Mixed Results from Two Iconic Canadian Brands

[00:00:01] This is The Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger Welcome back to The Canadian Investor Podcast. I'm back here with Dan Kent. We are back with a fresh episode for news and earnings on Thursday. Dan, how's it going? You glad to be back in the minus 30 Celsius weather from going down south?

[00:00:31] No. Yeah, there's like, I don't know, it was like 30 degrees there, so like yeah, 60 degree swing in temperature. It is really cold here in Alberta over the last few days, but I think it's going to pick up soon. Glad to be back. Yeah, no, glad to have you back for us. I mean, anyone out east is probably living the same thing as I am right now, so just shoveling their way out of snow. This has been pretty crazy.

[00:00:55] I think we got in Ottawa within three, four days, I think about like 75, 80 centimeters of snow, roughly around there. And then with the blowing winds just been, it's been the full Canadian experience. Yeah. Yeah.

[00:01:07] I think that's a chance, but enough about weather. We'll start off. We have a lot to talk about, so we'll start off with Canadian CPI that came out just today for January 2025. Headline CPI was 1.9% year over year, which was slightly higher than expected or actually in line with expectation, but slightly higher than December. Prices went up 0.1% compared to December.

[00:01:33] The GST, HST tax break continues to impact certain groups of items. Obviously, one of the most impacted was food purchase from restaurant, which declined 5.1%. The tax break was offset by higher energy prices, and that's something that you and I have talked a whole lot because of these base effects with energy prices being very low for an extended period of time.

[00:01:58] I think it was safe to assume that at some point, this will revert and put some upward pressure on inflation. And we're starting to see that whether it's a trend or it's just a one off for a few months, we'll have to see. But energy as a whole was a 5.3% year over year and 3.2% versus December.

[00:02:17] So that's the whole energy bucket. If you drill down a bit more, gasoline prices were up 8.6% year over year and increased 4% month over month. Natural gas was up 4.8% year over year and increased 6% month over month. Before I continue, anything you want to add here? I mean, the natural gas situation is pretty crazy. Hasn't it just rocketed in price over the last six months or so? I think it's like almost doubled, hasn't it?

[00:02:45] Yeah, pretty close to that. The last I checked, it was definitely up there. I don't know if I don't have it in front of me, but it's increased quite a bit for sure. Yeah, I mean, energy is going to be pretty key moving forward. I mean, I actually didn't get a chance to look at this report. Did they say how much? Because I know when I went over the last one, they said how much the GST impacted overall inflation. I don't know if they mentioned it this time.

[00:03:10] I don't recall them saying that. It's possible they did and I just missed it, but they definitely said that it pushed inflation downwards. And you can see that a bit more. If you start looking at the biggest contributor to upward pressure and biggest contributor to downward pressure, you're going to see a lot of items that were in the GST, HST tax break.

[00:03:34] So food purchase from restaurant is right up there. You have booze purchased from stores. I don't know if that one was in there or not. I think that one was maybe under a certain percentage of alcohol, but that was also in the biggest downward contributor.

[00:03:50] You had the toys, games, excluding video games. I know that was in there. So these were all in the main downward contributors. And then the upwards one, you had mortgage interest costs, rent, gasoline, vehicle insurance, and property taxes. So these are all some of the things that impacted in terms of the main changes, whether upwards or downwards.

[00:04:10] Yeah. And it's, I mean, if you look at the upwards contributors right now, they're pretty much something that impacts everyone. Whereas the downwards contributors, like maybe, I mean, food purchase from restaurants, alcohol, air transportation, toys and games and stuff, you know, that's kind of stuff that is avoidable to a certain degree for a lot of people. Whereas the upwards are still kind of hitting people pretty hard.

[00:04:34] I mean, mortgage interest costs is getting closer to 10%, which I think is like a pretty substantial decline over, you know, what it's been over the last while. But I mean, I would imagine when this GST holiday goes away, we'll be ticking up to the mid 2% range, but who knows? Yeah. Yeah. And that's some of my questions. And before I move to that, if we look at the core inflation metrics, so the ones that the Bank of Canada looks at, the CPI common, I find that one a bit confusing.

[00:05:03] So let's just focus on CPI medium. So let's just focus on CPI medium. Just keep in mind, they look at all the items and it's basically the items that are in the middle in terms of the percentage increase. So there's as many that had a lower percentage increase and as many as that had more than that. So that one was 2.7% and is actually a slightly higher than December.

[00:05:27] And if you're looking at CPI trim, which removes the extremities. So the most volatile items on either side. So whether on the decline or the increase, that one was 2.7% again, up from 2.5% in December. And what's interesting is you actually saw for CPI medium and trim, you actually saw those kind of stabilize slash go down since October of last year.

[00:05:54] And this is the first month. And I don't know, obviously one month, it's way too soon to say it's a trend or anything like that, but you're starting to see a potential increase. So it'll be interesting whether this continues. And that's something I'll keep a close eye on for the next little while. I think spring and maybe into early summer, see how that trends. Yeah. The one I was listening to the news this morning, they said food prices went down for the first time in like a decade almost.

[00:06:22] I think they declined like 0.6%. That's probably welcome news for a lot of people. I mean, food's been one of the main things that have just gotten thrashed over the last while in terms of costs. But again, it's one month who really knows, but there was no tax break on food or anything. I don't think that was all, which I mean, you would think that. I mean, there were, it depends on what kind of food. So it was like, I think prepared meals.

[00:06:47] Oh yeah. If I remember correctly, it wasn't everything. And obviously there's already some food that you don't pay any taxes on. So it is a bit, I think it's harder to figure out exactly what the impact was for food for that reason, because I think there was some impact from the tax holiday, but to what extent, I'm not quite sure. I think that's probably what a lot of people are trying to figure out here. Yeah. And I mean, I guess we'll find out because it's over now, isn't it?

[00:07:17] Or no, you'll still see numbers next month, but then after that it's over. So it'll be a partial month and January, I think we were talking about that as the only full month that the GST, HST tax break was in effect, where December was a partial month and then you'll have February for partial month as well. So it'll be interesting to see how those trends. And for me, there's four main things that I'll keep an eye on for the CPI in Canada.

[00:07:46] Probably now, between now and the end of the, or the start of the summer. So will energy prices keep putting upwards pressure on inflation? We'll have to see again. We saw it on this one, but does it continue? It'll be hard. It's hard to say at this point. Will a lower Canadian dollar start putting upward pressure on CPI? Because yeah, the Canadian dollar has weakened a lot in over the last six, seven, I would say three, four months, not even six, seven months. But it's been really pronounced since Trump took office.

[00:08:16] Are we going to start seeing that appearing the CPI numbers in the upcoming months? I would argue that there's probably a chance, a good chance that we'll start seeing that. And to what extent will the end of the tax holiday put upward pressure on inflation? I think it's safe to say that it will put upwards pressure on inflation. To what extent we'll have to see. And how much will a slowing economy offset those things that are potentially putting upwards pressure on inflation?

[00:08:45] Because if the economy is slowing, that has a bit of a counter effect. But then you get into if the economy is slowing too much, does the government step in and provide stimulus? So there's a whole lot of different things that could impact inflation. And we just don't know right now. Yeah. And I think tariffs would be a big thing too. Nobody really knows what's going to be going on in that regard. So I guess we'll find out at the start of March. But that could definitely impact things as well. Yeah.

[00:09:13] I mean, it kind of sets the Bank of Canada up this print, at least, to probably cut rates again. But as you go over with US CPI, I mean, I don't think they're going to be in any rush too. So it kind of makes the situation a bit difficult. Yeah, exactly. With the US CPI, it's a little bit different. And I'll go quickly here because we have a lot on the slate today. US CPI came in higher than expected at 3%.

[00:09:40] Markets were really surprised by this, especially from the month over month, which came at 0.5%. And for those watching on Joint TCI, you'll see here that the month over month change basically was zero for me in June of last year and has been steadily increasing since. So it was 0.1% in July, August through October, 0.2% for each month on the month over month basis.

[00:10:07] And then you saw November, December, and January, 0.3%, 0.4%, 0.5% respectively. So that could potentially be a pretty significant problem here for the US, especially with the Fed trying to balance low inflation and maximum employment. And again, if you're starting to think about the US, it's not looking great because they've literally not been able to get to their 2% target.

[00:10:36] Yes, they're much lower than they were at the peak. I think it peaked around 2022, if I remember correctly. And the lowest was 2.4% in September of last year. But it's since creeped back up closer to 3%. And one question that I think a lot of people have, especially if you read a lot and you do a lot of research on macro is, at what point does the Fed just kind of drop the 2% and the 3% is the new 2%.

[00:11:03] I think more and more, I think this is becoming the most likely approach that you'll start seeing because it's taking a long time for them to get to 2% if that's still their target. Yeah. And will they be able to get there? And I mean, the thing is, is can they keep policy rates where they are right now? I mean, they don't seem in any rush to cut, which, I mean, what was it?

[00:11:30] I guess we'll go over the FedWatch tool, but I think they were predicting two cuts in 2025 now. But I mean, is that even still the case? One and a half, I would say. Yeah. Yeah, like it keeps... Yeah, exactly. So the CME FedWatch tool, if you're starting to look here at the aggregated policies, so for people listening, just Google CME FedWatch, and then you'll have the tool. And if you look at the target rate section, go into the aggregated portion, so it puts in

[00:11:59] the most probable outcomes. And if you're looking right now, we're at the 4.25 to 4.5% range. That's the overnight rate for the, or the FEDS fund rate, excuse me, for the Fed. And if you're looking here, it doesn't price in a more than 50% chance cut until the June meeting. And that's 53%. The July one is at 75%.

[00:12:25] So by July, the market are saying there's a high probability of one cut. And then if you go down to the end of the year to the December meeting, it's a 50-50 chance between one cut and two cut at that point. So that's why I said 1.5% rate cuts, but that's changed quite a bit. And now the likelihood, I think it's not even far-fetched that we see the Fed just standing

[00:12:52] path for the rest of the year or even potentially increasing rates. I know there's not many odds. There's not a lot of odds on that. But if inflation data starts picking back up, the Fed may have no choice but to increase rates. Yeah. And I mean, we're looking at the chart there, 60% chance of 350 basis points, but that's by the end of 2026. So what is Canada at right now? I think they're at three or three.

[00:13:22] Yeah, I think we're at three. Yeah. So I mean, and a lot of Canadian banks have estimates for Canada to go down as low as two. So I mean, there's going to be a really wide spread there. And they don't even have, it doesn't even look like they have the chances of a rate increase into this FedWatch tool. So I mean, I don't see why they'd be in any rush to cut. I mean, isn't unemployment, it's like in the 4% range or something, isn't it? Like, it's crazy. Yeah, low fours in the US.

[00:13:51] Their economy is doing very well, especially, I mean, relative to ours. Ours isn't doing well at all. But yeah, it's definitely an interesting situation. Yeah. And I'll just finish on this. So for those thinking, what's the big deal? 2% versus 3% inflation? Well, that's the difference between prices in the aggregate doubling after 24 or 36 years. So if you're at 3%, it doubles after 24 years.

[00:14:15] And if you're at 2% doubles after 36 years, just goes to show that yes, the compounding effect really adds up, even though it might not sound like a lot. And it's the same for investing, right? So a 1% change in your annual return for your investment will make a big difference at the end of the line. And it's no different for inflation. Yeah, definitely. And I mean, they haven't been able to get down to that 2% target.

[00:14:43] And now, as you showed in that chart, it's just creeping upwards. Like you said, 0.5%, I mean, it doesn't look like a lot on the surface. But if you put that out to an annualized basis, that's big. That's 6% right there. Yeah. Definitely sure they're a bit worried right now, I would say. Yeah, I think so. So it'll be interesting to see what happens on that front.

[00:15:10] We'll move on from CPI data and go on to some earnings. So we had earnings season is in full force right now. We missed some of the earnings. I did talk with Brayden on some of them. So we were able to get some done. And now we'll go over some. There was plenty to pick. So we'll try to focus only on Canadian companies. And we'll start with GoEasy. So the Canadian prime lender here. Yeah.

[00:15:36] So this is one we've talked about quite a bit on the podcast, because I really think it does paint a picture of the Canadian economy as a whole. I mean, there aren't too many alternative lenders here in Canada. GoEasy is definitely the biggest. And they continue to just put up some crazy results. So revenue came in 23% higher. Operating income came up 16% higher and new customer volumes grew by 16%.

[00:16:05] So the company is witnessing record applications for credit. That's up 28% year over year. And 71% of loan advances were issued to new customers. So that's up from 67% last year. The one thing is 45% of the company's loans are now secured. So that was at 42% last year. And I would imagine I actually didn't find any data on it. They had commented on the HELOCs last quarter, but I couldn't really find anything unless they

[00:16:35] mentioned it in the conference call. But I would imagine a lot of this is coming from HELOCs, people taking out home equity line of credits. Those would obviously be loans that are kind of backed by the house. And a lot of the issues with GoEasy over the previous years, they issue a lot of unsecured loans. But this just isn't really the case at this point. I mean, at least it's ticking up. We look at pretty close to half the portfolio, not quite.

[00:17:00] When we look to the full year, the company's consumer loan portfolio grew by 26%, revenue by 22%, and operating income increased by 28%. So earnings per share increased by 18%, return on equity 25.5%. So the company's charge-off rate came in at 9.1%, which is 30 basis points, 0.3% higher than last year. So this is in line with the company's guidance.

[00:17:26] It actually comes in at the lower end, and they have managed to keep this relatively stable over the last while. It's been creeping up for the better part of a year, but it now hovers around that 9, 9.1% range. So it's easy home segment, which covers just ridiculous financing on home items like electronics, furniture, revenue decline by 2%, operating income by 6%. I'm not really sure when we see this segment pick up the pace again. I mean, I imagine it'll take quite a while.

[00:17:56] It only makes up around a mid-single-digit portion of the business. So its struggles really aren't hitting the company all that bad, but still worth mentioning. I mean, GoEasy is a company we used to cover quite a bit over on our premium platform since 2018, I think. But I did actually pull it off the list when it hit the $200 mark last year. I just felt like considering the overall risk, economic risk, and I mean, just the results

[00:18:22] of the company overall with new customers, things like that, the highest credit ratings the company's ever witnessed in history. I just kind of thought more and more people are having to tap into the subprime market, which kind of paints a bit of a bleak picture on the Canadian economy. And then I do see a lot of people talk about how cheap this company is. I mean, they say, you know, you're getting 20% growth for 11x earnings. Yeah, that's dangerous. And one thing I'm showing, I know you're familiar with this.

[00:18:52] So the gross loan origination has just... Skyrocketed. Exploded. Yeah. Yeah, exactly. So I'm looking, I just pulled it since 2017. But if we look at 2017, where it was 579, I think that's in, yeah, millions. Millions, yeah. Yeah, 579 millions. You look and it's really, really grown. It's almost what's, it's grown at a pace of 27% annually and really, really picked up in

[00:19:20] 2021 when the pandemic hit. So it's, yeah, it's definitely something to keep an eye on. And I think just the sheer volume, I know they have some more, you know, secured loan by actual assets. But again, all depends how well they're doing their underwriting. Yeah. The housing market, I think we can all agree that there's a lot of issues depending where you're at with a different housing market. So I think it's something just to keep an eye on.

[00:19:50] The sheer volume, I find a bit worrying, especially as we have more and more uncertainty. And a lot of people that have these loans potentially could see their job impacted or have job losses coming up in the next year or two with what we're seeing here in Canada or in our own economy, but also what's happening with the US and the potential ripple effect with tariffs and everything that's been happening with Trump 2.0.

[00:20:15] Well, yeah, when the tariffs got originally, you know, talked about with Trump, GoEasy took a big hit in price. That's like how sensitive this company would be to, you know, the Canadian economy overall. And if we look at the loan originations, like they really started to spike in 2022. High inflation, high interest rates. You know, the economy was weakening and they've effectively almost doubled since 2021.

[00:20:44] I mean, it's there's a reason why. And I mean, this company has traded at 11 to 12x earnings for the last like 15 years. I don't really think the market's all of a sudden going to, you know, value it higher. They just they probably value this company the way it is just because of the loan book, just because of, you know, the risks of it overall. Yeah. I mean, that said, though, if if it can continue to put up, you know, 15% earnings growth, I mean, you don't really need any sort of multiple expansion to realize some some pretty strong

[00:21:14] returns. I mean, the difficulty here is obviously the risk. I mean, the company grew 20% over the last while, but the stock hasn't budged. It's effectively flat over the last year. And I think, you know, a lot of people are worried about the Canadian economy overall. And if we look at again, I had mentioned that the company's customer profile is improving. But in my eyes, it just means more and more high quality buyers are going to are having

[00:21:38] to tap into the subprime market because of the cost of living crisis we're facing. They issued their forecast for the next few years, and it really doesn't expect things to slow down. It did downgrade most of its targets from previous guidance. So go go easy tends to issue its guidance in three year segments. So in August 2024, they issued guidance in relation to 2025, 2026. So in its new guidance, it did 25, 26, 27.

[00:22:06] And when we look to the new numbers compared to what they issued in August of 2024, they are a bit lower across all fronts. However, they're like very small reductions, negligible almost. So they just it's probably just rounding errors, to be honest. They still expect to grow at a pretty crazy pace. And I mean, I'm not really all that surprised considering, you know, the state of the Canadian consumer, how expensive it is to live here. People just need to tap into additional credit.

[00:22:36] And I don't think it'll slow down. Yeah, the problem is not the growth. The problem is the write offs, right? Yeah. These write offs start really picking up and it's very hard for them. I'm sure they have models. I'm sure they do all different kind of forecasting. But if there is a severe recession, I mean, throw those models out the window. They're probably not making their forecast based on the severe recession in Canada.

[00:23:01] And if that's how if that happens, the write offs will go way, way up. And I wouldn't be surprised that they their profits really just go fully go out the window or there's even losses. So I think it's just buyer beware. This may look like a great company right now. But to me, this is probably starting to be an inflection point for them where things may have peaked and could quickly get worse in the upcoming years.

[00:23:31] And I think people looking at, oh, they're growing 20 percent, trading too cheaply. I don't think they understand the risk involved with these type of businesses. And unless they're a special kind of subprime lender, which I think their past has shown that they're a good subprime lender, but I don't think it's anything special per se. They will have cycles and they're going to be hit very hard if we enter a recession.

[00:24:01] And even more so if it's a severe one. Yeah. I mean, if you look to this company on pretty much every economic crisis, I guess I could say like financial crisis, even dot com, like they were they were a publicly traded company back then. They've been around for a very long time. 2014 when when oil tanked, even 2017, 2018, when they started raising rates, like the company survived all this. Yes. Yes. But it the volatility was gigantic.

[00:24:28] Like you're talking 50, 60, 70 percent drawdowns, which I'm not saying it's going to happen, but I'm just saying like the market is probably pricing in a lot of risk just due to the deteriorating health of the Canadian consumer. And the one added worry here is and the one thing they'd never be able to forecast is that tariff issue. Like when they implemented those tariffs and, you know, many banks were predicting, you know, double digit unemployment if they stick around.

[00:24:57] Like that's just not something you could forecast. And that's also, you know, that's when plenty of consumers who would have no problem paying their, you know, go easy loans would all of a sudden not be able to. You know what I mean? And that's why a lot of these alternative lenders like there's a there's a shock there and it tends to happen quickly. Not saying it's going to happen, but obviously, you know, there's a bit of of that risk being priced in here because the company has grown a ton over the last year, but the stock price

[00:25:26] hasn't budged. Yeah, and I guess I'll finish on this is I'm not an expert when it comes to HELOCs, but my understanding is if you have a mortgage already on the property and you get a HELOC, the HELOC is considered the second mortgage. So, yes, it may still be backed by the property itself, but they're going to be second in line if you default on your HELOC and mortgage. The bank that or the financial institution that has the original mortgage will be first in line.

[00:25:54] So, yes, it may be secured. It may be asset back. And I'm going to say that because they're offering HELOCs and not mortgages like traditional mortgages. I'm going to say most of them are actually second mortgages for most people. So, yes, it may be secured, but the security is probably a bit misleading for some people too. Yeah, I don't really know how that works. I've never I've never had a HELOC. I know when I look to get one, I would have needed to refinance. So I don't know how that would have worked.

[00:26:24] But yeah, it's it's a solid company. But there's there's a lot of worries there that you just need to you need to take into account for sure. Yeah. Yeah, exactly. Just be aware of the risk. Yeah. Now, speaking of another Canadian company that has financial operations, I'm going to do my best to transition here to Canadian Tire, released their Q4 2024 results.

[00:26:50] At first glance, I would say it's getting slightly better for Canadian Tire. I would say that's my my biggest takeaway from their earnings. So sales were up one point one percent to five point four billion for the quarter. Comparable sales were up between one and two percent for all of their brands. So definitely a small improvement, because if you look to the previous quarter, not even

[00:27:17] a year before just Q3 of 2024, they had low single digit decline for all their brands. So that is definitely an improvement. And then if you go back a year, if people don't fully remember Q4 2023, they were looking at high single digit decline in comparable sales for all their brands, with the exception of the gas brand. So that's a big that one to two percent, even though it doesn't look great. And obviously their sales have declined.

[00:27:45] So they have a lot of sales to make up. So it's going to take some time until they make that up compared to where it was before it started declining. But it is, I think, a step in the right direction. Net income was 119 percent higher to 432 million. EPS was 139 percent higher to $7.37. Free cash flow more than doubled to 1.5 billion for the full year.

[00:28:14] Free cash flow can be lumpy on the quarter basis. So I like to look at that more on a full year basis. And if you listen to the podcast for a bit, like I mentioned a bit before starting this segment, you'll know that I like to look at how their financial arm is doing. That's because they issue their own credit card, even though I think it's on the MasterCard brand, if I remember correctly. Not sure. Their MasterCard brand did. Yeah. They probably would. But MasterCard is just a network.

[00:28:41] They actually do the financing for that. And their financial arm will issue those credit cards. So that's why you have a lot of people when you go into the stores that are like following you like little sniff dogs trying to sell you a credit card. I'm usually pretty blunt and tell them, no, I just don't do eye contact. I never get bugged because I'm pretty direct. Either that or I have my two and a half year old toddler and clearly I have my hands full when I have her with me so they don't bug me.

[00:29:12] But now looking at what it looks like overall, I would say it wasn't great from that perspective. So net credit card write-offs, which is what amount of loans they've written off over the last 12 months after recovering after recovery. So some of the loans that they thought might go bad, so the ones they actually recovered. So that was up from 6.1% to 7% in the span of a year. So big increase there.

[00:29:42] The other important metrics to look at, I won't drill down to all of them, but they were either stable or slightly worse for their financial arm. So it is something to keep an eye on. It's important because it also, along with GoEasy that we talked about, it gives us a good idea of the Canadian, maybe not the Canadian consumer as a whole, but maybe the Canadian

[00:30:07] consumer that's a little, I'm not sure how to put that, but maybe the ones that are maybe not subprime, but the ones that are not the highest quality consumer. And I'm not trying to put anyone in the category if you own a credit card with Canadian Tire. So I'm not trying to say that, but again, just based on their charge off rates or the write

[00:30:32] off rates compared to the big banks, clearly there's a different quality of consumer here that are taking on the Canadian Tire credit cards or even lesser quality. If you look at a GoEasy that we just talked about. Yeah, that's what I actually, while you were talking, I was trying to look up the charge off rates for something like Royal Bank, but I can't find it quick enough, but I can. I think it's like three to 4% in that range.

[00:30:57] So the big banks are typically that, and I think they'll typically have better, stronger clients that have those kinds of credit products. So they, I don't know if it's the due diligence exactly, or the underwriting, how they approve people for credit cards. I don't know the whole process, but there's clearly for that, let's say bottom half of Canadian consumers, you can see that strain starting to happen a bit more with Canadian Tire Financial and GoEasy.

[00:31:27] Well, I think when you look to Canadian Tire too, if you think of, you know, the products they offer, they're almost all discretionary, I guess, in nature. It's probably, you know. A lot of it. Yeah. I mean, I guess auto is not so much, I guess, discretionary if you need that to travel for your job or whatnot. But a lot of it, I agree, is definitely discretionary. Yeah. I mean, that's a relatively high charge off rate. And I think when we first started, when I first started on the podcast, I think we covered

[00:31:56] Canadian Tire and it was in like the low 3% range. So, I mean, it's doubled. I don't remember. Yeah. I'd have, I didn't look that far. I mean, it's gone up quite a bit. Yeah. Yeah, exactly. And I think it just gives a picture here. And of course, I'm not, especially for Canadian Tire, GoEasy, I think it's safe to say that it's definitely consumers that are in a tougher spot that are accessing their products just because they're not very attractive products.

[00:32:25] Nobody goes to a subprime lender unless they need to. I mean, because the rates are so high. Yeah. And Canadian Tire is probably more of a mix. So, it's probably kind of in between of a GoEasy and what kind of consumers or clients a big bank would have. So, it's probably kind of in between those two. And I'm sure they have some high network individuals that have their credit cards as well because they like the rewards or whatnot that come with it.

[00:32:54] And that's fine. But the reality is it gives us a good idea of what the consumers are doing. And keep in mind, they're using those credit cards not necessarily to spend a Canadian Tire. I mean, you can use that credit card at Loblaws if you want. You can use it wherever. So, it gives a good idea of how they're actually able to make those payments. So, I think that's enough with the Canadian Tire. Anything else you want to say before we move on to TELUS? No. I'll just dig into TELUS here. I mean, it's the telecoms.

[00:33:23] They had some pretty interesting earnings. TELUS was actually like a standout. Like, they actually reported some pretty strong Q4 earnings, especially, I mean, relative to Rodgers and BCE. I mean, don't get me wrong. All of them are struggling. But when you look to TELUS' performance over the last year, it's not even close. So, they're down around 1% while BCE is down 27% and Rodgers is down 33%.

[00:33:49] So, on the year, TELUS is up around 12% while BCE is up 1% and Rodgers is down 10%. Telecoms are very much in a drawdown. But, and I've seen a lot of people who are holding these companies who kind of think, you know, it's just a sector-wide drawdown. And I mean, if you are, if you're thinking this, I would just say you're probably not paying attention because, you know, there's some substantial differences between the three.

[00:34:16] And TELUS has kind of, you know, it's been a dog, obviously, but it's outperformed the other two by quite a wide margin. So, for the full year, T-Tech revenue came in 2% higher and adjusted EBITDA by 5.5%. So, the company's T-Tech segment, it contains things like its mobile plans. Let's say TELUS Health, TELUS Agriculture. I believe there's security, but I'm not 100% sure on that. Earnings per share grew by 15%.

[00:34:45] And interest expenses grew by around 7.4%. So, when we compare those interest expenses to a company like BCE, they saw interest expenses go up by 14.5%. So, a little less than double, while Rodgers sat at 12%. So, one key thing, one key struggle for the company, and this is something that is certainly industry-wide, is ARPU. So, average revenue per user. So, they declined by 3.1% year over year.

[00:35:13] And overall, churn rates actually increased to 1.5% from 1.4% last year. I believe I looked up churn rates like pre-pandemic and they were like 1%. So, it's definitely higher. I mean, if we look to it, Canadians, they're pinching pennies. Again, we go over cost of living crisis. Many people are holding on to devices longer. We saw that with Apple. Their iPhone sales are really not as good as they typically are.

[00:35:41] And I think that's because a lot of people are first off realizing how bad phone contracts are. So, they're hanging on for longer. They're doing BYOD bring your own device plans. Because first off, you have a lot more negotiating power when it comes to that. Like, you could pretty much demand. Well, I mean, I guess you can't fully demand what you're going to pay. But I mean, you can just threaten to go somewhere else. And typically, they'll, you know, kind of negotiate with you. So, those are no doubt.

[00:36:10] I would have no doubt hitting their ARPUs. And secondly... Well, they're going to transfer you to their customer loyalty department. Or customer retention team. And then all of a sudden, they have a super good deal for you. I've been through that process with one of them. That will remain nameless. But I've been through that process. If you stick around on hold long enough. Depends. No, I did it actually with the chat.

[00:36:39] Oh, the little bot? Yeah, yeah. Well, no. The bot is completely useless. So, you... After you tell them like five times you want to talk to like a real person, they will put you through a real person. And then they'll just authenticate you. And then you'll be able to negotiate. So, you don't have to... You can do something else while you're at it. Oh, yeah. That's pretty handy. That's kind of the old... That's the new school method before when you had to call in. You just hammer zero. Yeah. Until they put you on. No, exactly. But I mean...

[00:37:08] I get pissed off at the bot. Yeah. The other thing that's definitely impacting these companies is population growth. So, I mean, there's not really... If you think about it, a lot of what these telecoms offer product-wise are kind of, you know, internet, TV, especially TV is declining over the years. So, they do rely a lot on a growing population. So, first off, the birth rates in Canada are, I think, at the lowest points in history.

[00:37:37] So, they require a lot on... They require, you know, a lot of immigration ultimately to get new customers, which is going to be scaled back. So, that could be another sign of slowing. In terms on the free cash flow front, they generated around 2 billion in free cash flow on the year. And they expect to increase free cash flow generation by about 10% next year. So, this kind of surprised me. I do hold a position in TELUS, kind of a short to midterm hold.

[00:38:05] My main basis on this was free cash flow expansion. And I did expect higher figures in this. So, next year's free cash flow will pretty much get them to dividend coverage. And that's about it. The positive thing is the company did report larger free cash flow generation in 2024. So, there's a possibility that it'll come ahead of this guidance in 2025 as well. And another possibility that could lead to larger free cash flow is the company's capital expenditure guidance. They came in at 2.5 billion on the year. That's what they expect to spend in 2025.

[00:38:36] But they did come in lower than their guidance in 2024 as well. So, just to give you an idea on how much lower that is, the company spent $6 billion in 2020 and $5.5 billion in both 2021 and 2022. So, spending is going to be scaled back quite a bit over the next few years. Obviously, I believe over the last while, these telecoms have been rolling out big 5G network spending.

[00:39:05] They should be on the tail end of that. And, yeah, overall, it was a pretty solid quarter. But still, you know, all the telecoms are in a rut. TELUS is just in less of one, I guess I would say. Yeah. And I think there's just more competition there. And then if you get into broadband with some competition coming from Tesla, I think it is Tesla with the... Or is it SpaceX? The Starlink type? The whole... Starlink. Yeah. Yeah, exactly.

[00:39:34] Anyways, one of the companies owned by... Elon Musk. And, you know, there's more competition coming with that, especially that you can access it pretty much anywhere you want. I think they're in for a rough couple of years, especially if we see population growth kind of stagnating or increasing at a much slower pace. It's not something... These are not companies I'm personally interested in just because, yes, they had to make these massive investments.

[00:40:03] And I'm sure they were projecting that population would continue increasing and they get some better ROI on those investments. Because once you've made them, obviously the additional subscribers that you get, that's revenues that come in that doesn't all go straight to the bottom line. But once these investments have been made, a big chunk of them actually just go to the bottom line because you've already paid all of your costs and you don't necessarily need

[00:40:30] that much more employees to be able to run the business. So it is something... It is a big headwind, I think, for these companies. And we'll have to see how it trends over the next couple of years. But definitely, I think they'll be in for a little bit of a rough patch. And I think TELUS is definitely a bit better position. But Bell, I think, is still, for whatever reason, hanging on to that dividend.

[00:40:57] But I think they will come to the conclusion that they will face reality at some point and realize that they don't have a choice to cut it. Yeah, and I think the only reason TELUS is kind of doing a little bit better over and above something like BC and Rogers is just those extra verticals, I guess, in terms of growth. Yeah. The health, the agriculture used to be able to say that TELUS International, which I think is TELUS Digital now, but that ended up being a bit of a disaster.

[00:41:25] But I think that is what is kind of shoring up the results a bit. And again, I don't plan to hold this long term. I don't think there'll be a lot of growth here in the future. I just think kind of lower spending will lead to increased free cash flow. But I mean, the environment does not look good for these companies over the long term, especially again, the slowing population growth, I think, is the biggest issue here. There's just not enough existing clients that are adding more services.

[00:41:55] In fact, I think they're cutting them. Like, to be honest, like if you think I canceled my TV like four years ago, I think I and I have not missed it whatsoever. I've never had never had cable subscription or anything like that. Yeah. It's just like I kind of when I canceled it, I was kind of like, oh, like, is this going to be bad? I don't immediately. I was like, oh, this is 150 bucks a month. I'm putting in my pocket and have absolutely no issues with doing so.

[00:42:20] So, and I mean, again, like with the competition in the phone space, like I, how do they increase ARPUs? I just don't see how they do. They'll continue to decline, I think. Yeah. No, I think that's in. Yeah. So I think that's a good space, good spot to wrap it up. We're trying to keep the episodes around, I would say around 45 minutes, a little shorter because I know sometimes it just gets jam packed.

[00:42:46] So you heard it here first, Dan says, just invest in Telus for the dividends, forget about total returns. So you heard it here first. I was, I wanted to talk about Air Canada, but we'll keep that for the next episode. They came out with their earnings last week. That's okay. I know some people own Air Canada, so don't worry. I'll keep it for next week. So just tune in, have my notes done and I listened to the conference call as well. So I'll stay tuned next week for that.

[00:43:16] Fun episode. Happy to have you back, Dan. Finally, we didn't have to record this episode two, three weeks in advance. It's kind of nice. A little bit more work on a week to week basis now, but that's okay. A little bit of a break. So it helped me move and try to settle into my new place, even though my podcast studio still needs a bit of work. But it does look like it. Yeah. But yeah, good to be back. I've been focusing on other stuff around the house. Yeah. Oh, that's fair. Yeah, but yeah.

[00:43:46] Thanks for listening, everybody. Good to be back. Yeah. Thanks again, everyone. The Canadian Investor Podcast should not be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions. Feel the same. The host and guest of theIA this podcast is a free agent. You'll be interested in your little bit on this podcast. No part of this podcast is a free agent. You'll be interested in your little bit.