goeasy Ltd
TSX:GSY
goeasy Ltd
TSX:GSY
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Good day, ladies and gentlemen, and thank you for standing by. Welcome to goeasy Ltd.’s First Quarter 2018 Financial Results. [Operator Instructions] 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 31. 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. Steven Ingram (sic) [ David Ingram ] will then provide some insights into our strategic direction and outlook before we open the lines for question 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 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 to use management's comments and responses to questions and any coverage. However, we would ask that they not quote callers unless that individual has granted their consent.Today's discussion may contain forward-looking statements. I'm not going to read the full statement, but I will direct you to the caution regarding forward-looking statements included in our MD&A.Now I'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 continue to grow revenue, reaching almost $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 $202 million, almost doubling the originations in the first quarter of 2017. 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 counts, 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 Québec.These products 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 $75 million against loan book growth of $16 million in the last 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 $602 million by the end of the quarter, up $215 million or 56% over the prior year. As we have previously communicated, the acceleration of our loan book growth would be accompanied by decline in revenue 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 $16 million in the first quarter of 2017 and we recorded a provision of $1 million. In the current quarter, the loan book grew by $75 million and we recorded a provision of $7 million, related to the higher level of growth and the adoption of IFRS 9. This translates to approximately $0.31 per share.Our reported diluted earnings per share in the quarter was $0.77. This compares to a diluted earnings per share of $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 2017 would've been reduced to $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 to review the operating results, I thought it would be helpful to fully explain this impact. As required, we adopted IFRS 9 on January 1, 2018. Under the previous accounting standard, a collective allowance for loan loss was recorded on those loans where a loss event had occurred but had not been reported as of 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's 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 days 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 noncash 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 determine that the rate of inflation, the rate of unemployment, the 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 for 5 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 1, 2018, with an opening adjustment to retained earnings. The provision under the previous accounting standard as at December 31, 2017, was $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 $49.1 million. As such, we reduced the net carrying value of our loan book by $17.4 million, with a corresponding after-tax reduction to retained earnings of $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 the accounting standards on the comparative financial results. In our MD&A for the quarter, we've 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 $10.3 million or $0.73 per share. On the modified basis, that I just explained, net income would have been reduced to $9 million or $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-FRI -- non-IFRS financial measure. Pretax pre-provision income or PTPP income. PP -- 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 $28.7 million in the first quarter of 2017 to $39.6 million in the current quarter, an increase of $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 $700 million to $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 3-year growth targets when we report in Q2.Our focus in 2018 will be on driving growth and capturing the largest share of $165 billion market for nonprime 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 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 the 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 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 nonprime 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 our 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 $165 billion nonprime consumer credit market and to deliver record levels of earnings in 2018 and beyond.Now before I open it 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, with the right culture and the organizational structure to support the next phase of our growth. The board and I are excited about Jason Mullins' 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, am 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 9 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 operates 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.
[Operator Instructions] Our first question is from Gary Ho with DesJardins Capital.
Maybe just first question, just on the forward-looking indicators. Is it possible to give us some earning sensitivities to a change in each of these variables? So obviously, these indicators fluctuate month-to-month, 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 second part of this is, how far out do look in terms of these forecasts?
I'm going to start and I'm going to pass it over to Jason Appel. We've communicated what the forward-looking indicators are. At this time, it's not appropriate -- we're not able to provide the exact correlation and the impacts on 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 going to 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 know, obviously, and I know you're aware of this, but obviously, the allowance that we calculate 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 5 years, as that is where we have the most robust amount of experience. And based on that, we looked at a serious of macroeconomic indicators, of which Steve has mentioned 3, but we actually looked at a much larger set and ultimately selected the 3 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 5-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. And the reason, once again, of why that is such is that 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 analysis 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 you 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 it'd be helpful if you can, kind of, give us some context. When you back tested this model, like, what would that range have looked like through the cycle?
Well, it's difficult for us to say through the cycle because our period of analysis was only the last 5 years. And 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 FLI, but was also due to the underlying calculations. Our old methodology, we were only looking at credit losses for the subsequent 5 months. Under IFRS 9, it's 12 months for performing loans and greater than that for nonperforming loans. So the change in methodology was also responsible for the change in rates throughout 2017. Focusing on just the FLIs, though, 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 forecast -- where the inflation is today. So the movement in those FLIs is what drive the change in the provision, not the absolute forward-looking rate.
Okay. If you look at kind of 1 year out, is that the -- where the [indiscernible]?
Yes, to do it, we've taken a numerical approach, unlike a lot of entities that are using their own forecasts and injecting management's assumptions and interpretations, we wanted to remove discretion. So we are simply, for each of those 5 FLIs, taking the aggregate -- the average forecast of 5 large Canadian banks. And yes, we're looking at the forecast 12 months out.
Okay, that's helpful. And maybe just moving on my last question, perhaps, for David. Just good loan book growth this quarter. I guess the flip side is the fast -- you also are using the cash faster. I think you have $110 million in your credit facility and $15 million of cash on hand. Can you update us on your capital use and financing plans looking out, kind of, 12 to 18 months from now?
Gary, 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, the -- 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 on our cost of capital. We're looking -- we're always looking to get the capital planning, the cash needs of the business, our ability to secure that. And we're confident using either of those 2 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. So 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. So I think the timing was great for us. And 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.
Gary, it's Jason Mullins. Just wanted to bolt-on the prior point on the provision of the allowance. So just to kind of close up on the points that Jason and Steve raised. Although the FLIs 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 12-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 most dramatic thing that influences the long-term losses and therefore the long-term allowance. So just wanted to make sure that that's top of mind as you think about how to model this long term in the future.
And our next question is from Stephen MacLeod with BMO Capital Markets.
I just wanted to follow-up on just the previous line of questioning around the provision rate. Jason, you just made a comment that over the long run, the portfolio performance is the biggest indicator of what that number will look like. When you think about the elevation of the rate under IFRS 9, 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 you 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 -- the current rate is 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, that's helpful. Then as we think about the net charge-offs, the number of 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 middle -- mid-part of that -- the mid-part of that 12% to 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 had 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, that's helpful. And then maybe just finally, as you think about -- David, you mentioned in your prepared, just an expectation to -- for potentially revised targets being released with Q2. When you think about how you expect the loan book to evolve over the next couple years, can you just talk a little bit about some of the puts and takes that might move those numbers higher or keep you -- keep them within the same range?
Yes, I mean, if you look at the trend, 2016, I think we grew $75 million. 2017, $150 million. And in the first quarter, $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 tickets loans for these better credit quality customers, which means, also, 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 $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 will give you a bit more clarity at the Q2 update. The other piece is what Québec and what the maturation of our existing stores would do. So if you remember back 2 or 3 years ago, we guided that mature store looks like a $2 million size book on average. We can now see a $2.2 million, $2.3 million average book and that's coming at a time that's before the 5-year cycle. So we have now about 4, 5 branches that are hitting $6 million in loan book size, 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 5, year 6. So those will be, 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.
Our next question is from Jeff Fenwick with Cormark Securities.
Just wanted to start off just with the follow-up on a 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 played there. So anything we should be think about on that -- in that regard?
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 resetting of those covenants to reflect the new accounting basis. As we move forward, obviously, we'd 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 can go back to discussing the growth that we saw in the quarter. Sort of, one quarter ended your 3-year plan and already thinking about upsizing it there. So could you just describe the -- you gave us a little bit of color on 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?
Jeff, it's Jason Mullins. I think as we look and dissect the growth, there isn't really one clear thing that is driving the lion 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 resulted in improvement and the retention of your portfolio. And therefore as you originate new dollars, you don't have as much run-off 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 driving, 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 was 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 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?
Yes, 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 and a lower rate as a result of being a homeowner and therefore looking at easyfinancial differently than you have in the past. Where in the past we were looked at as just one product and you will just fill one short-term unsecured credit need, now the customer can see a 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 weigh it 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.
That's helpful. And maybe just if we can move on to expenses here as well. I mean, the expense level is actually a bit better than I'd been modeling for the quarter. How should we be thinking about Q1 versus the expense for the rest of the year?
Yes, I think 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.
And our next question is from Brenna Phelan with Raymond James.
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 and the allowance in the percentage of growth loans?
It'll...
Or that you can't even -- okay.
I'm going to answer it in 2 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 over the course of several quarters or a couple fiscal years, yes, it will continue to trend down in lockstep with the decline in the charge-off rates. 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's going to 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?
Well, all we're saying, it still -- it could be up to a 10% move over the period of analysis that we've given. 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's it is, but as an example, the introduction of FLIs could move that up or down 10%.
Okay. And not the relative move that we saw through 2017?
Yes.
Okay.
Unfortunately, and I know everybody's struggling with it, ourselves included, the FLIs are introducing significant volatility. And it's very difficult to forecast, because forecast 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 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 will 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 allowance current? 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. So the underlying 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's -- can you tell us which one your most important? Which one is the most sensitive 2 out of 3 that you gave?
No, we haven't given that level of disclosure right now. Because there's interrelationship between the 3, 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, 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's that going to come into intangibles and the amortization thereof?
So yes, 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.
And what should we be expecting order of magnitude in Q2 for spend?
It's not that simple because we've done a lot of spending on different IT initiatives. Sometimes it's digital transformation, sometimes its 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 million. Of that, roughly half of it is probably IT-type spending. And so it's relatively up and down throughout -- I mean, relatively consistent throughout the year.
Yes. Of course, that's aided by -- that will 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.
So let me -- I got some updated numbers. It's about -- it's not $17 million, it's about $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, that allows us to simply drive core 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 try to find a way to then replace the spend differently, it's rather a way to drive the 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 they give us the flexibility to hopefully drive a better conversion from our web traffic. That's the ultimate goal.
And Brenna, just to finish out the answers to questions around spend. Advertising spend at this point looks to be around $18.5 million this year versus $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 co-mingled. So you've got the CapEx spend, which is half of the 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 $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 per dollar value of loans?
Absolutely. So as we have said in the last 2 years, we're looking to increase the margin and return of equity as we continue to scale the business. And if you put IFRS aside, that's what you'll see the core business doing.
Do you -- have you ever disclosed an acquisition cost for customer? Do you estimate that?
No. There's so many different ways to calculate it and so many different channels, but we just don't do that.
Okay. And then switching to the revenue yield in easyfinancial. So if I take out the interest income left with the, sort of, fee-based yield, 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 the function of lower take up as you're moving into secure loans and risk-adjusted loans and maybe even Québec?
Yes, 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's 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 2 big drivers.
Yes, if you look at a comparative basis, remember in the first half of last year, our commission earned on the sale of ancillary products benefited from a switch -- one-time switch in providers. So to look -- you look towards the back half of the year for 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 as we said the last quarter, nothing new that we can share about those and their impact to our business.
And our next question is from the line of Doug Cooper with Beacon Securities.
Just want to focus on the geography, for a second. Ontario grew $36 million sequentially, Québec was up 7%, BC up 10% and Alberta up 9%. Why -- maybe you can just -- why the over performance in Ontario, I guess, particularly, versus Québec? Is it just a question of setting up the branches in Québec first?
So 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 2 with the introduction of where we put new locations, and those locations have performed really, really well for. So it's also generally got less competition from our major direct competitor than what we've seen, so that's really the only thing that would drive over performance in Ontario that I can think of. The rest of the business, 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 over-index an average loan book. So not only is it the addition of more stores, but it's the over performance of those stores because of the size of the audience.
Okay. And just in Québec, what is the -- what's the store count in Québec stand right now?
I think we're at 7 or 8 locations now.
And sort of 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 next, kind of, 3 to 4 years. So call it 10 to 15 a year in that market, fairly linear.
Okay. And I think you touched on it maybe just a little bit about the acceleration of the loan book, David, which you referred to earlier in the call. What does it say about the competition? You can maybe just -- obviously continue to -- you're gaining share? Or is this just uncovering new pockets of demand that haven't been uncovered at all before?
So I think it would be the last point that you focused on, which is, we have said that the market is quite wide and open for business. And there was only really a size of competitive set that was back in 2009 and '10 with HSBC, Wells 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% to 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 out 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 books 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 underpenetrated with options for customers to go to. So there is really only 2 of us here operating in Canada that can offer a full suite of product for the installment lending. And if you entered the U.S., you might find 100. So part of it is 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.
And my final, just comment question -- just on the leasing side, EBITDA looks like it was about $16 million, which is I think the capital expenditures in that segment was $7.5 million or so. The corporate overhead for the entire company is sort of $9.5 million. So EBITDA almost covers the entire corporate overhead for the company, inclusive of its own capital requirements. How long -- just -- the performance in that segment seemed to be much better than it was in Q4? Anything in particular going there? How -- is it a steady state now? You think those margins are sustainable at, sort of, 15.5%, 16%?
Yes, 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, or the continuing decline in revenue associated with the leasing portfolio, with that group of stores and that business unit now issuing loans. So I think it's a look -- 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.
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.
And ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.