Element Fleet Management Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 10 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management First Quarter 20 23 Financial and Operating Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. 2020.

Operator

After the presentation, there will be prepared pardon me, after the prepared remarks, there will be an opportunity to ask questions from analysts. Call. Element wishes to remind listeners that some of the information in today's call includes Forward Looking Statements. These statements are based on assumptions that are subject to significant risks and uncertainties, and the company refers you to the cautionary statements and risk factors in its year end and most recent MD and A, 2019 as well as its most recent AIF for a description of these risks, uncertainties and assumptions. Although management believes But the expectations reflected in the statements are reasonable.

Operator

It can give no assurance that the expectations reflected in any forward looking statements will prove to be correct. Element's earnings press release, Financial Statement, MD and A supplementary information document, quarterly investor presentation and today's call include references to non GAAP measures, which management believes are helpful to present the company and its operations in ways that are useful to investors. A reconciliation of these non GAAP measures to IFRS measures can be found QMB MD and A. I would now like to turn the call over to Jay Forbes, President and Chief Executive Officer of Element. Please go ahead.

Speaker 1

20. Thank you, operator, and good evening to all of you joining us to discuss Element's Q1 results and our improved outlook for the business this year. 18. I would first like to spend a bit of this time speaking to how far Element has come over the last 5 years, the momentum we have in this current environment 5 and where the business is heading before turning things over to Laura and Frank. In 2018, a number of us, 18%.

Speaker 1

Myself included saw something quite special in Element. That belief provided us with the impetus and courage to launch a 3 pronged strategy 18. To transform the core fleet management business, returning its focus to delivering a consistent, superior client experience, 18 to deleverage and strengthen the balance sheet and to rid the company of non core distractions. 18. Not too long after launching this transformation strategy, I started to notice a change.

Speaker 1

The wind shifted 18. While we know that the fruits of transformation would have been born earlier, but for the pandemic and the OEM production shortages, the work we put into transformation 20 and the ensuing pivot to growth has perfectly positioned Element to make 2023 another record year 18, in which we can fully harness the power of the tailwinds that now propel us forward. Positive momentum we have built is readily sustainable. 18. Thanks to the strong commercial capabilities we've developed, the scalability of our operating platform, 18, our competitive differentiators such as strategic consulting, art by Element and most importantly, our client facing people 18.

Speaker 1

And our momentum is sustainable. Thanks to that best in class leadership team that we have in place who are committed to see 18. When I think about our investments in our commercial capabilities and the $1,000,000 scalable operating platform coupled with the favorable market dynamics and consolidation taking place in this industry. 2. I have every reason to believe Laura and the leadership team can sustain and indeed build on the current momentum for years to come.

Speaker 1

18. And Laura is exactly the right leader to ensure this organization does so. When I express to the Board's 18. Instead, I want to ensure we found the right successor with a strong cultural fit. We needed someone with experience managing a large and complex balance 2 that would embrace and be embraced by our organization.

Speaker 1

It was an exhaustive search, but our patience paid off. 18. We found that proverbial needle in the haystack with Laura. Not only does she possess the requisite capabilities, more importantly, 18. She understands the importance of preserving and enhancing Element's unique culture.

Speaker 1

Our culture of client centricity, 2.5 Collaboration and of continuous improvement is the backbone of this organization and has been foundational to every success we've achieved 18% over the last 5 years. One of my fondest memories of my time here involves seeing that spirit of collaboration and continuous improvement in action. 20. It was early 2020 and the ANZ leadership team traveled to Mexico to understand the incredible success of the Mexican commercial growth strategy. 20.

Speaker 1

I'll never forget the humility and curiosity that our leaders models, first in listening and then learning and then importing those learnings 20 to apply them in ANZ in 2020 and later that same year into the U. S. And Canada. This habit of best 2 Practice sharing is something that we continue to foster and is one of the many benefits of working in a global organization. 18.

Speaker 1

Our continuous improvement mindset is another example of how far we've come. We are a high performance organization and we constantly challenge ourselves 2 be better, whether it be our employee experience, our client experience or the business itself. This is especially true in our commercial groups Where we're constantly scrutinizing and evolving our sales and marketing practices to ensure that we can capture an outsized share of opportunities 2. And whether this is winning clients from competitors or advancing our self managed mandate, 18. The continuous improvement mindset ensures we have best in class commercial approaches across all markets.

Speaker 1

18. In short, we built an organization that is experiencing tremendous positive momentum through the combination of investment 18th 18th consecutive quarter of fiscal 2019. We are pleased to announce that our 18. The strength and stability of the company and the positive outlook we have for its future provide me with both the satisfaction and confidence 2 to bring my time with Element to a close. In doing so, I'd like to take this opportunity to say a heartfelt thank you 5,100 strong team here across all of our locations from the frontline staff to our executive group 18.

Speaker 1

It has been incredibly satisfying for me to be part of this organization and I will truly miss the sense of belonging 18 and camaraderie that I've experienced during my time with Element. I've led many organizations 2 through turnarounds and transformations and not have been as special or as successful as this one. 18. The reason for this success is undoubtedly the people that make up our company and their willingness to engage and to be challenged 18 and pursuit of the ambitious objectives that we set forth. Watching this play out over the past 5 years has been the highlight of my career.

Speaker 1

18. As I step out of the CEO role and move into my role as Strategic Advisor to Laura, I do so with great confidence and peace of mind. 2019. Norm Laura is as committed to our strategy and to the people that make it a reality as I have been. 18.

Speaker 1

With that, Barb, the floor is yours.

Speaker 2

Thanks, Jay. Good morning, everyone, and thank you for joining us on this call this evening. Q1. Before we discuss our Q1 results, I do want to express my gratitude to Jay for his leadership and his dedication to our company. 18.

Speaker 2

Under his guidance, Element has become a market leader and a client centric growth engine. Our clients, eighteen. Investors and team members are deeply appreciative of Jay's contributions. Now during my comprehensive onboarding program over the 18 months. I focused on our 3 strategic priorities: the first, achieving profitable organic revenue growth the 2nd, Advancing a Capital Lighter Business Model and thirdly, our approach to capital allocation, which really consists of appropriate 18 months in our business followed by return of capital to our shareholders.

Speaker 2

Now regarding our first priority of profitable organic revenue growth, 20. I did spend time with our clients, commercial leaders and sales teams in each country we serve to understand how we can expand our

Speaker 1

$1,000,000 share of wallet with existing clients and

Speaker 2

attract new ones. And with our talented team and culture, 18. I do believe 6% to 8% annual organic growth is very achievable. Now regarding our second priority 18 months of 2019. We are pleased to announce that we are in a position 18.

Speaker 2

I see ample room for services revenue growth within our existing client base and the self managed fleet markets. 18. As proven this quarter, our access to the U. S. Market for vehicle lease indication remains robust.

Speaker 2

18. And as you would have seen, our first quarter results are impressive. We had 8.9% net revenue growth, quarter over quarter margin expansion record pretax return on equity and double digit free cash flow per share growth, 18. But I'll leave Frank to provide more details on these numbers. As we look ahead, I'm confident in our strategy and ability to continue generating value for our $1,000,000 We have pent up demand for fleet vehicles that remain strong across our client base.

Speaker 2

20. Our order backlog is expected to remain at elevated levels through 2023 and into 2024, eighteen, and that's despite increasing originations. This is a direct reflection of that pent up demand from existing clients, eighteen, combined with the ongoing success of our commercial and operating teams at winning and onboarding new clients. 18. Consumer demand for new vehicles is also relevant because any weakening that could happen there could lead to further OEM 19th

Speaker 1

consecutive quarter of fiscal 2019.

Speaker 2

We expect to continue to see a significant contribution to the fleet segment, which of course would benefit Element. Our momentum coupled with current market dynamics has us updating our outlook 18% of this year. Not only is our near term outlook improving, but our clients' and our prospects' continued interest in the shift towards 18,000,000 hybrid and battery electric vehicles presents a long term runway of growth opportunity for us. 22. Through further expanding our Arc by Element services, we'll continue to provide our clients with innovative solutions that meet their evolving needs in this area.

Speaker 2

18. And with that, I'll turn it over to Frank for more details on our Q1 results and the year ahead. Over to you, Frank.

Speaker 3

18. Thank you, Laura, and good evening, everyone. Q1 was another record quarter and it's great to be demonstrating Element's ability to deliver on our client value proposition 18.5% and microeconomic impacts continues to allow us to deliver growth and strong financial results in this environment. 18. As I take you through Q1, I'm going to cite growth measures in constant currency.

Speaker 3

The U. S. Dollar strengthened significantly against $1,000,000 between the Q1 of last year and this year, which materially benefited this quarter's results. 18. Constant currency eliminates those benefits making for cleaner comparability year over year and to a lesser extent quarter over quarter.

Speaker 3

18. As always, we want to be transparent about the underlying business. Even after you control for the impact of 18.5%. Our first quarter results are near the high end of our long term growth guidance and extremely strong on an absolute basis. 18.

Speaker 3

We grew net revenue 8.9 percent over Q1 last year to $304,000,000 which is a quarterly record. $1,000,000 Adjusted operating income grew 7.2 percent over Q1 last year despite increased investment in our commercial capabilities $1,000,000 to fuel continued long term growth at our 6% to 8% annual net revenue trajectory. Operating margin was 54.4 $6 for the quarter. Adjusted earnings per share were a record $0.31 a share, a $0.04 or 15% improvement over Q1 last year. Free cash flow per share was 0 point 3 $7 which is a 0 point 0 $6 or 19.4 percent increase over Q1 last year and our capital lighter business model expanded our pre tax return on common equity to a record 18.8%.

Speaker 3

Zooming in on our year over year net revenue growth, it was driven primarily by services revenue and net financing revenue growth. 18. Services revenue is a pillar of our capital lighter business model and our services to clients are at the apex of our value proposition, 18th year, reflecting all three forms of share of wallet growth, which are in order of impact this quarter. 1st, penetration with existing clients who are increasingly turning to Element for help managing their growing fleet operating costs. 6% to Element for service.

Speaker 3

2nd, utilization of our services, in particular, our vehicle maintenance management service this quarter. 18. Maintenance management entails working with clients to undertake more proactive vehicle maintenance in order to avoid the costly downtime they would otherwise suffer having to perform reactive repairs to their vehicle on an unplanned basis. 3rd, inflationary increases in the cost of parts and labor benefited our services revenue in the Q1. Beyond share of wallet, there were 2 additional contributors to service revenue growth this quarter.

Speaker 3

2017. The first was the services side of our business in ANZ, driven by growth in our fuel and roadside assistance product take up as well as improved supply terms with existing and new partners in our network. The second was the ongoing growth of our relationship with Armada in the U. S, which includes developing innovative new products and services for them. There remains growth opportunities for us in our relationship with Armada, 18, both within and outside the U.

Speaker 3

S. In the latter category, there's Mexico, where we began working with our model last year 18 and officially hit the road this quarter, meaning Q2 of this year. And of course, there's ANZ, 18 months. Net financing revenue grew 6.6% year over year driven by strong volume as we took advantage of 18.7% continued gain on sales strength in ANZ and to a lesser extent Mexico as well as average net earning assets growth 2019 as we benefit from the superior economics of holding certain assets on book for the near term. Now we'll turn to the second pillar of our Capital Lighter 18th year.

Speaker 3

We syndicated $690,000,000 of assets in the Q1 and generated $14,900,000 of syndication revenue. In mind when modeling Element Syndication revenue. The current environment of higher interest rates may create more variance in syndication yields quarter to quarter. Notwithstanding, we transacted on over 50% of the assets that we syndicated in Q1 18% within the last 2 weeks of the quarter. While this is somewhat typical, it also illustrates the depth of this funding source for us put their deposit basis to work.

Speaker 3

And with corporate debt and lending slowing, they're providing less supply. The risk profile and tax benefit of our assets eighteen are very compelling to financial institutions. As the rate environment stabilizes, we will likely increase our syndication volumes 18 months to keep pace with originations. As stated in our press release 18. On access to cost effective capital last month, Element maintains ready access to diversified sources of funding from a high twenty-twenty 20.

Speaker 3

We are very pleased with the fleet ABS markets reception to our term note offering last month, which was materially oversubscribed and shows the enduring strength of our name in the market despite the high interest rate environment. We are equally pleased with our lending syndicate partners' appetite to expand their funding capacity commitments to Element. 18. Returning to our quarterly results, I want to touch briefly on operating expenses. While costs were down quarter over quarter, the year over year increase is a Which was not the case in Q1 2022.

Speaker 3

The current environment has allowed us to connect with our clients and our teams more effectively face to face. 18. With line of sight to materially more long term organic annual growth than we originally thought possible, we want to ensure our commercial teams are appropriately resourced 18 to take advantage of this trajectory, which means getting in front of prospects. We have already seen the fruits of this initiative pay off in Q4 and 1 Wins, which will manifest themselves in the second half of twenty twenty three results, 2024 results and beyond. 22.

Speaker 3

Also illustrated in the supplement is our continuing success growing vehicles under management. We expect our vehicles under management for Q4 2023 to demonstrate healthy year over year growth for 2023 as a whole based on the growing number of commercial wins we are securing. While commercial additions will be strong, they may not be enough to offset the departing vehicles. However, the economic impact $3 business will be immaterial and has been factored into all our 2023 full year results guidance we provided. 2019.

Speaker 3

Regarding our order backlog, last year, we were of the view that our backlog would begin to get work through in the second half of this year, $1,000,000 when OEM production capacity returns to historically normal levels. Our view is evolved and it's good news. 20. As Laura said, we now anticipate our order backlog will remain at elevated levels through the end of this year and into 24 despite increasing originations. This is a direct impact of the commercial success we have had in winning and onboarding new $3,000,000 as well as the strength in order patterns of our existing clients.

Speaker 3

We're still going to originate record volumes, 20, which we have been consistently forecasting for 2023. Q1 originations were up 24% year over year before foreign exchange 2. Weakened and further production has shifted to the fleet segment. What has evolved is our appreciation of 3 things. 2019.

Speaker 3

1st, the scale of pent up demand across our client base. We have always known there is unquantifiable demand for replacement vehicles 18.5% beyond the volumes reflected in our formal order backlog. As this gets quantified in the form of irrevocable orders, 2. We are seeing upward pressure on our order backlog. The second reason that the time horizon on our excess order backlog is lengthened is the extent of our commercial team's ongoing success of winning new business.

Speaker 3

And the third thing blamed our order backlog outlook 22. Finally, our increased full year 2023 results guidance encompasses both the fundamental strength of the business 18. I want to be clear that we do not forecast currency and encourage you to make your own assessment of same in deriving your forecast. We do not hedge currency as it represents predominantly translation impacts and not economic impacts of foreign exchange. 2017.

Speaker 3

However, the growth rates implied by today's guidance allow you to understand our fundamental growth outlook regardless of currency, I. E. Constant currency growth rates. Given the strength of our Q1 results, our momentum in commercial success, 18.5% year over year growth on a constant currency basis. $54 to 55 percent operating margin, resulting in $675,000,000 to $700,000,000 of adjusted operating income percent or 7% to 10% year over year growth in constant currency.

Speaker 3

This AOI range translates into between $1.26 $1.31 of adjusted earnings per share, which is 12% to 16% growth year over year $1.58 $1.63 of free cash flow per share for the year, which is 13% to 17% growth. 19. We continue to expect the same volume of originations this year as we expected when we last spoke to you in March. The reason our originations volume guidance has increased $1,000,000 is solely due to the strengthening of the U. S.

Speaker 3

Dollar and the Mexican peso in relative terms. 18. Again, I want to be clear about the fact that we do not try to forecast foreign exchange. We do not have a view on what the U. S.

Speaker 3

Dollar or the Mexican peso or peso or Australian dollar will be worth relative to the Canadian dollar at any future point in time. Instead, we generate our internal forecast using the most recent periods exchange 18. So our guidance effectively assumes that FX will remain constant to that prevailing time at to that prevailing at the time of the forecast.

Operator

Q1 2019. In order to afford all analysts the opportunity to ask questions, Element kindly requests that analysts limit themselves to 2 questions in live dialogue with management. 18.

Speaker 1

18.

Operator

Our first question is from Geoff Kwan with RBC Capital Markets. Please go ahead.

Speaker 4

Hi, good evening. First off, Jay, I just want to say congratulations on your time as CEO and wish you the best in your retirement.

Speaker 1

18. Thanks,

Speaker 4

Jeff. The first question I have was just with the new guidance that you've got on the EPS, 18. Outside of the FX, like what would be some things that would drive better than expected on your new guidance and conversely where it would might come in below what your new guidance is?

Speaker 3

Yes. Jeff, as it relates to earnings per share, what really has driven That increase in guidance outside of FX, so going from that 7% to 12% previous growth 12% to 16% growth in EPS under the new guidance. We see just the fundamental Momentum that we have, particularly in the services revenue, as we look forward on the business. So again, strong double digit service revenue growth percent from that perspective and the NFR solid NFR growth that we've seen in the Q1. 18.

Speaker 3

Additionally, we continue to anticipate and drive to a scalable operating platform and watch 6. That net revenue growth over the course of the year will outpace the increase in operating expenses, therefore allowing us to expand our margins over time. So that is a critical aspect of driving that growth that goes down to AOI. Then lastly, I would just point to modestly lower tax 18. So we originally were in the 25% to 26% range as we typically are And I would guide you closer to the 24% to 25% range for this year.

Speaker 4

Okay. And just my second question was on the self managed opportunity. Can you kind of talk about how that progresses today versus, say, 2 quarters ago or there's some examples you can give of how you're making progress on this front?

Speaker 3

Yes. So Jeff, 18. As you know, it's a long it's a longer lead cycle time or lead time cycle to do that. That being said, we have Continue to focus on the effort for the self managed fleets and believe it's progressing well with again a significant focus there. 18.

Speaker 3

As we've said in the past, one of the benefits that we have seen more recently with the improving capabilities of the organization, both from the NPS scores and how clients perceive us is our ability to win share via steels in the marketplace and that continues to be prevalent in what we see here and in fact winning back clients who left us This opportunity from a to come back to Element that looks very different from a client experience than when they left us. And so we're leaning into those opportunities as we see the competitive dynamics landscape lay itself out, but we don't hesitate and we continue to lean heavily into self managed fleets, and we'll continue to do so and believe that that will continue to pick

Speaker 5

Okay. Thank you.

Operator

The next question is from Paul Holden with CIBC. Please go ahead.

Speaker 6

18. Thank you. Good evening. Also first half to congratulate Jay, very successful career obviously at 1st question 2. From me is regarding your expectation for OEM production in the second half of the year.

Speaker 6

I think 16. Sort of listening to a couple of the important OEMs, I think I'm getting a sense that maybe there's potential downside to production. They seem to be Because of weaker consumer demand, do you think there is a realistic risk that production doesn't ramp in the second half of the year as expected or maybe you have better indicators than I on why it still should ramp in the second half?

Speaker 2

Yes. Hi, Paul. It's Laura. I'll take that one and Frank, you can add on. So we actually are feeling positive about that.

Speaker 2

For as much as we expect our backlog to remain elevated into 2020 24. We still have, as I mentioned in my prepared remarks, we still have a lot of pent up demand on the fleet side. We're still 18. I'm seeing high demand on the consumer side, but if you imagine for a moment that the consumer demand starts to fall away or weaken, That just would mean that more production would likely be diverted to the fleet side, which would be good for us. And so we've got eighteen.

Speaker 2

Good momentum in the business and good results, notwithstanding that there are higher backlogs. And 2. So we see, I'm going to say some real opportunity for future growth if that does start to come off.

Speaker 3

18. And Laura, I would just add, as we've said before, we have very good relationships with the OEMs. They're in constant dialogue As a major buyer there and our discussions with them lead us to believe that we're pretty spot on in regards to The production volumes and as Laura suggested that consumer weakness could provide upside in originations for us.

Speaker 6

Got it. Okay. Thanks for that. Second question is related to your disclosure on Voom. And I can't recall if this question has come up in the past, but I'm going to ask it anyway.

Speaker 6

So if I look at the 1Q 'twenty three number versus 3Q 2021. There's virtually no growth in the serviced and financed room. Virtually all the growth has come from Serviced only. So I guess first part of the question is kind of what explains that divergence because I'd Expect growth in both. And then 2, is that what we should expect going forward or should we expect growth in both

Speaker 3

Q2 going forward. Yes. So let me answer the second question first. You should expect growth in both going forward with the caveat of the white gloves or the white label service that we provide to a competitor, which is very low margin and has really no implication whatsoever for When we end that service to them in this coming quarter. So that will you will see that in a flatter or maybe even a modest decrease.

Speaker 3

But from From a mobility perspective, no impact to us in regards to that.

Speaker 6

And sorry, Frank, just to cut in there, is that a serviced Only or is it a serviced and financed relationship?

Speaker 3

That is a serviced only. So these are vehicles that Are managed by another FMC who has contracted with us for a service That we had done historically for them. And we are no longer going to provide that service going forward. 20. And so and it was again not really no major impact to the P and L.

Speaker 3

It's very low margin business, very

Speaker 1

20. Understand. And the sort of

Speaker 6

20. Explanation of why the service and finance hasn't grown?

Speaker 3

Yes. I think as you look at the business 6. Over time, the big some big components of it are OEM supply shortage to some extent is an overhang on that. So as some vehicles come off road, need to get replaced. So we feel very comfortable that we will start to see that grow more over time.

Speaker 3

It's also a relic of what we've talked about in the past, which is some again, some 18. Very low profitability business that we've moved off the books from that perspective in Q3 and Q4, I believe, of last year. And the proof is to some extent when you look at the revenues per BUM, You see those either consistently increasing over time, relatively strong in the last quarter. I would say I wouldn't expect that type of growth in the future because we are as we onboard some of these big wins, they do take time to ramp up. And so the VUM comes on quicker than the revenue.

Speaker 3

But again, you'll see growing BUM and then over time revenue per BUM as we move forward in So hopefully that answers your question, Paul.

Speaker 6

That's helpful. Thank you. Have a good night.

Speaker 3

18. I guess, Laura, I'd

Speaker 7

like to 18. Extend my first question to you that as an outsider coming in, I know it's only been 3 months, but it does sound like you've Being able to go around and see the entire operations. Is there anything about Element that has actually surprised you that you didn't realize coming in? 18. Good, bad, ugly, doesn't matter.

Speaker 2

Thanks for the question, John. 16. I did a lot of due diligence prior to arriving. And I would say for the 3 months and 2. I've been put through quite the onboarding from Jay.

Speaker 2

It's been tougher than being at university. 2. So a lot of learning and it has been as Jay told me, he did say to me eighteen. You'll see when you arrived, everything is as advertised. And so I'm happy to report that everything is as advertised.

Speaker 2

Eighteen. What I've seen to date again, a company with some really strong business fundamentals, solid strategy, eighteen, which has really impressed me. And I'd say really a high performance organization that is continually improving, 18. Very strong culture, very competent people who really know how to execute on the strategy. And I think that's what we're seeing in the results.

Speaker 2

20. You can see really good results. And so, I'm actually left feeling very optimistic that we'll be able to generate more value for our twenty two. Thank you. So as advertised.

Speaker 2

And if I may, I'll thank Jay again for his leadership on behalf of everyone in this organization.

Speaker 7

Thanks, Laura. And then, I guess my second question, if I can switch Frank, you had mentioned in your prepared commentary that you're developing new services for Armada. 18. Is there any are you able to give us any sense in terms of what these services are and regardless of whether or not these are state secrets, Are these services that could potentially be deployed through your broader customer base at some point down the road?

Speaker 5

Yes. 18. I think

Speaker 3

the thing we love about working with Armada is they always challenge us and they take the And again, remember, they have different cycles throughout the course of the year and say, how can you help us manage our fleet to increase utilization, To drive more productivity, to have more flexibility in the utilization of that fleet, etcetera. And it's those type of challenges Answers to those challenges that we then work with them to implement. And they move at a relatively fast pace, which is good. I would say that the learnings we get from working with a mega fleet, regardless of who it is, Can always be transported into our broader operations, to the extent that there are good learnings from those, Obviously modified in many cases, but again, it's just those type of learnings, those type of exercises make us Better and when they make us better for one client, they make us better for all clients that are applicable.

Speaker 1

Thanks for the color, Frank.

Operator

The next question is from Tom MacKinnon with BMO Capital. Please go ahead.

Speaker 8

Yes, thanks very much. And I want to congratulate Jay 18. All your great work at Element and all the great work you did at previous companies you worked at before Element. So enjoy the next phase 18. The question is with respect to The gain on sale of equipment under operating leases.

Speaker 8

This was up significantly year over year and even more so quarter over quarter. So, was there anything special driving that? And how should we be thinking about that going forward? And then I have a follow-up. Thanks.

Speaker 3

20. Yes. So when we look at our gain on sales, obviously predominantly A and Z, we saw a couple of things. One is That market has remained very robust from a pricing perspective on gain on sale. And so eighteen.

Speaker 3

We took a strategic perspective of making sure that we took advantage of where that market is and moved the volumes that we had available Into that market. And so you saw kind of across the board on our gain on sales, predominant one The larger impact was volume, but yield was up or rate was up as well in those markets. And given our view that originations We'll continue to start to come in. We wanted to make sure that we made hay while the sun was shining And took advantage of those very strong markets and the demand appetite that was out there. That being said, We continue to believe that those markets will remain strong over the course of the year because of that dearth of demand, but our volumes will probably Not be at the levels that they were in Q1 of 2023.

Speaker 3

So you'll see that be moderated as we move through the course of the year and that's all built into our guidance.

Speaker 8

Great. And with respect to syndication is the second question. I think in the last quarterly call, you talked a little bit more measured about the outlook with respect to $6,000,000 Syndicating assets and just wondering how that sort of changed. I think you're guiding to still the 3% to 4% in terms of volume, 2% yields are going to be lumpy, but is there any way you would change your characterization of the syndication market now versus how you were describing it to 3 months ago.

Speaker 3

Yes. And just to recall back, we've always said the syndication market is very strong for our assets And we think it's very deep for our assets as we built out that capability with north of 30 partners. And I think the strength of that showed through, especially in the last 2 weeks of March, as there was market dislocation elsewhere where we were able to syndicate at yields above our target levels for the most part. So really strong demand there. So The discussion around syndication is more around the economic value and the breadth of The opportunity versus holding it on our book and getting better economics in a higher spread world.

Speaker 3

And so 2 if we choose to go into the market with it. I would just add one other As we move through the year, we believe that as rates stabilize, I. E. Rates going up eighteen. For offering us a better opportunity to get better economics on the syndication product As well as driven by the fact that other the supply of other investable assets, think Mortgage securities or corporate loans which are down will be less supply our asset both from a risk 3rd quarter.

Speaker 3

Typically, the tax benefits become more valuable because their use in time are more near term And so we benefit from that. So we feel good about the syndication market. And what we saw in the first quarter only gave us more comfort that we've got depth and breadth of funding opportunities.

Speaker 8

2. That's great. Thanks.

Operator

The next question is from Jaeme Gloyn with National Bank Financial. Please go ahead.

Speaker 7

6. Yes. Just to follow-up on that last question and hoping perhaps you can answer this. 2. Have you been active in recent weeks on syndication markets?

Speaker 3

Yes, we have. 20. And again, those markets, we haven't seen any real noticeable change in tone, as we've been in those markets. We're typically lighter in the 1st month of any quarter and heavy a little heavier in the back end of the quarters. But no, we've been continuing to bring volume to the market And had rapid and ready reception of it as we move forward.

Speaker 3

And again, no change in tone from our perspective for our assets.

Speaker 7

Yes. Okay, great. And then on that, I guess, I don't know, in sourcing of a competitor's fleet, Does that exist elsewhere in your portfolio of vehicles under management? And If it does, can you size it and maybe talk about like the any other metrics around that in terms of like time of relationship, etcetera?

Speaker 3

20. No, there's really no any material other components to that there. And again, this is 18. Now we're a competitor and we've decided that the economics at that business were just not attractive to us And therefore, we will be exiting that business in the Q2.

Speaker 7

Yes, understood. Okay, that was it for me. Thank you very much.

Operator

The next question is from Graham Ryding with TD Securities. Please go ahead.

Speaker 9

Q2. Hi, good evening. Maybe I could stick with the syndication theme. You increased, I guess, from an FX perspective, your originations outlook, but you kept your syndication volumes unchanged relative to your old guidance. Are you just trying to be but then on the other hand, you gave a pretty constructive outlook for the depth and breadth of that market.

Speaker 9

So I'm just wondering why you didn't increase your syndication volume outlook, but you did your originations outlook?

Speaker 3

Yes. When we reset that syndication guidance from $4,000,000,000 to 4.5 $1,000,000,000 We left it at a pretty wide range of $3,000,000,000 to $4,000,000,000 Graham. So there's a lot of areas to land Within that range. And so we've got even if those originations continue to go up, you can see opportunities in syndication. It's going to It's going to be more driven though by the rate environment and the originations and whether or not we would to keep those on book in the near term until the rate environment gets more attractive to us and then we syndicate those assets at a later date.

Speaker 9

Okay, fair enough. And then just broadly speaking, when we sort of look at the Increasing rate environment. Are you seeing any pressure on your business with higher variable rate funding? Eighteen. Are you able to pass that on, on your variable rate sort of NFR?

Speaker 9

Are you seeing any pressure there at all or are you able to pass through the higher rates?

Speaker 3

What we price our leases at as we move forward. That being said, we have long term relationships and long term agreements with clients, right? So As we see rates increasing, we have discussions, but specifically as we onboard new business, we make eighteen. Sure that they reflect the new rate environment that we're in. And to the extent that there is a reason to have a discussion on rate with an existing client, we will Continue to finance our business at attractive levels, right?

Speaker 3

And so and shown that ample access to capital. So 20. Although we do see some rate increase within our NFR, some of that's just 3rd driven by as we continue to lag into match funding in Mexico and the peso which we've talked about before $20,000,000 is the bigger component of that versus slightly higher rate on a $500,000,000 or $750,000,000 ABS. And remember, our variable funding relatively stable. Our senior lines, our other 20.

Speaker 3

Funding mechanisms have been relatively stable. And when we go to market, we go with a relatively small percentage of the overall to term out those type of facilities. And so we're not seeing a major impact from the rate moves, albeit the funding that we've done more recently in the ABS market is Higher than the one we did in 2021, but makes sense.

Speaker 9

That's interesting.

Speaker 3

Yes. And I'd also say, Graham, 18. This is important. As overall rates go up, we are completely agnostic 2. So our contracts are set.

Speaker 3

So if the Fed, whether it's SOFR, historically LIBOR, Whatever. As those rates increase, our cost to clients actually increase lockstep with those, Right. So the only exposure we have is just on terming out facilities with Whatever spread increase we have over and above the base rate. So most of and this is why we've said many times, we're effectively intra 18. State rate agnostic because we lock in the economics at the time of the origination based on where base rates are at the time of that origination.

Operator

18. The next question is from Shalab Garg with Veritas Investment Research. Please go ahead.

Speaker 5

Thank you and good evening. My questions are on order backlogs. Can you share any insights on the mix of electric vehicles within the order backlog?

Speaker 3

Yes. So 18. If you look at our BUM calculation, we do disclose the amount of EVs in that BUM calculation And it's very small component of the overall VUM. We are seeing more interest in electric vehicles. And so on a percentage basis, more opportunity within the order backlog, but it's still very, very small Relative to the overall component, for several reasons.

Speaker 3

One is, as we work really closely with clients, The prudent and stepping in manner as they want to do pilots on a much on a smaller scale to understand Sure, which is also a big component of how they do it. So it's still small. It's one of those things that we believe will continue to move over time. And as we've said before, we think 40% to 60% of the fleets by 2,030 will be electrified. But that being said, that means 40% to 60% of the fleets will still be ICE.

Speaker 3

And so someone like Dossa has capabilities to Both have the data and help people migrate to the EV journey, but be able to manage a mixed fleet as those fleets become more mixed, Continue to be very well positioned for that migration.

Speaker 5

Okay. That's useful color. And are you seeing any As it came from clients because of the electric timelines being longer for electric vehicles?

Speaker 3

I think it's too early to say. I don't think anyone's 6. Extended time lines. We're seeing more interest from the client base. We're spending a significant amount of our strategic Consulting on EVs.

Speaker 3

It is a topic on every new business and existing client discussion. It is one of the things that I think provides an incredible opportunity for us, not only with our existing client base, but with self managed fleets, 2. Catalyst to one of the earlier questions, self managed fleets looking to this because we should have, based 18. On our 1,500,000 vehicles under management, some of the best data on in use Hoping people to solve the charging infrastructure component of it as well.

Speaker 5

Okay. That's helpful. One last one from me. 20. So the order backlogs are approximately 3 times the prepayment limit, which we have seen for quite a few quarters.

Speaker 5

Can you provide a breakdown of that 3x 6. Growth into things like is it driven by majority number of vehicles, by inflation, by a change in mix towards electric vehicles, which are a bit more expensive? 18. Anything on that would be very helpful.

Speaker 3

I think the reason you've seen it stay elevated predominantly is the strength of the ordering that our clients have. I mean these are our clients are looking and their fleets have aged over time. They believe in their business. These are mission critical vehicles, so they cannot generate revenues without these vehicles. And there's a real need to control costs and obviously costs have gone up.

Speaker 3

We've been a great partner with our clients in trying to help them manage those costs with that aging 18. We've been through preventative maintenance and other products to make sure we're keeping downtime down, but they need new vehicles. And so as these order banks So open up. They have been placing their orders at very strong volumes quarter after quarter, which has kept Despite increasing originations, new orders are just backfilling those. Obviously, inflation is a small component, but the bigger component by far It's just the demand component of our client base.

Operator

18. This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Earnings Conference Call
Element Fleet Management Q1 2023
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