Element Fleet Management Corp.

Good morning, ladies and gentlemen, and welcome to Element Fleet Management's second quarter 2024 financial and operating results conference call. At this time, all participants are in a 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, press 1, press star, then 1. In the event you need assistance during the call, you may signal an operator by pressing the star key followed by zero. Ella 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 AIS. Although management believes that the expectations 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. A 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 Dottorio Atanasio, Chief Executive Officer of Element. Please go ahead.

Good morning and thank you for joining us today. I'm delighted to share our latest achievements. As a team across Element, we created and unveiled our purpose, We are acquiring new capabilities in the digital and automation space. We delivered another strong financial quarter for our shareholders. Our centralized leasing initiative officially began operations in Ireland on time and on budget with no change to our expected benefits that we previously shared with you. And we released our fourth annual sustainability report with a commitment to setting science-based targets that include intended reductions to our greenhouse gas emissions. Now let me start with our purpose. To further strengthen our culture, our team members worked collaboratively over the past year alongside our clients and key partners to unlock our very first purpose statement, move the world through intelligent mobility. Our purpose is a reflection of our unwavering commitment to putting our clients first, to leading the industry and our ambition to affect positive change for a brighter future. To move the world embodies our dedication to intelligent, seamless mobility. And so, driven by our purpose, we accelerated our digitization and automation initiative with the acquisition of Autofleet. Autofleet is an end-to-end software platform that's designed to support fleet management systems optimize and manage complex operations, and maximize fleet utilization for mobility operators. It's led by a team of incredibly talented individuals, including its co-founders, Coby Eisenberg and Dor Shea. They have built a world-class team and a scalable digital platform that is built on a modern tech stack. Now, having worked with the Autofleet team previously, we have experienced firsthand the cultural fit with Element and the value-add they bring to us and to our clients. This acquisition will enable us to better serve our clients by accelerating our digitization and automation efforts in fleet with optimized mobility solutions, and it will help us expand into new value-added services. Now, with regards to our quarterly financial performance, We continued our commercial success with the addition of more new clients by both earning share and converting self-managed fleets along with increased share of wallet wins. For the second quarter, we delivered 14% net revenue growth with expanded margins, all of which translated into double-digit adjusted earnings per share and free cash flow per share growth. Our very strong performance is a reflection of our team's relentless passion and dedication to delivering the very best for our clients. So thanks to our clients for their continued support and to our Element team members for their great work. It's an honor to be part of such a great group of people. And with that, I'll hand it over to Frank.

Thank you, Laura, and good morning, everyone. We delivered another quarter of strong results. The momentum we benefited from in Q1 has carried into Q2, resulting in robust growth across all key metrics. Notably, we saw continued double-digit year-over-year growth in services revenue, along with a substantial 16% increase in net financing revenue compared with the same period last year. Our strong performance to date, combined with a positive outlook for the remainder of the year, led us to raise our full-year 2024 guidance for most metrics. We announced the acquisition of Autofleet, which, although relatively small with a purchase price of approximately $110 million, aligns with our goals of acquiring capabilities to accelerate digitization and automation efforts. We expect the transaction to be accretive in 2025 with a payback of less than three years. As with our previously announced strategic initiatives, we will incur one-time non-recurring costs associated with this acquisition, which we will call out and adjust in our Q3 results. For clarity, our revised guidance excludes these one-time costs. We expect the acquisition to close early in the fourth quarter. Let's now turn to our second quarter results. All dollar amounts cited today will be on an adjusted basis, excluding one-time costs of just over $2 million in Q2 incurred in connection with our Dublin and Singapore initiatives. These initiatives have been stood up on time and on budget. We anticipate the last of these expenses in Q3, consistent with our original budget. Q2 was another record performance for us in terms of net revenue earnings, EPS, and free cash flow. This success was driven largely by the resilient and recurring nature of our revenue, as well as the robust and sustained commercial momentum we've generated as we continue to deliver on our client value proposition and create increasing value for both our clients and shareholders. For the quarter, our adjusted operating income reached $153 million, up 15% year over year. This translates to an adjusted EPS of $0.29, which is a $0.04 increase from the same period last year. Additionally, our adjusted free cash flow per share also grew by $0.04, or 12% to $0.38 per share. We expanded adjusted operating margins year-over-year by 60 basis points to 55.7% this quarter. Moving forward, we anticipate operating margins to end the year at approximately 55 to 55.5%, assuming stable currency rates relative to Q2. Net revenue grew over 14% year-over-year to $275 million. This growth was largely driven by services and net financing revenue growth. Service revenue rose by $14 million, or 11%, compared to Q2 2023, reaching $140 million. This increase was fueled by robust origination volumes and sustained higher penetration rates from new and existing clients. As noted, last quarter, Q1 services revenue benefited from $7 million in one-time items discussed last quarter. Excluding these amounts, services revenue was largely unchanged compared to a very strong first quarter. Net financing revenue grew $17 million, or 16% year-over-year, and $15 million, or 14% quarter-over-quarter. This growth is largely attributable to higher net earning assets associated with the increased origination volumes in the U.S., Canada, and AMZ. Gain on sale remained relatively unchanged year-over-year, as gains in Mexico were mostly offset by lower gains in Australia and New Zealand, as prices moderated. The increase in financing revenue was somewhat mitigated by higher funding costs and standby fees to support forecasted growth and originations. Overall, rates remain significantly more attractive than the prior year period. Shifting our focus to syndications, we successfully syndicated a record $955 million of assets this quarter. This represents a substantial 86% increase from Q2 last year and double that of Q1, increasing syndication revenue by $4 million or 42% year-over-year. We expanded the volume and names associated with syndications, which impacted MIX from a yield perspective. These significant volumes illustrate the depth of this funding source for us and the ongoing appeal of our assets to syndication clients. On the expense side, adjusted operating expenses for Q2 were $122 million, an increase of 13% year-over-year. This increase was primarily due to higher salaries, wages, and benefits associated with accelerated spend, including higher short-term incentive compensation accruals and targeted headcount and G&A to support growth initiatives. We believe that the acceleration of our digitization efforts, expedited by the capabilities we will onboard as part of the auto fleet acquisition, will allow us to enhance our scalability over the intermediate term. It is worth noting that net revenue growth continues to outpace operating expense growth by 110 basis points year over year. And as I mentioned last quarter, we will continue to be purposeful in accelerating investments in the near term as our top line growth allows us to do so. This will help us ensure we are well positioned to expand our leadership in the fleet management sector. Additionally, originations were $2 billion this quarter. up 5% from Q2 last year, and up 28% from Q1. This growth can be attributed to three items. First, OEM production volumes have recovered from earlier supply chain constraints. Second, Q2 traditionally represents the quarterly high watermark aligning with OEM ordering windows. And three is inflation oil prices. Now, let's turn to guidance. Our strong financial performance and positive outlook for remainder of the year led us to raise our full year 2024 guidance for the following metrics. We anticipate net revenues to be between 1.06 and 1.08 billion, implying annual growth between 11 and 13 percent, adjusted operating income between $575 and $595 million, adjusted EPS between $1.07 and $1.11, and adjusted free cash flow per share between $1.32 and $1.36. Again, these are before any one-time costs associated with our previously announced strategic investments and the costs associated with the acquisition of autoplay. While Q2 foreign currency volatility is reflected in our revised guidance, we do not forecast currency. As such, the outlook for the remainder of the year assumes that FX will remain stable to those rates prevailing in Q2. Before concluding and opening the line to questions, I would like to walk you through certain changes to our capital structure. As previously communicated, we completed the redemption of our CRC preferred shares this June for a total of $91 million. Additionally, in September, we plan to redeem our Series E preferred for a total of $92 million. Recall that the result of replacing these preferred shares with debt will move the cost of capital from below the pre-tax income line to the NFR line, creating modest compression to NFR margins in the second half of 2024. Most importantly, these actions are EPS-accreted and economically attractive to us. Additionally, in connection with conversion of our remaining convertible debentures, we issued 14.6 million shares from Treasury, which will impact our per-share financial results and are taken into consideration as per our guidance. We ended the quarter with tangible leverage at 6.5 times and financial leverage or debt-to-total capital at 74.8%. both metrics providing flexibility to pursue strategic objectives, operate the business efficiently, and continue to return capital to shareholders. In summary, we had an exceptionally strong first half of 2024, which allows us to continue investing in the business to sustain future growth and drive value for shareholders. Thank you, operator. We're now ready to take questions.