Element Fleet Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management fourth quarter and full year 2021 financial and operating results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the prepared remarks, there will be an opportunity for analysts to ask questions. To join or rejoin the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. 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&A, as well as its most recent AIF or 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. Elements earnings press release, financial statements, MD&A, supplementary information document, quarterly investor presentation, and today's call include references to non-IFRS measures, which which management believes are helpful to present the company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in the MD&A. I would now like to turn the call over to Jay Forbes, President and Chief Executive Officer of Element. Please go ahead.

Thank you, Operator, and thanks for all of you for joining us this morning. We're going to briefly address Elements 2021 performance and its results, as well as our outlook on this year and next year, which has not changed since we last spoke to you in November. However, the majority of our time together is going to be available for you to ask questions and we'll endeavor to provide as much color and insight as possible in our responses. Let me start by repeating what I said when we last spoke. which is that Element as a whole is performing better than ever before. And the list of proof points to this effect is three months longer now than it was in November. Allow me to step back for a moment, if you would. In October of 2020, we set out three strategic priorities for Element in 2021. The first was to grow net revenue between 4% and 6% above 2020 levels. in constant currency, demonstrating the scalability of our transformed operating platform by magnifying that growth into superior operating income growth, thereby expanding our operating margins. As you have seen in our disclosures, we succeeded on all counts. Our second strategic priority for 2021 was to advance a capital lighter business model through growing services revenue, and strategic syndication enhancing returns on equity. And we did that too. And our third strategic priority was to grow free cash flow per share and return capital to shareholders through growing our common dividend and repurchasing our common shares under an NCIB. Mission accomplished. While achieving these growth objectives is gratifying, What still amazes me is that our organization accomplished this during the first ever global vehicle production shortage in the history of this industry, which lasted the entirety of 2021 and continues to persist, albeit to a lesser extent now than before. Element's growth in 2021 against the backdrop of unprecedented supply chain disruption speaks to a few things. It speaks to the determination, the agility, the accountability of our 2,500 employees across the five countries in which we operate. My executive leadership team and I are tremendously grateful for our people and everything they accomplished for our clients in 2021. Element's growth in 2021, notwithstanding OEM production shortages, also speaks to the resilience of this business model. That resilience has been proven two years in a row now, first against the backdrop of COVID's arrival and the waves of global lockdowns in 2020, and again last year. This resilience is what gives us confidence in being able to deliver on our outlook for this year, as well as 2023. Lastly, element success in 2021 speaks to the crucial role that our services and solutions play for our clients and their businesses. While the vehicle supply side of our business was constrained in 2021, we've experienced record levels of demand for vehicles as well as elements expertise and support across the entirety of our client base. On the subject of demand for vehicles, in addition to the 2021 results we reported yesterday, our business generated between $40 and $65 million of incremental revenue, operating income, and cash flow in 2021, which has been deferred as a consequence of OEM production delays. This value is represented by the excess $1.9 billion of backlogged vehicle orders placed by Element clients as at year-end 2021. These orders are excess in that they're on top of our usual year-end global backlog of approximately $1 billion in order volume. We continue to forecast this order backlog having grown further by mid-2023 when we expect global OEM production capacity to be back at 100% and our excess backlog begins to recede. All these details are identical to the outlook we provided in our November public disclosures. If anything, our confidence in this trajectory has been bolstered by our Q4 2021 and year-to-date 2022 performance in combination with the recent public statements made by several large OEMs regarding expected production volume recoveries. Returning to my belief that Element has never performed better, allow me to offer a few proof points from our 2021 results. These are in cost of currency to eliminate FX translation noise and restrict it to our fleet management or core business performance in prior years. In other words, on an Apple to Apple's basis, Element generated more net revenue in 2021 than ever before. This was driven by more service revenue and more net financing revenue generated in 2021 than ever before. We produced more adjusted operating income than ever before, more free cash flow and more free cash flow per share than ever before. And we returned more cash to common shareholders than Element ever has before. We achieved all-time high global net promoter scores for 2021, as well as for Q4 2021 specifically. This is a truly remarkable achievement for an organization that was receiving negative net promoter scores in some geographies when I joined in 2018. A world-class loyal client base ordered more vehicles from Element in 2021 than ever before. On this count, we have to exclude Armada. However, if we include Armada, 2021 was the second best year of orders in Element's history and a mere $150 million shy of 2019. Q4 2021 on its own was the single largest quarter of vehicle orders in Element's history by a $400 million margin, regardless of whether Armada is in or out of the data set. And the list goes on. There were a dozen all-time highs reached by our commercial teams in 2021 as they carried that momentum into this year, which we anticipate will be even more successful for our clients and client prospects. The bottom line remains that Element is performing better than ever, and perhaps more importantly, we've never been better positioned to sustain and build on this success. Before I give Frank the floor, I want to conclude by spotlighting the launch of Arc by Element last week, which is our integrated end-to-end EV offerings. Arc by Element builds on our established success with EVs in all the markets we serve, with special recognition due to our colleagues at Custom Fleet in New Zealand, where their offering, called EV Plus, has been and continues to be the only end-to-end EV offering in that market for years. Element's basic value proposition, making the complex simple for our clients, is innately responsive to the challenges of fleet electrification. And as the market-leading FMC in every region we serve, Element is best positioned to support our clients and lead our industry through the gradual electrification of automobile fleets. We're excited to bring our full-service EV offering to our clients under the ARC by Element banner, ensuring consistency for our global clients in developing this offering to be seamless across all of our geographies. With that, I'll turn things over to you, Frank.

Thanks, Jay, and good morning, everyone. I want to make several comments regarding our 2021 results and another few about our outlook for Element this year. After that, we'll jump into Q&A. The last time we spoke in November, we gave you some guidance ranges on how we expected Q4 to play out and therefore how 2021 would look as a whole. The business ended up outperforming many of those guidance ranges. We are pleased with the outcome, and I will provide some insights on the strong performance. For the month of October 2021, the top five OEMs we do business with in the U.S. and Canada posted their lowest vehicle production numbers that we have record of. They were struggling with supply chain issues, and the near-term outlook was dubious, with the consumer holiday season approaching and presumptive routing of microchips to higher margin in-demand consumer electronics. This changed very quickly in November. OEM scheduling and production capacity accelerated materially. Supply chain raw materials, including microchips, ended up being able to support multiple shifts at our OEMs, and a number of plants worked throughout the U.S. Thanksgiving holiday and later into December than is customary to maximize vehicle production before the end of the year. With historic order backlogs, the OEMs were able to be selective about which vehicles they produced, So they focused on higher margin and less microchip intensive models to maximize results in total production numbers. Many of our clients' vehicles fall into the higher margin but less microchip intensive category. As a result, our originations were above initial expectations in Q4. Additionally, and this is independent of originations, we were able to implement and start generating revenue on a number of commercial wins that we had assumed would come online in 2022. Essentially, our Q4 outperformance benefited from this timing of originations and implementation of client wins. But it is also a testament to the performance of our employees who were able to process this volume of unexpected originations and onboard new client wins. As we have told you before, originations are very revenue and cash accretive events in our business, especially when you include the knock-on effects to services like titling and registering the new vehicle, and remarketing the vehicle being replaced. The outperformance was not 100% driven by incremental originations, but there were significant contributors, as was the anticipated January revenue being earned in December. Indication revenues for the year were healthy, $64.4 million, with a full year yield of 2.4%. Cue force indications were 14.5 million, while achieving a healthy 2.9% revenue yield during the quarter. Notwithstanding the strong syndication revenue yields in both Q4 and Q3 2021, we continue to recommend modeling syndication revenue yields closer to 2% going forward, and we will let you know if this outlook changes. The other metric that varied modestly from our Q4 guidance was adjusted operating expenses. You may recall that Q3 adjusted op-ex included a year-to-date catch-up accrual for short-term incentive costs, reflecting strong business performance relative to our balanced scorecards. Q4 business performance exceeded expectations on the same basis, and Q4 salaries, wages, and benefits increased incredibly. Nonetheless, we delivered on our adjusted operating margin guidance for 2021, and adjusted operating income growth continues to outpace net revenue growth, exemplifying our scalable operating platform. As you update your model for 2022 based on yesterday's results, a couple of items that should help. We remain committed to 2% net revenue growth in constant currency in 2022, despite higher than anticipated net revenue in 2021. We expect our adjusted effective tax rate to be somewhere between 25 and 27% in 2022. Many external factors impact this on the margin, including currency and dispersion of earnings by geography, amongst other variables. We will let you know as we progress through the year if our ETR expectations change. That being said, as you know, effective tax rate is an accounting construct and our actual cash tax obligations remain materially lower. We expect cash taxes to be in the 50 to $55 million range for 2022. We expect to keep our operating margin in line with 2021, despite slower growth. And we expect sustaining capital investments to be in the 50 to $55 million range. Recall that we've already signaled our intention to redeem our Series I preferred shares in June this year, which will have a positive impact on our free cash flow per share. And we are committed to continuing to repurchase shares under our NCIB. In addition, our focus on an asset lighter model is enabling the return of cash to shareholders via the NCIB and our recently increased dividends. These ongoing returns of capital remain a critical component of our value proposition. With that operator, let's please open the line for questions.