Element Fleet Management Corp.

Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management First Quarter 2023 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 to ask questions from analysts. To join or rejoin the question queue, you may press star then one 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 AIS, 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 earning Press release, financial statement, MD&A, supplementary information documents, 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.

Thank you, operator, and good evening to all of you joining us to discuss Element's Q1 results and our improved outlook for the business this year. I would first like to spend a bit of this time speaking to how far Element has come over the last five years, the momentum we have in this current environment, and where the business is heading. before turning things over to Laura and Frank. In 2018, a number of us, myself included, saw something quite special in Element. That belief provided us with the impetus and courage to launch a three-pronged strategy to transform the core fleet management business, returning its focus to delivering a consistent superior client experience, to deleverage and strengthen the balance sheet, and to rid the company of non-core distractions. Not too long after launching this transformation strategy, I started to notice a change. The wind shifted from head-on to an angle we could catch, and our momentum began to build in the right direction. While we know that the fruits of transformation would have been born earlier, but for the pandemic and the OEM production shortages, the work we put into transformation and the ensuing pivot to growth has perfectly positioned Element to make 2023 another record year in which we can fully harness the power of the tailwinds that now propel us forward. Positive momentum we have built is readily sustainable. Thanks to the strong commercial capabilities we've developed, the scalability of our operating platform, our competitive differentiators, such as strategic consulting, Arc by Element, and most importantly, our client-facing people, And our momentum is sustainable thanks to that best-in-class leadership team that we have in place who are committed to see the existing proven strategy take hold. When I think about our investments in our commercial capabilities and the scalable operating platform, coupled with the favorable market dynamics and consolidation taking place in this industry, I have every reason to believe Laura and the leadership team can sustain and indeed build on current momentum for years to come. And Laura is exactly the right leader to ensure this organization does so. When I expressed to the boards my intention to retire from the CEO role, I made clear that I was not working towards a specific ending. Instead, I wanted to ensure we found the right successor with a strong cultural fit. We needed someone with experience managing a large and complex balance sheet, and experience with a B2B commercial strategy. However, perhaps the most salient requirement from my perspective was someone that would embrace and be embraced by our organization. It was an exhaustive search, but her patience paid off. We found that proverbial needle in the haystack with Laura. Not only does she possess the requisite capabilities, more importantly, she understands the importance of preserving and enhancing Elements' unique culture. Our culture of client centricity, of collaboration, and of continuous improvement is the backbone of this organization and has been foundational to every success we've achieved over the last five years. One of my fondest memories of my time here involves seeing that spirit of collaboration and continuous improvement in action. It was early 2020, and the ANZ leadership team traveled to Mexico. to understand the incredible success of the Mexican commercial growth strategy. I'll never forget the humility and curiosity that are leaders' models, first in listening and then learning, and then importing those learnings to apply them in A and Z in 2020, and later that same year into the US and Canada. This habit of best practice sharing is something that we continue to foster, and it's one of the many benefits of working in a global organization. Our continuous improvement mindset is another example of how far we've come. We are a high-performance organization, and we constantly challenge ourselves to be better, whether it be our employee experience, our client experience, or the business itself. This is especially true in our commercial groups, where we're constantly scrutinizing and evolving our sales and marketing practices to ensure that we can capture an outsized share of opportunities in the fleet management market. And whether this is winning clients from competitors or advancing our self-managed mandate, the continuous improvement mindset ensures we have best-in-class commercial approaches across all markets. In short, we built an organization that is experiencing tremendous positive momentum through the combination of investment in our people, processes, systems, and culture, and opportunities with well-established market leadership in three regions that are experiencing very favorable dynamics for organic growth. The strength and stability of the company and the positive outlook we have for its future provide me with both the satisfaction and confidence to bring my time with Element to a close. In doing so, I'd like to take this opportunity to say a heartfelt thank you to the 2,500-strong team here across all of our locations, from the frontline staff to our executive group and board of directors, all of them have done so much to drive our success over the last five years. It has been incredibly satisfying for me to be part of this organization, and I will truly miss the sense of belonging and camaraderie that I've experienced during my time with Element. I've led many organizations, through turnarounds and transformations, and none have been as special or as successful as this one. The reason for this success is undoubtedly the people that make up our company and their willingness to engage and to be challenged in pursuit of the ambitious objectives that we set forth. Watching this play out over the past five years has been the highlight of my career. As I step out of the CEO role and move into my role as strategic advisor to Laura, I do so with great confidence and peace of mind, knowing Laura is as committed to our strategy and to the people that make it a reality as I have been. With that Laura, the floor is yours.

Thanks Jay. Good morning everyone and thank you for joining us on this call this evening. Before we discuss our first quarter results, I do want to express my gratitude to Jay, for his leadership and his dedication to our company. Under his guidance, Element has become a market leader and a client-centric growth engine. Our clients, investors, and team members are deeply appreciative of Jay's contributions. Now, during my comprehensive onboarding program over the past three months, I focused on our three strategic priorities. The first, achieving profitable organic revenue growth The second, advancing a capital lighter business model. And thirdly, our approach to capital allocation, which really consists of appropriate investments in our business, followed by return of capital to our shareholders. Now, regarding our first priority of profitable organic revenue growth, I did spend time with our clients, commercial leaders, and sales teams in each country we served, to understand how we can expand our share of wallet with existing clients and attract new ones. And with our talented team and culture, I do believe six to eight percent annual organic growth is very achievable. Now regarding our second priority of advancing a capital lighter business model through services revenue growth and through syndication, I see ample room for services revenue growth within our existing client base and the self-managed fleet market. And as proven this quarter, our access to the U.S. market for vehicle lease syndication remains robust. And as you would have seen, our first quarter results are impressive. We had 8.9% net revenue growth, quarter over quarter margin expansion, record pre-tax return on equity, and double-digit free cash flow per share growth. But I'll leave Frank to provide more details on these numbers. As we look ahead, I'm confident in our strategy and ability to continue generating value for our stakeholders. We have pent-up demand for fleet vehicles that remain strong across our client base. Our order backlog is expected to remain at elevated levels through 2023 and into 2024. and that's despite increasing originations. This is a direct reflection of that pent-up demand from existing clients, combined with the ongoing success of our commercial and operating teams at winning and onboarding new clients. Consumer demand for new vehicles is also relevant, because any weakening that could happen there could lead to further OEM allocation to the fleet segment, which of course would benefit Elements. Our momentum, coupled with current market dynamics, has us updating our outlook for this year. Not only is our near-term outlook improving, but our clients and our prospects' continued interest in the shift towards hybrid and battery electric vehicles presents a long-term runway of growth opportunity for us. Through further expanding our arc by element services, we'll continue to provide our clients with innovative solutions that meet the revolving needs in this area. And with that, I'll turn it over to Frank for more details on our first quarter results and the year ahead. Over to you, Frank.

Thank you, Laura, and good evening, everyone. Q1 was another record quarter, and it's great to be demonstrating Element's ability to deliver on our client value proposition and generating growing value for shareholders. The recurring revenue nature of our business, combined with our resilient model despite macro and microeconomic impacts, continues to allow us to deliver growth and strong financial results in this environment. As I take you through Q1, I'm going to cite growth measures in constant currency. The U.S. dollar strengthened significantly against the Canadian dollar between the first quarter of last year and this year, which materially benefited this quarter's results. Constant currency eliminates those benefits, making for cleaner comparability year over year and, to a lesser extent, quarter over quarter. As always, we want to be transparent about the underlying business. Even after you control for the impact of foreign exchange, our first quarter results are near the high end of our long-term growth guidance and extremely strong on an absolute basis. We grew net revenue 8.9% over Q1 last year to $304 million, which is a quarterly record. Adjusted operating income grew 7.2% over Q1 last year, despite increased investment in our commercial capabilities to fuel continued long-term growth at our 6% to 8% annual net revenue trajectory. Operating margin was 54.4% for the quarter. Adjusted earnings per share were a record, 31 cents a share, a four-penny or 15% improvement over Q1 last year. Free cash flow per share was 37 cents, which is a six penny or 19.4% increase over Q1 last year. And our capital lighter business model expanded our pre-tax return on common equity to a record 18.8%. Zooming in on our year-over-year net revenue growth, it was driven primarily by services revenue and net financing revenue growth. Services revenue is a pillar of our capital lighter business model, and our services to clients are at the apex of our value proposition. driving long-term sticky client relationships. Services revenue was up 11.8% from Q1 last year, reflecting all three forms of share of wallet growth, which are in order of impact this quarter. First, penetration with existing clients who are increasingly turning to Element for help managing their growing fleet operating costs. In this context, service penetration can improve through increased service attachment rates for vehicle or an increased number of a given client's vehicles being entrusted to Element for service. Second, utilization of our services, in particular, our vehicle maintenance management service this quarter. Maintenance management entails working with clients to undertake more proactive vehicle maintenance in order to avoid the costly downtime they would otherwise suffer having to perform reactive repairs to their vehicle on an unplanned basis. Third, inflationary increases in the cost of parts and labor benefited our services revenue in the first quarter. Beyond share of wallet, there were two additional contributors to service revenue growth this quarter. The first was the services side of our business in ANZ, driven by growth in our fuel and roadside assistant product take-up, as well as improved supply terms with existing and new partners in our network. The second was the ongoing growth of our relationship with Armada in the U.S., which includes developing innovative new products and services for them. There remains growth opportunities for us in our relationship with Armada, both within and outside the U.S. In the latter category, there's Mexico, where we began working with Armada last year and officially hit the road this quarter, meaning Q2 of this year. And, of course, there's ANZ, where we won the mandate last quarter to work with Armada, We anticipate the first Armada vehicles in that region being onboarded by our custom fleet business in approximately three to four months. Net financing revenue grew 6.6% year over year, driven by strong volume as we took advantage of continued gain on sales strength in A&Z and to a lesser extent Mexico, as well as average net earning assets growth as we benefit from the superior economics of holding certain assets on book for the near term. Now we'll turn to the second pillar of our capital lighter business model, which is syndication. We syndicated 690 million of assets in the first quarter and generated 14.9 million of syndication revenue. That represents a 2.2% yield on the assets we syndicated, which is moderately better than our targeted 2% yield, which target should be kept in mind when modeling element syndication revenue. The current environment, of higher interest rates may create more variance in syndication yields quarter to quarter. Notwithstanding, we transacted on over 50% of the assets that we syndicated in Q1 within the last two weeks of the quarter. While this is somewhat typical, it also illustrates the depth of this funding source for us and the attractiveness of our assets to syndication investors. In all economic environments, Banks and insurance companies need to put their deposit bases to work, and with corporate debt and lending slowing, thereby providing less supply, the risk profile and tax benefit of our assets are very compelling to financial institutions. As the rate environment stabilizes, we will likely increase our syndication volumes over the next 18 to 24 months to keep pace with originations. As stated in our press release on access to cost-effective capital last month, Element maintains ready access to diversified sources of funding from a high-quality roster of lenders and investors across markets. We are very pleased with the fleet ABS markets reception to our term note offering last month, which was materially oversubscribed and shows the enduring strength of our name in the market despite the high interest rate environment. We are equally pleased with our lending syndicate partners' appetite to expand their funding capacity commitments to Element. Returning to our quarterly results, I want to touch briefly on operating expenses. While costs were down quarter over quarter, the year-over-year increase is a practical and strategic decision. First, we are out of the COVID pandemic for all practical purposes, which was not the case in Q1 2022. The current environment has allowed us to connect with our clients and our teams more effectively face-to-face. With line of sight to materially more long-term organic annual growth than we originally thought possible, we want to ensure our commercial teams are appropriately resourced to take advantage of this trajectory, which means getting in front of prospects. We have already seen the fruits of this initiative pay off in Q4 and Q1 wins, which will manifest themselves in the second half of 2023 results, 2024 results, and beyond. Also illustrated in the supplement is our continuing success growing vehicles under management. We expect our vehicles under management for Q4 2023 to demonstrate healthy year-over-year growth for 2023 as a whole based on the growing number of commercial winds we are securing. That said, we're likely to see a modest decline in BUM or vehicles under management next quarter. We have ended our provision of white label services to a competitor. and we'll see the related vehicles come out of our vehicle under management count in the second quarter. While commercial additions will be strong, they may not be enough to offset the departing vehicles. However, the economic impact to our business will be immaterial, and it's been factored into all our 2023 full-year results guidance we've provided. Regarding our order backlog, last year we were of the view that our backlog would begin to get worked through in the second half of this year. when OEM production capacity returns to historically normal levels. Our view has evolved, and it's good news. As Laura said, we now anticipate our order backlog will remain at elevated levels through the end of this year and into 2024, despite increasing originations. This is a direct impact of the commercial success we have had in winning and onboarding new clients, as well as the strength in order patterns of our existing clients. We're still going to originate record volumes, which we have been consistently forecasting for 2023. Q1 originations were up 24% year-over-year before foreign exchange, and we anticipate full-year volumes will be up between 15% and 23% on a constant currency basis, with upside if consumer demand for new vehicles weakens and further production is shifted to the fleet segment. What has evolved is our appreciation of three things. First, the scale of pent-up demand across our client base. We have always known there's unquantifiable demand for replacement vehicles beyond the volumes reflected in our formal order backlog. As this gets quantified in the form of invocable orders, we are seeing upward pressure on our order backlog. The second reason that the time horizon on our excess order backlog has lengthened is the extent of our commercial team's ongoing success at winning new business. And the third thing blamed our order backlog outlook is new vehicle price inflation, which on average is up 6% in 2022. Finally, our increased full year 2023 results guidance encompasses both the fundamental strength of the business and the current favorable FX environment based upon the average foreign exchange rates for all currencies in Q1. I want to be clear that we do not forecast currency and encourage you to make your own assessment of SANE in deriving your forecast. We do not hedge currency as it represents predominantly translation impacts and not economic impacts of foreign exchange. However, the growth rates implied by today's guidance allow you to understand our fundamental growth outlook regardless of currency, i.e., constant currency growth rates. Given the strength of our Q1 results, our momentum in commercial success, trends in service revenue, and ongoing efforts to drive scalability, we expect to generate $1.24 to $1.26 billion of net revenue, implying approximately 6.5% to 8.5% year-over-year growth on a constant currency basis. A 54% to 55% operating margin, resulting in $675 to $700 million of adjusted operating income were 7 to 10% year over year growth in constant currency. This AOI range translates into between $1.26 and $1.31 of adjusted earnings per share, which is 12 to 16% growth year over year, and between $1.58 and $1.63 of free cash flow per share for the year, which is 13 to 17% growth. We continue to expect the same volume of originations this year as we expected when we last spoke to you in March. The reason our originations volume guidance has increased by approximately 500 million Canadian dollars is solely due to the strengthening of the U.S. dollar and the Mexican peso in relative terms. Again, I want to be clear about the fact that we do not try to forecast foreign exchange. We do not have a view on what the U.S. dollar or the Mexican peso or Australian dollar will be worth relative to the Canadian dollar at any future point in time. Instead, we generate our internal forecasts using the most recent periods exchange rates. So, our guidance effectively assumes that FX will remain constant to that prevailing at the time of the forecast. With that, let's open the line to your questions.

Thank you. We will now begin the question and answer session. In order to afford all analysts the opportunity to ask questions, Element kindly requests that analysts limit themselves to two questions in live dialogue with management. Should an analyst have additional questions, please rejoin the queue. To join or rejoin the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star then two. Our first question is from Jeff Kwan with RBC Capital Markets. Please go ahead.

Hi, good evening. First off, Jay, I just wanted to say congratulations on your time as CEO and wish you the best in your retirement. Thanks, Jeff. The first question I had was just with the new guidance that you've got on the APS, you know, outside of the FX, like what would be some things that would drive better than expected on your new guidance and conversely, you know, where it might come in below what your new guidance is.

Yeah. Jeff, as it relates to earnings per share, you know, what really has driven that increase in guidance outside of FX, so going from that 7% to 12% previous growth to 12% to 16% growth in EPS under the new guidance, we see just the fundamental momentum that we have, particularly in the services revenue as we look forward on the business. So, again, strong double-digit service revenue growth from that perspective and the NFR, solid NFR growth that we've seen in the first quarter. Additionally, we continue to anticipate and drive to a scalable operating platform and watch that net revenue growth over the course of the year will outpace the increase in operating expenses, therefore allowing us to expand our margins over time. So that is a critical aspect of driving that growth that goes down to AOI. Then lastly, I would just point to modestly lower tax rate than initially assumed. So we originally were in the 25 to 26% range, as we typically are, and I would guide you closer to the 24 to 25% range for this year.

Okay. And just my second question was on the self-managed opportunity, can you kind of talk about how that progresses today versus, say, two quarters ago? Or there's some examples you can give of how you're making progress on this front.

Yeah. So, Jeff, as you know, it's a longer lead cycle time or lead time cycle to do that. That being said, we have continued to focus on the effort for the self-managed fleets and believe it's progressing in well with, again, a significant focus there. As we've said in the past, one of the benefits that we have seen more recently with the improving capabilities of the organization, both from the NPS scores and how clients perceive us, is our ability to win share via steals in the marketplace, and that continues to be prevalent in what we see here. And in fact, winning back clients who left us back in the 2018, 2019 timeframe, back from other competitors who come in and see this opportunity to come back to Element that looks very different from a client experience than when they left us. And so we're leaning into those opportunities as we see the competitive dynamics landscape lay itself out. But we don't hesitate and we continue to lean heavily into self-managed fleets. And we'll continue to do so and believe that that will continue to pick up and be additive to both the share of wallet and many of the other levers of growth that we have.

Okay.

Thank you.

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

Thank you. Good evening. Also, first have to congratulate Jay. Very successful career, obviously, at Element. So well done and enjoy the well-deserved time off. Thanks, Paul. First question from me is regarding your expectation for OEM production in the second half of the year. I think sort of listening to a couple of the important OEMs, I think I'm getting a sense that maybe there's potential downside to production. They seem to be because of weaker consumer demand. Do you think there is a realistic risk that production doesn't ramp in the second half of the year as expected? Or maybe you have better indicators than I on why it still should ramp in the second half?

Yeah. Hi, Paul. It's Laura. I'll take that one. Frank, you can add on. So we actually are feeling positive about that. For as much as we expect our backlog to remain elevated into 2024, we still have, as I mentioned in my prepared remarks, we still have a lot of pent-up demand on the fleet side. We're still seeing high demand on the consumer side. But if you imagine for a moment that the consumer demand starts to fall away or weakens, That just would mean that more production would likely be diverted to the fleet side, which would be good for us. And so we've got good momentum in the business and good results, notwithstanding that there are higher backlogs. And so we see, I'm going to say, some real opportunity for future growth if that does start to come off.

And Laura, I would just add, you know, as we've said before, we have very good relationships with the OEMs. They're in constant dialogue as a major buyer there. And our discussions with them lead us to believe that we're pretty spot on in regards to the production volumes. And as Laura suggested, that consumer weakness could provide upside in originations for us.

Got it. Okay. Thanks for that. The second question is related to your disclosure on VOOM. I can't recall if this question has come up in the past, but I'm going to ask it anyway. If I look at the 1Q23 number versus 3Q21, there's virtually no growth in the serviced and financed VOOM. Virtually all the growth has come from serviced only. I guess the first part of the question is kind of what explains that divergence, because I'd expect growth in both. And then two, is that what we should expect going forward, or should we expect growth in both going forward?

Yeah, so let me answer the second question first. You should expect growth in both going forward with the caveat of the white gloves or the white label service that we provide to a competitor, which is very low margin. and has really no implication whatsoever for when we end that service to them in this coming quarter. So you will see that in a flatter or maybe even a modest decrease, but from a profitability perspective, no impact to us in regards to that.

And sorry, Frank, just to cut in, is that a serviced only or is it a serviced and financed relationship?

That is a serviced only. So these are vehicles that are – managed by another fmc who has contracted with us for a service that um we had done historically for them and uh we are no longer going to provide that service going forward um and so and it was again not really uh no major impact to the p l is very low margin um business very small from a revenue perspective as we look at

I understand. And then sort of the historical explanation of why the serviced and financed hasn't grown?

Yeah. I think as you look at the business over time, some big components of it are OEM supply shortage to some extent is an overhang on that. So as some vehicles can come off-road, need to get replaced. So we feel very comfortable that you will start to see that grow more over time. It's also a relic of what we've talked about in the past, which is some, again, some very low profitability business that we've moved off the books from that perspective in Q3 and Q4, I believe, of last year. And the proof is, to some extent, when you look at the revenues per BUM, you see those consistently increasing over time. relatively strong in the last quarter. I would say I wouldn't expect that type of growth in the future because as we onboard some of these big wins, they do take time to ramp up. And so the VUM comes on quicker than the revenue. But again, you'll see growing VUM and then over time, revenue per VUM as we move forward in history. So hopefully that answers your question, Paul.

That's helpful. Thank you. Have a good night.

The next question is from John Aiken with Barclays. Please go ahead.

Good evening. I guess, Jay, I wish you well in your retirement as well, and we're sorry to see you go, but Laura, happy to have you on board with us this time around. I guess, Laura, I'd like to extend my first question to you that as an outsider coming in, I know it's only been three months, but it does sound like you've been able to go around and see the entire operations. Is there anything about Element that has actually surprised you that you didn't realize coming in? Good, bad, ugly, doesn't matter.

Thanks for the question, John. I did a lot of due diligence prior to arriving. And I would say for the three months, and I have been put through quite the onboarding from Jay. It's been tougher than being at university. So a lot of learning. And it has been, as Jay told me, he did say to me, you'll see when you arrive, everything is as advertised. And so I'm happy to report that everything is as advertised. What I've seen to date, again, a company with some really strong business fundamentals, solid strategy, which has really impressed me. And I'd say really a high-performance organization that is continually improving, very strong culture, very competent people who really know how to execute on this strategy. And I think that's what we're seeing in the results. You can see really good results. And so I'm actually left feeling very optimistic that we'll be able to generate more value for our stakeholders over the long term. So as advertised. And if I may, I'll thank Jay again for his leadership on behalf of everyone in this organization.

Thanks, Laura. And then I guess my second question, if I can switch to Frank. Frank, you had mentioned in your prepared commentary that you're developing new services for Armada. Are you able to give us any sense in terms of what these services are, regardless of whether or not these are state secrets? Are these services that could potentially be deployed through your broader customer base at some point down the road?

Yeah, I think the thing we love about working with Armada is they always challenge us. And they take the concepts of efficiency and how they can more efficiently use their fleet. And again, remember, they have different cycles throughout the course of the year and say, how can you help us manage our fleet to increase utilization? to drive more productivity, to have more flexibility in the utilization of that fleet, et cetera. And it's those type of challenges that we love because it makes us better and we come up with them with answers to those challenges that we then work with them to implement. And they move at a relatively fast pace, which is good. I would say that the learnings we get from working with a mega fleet, regardless of who it is, can always be transported into our broader operations to the extent that there are good learnings from those, obviously modified in many cases. But, again, just those type of learnings, those type of exercises make us better. And when they make us better for one client, they make us better for all clients that are applicable.

Thanks for the call, Frank.

The next question is from Tom McKinnon with BMO Capital. Please go ahead.

Yeah, thanks very much, and I want to congratulate Jay on all your great work at Element and all the great work you did at the previous companies you worked at before Element. So enjoy the next phase of your continuing to – of your continued career. The question is with respect to the gain on sale of equipment under operating leases. This was up significantly year over year and even more so quarter over quarter. So was there anything special driving that and how should we be thinking about that going forward? And then I have a follow-up. Thanks.

Yeah. So when we look at our gain on sales, obviously, you know, predominantly A and Z, we saw a couple of things. One is that market has remained very robust from a pricing perspective on gain on sale. And so we took a strategic perspective of making sure that we took advantage of where that market is and moved the volumes that we had available into that market. And so you saw kind of across the board on our gain on sales, one, the larger impact was volume. but yield was up or rate was up as well in those markets. And given our view that originations will continue to start to come in, we wanted to make sure that we made hay while the sun was shining and took advantage of those very strong markets and the demand appetite that was out there. That being said, we continue to believe that those markets will remain strong over the course of the year because of that dearth demand, but our volumes will probably not be at the levels that they were in Q1 of 2023. So you'll see that be moderated as we move through the course of the year. And that's all built into our guidance.

Great. And with respect to syndication is the second question. I think in the last quarterly call, you talked a little bit more measured about the outlook with respect to syndicating assets. And I'm just wondering how that sort of changed. I think you're guiding the different still the three to four in terms of volume, 2% yields are going to be lumpy, but is there any way you would change your characterization of the syndication market now versus how you were describing it three months ago?

Yeah, and just to recall back, we've always said the syndication market is very strong for our assets, and we think it's very deep for our assets as we've built out that capability with north of 30 partners. And I think the strength of that showed through, especially in the last two weeks of March, as there was market dislocation elsewhere, where we were able to syndicate at yields above our target levels for the most part. So really strong demand there. So the discussion around syndication is more around the economic value and the breadth of the the opportunity versus holding it on our book and getting better economics in a higher spread world. And so we will continue to take advantage of that, and we continue to see that depth and breadth of the market. So volume's not an issue if we choose to go into the market with it. I would just add one other piece of information. As we move through the year, we believe that as rates stabilize, i.e. rates going up stop or slow, that that market will begin to, yields will begin to come in again, therefore offering us a better opportunity to get better economics on the syndication product, as well as driven by the fact that other, the supply of other investable assets. Think mortgage securities or corporate loans, which are down, will be less supplied. Our asset, both from a risk perspective on the top of the pyramid, from a safety perspective, as well as amply available, will continue to be attractive. And as such, we may actually see some more volume opportunities in the second half of the year. And then lastly, as we've said before, in the fourth quarter, typically, the tax benefits become more valuable because their use in time are more near term. And so we benefit from that. So we feel good about the syndication market. And what we saw in the first quarter only gave us more comfort that we've got depth and breadth of funding opportunities.

That's great. Thanks.

The next question is from Jamie Goyne with National Bank Financial. Please go ahead.

Yeah, just to follow up on that last question and open, perhaps you can answer this. Have you been active in recent weeks on syndication markets?

Yes, we have. And again, those markets, we haven't seen any real noticeable change in tone as we've been in those markets. We're typically lighter in the first month of any quarter and a little heavier in the back end of the quarters. But, no, we've been continuing to bring volume to the market and had rapid and ready reception of it as we move forward. And, again, no change in tone from our perspective for our assets.

Yeah, okay, great. And then on that – I guess, I don't know, insourcing of a competitor's fleet. Does that exist elsewhere in your portfolio of vehicles under management? And if it does, can you size it? And maybe talk about any other metrics around that in terms of time of relationship, etc.? ?

No, there's really no any material other components to that there. And again, this is historical business that we've had that came with an acquisition we did several years ago in our collision business. And so they had that business. And as we've moved forward and brought it in, obviously now we're a competitor and we've decided that you know, the economics of that business were just not attractive to us. And therefore, we will be exiting that business in the second quarter.

Yeah, understood. Okay, that was it for me. Thank you very much.

The next question is from Graham Riding with TD Securities. Please go ahead.

Hi, good evening. Maybe I could stick with the syndication theme. Um, you know, you increased, uh, I guess from an FX perspective, your originations outlook, but you kept your syndication volumes, uh, unchanged relative to your old guidance. Um, are you just trying to be, but then on the other hand, you, you know, you gave a pretty constructive outlook for, you know, the depth and the breadth of that market. So I'm just wondering why you didn't increase your syndication volume outlook, but you did your originations outlook.

Yeah. When we reset that syndication guidance from four to four and a half billion, We left it at a pretty wide range of 3 to 4 billion grams. So there's a lot of areas to land within that range. And so we've got, you know, even if those originations continue to go up, you know, you can see opportunities in syndication. It's going to be more driven, though, by the rate environment and the, you know, the originations and whether or not we would prefer to keep those on book. in the near term until the rate environment gets more attractive to us, and then we syndicate those assets at a later date.

Okay, fair enough. And then just broadly speaking, when we sort of look at, you know, the increasing rate environment, are you seeing any pressure on your business with, you know, higher variable rate funding? Are you able to pass that on on your variable rate sort of Are you seeing any pressure there at all, or are you able to pass through the higher rates?

Yeah, so, you know, we always look at the confluence of our funding costs versus what we price our leases at as we move forward. That being said, we have long-term relationships and long-term agreements with clients, right? So as we see rates increasing, we have discussions, but specifically as we onboard new businesses, We make sure that they reflect the new rate environment that we're in. And to the extent that there is a reason to have a discussion on rate with an existing client, we will have those discussions as we move forward. But again, we've been able to continue to finance our business at attractive levels, right? And shown that ample access to capital. So although we do see some rate increase within our NFR, you know, some of that's just driven by as we continue to leg into match funding in Mexico and the peso, which we've talked about before, is the bigger component of that versus slightly higher rate on a $500 million or $750 million ABS. And remember, our variable funding, you know, relatively stable, Our senior lines, our other funding mechanisms have been relatively stable. And when we go to market, we go with a relatively small percentage of the overall to term out those type of facilities. And so we're not seeing a major impact from the rate moves, albeit, you know, the funding that we've done more recently in the ABS market is higher than the one we did in 2021, but makes sense. And I'd also say, Graham, this is important. As overall rates go up, we are completely agnostic to base rates. So our contracts are set so if the Fed, whether it's SOFR, historically LIBOR, whatever, as those rates increase, our costs to clients actually increase lockstep with those, right? The only exposure we have is just on terming out facilities with whatever spread increase we have over and above the base rate. So most of, and this is why we've said many times we're effectively interest rate agnostic because we lock in the economics at the time of the origination based on where base rates are at the time of that origination.

Thank you.

Once again, panelists who have a question may press star then 1. The next question is from Shalab Garg with Veritas Investment Research. Please go ahead.

Thank you, and good evening. My questions are on auto backlogs. Can you share any insights on the mix of electric vehicles within the auto backlog?

Yeah, so if you look at our VOM, calculation, we do disclose the amount of EVs in that BUM calculation, and it's a very small component of the overall BUM. We are seeing more interest in electric vehicles, and so on a percentage basis, more opportunity within the order backlog, but it's still very, very small relative to the overall component for several reasons. As we work really closely with clients, the prudent and stepping in matter as they want to do pilots on a smaller scale to understand vehicle in use and best fit for use type of vehicles and get used to charging infrastructure, which is also a big component of how they do it. So it's still small. It's one of those things that we believe will continue to move over time. And as we've said before, we think 40 to 60% of the fleets by 2030 will be electrified. But that being said, that means 40 to 60% of the fleets will still be ICE. And so someone like us who has capabilities to both have the data and help people migrate to the EV journey, but be able to manage a mixed fleet as those fleets become more mixed, continue to be very well positioned for that migration.

Okay. And are you seeing any hesitant from clients because of electric timelines being longer for electric vehicles?

I think it's too early to say. I don't think anyone's extended timelines. We're seeing more interest from the client base. We're spending a significant amount of our strategic consulting on EVs. It is a topic on every new business and existing client discussion. It is one of the things that I think provides an incredible opportunity for us, not only with our existing client base, but with self-managed fleets, given the complexity of moving to an EV fleet or even a mixed fleet over time. So we believe this will be a catalyst to to one of the earlier questions, self-managed fleets looking to this because we should have, based on our 1.5 million vehicles under management, some of the best data on in-use data for these type of vehicles, what type of vehicle to use, what are the challenges going to be, and then helping people to solve the charging infrastructure component of it as well.

Okay, that's helpful. One last one from me. So the order backlogs are approximately three times the pre-pandemic, which we have seen for quite a few quarters. Can you provide a breakdown of that 3x growth into things like, is it driven by a majority number of vehicles, by inflation, by a change in mix towards electric vehicles, which are a bit more expensive? Anything on that would be very helpful.

I think the reason you've seen it stay elevated predominantly is the strength of the ordering that our clients have. I mean, our clients are looking, and their fleets have aged over time. They believe in their business. These are mission-critical vehicles, so they cannot generate revenues without these vehicles. And there's a real need to control cost, and obviously costs have gone up. We've been a great partner with our clients in trying to help them manage those costs with that aging fleet through preventative maintenance and other products to make sure we're keeping downtime down. But they need new vehicles, and so as these order banks open up, they have been placing their orders at very strong volumes quarter after quarter, which has kept, despite increasing originations, new orders are just backfilling those. Obviously, inflation is a small component, but the bigger component by far is just the demand component of our client base.

This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.