goeasy Ltd. (GSY) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the goeasy Annual Meeting of Shareholders. I'd now like to introduce the Executive Chairman of the Board, David Ingram.

Good afternoon, and thank you for joining us for the Annual Meeting of Shareholders of goeasy. My name is David Ingram. I am the Executive Chairman of the Board of goeasy, and I will also be acting as Chair of today's meeting. I would like to acknowledge the following members of the goeasy management team that are with me today: Jason Mullins, President and CEO; and Hal Khouri, Executive Vice President and CFO; and Sabrina Anzini, Senior Vice President, Legal and Corporate Affairs. I would also like to acknowledge the current board members that are joining us virtually at today's meeting. To proactively deal with the unprecedented public health impacts of COVID-19 pandemic and to mitigate risks to the health and safety of our communities, shareholders, executives, employees, and other stakeholders, we are pleased to host today's meeting through this virtual meeting platform, accessible to all shareholders regardless of physical location, to participate, submit questions and vote. Allow me to outline the agenda for this afternoon. We have 2 formal matters of business to conduct today: The election of Directors and the reappointment of the corporate's auditors for the coming year. Once the formal business of the meeting has been completed, I will turn the agenda over to Jason Mullins, President and CEO, who will make a presentation regarding our strategy key initiatives and the current quarter business trends. We will then take any questions. We will conduct the votes on the election of directors and the reappointment of the corporation's auditors for the coming year. Given that this is a virtual meeting, the voting at today's meeting will be conducted by online ballots for all matters. If as a registered shareholder or a duly appointed proxy holder, you are using your control number to log into the meeting and you accept the terms and conditions, you will be provided with the opportunity to vote by online ballot. If you have already voted by proxy and you vote again during the online ballot during the meeting, your online vote during the meeting will revoke your previously submitted proxy. If you have already voted by proxy and do not wish to revoke your previously submitted proxy, do not vote again during the online ballot. The poll will be opened for all resolutions at the same time. This will allow you to choose to vote on each resolution immediately or wait until conclusion of discussion on each resolution prior to casting your vote. Once the polls have opened, the items of business to be voted on and your available voting options will be visible on the voting panel on your screen. To submit a vote, please click on the voting choice displayed on your screen. Given the virtual format of today's meeting, and in order for us to expediently undertake the business to be conducted at the meeting, we would request that registered shareholders and duly appointed proxy holders who have specific comments or questions on a formal item of business make such written submissions now, clearly identifying the applicable item of formal business as well as your name and contact information. [Operator Instructions] During the course of this meeting, at the appropriate time, questions on formal items of business will be addressed prior to voting on the applicable motions. Once discussion on all items of business has concluded, I will give you 30 seconds to enter your votes and then declare voting closed on all resolutions. The results of the meeting will be released to the TSX today and will be made publicly available. I now declare the polls to open on all resolutions. I will now call the meeting to order. I will preside as Chair of the meeting, and I shall ask Sabrina Anzini to act as Secretary of the meeting. I shall appoint Rebecca Prentice and Christopher de Lima of TSX Trust Company to act as Scrutineers for the meeting. The Secretary has advised me that the notice calling this meeting, together with a form of proxy and management information circular and the annual report containing the financial statements of goeasy Limited for the financial year ended December 31, 2019, and auditor's report thereon have been sent to each Director of the corporation, the auditors of the corporation and each intermediary and registered holders of common shares of the corporation of record on May 1, 2020, the record date for the meeting. Copies of these materials are available on the corporation's website and on SEDAR. Accordingly, I will dispense with the reading of the notice of the meeting. The Scrutineer has provided me with a preliminary report regarding shareholder attendance at this meeting. Based on the preliminary report, I declare that the requisite quorum of shareholders is present, and I declare that the meeting is duly and properly constituted for the transaction of business. I direct that the confirmation of mailing of the notice of the meeting received from TSX Trust Company and the Scrutineers' complete report on attendance, be annexed to the minutes of the meeting. There are several matters that must be dealt with during this formal part of the meeting. In order to expedite these matters, I have requested that certain persons make and second the formal motions, and I will call on these persons at the appropriate time. The Secretary has the minutes of the last meeting of shareholders of the corporation. I will dispense with the reading of the minutes of such meeting. The first item of business is the presentation of the corporation's consolidated financial statements and the auditor's report thereon, which have been made available prior to the meeting and are available on the corporation's website and on SEDAR. I will dispense with the reading of the auditor's report to the meeting. We will now proceed with the election of the Directors. The number of Directors to be elected at the meeting is 7. I declare the meeting open for nominations. In the interest of expediency, I will make the nominations on behalf of the management of the corporation. I nominate those persons specified in the management information circular delivered with the notice of meeting, namely David Appel, Karen Basian, Susan Doniz, David Ingram, Donald Johnson, James Moore and Sean Morrison to serve as directors of the corporation, to hold office until the next Annual Meeting of Shareholders or until their successors are duly elected or appointed in accordance with the articles and bylaws of the corporation. As no further nominations were received, I now declare the nominations closed. May I have a motion that 7 persons nominated as Directors of the corporation be so elected?

I so move.

Thank you, Jason. May I have the motion seconded?

I second the motion.

Thank you, Hal. I will now call for a vote on the motion. The online ballot will allow for voting for each individual Director nominee. [Voting]

We will now proceed with the reappointment of the auditors of the corporation. May I have a motion that Ernst & Young LLP be reappointed as auditors of the corporation until the next Annual Meeting of Shareholders or until a successor is appointed and that the Board of Directors are authorized to fix the auditor's remuneration?

I so move.

Thank you, Jason. May I have the motion seconded?

I second the motion.

Thank you, Hal. I will now call for a vote on the motion. The online ballot will allow for voting on this item. [Voting]

The polls for all items of business and -- of those at this meeting will close in 30 seconds. For those of you who have not yet voted and wish to do so, please do so now. I now declare the polls closed and voting terminated for this meeting. I confirm the polls are now closed. Based on preliminary voting results, the 2 resolutions, namely the election of Directors and the reappointment of auditors have passed. Accordingly, as a result, I hereby declare the Directors elected and the auditors reappointed. A report disclosing the voting results will be filed on SEDAR and disclosed in a press release in due course. This concludes the formal business brought before the meeting. I wish to thank you all for attending and now declare this meeting to be terminated. I will now turn this over to Jason Mullins, the company's President and CEO, who will give a presentation regarding our strategy key initiatives and current quarter business trends.

Thanks, David. Good afternoon, and thank you for joining our 2020 Annual General Meeting. For today's presentation, I will provide a brief recap of our results and accomplishments since the 2019 AGM and the Investor Day hosted last year, provide an overview of our strategic initiatives for the year, then zoom in and provide an update on the current state of the business and the quarterly trends we are observing. I will begin with a summary of our financial highlights. 2019 was another significant year for our organization highlighted by record financial results, several major milestones and great progress made against our strategic initiatives. We were also pleased to achieve all 7 of the revised commercial targets published for the year. The loan book finished over $1.1 billion, up 33%, leading to revenue growth of over 20%. The scale and operating leverage turned the revenue into adjusted net income growth of over 51% and growth in diluted earnings per share of over 45%. When combined with the consistent financial leverage, return on equity was a record 25.3%, up from 21.8% in the prior year. 2019 marked the 18th consecutive year of revenue growth for the company at $609 million and lifted our compound annual growth rate since 2001 to 13.1%. After adjusting for the onetime charge associated with the early redemption of our unsecured notes, adjusted net income for the full year was a record $80.3 million and adjusted diluted earnings per share was a record $5.17, up 45%. It was the 18th consecutive year of reporting a profit and lifted our compound annual growth rate for net income since 2001 to 31%. As we highlighted during our Investor Day in 2019, we continue to pursue a long-term strategy of expanding our product range and increasing the use of risk-based pricing, which increase the average loan size and extend the life of our customer relationships, thereby increasing our share of wallet and the lifetime value. As such, the total yield earned on the consumer loan portfolio continued to gradually decline while generating accelerated organic loan growth across our existing fixed cost base. This meant we increased the average loan book per branch from $2.9 million to $3.7 million at year-end. The revenue produced by growing the average book per branch is accompanied by only a marginal level of incremental cost, resulting in significant operating leverage for the business. As such, the operating margin expanded to a record 27.7%, up from 23.7% in 2018. Over the course of the year, we made several important enhancements to our balance sheet, including amendments to our revolving credit facility and refinancing our unsecured notes. The revolving credit facility was increased to $310 million, while reducing the cost of borrowing and extending the maturity out to February 2022. Additionally, the unsecured notes were refinanced and increased to USD 550 million, while reducing the cost of borrowing and extending the maturity out to December 2024. Collectively, these amendments increased our liquidity while extending the maturities and providing us with stable and long-term capital. As I outlined in the letter to shareholders in the annual report, we certainly did not foresee a global pandemic producing a severe economic recession. However, the decisions made to increase our liquidity and extend our debt maturities and take advantage of excellent conditions in the capital markets were very timely. When combined, these 2 balance sheet enhancements increased our funding capacity to $240 million at year-end, providing enough capital to fund our business until late in 2021. Furthermore, our fully drawn weighted average cost of debt reduced from 6.8% at the start of the year to 5.5% at year-end, helping to further boost our return on assets. With these major enhancements behind us, we have now begun to lay the groundwork for the next stage in the evolution of our balance sheet through the establishment of a securitized funding facility which we hope to implement as soon as the conditions in the market improve. As a portfolio business with strong risk-adjusted margins and an average remaining term on our loans of less than 4 years, our business generates significant free cash flow. Our first preference is to invest our free capital in growing the loan portfolio as the organic growth of our business produces the best return on our investment and fuels earnings into the future. During the year, we deployed $277 million into organic loan growth. If we produce incremental free cash above the level that can be deployed into organic loan growth, the excess capital can then be used to either pay down debt and deleverage the balance sheet, invest in new lines of business or acquisitions or return capital to shareholders through dividends or share repurchases. In this event, we will first assess our ability to access and maintain sufficient liquidity to fund our organic growth and whether our current level of financial leverage is appropriate, which we believe to be optimal at approximately 70% net debt to total capitalization or roughly 2.5x debt to equity. Provided we are confident we have access to the capital to fund organic loan growth, we have chosen to return approximately 35% of our trailing earnings to shareholders through a dividend, while investing the remaining capital where we can generate the next highest return that will maximize the long-term per share value of the company. Based on the 2019 earnings and confidence in our liquidity position, the Board approved an increase in the annual dividend from $1.24 per share to $1.80 per share, an increase of 45%. 2019 marked the sixth consecutive year of an increase in the dividend to shareholders. As outlined in the Investor Day last year, we will also take advantage of repurchasing us -- of opportunistic times when our share price trades below its intrinsic value such that repurchasing our stock becomes the best return on our capital. Over the year, we invested $20.3 million in share repurchases, buying back approximately 458,000 common shares at a weighted average price of $44 through our normal course issuer bid. With our NCIB still active today, year-to-date, we have invested another $21 million, buying back over 400,000 shares so far in 2020. It is important to note that all the decisions we make with respect to our financial leverage, distributing dividends, repurchasing stock or investing in new lines of business are all made on the principle that they are sustainable through economic cycles. Lastly, as we anticipated, the continued increase in our dividend, combined with the milestone $1 billion market capitalization reached last November, has further helped increase the trading volume of our shares. The average daily volume has nearly tripled, reaching 138,000 year-to-date relative to only 47,000 a day during the same period last year, helping increase the liquidity of the goeasy investment. Al together, we have continued to produce industry-leading total shareholder return, finishing 2019 at over 7,700% since 2001. Furthermore, at the end of 2019, we ranked second compared to the 27 companies in the TSX Financials index, fourth compared to the TSX 60 and #27 compared to the entire 736 independently listed operating companies on the TSX based on our last 5-year compound growth rate and diluted earnings per share. I will now turn to some updates on our strategic initiatives with a brief recap of our progress in 2019 and our current focus for 2020 and beyond. As shared last year, our strategy to become the largest and best-performing lender in our industry is guided by 4 strategic pillars of expanding our product range, developing our channels of distribution, increasing our geographic footprint and delivering a best-in-class experience that helps put our customers on the path to a better tomorrow through improving their credit and graduating back to prime. This strategy is ultimately powered and made possible by our technology and most importantly, our people. I'll start first with a brief recap of our progress made in 2019. On product expansion, after fine-tuning our secured loan product throughout 2018, we began to scale our offering in a more meaningful manner in 2019. The test-and-learn philosophy we have always employed successfully exposed the learnings and insights we needed to be comfortable accelerating growth. A product which allows homeowners to graduate to larger loans at lower interest rates more than doubled during the year, finishing at $115 million or approximately 10% of our portfolio. With 20% of easyfinancial customers owning their home, we continue to believe this product will be an important part of our broader financial services offering and helping our customers get back to prime credit. On geography, as we entered 2019, our efforts to refine and optimize our business in Québec also proved successful. Loss rates were progressively trending towards the portfolio average, and we began to scale our presence in the province. By year-end, we had doubled our loan book in the province to $75 million or approximately 7% of our total portfolio. We also increased our footprint in the urban city centers, specifically the greater Toronto area, where we have historically lacked representation. With 6 additional branches opened in the GTA alone, we are building a leading presence in these denser population markets. With respect to our channel expansion, as we discussed last year, we have been developing our point-of-sale financing channels to provide greater access to credit for non-prime Canadians when shopping for goods and services. We've always viewed this channel as a great low-cost source of acquisition to bring new customers into our lending ecosystem so we can offer them other products and services and expand our share of wallet. Historically, our greatest challenge in this channel has been the lack of integration between a prime lender and ourselves. If a customer was declined for prime credit and then forced to resubmit a new application from scratch, it created significant friction in the experience, resulting in abandoned sales and frustrated customers. Furthermore, we knew the right long-term solution was an omnichannel model to support the continuing shift to e-commerce. So a few years ago, we began a journey to find a prime point-of-sale lending partner that we could team with. All options were explored, including partnering with major banks, acquisitions, international incumbents and building the platform ourselves. After extensive market research, we found the ideal partner. In September, we entered into a strategic commercial partnership and made a $34.3 million equity investment in PayBright, a Canadian fintech business focused on instant point-of-sale consumer financing to the prime market through interest-bearing, 0% financing and paying for programs. Through this arrangement, easyfinancial became the provider of nonprime financing within their platform. PayBright has partnered with over 6,000 domestic and international merchants, allowing them to offer instant payment plans to their Canadian customers and a quick and easy digital experience through both e-commerce and in-store. Major partners today include brands such as Wayfair, Samsung, Lenovo and The Source. By offering PayBright as a payment method at checkout, retailers provide their customers with additional spending power, which drives increased sales through higher checkout conversion, increased average order value and greater customer loyalty. Through integrating our nonprime loan product into their platform, we now offer Canada's leading instant point-of-sale payment solution that serves the entire credit spectrum of consumers in a single seamless user experience. PayBright is compounding revenue growth at over 100% a year, and we have already acquired thousands of customers through this channel at goeasy. Nevertheless, we consider this partnership to be at the very early stages. Lastly, we made several enhancements to our customer experience during the year, including introducing e-transfer as a new funding method for our borrowers and launching a new credit score optimizer product, the first of its kind in Canada, which helps our customers tackle their debt in a methodical manner. Continuing to digitize the transaction, automate underwriting and give consumers more tools that can help them on their journey back to prime credit will continue to be at the core of what we do. Turning now to our strategic initiatives for 2020. While the current conditions created by COVID-19 required us to briefly pause and focus all efforts on supporting our existing customers, we were fortunate to retain all our team members, many of whom continue to make progress on this year's strategic initiatives. As we highlighted last year, we continue to believe there are unique opportunities for us to develop additional products on our quest to be a full suite financial services organization. Our first initiative will be to pilot a new product in the form of a direct-to-consumer auto secured loan. After careful and exhaustive research of the market, we see a significant opportunity for this product to take several forms. First, we estimate there is over $26 billion of nonprime consumer loan balances in Canada and over $13 billion of nonprime auto loan originations annually. More important, we believe there is an opportunity to create a better car buying experience for these customers. Today, consumers wait until they find the dealership that can get them approved for financing and are often at the mercy of the dealer who controls the entire transaction. By preapproving customers for financing upfront, they'll be able to shop wherever they like with ease and control. Secondly, many nonprime customers rely on purchasing vehicles through private sales, such as from a neighbor or a friend, yet there currently is a void in the market for financing these type of transactions. Our research suggests that there's over 1 million used cars changing hands privately each year. So this is a true white space opportunity we believe we can fill. Lastly, as we aim to offer our existing customers larger loans at lower interest rates on their journey back to prime, there is an opportunity for customers to provide their existing vehicle as security to secure a better loan offer. Like our real estate secured loan, this product would be underwritten on credit and affordability but utilized security to offer a more attractive interest rate to the customer. Consistent with our test-and-learn philosophy, we are aiming to be in market with a pilot program in late 2020 or early 2021 so that we can test and optimize the product before beginning to scale. Our second major initiative will be to continue to focus on further developing our point-of-sale business in partnership with PayBright. Each year in Canada, we estimate there is more than $30 billion of credit extended to consumers through financing and buying now, pay later programs offered at the point of sale. With only a small handful of PayBright's major e-commerce merchants live with the nonprime integration today, we'll work together to onboard new partners, further optimize the technology platform and launch the in-store solution. With sales volume already beginning to climb, thanks to PayBright's presence in e-commerce, we expect customer acquisition from this channel to build throughout 2020 and beyond. Most importantly, customers acquired through this channel will have the opportunity to access our other unsecured and secured loan products as we aim to give them the full easyfinancial borrowing experience. PayBright, with goeasy's full support, as both commercial partner and shareholder, is on a mission to be the buy now, pay later market leader in Canada. Within Canada, we will remain focused on developing our footprint in the Québec market and urban city markets, where we remain underdeveloped relative to the population. With 22% of the population in Québec and only 7% of our portfolio today there remains tremendous growth in this market for many years into the future. Likewise, the urban centers have some of our most successful branches with 6 of our top 10 locations residing within the Greater Toronto area, with the others being in Vancouver, Calgary and Edmonton. As we highlighted last year, we also believe there are excellent opportunities for an acquisition in other markets where the easyfinancial business model can be replicated with success. Like Canada, many similar countries lack professionalized omnichannel providers of nonprime credit, leaving a comparable gap between traditional banks and payday loans. The ideal opportunity would be in the U.S. or U.K. markets, where we can overlay our multiproduct and omnichannel business model and leverage our capabilities in digital and analytics to generate real long-term growth and revenue synergies. With a robust organic growth trajectory here in Canada, it permits us to be careful and disciplined buyers, only considering a transaction if it can be truly accretive to our base plan. Our next major initiative is to begin offering lending products and services to several new segments of the market that are unable to access credit today through the launch of all new proprietary credit model that leverage consumer banking data as an alternative or supplement to traditional credit data. Each year, there are more than 300,000 newcomers to Canada and 500,000 students graduating with postsecondary education who do not have a credit file or have very limited borrowing history. These new credit algorithms, which are the first of their kind in Canada, are built using the latest statistical modeling techniques and will enable us to utilize the customer's income and expense transactions to assess their creditworthiness and offer them the opportunity to borrow while establishing or building their credit profile. Over the last 3 years, we have enabled applicants to submit their bank account data electronically as part of their application for an easyfinancial loan. As a result, we have collected data from over 0.5 million bank accounts containing over 700 million transactions and have utilized machine learning to carefully mine and analyze this data to build more advanced and predictive credit models. With a plan to begin testing these models late this summer, we believe this represents a major milestone in the use of alternative data and the evolution of our risk and analytics practice. Moving forward, as I described earlier, at the center of our strategy must be the technology to support our ambitious growth plans. So in 2020, we will be working on upgrading our core lending platform. As we aim to develop new lending products, expand our channels of distribution and leverage new technologies to disrupt and innovate within our industry, our core lending technology is a critical part of our business. Our existing platform, which was implemented nearly a decade ago in the early stages of our lending business, has served us well. However, in a world that now demands a frictionless digital experience for our staff and customers, there is a competitive edge to be gained through a more intuitive and flexible platform. The launch of a best-in-class fully cloud-based SaaS lending solution will give us the platform to scale the enterprise for many years into the future. The new platform is truly a global lending solution with all of loan origination, loan servicing, customer relationship management and collections, within one Salesforce-based application, the new platform will offer multiproduct, multichannel, multilanguage and multicurrency capabilities. After spending almost 2 years researching and selecting the right platform, we began this important project late last year and expect to complete the configuration and migration in 2021. We will now take a moment to zoom in and provide an update on the current state of our business and recent commercial trends. Timed in accordance with the opening of retail businesses in each province, we are now in the first phase of our reemergence plan. Stores and branches have reopened in all provinces while significant health and safety measures remain in place to protect the well-being of our staff and our customers. We continue to use tools such as digital loan contracts and doorstep delivery to ensure we can remain fully operational despite any of the health precautions needed to serve all of our customers. As we have outlined previously, we have not had to furlough any of our team members so the entire organization is here to support our gradual pivot back to a balanced focus on loan originations. Lastly, we remain proud of the work we are doing in the communities, both locally and abroad. With over $170,000 donated since the onset of the pandemic and our drivers supporting local boys and girls club deliveries in several cities throughout Canada, we aim to help those in greater needs through our efforts. With the month of May now behind us, we can share a high-level overview of how things are trending. Generally, everything remains broadly in line with the expectations that we communicated during our first quarter release about a month ago. With respect to consumer demand and sales volume, we believe April was the low month for originations, driven in part by our reduced advertising spend, stay-at-home orders and the lack of basic expenses that often fuel our consumers' borrowing needs. In May, however, we saw a gradual improvement. While web traffic, application volume and loan origination remained down 6%, 44% and 50% year-over-year, they have greatly improved over the month of April. Traffic was up 8%, loan applications were up 17%, and originations were up 38% over the prior month. All together, we still expect the loan book to reduce slightly between the 1% and 3% we previously guided, but likely at the higher end around the 3% level. Turning now to payment and credit performance, we have continued to see very strong results. For those that have faced financial challenges, we continue to utilize our customer assistance program, which consists of a suite of loan amendment solutions that support borrowers. In May, we saw the volume of support provided reduce dramatically to levels below our historical norms. During the month, only 6.5% of our customers utilized the form of support as compared to the approximately 7% to 8% that would normally utilize this program in a typical month. We have also continued to experience assistance being provided by our optional loan protection plan, which the majority of our customers purchase at the time of loan origination. This insurance, which is offered by Assurant Inc. protects the customer in the event of death or disability and covers their loan payments for a period of 6 consecutive months in the event of unemployment, paying a onetime lump sum payment of $2,000 if the customer remains unemployed at the end of their claim. Claims under this program are funded through premiums collected from borrowers, and while elevated claims can serve to reduce the amount of commission earned by easyfinancial from this program, a fixed portion of the premiums we collect are guaranteed while the insurer carries the additional underwriting risk. In May, we saw the claims paid reduced just slightly to approximately $7.7 million of payments, which were made to easyfinancial on behalf of our borrowers. Notwithstanding the critical support these programs provide to our customers, we also continue to observe a strong level of true overall payment performance. In the month of May, these levels increased to 95% of the payments we would normally collect, representing over $70 million worth of customer payments in the month demonstrating the strength and the capacity of our customers to repay their loan. Lastly, the strength of government support, flexibility of creditors and lower overall expenses have culminated the lowest level of insolvencies in Canada in over a decade. Based on these factors and the current delinquency trends and consistent with what we communicated during the first quarter release, we would expect our net charge-off rate in the second quarter to reduce from the prior year and finished well below 13%, likely closing over 200 basis points below that level. In closing, and as we said before, we continue to view ourselves as a small entrepreneurial company in a vast underserved market. Our evolving business model has proven resilient, and we are in the early stages of our third phase of growth, which involves building a full suite financial services organization. Lastly, we are proud of our history of execution. We continue to set ambitious but realistic goals, test and trial growth initiatives well in advance of scaling them and following through on our commitments. Executing our plan while carefully and thoughtfully allocating our capital will continue to maximize returns for shareholders, while putting nonprime Canadians on the path to a better tomorrow. We are truly just getting started. Thank you.

Thank you, Jason. Management will now be pleased to answer any questions that have been submitted online during the course of this meeting. We will attempt to answer all questions to the extent time permits. If we're unable to respond to all questions, we will endeavor to provide updates on the matters noted in our future disclosures.

There's currently no questions in queue, so we'll just give it a quick minute to see if any come in. And if not, then we can wrap up.

Okay. There doesn't appear to be any questions. So as always, we're more than happy to receive questions outside of these formal matters. So if there are things on your mind, please feel free to reach out to us. But on behalf of everyone here at the meeting today, I wish to thank all of you for your continued support and participation. And we look forward to updating you in August with the Q2 release. Thank you.

Thank you.