Element Fleet Management Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 8 speakers on the call.

Operator

Welcome to

Speaker 1

the Element Fleet Management Second Quarter 2023 Financial and Call. As a reminder, all participants are in listen only mode and the conference is being recorded. Call. After the prepared remarks, there will be an opportunity for analysts to ask questions. And Xero.

Speaker 1

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 in its year end and most recent MD and A as well as its most recent AIF for a description of these risks, uncertainties and assumptions. Although management believes that the expectations reflected in the statements are reasonable, 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 statements, MD and A, supplementary information document, Quarterly Investor Presentation and today's call include references to non GAAP measures, which management believes are helpful Program of 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 in the MD and A.

Speaker 1

I would now like to turn the call over to Laura D'Torrias Nazzio, President and Chief Executive Officer of Element. Please go ahead.

Operator

Operator, good morning everyone. We are pleased to be here to discuss Element's 2nd quarter performance which includes record results driven by commercial wins and client growth. We continue to deliver a superior client experience in all five countries we serve and we're successfully executing all five drivers of our revenue growth strategy by retaining 99% of our existing client base, expanding our share of wallet with those clients, earning market share from our competitors, converting self managed fleets into new clients and securing government mega fleet mandates. To put this into context, this quarter we earned market share in welcoming 23 new clients. We converted 25 self managed fleets and we continue to expand our share of wallet with 124 pre existing Element clients.

Operator

These wins represent the potential addition of over 20% more vehicles under management and what our global commercial team accomplished during the same period in 2022. In addition, an important part of our performance was the impressive $2,500,000,000 of new vehicles that we were able to originate for our clients. This was a function of steadily improving OEM production capacity which of course is great news for both our clients and our shareholders. And as we communicated last quarter, our backlog of orders continues to remain at elevated levels and is expected to carry us well into 2024 with $2,600,000,000 of contractually committed future origination volume. Moreover, our clients demand for new vehicles continues to be strong as they placed $4,000,000,000 of orders, a record in the first half of this year.

Operator

Now pivoting to ESG, we published our 3rd annual report in June containing full disclosure of our scopes 1, 2 and upstream 3 greenhouse gas emissions and we're currently working on the establishment of science based emission reduction targets and expect to share those with you in 2024. That said, we've already been taking action to reduce our environmental impact. We achieved a 55% reduction in scopes 1 and 2 emissions in 2022 and that's relative to our 2019 base year and it's thanks to our internal fleet electrification efforts and decreased energy usage at our offices. Regarding electric vehicles, we launched and guided numerous client pilots across our global footprint with the full suite of Arc by Element services. Our strategic consulting capabilities in EVs continues to garner strong interest from clients and prospective clients particularly in the self managed space.

Operator

Now before I hand it over to Frank, I want to thank our entire team at Element for your continued dedication and hard work. Without you these record results would not be possible. Now looking ahead, we continue to have lots of opportunity to grow and further improve our performance with plan and pace investments in our business and with the continued execution of our strategy. This is an exciting time for Element and we're looking forward to and Sharon's future successes with you. Over to you, Frank.

Speaker 2

Thank you, Laura. Good morning, everyone. It's great to be demonstrating Element's ability to deliver on our client value proposition and generate strong results across the business. 2 things before I take you through these those results. 1st, we disclosed this time last year, we earned $8,000,000 of non recurring net revenue in Q2 2022.

Speaker 2

Excluding that from year over year comparison shows the organic growth of the business, so I'll be citing growth on that basis. And Mexican peso benefited our Q2 results as reported. After normalizing for those factors, our 2nd quarter growth still near the high end of our long term guidance ranges and very strong in absolute terms. We grew net revenue 8.4 percent year over year to $323,000,000 for the quarter. Adjusted operating income grew 4.5% on the same basis despite increased investment in our commercial capabilities, which I'll come back to shortly.

Speaker 2

Operating margin was 55.1% for the quarter, consistent with our guidance. Adjusted earnings per share were $0.33 which is a 10% improvement year over year and free cash flow per share was $0.46 which is a 22% improvement year over year. It's worth noting that Q2 free cash flow benefited somewhat from the timing of cash payments and cash inflows from originations in the first half of this year. Normalizing for those items, free cash flow per share would have been approximately $0.42 in the 2nd quarter and the incremental $0.04 would likely benefit the second half of this year equally. For certainty, we reaffirm our guidance of $1.58 to $1.63 of free cash flow per share for the full year.

Speaker 2

Looking more closely at our 2nd quarter net revenue growth year over year, it was driven by services revenue and net financing revenue growth. Services result in our clients and their drivers developing a near daily working relationship with Element, which is the stickiness that enables us to retain almost 99% of our business annually. Services revenue was up 12% year over year driven by share of wallet growth, namely increased penetration and utilization, as well as modest growth in ANZ Mexico and Armada services revenue streams. We've quantified the relative value of these contributions in our supplementary information document for Q2 and included further detail in the MD and A results commentary. Net financing revenue grew 6.4% year over year, driven by average net earning assets growth of 6.2 percent and interim funded asset growth of 100%.

Speaker 2

Each of these asset categories grew expense of a record $2,500,000,000 of global originations in the quarter. Year over year gain on sale or GAS growth also contributed net financing revenue growth. In Q2, GAS moderated slightly in Australia and New Zealand compared to the Q2 of last year. However, this was more than offset by gas growth in Mexico on the same comparative basis. Now I'll turn to the 2nd pillar of our capital lighter business model, which is syndication.

Speaker 2

We syndicated $690,000,000 of assets in the 2nd quarter and generated $11,400,000 of revenue. That represents 1.65% yield on the assets syndicated or 35 basis points shy of the 2% long term average yield we continue to guide for modeling purposes. As we've said before, the continuing uncertainty around interest rates has sustained elevated spreads, which compress available syndication yields. Remember, the biggest benefits to Element of our syndication program are: 1st, the ready access to off balance sheet funding for growth second, the ability to manage our tangible leverage ratio 3rd, the accelerated revenue recognition and increased velocity of cash flow, which we can redeploy for attractive returns and 4th, the freeing up of excess equity to reinvest in the business and return to shareholders through buybacks and dividends. Our access to capital through syndication remains deep, and we are confident that we can syndicate the volumes implied by our full year guidance.

Speaker 2

2nd half originations should provide ample inventory for our syndication team to work with. Turning now to operating expenses, We knew the modest increase was coming this quarter as planned, which we signaled in May. And this increase reflects both practical and strategic choices as well as inflation. Given our confidence in longer high long term higher annual organic revenue growth potential of 6% to 8%, resourcing properly means hiring and developing the right talent in the right roles. It means continuously improving our market leading capabilities and it means facilitating meaningful client interactions through travel and events as we exit the pandemic era and increase our commercial ambitions.

Speaker 2

We are also investing in our service delivery model to sustain the growth of our net promoter scores and lower our cost to serve. The healthy returns on these OpEx investments are already being demonstrated. For example, in our second quarter results and in the commercial success profile that Laura shared. That commercial success will have lasting impact on our performance over the next several years, such as the nature of our incremental recurring revenue growth model. I want to briefly discuss sustaining capital investments, which we disclosed in our calculation of Element's free cash flow in the supplementary.

Speaker 2

We expect to make between $75,000,000 $80,000,000 of sustaining capital investments this year, which is more than we have in recent years. This is partly a function of inflation on the $50,000,000 to $55,000,000 in annual sustaining CapEx range we first set out several years ago. However, that range was predominantly focused on IT spend. As Laura mentioned, we've been electrifying Elements internal global fleet, which will impact our sustaining capital investment totals both this year and next year. We will also be optimizing certain of our real estate footprints over the next 2 to 3 years, the cost of which will be partially comprised of incremental sustaining CapEx.

Speaker 2

These and other non IT sustaining capital investments forecast to be approximately $18,000,000 in 2023. Turning now to our funding. As you know, Element maintains ready access to diversified sources of on balance sheet funding from a roster of high quality lenders and investors across all of our markets and this is evidenced by our activity in the first half of the year. In April, we issued $750,000,000 of asset backed term notes, which was greeted by strong investor demand, allowing us to upsize the offering from $500,000,000 while improving pricing. In June, we upsized our credit facilities as well as issuing and $750,000,000 senior unsecured note at 200 basis points over the relevant treasury.

Speaker 2

Quarters, we continue to evaluate funding options to optimize both our on and off balance sheet mix and, of course, lower our cost of capital. And the organization's cohesive approach to delivering that consistent superior client experience. Over time, This growing profitability combined with recent and contemplated global tax legislation is likely to drive increasing cash tax expenses. That said, we expect cash taxes to remain below the accounting provision for tax that is a function of our effective tax rate. Before we take your questions, let me officially reaffirm the full year 2023 results guidance we provided the market in May, which remains unchanged.

Speaker 2

We commit to revisiting this guidance since November as part of our Q3 earnings release. We also expect to be in a position to provide you with full year 2024 results guidance at that time. For now, I'll turn this call over to the operator for your questions.

Speaker 1

Thank you. We will now begin the analyst question and answer session. In order to afford all analysts the opportunity to ask questions, you will hear a tone acknowledging your request. The first question comes from John Iken with Barclays. Please go ahead.

Speaker 3

Good morning. Frank, just first off, a quick clarification on your commentary around free cash flow. You said this quarter benefited by $0.04 from the pull forward, but I think you said that $0.04 will also benefit the second half. Did I get that correct?

Speaker 2

No. What I said, John, was Had we not had that pull forward, that would have affected and I wouldn't call it pull forward. It's really driven by both the timing of the originations that we saw, so the strong originations and then also by the timing of cash taxes, which were lower in the quarter. Had we not had those two impacts, That $0.04 would have likely benefited the second half instead of coming in, in the second quarter.

Speaker 3

Frank, that makes a lot more sense to me. And then I guess my second question is admittedly this commentary came from at least 2 generations of management teams ago, but when we originally there had been some commentary around interest rates And when, if I remember correctly, interest rate sensitivity for clients hit around 11% or 12%, And we're at that level now at least in general. Are you seeing any rate sensitivity with your clients in terms of what you're charging or is the environment just so different today because of the impact we saw through the pandemic that there's basically no sensitivity? Any commentary would be appreciated.

Speaker 2

Yes. No. And I think the way I would phrase it is, are we seeing any impact on demand, right, in Demand and we are not. And remember, it's the aspect of the mission critical nature of these vehicles, The fact that the clients need to replace them and the fact that the aging fleets because of the supply chain is helpful, but not Driving that. It's just the overall mission critical aspect of those vehicles.

Speaker 2

And overall, all funding for our clients, whatever markets and Forever, what our uses are up in this environment. So we're in that same vein, obviously, up higher because Our contracts are based on base rates at the time of the origination. So no, we see demand as still very good. And I point you to $2,100,000,000 $1,000,000,000 worth of orders, in the quarter, which was very, very strong from our perspective.

Speaker 3

Thanks for the color, Frank. I'll re queue.

Speaker 1

The next question comes from Geoff Kwan with RBC Capital Markets. Please go ahead.

Speaker 4

Hi, good morning. Frank, I had a question on the syndication yield. It's varied a little bit at certain times over the past few years. Just wondering how should we think about how the yield gets impacted by interest rates, the higher funding costs and tighter conditions for the regional banks and any other factors that we need to be aware of? And also how are you expecting that yield to trend over the next couple of quarters or next few quarters?

Speaker 2

Yes. So I think you will continue to I'll answer the last question first. I think you'll continue to see yield kind of depressed from that 2% level over the next two quarters as we continue to be in this interest rate environment that we currently are in. That being said, what is driving that is twofold. 1 is, obviously, the increasing spreads that we've seen, But more importantly, the increasing hurdle rates at the banks, as they have gone through this year.

Speaker 2

So that impacts their ability to or the pricing of our product into their investment portfolios. So that's an important consideration from that perspective. That being said, I would say we continue to see significant depth in that market and feel very strongly, as I commented In the prepared comments that we are on target for our guidance range, Which would mean the second half will be stronger than the first half in regards to syndication volume. And that's really benefiting from the supply we're getting from the higher originations as we look there. Longer term, so going out past a quarter or 2, We would anticipate that those yields would start to rise again, in particular as interest rates, number 1, stabilized.

Speaker 2

And then number 2, should when interest rates start to come down, we will benefit, in particular, on our fixed rate product. So historically, and I've said this before, we tended to sell more fixed rate and less floating rate In the current environment, over the last year or so, we actually sell slightly more floating rate than fixed rate, Because it is much more agnostic to the volatility in interest rates. That being said, it tends to because floating rate notes do carry lower yields once sold.

Speaker 4

Got it. No, that's very helpful. And just my second question on was on the when thinking about the reported backlog and what you think is maybe your shadow backlog, How long do you think it will take for all your clients to have their fleets fully, call it, up to date? But in particular also is Like how do you think that backlog normalizes in terms of what it means from the OEM side? In other words, is it that increasing production Allocations to fleets in terms of that shifting market share to fleets, is it adding an extra production shift, is there new plant openings?

Speaker 4

Just trying to understand how you think about that path to normalization.

Speaker 2

Yes. 1st and foremost, increased production, right, is always The best way towards it. And I know the OEMs have been focused on increasing production and getting there. And obviously, they've done a Significantly good job doing that and being able to originate the $2,600,000,000 that we had this quarter. So That's been a very, very big plus to it.

Speaker 2

To us, the gravy is to the extent if there is any shift towards the fleets versus retail and that's really a flat out how strong is retail demand for vehicles because obviously retail is an important pulling up their business as well. So we don't count on that, but we do think we'll see benefits should the retail demand slow down in any way, shape or form. In regards to the backlog and when it normalizes, our crystal ball isn't better than anyone else. But that being said, we think it will carry meaningfully into 2024. We think we'll end the year with still a strong order backlog that is above normalized levels and will take some time through 2024 assuming continued improvement in production as we move through the year.

Speaker 2

And that also includes our perspective that orders will remain Strong, because of the demand that we see and the need for our clients to continue to replenish their fleets.

Speaker 4

Okay. Thank you.

Speaker 1

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

Speaker 5

Yes, thanks very much. Just a follow-up question with respect to free cash flow. Even if I normalize for the $0.04 that you talked about, it still looks like free cash flow is up Maybe closer to 12%. This is excluding currency adjustments versus your adjusted EPS that's up 10%. So we do have sort of free cash flow even ex the items you talked about growing faster than adjusted EPS modestly faster.

Speaker 5

Why might that be? And what would be the outlook for that relationship as we move into 2020 4, just given some of the sustained CapEx investments that you've been talking about? And if you could shed a little bit of color with take that into account as well? Thanks.

Speaker 2

Yes. I think the first and foremost that I would point to, Tom, is that Originations in general and even normalizing a little bit for that, they're very strong in the quarter. And as we've said going on for the last couple of years, originations are very good, both from a revenue perspective, but from a free cash perspective. So we really enjoy the improvement in originations and we know our clients enjoy and so we're glad that, that is starting to come through from that component of it. As we look going forward, as I've said, We believe we will continue to have a material spread between our free cash flow effective rate Free cash flow, cash tax rate and our effective tax rate.

Speaker 2

So you'll continue to see a nice spread between those 2 and hence why we focus so much on free cash flow as we look overall at the business. And lastly, again, I'd point you in the future, the strength of originations and just how strong cash flow drives from that regardless of the AOI component is an important component of why we see that differential.

Speaker 5

Proposition, are you looking at can you just shed a little bit more color with respect to what you're doing with your service model?

Speaker 2

Sure. So we have a significant operating leverage in our business, but it is not absolute operating leverage, Right. So when we see this level of originations and as we grow clients and as we increase our vehicles under management, There are certain aspects of the business, whether it's FPS or our maintenance service coordinators or others that can serve as a set number of vehicles. And so As we grow the business, we need to invest in those areas. And the reason that's absolutely critical Those are pieces of the business that directly face the client.

Speaker 2

And so if we want to continue to maintain high NPS scores, high retention rates, etcetera. We need to make sure that we're providing best in class service to those clients, Which starts with our frontline people, which is absolutely critical, from that perspective. So that is the service component. And then obviously, I've talked about investing in the commercial component of it as well. And if you look overall, a significant amount of our investment increase and OpEx over the quarter really is in our people.

Speaker 2

And our people drive our NPS and they drive our client experience That's why it's so critical.

Speaker 3

If I

Speaker 5

could just squeeze one more. What about orders? How are they trending relative to originations?

Speaker 2

Yes. So we saw $2,100,000,000 in orders, which I believe is a record. And so they're trending very well. Obviously, we had a very, very Strong origination quarter, probably the high watermark for the year, but we'll Knock on wood, hopefully see strong originations going forward. So we feel really good about the order volumes that we are seen in the business and then the continued ability to originate against those order policies.

Speaker 5

Thanks.

Speaker 1

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

Speaker 6

Thank you. Good morning. I want to go back to the OpEx investments you're making, make sure I understand the story right. So 2 parts of the question, I guess. First off, Frank, I mean, you just referenced NPS scores.

Speaker 6

I thought those were already strong. So just want to make it clear, are you Making these investments for enhancing future revenue potential or is it really just to bring up Service levels that were maybe below where you're aiming for? And then 2, maybe just remind us of your approach to managing investments versus revenue over time, I. E. Marginoperating leverage And how you plan to manage that over time?

Speaker 2

Yes. It's a good question, Paul. The answer to your first question is both, Right. So we have to support the growth that we have. That's absolutely critical.

Speaker 2

But and we have to The growth we're getting at least at the levels that we currently have that provide those high net promoter scores. But additionally, in a world where you stand still, that is evolving as quickly as our world's and our client expectations continue to increase, We have to continue to invest to make sure that we're meeting those needs and in fact exceeding those expectations of our clients For two reasons. One is, it helps with our retention rates. 2nd is, it gets out in the market and it provides our commercial team a very strong foundation to go sell on value. And that is absolutely critical to our proposition as we move forward.

Speaker 2

So that's what you're seeing in this near term. I think longer term, you'll see OpEx kind of moderate from the perspective of We will get to a scale and a level in regards to the commercial investment that will start to level off. And remember, we're coming out of comparisons that are still pandemic or just coming out of pandemic. So that's why you see some of those step ups on the commercial piece, whether it's travel, meeting clients, etcetera. But we will always focus and have always focused For the last 5 years on delivering that consistent superior client experience and we're going to make sure that that's something that we never that we don't put in jeopardy, While still maintaining our commitment to driving operating leverage over the longer term.

Speaker 6

Okay. And then last question is just with respect to The syndication rates and maybe it's an obvious answer, but just assuming if they sort of stay in line with Q2 or below 2%, That means a lower proportion of syndication versus what you retain on the balance sheet And maybe that has some influence on your 2023 guidance. Is that fair?

Speaker 2

There's no impact on our 2023 guidance. And what I would say, Paul, is When we look at a syndication, whether or not we syndicate a lease or group of leases, we always look 1st and foremost, Is it a positive net economic benefit to syndicate that asset, right? So if it is not a positive net economic benefit And it's better to hold on both than syndicate, absolutely we'll hold it on both, right? And so we're not going to give away economic value for the sake of Just indicating an asset. That being said, because of our partners' lower cost of capital and the tax benefits that we can't use today, but our partners economic perspective.

Speaker 2

And so we're not seeing the current rate environment driving significant decisions around the volume we're going to syndicate and hence why we said our guidance for the year is good for syndication volume And that as by definition, our second half will be more robust from a volume perspective than the first half of the business. And I'll point you to when we look at syndication and look at the P and L impact, it is relatively minor next to some of the other key drivers of the business service revenue, some of our NFR and what we're doing there. But that being said, it is critical, but I'll go back to what I said in the prepared remarks, which is it is critical funding. It's for funding. It increases the velocity of cash flow.

Speaker 2

It allows us to go out and win more business and take on more vehicles under management, which carry with those service revenues that inured to our benefit as well as upfront originations whether or not and the benefits of those upfront originations whether or not we syndicate it. So I think hopefully that answers your question.

Speaker 6

Yes. Sorry, I do want to follow-up because I guess the way I'm just looking at it is syndication Rates are somewhat under pressure, Lisa certainly were in Q2 and you're suggesting they will remain under pressure to some degree versus historical norms. Yes. When we look at the net financial margin, your earning on what you keep on the balance sheet, it's expanding and continues to expand. And so I'm just Curious why that doesn't change the equilibrium between retaining assets and syndicating assets?

Speaker 6

To me, I would have thought it would.

Speaker 2

Yes. Again, it just it goes to that net economic value benefit and the equity return on equity we get in regards to holding on balance sheet versus holding on balance sheet. And remember when you're looking at, I'm not sure exactly what you're looking for in regards to yield, but if you're looking at the yield, there's a couple of things that influence yield. The first one is the geographic perspective, right? So we are growing assets outside of the U.

Speaker 2

S, which carry higher yields to them, And those are inuring to our benefit from that perspective. And then secondly, obviously, some of the non interest component benefits like gain on sale continue to benefit us in regards to that as well.

Speaker 6

Okay. I'll leave it there. Thank you.

Speaker 1

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

Speaker 3

Yes, there's some concern out there just a potential auto worker strike looming in September. How concerned are you or that that could sort of negatively impact production volumes or would you at this point expect that to

Speaker 6

be a bit more of

Speaker 3

a transitory type event?

Operator

Hi, Graham. It's Laura. I'd say that we're watching it closely. We've run different scenarios within the organization and all of it's very manageable. It'd be Let's say similar to previous supply chain disruptions that we would have had.

Operator

So we'd expect again the fact would be we continue to see a good order backlog would be elevated and it would all be a deferred revenue. And I'd say more importantly, as Frank was talking about earlier, we don't expect it change our previously provided guidance. So we're comfortable with our guidance for the balance of 2023. And if it's persistent to 2024, we think it's all manageable.

Speaker 3

Okay. Understood. Maybe I can just jump to your the services piece. It looks to me like in the U. S.

Speaker 3

And Canada over 50% of revenue roughly comes from services where it's a much lower mix in A and Z in Mexico. I guess, why is it so much lower in those markets? And then do you feel like there's an opportunity to maybe replicate some of the services that you're offering in U. S. And Canada to those other geographies increase that mix?

Speaker 2

Sure. So I would say the number one, it's maturity, maturity of the market. So the U. S. Market we've operated here longer.

Speaker 2

We've got a much more built out service network. We've got a much more Consistent offering from just because of the size of the network and for the length of time we've been doing it. It is absolutely one of the biggest focuses that we have from a growth opportunity perspective is to drive service revenues in Mexico and A and Z and we have seen considerable growth in those markets on our services business, albeit from a smaller base. Sense of real opportunity to mature those services markets and gain outsized growth within that service piece in those geographies. So yes, it is absolutely a focus and absolutely an opportunity from our perspective.

Speaker 3

That's it for me. Thank you.

Speaker 1

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

Speaker 7

Yes, thanks. Good morning. Just wanted to go back to maybe, Ray, pop your opening remarks. Already talked about some of the new client wins stealing market share in the self managed fleet, it sounded like 20 or 25 new clients in each of the categories. Just wondering if you can frame like the revenue contribution of those clients and looking at the sub path, it looks like the services per VUM of these new clients in Q2 were A little bit lower than the broader average.

Speaker 7

So just curious like how a typical new client starts with like maybe a couple of services and then you land and expand like What's the timeline or progression for that revenue to kind of flow through?

Operator

Yes. Thanks for the question, James. We usually start as Frank was responding to the earlier question. So Austin will start from the leasing side and then look at adding services over time with services of course coming into revenue sooner as we take them in. But it's really a question of progression over time.

Operator

Once get in and start providing a service and we look to add additional services on. And so dependent upon the service, It can take for products can take 3 months to sometimes 6 months before we see those sales represent on the revenue side.

Speaker 2

The other thing I would add, Jaeme, is what is really interesting about New business wins is just the tail on which it provides growth. And so When you think about the lease, we will typically if they're already with another FMC, the FMC keeps those leases. So, it takes 4 years roughly, three and a half years to fully ramp up the full lease revenue and that's before any growth within the client's fleet, which also adds to that increasing growth. And then with the services piece, obviously, we typically don't start out with The full suite of services, and so we have that ability to add share of wallet over time. So the nice thing about the recurring revenue business is that It's actually a recurring growing revenue business with a new client because by definition a win today not only provides value today, But it provides value in year 2, year 3 and year 4 as that growth takes place and derisks those future 6% to 8% growth rates we talked about.

Speaker 5

Okay, thanks. And

Speaker 7

then thinking about the gain on sale This quarter a little bit down from last quarter. Are you able to break out volume and price contributions? I guess, what I think is like our volumes higher versus last quarter and it's prices are coming down, of course, maybe a little bit of more color on how that gain on sale is progressing?

Speaker 2

Sure. So we've seen a little bit of pressure in ANZ in regards to pricing Within the fleet, but we did see more volume, and we also which helped to offset it. And we also saw Higher vehicles that had more depreciation because of the age of the vehicles. And then we also have and growing our gain on sale in Mexico, which has been a benefit to us as we move forward with the business. So I think in general, it's down a little.

Speaker 2

It's relatively stable. We think that it will decline over time, but at a very modest pace because of many of those offsets we talked about and the growth in Mexico relative to A and Z.

Speaker 3

In terms of originations for 2023, you're at $4,400,000,000 for the first half. To hit your guidance of $8,000,000 to $8,500,000 And even at the top of that range, you only have to do about $2,000,000,000 per quarter. So we assume that like this was a quarter in the year and perhaps originations do slow down in the second half?

Speaker 2

Yes, I would say that is a fair estimate and it's very consistent with past experience where the second half tends to be a little bit lighter As the OEMs go through the model changeovers in Q3, which they have to take the lines down, retool and then bring them back up But we'll keep an eye on that. And I think you heard the earlier question earlier comment in regards to UAW strike. And so we didn't want to go out on a limb in regards to how we think about the originations in the second half.

Speaker 5

Okay. That's good. And Laura, sorry, can

Speaker 3

you just talk a little bit more on the self managed conversion? I know Jane just asked the question, but I presume that near the tail end, I know some of these contracts take a long time to come to fruition, but you must have been or could have been part of some of these conversations with these new clients. Maybe you could just talk about what you saw through those discussions. What got those fleets to convert? Was it pricing?

Speaker 3

Was it the additional promise of services? What in your view Made those companies or governments or regions convert to Element?

Operator

Thanks for the question, Stephen. I just want to start with our people. I've had the opportunity to We go on some of the sales calls and spend time with the team and we have a very high quality sales team and account management team that builds really strong relationships and they create trust from our prospective client base. So that goes a long way. We have great people and a really solid value proposition.

Operator

Not only in what we offer in terms of total cost of operation where we can help our clients save money. I would say a real differentiator is the strategic consulting value that we bring forward. Again solid team that offer really impressive insights to our clients where they can take action and save costs by following the advice that we're given. All that said, it is a longer sales cycle just given it does take A few meetings again to gain trust and get our prospective clients comfortable with entrusting us with these operations. But once our clients do sign on, as you saw with our retention rates, we do a great job keeping them.

Operator

And as Frank alluded to earlier, we've got some really solid momentum in the business and with a lot of these wins we've seen should carry us from a growth perspective in future years.

Speaker 3

Okay. Just when you mentioned strategic consulting, that's not just for EV, that's just for the whole product offering?

Operator

That's right. Offering including EV.

Speaker 3

Okay. Thanks very much.

Speaker 1

This concludes the question and answer session and today's conference call.

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Earnings Conference Call
Element Fleet Management Q2 2023
00:00 / 00:00