Executives: David Ingram - President, Chief Executive Officer and Director David Yeilding - Senior Vice President of Finance Jason Appel - Chief Risk Officer and Senior Vice President of Risk and Analytics Jason Mullins - Executive Vice President and Chief Operating Officer Steven Goertz - Executive Vice President and Chief Financial Officer
Analysts: Jeff Fenwick - Cormark Securities Inc. Stephen MacLeod - BMO Capital

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Operator: Good morning, ladies and gentlemen, and welcome to the goeasy Limited 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Mr. David yielding, Senior Vice President of Finance.

David Yeilding: Thank you, operator. Good morning, everyone. Thank you for joining us to discuss goeasy's results for the first quarter ended March 31, 2017.

The news release which was issued yesterday, after the close of market, is available on the Marketwire and on our website. Today, David Ingram, goeasy's President and CEO, will talk about the highlights of the first quarter. Following his remarks, Steve Goertz, the Company's CFO, will discuss goeasy's financial results in greater detail. David Ingram will then provide some insights into our strategic initiatives and outlook before we open the line for questions from investors. Jason Mullins, the Company's Chief Operating Officer; and Jason Appel, the Company's Chief Risk Officer, are also the call.

Before we begin, I'll 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 has 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 coverage. However, we would ask they do not quote callers unless that individual has granted their content.

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.

David Ingram: Good morning and thank you for participating on our call today. We had a strong start to 2017, with both revenue and earnings expansion.

Overall, revenue increased by 15% reaching $94.5 million for the quarter. The Company's revenue growth was again driven by easyfinancial as it grew its loan book to $387 million by the end of the quarter, a year-over-year increase of 27% and on track to reach our stated goal of $475 million to $500 million by the end of the year. The growth in revenue contributed to increased earnings. Diluted earnings per share for the quarter increased by 35.2% to $0.73 from $0.54 on a normalized basis in the first quarter of 2016. Before Steve reviews the detailed financial performance for the quarter, I want to touch on some of the highlights from the quarter.

Originations in the quarter of $106 million continued to be strong, increasing 30% against the first quarter of 2016. The growth in originations was aided in part by the expansion of our risk-adjusted interest rate loans. We launched risk-adjusted pricing in 2016, where we provide our best and most creditworthy customers with access to larger dollar loans with reduced interest rates. This product extension was consistent with our mission of helping our customers improve their credit profile and graduate back to lower-cost prime lending. The customer benefits from the reduced rate of interest and we benefit from the low charge-off rates and greater lifetime values.

While we continue to require a stronger credit profile for these customers obtaining a lower interest rate loan, we expanded the availability of this product from 10% of total originations in 2016 to 20% in the current quarter. Consumer demand has been strong and the early results suggest an improvement in charge-off rates and an increase in the lifetime value of these customers. In addition to the strong growth in originations during the first quarter of 2017, we also achieved a significant reduction in our annualized net charge-off rate to 13.9%. While this rate did benefit from a seasonal reduction in the first quarter, it was also reduced by several measures that we have put in place over the past few quarters. First, as I indicated, the introduction and subsequent expansion of risk-adjusted interest rate loans to larger, more creditworthy population has reduced the risk profile of our portfolio.

Second, bankruptcies and consumer proposals were reduced on a relative basis during the first quarter of 2017, aided in part, by our deployment of a new internally developed bankruptcy model. And finally, our efforts to improve our collection practices through the use of advanced analytical models and enhanced collection tools topped in high-risk customer populations within the portfolio began to positively impact our loss rates. We continue to expect our net charge-off rates throughout 2017 will remain in our previously guided range of 14% to 16%. The increased growth in scale, strong yield and lower charge-off rates allowed the easyfinancial business to deliver a record operating margin of 41% in the quarter. Now looking to easyhome.

Same-store sales were down 1.7%, due largely to the portfolio decline experienced in 2016. Generally, the changes in the size of the leasing portfolio are seasonal and the portfolio typically declines in the first quarter of the year. While the leasing portfolio did decline in the current quarter, the amount of this seasonal decline was the lowest we have seen since the first quarter of 2008. As a result, easyhome's operating margin remains solid at 15% in the quarter and in line with our expectations. Our goal remains to maximize the profitability of this mature business, which will likely see a modest up steady structural decline.

Ultimately, we were pleased with our financial results for the quarter. We achieved improvements in all of our key financial statement metrics, including a reduced net charge-off rate during the quarter. Now I'll turn the call over to Steve, to review our financial results for the quarter in far greater detail.

Steven Goertz: Thank you, David. The gross consumer loans receivable portfolio grew by $16.5 million in the quarter, driven by our strong originations, which increased to $106 million from $82 million in the first quarter of 2016.

The growth of easyfinancial contributed to improved financial results for the quarter. Total revenue was $94.7 million, an increase of $12.4 million or 15% compared with $82.3 million in the first quarter of 2016. Same-store sales growth was 17.9%. Both revenue and operating income for the quarter were increased by $1.5 million due to the transition of our creditor life insurance product to a new provider. Offsetting the $1 million reduction in revenue and operating income due to this transition reported for the fourth quarter of 2016.

Easyfinancial's operating expenses before depreciation and amortization were $33.8 million for the first quarter of 2017, an increase of $6 million or 21.7% from the first quarter of 2016. The increase was driven primarily by the additional $1.2 million in advertising and marketing expense to support the growth in originations, higher operating cost of the maturing branch network, incremental costs to develop and launch new products and expand distribution in 2017 and increased bad debt expense due to the large portfolio. Easyfinancial's bad debt expense increased to $14.1 million for the first quarter of 2017, up $1.7 million or 14%. This rate of increase was below the 27% rate of growth for the loan book. Net charge-offs as a percentage of the average gross consumer loans receivable on an annualized basis were 13.9% in the quarter, down from 15.2% reported in the first quarter of 2016 and for the reasons that David provided.

Corporate expenses before depreciation and amortization and transaction and advisory costs were $9.1 million for the first quarter of 2017 compared to $6.7 million in the first quarter of 2016, an increase of $2.4 million. The increase was driven by three key items. First, while the Company has largely exited the U.S. market, it continues to generate fees and have certain receivables from its remaining U.S. franchisees and business partners.

Given the difficult market conditions in the U.S, the Company recorded a $800,000 provision against these receivables. Second, corporate expenses for the first quarter of the prior year included an $800,000 gain on the sale of stores to a franchisee. No such sales took place in the first quarter of 2017. Finally, corporate expenses for the first quarter of 2017 increased by $800,000 related to higher salary and administrative costs to support the larger business and the strategic initiatives designed to drive additional growth in future periods. Operating margin was 21.6% for the first quarter of 2017, up from 18.5% reported in the first quarter of 2016 on a normalized basis.

Operating income in the comparable period of 2016 was negatively impacted by a $500,000 transaction advisory cost, which were nonrecurring and unusual in nature. The improvement in operating margin was driven by the higher operating margin in the easyfinancial business and a large percentage of earnings generated by that business. The improved operating income translated into higher net income and earnings per share for the quarter. Net income for the quarter was $10.3 million and diluted earnings per share increased to $0.73 in the quarter compared to normalized net income in the first quarter of 2016 of $7.6 million and normalized diluted earnings per share of $0.54. On this normalized basis, both net income and earnings per share increased by 35% in the quarter.

As I previously indicated, net income in the first quarter of 2017 was positively impacted by $0.08 due to the transition to a new provider of the company's creditor life insurance product and negatively impacted by $0.06 due to the aforementioned provision against our U.S. provision. Our overall financial position remains strong at the end of the quarter. Our debt to total capitalization was 0.58, less than many of our industry peers. $280 million was drawn against our $300 million committed credit facility.

As at March 31, 2017, the company had $44.2 million in cash and committed facilities available to support future growth. Based on our remaining borrowing capacity, cash on hand and the cash flows generated by operations, we have adequate capital to continue executing our growth plan through the third quarter this year. Additional financing will be required to meet our long-term growth objectives. We have historically retained much of our earnings to support our asset base. We also believe that the Company's leverage ratio is low compared to most industry players and has room for expansion.

As such, we do not intend to raise additional equity to fund our growth strategy. We have established relationships with many providers of debt financing and continue to explore funding alternatives that represent an optimal balance between interest rates, term, flexibility and security. We are confident that we will be able to access the necessary capital to continue executing on our plan. Finally, given recent market events, I think it's important to highlight that goeasy does not fund any of its consumer loans receivable or its operations from consumer deposits. We currently have a long-term funding structure that was originally put in place in 2014 and has been expanded and enhanced on several occasions since that time.

Our current credit facilities consist of a $280 million term-loan provided by a syndicate of U.S. based debt funds and a $20 million revolving operating facility provided by a large Canadian bank. Details of the terms of these facilities are disclosed in our financial filings. Now I'll turn the call back to David.

David Ingram: Thanks, Steve.

As we discussed last quarter throughout 2016, we completed an in-depth strategic review gaining a greater understanding of available opportunities within the nonprime market for consumer lending in Canada. This review confirmed that our corporate strategy continues to be appropriate and identified several opportunities for our future growth. The market for non-prime lending in Canada, excluding mortgages is approximately $165 billion. The supply, however, is fragmented by both product and credit segments. It is satisfied by a large number of diverse lenders, each focusing on a relatively narrow range of products.

Opportunities for growth exist for those lenders who're able to effectively offer multiple products spanning the nonprime consumer credit spectrum across various distribution channels. We continue to believe that direct personal relationships with our customers are essential to achieving optimal results. Such relationships are best achieved through a physical location where our customers live and work. In April of this year, to provide greater access to a physical location to our customers, we began offering our easyfinancial loan products within our easyhome retail stores through an initial rollout to 33 of our easyhome locations. These easyhome stores are in areas that service easyfinancial's target market, have existing relationships with customers that are likely consumers of the products offered by easyfinancial and are staffed with dedicated employees that have significant experience in managing the relationships, including collections with nonprime consumers.

This rollout will continue during the second quarter of 2017. We will make easyfinancial loans available through an additional 33 easyhome stores in May and another 34 easyhome stores in June, so that by the end of the second quarter, 100 easyhome stores will be offering easyfinancial loans as well as their traditional consumer leasing products. While its early days, the rollout of lending to our easyhome stores has been strong and in line with our expectations. In April of this year, we also expanded our easyfinancial footprint by launching easyfinancial in Quebec. The launch commenced with one branch in Laval as well as offering loans online.

The customer response to our launch of lending in Quebec has exceeded our expectations and the growth of the first branch was the fastest launch ever experienced by an easyfinancial location. While we have only just launched in Quebec, we are confident that this new market will significantly contribute to our growth in the years to come. We will therefore open 10 additional branches in Quebec this year and expect to reach 40 branches in this market by the end of 2019. Last year, we rolled out risk-adjusted pricing to our highest credit quality customers. As I mentioned earlier, we recently expanded this program and believed that there is a strong appetite for lending products at this lower price point for a better credit quality customer.

While we'll give up some yield, we benefit from reduced charge-offs and a greater customer lifetime value. We are now looking forward to our next new product launch. In the third quarter of 2017, we will introduce a secured installment loan product to our retail distribution channel. These installment loans will provide our customers with access to a larger loan size with lower interest rates. Our risk will be reduced as these loans will be secured by real estate, while our decision to lend will also be based on the creditworthiness and affordability of the consumer.

The reduced yield we achieve from this type of product will be offset, again, by lower credit losses and lower relative cost to administer. As you can see, we have taken significant steps to expand our geographic footprint and product offering over the next few quarters. To support these activities, we plan to make a significant incremental investment to our advertising. We have budgeted our advertising spend to increase by $2.2 million in the second quarter of 2017 when compared to the first quarter of 2017. This incremental spend will support our launch of easyfinancial into our easyhome stores, introduce the easyfinancial products into Quebec and introduce our new secured loan product while investing in TV and testing other media to continue to build brand awareness and finally enhance our digital and mobile capability to improve the customer experience.

The initiatives that we have launched today have exceeded our expectations, and we remain confident in our ability to achieve our stated 2017 targets. Given the growth of our loan book to date as well as the strength of our launch in Quebec, we are well on track to reach a loan book of $475 million to $500 million by year's end. As we have previously indicated, the growth in our overall average loan size, the increased penetration of our risk-adjusted pricing loans and our launch of easyfinancial into Quebec will continue to reduce the overall yield that we achieve in our portfolio. Although our yield in the first quarter was high at almost 63%, this was elevated due to the onetime $1.5 million impact, resulting from the transition of our creditor life insurance product to a new provider. We anticipate that our yield will moderate slightly for the balance of the year to a guided range of 60% to 62%.

In conclusion, our financial results were strong in the first quarter and our growth initiatives have exceeded expectation. We have launched a suite of products that very much align with our vision of helping our customer segment improve their credit standing and take control of their financial future. We have a sound and consistent strategic plan. We have set ambitious, but achievable goals, and we have a history of delivering on our goals and doing what we say we will do. 2017 will be a record year for our Company and I look forward to updating you further on our progress in the coming months.

So with our formal comments complete, we will now open it up for questions.

Operator: [Operator Instructions] Your first question comes from the line of Jeff Fenwick with Cormark Securities. Your line is open.

Jeff Fenwick: Hi, good morning everyone. Just I wanted to start my questioning on your debt capacity here.

Appreciate the comments that you offered at the beginning of the call here. But I guess the concern that I might have here is just a timing thing. So Q3 is not that far away, you're clearly opening the taps on what could be some pretty meaningful incremental growth here for the business. When do you feel like you need to have that solution in place so that you're confident that you can accelerate your activity today, and be able to deliver on that from a funding perspective going forward?

Steven Goertz: Hey, Jeff its Steve. As we've said, our current facilities and cash on hand plus the cash flow generated by the business gives us ample cash flow to meet our growth objectives till at least the end of the third quarter.

Obviously, we want to get a solution in place before that point in time. We're confident we can put in solution in place today, but want to make sure we're putting the optimal solution in place, long term for the company. So we're taking a little bit more time exploring all of the options, and then we'll get something done that provides us with the long-term structure that makes sense for us in the years to come. For that reason, we haven't done anything quickly. We haven't finalized any facilities.

We're still exploring a few different options. All of them appear to be doable. It's just finding the one that makes sense for us. Sometime, in the upcoming months, we'll have more to talk about there, but I don't want to disclose that until we've got something locked up.

Jeff Fenwick: Okay.

And I guess, we can move on then to the growth and you're mentioning opening up a greater proportion of the risk-based product within your mix. How should we be thinking about that interest revenue yield sort of gradually moderating as you bring more of that into the mix? When I look at the last two or three quarters here I mean, it looks like 50 to 100 basis points just on that interest revenue yield movement quarter-by-quarter. I mean is that the order of magnitude that we should we be thinking of? Or how should we be framing our thoughts on that?

Jason Appel: Yes, that's probably the right way to think about it. The range we provided 60% to 62% still is in line with our expectations at this point. It'll generally trend slowly down throughout the year within that range.

Once we get to the end of the year, and we introduce the new secured lending product, which will contribute some growth in the back half of the year but not meaningful, it will be more significant next year, and then we'll be able to provide more guidance beyond 2017 and what the yield implications are. But certainly, we're doing other things like obviously trying to improve the penetration rate of ancillary products and things that help weigh the yield that lost that some of that interest. But otherwise, the range we provided with 60%, 62%, we still feel comfortable with and that will be how it will trend for the next few quarters.

Jeff Fenwick: Okay. And I guess, within that, you were benefited by this change in your creditor life product.

So with that, that I assume was largely a one-time item in the quarter and going forward the relative contribution to revenue will be similar to what your prior provider was generating for the business?

Steven Goertz: Yes. It'll be roughly the same. The $1.5 billion in the quarter really offsets the $1 billion - $1.5 million, excuse me, offsets the $1 million charge we had Q4 last year. So once those – you offset those together, will trend more towards normal rates going forward.

Jeff Fenwick: Okay.

And then within the risk-based pricing and again the contribution to the profile of the book here, how should be thinking of it from a duration standpoint? Are these loans going to be offered – you think the relative duration of the mix of that portfolio would be similar to your existing product or maybe a bit longer?

Jason Mullins: It's Jason here, Jeff. It would be a bit longer. Obviously, by giving these customers the opportunity to borrow at a lower rate, we're able, based on affordability, to give them a larger dollar-size loan. Those loans tend to be amortized over longer terms, which is why overall, we see an increase in improved lifetime value. So obviously, it buoys the portfolio on a short-term basis both in terms of loan size, but it does position us quite nicely for growth as those loans, obviously, take longer periods of time in which to pay down.

Jeff Fenwick: Okay. Makes sense. And let's move on to credit then. Interesting to see the movement there in the first quarter being so positive. But you're not really changing your outlook for charge-offs.

So what was it – was this really something that was just atypical that surprised you? Or is there something in the macro that you're seeing, maybe in Alberta that's helping here? And why would it not sort of carry forward? Particularly as you're shifting next to higher credit quality borrower?

Jason Mullins: Well, we had gone over what the primary factors were that were driving the change. Q1, obviously, is typically among the best of the quarter seasonally for overall charge-off rates in any lending business, certainly in ours, and that pattern has continued year-over-year. We did see lower charge-offs in the bankruptcy size. Some of that obviously was due to the fact that we had deployed a new model in the latter part of Q4, which we're beginning to see in terms of our bankruptcies. But we also did see an unexpectedly large seasonal year-over-year drop in the number of bankruptcies in totality.

Some of that, I think, is being manifested in the broader macroeconomic environment. So we did get a bit of an unanticipated lift, which is why quite frankly, we were just slightly outside of our previously guided range of 14% to 16%. I don't necessarily expect that seasonal drop year-over-year to precipitate going forward, which is why we're pretty confident with the impacts of the model plus the adjustments on risk pricing as well as our continued expansion in use of analytical scoring and enhanced collection work that we've done that will still put us comfortably within the range of the 14% to 16% guidance that we've given the past.

Jeff Fenwick: Okay, great. Thank you for your answers.

Operator: [Operator Instructions] Your next question comes from the line of Stephen MacLeod with BMO Capital Markets. Your line is open.

Stephen MacLeod: Thank you. Good morning.

David Ingram: Good morning, Stephen.

Stephen MacLeod: Just wanted to talk a little bit about or get a little more color around, I guess, the sort of moderation in the operating income growth you're expecting, easyfinancial in Q2? And I just wanted to get a sense of how the loan book growth is distributed through the balance of the year? And I guess maybe a little bit more color on how the margin profile is expected to evolve between Q2, Q3 and Q4 to get to your 35% to 37% range? Just with all the initiatives that are happening and how you expect that all to rollout?

Jason Mullins: Yes, I think, I'll touch on that. It's Jason. So as David said, we're making some concentrated investment in Q2, particularly in marketing to help prepare us for the acceleration of loan book growth in the back half of the year and to match suit with the new initiatives Québec, easyhome and then eventually our secured products. So you'll probably see margin moderate in Q2 in the easyfinancial business somewhere in the kind of 35% to 37% range, so a little bit more traditional of what we've seen in quarters in the past year as those extra investments are made. You also generally see a more accelerated loan book growth in Q2 than you do over Q1.

So you'll probably see growth in the quarter will be 30% or 40% more in absolute growth dollars than what we saw in Q1 for loan book growth. So when you combine that and the extra provision we take on that higher accelerated growth, combine that with the extra marketing spend that David mentioned, that's what's going to moderate the margin in the quarter. Then as we move into the back half of the year that margin starts to expand again, until we finish the year with the original guided range we gave.

Steven Goertz: And if we look at the growth, given that a lot of the initiatives just launched, our secured lendings cannot launch till the third quarter. A lot of that growth is back ended to the final quarter of the year, which seasonally is always the strongest quarter for us.

So very heavy – a heavy portion of the growth will be in Q4.

Stephen MacLeod: And that's for loan book growth showing above specific ranges?

Steven Goertz: Yes.

David Ingram: Stephen, just to finish off the marketing piece. The additional spend is going to be – is all go to be incremental to easyfinancial and it's going to be – in terms of magnitude, it's going to be roughly $2 million year-over-year and $2 million quarter-over-quarter. It will be the highest pair we've ever spent in our history, and it will then moderate and come back down in Q3 and go up a bit more in Q4.

But the highest spend that we've ever made is coming through in Q2.

Stephen MacLeod: Okay. I see. Okay. So I guess, the expectation really is – and Jason, just to clarify, I think you were saying that margins were moderating Q2 below the 35% to 37% range? Is that right?

Jason Appel: Yes.

Into that range of 35% to 37%, roughly.

Stephen MacLeod: In Q2?

Jason Appel: For Q2. Yes.

Stephen MacLeod: Okay, that's helpful. And can you just talk a little bit about the performance you've seen from the loans that you've been extending through your initial rollout into your easyhome stores? Just how those have performed and the relative profitability if anything's – if there's any meaningful differences?

Jason Appel: Yes, it's Jason.

So we only introduced that rollout just in the last few weeks, so it's really far too early to provide any commentary. At the end of the day, we're using the same risk model and the same lending criteria. So we don't generally expect the performance of those loans to be any different than we would the rest of our book. A lot of our easyhome stores are generally found in similar type pockets of the community, similar type strip plazas. Although there's a slightly different consumer set, it's not material enough that we expect any major impact on the portfolio.

Stephen MacLeod: Okay. And then in terms of Québec, is there anything maybe – your commentary probably answers the question, but I just wanted to get a sense as to whether you saw any challenges in sort of building the brand or having this new offering in the Québec market? A market where you previously haven't had the easyhome, I guess, the goeasy brand, generally?

Jason Appel: Yes, I mean, so obviously, we had the easyhome leasing business there for a little while. And so there's a little bit of carryover of the awareness of that brand into the easyfinancial and goeasy name. But you're right, otherwise, easyfinancial was new there. As David mentioned, that market has done very well for us so far.

There's less supply and less competition in that market. So that makes it a little bit more attractive, because we're able to attract the consumer demand more quickly through specifically digital advertising and digital marketing. So for us, obviously, we believe that, that market will contribute its proportionate share of business related to the population that contributes to Canada. So we're on the way to eventually accumulating the business there the same ratio we would anywhere else.

Stephen MacLeod: Okay.

And then there just finally, just for Steve. I just wanted to get a sense as to what you expect for corporate expenses and the tax rate through the year?

Steven Goertz: Yes. The corporate expenses, if we were normalized Q1 for the reasons that we disclosed, the provision against the U.S. franchise business, remove that. That's probably a pretty good indicator where it's going to be going forward.

It's elevated from last year a little bit because of the additional expenditures for the new initiatives. Guys remember last year's corporate expenditures continued to rise quarter-over-quarter, so we kind of reached that run rate. On the tax rates, abnormally high for the quarter given the unusual items. The normalized tax rate is about 27.5%. So that's where it should be for the balance of the year.

Stephen MacLeod: Great. Thanks so much. End of Q&

A
Operator: There are no further questions in the queue at this time. I will turn the call back over to the presenters.

David Ingram: Well, thank you.

As there are no more questions, I want to thank everyone for their participation on the call. And for those of you that can make it, we look forward to seeing you in person at the AGM at 2 o’ clock this afternoon. So once again thank you and we look forward to continuing to update you. Thanks.

Operator: Ladies and gentlemen, this concludes today's conference.

Thank you for your participation, and have a wonderful day. You may all disconnect.