Element Fleet Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management 3rd 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 your 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 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 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, sir.

Good morning to all of you joining us on the call to discuss another record set of quarterly results for Element, our full year 2023 results guidance and outlook, and a few familiar topics we want to reiterate to stakeholders given the current macroeconomic environment. Frank and I will be very brief up front to afford ample time for your questions this morning. As you can imagine, we're very pleased with Element's third quarter performance, which is the direct result of our people's ongoing hard work and sharp focus on our clients and their needs. We expect Element to perform even better next year as reflected in the 2023 guidance that we've offered, which Frank will take you through momentarily. Management and the board recently completed our annual review process, where we reconfirm the organization's continued commitment to our three strategic priorities being organic revenue growth atop a scalable operating platform, advancing a capital lighter business model, and returning excess equity to our shareholders. We updated our three-year forward view of our performance on key metrics by which we measure achievement against these priorities. And our optimism and confidence are evident in two outcomes. First, we're increasing our baseline expected organic debt revenue growth range from 4% to 6% to 6% to 8% annually. This is based on the demonstrated capabilities of our commercial organization everywhere we operate, as well as our confidence and sustained demand for elements compelling client value propositions. Second, the board has endorsed management's outlook on resulting free cash flow generation per share and increased the common dividend 29%, reflecting same, from $0.31 to $0.40 annually per share. Let me turn it over to Frank now to discuss our Q3 results and next year's guidance.

Thank you, Jay, and good morning, everyone. Q3 was another record quarter, and it's great to be able to continue demonstrating elements of ability to deliver on our client value proposition and and generate value for our shareholders in the process. I'm going to talk exclusively about our organic results for the quarter, which means they exclude the contribution of net revenue that we don't expect to generate next year or in future years. I'm also going to cite growth exclusively in constant currency. The U.S. dollar strengthened against the Canadian dollar throughout the quarter, which benefited Q3 2022 over both prior quarter and prior year results. Constant currency eliminates those benefits making for cleaner comparability between periods. As you'll hear, even after you control for these tailwinds of non-recurring revenue and favorable FX, pure third quarter performance was outstanding. We grew net revenue 10.2% over Q3 last year, and our scalable operating platform magnified that into 16.3% adjusted operating income growth. Operating margins expanded 288 basis points from last year, to 54.2% for the quarter. After-tax adjusted earnings per share were $0.26 for Q3. A $0.05 per share or 24% improvement over Q3 last year. And again, just a reminder that I'm citing organic results in constant currency throughout here. Double-clicking on year-over-year net revenue growth, it was primarily driven by services revenue, which is a pillar of our capital lighter business model. Services revenue was up 16.4% from Q3 last year, reflecting all three forms of share of wallet growth. One, penetration with existing clients who are increasingly turning to element services for help managing their growing fleet operating costs. Two, increased utilization of our vehicle maintenance management service. Working with clients to drive more proactive maintenance to reduce downtime were more costly repairs given the elevated average age of clients' fleets due to new vehicle production delays. And lastly, inflationary increases in the cost of parts and labor, which benefit Element as a function of our Cost Plus business. Please see section 1.3 of this quarter's supplementary information document for more details of services revenue growth. The second pillar of our Capital Lighter business model is syndication. We syndicated $599 million of assets in the third quarter and generated $13.5 million of syndication revenue, we're at 2.25% yield on the assets we syndicated. We were able to deliver this volume in yield despite rising rates due to the attractiveness of this very low risk asset class to our syndication partners by syndicating more floating rate leases and by leveraging our bespoke hedging program to protect yields of known fixed rate syndication names from the time between lease activation and syndication. Syndication is an economically beneficial and reliable source of recurring high margin revenue for Element, accelerating the velocity of net revenue and cash flow, allowing for investment in the business or returning capital to shareholders via dividends and share repurchases, thereby driving higher ROE and free cash per share growth. Let me round out my comments on net revenue by noting the 5.4% year-over-year growth in net financing revenue, or NFR. Q3 performance was stronger this year than last year due to increased gains on sale in ANC in Mexico and improvements in yield on our net earning assets, which is largely a function of proportionate mix shifts in favor of ANC and Mexico assets as we syndicate U.S. assets and now some Canadian leases. It's important to note that we expect NFR to soften materially in the fourth quarter this year because the $9 million one-time benefit in this Q3 will not recur next quarter. And there is some pressure on our interest expenses from increasing our local currency funding structure in Mexico, as previously discussed. We also anticipate gains on sale in ANC to moderate in Q4, which is common for that market due to the combination of summer and Christmas holidays. This puts additional pressure on Q4 NFR. We are forecasting full year 2023 NFR is essentially flat year over year. This is largely a consequence of the planned increase in syndication volumes. Both our net financing revenue and syndication forecasts are tied to OEM production, enabling achievement of our originations forecasts. The outlook for NFR is also a product of increasing our local currency funding in Mexico in 2023. All the other components of NFR, including games on sale, are expected to grow full year over full year next year. We view lagging into Mexico peso funding as a strategic evolution of our business. Given the anticipated continued annual double-digit growth of our Mexico platform for the foreseeable future, we believe it's prudent to mitigate FX risk exposure risk. Lastly, with respect to Q4 2022 results, we can expect adjusted operating expenses at the high end of the range implied by our guidance. This is a strategic decision. With line of sight to materially more long-term organic annual growth than we previously thought possible, we want to ensure our commercial teams are appropriately resourced to anchor this trajectory. Accordingly, we will be reinvesting some of the non-recurring revenue earned this year into commercial capabilities over the next five quarters beginning this Q4 2022. Having said that, we expect to continue to expand our operating margins year over year in 2023. Returning to our Q3 2022 results, our net revenue growth atop a scalable operating platform primarily driven by the capital lighter side of our business model, generated $0.34 of organic free cash flow per share in the third quarter, which is $0.07 per share more than Q3 last year. Our per share metrics are helped by repurchases pursuant to our NCIB, which will renew this year for the remainder of 2022 and better part of 2023. The combination of common share buybacks and dividends in Q3 had us return $92.3 million in cash to our investors. That return of capital will remain generous going forward, given yesterday's announcement of our 29% common dividend increase to $0.40 per share annually. $0.40 per share puts us right in the midpoint of our 25% to 35% payout range based on last 12 months' free cash flow per share. In addition to predictable and predictably growing common share dividends, as well as buybacks, we will return capital to our preferred share investors next year and in 2024 with the redemption of our remaining outstanding three series of preferred shares, thereby further optimizing our capital structure and benefiting our common shareholders. Finally, as promised last quarter, we are providing full year 2023 results guidance, which is detailed throughout yesterday's disclosures. We expect 2023 originations of approximately $7.5 to $8 billion in in keeping with our belief that OEM production volumes will begin to normalize by the second half of next year. Tracking the anticipated growth and originations with robust demand continuing for our assets, we plan to syndicate 4 to 4.5 billion of assets, predominantly in the U.S., but also again in Canada next year, and we are actively working towards Mexico syndications in 2024. All told, we expect to deliver strong results and growth with net revenue of 1.14 billion to $1.17 billion in net revenues, operating margins of 54 to 55%, adjusted operating income of 615 to $645 million, adjusted EPS of $1.12 to $1.17 per share, and free cash flow of $1.45 to $1.50 per share for the full year 2023. These results are in constant currency based on a Canadian exchange dollar of 1.29, which is our proxy for the full year 2022 average exchange rate. Should Canadian to U.S. dollar exchange rates stay at current levels, that will provide upside to our reported earnings relative to guidance. Relative to the top end of our 2022 organic guidance, our 2023 guidance implies 6 to 9% net revenue growth, approximately 100 basis points of operating margin expansion, and 16 to 20% cash flow per share growth. We anticipate reporting full year organic results in March that are at or near the top end of our current 2022 guidance range. Before I turn it back to Jay, I want to say how much I look forward to seeing as many of you as possible in person at this management team's first ever Element Investor Day, which will take place on Tuesday, November 29th at the Design Exchange Venue in Toronto and simultaneously online. Please take a moment to pre-register your intent to participate, even if you only plan to join us virtually. There are hyperlinks to registration process in yesterday's news release of our Q3 results and on our IR website. Back to you, Jay. Thanks, Frank.