Executives: David Yielding - Senior Vice President, Finance David Ingram - President and Chief Executive Officer Steve Goertz - Chief Financial Officer Jason Mullins - Chief Operating Officer Jason Appel - Senior Vice President, Risks and

Analytics
Analysts: Jeff Fenwick - Cormark Securities Stephen MacLeod - BMO Capital Markets Marc Charbin - Laurentian Bank

Securities
Operator: Good morning, ladies and gentlemen. Welcome to the Third Quarter Financial Results Call for 2016. I would now like to turn the meeting over to Mr. David Yielding, Senior Vice President, Finance of goeasy limited. Please go ahead, Mr.

Yeilding.

David Yielding: Thank you, operator and good morning everyone. Thank you for joining us to discuss goeasy’s results for the third quarter of 2016. The news release, which was issued yesterday after the close of market, is available on Marketwire and on the goeasy website. Today, David Ingram, goeasy’s President and CEO, will talk about the highlights of the third quarter.

Following his remarks, Steve Goertz, the company’s Chief Financial Officer, 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 lines for questions from investors. Jason Mullins, the company’s Chief Operating Officer and Jason Appel, the company’s Senior Vice President of Risks and Analytics 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 welcomed 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 welcomed to listen to this call and use management’s comments in responses to questions and coverage. However, I would ask that they do not call callers unless that individual has granted their consent. Today’s discussion may contain forward-looking statements. I am not going to read the full statement, but I will direct to the caution regarding forward-looking statements included in our MD&A.

Now, I will turn the call over to David Ingram.

David Ingram: Good morning, everyone and thank you for your participation on today’s call. We are very pleased to report another record quarter for goeasy. For the third quarter of 2016, overall revenue increased by 13% to a record of $88 million. The company’s revenue growth was again driven by easyfinancial as it continued to meet strong consumer demand by offering everyday Canadians an alternative between banks and high cost payday lenders.

Our loan book reached $344 million by the end of the quarter growing 36% over the past 12 months and on track with our internal plan. Included in the operating expenses for the quarter were $5.3 million in transaction advisory costs that we incur to analyze, arrange financing and submit a bid for a potential strategic acquisition. Our criteria for acquisitions are simple. They must align with our long-term strategy. They must be accretive to earnings and they must deliver a rate of return equal to or greater than our core business.

We did not ultimately complete the contemplated acquisition as during the process we determined that we could create greater shareholder value by continuing our investment in the expansion of our current business rather than by trying to execute this transaction. Excluding the above noted transaction advisory costs, normalized net income increased by 41% to $8.8 million and earnings per share increased by 42% to $0.64 for the quarter. The strong results were driven by easyfinancial which saw its operating margin increased from 34.2% to 39.9%. Easyfinancial’s performance was aided by improved collection execution. During the quarter, we introduced new collection towards the strategies and tactics, which had the desired effect.

These changes were more evolutionary than revolutionary but were based on in-depth data analysis of our optimal collection and calling tactics. While charge-off rates in the quarter were comparable to the prior sequential quarter and the third quarter of 2015, we made significant progress in reducing the levels of delinquency. Delinquency on the last Saturday of this quarter was 6% down from 7.1% on the last Saturday of the third quarter in 2015. Average levels of delinquency in the quarter were also lower than the third quarter 2015 and down sequentially from the first half of 2016. Just after the end of the quarter on October 3, we launched our indirect lending partnership with Sears Canada.

We have developed Canada’s first single source application system for point-of-sale financing across all customers in the credit spectrum. Our tablet based and proprietary application system allows the customer to complete a single credit application and provides the best possible financing solution. Sears is financing the prime loans thoroughly on their balance sheet while we are financing the non-prime loans that do not meet Sears’ lending criteria, but which will meet our own lending criteria. We are also using our people, our processes and infrastructure to manage, administer and collect all loans originated under these programs. We look forward to supporting Sears and the customers in obtaining purchase financing across the credit spectrum and in our ability to leverage this industry leading and proprietary technology with other business partners.

While easyfinancial achieved strong loan book and profitability growth during the quarter, the trading environment for easyhome continued to be soft. Although we saw revenue decline in this mature business with same-store sales down 4% in the quarter, our performance continued to be stronger than many of our industry peers. Likewise, easyhome’s operating margin of 14.4% continued to be favorable when compared to the industry peer group. In this difficult trading environment, we continue to take steps to right-size our store network and to aggressively manage cost to maintain solid levels of profitability. So, overall, we are pleased with the strong results of our company in the quarter and the progress we made in growing the top and bottom line of easyfinancial.

I am particularly proud of our team who focused on the execution of the day-to-day business, while many of our executives were managing the diligence process for the last two quarters. Now, I will turn the call over to Steve to review our financial results for the quarter in greater detail.

Steve Goertz: Thank you, David. Total revenue for the quarter was $87.8 million, an increase of $9.8 million or 12.6% compared with $78 million in the third quarter of 2015. Same-store sales growth, which includes easyfinancial, was 15.4%.

To better understand our financial performance, I will review each of our business units separately. Within easyfinancial, we continued to experience strong growth of our easyfinancial gross consumer loans receivable portfolio, which finished the quarter at $344 million, up from $254 million at the end of the third quarter of 2015. This represented an increase of $90 million or 36%. The gross consumer loans receivable portfolio grew by $18 million in the quarter. Easyfinancial reported revenue of $52.6 million for the quarter compared to revenue of $39.3 million for the third quarter of 2015.

Easyfinancial’s revenue growth for the quarter of 34% was in line with the growth of the gross consumer loans receivable portfolio. The yield decline of 200 basis points when compared with the third quarter of 2015 was driven by the continuing strong demand for larger dollar loans, which have lower pricing on certain ancillary products. This decline was somewhat offset by yield improvements relating to the introduction of new ancillary products and improved penetration of existing products. Claims against the company’s creditor life insurance product are netted against the commissions earned by the company. These claims peaked in the first quarter of 2016 resulting in reduced yield and revenue.

Since then, we have seen a sequential improvement in claims in each ensuing quarter as unemployment claims have abated. The operating expenses of easyfinancial excluding debt expense increased by $1.6 million or 11.4% in the quarter compared with the third quarter of 2015. As a percentage of revenue, these operating expenses declined from 36.5% of revenue in the third quarter of 2015 to 30.3% of revenue in the current quarter. The declining pace of branch openings and the maturation of the branches acquired in early 2015 have had a positive impact on our operating margin. Additionally, while total advertising spend in the quarter was consistent on a dollar basis with the third quarter of 2015, it declined on a rate basis from 4.1% of revenue in the third quarter of 2015 to 3.1% in the current quarter.

Easyfinancial’s bad debt expense increased to $14 million for the third quarter of 2016, up 29.3%. This rate of increase was below the 36% 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 15.4% in the quarter, up slightly from the 15.2% reported in the third quarter of 2015, but well within our targeted range of 14% to 16%. All of these factors allowed the easyfinancial business to scale and to grow its operating margin from 32.4% in the third quarter of 2015 to 39.9% in the current quarter. On a dollar basis, easyfinancial’s operating income was $21 million in the third quarter of 2016 compared to $12.7 million in the third quarter of 2015, an increase of $8.3 million or 65%.

Now, moving to easyhome, easyhome generated $35.1 million in revenue, a decrease of $3.6 million or 9.2% when compared with the third quarter of 2015. There were three key drivers of the reduction in easyhome revenue. First, the company acquired the lease portfolio of 14 rent-to-own stores from a large U.S. based rent-to-own company in the third quarter of 2015. Such acquired lease portfolios tend to experience a decline over the 12 months subsequent to the acquisition.

This year-over-year decline in revenue from this acquired portfolio was $0.5 million. Secondly, the company completed several other transactions over the past 15 months to close or sell merchandising leasing stores that its own. These transactions in aggregate reduce revenue by $1.5 million in the quarter when compared to the third quarter of 2015. Finally the trading environment for easyhome continued to be challenging for the reasons that David touched earlier. These factors resulted in revenue declines of $1.3 million and the negative same-store sales figure.

The operating income for the leasing business was $5.1 million for the quarter, a decrease of $1 million when compared to the third quarter of 2015. The reduction was driven primarily by the lower revenue as previously described, partially offset by a reduction in operating expenses. Similarly, operating margin for the third quarter of 2016 was 14.4%, a decline from the 15.6% in the third quarter of 2015. We continue to expect the operating margin in the leasing business to be in the range of 14% to 15%, still ahead of industry peers. Corporate expenses, excluding the transaction advisory cost increased from $5.8 million in the third quarter of 2015 to $8.1 million in the quarter.

The main drivers behind this increase were high recruit, but not paid incentive compensation as the financial results of the business exceeded budget and higher salary costs as we continued to augment our IT and risk teams. As David mentioned earlier, included in operating expenses for the quarter were $5.3 million in transaction advisory costs that we incurred to analyze, arrange financing and submit a bid for a potential strategic acquisition. We have excluded the impact of these transaction advisory costs on our normalized results. Normalized operating margin was 20.2% for the third quarter of 2016, up from 16.5% reported in the third quarter of 2015. The improvement in operating margin was driven by the higher operating margin in the easyfinancial business and a larger percentage of earnings generated by easyfinancial.

The improved operating income translated into higher normalized net income and earnings per share. Normalized net income for the quarter was $8.8 million and diluted earnings per share increased to $0.64 in the quarter, up from $0.45 in the comparable quarter in 2015 and an improvement of 42%. The company has continued to generate a strong return on equity. On a normalized basis, return on equity for the quarter was 18.9%, up from the 15.0% recorded in the third quarter of 2015. While we have increased our leverage somewhat, our overall financial position remained strong at September 30.

Our debt to total capitalization was 0.57, less than many of our industry peers. $255 million was drawn against our $300 million committed credit facility. This additional borrowing availability coupled with the $29.8 million of cash on hand provides sufficient capacity to fund the expected loan book growth into mid-2017. Now I will turn the call back to David.

David Ingram: Thanks Steve.

So looking forward, our strategy remains unchanged. We will continue to evolve our delivery channels, expand the size and scope of easyfinancial and execute with efficiency and effectiveness. While our recent exploration of a potential strategic acquisition would have accelerated the implementation of this strategy, we have concluded that organically growing our business provides greater value creation for our shareholders. We are now developing an accelerated growth plan that we will share in more detail in our next quarterly call. Our MD&A for the three months and nine months ended September 2016 includes an update on our 2016 commercial targets to reflect the most recent performance.

Our guidance for 2018 remains unchanged at this time. Our easyfinancial business has performed well and continues to grow in line with our expectations. We attribute this continued success to our investment in credit and risk analytics and to our bricks-and-clicks strategy which includes a coast to coast branch network coupled with a strong digital presence and an efficient online loan application process. The growth of easyfinancial continues to be aided by our investments in brand building recognition. Television is the key component of our appetite and strategy for the year.

We were on TV in the second quarter and this resulted in a heightened level of advertising spend of 4.8% of revenue. We took a pause from TV in the third quarter and our ad spend declined to 3% of revenue. Our plans called for renewed television advertising in the importing fourth quarter and so we expect advertising to represent around 4.5% of total revenue during that quarter. This will result in advertising spend coming in at just the 4% for the full year. Our success in the quarter gives us confidence in our ability to execute our plan, meet our objectives, build upon our 26 consecutive quarters of same-store sales growth and deliver record revenue and profitability in 2016.

We look forward to providing you with greater clarity on our future growth and capital plans as part of our next update call. So with our formal comments complete, we will now open it up for questions.

Operator: Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Jeff Fenwick of Cormark Securities.

Please go ahead.

Jeff Fenwick: Hi, good morning everybody. Just I wanted to take my first question David, just on that strategic exercise you undertook there, I guess one of the questions meeting this morning is just around, what’s the potential risk to the competitive environment here if we have another party coming and acquire that asset and then has some capital to put behind it and something we should be thinking about that – or how should we be thinking about that from a competitive perspective?

David Ingram: Yes. It’s a good question. Clearly, with the NDA that we have in place I can’t be any more explicit about who that asset is.

But I think it’s worthy of just reminding ourselves how big this industry is and how big it has been in the past. So, if we take ourselves back to just 2008, 2009, we had three big players Citi, Wells, and HSBC through household finance. And we know from information going back to those periods that, that collective loan books exceeded $10 billion for the principal businesses that we are in. So, we know that the size of the market has been quite large in the past. If we now fast-forward to the size of the market today and we look at the credit band in which we float, so from the highest scores that we use for our credit reference to the lowest scores that we used to let people through, that corridor from the high to the low in the kind of non-prime space, excluding mortgages is worth around $150 billion for that class of consumer and spend.

So, the way that we would look at this is the market is truly underdeveloped at this stage. There is huge demand. There is very little supply and the strategy of using stores in a multi-channel existence only has a couple of competitors for it. So, while there will be always competition and probably likely to be added competition for this category, we are nowhere near the capacity that has in demand for this product in the future. Again the other thing that we learned through the process is that while we today have one single product with the unsecured loan, we can see clearly that’s part to adding other products down the road and that’s part of what we will start to give you more information about in the Q4 year end update.

Jeff Fenwick: Okay. And just moving on to operationally some questions here, I think one of the challenges for me is just trying to understand the expense to build trajectory within easyfinancial and in light of your operating margin guidance, I mean we saw an example of a quarter here where you had some loan book growth, the expenses were actually down slightly in the segment I believe and it sounds like maybe just from the deferment of some advertising, but as we go forward here, I mean what are the key things that are driving expenses higher as you move along and is there a point where we have some big step-up and some things either adding a call center or having to step-up the operational facilities here to support the business, because it seems like there is certainly potential to pretty readily exceed that 38% operating margin if you got a book of $500 million going forward from here unless you are materially changing your product lineup?

Jason Mullins: Yes. Jeff’s, it’s Jason. I will just touch on the sort of the quarter specifically and then talk about going forward. So, if you look at the quarter specifically, David mentioned that from an advertising point of view we took a break off TV in Q3 whereas in Q2 we had the TV spend and in Q4 we will as well.

So, TV creates a bit more lumpiness in your ad spend timings and some of the other mediums like digital do, for example. So, the ad spend just within the easyfinancial business and where we allocate that spend is a couple of points of margin expansion in the quarter – quarter-over-quarter. It’s about 2.5x of that margin growth. And so obviously as we move into a quarter where we are going to reinvest in advertising and TV that will impact the operating margin somewhat. I think the reason David indicated that our long-term guidance in 2018 remains unchanged from an operating margin point of view is that we do expect that in the new plan that we will share in the new year we are going to further accelerate growth.

And similar to what we saw in this business over the last several years is that in a period of accelerating growth where you are investing in advertising, investing in physical expansion and then investing in the provision taking our loan book growth, that will put some pressure on the margins and move them into the kind of 34, 35, 36 range that we have provided our guidance on. So, I think the sort of upward expansion into the 38, 39 range is a little bit due to timing. And so our long-term operating margin guidance doesn’t really change much at this point, but certainly we will update in the new year as we look at the file going forward.

Jeff Fenwick: Okay. And then just in terms of the capital plan going forward from here, I think you are going to take your last draw on the facility to the first quarter of next year.

So, what do you have underway right now in terms of looking to either upsize that or replace that facility and is there some possibility here of funding costs going lower?

Steve Goertz: Yes, we definitely are looking at different alternatives to increase our capital to fund the growth. The first step in that is for us to clarify what our growth prospects look like. So, that’s why Dave indicated we are going through the strategic planning process right now to understand which products we are going to be going into, how aggressive we were going to expand their business, and from there that will determine the total capital required and we can go put plans in place. We know we have got the capacity using our current business plan to fund the growth in the mid 2017, excuse me, based on the committed capital that’s there today. We believe that there is additional capital in the similar vein to what we have, but we will be looking to approve upon our capital position, rate appropriate leverage ratios and so on in the next coming quarter as we solidify those plans.

So, it’s a bit early to say what that’s going to look like. We have got a really chart out the growth of the business first, because that gives us a better story to tell to the capital markets to make sure we get the appropriate capital structure for the next few years.

David Ingram: Yes. Just one piece to add, Jeff to what Steve has said, what we did gain confidence from the process that we went through over the last several months

was that: a) there was capacity to grow at a much faster pace than what we have been growing at and b) that there was a capacity to get funding for this acquisition and for higher growth. So, we gained a lot of confidence that we ultimately an acquisition like this comes down to what you are willing to trade-off in terms of price and concessions, but financing it was not one of them.

We were able to get all of the financing needs met and that’s given us confidence to go back and draw up a faster plan for organic growth than what we currently had thought through.

Jeff Fenwick: Okay, great. Thank you. That’s it from me.

Operator: Thank you.

[Operator Instructions] The following question is from Stephen MacLeod of BMO Capital Markets. Please go ahead.

Stephen MacLeod: Thank you. Good morning, guys.

David Ingram: Hey, Stephen.

Stephen MacLeod: I just wanted to just ask a little bit about the store network expansion at easyfinancial and what you expect to see going forward. And I just want to make sure that I am understanding correctly based on some of the commentary in the MD&A that is it safe to assume that outside of the 2018 targets that you put in place, is the store network build-out largely complete?

David Ingram: I think, Stephen, the total number of locations is fairly close. The distribution between standalones and kiosks is the next piece for us to work our way through. So, we know the standalone locations do roughly double the business that a kiosk does and we still have 40 to 50 kiosks remaining in our network. So, part of the exercise and part of what we are working through on the strategic plan is how fast and how many of those kiosks will be moved into standalone locations.

So, on a absolute count basis, we are getting close, but the distribution will change quite quickly as we move more to a monoline offering.

Stephen MacLeod: Okay. So, would it not to accelerate things beyond what you are willing to discuss in terms of the new strategic plan, but would it be safe to assume that as you roll kiosks into standalones, do you get some sort of offset with more business offsetting the incremental cost in terms of the loan book?

David Ingram: Yes, because the modeling that we have now got over the last 10 years, show us that the size of the average book in a standalone versus a kiosk

is 2:1. So, that’s an average of $2 million loan book versus $1 million. And the added extra cost of running the rents through a separate store and some staff is quite minimal compared to the leverage you get from the operating margin on the extra million dollars.

So, ultimately it’s always more profitable for you, which is why we have been moving that way, which is accelerating the amount that we move there and that would then take us to roughly call it 220 standalone locations and the targets that we have been talking about over the last few years is a target around 240, 250. So, we would still have kind of in the range of 30, 40 locations over the next few years to build.

Stephen MacLeod: Okay, that’s helpful. And then just as you think about the 2016 margin in easyfinancial given the strength of Q3, do you – what does that imply in terms of Q4 margins roughly for easyfinancial. And then also on the leasing business, the same-store sales growth – or same-store sales decline is a bit steeper than I had been expecting.

And I just want to know if that’s relative to a weaker comp or is that – sorry a stronger comp or relative to some overlying weakness in the market?

David Ingram: I will do with the leasing first and then Jason perhaps can pickup the easyfinancial margins. So, on the leasing piece, when we have looked closely at the results reported in the last – just even the last week from Rent-A-Center and Aaron’s, you can see that there is a bit of an industry softening and it’s particularly around the categories that are in the electronics. So, whether it’s TV, computing, tablets, phones, all of those categories are performing the same way that you might see with other national branded retailers who have just seen a softening. And you can tell that there is nothing new in the category. There is no inflation in the price.

There isn’t the same demand. So, you are relying now more on home furnishings to pickup some of the demand. So between those two categories, that’s creating some downward pressure on the leasing industry for demand. The other piece to it is that people will now have more alternative choices to get access to purchase stuff with products like easyfinancial. And again, you see that in the states where there are cash alternatives that are now providing them in a different access vehicle to get the same goods.

So, it slightly was in the quarter and part of that is just overlapping with the stores that we had acquired from Rent-A-Center that final 15 branches who now were merged into an existing easyhome, but have a deflated portfolio so they are overlapping on better comps a year ago. So, I think you will see the worst of it in Q4 and then we should start to see it level out for Q1, Q2. As far as easyfinancial margin, I will let Jason take that one.

Jason Mullins: Yes. I think Stephen sort of just tying back to the response on the earlier question.

So with the lumpiness of the timing of the ad spend, the way to think about Q4 is it’s probably going to look from an operating margin similar to the way Q1, Q2 looked, which were in the 35 to 37 range. So, you won’t quite see the peak benefits as we saw in Q3 of 39. That will come down a few points as the growth rate will be a bit higher given the seasonality and then the investment in the ad spend as well. So, that’s directionally where you can think about Q4.

Stephen MacLeod: Okay, that’s great.

And then just one last final one, I don’t want to put you in a position where you can actually to say more than you can, but just in terms of the strategic review that underwent, was there anything else in terms of your thinking in your learnings as you went through the process that really underscores your confidence in the ability to sort of go it alone as opposed to accelerate the growth through a large acquisition?

David Ingram: Well, I can tell you that the entire management team far more up to mistake about taking charge of their own platform of growth for the future, the ability of the team to execute and perform, the ability to look at and potentially add new products to the business. And when you put all of that together and the size of the demand in the marketplace, everyone is feeling an extremely excited and motivated to get on with a more aggressive growth plan. Even though we have had great growth and as I have said in earlier comments, we have had 26 consecutive quarters of same-store growth and for the majority of those that’s double-digit growth, we feel even more encouraged and more enthusiastic that we get higher growth numbers from 2017. So we learn a lot, I can’t obviously use this platform to divulge what we may have learned, but it gave us confidence that we can chat a better course for ourselves.

Stephen MacLeod: Okay, that’s great.

Thank you very much.

Operator: Thank you. [Operator Instructions] The following question is from Marc Charbin of Laurentian Bank Securities. Please go ahead.

Marc Charbin: Good morning.

With respect to your point of sale agreement with Sears, can you give us a sense of how one Sears location might compare to an easyfinancial location on average loan book at maturity and yield?

Jason Mullins: Yes. It’s Jason. So, it would be too early for us to really provide any guidance on that regards with the program really just being off the ground for a few weeks and still being rolled out across the country. And ours is a very different model where the customer in store financing purchase and then after the purchase has been financed in the event that they are a prime consumer. As I mentioned earlier, those loans will be carried by Sears and so they will own that customer relationship.

In the event, the loans are funded by us because they are a non-prime, we would take that customer and we would then service them from the branch that’s local to their market or from our call center. And then of course, we market to that customer to extend their lifetime value. So we really look at that channel as an acquisition channel for as to acquire a customer that we can then put into our other distribution channels for servicing long-term. So the only thing I think we can really say at this point is that the average ticket for those transactions is usually between $1,000 and $2,000 compared to our typical average loan of about $3,500. So it will really be taking the customer and then extending their life with us as we offer them other products after they have been acquired.

Marc Charbin: Okay. And the loans that you expect to take on are unsecured?

Jason Mullins: Yes. In some cases and in some cases depending on the partners, they will have some security in place, general purpose security. But when we think about the loans and that’s similar to an unsecured loan. So we expect the loans through that channel to perform very similar to our core business, which is why our outlook and our guidance from me is a portfolio performance and loan loss perspective doesn’t change.

Marc Charbin: Okay, thank you.

Operator: Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Ingram.

David Ingram: Thank you, all. Since there are no more questions, I want to thank everyone as usual for participating in this call. And we certainly look forward to updating you in February with our Q4 and year end results and the development of our strategic plan growth for the next few years. So, thank you, again.

Operator: Thank you.

The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.