Element Fleet Management Corp.

Good morning, ladies and gentlemen, and welcome to Element Fleet Management's fourth quarter and full year 2023 financial and operating results conference call. At this time, all participants are in listen-only mode, and you are reminded that this call is being recorded. Following the prepared remarks, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star, then 1. In the event you need assistance during the call, you may signal an operator by pressing star key followed by zero. Element wishes to caution listeners that today's information contains forward-looking statements. The assumptions on which they are based and the material risks and uncertainties that could cause them to differ are outlined in the company's year-end and most recent MD&A, as well as its most recent AIF. Although management believes that the expectations expressed in these statements are reasonable, actual results could differ materially. The company also reminds listeners that today's call references certain non-GAAP and supplemental financial measures. Management measures performance on a reported and adjusted basis and considers both to be useful in providing readers with a better understanding of how it assesses results. Reconciliation of these non-GAAP financial measures to IFRS measures can be found in the company's most recent MD&A. I would now like to turn the call over to Laura Dottori-Atanasio, President and Chief Executive Officer of Element. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining us this morning. 2023 has been a year of record-setting results that translated into real value for our shareholders. Our team delivered on our growth levers with the addition of 155 new clients for the year, of which 45% were self-managed conversions. We also increased our share and wallet gains across all geographies by 28% over last year. Our sales conversion rates are up, and we have a very healthy pipeline. Our sales team drove net revenue to an all-time high of $1.3 billion for the year, and we delivered adjusted earnings per share at $1.32. We returned $345 million to our shareholders by way of increased common share dividends, share repurchases, and preferred share redemptions. We generated record revenue results, and we continue to have a lot of opportunities for further growth and optimized performance in the years ahead. Additionally, we're making solid strides with our three key strategic initiatives that we shared with you last quarter. You'll recall we committed to centralize accountability for our US and Canadian leasing operations, establish a strategic sourcing presence in Asia, and advanced digitization and automation. Now, with regards to leasing, we're set to be operational by mid-year in Ireland, a globally renowned leasing center of excellence. Last week, our head of leasing, Chris Gittins, and I had the opportunity to visit our new location. We met with local officials and spent time with the first five of approximately 70 employees that will work in our Dublin office. I have no doubt that under Chris's leadership that our team will elevate our clients' leasing experience, standardize and optimize their operations and pricing discipline, and further maximize the value of our portfolio. Now turning to Asia and establishing a strategic sourcing presence, we recently welcomed our newest executive based in Singapore who will run this initiative. She has previous experience in fleet management, including a strong tech background and a proven track record on strategy development and execution. She brings a wealth of knowledge and expertise about the region and the industry, and she'll undoubtedly be a great asset to Element. With her arrival, we'll expand and improve our clients' access to new vehicles and further provide our business with the economic benefits of sourcing at scale. And given Asia's global leadership position in the development and production of EVs, this aligns perfectly with our clients' commitment to sustainability and decarbonization. For these initiatives, we do remain on track to deliver the profitable revenue growth and operational efficiencies that we committed to last quarter, which was on a run rate basis, generating between 40 to 60 million of revenue and 30 to 50 million of adjusted operating income by 2028. And with regards to our third strategic initiative to advance digitization and automation, as I shared last quarter, we added strong expertise to our team with a new chief digital officer and a new chief information officer. Their mandate is to elevate the client experience, deliver more data-driven insights, and simplify the complexities of managing large-scale fleets. Their work will help us increase our client net promoter score. This year, while we did make progress moving our score from 39 to 41, it was slightly below the bar that we raised for 2023. So we're going to continue to challenge ourselves by raising expectations further And so for 2024, we set our targeted client net promoter score at 50. As the EV mobility and connectivity landscape evolves, accelerating our digital user experience and automating how we serve is an imperative to further optimize our operations, enhance our client-centric business model, and accelerate future growth prospects. In the year ahead, We will build on our momentum with a client-centric approach and a sharp focus on our key initiatives to position Element for a sustainable future, one that delivers long-term value creation for our shareholders. And with that, I'll hand it over to Frank to cover the financials.

Thank you, Laura. And good morning, everyone. Looking back at 2023, we delivered another record-setting year for Element. These results also reaffirm our continued commercial success and provide us with the financial flexibility to invest in our business and return capital to shareholders in 2024. Before diving into 2023 results and achievements, I'd like to draw attention to three notable reporting items. First, we continue to call out the non-recurring setup costs in connection with the strategic initiatives in leasing and sourcing that we announced last quarter. Q4 and 2023 included $14.6 million and $18.5 million, respectively, in such one-time items. We anticipate that the vast preponderance of the estimated remaining $12 million will be completed by Q2. By excluding one-time revenues of $25 million in 2022 and one-time cost of strategic initiatives of $18.5 million in 2023, these adjusted figures provide a more accurate picture of our underlying performance. As such, the growth measures I cite on today's call will be on an adjusted basis. To simplify and streamline reporting, commencing this quarter, we are reporting our financial results both as reported in accordance with IFRS and as adjusted, which are non-GAAP financial measures. Last evening's MD&A and earnings release included a comprehensive reconciliation between the two. Third, starting next quarter, we will transition all our financial reporting to the U.S. dollar, further enhancing our financial reporting process. In anticipation of this transition, we've prepared unaudited quarterly financial highlights for both 2023 and 2022 in U.S. dollars, which are available in the supplementary information on our website, as well as a comparison of growth rates and margins between our reported figures, constant currency, and U.S. dollars, all on an adjusted basis. Additionally, we have provided our 2024 guidance in U.S. dollars. The decision to transition to US dollar reporting is supported by the fact that over 60% of our revenues are derived in US dollars. This change will significantly reduce the impact of currency fluctuations on our reported earnings relative to our current Canadian dollar reporting. Despite this change, Element will remain a Canadian company listed on the TSX with its shares quoted in Canadian dollars. With that said, Let's now turn to our 2023 results in Canadian dollars. We delivered record-setting results for revenue, services revenue, adjusted operating income, adjusted operating margins, adjusted EPS, and adjusted free cash flow per share. Net revenue grew 16.9% year-over-year, led largely by a 19% year-over-year increase in capital life services revenues. Positive operating leverage contributed to adjusted operating income of $715.8 million in 2023, delivering an adjusted operating margin of 55.3%. Adjusted interest grew $0.27 to $1.32, while adjusted free cash flow per share increased 27.5% to $1.67 per share. Growth in capital-like services revenue outpaced overall net revenue growth during the same period. The growth in services revenue can be attributed to several factors. Increased penetration and utilization rates from existing clients, higher origination volumes, and furthermore, services revenue is also benefiting from the addition of new clients with higher services attachment rates. We expect services revenue to continue growing in the low double-digit range, supported by enhanced commercial efforts and growing originations from strong client demand as OEM production capacity and prior supply chain constraints are showing increasing signs of normalization. We grew net revenue 15.6% year over year, which was driven by growth in net earning assets resulting from increased originations across all geographies, higher gain on sale, and growth in higher yielding assets in Mexico. This growth was partly offset by higher year-over-year interest expense in connection with increasing credit spreads in 2023. Remember, we are protected to base rate moves given our lease contracts and match funding. That said, maintaining access to diversified sources of cost-efficient capital is strategically important. During 2023, we made the strategic decision to increase our liquidity given the significant increase in forecasted originations. As a result, We ended the year with $6.4 billion of committed undrawn liquidity across various funding facilities. We expect modest net financing revenue growth in 2024 due to expected growth in net earning assets. The yield on net finance revenue will moderate in 2024 due to a decrease in gain on sale, increased credit spreads on terming out our debt, higher standby costs associated with our enhanced liquidity position, as well as the redemption of the preferred shares with term debt, thereby moving the associated costs from below the tax line up to the interest expense line. Now let's delve into the second pillar of our capital lighter strategy, syndication. We grew 2023 syndication revenue 7.3% year over year on record volumes of $3.4 billion. Syndication remains an important funding mechanism for us providing convenient access to cost-effective off-balance sheet capital. Looking ahead, we anticipate modest growth in syndication volume for 2024, roughly consistent with our growth in originations. Moving on to adjusted operating expenses for the year, we saw year-over-year growth of $70.8 million, or 14%, to $578.3 million, 2.9% lower than our net revenue growth, and consistent with our expectation of growing revenues faster than expenses. This increase can be attributed to several factors, including higher depreciation and amortization from prior capital investment in our business, higher wages in connection with ongoing investments in our people and our businesses that are expected to accrete to long-term growth, and general cost inflation. Wage increases and depreciation accounted for 30% of the year-over-year increase. The remaining year-over-year increase reflects our ongoing investments in commercial capabilities with net revenue contributions more than outpacing these investments. This has contributed to 110 basis point expansion in our adjusted operating margin to 55.3% in 2023. We will continue to invest in our business to ensure we are well positioned to exceed the expectation of our clients and position Element for continued expected net revenue growth of 6% to 8% in the future. Full year adjusted EPS were $1.32 per share, a 27 cent increase year over year, And full year adjusted free cash flow per share was $1.67, a 36 cent increase year over year. Adjusted free cash flow per share was positively impacted by higher originations and the positive cash flow benefits that come with them as well as lower costs to acquire new business. We've returned a total of $229.8 million of cash to shareholders through dividends and buybacks of common shares this year. And $344.8 million to all shareholders which is inclusive of our $115 million Series A preferred share redemption in Q4. We reaffirmed our 2024 guidance provided last quarter, and we remain confident in our ability to deliver on this guidance. To recap, we expect full year 2024 to deliver the following financial results in Canadian dollars. Net revenue of between $1.365 and $1.390 billion, adjusted operating margins of 55% to 55.5%, adjusted operating income of $750 to $770 million, adjusted EPS of between $1.41 and $1.46, and free cash flow of $1.75 to $1.80 per share, originations between $9.5 and $10 billion, and a modest increase in share count as our convertible debentures convert into approximately 14.6 million common shares. We have also provided the U.S. dollar equivalent of the above ranges in our disclosure documents, to match our change in reporting currency beginning in Q1 2024. Before I turn the call back to Laura for closing remarks, there are a couple of additional points I would like to address. First, we anticipate total capital investment requirements to remain relatively consistent with 2023 at around $110 million. We expect CapEx to be weighted heavier to growth relative to prior years. Second, our cash tax rate in 2023 was 12.7%. And we expect that to increase modestly in 2024 and grow to the OECD minimum rate of 15% over time, as previously discussed. This rate is expected to remain well below our adjusted effective tax rate, which we forecast to be approximately 25% in 2024. With that, I will turn it back to Laura.