Element Fleet Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management Second Quarter 2022 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 0. 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, 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. Elements, earnings, press release, financial statements, MD&A, supplementary information document, quarterly investor presentation, and today's call include references to non-GAAP measures. Which management beliefs 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 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 good evening to all of you joining us on tonight's call. to discuss Element's second quarter results and the organization's progress in advancing its three strategic growth priorities. Like last quarter, Frank and I will be brief in our prepared remarks affording us ample time for your questions and discussion. As you might imagine, everyone here at Element is delighted with the record second quarter and first half results we shared with you earlier this evening. My executive team and I have long understood the value that our transformed business model and reinvigorated sales efforts were going to create for Elements and all of its stakeholders. However, first the pandemic and then more recently OEM production delays have hidden or deferred much of this substantial value. With the progression towards a more normal operating environment over the last seven months, I believe the true value creation potential of our business has become readily apparent to all. In the second quarter of business grew and improved by virtually every measure both quarter over quarter, as well as compared to our Q2 results last year. Our organic revenue growth strategy has resulted in more blue chip clients and trusting more vehicles under management to element subscribing to and utilizing more of our services in doing so at higher price points which benefit our cost plus model. Our advancement of a capital lighter business model via syndication and service revenue growth has allowed us to reduce our capital requirements, generating excess cash that is being returned to shareholders by way of growing common dividends and share buybacks. And the resulting significant reduction in our share count has amplified our free cash flow and earnings growth on a per share basis. Importantly, this performance was achieved against a backdrop of macroeconomic uncertainty and continued supply chain challenges for our OEM partners, which speaks volumes about both the resilience of our business model and the value creation potential of our three-prong growth strategy. We can trace much of this success to our 2,500 employees who help our clients and their drivers operate safer, smarter, and more productive fleets every day. Element's seasoned specialists, supported by transformed processes and systems, deliver our value proposition to clients by facilitating ready access to cost-efficient capital, lowering the total cost of operating clients' vehicles, and eliminating fleet-related administrative burden. We believe this value proposition has even greater resonance with our clients and prospective given current macroeconomic trends. For instance, rising vehicle, parts, and labor costs should make our scale as market leader even more attractive. With approximately 1.5 million vehicles under management, we offer the greatest purchasing power, the largest data set for cost optimization, and the most extensive supplier network to lower client costs. Our proactive complementary client consulting services in the first half of this year alone identified some $430 million of opportunities to reduce our clients' fleet operating costs. Further, rising interest rates should make our securitization and syndication-enabled financing all the more compelling. Secular trends are also serving as tailwinds. For example, given the increasing imperatives of ESG, and the ability of electric vehicles to advance the sustainability agenda, our experience shepherding organizations through this complex change in automotive technology is of significant interest to current and prospective clients alike. As a company, we pride ourselves on our say-do ratio. And the last four years have provided ample opportunity for us to come good on our commitments. Transforming elements business, deleveraging and maturing our balance sheet, ridding ourselves of non-core distractions, staying our strategic course through the pandemic, pivoting the company to focus on organic revenue growth, improving our ability to deliver that growth despite the headwinds of 2021 and 2022. These are all examples of things that we have said and done. Culturally, this is how accountable leadership is defined within Element. making commitments, and then seeing them through to completion. As accountable leaders, we will continue to advance our three strategic growth priorities for the foreseeable future. Growing net revenue organically and profitably, evidenced by expanding margins that demonstrate the scalability of our industry-leading operating platform. Advancing our capital lighter business model by growing services revenue and strategically syndicating fleet assets, thereby enhancing returns on equity. And growing free cash flow per share, enabling the predictable return of excess equity to shareholders, first, by generously growing our common dividend on an annual basis, and second, by repurchasing both common and preferred shares. Our business is distinctly well positioned for sustainable performance right now. making Element not just a safe haven, but a low risk source of growth for investors in these turbulent times. With that, I'll turn things over to you, Frank.

Thank you, Jay. And good evening, everyone. As promised, I will be brief and then we will open the line for your questions. To me, Element's record second quarter and first half results are, among other things, another set of proof points. They prove that our organization is executing the right strategy to create value for all of our stakeholders, our clients, our employees, our business, long-term, and our investors. Q2 was an incredibly strong quarter top to bottom. Element generated $288 million of net revenue, which is a single quarter record, 22.4% more than Q2 last year and 10.5% more than last quarter. Operating margin was 57.6%, which is 390 basis points wider than last year and 280 basis points wider than last quarter. Adjusted earnings per share of $0.29 were $0.09 per share more than Q2 last year and $0.05 per share more than last quarter. Capital Light services revenue of $150 million is 32.6% better than last year and 13.8% better than last quarter. Combining that services revenue and $14.8 million of syndication revenue enhanced our pre-tax return on common equity to 16.8%. And lastly, but we think most importantly in terms of evaluating elements performance, second quarter free cash flow per share grew materially to 37 cents, which is 11 cents more than we generated in Q2 last year and 8 cents more than last quarter. Excluding the roughly $8 million of second quarter revenue generated by actions that are not expected to generate similar levels of revenue next year, elements still had a very, very strong Q2. 280 million of net revenue would still be the most element has ever generated in a single quarter. 18.8% growth from last year and 7.2% growth over the last quarter. 56.3% operating margins would be 260 basis points wider than for Q2 last year and 150 basis points wider than last quarter. Adjusted EPS of 27 cents is 7 cents more than last year and 3 cents more than last quarter. and free cash flow of $0.35 per share would still be $0.09 more than we generated in Q2 last year and $0.06 more than last quarter. The $8 million in non-recurring revenue recorded in the second quarter is a portion of the approximately $25 million in one-time revenues we expect to earn in 2022. These revenues vary greatly by type, but share the similar characteristics that they are discrete and unlikely to recur in nature. Providing a whole host of service offerings and financing for nearly 1.5 million vehicles across five countries in a period of unprecedented change has presented us with an equally unprecedented opportunity to generate incremental one-time revenues. For this reason, our Q2 supplementary offers guidance as to both the results we expect to report at year end and an organic version thereof, excluding the estimated $25 million of revenue that we believe to be unique to 2022. Both versions constitute a material increase in 2022 guidance driven by the powerful fundamentals of our resilient business model. The purpose of providing an organic set of full year 2022 results is to help you better assess and model elements 2023 performance. Like last year, we plan to provide full-year 2023 results guidance as part of November's Q3 disclosures. In the meantime, we are happy to reiterate that we believe ELEMENT's 2023 performance will be superior to that we offered in November last year, which we now consider understated. Returning for a moment to our full-year 2022 guidance, it's important to note that those results do not include any benefit from originating the significant excess order backlog we continue to maintain, which is roughly $1.8 billion at Q2 quarter end, and therefore represents the same $40 to $65 million of deferred net revenue, AOI, and free cash flow as had been the case for the past two quarters. Looking ahead at the balance of this year, I would offer that Q2 is likely to have been the strongest single quarter of 2022, benefiting greatly from macroeconomic trends increased utilization, strong originations, and a solid book of onboarded business wins. That said, Q3 and Q4 will each be very strong as well and evidence material growth over the same quarters in prior year 2021, respectively. The second to last thing I want to flag quickly before we get to your questions is the fact that management and our board of directors revisit elements common share dividend annually ahead of our Q3 results, report out every November. As we've communicated before, going forward, the plan is to maintain a common dividend payout range of between 25% and 35% of elements last 12 months' free cash flow per share. At June 30, our common dividend was 25.4% of last 12 months' free cash per share, which is at the bottom end of our range. We will provide you any news applicable to our common dividend in three months' time, and again, offer our full year 2023 results guidance then too. Lastly, please hold the morning of Tuesday, November 29th this year in your calendar for an Element Investor Day here in Toronto, as well as online for those who may be unable to join us in person. An official save the date and further details will be distributed shortly. For now, operator, let's please open the line to questions.