Element Fleet Eyes Growth Revival as CFO Flags Commercial Execution Challenges

Key Points

• Element Fleet maintains a strong long-term growth opportunity, reporting year-to-date revenue growth of 13%, adjusted EPS growth of 18% and free-cash-flow growth of 11%. However, commercial execution has weakened, with fewer new-business wins, slower vehicle-under-management growth and cautious fleet customers.
• Customer concerns over fuel prices, interest rates, vehicle costs and trade uncertainty have delayed fleet replacements and expansions. Management expects growth to depend on improving VUM, increasing service penetration and converting delayed orders, though lengthy sales cycles mean benefits may take time.
• The company is pursuing a more capital-light model through its new equity residual financing structure, while targeting C$20 million in annual cost savings from digitization and AI. Element is prioritizing organic growth, maintaining its investment-grade rating and selectively repurchasing shares rather than pursuing acquisitions.

Element Fleet Management TSE: EFN Chief Financial Officer Heath Valkenburg said the company continues to see a substantial long-term growth opportunity despite softer recent commercial execution and more cautious fleet customers.

Speaking at an investor presentation, Valkenburg pointed to year-to-date financial results that included 13% revenue growth, 18% adjusted earnings-per-share growth, 11% growth in free cash flow and free-cash-flow conversion of 123%. Return on equity was 19.9%, up 200 basis points from a year earlier, according to the presentation.

Valkenburg said the company’s core growth outlook has not changed structurally. He cited an addressable market in which more than half of fleets remain self-managed, as well as Element Fleet’s investment-grade balance sheet, client retention near 98%, recurring revenue base and increasingly capital-light model.

“Nothing has changed structurally,” Valkenburg said. “I guess what has changed is our conversion of that opportunity into growth.”

Commercial execution and cautious customers

The CFO said Element Fleet has not generated the level of new-business wins, vehicle-under-management growth and service penetration it wants from its commercial organization. The company has made management changes intended to address its commercial execution, though Valkenburg said the benefits will take time to show because fleet sales cycles are lengthy and newly won fleets take time to ramp.

He also cited customer caution stemming from higher fuel prices, interest rates, vehicle capital costs and trade-related uncertainty. Those factors have contributed to delays in vehicle replacement cycles and fleet expansions, he said.

Regarding originations, Valkenburg identified three factors affecting the year-over-year comparison:

• Element Fleet deliberately reduced its exposure to an originate-to-syndicate client.
• Customers have delayed some replacement and expansion decisions.
• New-business wins need to improve to support additional fleet onboarding.

Excluding the originate-to-syndicate client, originations were up 4%, Valkenburg said. He added that delayed orders had begun to pick up during the third quarter, though there is a lag between customer orders and reported originations.

Valkenburg emphasized that originations and vehicles under management, or VUM, should be viewed separately. Most annual originations are tied to normal replacement activity among existing customers and therefore do not necessarily increase the number of vehicles under management. VUM, he said, is a more meaningful measure of the company’s portfolio growth.

About 60% of Element Fleet’s portfolio is services-only, meaning those clients do not generate financing originations but can still contribute service revenue. The company can increase VUM by expanding relationships with existing customers or adding services-only customers, Valkenburg said.

Service revenue and financing yields

Element Fleet’s servicing income growth reaccelerated to 8% in the second quarter after softer preceding quarters. Valkenburg said service revenue depends on the number of vehicles under management, product penetration, service utilization and pricing.

He said the company sees room to increase adoption across its geographic markets and product categories. Maintenance penetration is in the 50% range, while newer technology-oriented offerings such as telematics and route optimization have penetration levels ranging from low single digits to about 20%.

Valkenburg said financing yields have benefited from the company’s leasing business and efforts to improve its funding structure and reduce funding costs. However, he does not expect the pace of yield expansion seen in prior years to continue. Instead, Element Fleet’s objective is to maintain yields while expanding its portfolio.

Gains on vehicle sales, which are included in net financing revenue, remain above pre-COVID levels, he said. Valkenburg expects vehicle pricing to continue normalizing, partly offset by a larger number of units sold as the portfolio expands.

Funding, costs and capital allocation

Element Fleet introduced a new financing arrangement in June that it calls an equity residual structure. Like traditional syndications, the structure enables the company to move assets off its balance sheet while retaining the customer relationship and related service revenue.

Under a traditional syndication, Element Fleet generally receives an upfront fee and gives up future lease cash flows and tax benefits. Under the new structure, it receives a smaller upfront fee but retains 49% of future financing cash flows and tax benefits, Valkenburg said. The arrangement also allows the company to pool smaller clients, providing additional off-balance-sheet funding flexibility.

He noted that the transition can create a timing effect on reported results because it produces less revenue initially and more revenue over time.

The company is also targeting C$20 million in annual cost savings through digitization initiatives, including the use of data and artificial intelligence in maintenance transaction approvals and compliance processes. Valkenburg said the primary objective is to improve the client experience, with greater operating scale as an additional benefit.

On capital allocation, Valkenburg said Element Fleet intends to preserve its investment-grade credit rating and target a debt-to-capital ratio of 73% to 77%. The company pays 25% to 35% of free cash flow as dividends and invests about C$80 million annually in technology and product development.

He said Element Fleet typically repurchases 1% to 2% of its shares annually, but may increase buybacks when management believes the stock is trading materially below intrinsic value. The company had repurchased more than 2% of its shares by the midpoint of the year and resumed buybacks after a blackout period related to its unsuccessful pursuit of FleetPartners.

Valkenburg said Element Fleet withdrew from the FleetPartners process after higher bid prices no longer met its return thresholds. While the transaction would have expanded the company’s scale in Australia and New Zealand, he said Element Fleet’s current focus is organic growth rather than further acquisitions.

For the next 12 months, Valkenburg identified VUM growth, increased service penetration and revenue per unit, and margin expansion as the company’s principal areas of execution.

About Element Fleet Management (TSE:EFN)

Element Fleet Management TSX: EFN is the largest publicly traded pure play automotive fleet manager in the world and a global leader in intelligent fleet and mobility solutions. Guided by our Purpose to Move the world through intelligent mobility, we help clients manage the vehicles, data, technology, and decisions that keep their businesses moving. Fleet is our foundation, and intelligent mobility is how we lead. By combining deep fleet expertise with connected technologies, data driven intelligence, and strategic partnerships, Element helps clients lower total cost of ownership, improve uptime and driver experience, and build more resilient operations.

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