customers from within the broader non-prime credit spectrum. And finally, we believe that a substantial opportunity exists to complement our current unsecured installment lending product with secured loan products that are secured by hard assets. For these new products, the interest rate charged to customers will be reduced due to the expected lower charge-off rates stemming from the collateral security pledged by the customers, thereby generating attractive returns on equity. Initially, we will explore an installment loan product that's secured by real estate, while future products may include loans secured by other hard assets, such as automobiles.
We expect to commence offering our secured loan product in the third quarter. As a result of these new initiatives, we are targeting an accelerated rate of growth. We forecast our loan book reaching CAD 475 million-CAD 500 million by the end of 2017, achieving a CAD 500 million consumer loan receivable portfolio one year earlier than originally communicated. We further expect our loan book growing to CAD 775 million-CAD 800 million by the end of 2019. Although revenue growth in 2017 and beyond will be positively impacted by the growing loan book, the yield that we will realize in our loan portfolio will decline as we introduce more loans with risk-adjusted pricing and launch our secured loan product that also offers a lower rate of interest.
We anticipate that our easyfinancial revenue yield, including revenue generated on the sale of optional auxiliary products, will decline to 60%-62% for two thousand and seventeen, and to approximately 49%-51% in two thousand and nineteen. The impact of a growing loan portfolio, somewhat offset by a lower total yield, will continue to drive strong revenue growth. Based on the factors noted above and the successful execution of the initiatives, we anticipate revenue growth of 10%-12% for two thousand and seventeen, accelerating further in the years thereafter, as we will have the full annual benefit from these initiatives. The continued growth of easyfinancial will allow us to achieve further economies of scale, including lower rates of loan losses that will help offset the reduction in total yields. As such, we expect easyfinancial to continue generating strong operating margin.
We expect easyfinancial to achieve operating margins of 35%-37% for 2017, increasing to above 40% by 2019. The growth in income associated with the targets and initiatives identified at, above will enable us to continue improving our overall financial performance. For 2017, we anticipate improving our return on equity to 18%-19% and increasing this further to more than 21% by 2019. The successful implementation of these specific initiatives and the achievement of our growth forecast is dependent upon additional financing being secured. Although these financing plans have not yet been completed, we are confident that we will continue to have access to additional debt capital to fund our growth into the future.
We continue to retain a large portion of the net income that we generate, building up a sufficient equity balance to support our assets. We also believe that the company's leverage ratio has room for expansion. As a result, we do not believe that additional equity will be required to fund our growth strategy through two thousand and nineteen. Additionally, over the past several years, we have established relationships with many alternative providers of debt capital and continue to explore funding alternatives that represent an optimal balance between interest rates, term, flexibility, and security.... So in closing, I want to thank our entire team for their dedication and tireless efforts that allowed us to meet our goals. 2016 was a record year for goeasy, and was one that included many other strategic achievements that position us for long-term success.
We have a history of setting ambitious goals, but we also have a history of delivering on our promises that have delivered a total shareholder return of over 3,000% during the past 15 years. Going forward, our history of success, coupled with our in-depth strategic review, tells us that we are on the right path with the right plan and the right people to deliver strong, sustainable growth in 2017 and beyond. So with our formal comments complete, we're now happy to open the call up for questions.
Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. The first question is from Stephen MacLeod of BMO Capital Markets. Please go ahead.
Thank you. Good morning.
Morning, Stephen.
Morning. I just wanted to just get a sense of the cadence or pace of expansion through twenty seventeen. So I guess, just in terms of, you know, loan book growth, it sounds like maybe it's tilted towards the back half of the year, but I just wanted to get a sense of loan book growth, the new stores that you're putting in, and also how you expect bad debt expense and margins to move through the year as you get to your twenty seventeen target of 35%-37%.
Sure thing. It's Jason. So, yeah, you're right in that because of the way we've staggered some of the growth initiatives, the growth will be more heavily weighted in the back half of the year. You know, you're looking at roughly, call it, 35%-40% of the growth in the first half and 60%-65% of the growth in the back half from a total receivables growth point of view. Store expansion will be a little bit similar. We'll have probably more of the openings kind of in Q3, Q4 timeframe. So of the total 20-30 we gave guidance on, probably looking at, say, five or so in the first half and the balance in the second half.
Because we're sort of staggering the rate of expansion through store openings and book growth, the loss rates and the operating margins will be fairly steady throughout the year. We don't expect any major peaks and valleys in those two major metrics.
Oh, okay. Okay, great. And then I guess in terms of the, you know, specific initiatives that you outlined, David, in terms of, you know, Quebec, the risk-adjusted lending, the opportunity for secured loan products, and then also adding loans through the easyhome footprint. I mean, you know, which of those do you expect to generate the, you know, the highest sort of penetration in terms of loan book growth, I guess?
Are you asking it by value or in terms of volume, size of receivable from each of the initiatives?
Yeah. Yeah, just trying to get a sense of which you view as the biggest opportunities.
Yeah. So, I think you've got to look at it in two time horizons. So in the initial launch of twenty seventeen, secured will be quite small in the mix of what we actually achieve in twenty seventeen because of the timing of launch. But when you look at it over the three-year time horizon, come twenty nineteen, you start to see it make one of the biggest contributions in the total mix of new initiatives. So if you think of secured as being a bigger allocation of this mix, risk-adjusted pricing will continue to grow, and we have good experience, so that will be a fairly decent slug.
Quebec is an interesting province for us because while it has a slightly different product, the opportunity with the population in Quebec has very low supply side and quite good demand side. Quebec will be quite good for us over the next three years. The one that's trickier for us to try and give you any kind of guidance on is the conversion of easyfinancial inside easyhome. That one, I think we're gonna start quite quickly in terms of rolling it in, but we have a lower expectation of high growth in year one as the staff get familiar with the product, and they try to work through the management of the leasing side, as well as the easyfinancial side.
So if you're looking out the next two, three years, I would say secured lending will take a big allocation. Then you'll have the risk-adjusted lending, then you'll have Quebec, and then you'll have the easyhome contribution for easyfinancial, if that helps.
Yeah, that's very helpful. And do you expect that secured could potentially be bigger at some point than the unsecured business?
Difficult to say because, as we said in the text, we're starting with using the homes as the hard asset to secure the lending, and we're still not quite sure about the other asset classes to get into, so depending on which direction we go with the other asset classes, that combined value could be something that gets close to the unsecured or could exceed it, but it depends if we go beyond the first asset class that we begin with, so I don't think I can give you more clarity on that until we get through at least the next 12, 18 months, and then we can give you a bit more of a clearer picture at that point.
...Thank you. And then do you expect to have to invest in ad spend in order to, you know, pursue these new growth channels? And does that build into your guidance for margins?
Yeah. So, there's really two areas to think about where most of the investment will be made. You've got the CapEx investment because there's a whole bunch of IT investment that needs to be done to allow these things to be accelerated. So whether it's your CRM platform, whether it is the ability to be a better digital provider for the different products and consumers. And a lot of it is to engineer the ability to make these products work, quite frankly. So there's a CapEx spend increase that is gonna be, call it, CAD 4 million or so year-on-year. That is the investment to get these initiatives all to work. So that's kind of part one.
Part two is then the marketing advertising investment, which we are going to increase in 2017 to give the new products the ability to grow and penetrate further. So for example, digital spend in the mix for 2017, so our online spend in particular, will be 50%, roughly, of our total spend of marketing dollars. So that will see quite a big increase. And we know that the market wants a faster delivery of getting access to loans. They want a better experience online, and all of that costs more dollars to get more customers through the door. So between online and a new TV production, a new TV media spend, all of those things will help launch these products in 2017.
And then finally, there will be additional resource or headcount to support these new initiatives, to make sure that they are well planned, well thought through, and then executed for delivery.
Oh, okay. Okay, that's great. And just, sorry, just to clarify, did you say CAD 4 million incremental in 2017 on CapEx?
Yeah. I think if you look at it, as a comparison to 2016, I haven't got the number in front of me, but from top of my head, it's roughly in the order, the magnitude of, CAD 4-CAD 5 million on a full year spend, year over year.
Oh, okay. Okay.
On a CapEx basis.
On CapEx, right. Okay. And in terms of, increased headcount, do you expect to see an increase to your corporate costs?
There'll be an ongoing increase to corporate costs just because of the pace of growth. It will scale quite well, so the leverage ratio will be okay, but if you're looking at total headcount to the office to support all these new initiatives, we'll be adding probably somewhere in the order of 15 to 20 heads over the next 12 months. Not all at once, but phased in over the 12 months to support the areas like risk, like IT, like marketing and digital, so it's gonna be lower than the rate of growth for the business, but it will be an investment to keep the new initiatives being built.
Okay. Okay, that's great. Thank you. I'll go back in line.
You're welcome.
Thank you. The following question is from Jeff Fenwick of Cormark Securities. Please go ahead.
Hi, good morning, everybody. Just wanted to follow up on the aspect of the growth plan here that's going back into the easyhome stores. I know you just talked about the decision to do them. I mean, the focus had been on removing a lot of those locations and putting them into standalone. And is the offer gonna be substantially the same or the structure of that and within the store as it was in the past? And what was the thinking behind that?
Yeah, sure, Jeff, it's Jason. Yeah, so obviously, our kiosk model has been proven to be successful, as you know, so we clearly know that in those locations, there is traffic coming in those stores that is attractive to this product and is interested in this product, and so as we look at the leasing business and recognize that in that particular industry, there isn't a tremendous amount of growth opportunity from the product categories we offer today. This is really an opportunity to give that staff the ability to offer a product that we do know there is growth in consumer demand for, so they can grow their business and grow their portfolio.
Again, as David mentioned earlier, the staff are all very well trained in the exact same skills and competencies that are necessary to offer an easyfinancial product from sales to collections. So really the idea is we've just tried to simplify some of the operational procedures, centralize some of those procedures, so it takes less burden on that staff complement. But otherwise, giving them, yes, the identical same unsecured product that we would have used typically at easyfinancial.
Just one thing I'd add, Jeff. In the context of success or failure, the kiosk never really failed for us, being in an easyhome store. We chose to move the majority of them into standalone stores just because the economics were factored two times when we moved outside the kiosk. So kiosk was always profitable, but they would reach a peak of a CAD 1 million loan book portfolio, and we knew that moving them into a monoline standalone would reach an average of CAD 2 million plus. So that was the strategy, and it continues to be the strategy. That still leaves a smaller book that can be built inside easyhome with the easyhome team.
Won't be the same size as a kiosk because it won't be a dedicated transaction, but it still gives us an opportunity to further increase our reach and our ability to give loans.
Okay. And I'm not really familiar with the geographic distribution of the stores. Are there just any risk there in terms of cannibalizing the standalone stores that you've launched in the past?
... I think there's always gonna be the risk of cannibalization. But the amount is quite small, and like all things, when you've got a commoditized product, it will come down to local execution and the skill of the employee to build that relationship. So, we haven't built a scenario that worries too much, because we don't see a large scale cannibalization of the transaction. And when I look at the cannibalization potential of the leasing business and easyfinancial, we still think the customers will choose to have two separate transactions as opposed to use the money that they borrow to pay out the lease. There will be some, but it'll be quite minor. So the cannibalization there, we think, will be quite small.
I guess, you know, I look at that, and I look at the easyhome business itself as sort of been slowly contracting over time. Are there opportunities here for eventually just replacing those stores and have the easyfinancial banner, you know, pop out on the front of the store, and it's just a way of, I guess, of efficiently transitioning that business?
Well, look, there's always possibilities, and if you look at the industry, on a macro basis, there is a structural decline, and the public companies that report have had a bad go of it in the last twelve, eighteen months. So by comparison, we've actually done very well against the industry norms. Our same-store sales on an annualized basis were down just over 1%, just under 2%, rather, for the full year. So there is a small decline that is taking place. We saw a very good fourth quarter in terms of portfolio growth. It was better than the prior year, so that was. Those were good signals. But ultimately, if we do nothing, it will be a slow drip, where the portfolio declines and the profitability declines.
By introducing and widening the product choice to having cash as an available product, we believe we can reverse that trend within the four walls, and we can start to see it go back to growing profitability as opposed to either holding or declining it. Whether it ends up three years, four years from now, showing that we should dramatically change the business to one that's primarily lending rather than leasing, then I can't tell you that until we see how we perform with the new product. My sense is it won't, because we are the primary leader in doing rent-to-own and leasing in Canada, and there's little competitive pressure on us from other companies.
Okay, that's great. And maybe just a comment back on competition, and I recognize the comments you gave earlier around it being still very fragmented. But you did have, you know, I guess CitiFinancial is always considered as your, as a peer company or a big competitor in the market there at least, and you've had a change in ownership and backing behind that business. And do you have any sense of their intentions in the marketplace? And you're seeing anything at this point, recognizing it's still pretty early?
No, I mean, the short answer is no. We have not heard of the transaction being closed. We've not heard anything about what it may or may not look like going forward. So what we are planning is what we can control and what we can influence. And we believe that we can be quite disruptive in introducing new products, new ways to do business that will allow us to path our own journey and do well while they go through their change. But I can't tell you what that change looks like for them. I can only tell you what the change looks like for us.
Okay. And maybe just chat a bit about the finance plan here. You gave some time to that in your comments earlier. Given the state of flux the business is in and the plans to launch new products with different sort of credit profiles, does that make it easier or harder or just more complex, I guess, for determining what the right solution is going to be for you? And I guess the follow-on to that is there gonna be maybe some opportunity here, if the overall risk profile of that book looks like it's gonna be less for you to perhaps get a lower cost of funding as you go forward?
Yeah, I think it's both gonna be more complex, but easier. You know, if I take you through a bit of history, you know, we put in place financing for easyfinancial a number of years ago. Every time we've needed additional capital, we've accessed the markets, increased the size of our borrowings, reduced the rate, increased the flexibility. We expect that trend to continue. Over the last twelve months, through the acquisition process that we participated in, we were able to raise significant capital to fund an acquisition that was much larger than we were. Through that process, we were also introduced to a whole host of providers of capital, and we've maintained those relationships.
So as we've gone through this strategic planning process, we've been in contact, and been in discussions with a host of different lenders to understand what might be possible. We haven't been able to firm anything up yet because we needed a strategic plan in place, as well as the forecast in place, to understand what the needs were, what the products were, and what the end goal was gonna look like. Now that we've completed that, we're completing the engagement with those providers to come up with a capital plan that meets the needs of the business over the upcoming several years. As we move into lower-risk products, that has the opportunity to help us improve our rate, help us improve our access, and most importantly, helps us improve our leverage ratios.
Right now, relative to most of the participants in our industry, we're under-levered. We're heavily equity financed, and relatively light debt-financed. So we see an opportunity to improve upon that, and finance all of the growth through additional debt capacity.
Okay, thanks for your comments. Appreciate it.
Thank you. Once again, please press star one at this time if you have a question. The following question is from Michael Overvelde of Raymond James. Please go ahead.
All right, thank you. Hello, everyone. Just maybe a follow-up on Jeff's question on the rates. To the extent that you may have additional sources of funding out there that you've identified, now that you've got the strategy in place, is it possible that you might be able to arrange, call it a lower rate, interest rate, in financing ahead of the portfolio mix changing, considering that the portfolio mix won't really be changing all that materially through twenty seventeen?
We're gonna be looking to go out and source that capital. Obviously, we're always looking to decrease the rate, but at the same time, we're looking to increase the leverage ratio because that's probably a bigger driver of creating shareholder value, so it will continue to be a balance between those two elements.
Maybe just to, I guess, a follow on considering all the ways that this might change some of your financial trends going forward. One of the targets, I guess, that you haven't updated necessarily, and I don't blame you, I guess, because there's a lot of uncertainty, is the net charge-off loan loss type targets as you look forward. Clearly, those should come down as the mix changes. Just kind of want to get a sense for order of magnitude. If by 2019, your revenue yield, call it on easyfinancial, is going to be 10%-11% lower as a percentage of revenues, you know, how much lower would you anticipate your credit costs to be over the same time frame?
We've intentionally not communicated that. We're working out what the product mix will be because it will shift. We know that the yield decline will be offset by reductions in charge-off, as well as significant reductions in a per unit cost to administer our loans. You know, it costs us the same amount to administer a lower dollar loan as a larger dollar loan. So as we're increasing the size of our loans, we get efficiencies there. That helps us to maintain the margin that we forecasted, but we haven't got into providing details on what the charge-off rates are gonna be in the future.
All right, maybe just two other quick clarification questions on a couple of things that have been discussed. One was on ad spend. I know in the past you've had targets. I don't know if it's 3.8-4% of revenues, and you've indicated maybe a higher level of spend. Are you able to kind of quantify as a percentage of revenues, you know, what you might be targeting for 2017?
Yeah, 4.9%.
4.9. Okay. And just a clarification on the comment you made with respect to corporate costs, because clearly those are going to be rising. You mentioned they'd be rising less than revenue growth. Would we be talking sort of plus minus 5% a year growth from the CAD 30 million level in 2016?
Given the investments we've got to make in systems, in people and advertising, as well, to support the growth as well as the new products, the corporate cost rate is going to be greater than that. It will be lower than the rate of growth, but we're probably somewhere in the area of 6%-8%.
6%-8%. All right. Thanks, guys. Appreciate it.
Thank you. The following question is from Doug Cooper of Beacon Securities. Please go ahead.
Hi, good morning, guys. I just want to circle back on the secured product. You said initially on real estate, any idea, you know, how would this work in terms of loan-to-value? What do you anticipate the yield would be on that kind of product?
Yeah, it's Jason. So, generally speaking for that type of product, for the consumer segment that we're in, you're looking at a yield somewhere in on the low end, kind of mid to high teens, going into kind of the mid-twenties. That's generally the range that you'd find that type of product priced at for the consumer who has equity in the home, but doesn't necessarily have the credit to go out and get traditional prime secured financing, or the prime lender just isn't willing to go above a certain loan-to-value ratio. So you're really dealing with those two types of consumers, and that's kind of the rate range you would expect.
Right, so do we think of this as like second or third mortgages kind of thing on the property?
Yeah. Ultimately, the lien itself is a collateral mortgage. So, it functions like a mortgage in terms of its lien characteristics, but it's treated more like an installment loan. So a fixed payment over a longer amortization. It's really for someone to use as a second or maybe in rare cases, a third. And it's really just to go in and be able to get quick and easy access to a small amount of capital that they would access against their equity for, you know, personal purchases or renovations into the home are probably the most common.
Right, and I guess, how often would you review the value of that asset? You know, considering that, I don't know, BMO just came out the other day and said that we're in a housing bubble.
Yeah. So I mean, every time someone is going to attempt to access credit, you would redo an evaluation of the value of the property, reassess all of their income and liabilities, and therefore reestablish both their credit rating, their affordability, and the value of the asset that you're securing against.
Okay. And finally, just typically, the term on these would be how long?
Amortizations on these are generally longer, so you're probably looking around ten years. You know, you'll offer terms that'll be kind of six to eight, but your typical customer will take a term closer to ten years because of the size of the loan.
Okay. Okay, and the size of the loan, you know, is 10-15 thousand where you're at now on the unsecured product. But what do you think this, what do you imagine this would be?
...This will be up to, we'll initially start with up to CAD 25,000. So your average is probably in around the 20 range. So it's again, really for that customer who, you know, the CAD 10,000 unsecured loan is not, not enough proceeds to do what they need to. And so because they own a home, they can, they can access a, a larger, larger loan.
Okay. Just shifting gears to go back for a second. What are the actual differences from a regulatory legal perspective? Is it rates? Is that the biggest difference?
Yeah, so ultimately, there isn't a regulated rate difference in Quebec. The Criminal Code regulation still applies federally, inclusive within Quebec, but they do have a financial services regulatory regime that requires that you apply for and obtain a lending permit, and through that lending permit application process, there's a bit more scrutiny placed on your total cost of credit, in this case, including your optional products. In the province of Quebec, when we disclose the credit rate or the cost of borrowing rate on the contract with the borrower, it has to include those optional products.
So as a result, in order to both be competitive and to be regulatory compliant, we'll end up with a reduced yield from a reduction in the interest rate and a reduction in the premiums charged on those optional products.
Right. So if you're give or take, what's called 60% yield on your unsecured product today, what do you envision Quebec would be, just as a for instance?
It's gonna be probably somewhere in the forty to forty-five range.
Okay. And is it primarily there, the payday loan guys who are there? I mean, is Citi there? Like, who's there in terms of... You talked about lower competition.
Yeah. So Citi's there today. They have 40 to 50 locations there, so it represents a fairly sizable share of their footprint. But they're really the primary dominant player. There isn't payday loan regulation that's been allowed for in the province. So outside of them, for non-bank, non-prime lending, you're only other major option there is gonna be credit card options, like your, you know, non-traditional credit cards, like, say, Capital One, et cetera. So, so there's clearly gonna be, we think, you know, a fair amount of demand that today there isn't supply for.
Right. And you're targeting 260 stores by 2019. You're at 208 today. How many of those 52 stores would be earmarked to Quebec?
So we're planning to do, of the 20-30 we gave guidance on this year, we'll do 10 this year. And we'll probably do sort of 10 each year. And we think the capacity for stores in Quebec is not that far off what Citi has today, so call it 40 locations or so.
Okay. And finally, I'm just looking at the operating margin in easyfinancial just reported, I think it was 34.9%. And then you talked about CAD 1 million, I guess. I don't know if you would call it a cost or from the insurance changeover. Is that captured in the lower margin? Like, I'm just trying to say, excluding that, you talked about excluding those CAD 0.05. I mean, would that change your operating margin by my math up to 36.7%, excluding that million dollars? Is that fair?
Yeah. The impact of the shift in insurance provider is basically reflected in lower revenue, which manifests itself in a lower operating margin in the quarter as well.
Yeah, the margin number we stated has not adjusted for that reduction.
Right. And can you just sort of elaborate on why you changed your providers and what that CAD 1 million actually is?
So we changed providers really to provide us with a lower rate of commission opportunity when our portfolio gets bigger. As well, this new provider, we believe, offers a greater level of customer service, so a better experience for our customers. As part of that transition process, the old contract as it was winding down, called for a lower commission rate at the tail of that contract.
Mm-hmm.
So that's why the reduction in Q4.
Okay. Okay, great, guys. Thanks very much.
Thank you. The following question is from Stephen MacLeod with BMO Capital Markets. Please go ahead.
Thank you. I just had one follow-up question as you sort of go out from twenty seventeen, twenty eighteen, twenty nineteen, and yields come down, but, you know, they're lower cost loans, fewer charge-offs. Like, how does bad debt expense move if you go out through, you know, over the next, call it, three years, twenty seventeen, twenty eighteen, twenty nineteen?
Yeah. It is going to reduce. We haven't disclosed what our expectations are for charge-off rates in those later years.
Mm-hmm. Okay. Okay, that's great. Thank you.
Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Ingram.
Once again, I want to thank everyone for their participation in this call. We look forward to further updates and enjoying what we think will be a very challenging in terms of workload, but a very productive and a strong year for 2017. Again, thanks for your participation in our organization. Thank you.
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