Executives: David Yeilding – Senior Vice President, Finance David Ingram – Chief Executive Officer Steve Goertz – Chief Financial Officer Jason Mullins – President and Chief Operating Officer Jason Appel – Chief Risk

Officer
Analysts: Gary Ho – Desjardins Capital Stephen MacLeod – BMO Capital Markets Jeff Fenwick – Cormark Securities Brenna Phelan – Raymond James Doug Cooper – Beacon

Securities
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to goeasy Ltd’s First Quarter 2018 Financial Results. [Operator Instructions] 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.

David Yeilding: Thank you, operator, and good morning, everyone.

Thank you for joining us to discuss goeasy’s results for the first quarter ended March 31st. The news release which was issued yesterday, after the close of market is available on Globe Newswire and our website. Today, David Ingram, goeasy’s Chief Executive Officer, will talk about the highlights of the first quarter and some of our achievements thus far. Following his remarks, Steve Goertz, the company’s Chief Financial Officer, will provide additional insights on the implementation of IFRS 9. David Ingram will then provide some insights into our strategic direction and outlook before we open the lines for questions from investors.

Jason Mullins, the company’s President and COO; and Jason Appel, the company’s Chief Risk Officer, are also on the call. Before we begin, I’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 is finished. The operator will pull for questions and will provide instructions at the appropriate time. Business media are welcome to listen to this call and use management’s comments in responses to questions and the coverage.

However, we would ask that they not quote callers unless that individual has granted the 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.

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 experience 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 had historically been one of the lowest, slowest rather quarters for loan originations. The growth was a direct result of the strategic actions and investments that we made in 2017 including the increased branch count, the maturation of our branch network, the increased penetration of risk adjusted rate loans to qualifying borrowers, the launch of secured lending to homeowners, the launch of lending as an additional product within our easyhome stores, and the expansion into Quebec. These product extensions and the expansion of our branch network and geographic footprint were further fueled by significant improvements in brand awareness and additional investment in advertising and customer acquisition in the current quarter. We also delivered record loan book growth of $75 million against loan book growth of $16 million from the first quarter of 2017. The growth was also aided by improved customer retention and an increase to the average loan size.

All of these factors translated to our loan book reaching $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 a decline in revenue in 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 ancillary 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, a 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 were put up 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’ve recorded a provision of $7 million rate 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 low on a comparative basis.

We estimate that the earnings per share for the first quarter of 2017 would have been reduced to $0.64 per share if we had applied to 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 experience in the quarter has positioned that 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.

Steve Goertz: 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 1st, 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 of 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 of the balance sheet date. It is important to note that the adoption of IFRS 9 does not impact the net charge-off rate of the company’s consumer loans receivable portfolio, which is driven by the borrowers’ 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 and the periodic increase in the allowance for loan losses as a result of growth in the consumer loans receivable is a non-cash item. IFRS 9 also requires that forward-looking indicators be considered when determining the impact on credit risk and measuring expected credit losses, and these forward-looking indicators must be incorporated in the risk parameters as relevant.

Based on the analysis performed, we determined that the rate of inflation, the rate of unemployment and oil prices historically have had an impact on a 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 that each balance sheet date, we’ve decided to utilize the average forecast of these forward-looking indicators for five large Canadian banks. IFRS 9 does not require the restatement of prior period financial statements. Companies can restate prior periods, but only a hindsight is not employed, which makes doing so very difficult. As such the company similar to all banks and lenders, made the decision not to restate 2017, but rather to apply IFRS 9 prospectively on January 1st, 2018, with an opening adjustment to retained earnings.

The provision under the previous accounting standard as of December 31st, 2017 was $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 of 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 IFRS 9 had been applied retroactively. It is important to understand the estimated impact of this change in accounting standards on the comparative financial results. In our MD&A for the quarter, we presented the estimated impact on our financial statements if we were to calculate the applicable allowance for future credit losses using the methodology applied in the first quarter of 2018 under IFRS 9. This was 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 income as a result of changing provision rates, we are introducing a new non-IFRS financial measure, pretax pre-provision income or PTPP income. PTPP income detailed 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 a 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.

David Ingram: 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 a three-year growth targets when we report in Q2. Our focus in 2018 will be on driving growth and capturing a larger share of $165 billion market for non-prime credit in Canada. While doing this, we will continue to plan for the future to ensure the sustainability of our growth. We will continue to invest in our digital properties to improve the online experience for our customers, and in the third quarter of this year, we will be launching an enhanced digital loan application platform, which we utilize the leading architecture to further streamline the customer experience or significantly reduce in the customer’s effort to get a loan.

The new loan app will capture key data that will allow us to rapidly test and learn what application methodology, sequencing and format delivers the optimal customer experience, and optimizes the ratio of traffic to applications to funded loans. We believe that this investment will drive increased customer conversion and ultimately loan origination. There are further opportunities to provide our customers with additional products and services that meet the financial borrowing needs and assist them on their journey back to a lower cost prime financing. In 2018, we will undertake in-depth to consumer research and explore other lending products that can be added to our product suite in 2019 and beyond. We remain committed to building our full suite of products that will ultimately serve all the borrowing needs of our chosen customer segment across the non-prime credit spectrum.

We have a history of setting ambitious goals, but we also have a history of celebrating on our promises. The investments we’ve made and the growth we’ve experienced in the first quarter gives us renewed confidence for the future. We believe strongly in our strategy and in our ability to execute on a growth plan. With our strong balance sheet, robust infrastructure, expanded product offering and coast-to-coast branch network, we are well positioned to continue to capture a much larger share of that $165 billion non-prime consumer credit market and to deliver record levels of earnings in 2018 and beyond. Now before I’d 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, 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 nine years of service as CFO. Steve was instrumental in leading the introduction and development of the risk management function, overseeing the transformation of the technology group and systems and advancing the company’s corporate governance structure.

In addition, Steve provided leadership and guidance to the business and the strategic planning process. Steve operates with a high degree of integrity and passion while being a great steward of the company’s finances. And finally he played in integral role in the recent recapitalization 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: Thank you.

[Operator Instructions] And our first question is from Gary Ho with Desjardins Capital. Your line is open.

Gary Ho: Thanks, good morning. Maybe just to ask first question just on the forward-looking indicators, is it possible to give us some earnings sensitivities to a change in each of these variables? So obviously, these indicators fluctuate month-in-month, it will be good if we can somehow track this and apply sensitivities to it, so we can adjust kind of our estimates going forward. And in the second part of that this how far do you look in terms of these forecasts?

Steve Goertz: Hey, Gary.

I’m going to start and then 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 or we’re not able to provide the exact correlation and the impacts in the portfolio on a numeric basis. I think as we get more comfortable with IFRS 9 and the market gets more comfortable with IFRS 9, the disclosures could improve. and we couldn’t 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 it, and what we believe that a high level the impact on our portfolio could be as we move forward?

Jason Appel: Thanks, Steve. It’s important to know obviously, and I know you’re aware of this, obviously the allowance that we calculate is largely based on the performance of 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 then obviously at every quarter-end as required under the standard. We’ve spent a tremendous amount of time leading up to the actual deployment of IFRS 9 to look at the historical performance of our credit portfolio with a particular focus over the last five years as that is where we have the most robust amount of experience.

And based on that we looked at the series of macroeconomic indicators, which Steve has mentioned three, but we actually looked at a much larger set, and ultimately selected the three that he had mentioned the forecast rate of inflation, rate of unemployment and the forecast price of oil. As those were found best to explain, the loss performance over the five-year analysis period that we had looked at. Now based on this analysis to give you some idea of how to think about the allowance going forward, we expect that those FLIs in combination could modify the allowance plus or minus the 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 to get to the underlying performance or underlying credit performance of the portfolio is largely will dictate how that performance – how that portfolio will perform as opposed to just the indicators themselves. So to think about it, as the portfolio has continued to shifts over the last several years with the adjustments of our risk adjusted loans, and our lending to more creditworthy customers, we expect that the impact of those FLIs will also shift, but we can’t measure them going forward as those analyses are looking back retroactively.

We intend to look at those every quarter and make adjustments where necessary, but again, the way to think about modeling the impact on the allowance with the FLIs is a swing factor of about plus or minus 10%.

Gary Ho: Okay, that’s helpful. Maybe I can just stay on maybe ask it in 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 biggest swing versus the improving trend we saw using IF 39. I know it is consensus forecast driven somewhat, but it will be helpful if you can kind of give us some contacts when you backcasted this model like what would that range have looked like through a cycle?

David Ingram: It’s difficult for us to say through a cycle, because our period of analysis was only the last five years.

And throughout that time, I would say most of the forward-looking indicators trended to be more positive. The change in the rate from the old standard to the new standard, and the different direction they travel during 2017 was due to the FLIs, but was also due to the underlying calculations. Our old methodology we were only looking at credit losses for the subsequent five months under IFRS 9, it’s 12 months for performing loans and greater than that for non-performing loans. So, the changing methodology was also responsible for the changing rates throughout 2017. Focusing on just the FLIs, so it was really the shift in those FLIs versus the actual indicators during the year that caused a lot of that transition, so it’s not just the FLIs, it’s also your starting point.

So if you look at inflation for instance in FLI, it’s where the forecasted inflation is going to be a year from now, but also where the inflation is today. So, the movement in those FLIs is what drives the change in the provision, not the absolute forward-looking rate.

Gary Ho: Okay. And you look at it kind of when you’re out is that where the…

David Ingram: Yeah, to do it, we’ve taken a numerical approach unlike a lot of entities that are using their own forecast and injecting management’s assumptions interpretations. We wanted to remove discretion, so we are simply for each of those five FLIs taking the aggregate – the average forecast of five large Canadian banks.

And yes, we’re looking at the forecast 12 months out.

Gary Ho: 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’re also using the cash faster, I think you have the $110 million new credit facility and $50 million cash on hand. Can you update us on your capital used and financing plans looking out kind of 12 months to 18 months from now?

Steve Goertz: Hi, Gary, 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 the last November. We’ve 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 for an additional issue of high yield debt if necessary. And ultimately, if we look at the markets right now, that our high yield bonds have traded very possibly, so the yield to maturity is lower than we issued. So if we were to go – if we needed to and were to go that route, it could be beneficial in our cost of capital, we’re looking – 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 those two sources going forward; we’ll be able to continue to fund our growth.

David Ingram: 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 in 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 the borrowing needs right now.

Jason Mullins: Gary, it’s Jason Mullins, just want to built-on the prior thing on the provision of the allowance. So just to kind of close up on the points that Jason, Steve raised. Although the FLIs layered on to the provision rate or the allowance, which is calculated on the underlying loss performance of the book. We’ll 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, their credit performance of the book as a result of our credit strategy and the mix of the quality of the consumer through the different products and price points that we’ve initiated will, in the long run, be the most dramatic thing that influences the long-term losses and therefore the long-term allowance. So, just want to make sure that that’s top of mind as you think about how to model this long-term in the future.

Gary Ho: Yeah, okay. Thank you. That’s it from me.

Operator: Thank you. And our next question is from Stephen MacLeod with BMO Capital Markets.

Stephen MacLeod: Thank you. Good morning guys.

David Ingram: Good morning, Steve.

Stephen MacLeod: I just wanted to follow up on just the previous line of questioning around the provision rates. Jason you just made a comment that over the long run, the portfolio performances is the biggest indicator of what the number will look like. When you think about the elevation of the rate under IFRS 9 was roughly, call it 300 points from last year to this year and even on a revised basis, is that a good number to use as a starting point going forward, when we think about how to model this? Just on the underlying performance of the portfolio.

Jason Mullins: 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 our larger loans to more creditworthy borrowers, so that would be a leading indicator of a decline or a change in the allowance rate. Since your allowance rate is based on more historical performance.

It always will have a bit of a lag, so that that current rates are 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.

Stephen MacLeod: Right. Okay, okay. That’s helpful. And then as we think about the net charge-offs the number for Q1 was quite low, very good.

I mean was there something specific to the quarter that would have caused that number to be so low, and would you expect that’s sort of trend closer to the mid part of that 12% to 14% range as we head through 2018?

Jason Mullins: 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 helped the metrics. 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 got it 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.

Stephen MacLeod: Right. Okay, okay. That’s helpful.

And then just maybe just finally as you think about – and David you mentioned in your prepared remarks just an expectation to – for potentially revised targets being released for Q2. When you think about how you expect the loan book to evolve over the next couple years? Can you guys talk a little bit about some of the puts and takes that might move those numbers higher or keep them within the same range?

David Ingram: Yeah. 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 there is going to be a significant increase potentially close to doubling year-over-year. So for us, as we have tested and introduced the new products or the extension of products that we carry particularly risk adjusted lending, which comes with bigger ticket loans for these better credit quality customers, which means also a longer retention cycle for that consumer as well.

That will continue I think to have a big influence and it will have an influence clearly on the credit quality as well. The big unknown for us is what secured lending will do, because it’s still relatively new for us. The book size is still relatively small. So I think the good news for us is that $75 million came with very little participation really from a secured lending product at this stage. So that one is one that could surprise us nicely and go much higher or it could stay relatively low, so that one, we’ll wait to see and we’ll be giving you a bit more clarity at the Q2 update.

The other piece is what Quebec and what the maturation of our existing stores would do, so if you remember back two or three years ago, we guided that a mature store looks like a $2 million sized book on average. we can now see a $2.2 million, $2.3 million of our average book and that’s coming at a time that’s before the five year cycle. So we have now about four or five branches that are heading $6 million in loan book size and many other branches growing at a fairly healthy clip. So again, one of the unknowns for us is what will the average loan book like with a full suite of products at a mature state year five, year six. So those are the kind of variables that we are managing and when you then couple that with the marketing investment, which is now 50% digital, which is driving a huge amount of the origination channel for us.

those are all things that we think will help give us a healthy continuation of this growth throughout this year.

Stephen MacLeod: Okay. That’s very helpful. Thank you.

Operator: Thank you.

Our next question is from Jeff Fenwick with Cormark Securities.

Jeff Fenwick: Hi everyone. Good morning.

David Ingram: Good morning, Jeff.

Jeff Fenwick: I wanted to start off just with a follow-up on the capital discussion there.

So I take your point around the ability to upsize, but what about negotiating on the covenants there. When I look at your leverage ratio, you’re not far off where the maximum would be under the revolver that you played out there, so is there anything we should be thinking about on that in that regard?

Steven Goertz: Yeah, one of the reasons that we’re getting a little tighter against the companies 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 a work against IFRS 9 that we said 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 packets 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 will take into consideration the covenant requirements.

Jeff Fenwick: Okay, thanks. That’s helpful. And maybe we go back to discussing the growth that we saw in the quarter sort of one quarter in your three-year plan and already thinking about upsizing it there. So could you just describe that you gave us a little bit of color on the MD&A, but where the growth was coming from, but where were you surprised in terms of the level of uptake on the product?

Jason Mullins: Hey Jeff, it’s Jason Mullins.

I think as we look and dissect the growth, there isn’t really one thing that is driving the lion’s share. it’s very much an effect of all of the additive initiatives. So, if you look at it first is as you introduced lower rate products and larger loans to higher quality customers that result in an improvement in 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 to accelerate growth. So we’re seeing through the increase in the better credit quality customers and improvement in the retention rate, 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 and increased demand from consumers looking at easyfinancial as an alternative.

So it is very much a sum of the parts of fact as opposed to any one thing that is really contributing. I just think that each of them is on an additive basis, adding up to even bit more than that what we had expected to be the case this quickly. so that’s what gives us the confidence to survive the targets in the next quarter.

Jeff Fenwick: Okay. And within the mix of the new products there obviously, you began to push on the secured loan product.

Can you just characterize that as the approach to rolling that at, it’s obviously a bit more distinctly different from what you’ve offered in the past? So, how you’re getting the success there in the performance of that product?

Jason Mullins: Yeah. So the way we’re branding that is really loans for homeowners. So it’s to really specifically highlight that for the segment of our consumers who are homeowners albeit it’s a smaller portion. this is an opportunity for you to extend your relationship with easyfinancial by getting access to a larger loan and a lower rate as a result of being a homeowner and therefore looking at easyfinancial differently than you had in the past, where in the past, we were looked at as just one product and you would just feel one short term unsecured credit need. now the customers can see an opportunity to extend the 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 is too weighed and very carefully and cautiously, as we learn and test and optimize, that’s why you can see in the MD&A, where we break out the portfolio, I had still a very small amount of the total book and we’re continuing to get more comfort with that as we see more performances and get response from consumers. So still think as David said earlier, there’s quite a bit of upside in growth potential in the product, which is being really careful and smart about how we open the door of that product and promote it.

Jeff Fenwick: Okay. that’s helpful.

And maybe just we can move on to expenses here as well, I mean, the expense levels are actually a bit better than I’ve been modeling for the quarter. How should we be thinking about Q1 versus expense for the rest of the year?

Jason Mullins: Yeah. 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.

Jeff Fenwick: Okay, that’s all I had. Thank you.

Steve Goertz: Thank you.

Operator: Thank you. [Operator Instructions] And our next question is from Brenna Phelan with Raymond James.

Brenna Phelan: Good morning guys.

David Ingram: Good morning, Brenna.

Brenna Phelan: 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-off, should we still expect to see a decline throughout the year and the allowance in the percentage of growth loan? That you can even…

David Ingram: I’m going to answer in two parts. The underlying allowance before the application of forward-looking indicators should continue to trend downward, but it will take some time for that to be built in, because we’re using a historical analysis to determine the rates. So there always will be some lag, but over a long-term basis and over the course of several quarters or a couple fiscal years, yes, it will continue to trend down in lockstep with a decline in the charge-off rates.

Brenna Phelan: Okay.

David Ingram: The forward-looking indicators as the overlay that’s going to introduce the volatility and the variability, because it really depends on where the banks think the economy is 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.

Brenna Phelan: Okay.

So when you say that 10% plus minus window of 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 roughly a 10% move, is that the right way to think of that?

David Ingram: Well, all we’re saying – it could be in up to a 10% move over the period analysis that we’ve gained. So if we’ve got a 9.3% charge-off rate right now, and that’s the base number as an example, I’m not saying that’s what it is, but as an example, the introduction of FLIs could move that up or down 10%.

Brenna Phelan: Okay. And the relative move that we saw through 2017?

David Ingram: Yes.

Brenna Phelan: Okay.

David Ingram: Unfortunately, I know everybody is 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.

Jason Mullins: Yes.

I think just to add to that Brenna is to build on Steve and Jason’s earlier points, is that the application or the layering on to the FLIs is done by looking at the current actuals of those indicators versus the forecast. And so if for example, the forecast was for one of them to go up, then by the next quarter presumably, the underlying actual would go up, and therefore the delta from the actual to the forecast would be smaller and the impact in the subsequent period would now be less or potentially credit backed 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.

Brenna Phelan: So what has more of an impact on your forward-looking on your allowance current, that current level of the forward-looking indicator or the forecast level of the forward-looking indicator or the delta?

Jason Mullins: It’s the delta.

David Ingram: The delta is what impacts the FLI.

The way to think about the current is that your current is inherently built in to your underlying loss performance, which is your actual net charge-off rate. So the FLI really just looked at the delta to the forecast, your current portfolio is and net charge-offs, accounts for what’s going on in the world today.

Brenna Phelan: Okay. And which ones can you tell us, which one you’re most important, which one is the most sensitive to out of the three that you gave?

David Ingram: No, we haven’t given that level of disclosure right now, because there’s interrelationships between the three. So if you were to break one out, it would change the relationships to the other ones, so we haven’t disclosed which ones more problem which one is not.

Brenna Phelan: Okay. And then you’ve referenced expenditure for your enhanced digital loan platform to come in Q3 has this spending been undertaken? And we seen this – or when is that going to come into intangibles and the amortization thereof?

Steve Goertz: So, yes the undertaking of the beginning of that spend on the actual technology has begun. The depreciation of that that would happen when we deployed the new platform which we expect to be as David said in Q3.

David Ingram: So think it is way of the spend on its Q2, Q3 depreciation are likely start Q3 and then continue thereafter.

Brenna Phelan: And what should we expecting order of magnitude in Q2 for spend?

Steve Goertz: It’s not that simple, because we’ve got a lot of spending on different IT initiatives, sometimes it’s digital transformation, sometimes it’s core base 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 you relatively consistent throughout the year.

David Ingram: Yes, and of course dated by that we’ll have other technologies that are reaching the end of the depreciation schedule, so it’s not purely just an additive measure, there’s also depreciation that runs down and off as a result of other technologies from the past.

Steve Goertz: So let me I got some updated numbers, 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 will be caught up Q2 and Q3.

Brenna Phelan: And this maybe looking forward take some expense dollars from advertising away?

David Ingram: Not that significantly no, because lot of the advertising as you know is geared towards online advertising, search pick keywords, as well as television.

Steve Goertz: What it does Brenna, 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 velocity with the same spend, because we’re getting a higher conversion of the traffic that we do drive. So this is an initiative to actually help accelerate growth and be more effective as opposed to trying to find a way to do that and replace the spend differently, it’s rather a way to drive growth. So the new digital platform will 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.

David Ingram: 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, but $16.5 half last year, so there is an absolute dollar cash increase in spend, but the efficiency right is greater, because the revenues much stronger. So around 3.8% of revenue versus 4% of revenue a year ago.

On the actual digital part, Steve said, a lot of it can be kind of commingled. So you’ve got the CapEx spend, which is half to the stores in 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 a $1 million for that total investment for us getting more customers to the business.

Brenna Phelan: So ultimately what both are doing now is driving down your acquisition cost per customer or per dollar value of loan, right?

David Ingram: Absolutely. So as we have said in the last two years we’re looking to increase the margin and the return on equity as we continue to scale the business, and if you put IFRS side that’s where you’ll see the core business doing.

Brenna Phelan: Do you just – have you ever disclosed an acquisition cost per customer, do you estimate that?

David Ingram: No.

There’s so many different ways to calculate it, so many different channels that we just don’t do that.

Brenna Phelan: Okay. And then switching to the revenue yields and easy financial, so if I take out the interest income that sort of fee based field in percentage terms it looks like that’s down 13% year-on-year, can you just give a breakdown as how much of that is being driven by the fact that that commission spread over a larger loan lowers the yield and how much is a function of lower take up, as you’re moving into secured loans and risk adjusted loans and maybe even Quebec?

Steve Goertz: Yeah. The majority is the first point mentioned. So when the long-term is extended, then the relative commissions earned on those products decreases as we move to a better credit quality customer, the relative pricing of those ancillary products decreases and then there is a smaller piece that is related to a better quality customer has a slightly lower purchase rate of ancillary products, but it’s more the former points that you highlighted.

Brenna Phelan: So those are two growth drivers.

David Ingram: Yeah. If you look on a comparative basis, remember in the first half of last year, our commissioned earned on the sale of ancillary products benefited from a switch – one-time switch in providers. So, to look towards the back half of the year for more normalized basis.

Brenna Phelan: Okay.

And last one from me, anything on your radar election here and 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?

Steve Goertz: No. nothing material at this point that changed since the last update. We haven’t still yet heard anything follow on from Ontario since the initial consultation. So presumably, they’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.

Brenna Phelan: Okay, great. Thank you very much.

David Ingram: Thank you.

Operator: Thank you. And our next question is from the line of Doug Cooper with Beacon Securities.

Your line is open.

Doug Cooper: Hi, good morning guys. I just want to focus on the geography for a second. Ontario grew $36 million sequentially; Quebec was up 7%, DC up 10% Alberta up 9%. And maybe can just – why the over performance in Ontario, I guess particularly, versus Quebec.

Is it just a question of setting up the branches in Quebec first?

Jason Mullins: So, I think the that’s what answers 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 a year or two with the introduction of where we put new locations. And those locations have performed really, really well for us. So it’s also generally got less competition from our major direct competitors than what we’ve seen. So that’s really the only thing that would drive over performance in Ontario that I can think of, rest of the business distribution of ad spend and those types of things it’s generally quite proportionate.

David Ingram: The other thing, just to add to that Doug is, as you’d expect because of the population density is Toronto, they over index and 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.

Doug Cooper: Okay. And just in Quebec, what is the – what’s the store count in Quebec stand right now?

Jason Mullins: I think we’re at seven or eight locations now.

Doug Cooper: And so the plan in sort of 12 months from now.

David Ingram: So I think long-term we’ve said that we think there’s capacity for call it 30 to 40 in the market, and we’ll probably open those fairly linear over the next kind of three to four years, so call it 10 to 15 year in that market fairly linear.

Doug Cooper: Thank you. And I think you touched on maybe just a little bit about the acceleration of the loan book they would refer to earlier in the call. What to say about the competition, maybe, just obviously continue to – you’re gaining share or is this just uncovering new pockets of demand that haven’t been uncovered with all before?

David Ingram: 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 2010 with HSBC, Wells, and Citifinancial. So as we think quite consistently that the supply side has been soft and weak, and the demand side has remained consistent, has 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 traction to more of those customers and we’re less focused on what the others are doing and more focused on what we are doing.

And what we’ve been doing is expanding the credit box and that’s been inviting many more new customers in, and it’s serving us very well. So when you think about it compared to other mature countries that have lending options, we’re still underpenetrated with options for customers to go to. So there is really only two of us here operating in Canada that can offer a full suite of product for the installment lending and if you went to U.S., you might find a 100. So a part of – it’s just the dynamics of this environment and part of it is looking after our own strategic plan and getting on with the job of outgrowing the book to a much, much more sizable number.

Doug Cooper: And my final just comment question, just on the leasing side, EBITDA looks like about $16 million, which is I think the capital expenditures in that segment was $7.5 million or so.

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 is the performance in that segment seemed to be much better than it was in Q4? Anything particular going there, how is it a steady state now, you think those margins are sustainable at sort of 15.5% to 16%?

Jason Mullins: If you go to the segment reporting, you’ve noticed that the easyhome segment now has interest income. So we’re able to offset the decline – the continuing declines in revenue associated with the leasing portfolio with that group of stores and that business unit now issuing loans. So I think it’s – we 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.

Doug Cooper: Okay, great. That’s it from me. Thanks, Jason.

Jason Mullins: Thanks, Doug.

Operator: Thank you. And I am not showing any further questions in the queue. I would like to turn the call back to David Ingram for his final remarks.

David Ingram: 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.

Operator: 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.