Element Fleet Management Corp.

Good morning, ladies and gentlemen, and welcome to Element Fleet Management's first quarter 2024 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 then 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 are expressed in the 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 Dottoria Atanasio, Chief Executive Officer of Element Fleet. Please go ahead.

Good morning, and thank you all for joining us today. We had a strong start to 2024. This quarter, we achieved record net revenue of $262.5 million U.S. dollars and adjusted earnings per share of 27 cents demonstrating robust revenue results. The impressive performance of our commercial team continues to deliver, adding 39 new clients, 59% of which were self-managed conversions, and adding 178 share of wallet services, and continuing to drive higher service penetration and utilization rates. All of this was pivotal in driving our solid growth. These results highlight the exceptional quality of our team and the trust our clients have in our ability to contribute to their success. Our strong revenue allowed us to expedite investments in our business to support our growth, to refine our service delivery model, and to establish the groundwork for our digitization and automation initiatives, which will benefit our clients and ensure our continued market leadership. While prioritizing these investments, we also maintain solid adjusted operating margins this quarter, expanding margins by 30 basis points on a year-over-year basis. We continue to make progress in client satisfaction, achieving a net promoter score of 48 this quarter as our client-centric focus further enhances the client experience. Our confidence in our future is reinforced by several factors, which include the 9.8% year-over-year increase in originations driven by strong client demand and normalizing vehicle production volume, by the advancement of our digitization and automation initiatives to optimize our business, deliver a higher degree of client experience and drive growth, by the traction of our EV offering, known as ARC by Element, along with our end-to-end electrification solutions for clients that are pursuing decarbonization goals and navigating the complexities of transitioning their fleet to EVs, and of course, the enhancement of our strategic advisory services, providing more proactive insights to our clients. Additionally, we're making significant progress with our strategic initiatives in leasing and in strategic sourcing. For leasing, we're on track and on plan for the official start of operations in Dublin this summer. And for strategic sourcing, we appointed a new head of Asia operations to lead our Singapore office, and we signed our first direct collaboration agreement with a leading OEM in Asia, expanding vehicle procurement options for our clients. The first quarter laid a strong foundation for our future growth, and we're enthusiastic about the opportunities ahead. Our financial stability, our purposeful investments to support our growth, and our client-centric focus as well to continue creating value for our clients and our shareholders alike. And with that, I'll hand it over to Frank to take us through the numbers.

Thank you, Laura. Good morning, everyone. We started the year with strong momentum, including exceptionally strong net revenue growth year over year. We also continue to invest in the business while managing to our targeted full year AOI margin. As we stated in our earnings release, we believe our performance to date positions us well to achieve or potentially beat the high end of our guidance on most metrics, assuming a relatively stable foreign exchange rate environment. Before turning to our first quarter results, I'd like to highlight a few important reporting items. First, we are pleased to present our financial results in U.S. dollars for the first time transitioning from the Canadian dollar. To aid our investors during this transition, we will continue to report key per share amounts in both U.S. and Canadian dollars for the next several quarters. These metrics include earnings and adjusted earnings per share and adjusted free cash flow per share. Second, we will continue to adjust our results for the remaining non-recurring setup costs in connection with our strategic initiatives in leasing and sourcing announced last year. In Q1 2024, we've recorded $2.1 million of these non-recurring setup costs and anticipate recording the remaining amount next quarter. As such, all dollar amounts and growth measures I cite on today's call will be in U.S. dollars and on an adjusted basis for these one-time items. Let's now turn to our first quarter results. We achieved record results across many metrics. Net revenue grew 16.8% year over year, reaching an all-time high of $262.5 million. This growth was largely driven by continued services revenue growth and, to a lesser extent, higher net financing revenue. We strategically ramped up investments in our business this quarter, reinforcing our commitment to generating long-term growth and value creation for our clients and our shareholders. We will be purposeful in accelerating investments when our revenue performance permits. Managing tightly to our targeted adjusted operating margin will guide us in balancing discipline, expense management, with investment acceleration. Our adjusted operating income for the quarter was $143.6 million, up 17.5 percent year-over-year, translating to an adjusted EPS of 27 cents a share, a four-cent increase from the same period last year. Additionally, our adjusted free cash flow per share increased seven cents, or 25 percent, to $0.35 per share. We ended Q1 with an adjusted operating margin of 54.7%, marking 30 basis points of expansion year-over-year, consistent with our guidance. Let's take a deeper dive into the key drivers of net revenue growth. Services revenue, the cornerstone of this capital-like business model, grew 27.3% year-over-year to $147.1 million. This growth can be attributed to several key factors, increased penetration of service with our existing clients, higher utilization of services from both new and existing clients, and the continued growth in our other geographies. I would note that Q1 2024 services revenue included $7 million from certain revenue items that vary by type but share a similar characteristic in that they are discrete items and not expected to recur in 2024. Excluding these amounts, services revenue was still a strong 21.3% higher year over year. Also contributing to the year-over-year growth in net revenue was higher financing revenue, which was up 9.1% from Q1 last year. This uptake is primarily the result of an increase in net earning assets attributed to higher originations. This increase was somewhat mitigated by higher funding costs and higher standby fees due to higher committee capital balances to fund the forecasted growth in originations. Debt capital markets have been strong, with lower spreads on turning out our financings in the first part of the year compared with prior year transactions. We continue to capitalize on these favorable credit market conditions, including accelerating the refinancing of debt scheduled for maturity in Q2. Q1 gain on sale was largely unchanged year over year. Noteworthy improvements in Mexico were largely offset by lower gain of sale in A and Z, where the normalization of used vehicle prices continues in tandem with the improvement in new vehicle availability. Moving on to syndications, we syndicated 473 million assets this quarter, down by 6.6% from Q1 last year. The decline can be largely attributed to our strategic decision to defer certain syndication volumes out of Q1 as we awaited the outcome of potential U.S. tax legislation. Adjusted operating expenses for the quarter were $118.9 million, an increase of 16.1% year-over-year. This increase was outpaced by the 16.8% growth in net revenue over the same period. Salaries and raises grew largely for the following reasons. Increased headcount in support of growth initiatives and supporting our core growth until we realized the benefits from digitization and automation initiatives. And higher incentive accruals year over year, given our strong performance in Q1 and strong outlook for the remainder of the year. General and administrative expenses were up 12.8%, largely due to investment acceleration and business development expenses in support of our commercial activities. Higher depreciation and amortization also contributed to the increase in year-over-year adjusted operating expenses. As I mentioned before, we will be purposeful in accelerating investments when our revenue performance permits. Our commitment to manage our expenses closely within the boundaries of achieving our targeted adjusted operating margin while also prioritizing these investments that align with our long-term strategic goals remains unchanged. Our free cash flow generation remains strong. This quarter, we generated adjusted free cash flow per share of $0.35, up $0.07 year over year. We ended the quarter with tangible leverage of 6.68 times on the higher end of our target as we pre-funded the redemption of our senior notes. As such, you will notice significantly higher cash balance on our quarter end balance sheet. Had we deployed all the capital raised from our Q1 750 million senior unsecured notes offering during the quarter toward debt repayment, tangible leverage would have been 6.23 times near the bottom end of our targeted range. From a capital allocation perspective, our priorities remain unchanged. One, prudently invest in our business while maintaining our target tangible leverage ratio. Two, grow our common share dividend in keeping with our target payout ratio. Three, redeem the last of our high-cost legacy preferred shares. And four, return capital shareholders via share buybacks. Before I conclude, I'd like to draw your attention to two notable capital actions. First, we plan to redeem all of our remaining preferred shares. In June, we will redeem our Series C preferred shares for a total of $94.6 million. In September, we plan to redeem our Series E preferred for a total of $98.3 million. The result of replacing these preferred share redemptions with debt will move the cost of capital below the line up to the NFR line, creating modest compression to NFR margins in the second half of 2024. Most importantly, this action will be EPS accretive, and economically attractive development. Additionally, we plan to redeem all our outstanding convertible debentures this coming June. In connection with this redemption, we expect to issue 14.6 million shares from Treasury. In summary, the first quarter has established a solid foundation, and when combined with our positive outlook and the purposeful investments we are making to drive our growth and sustain our success, place us in a strong position to achieve or potentially surpass the upper end of full-year 2024 guidance on most metrics, provided that foreign exchange rates remain relatively stable. Thank you, Operator.