Element Fleet Management Corp.

Good morning and welcome to Element Fleet Management Sports Quarter and Full Year 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, press star then 1 on your telephone keypad. In the event you need assistance during this 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're 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 and AIF. Although management believes that the expectations agreed in these statements are reasonable, 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. 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 Dottori Adonazio, Chief Executive Officer. Please go ahead.

Good morning, and thanks for joining us today. Our Element team, guided by our purpose, is driving our global growth strategy, which continues to deliver meaningful value to our clients and our shareholders. 2024 marked a pivotal year for our company, highlighted by strong commercial success, important investments in our future, and record financial results. On the commercial front, we added 150 new clients, nearly half of whom transitioned from self-managed solutions, and we achieved strong share of wallet gains with the addition of over 1,000 new enrollments in additional services. On the investment front, We increased our spend to position our company for sustained industry leadership and future success. We completed the centralization of our US and Canada leasing operations in Dublin, including the establishment of a strategic sourcing presence in Asia. We acquired Autofleet, bringing in world-class talent and a global fleet optimization tech platform that will enable us to better serve our clients by accelerating our digitization and automation efforts with optimized mobility solutions and a distinct competitive advantage. We are laying the groundwork to enable exciting opportunities for growth in areas such as insurance, small to medium enterprise fleets, telematics, and EVs. On the financial front, Notwithstanding the planned acceleration of our strategic investments, which led to an increase in our expenses, we delivered adjusted operating margin within guidance, and we achieved double-digit year-over-year growth in each of net revenue, adjusted earnings per share, and adjusted free cash flow per share, with adjusted return on equity reaching 16%. Thanks to our strong performance in 2024, we redeemed our PREF shares, raised our annual common dividend, renewed and reactivated our normal course issuer bid, and we returned a total of $336 million to our shareholders. These achievements reflect the hard work and dedication of our team members alongside the strength and resilience of our business. While global trade issues will create volatility and economic impacts, we remain confident in our ability to deliver on our 2025 guidance. Our first priority is providing our clients with the right advice to help them navigate this situation successfully. The resilience of our business model, coupled with high investment-grade assets, diversified portfolio, and contracted recurring revenues, gives us confidence in our ability to deliver for our clients and our shareholders. Looking ahead, with the investments we've made in 2024, we expect to continue to grow organically and to considerably moderate our expense growth. Our investments made in 2024 are already beginning to bear fruit. In January of 2025, we announced Element Risk Solutions, a fully integrated insurance and risk management offering for our clients in the U.S. and Canada. In Q2 of 2025, we will be in market with the initial release of our new digital driver app, an effort that has been led by our colleagues at Autofleet, who will continually release new functionality throughout the year. And by Q3 of 2025, we will launch a new EV charger management platform, which gives us the ability to manage, control, and generate insights from chargers deployed in home, depot, or workplace settings, as well as integrate public charging access into a single platform. And this tool will be fully integrated with our digital driver app. And by Q4 of 2025, we will launch new digital vehicle ordering capabilities, including the introduction of a new offering for small to medium-sized fleets in Canada and the US. Prioritizing our clients' success with a digital-first approach by investing in better technology and automation while maintaining commercial momentum and operational excellence positions us well to continue to deliver strong results for 2025 and into the future. Now, before turning it over to Frank, I do want to thank him again for his leadership, his friendship, and his lasting impact on Element. Frank, we all wish you the very best in your well-deserved retirement. Over to you.

Good morning, everyone, and thank you for the kind words, Laura. It has been a privilege to work alongside you and the executive leadership team to guide Element over the past four years. 2024 was another outstanding year, and our team is prepared to continue this momentum in 2025. We concluded 2024 on solid footing, delivering record results and exceeding the high end of our guidance for net revenue and each of adjusted operating income, EPS, and free cash flow per share. As Laura mentioned, this strong performance allowed us to accelerate our strategic investments, which will drive innovation and position Element for continued success. Despite the anticipated increase in operating expense growth, largely a result of accelerated investments this year, we expanded adjusted operating margins by 30 basis points to 55.6%, excluding the impact of auto fleet. This result came in just above the high end of our 55 to 55.5% guidance range. Q4 adjusted operating margin was 54.1% after excluding the impact of auto fleet. This decline, as expected, reflects the impacts of accelerated strategic investments and typical seasonal factors affecting gain on sale. This morning, my comments will focus on our 2024 financial results and key factors impacting the quarter before turning it over to Heath, who will speak to our 2025 outlook and guidance. As always, the figures discussed are on an adjusted basis and exclude the costs related to Ireland leasing function in both 2024 and 2023. and the $7 million in expenses tied to the Autofleet acquisition, including severance and implementation costs. We closed the Autofleet acquisition on October 1st and are already realizing benefits, including accelerating our digital journey and actioning synergy opportunities. For the year, our adjusted operating income reached $601 million, up 13% year over year. This resulted in adjusted EPS of $1.12, which is a 14% increase from last year, while free cash flow per share grew 11% to $1.38. These increases were driven by double-digit revenue growth underpinned by continued commercial success and the effective execution of our global growth strategy. On a per-share basis, these strong results were partly offset by the $15.5 million increase and average common shares outstanding, primarily resulting from the Q2 conversion of our convertible debentures. Net revenue grew 13% year-over-year, reaching a record high of $1.1 billion in 2024. This growth was driven primarily by a robust 18% year-over-year increase in services revenue, which rose to $596 million. Additionally, net financing revenue grew by 9% over the same period. The strong services revenue performance in 2024 was largely attributable to higher penetration and utilization rates of our services by both new and existing clients. Net financing revenue grew 9% year over year to $450 million in 2024, supported by a 14% increase in net earning assets resulting from improved origination activity across all geographies offset in part by higher interest expense, which I will touch on shortly. Our strong net earning asset growth in 2024 was underpinned by an increase in origination volumes, driven by client demand and new vehicle pricing inflation, but moderated by the impact of foreign currency fluctuations. Impacting net financing revenue growth included, one, flat year-over-year gains on sale, as higher vehicle sales volume were offset by continued normalization in used vehicle pricing, Two, higher funding costs, standby fees. And three, increased interest expense from incremental debt linked to our preferred share redemptions and the auto fleet acquisition. The last item represents non-net earning asset components of interest expense and total $10 million in incremental interest expense. Excluding these factors and excluding gain on sale, net finance revenue growth would have reached 15% year over year. We syndicated a record 3.5 billion in assets in 2024, a 40% increase from 2023, highlighting the success of our capital lighter strategy and robust investor demand for our assets. Syndication revenue decreased 3 million or 6% year over year, primarily due to the Canadian $474 million bulk syndication of a Canadian lease portfolio to Black Zone in December. This transaction further diversifies our off-balance sheet funding sources, reduces leverage, and frees up capital for reinvestment and return to shareholders. Although not part of our core syndication program, the results of this sale are reported in syndication revenue, impacting syndication yield due to setup costs incurred in connection with the initial sale, the absence of bonus depreciation in Canada, and the unwinding of certain related hedges. Despite this short-term impact, the ability to strategically access other off-balance sheet markets is expected to benefit Element in 2025 and beyond. Syndication revenue and reduced net yield were also impacted by a reduction in bonus depreciation in the United States from 80 percent in 2023 to 60 percent in 2024, as well as a shift in syndication mix. Importantly, investor demand remains strong, with gross yield, or the price at which our investors value our assets, remaining stable when compared to 2023. Looking ahead, higher syndication yields are anticipated in 2025 as a result of continued strong investor demand, an improved portfolio mix, and the potential increase in U.S. bonus depreciation legislation later in 2025. This latter factor would provide revenue upside towards 2025 guidance. Turning to expenses, our robust revenue performance in 2024 allowed us to accelerate strategic investments. As expected, this led to a 13% year-over-year increase in expenses, well in excess of our normalized expense growth outlook. The growth, both for 2024 as a whole and during Q4, is predominantly a function of higher performance-based compensation aligned with our top-line outperformance relative to our initial guidance. The acceleration of our strategic investments, such as digitization and automation, and the development of new products, including insurance and small-medium enterprise fleets, and $3 million in operating expenses associated with auto fleet, which closed October 1. These costs reflect our commitment to modernizing our platform and bringing value-added solutions to our clients to sustain our industry leadership and enhance future growth opportunities. Further details on how we view the components of our expense growth in 2024 can be found in our supplementary document, including the operating expense waterfall on page 22. Lastly, I want to thank Laura and all Element team members for their support and their efforts over the past four years. Together, we have been executing on an ambitious growth strategy, and I am confident that it will drive both client success and the continued growth of Element in the future. As I move forward towards retirement at the end of March, I do so with the knowledge that every day I focus on serving all our constituents well by assisting in the provision of value-added service to our clients, providing opportunities for our employees and communities, and delivering strong financial results for our investors. We've achieved many great things together, and I have full confidence in Heath and our entire employee base to take the company forward on this strong trajectory. Thank you all for your trust and confidence. Over to Heath.

Thank you, Frank, for your outstanding leadership and contribution to Element's success over the past four years. Your mentorship during this time, including the six months of transition, has been invaluable. As Element embarks on an exciting new chapter within the rapidly evolving fleet industry, I'm excited by the clear opportunities for growth and innovation that lie ahead. We have established a strong foundation with our 1.5 million vehicles under management and the value proposition that we have proven out to our clients as this has underpinned our consistently robust top line growth over the past three years. And the decision to undertake thoughtful and strategic investments in 2024 will further differentiate Element in the intelligent mobility space with respect to both client experience and operational efficiency. Looking ahead to 2025, we anticipate continued growth in our client base and net revenue, driven by the ongoing transition of self-managed fleets and robust demand for our advanced solutions, which now includes auto fleet. With strong order volume over the past four months, and an expanding commercial pipeline, we continue to expect growth in both originations and net earning assets over the coming year. Additionally, we anticipate that our expense growth will moderate considerably in 2025 as the benefits of the investments undertaken over the past year begin to deliver operational efficiencies and enhance our financial performance. Due to the resiliency of our business model to perform across economic cycles, we are committed to generating positive adjusted operating leverage and expanding our operating margins going forward. In terms of our 2025 guidance, we expect to deliver the following. Net revenue of 1.16 to 1.185 billion. Adjusted operating income between 645 and 670 million. adjusted operating margin between 55.5% and 56.5%, adjusted EPS in the range of $1.20 to $1.25, adjusted fleet free cash flow per share of $1.48 to $1.53, and originations ranging from $6.9 to $7.1 billion. Our 2025 guidance reflects the same anticipated headwinds communicated last quarter. namely the depreciation of the Mexican peso, higher local peso funding costs, financing expenses tied to our 2024 preferred share redemption, and the scheduled reduction in bonus depreciation to 40%. As previously disclosed, our guidance assumes a Mexican peso to US dollar exchange rate of 20.5 to 1. We are also expecting an effective tax rate for 2025 between 24.5% and 26.5%. The above ranges are prior to any additional material foreign exchange fluctuations and any potential change in the trade agreements between the US, Mexico and Canada. On the latter point, while it is difficult to comment with precision on the impact of a trade dispute at this time, we do believe that there are components of our business, including capital cost inflation and our growing suite of service offerings, that would serve as an offset to the economic impact of any tariff implementation. Regarding capital expenditures, we anticipate that our spend will remain consistent in the $80 million range in 2025, primarily directed towards enhancements to our technology platform and client experience. Going forward, Element will communicate our expectations for annual financial guidance, as well as any planned increases in our common dividends alongside our fiscal fourth quarter results in February. Before we move to questions, I'd like to address a few notable items on our capital structure and balance sheet position. The redemption of all remaining series of preferred shares and convertible debentures in 2024 has substantially simplified our capital structure. In 2024, we returned $336 million to shareholders through common dividends, modest share buybacks and preferred share redemptions. We renewed our NCIB in November 2024 and intend to be more active in repurchasing shares during 2025. Last year, we purchased just under 631,000 shares for cancellation at a cost of $11 million. And through the first two months of 2025, We have already repurchased more than 1.1 million common shares for total consideration of 22 million, consistent with our previous statement to lean into NCIB this year. Optimising our leverage and reducing our cost of capital remains a key priority for Element, and we took an important step in this area during Q4. During the quarter, we revised our banking covenants from tangible leverage to debt to capital, which we consider to be a more meaningful measure of our balance sheet and financial position, as well as being significantly less sensitive to changes in intangibles and shareholders' equity. Our bank covenants are now set at 80% of debt to capital, and we are targeting a range of 73% to 77% going forward. At the end of 2024, our debt-to-capital ratio was 74.1%, while our tangible leverage ratio was 7.65%. The increase in our tangible leverage ratio is largely attributable to the higher intangibles acquired with Autofleet, as well as an FX movement, neither of which had a material impact on our credit profile. Excluding these two items, tangible leverage would have been 6.43%. We continue to focus on maintaining a strong investment grade balance sheet and our strong credit rating. Finally, given our clear operating momentum, strategic investments beginning to yield results and opportunities to expand beyond our core into adjacencies, including our recently launched insurance and risk management solution, as well as the service offering from Autofleet, we remain confident in our ability to deliver strong performance for each of our clients, shareholders and team members. Thank you. Operator, we are now ready to take questions.

Thank you. Analysts who wish to join the question queue, you may press star then 1 on your telephone keypad. You will 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, please press star then 2. We ask that you please limit yourself to two questions and then re-queue. Our first question today comes from John Aiken at Jefferies. Please go ahead.

Good morning. Laura, I was hoping that we could dive into a little bit in terms of your initiative in Ireland and Singapore. Can you give us a sense in terms of when we should expect to see a material impact on the operations from these things, or is this something that's a little bit longer? I'm thinking the Singapore one in particular, a little bit longer in the tail.

Yeah, good morning, John. Happy to do that. I'm looking at Heath so he can provide the numbers in U.S. dollars because I always think of them still in Canadian dollars. But our initiative has gone quite well. So setting up to have a sourcing presence in Asia, as we shared in the past, we had signed a collaboration agreement with BYD, and we have a few others that we're actively in conversations with. The bigger part of what we were looking to deliver is setting up our leasing for the U.S. and Canada and Ireland, and that is well underway. So we got that done on time, on budget, and in fact, I think just $2 million below what we were expecting to spend. So we are feeling very confident that we're going to be in a position to actually deliver on our run rate revenue and adjusted operating income. that we were going to have in 2028. And Heath, if you have that number.

Yeah, absolutely. So we feel confident that we're on track to deliver our number for 2028. It'll obviously ramp up over time and there is a portion in the 2025 plan that we've got. In terms of the targeted number for 2028, we've got a targeted amount of $20 million in there as a benefit that we expect to generate and $30 to $45 million of net run rate revenue full year by 2028.

Thanks, guys. And the initiatives that you're rolling out in 2025, including the new insurance side of the business, is this supposed to be impactful in 2025 or are we looking further out for those as well?

So on insurance, it won't be as impactful for 2025 as we announced in January. We're in test phase now, so we won't be doing quotes until we get through the test phase. So we expect that to happen by the end of March. So we're looking at mid to high single digits of net revenue contribution for the 2025 year for insurance. But if we can play this out as expected over the years and we'll have phased in approach, we would expect by 2029, again, if we get this all done right and it all plays out, we could see another $100 million in revenue for the company by 2029 if we hit all the various milestones we're expecting over the next few years. The most important one, however, will be now. in that as we look to launch at the end of March, we'll see what market receptivity is like. So this will be an important year for our insurance initiative.

Thank you. And our next question today comes from Steven Bourne with Raymond James. Please go ahead.

Morning, Frank. I just want to thank you for all your help over the years, and I wish you luck in the future. Good luck in your next adventure. I guess the first thing, just a clarification, the $1 billion in syndication, is the new bulk sale part of that, or is that a separate amount?

The total syndication volume that we've reported in Q4 includes the bulk sale.

Okay. I appreciate that. And maybe you could just talk about this initiative with Blackstone and you know, why did it start in Canada? Can it happen in the US? Is it a continual facility? And then, you know, how did you get off balance treatment for that? You know, obviously, we don't want to go in the weeds of securitization accounting, but maybe you could just talk about some of the high points that got you over the hump there in terms of getting it off balance sheet.

Yeah, absolutely. Morning, Steve. It's Heath here. I'll take that one. So, The Treasury team has done a great job here to further diversify out our off-balance sheet funding. In terms of the characteristics of the portfolio sale that we did, it's very, very similar to syndications. So we get full off-balance sheet treatment. That decreases our leverage. It obviously increases our cash flow, increases our return on equity, and allows us to reinvest that money back into the business. It's also important to note that we retain the service revenue component on the leases as well. So it's very similar in its characteristics to our standard syndication program, but it enables us to be a bit more operationally efficient and do bulk sales in one transaction. In terms of Canada versus the US, there's... given that we have a robust syndication program in the US, just from a diversification standpoint, we look to Canada. But there's no reason why we can't do this type of things in the US going forward. I guess final note that I'd call out on this is there was some startup costs that we incurred to get this program up and running, which we think will have great benefit going forward with a partner like Blackstone. We expect that the go-forward yield will increase because we won't have those startup costs. Important to note, though, that Canadian leases generally have a lower yield than the U.S. because the U.S. has bonus depreciation.

Okay, so maybe just a little bit of a follow-up there. So this is really just another syndication bulk sale facility. It's not a securitization facility like a Chesapeake that you've carved out the retained interest to get the off-balance sheet. I'm just trying to, like, where is the title? Is the title with the actual purchasers of the paper, or is it still with the actual securitization facility? I'm just trying to understand, because that was the initial thought, was that it was going to be more a securitization facility, that you were going to tweak some of the parts to qualify for the off-balance sheet.

Yeah, so this one is a syndication type facility. It's not a securitisation. What you're referring to is another program that we are looking to roll out so that we have syndications, bulk syndication, and then looking to do an equity residual structure. But that is something that is in the pipeline. So this is just a very, very similar. Think about it the same as a single name syndication. It's just a bulk sale of a number of different clients.

Okay. Thanks. I'll reach you. Thanks.

Thank you. And our next question today comes from Tom McKinnon with BMO Capital Markets. Please go ahead.

Yeah, thanks and good morning. And Frank, thanks for all your help here and all the best as you move on. Heath, you mentioned startup costs with respect to this bulk sale. Are you prepared to kind of quantify them?

Yeah, I guess what I would say in terms of of costs is we would expect once those startup costs are removed, our yield would trend up towards your standard yield that you would see in the quarter. The only added item I'd comment on that is there is the reduction in the US side of things where the bonus depreciation has moved from 60% to 40%, which will slightly decrease our yields, which is something we've called out in the past and included in our 2025 guidance.

Okay, now with respect to the originations coming in lower than your guide for 2024, I think you reaffirmed that guide in November. Did you not see some of the slower orders that in the summer months impacting that? Why did you come in lower for 2024?

Yeah, so 2024 saw record originations of $6.7 billion, which is up 6% year on year. Don't believe we reaffirmed the guidance for that last quarter. I'd need to check that. I guess in terms of what we saw happen is, number one, the appreciation of the USD in Q4 really just had a translation impact of the originations in our other locations. So that did give us a headwind in Q4 just from a translation impact. And then the other couple of key reasons is we did still have, unfortunately, a few makes and models on controlled allocation, and some of the OEM ordering in Windows were delayed in Q3, which pushed some originations out that we were originally hoping to get in 2024. But ultimately, it's still a strong number, albeit under guidance. And what I would say is we've seen our order volume be really, really strong for Q4. So our backlog of orders increased from $1.5 billion to $1.8 billion in Q4 on the back of strong orders. And therefore, we expect that that order volume will translate into strong originations in the first half of the year, particularly Q2.

And Tom, I would just add, I believe on the last conference call, when we went through the guidance, I said that we would be at or above the high end of guidance on most MESBRIX other than originations.

Thank you. And our next question today comes from Graham Riding with TD Cowen.

Please go ahead. Hi. Good morning. Got to get a question on tariffs. Maybe just to start, any Any concerns here that tariffs could weigh on auto production and therefore your origination volumes? How are you thinking about that? And then secondly, are you seeing any hesitation or delays at this point from any clients in Canada or Mexico, just given the tariff uncertainty?

Yeah, good morning, Graham. It's Laura. So I'll take that one. So I guess like everyone, we know we're all going to be impacted by any increase in tariffs, so we can expect that to impact supply chains. You name it, it's going to create complexity, delays, so increased costs for everyone, particularly the auto industry will be tough. Last 60 years, I think the auto industry has the most integrated supply chain there is on the continent. So this will be a rough one for the auto industry. So I'll start with our clients. That's our first priority. So it's really to get out there and to support them, give them the right advice, help them navigate through what will be a challenging situation if it is to happen. We believe we're really well positioned to do that with our strategic advisory services. I think now is also a good time for us. As you know, our value proposition is we can help our clients and prospective clients decrease their total cost of fleet operation by 10 to 20%. So we think our offering is actually of greater interest now or should be more than ever for our client base. I would say from our clients as well to your question on hesitation, we are not seeing any real slowdown from the vast majority of our clients. There are a few that are being tentative But that's very much on the, I'm going to say on the minority side is, as Heath pointed out, we've got some really strong order volume that we've received from our clients. So that does look good. And I tell you that I think our clients really learned from the last supply chain shutdown, that when you have non-predicted maintenance, that costs an awful lot of money. And so older vehicles have a lot more downtime and downtime will often cost our clients a lot more than increased cost to capital. So just some history sort of if we go back to pre-COVID, because, again, this might have some similarities to a pandemic when the OEM plants had to shut down because they couldn't source parts. Pre-pandemic, the current age of vehicles on average, again, depends a bit on mix, but was about 42 months. Post-pandemic, that went up just under 60 months. Today, that sits, when we look at our vehicles under management, around 49 months. So not a lot of maneuvering room, I'd say, for our clients to continue to extend the lifecycle of their vehicles, which is why we expect orders are going to continue. And again, as Heath said, we should see that represent in originations. And I do want to point out, you know, elements of, does have a really resilient business model. We don't have to look too far in the past. I talked about COVID, but where we've seen that our business continues to perform well, even in prior periods of disruption, whether that relates to OEM production, vehicle aging, cost inflation. I can point it out again. I think we all know that, but two-thirds of our revenue does come from the U.S. We've contracted recurring revenues from mostly investment-grade clients And then it was mentioned in our prepared remarks that any increase in the cost of vehicles does get passed on to our clients. And if they don't purchase new vehicles, the aging ones undergo higher maintenance costs, which in turn drives higher revenue for us. So we do have somewhat of an offset. The biggest potential impact for Element would actually be from FX volatility on the revenues that we generate outside of the US. And Heath can speak to that if you'd like. So as I said when I started, what's really important for us, again, is focusing on our clients and helping them manage through this. But our order volume does remain strong. And we expect that that's going to drive strong origination. And so we're feeling really good about the first half of 2025. And as we said in our prepared remarks, we're still committing to our 2025 guidance.

Great. Appreciate the thorough answer there. And just to be clear, like it sounds like your demand for orders is strong. But in terms of the OEMs, are you hearing any concerns on their part that these tariffs could be disruptive for production or is the expectation that it would just, the cost would get passed through and it could be somewhat demand destructive on the other end? Which way should we be thinking about the implication here?

Yeah, I don't want to talk for others, but the OEMs have been very vocal, particularly the CEO of Ford, in terms of how devastating this would be to the auto industry should tariffs happen. And again, That just relates to, I think it was the 1965 auto pack where I said earlier for the past 60 years, uh, the whole continent has been like a big supply chain. So a lot of things go from one country to another. So it will be very impactful. I think in 2024, it was almost a quarter of all us vehicle sales, uh, were imported or vehicles, I should say from Canada or Mexico. So just under, I think, 4 million vehicles. So this would be very impactful.

Thanks very much. That's it for me.

Thank you. And our next question today comes from Phil Hardy. It's Tushar Bank. Please go ahead.

Hey, good morning. My question here is more geared towards Heath and Frank. I think with the capital stack cleaned up and some new funding arrangements that have been a bit more capital-like, What do you see as the best opportunity maybe in debt markets to further reduce the cost of capital from here? And maybe just talk about any progress you've made on that front.

Yeah, no problem. So we will always continue to evolve our capital stack and our funding. The key focus in Q1 was obviously the portfolio sale and further diversifying our off-balance sheet treatments or off-balance sheet options in light with our capital light of business model. Having said that, we're also looking at other optionality on our other funding sources and we've set up a commercial paper program with a backstop by a revolving credit facility to further reduce and be more efficient in our funding there as well. So we'll continue to work on this. It's something that will evolve as the business grows. Okay.

And maybe as a follow-up here, can you talk about maybe the changes in that capital stock and certainly the funding sources and the implications on the midterm capital priorities with respect to maybe revisiting targeted dividend payout growth or share buyback? You talked about 2025. My question more is geared towards directionally mid and longer term, what the implications are.

Yeah, so from a capital allocation perspective, our priorities remain the same. So we'll reinvest into the business for long-term growth. We'll manage our leverage and we look to continue to grow our dividend in line with free cash flow. And as we've said, we will look to continue returning capital to shareholders via share buybacks. And if we look at just the first two months of this year relative to 2024, it's been a significant increase in the number of shares we've brought back just for Jan and Feb. And we expect that that will continue throughout the year.

Thank you. And as a reminder, if you'd like to ask a question, please press star then one. Our next question today is a follow-up from Stephen Boland at Raymond James. Please go ahead.

Thanks. Just a couple of follow-ups. Just in terms of the used car gain on sale, that number being down, obviously ANZ in Mexico, can you just maybe provide a little bit of a split? And were these EVs or internal combustion vehicles that were sold or split?

Yeah, I'll take that one, Steve. So the decrease in the gain on sale for Q4 was expected and seasonal. So what we see in Q4 of every year is with the holiday period in December, we always sell less vehicles than we do in Q3. So there's no real impact from an issue with EVs or anything like that. The vehicles that we sold was standard for the quarter, and we expect that then the volume will kick back up again in Q1 of 2025 and throughout 2025. So no issues there in terms of price, and we do expect a normalisation of the price post the pandemic, but we're on plan and the market is delivering price as we would expect.

Is there any requirement that that gain on sale has to be in the net financing segment? Because it has created a little volatility quarter over quarter. Like could it be not put in other revenues?

No, it ends up in there, but we do disclose it in the footnotes specifically what the gain on sale, so it's easy to back out. I don't want to say easy, but the information is available. You can back it out, and I think that's why it's important when we – You know, we talked about the growth in net earning assets. You saw 9% growth in service net financing revenue. But if you think about what underlies the net earning assets and what income streams come out of that, you back out GOSS, which was flat because it's not tied to the net earning assets, the impact of the preferred shares, and the auto fleet debt that was put on. and all that interest expense ends up under that NFR, you actually end up with 15% growth in NFR relative to a 14% net earning assets yield. So net earning assets, so you actually got some yield improvement over the year, which is driven by both what we're doing on the financing side as well as what we're doing in regards to optimizing pricing. And going back to an earlier question, you know, some of the work that's been done as we've set up the Ireland leasing business and put more focus on that business to help drive that in the U.S. and Canada, as well as improvements, I think, across all of the geographies that they've really focused on how to get the appropriate returns on the capital that we put out there for leases.

Okay, I'll follow up with that. And last one for me, just in the vehicle owner management, it says it includes the vehicles managed or services from Auto Fleet. I presume that's just EFN vehicles under management, not any of the third-party vehicle that they deal with outside of EFN. Is that correct?

Yeah, so the VAM number for this quarter includes the Auto Fleet VAM that we acquired, which is the auto fleet products and services that are linked to a vehicle and have a per vehicle per month charge?

Clients or outside clients? That's what I'm trying to get at. Because I know they came in with a basket of products that they were selling to rideshare and things like that. It doesn't include any of that. Is that correct?

Yes, that's correct. So if you think about it this way, The 9,000 units that are auto fleet units are third-party units that are not currently served by Element. Additionally, there are auto fleet products being sold to our existing client base, which provides probably the greatest opportunity to grow that revenue stream over time, given our inherent 1.5 million vehicles under management. But we would also expect auto fleet to grow within other markets, that we currently don't serve and provide synergies to cross-sell as we grow here. So it's another arrow in the quiver to help us drive that growth.

Thank you. And our next question is from Tom McKinnon at BMO Capital Markets. Please go ahead.

Yeah, thanks. I like the movement here into away from tangible leverage to the debt to capital. you mentioned that you've done that with banking covenants. Can you talk about discussions you've had with rating agencies? What are they looking at or do they, what's the measure that, do they think this is a more meaningful measure as well?

Yeah, it's a great question. So yes, we've migrated our banks and our banking covenants away from tangible leverage to debt to capital and and obviously the banks and ourselves agree that it's a more meaningful measure of our balance sheet and financial position. In terms of the rating agencies, S&P have always rated us based on debt to capital, so they're already there, and we will be having discussions with our other rating agencies and looking to migrate to debt to capital so that we're aligned across the board. Okay, thanks.

Thank you. This concludes the question and answer session. I would now like to turn the conference back over to Laura Dottore Adonazio for closing remarks.

All right. Thank you, operator, and thank you all for joining us today. With our great team members, our strong commercial momentum, our resilient business model, and the benefits from investments that we undertook in 2024, as we shared earlier, we are well positioned to continue creating value for our clients and shareholders in 2025 and beyond. Our focus is to continue executing with operational excellence and advancing intelligent mobility initiatives. So thanks again to our wonderful Element team members. Thanks to you, Frank. And thanks to everyone for all you do for our clients and for each other. Together, we are driving progress and we're helping to shape the future. We look forward to speaking with you all at our next conference in May. Have a great day.

Thank you. This brings to a close today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.