Q4 2019 Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the element fleet management fourth quarter and full year 2019 financial results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity for analysts to ask questions.
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I will make 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 statement and risk factors of its most recent mdna and AI AFE for a description of these risks and uncertainty.
He's an assumption.
Although management believes that the expectation is reflected in the statements are reasonable it can give no assurance that the expectations of any forward looking statements will prove to be correct.
[noise] elements earnings release financial statements M. DNA supplementary information document and today's call include references to non I FRS 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 I F. R. S measures to I FRS measures can be found any m. DNA.
I'd now like to turn the call over to Mr., Jay Forbes, President and Chief Executive Officer. Please go ahead Sir.
Thank you operator, and good evening to all of you joining us on the call to discuss our fourth quarter and for your 2019 results continue to demonstrate progress that we're making matching our strategic plan.
So should trend down high teens capital and accelerate wiped out and run off non core business.
Oh, it's impressive fourth quarter.
Universal's cops and outstanding 29 team for our fleet management business as we continue to deliver for all of our stakeholders.
We grew core assets under management, 11% on $1.7 billion on a constant currency basis in 29 team.
Certainly your $16.7 billion global assets under management.
Our core business achieved <unk> quarter over quarter, and 35% full year over year increases in adjusted operating income you're right.
[noise] annual free cash flow increased 59% or $169 million year over year, driven by this improved operating performance.
Oh people and focused on our clients, we exceeded our original yearend transformation goal by more than 30% actually to below 131 million annual run rate pre tax profit improvements through our transformation program.
Our client retention rates return to historical levels and all of our geography. Some 29 team and we enjoyed gross new client wins in all five countries.
As evidenced by our outstanding balance Scorecard results wrote 29 team, we're delivering more consistent superior client experience and exceptional value for clients, which in turn is earning our clients loyalty reflected an improving net promoter scores and all of our geographies.
So our expanded approach to syndication research to actually if you Reston de leverage elements balance sheet, and 29 team, while generating profitable new stream of revenue for the business.
Syndication enhance profitability and rising free cash flow all contributed to lowering elements tangible.
Leverage ratio over the course of 29 too.
[noise], earning a triple B investment grade rating from S&P in the fourth quarter and paving the way for our company tissue bonds in the U.S. unsecured debt market in the first half this year.
And of course in 29 chain, we demonstrated our ability to support and service a rapid growth in deployment of a banker fees.
Our model.
We will apply many of the skills for developing the lessons for learning from this relationship as we embark on our enhanced go to market strategy in 2020 and begin our pivot to growth.
Well, we have much to celebrate does reflect on 29 gene I want to acknowledge and address our decision regarding 19th capital and the $194 million noncash after tax charge we recorded.
Yes, these non core assets in Q4.
This was a necessary step to bring closure to elements ill fated and costly investment in line to capital and to afford our executive team, 100% focus on the exciting future our core fleet management business.
Recall that we initiated a formal process to expedite the sale of 19 capital in the fourth quarter of last year.
Well the process attracted nearly 50 potential buyers and multiple serious expressions of interest we have been unsuccessful in securing sale on acceptable terms.
The ongoing sweaters and Steve deterioration of use classic truck broker conditions has had a meaningfully negative impact on interest and valuations.
This coupled with the price discovery insurance and the sales process resulted in our writing down the assets and shifting efforts to accelerate the run off of 19 capital's portfolio, including wrapping up the pace of liquidation, reducing the scale of operations and engaging with third party lenders.
Following the Q4 church actually its capitals assets, our values at approximately $133 million on our balance sheet and the value of 19 Capitals third party lender debt is 122 million.
The words, we don't see any further meaningful value for element in this asset.
Despite though also means that we've addressed some potential future associated financial risk to element.
I want to be clear following.
The charge against elements noncore assets in the fourth quarter has no impact on our 2020 adjusted EPS guidance a dollar to dollar five.
Perversely, our return on equity actually benefits from the write down the noncore assets and thus we continue to target between 13, and 13 and a half perception or we exiting 2020.
And while the write down increased our tangible leverage ratio as at the end of 29 team.
Ongoing successful execution of our syndication strategy.
With the power of our fleet management platform to generate earnings and free cash flow underpin, our confidence and elements tangible leverage ratio continuing its decides to our target six times ratio.
In fact absence, the charge against the noncore assets in the fourth quarter.
And excluding the impact of our non recourse warehouse credit facility dedicated to our model. We would have actually achieved the six times target on December 30, Onest 29.
Returning to the subject of our core fleet management business I'd like to comments on our progress on each of the three ways of opportunities that we've identified for our company.
As you'll recall the first of these waves is our transformation.
In the fourth quarter reaction to the incremental $29 million annual run rate pretax profit improvement initiatives, bringing our cumulative total to $131 million.
Initiatives actions as at December 31st 29 team improved elements operating income by $71 million 29.
And the same initiatives are expected to deliver approximately $98 million operating income enhancement and 2020.
Further having invested 130 million in our transformation program asset you around 29 team, we have up to $50 million more budgeted for one time investments in support of our transformation activities in 2020.
As we enter the final phase of transformation, which we refer to as building for the future.
Be happier with the incredible effort put forth by our organization.
We set the ambitious target up a $100 million and profit improvements action by the entered 2019, we surpassed that target three quarters midway through the year. So we raised the bar a little higher to $120 million action by the end to the error.
And then surely overachieve that stretch targets as well.
Pardon me our primary agenda 2020 will remain on completing the transformation of our core business and delivering on more consistent superior client experience.
I have no doubt, we will actually the remaining 49 million dollar some profit improvement initiatives this year and deliver a goodly mounted enhancement from transformation to our operating results and I look forward to solar Britons success conclusion of the journey and approximately 10 months time.
But we will not rest between now and that.
All of our accomplishments in 2019 put element in an excellent position to achieve our goals in 2020, but first for most of which is transformation.
But in addition to transformation, we have our second wave of opportunity continuing to swell and that is the combination of an expanded approach to syndication that we talked to 29 team as well as scaling with our large fast growing client are bought.
In the fourth quarter 2019.
We syndicated $964 billion of assets and in the process generated over $27 million revenue for our business.
As you know we syndicate, 100% of the leases we originated four about up and as noted in our Mdna. Our Q4 syndication volumes reflected an increase in our bottom activations.
It was to be expected given the seasonal nature of our modest vehicle deliberate needs.
We also expect to Q4 to bring a healthy demand for fleet assets from syndication buyers approaching their fiscal year ads and the market did not disappoint in that regard.
We filled some of that demand with assets and attracted a slightly lower price and we saw in the first three quarters of 29 team.
Nevertheless, it make good sense to lean into that demand given the relationships that were building with syndication market participants as well as a rapid de leveraging agenda has the anticipated U.S. Bob Barker offering later this year.
We continue to strengthen our understanding of the market for assets and to build our syndication capabilities.
Accordingly, syndication will remain a profitable source quality recurring revenue for element throughout 2020.
And not unlike 2019, you can expect that there will be degree of variability from quarter to quarter and syndicated asset volumes and yield.
But we continue to target syndication of approximately $2.5 billion of assets for the full year 2020.
We expect that syndication will be more heavily skewed towards our motto assets.
As the last of the 2019 orders make their way into 2020, Activations and we syndicate, 100% of those activations to both managed credit concentration as well as to maintain capacity on our balance sheet to accept further vehicle orders as that client continues to build out their fleet.
Our relationship with our model remains dynamic and rapidly evolving. It also represents an incredible opportunity for us to grow element not just financially but also operationally.
In our model, we're working with one of the most admired and the successful companies in the world.
Archery and learning from this client relationship over the course of 29 team has undoubtedly been a highlights of the year for our organization.
The third wave of opportunity we have identified for element is strong sustainable organic revenue growth atop a best in class operating platform solidified by our transformation.
As we detailed last quarter, we performed a comprehensive in debt study of the North American bark for fleet management services financing.
Late Twentys 19.
The resulting insights into segmentation penetration pricing and industry dynamics have informed our enhance go to market strategy, which were beginning to implement now in 2020.
She went up our strategy for results and element generating net revenue growth of 4% to 6% annually beginning in 2021.
Thanks plants of our growth strategy.
Our holding market share through best in class client retention.
Improving sales force effectiveness better management client profitability.
Converting self managed fleets and targeted market segments intent element clients, using our strengthened financial position and a compelling value proposition.
And leveraging elements market leadership position in Mexico, and Australia, New Zealand.
We encourage you to think of the six plank of our growth strategy as option value and that is the addition of our model like Mega fleets to our client roster.
Successful this per pursuit.
Could drive annual net revenue growth above the 4% to 6% range.
Subsequent to quarter end, we announced organizational changes that will position element to capture these growth opportunities you asked in Canada.
We have combined our enterprise and mid box commercial teams into a single commercial organization with a dedicated focus on day, identifying and winning new clients in the enterprise mid market.
Governments and Mega fleet market segments.
Under the leadership to be magic out it was appointed Chief commercial officer.
To be built elements high performing Mexico team on the ground up delivering double digit growth in that market over the last four years and solidify our company's reputation as the industry leader in that region.
Fortunate to have some of them up to be his leadership ability and business at coming in this chief commercial officer role given the importance of our growth strategy in USA and Canada.
The decision to create the CCL role was in part by many factors, including the decision of our SVP of enterprise sales chalk Parker to leave element for some well deserved time off.
John 25 year tenure with GE.
One of those years of fleet management.
Has been a real enabler for us and to that end up onto personally. Thank John first dedications element and for his many contributions to this company success.
This is a good time to highlight the growth momentum already demonstrated by our full year 2019 core results as compared to 2018.
21% growth in originations, 11% constant currency growth in assets under management.
14% growth in net revenue comprised of 2% growth in net financing revenue despite steady volumes of earnings asset syndication, 8% growth and servicing income and more than a six fold growth and syndication revenue.
As you know these growth pickers and the delivery of operating cost savings by our transformation program combined to increase core adjusted operating income by 35% in 2019.
And all of this is helping to further elevate the free cash flow product profile of our business.
Free cash flow increased 59% to $456 million and 29 team.
As I said last quarter.
Growing profile is likely to put our board of directors and the enviable position of having to consider capital allocation to options and they're not so distant future.
All that said I'd like to turn it over to be don't to provide some greater detail on our financial results.
Thank you Jay and good evening, everyone continues to be with you to talk through Holyfield, a strong set of Q4 2019 operating results.
We're going to close an outstanding fiscal 2019 for element.
Positioning the company to continue the momentum into 2020.
Let me start off by walking through the key elements of our Q4 core adjusted operating income TNL.
As noted in our disclosures our Q4 19 core fleet adjusted operating income was 142.6 million or 24 cents per share.
Presented an increase of 43.6% versus prior year and 9.9% versus prior quarter.
Full year basis, we increased our core adjusted operating income by 134 million to 521.1 million or 88 cents EPS.
We delivered strong results across all lines of the PNM.
One of the first place as we start and we look at the underlying trends and health of our business is the performance of our assets under management.
It's a key barometer of future earnings momentum.
Fleet management finished the year with 16.7 billion assets under management, an increase of 1 billion or 6% from 15.7 at December 31st 2018.
On a constant currency basis, the year over year increase was approximately 1.7 billion or 11%.
As it relates to Q4 activity specifically are you EPS grew by 540.6 billion or 700 million on a constant currency basis.
Represents a 3% increase over 2019, Q3 levels or 4% on a constant currency basis, and our second consecutive quarter.
Meaningful expansion.
Originations in Q4 aggregated to 2.2 billion, a 22% increase over the Q4 2018 levels and 7.5 0.7, excuse me, 5.7% increase from our strong performance in Q3.
This brings total originations were 29 team to 7.85 billion at 21% increase over 2018.
But does this tell us.
Significantly improved client retention in the us in Canada.
New client wins in all geographies and our ability to scale their capabilities and execute on the opportunity provided by our model.
Section five of our supplementary information document provides a more detailed view of the quarterly progression about both assets under management and net earning assets.
Let me now turn to the Corp. CNL items.
Core net revenue in Q4, 2019 was 257.6 million, a 16.6% increase versus prior year and a 5.3% increase from Q3.
Coordinator core net revenue for 2019 was 988 million up 123 million or 14.2% 2018.
I'll now I'll touch on each of the three components of our core net revenue line financing service and syndication.
Net financing revenue of 101.3 million in Q4 increased slightly more than two per cent compared with both prior quarter and the prior year.
This is an impressive result.
Particularly when one takes into account that our average net earnings assets declined by 241.7 million Q3, 2019, and 748.7 million from Q4 20 team trace and of course, the increased syndication activity supporting our balance sheet strategy and the targeted.
Suction attends delivered.
The resulting NIM increases of 13, Bips and 26 Bips from Q3 29 heating.
Q4, 2018, respectively are reflective of the continued growth of assets and higher yield geographies within our portfolio as well as the very beginning of our work towards better manage client profitability.
On a full year basis, our net financing revenue was 405 billion an increase of 7.6 million from 2018.
Let's move on to servicing income.
Net servicing income for Q4, 2019 was 128.8, representing an increase of 6.6 billion over Q3 2019.
Mainly driven by higher revenues across multiple product as well as the impact of seasonally lower maintenance entitlement volumes in Q3 2019.
Year over year performance showed similar growth of servicing income excluding the seasonal impact an increase of 9.3 million or 8% over Q4 2018 across numerous projects, resulting from continued progression and transformation initiatives as well as organic growth in our us in Canadian business.
We continue to be very pleased with our progression in service income.
Finally, our third revenue component.
Syndication volume.
Volumes increased again this quarter to 964 million given us a total volume of 2.9 billion asset syndicated 2019.
Jay mentioned, we continue to see healthy demand for these assets translating to 27.5 billion in syndication revenue for Q4, 29, teed up 19.3% from Q3, 2019, and bringing us to a total syndication revenue.
$89.6 billion for 29 team.
Syndication activity levels will continue to be subject to quarterly variability, particularly in Canada, the seasonal nature of our modest vehicle delivery needs.
I'd characterize Q4 levels and on the high end of the spectrum.
Accordingly, we expect to see a reduction of syndication revenue in Q1 2020.
I'd like now lets turn your attention to our court Pete expenses and I'll direct you to section two of our supplementary.
Our adjusted operating expenses in Q4 aggregated to 115 million for the quarter, a decrease of 6.6 million from Q4, 2018, and relatively flat compared to Q3 2019.
The savings over last year, primarily due to say transformation offset by investment and strategic growth areas Armada, Mexico and syndication capabilities.
Similar to a full quarter adjusted operating expenses declined by $11 million with transformation benefits, partially offset by growth investments as well as some FX headwind.
Our transformation efforts I simply couldn't be more pleased and huge kudos to our entire team at element by the end of 2019, we had actually in a 131 million over that initiatives 11 million more than our increased target of 120 months.
Our core operating expenses benefited incremental $3 million from transformation seven savings in Q4, bringing our full year total opex savings delivered by transformation to just under $40 million.
With 31 million of additional operating income improvement delivered to net revenue for the full year. That's the 71 million total cooperate and spent delivered by transformation in 2019.
Please see section one specifically of our supplementary for a breakdown on this path.
Jay spoke to our key balance sheet metrics again, we have made and we'll continue to make great progress through 2020 and achieve under our desired tangible leverage of sub six as well as access the USA secured debt market on the back of strong investment grade ratings across our suite of rating agencies to 7.11 times reported tax will leverage.
Year end of course reflects the impact of the additional 19th capital rates had recorded in Q4, the noncash after tax charge of 194 million reduces our tangible equity and in a night in isolation had 0.6 times upward impact on taxes and leverage also as noted in section six of the supplement.
The impact of the non recourse debt that related to our modest amounts to a further zero point fivex increased attached with leverage.
Jay spoke at length about 19th capital and the affected our results.
Pre tax charge of $260 million is reported on its online in the statement of operations as impairment on 19th capital and of course is the main driver our lower IRS net income for the year and our IR for us net loss for the quarter.
The after tax impact of this impairment is 194 million also I want to direct you to footnote seven of the financial statements, which gives you more details on the assumptions used in the calculation of the impairment loss.
Let me also make mention of how we're tracking on our onetime transformation related investments in Q4, we recorded $29 million of onetime investments, bringing the full year 2019 totaled 91 million and Thats, a 130 million total since the beginning of transformation.
Q4, onetime transformation and investments are predominantly professional fees to our transformation partners and employee incentives associated with meeting transformation targets.
Before I hand, the call back to Jay and consistent with my comments on last quarters earnings call.
I want to reiterate three other very important metrics.
First our consolidated return on equity was 12.6% for Q4, excluding the impact of 19 are all you would have been 12.3% for Q4, which is aligned with our expectations and we remain on track to achieve our targeted range of between 30 to 30 than they have exited 2020.
Secondly, consolidated free cash flow set up in section four of our supplementary information document amounted to 125.2 million in Q4, an increase of 35.6 million or 39% year on year.
Finally, as Jay indicated there's no change in our 2020 bps outlook, we expect to generate after tax adjusted operating income per share in the range of one dollar to dollar five.
But that jail hit back too thanks.
In 2019, our organization demonstrated its ability to set ambitious targets focus on execution and over deliver for our stakeholders.
2020, we walk to bring the same energy and focus to our endeavors, we will complete our transformation program, having four to five elements industry, leading operating platform.
We will further strengthen in viewed leverage elements investment grade balance sheet by continuing to syndicate core assets and reduced our tangible leverage ratio as well as by issuing bonds in the us unsecured corporate debt markets in the first half a year.
The proceeds of our issuance will allow us to retire convertible debentures due in June 2020 replaced with a more economical source of financing and thereby lowering our overall cost of capital as well as improving liquidity for the long term.
Finally, we will begin to pivot to growth through 2020 wrapping up our clearly articulate a plant to deliver 4% to 6% net revenue growth annually beginning in 2021.
Now, it's my pleasure to open the floor to your questions operator.
Thank you Sir we will now begin the analyst question and answer session to join the question Q You May Press Star one on your telephone keypad, you will hear a tone acknowledging your request.
If you are using a speakerphone. Please pick up your handset before pricing any key to withdraw your question. Please press star Tim We will pause for a moment as colors join the queue.
Our first question comes from Jeff Kwan with RBC capital markets. Please go ahead.
Hi, Good evening on my first question was just around the customer wins. He made some references to it on the origination side, but are you able to kind of clarify did you have any new customer wins in.
Q4, and if theres any color you can provide around that.
Then on Armada and can you comment on the growth potential beyond what I think the initial order was kind of at around 20000 vehicles.
Hi, Good evening, Jeff.
In terms of Custer customer wins, we enjoy good wins in each of the five countries in Q4 and.
All the while experiencing customer retention that more traditional with rates and so as a consequence.
Our net revenue gains in Q4.
Were were impressive and strong and.
And creating nice momentum as we think about 2020 and this type of growth.
Regarding our model.
Again as you well know we operate under strict confidentiality agreement with that particular client. So we have to be very discreet in terms of information that we share the expectation that we have is that this is a fast growing organization that is looking to build out a very very.
Sizeable.
Fleets of delivery vehicles and.
As their primary conduit for accomplishing that.
We expect to be quite busy at 22008 fulfilling that particular needs.
Okay, and then on the 19th capital can you talk though like where the write down is today.
Relative to say like the highest kind of expression of interest value guides and whether or not the value that you got it is probably somewhere in salvage value our wholesale and just trying to understand what kind of has to happen.
If you had to take another write down.
So.
As we.
Hinted in our Q2 results call.
We have begun to see the deterioration and market demand and pricing for class eight used trucks in the United States on and.
Werent quite sure whether this was an aberration over the summer months or whether this was beginning or something and.
As a gathered momentum and took full route in Q4, it became very obvious to us.
Systemically.
Demand and shifted and was not likely to come back and.
Then a strong fashion anytime soon.
And coincident with the price discovery that we were able to.
Have as a consequence of the sale process, we had a clearer view in terms of both the market demand and pricing for these assets.
Having.
Undertaken the sale process having received.
Strong interest in yes, not being able to translate that into a sale transaction at a value that we thought was appropriate toward the assets.
We've made the difficult decision to move to an accelerated wind down of the business and to take the charge that we disclose pork for that.
Resulting valuation on our books of $133 million represents our view of the liquidation value and then accelerated wind down.
Mode and so.
It is reflective.
Of the difficult environment that we see in the marketplace and the expectation that that challenged market will remain.
Through the liquidation process.
Okay. That's helpful and if they can just ask one last question is there any sort of guidance you can give on syndication levels expected for twentytwenty, even ballpark and just broadly speaking on the strategy is it obviously, our Matt as driving that but to the extent that.
You know.
It would be used for where you are exceeding single name limits for your ABS or is it possible that might evolve into more of a provider.
Funding source in terms of increasing the funding diversification.
So in terms of syndication we would expect.
Plus or minus.
$2.5 billion some volume.
2020, it will skew a.
A little heavier towards our motto given.
The orders that we received in 2019 that have yet to be activated so it will.
Well I have been more pronounced in terms of our Nevada makeup of the syndicated vehicles and any year thereafter, we would.
We currently expect that would be roughly a portion 50 50 between Armada and.
And the core business.
In terms of.
Syndication for us.
The whole Genesis behind syndication was our model.
Given the sizable order intake that we have given.
The production and outfitting periods in which we need to.
Hold that asset.
We're just not in a position given the sheer volume of a program that his vision by them.
Not in a position where we can take.
The exposure.
Holding that asset on their books through our securitization and as a consequence I've made the decision to establish the syndication program.
That allows us to sell the related asset to a third party of take it off our books, which then gives us the opportunity to.
Except orders for new production and to fund through the non recourse facility kind of the work in progress that which has been drafted by the OEM, but yet has not been built true to our motto and lastly, we do see this very very much as I call.
Tree source of funding for the business.
I think the team has done a brilliant job of building out our secured securitization capabilities syndication gets added to that and once the inaugural issue of a U.S. debt instrument that will give us yet another funding source business and where we come back to our building.
To put forth a compelling value proposition to our clients and the ability to deliver.
Consistent access to cost efficient capital, we see syndication as say as a means of facilitating that.
Perfect. Thank you very much.
Our next question comes from Paul Holden CBC. Please go ahead.
Yeah. Thanks.
Questions on the net interest margin to guard.
Because it wasn't notice noticeable increase this quarter. So I guess the first question is regarding the sustainability of site you pointed out that it was partly due to higher margin business and non domestic markets is that can make sustainable trend.
It is.
Okay.
And then normally when we seen how large amount of in term funding that has had a negative drag on then NIM.
Is that correct characterization and therefore once fees.
Our motto, where host numbers sort of normalize NIM could expand even further and if that's the case when should we expect their MADA warehouse.
Our income funded volumes can normalize.
So.
Not sure of that relationship that you speak out.
So let us.
Maybe take that went away for a reflection of consideration, but it's not an observation that we've made.
And.
As you can appreciate and if you go back a couple of Investor iterations of our Investor presentation deck, where we.
Kind of map out on a time horizon.
So the continuum, whereby we accepted in order.
Based on order with the OEM that.
Vehicles manufactured grossed up trading.
Gets delivered and then it is in the billing cycle for full month.
The forward intelligible for syndication when you look at that period of time.
The minute were drafted.
We have an interim funding obligation as it relates to our model that's funded on a non recourse basis through the funding facility for all of our other business that is funded.
Based on our own working capital and so.
We would expect as the organization continues to grow and enjoy success that interim funding will continue to grow.
And we will work with the Oems and the outfitters to try and condensed size amounts of time.
Takes to kind of work its way through that aspect of the time continued but.
The interim funding is very much.
Like originations.
Precursor of growth in terms of.
Assets under management.
Okay.
Let me ask the question piece of the question, where the differently in terms of the interim funding you are.
Paying interest on that in term funding, but not collecting any revenue against that is that correct.
That's not correct.
Okay. Okay.
Remind that next question 19.
Capital.
So the expected timeline front unwinding these assets if I recall correctly originally was roughly a three year process.
Now that you said, you're going to accelerate that process, we should assume something less than two years given a year is already passed the fact is that fair.
Yes and.
We would expect by the end of this year and certainly by Q1 to 22.
21, but we will be complete.
Good.
And then just in terms of your tangible financial leverage and achieving that target of less than six is that still.
And attainable target by end of 2020.
This time.
Again unexpected.
Set back in terms of 19th capital.
But.
As you look at the impact I think it was better part of 62 basis point, except by times.
Have a drag so the 711 would have been closer to six stock five.
Terms, so power tangible leverage ratio.
So when we look at our plants for Twentytwenty the cash flow.
Being generated by the business they the profitability of the business coupled with.
The syndication program, yes, the six is still attainable and certainly our goal to reach that level.
Okay, Great and just one last quick one from me with C.
122 million a third party debt associated 19th capital is there any.
Recourse to our man it.
If the asset sales to not fully recover that 122.
There is not.
Okay. Thank you.
Thank you Paul.
Our next question comes from Tom Mackinnon with BMO. Please go ahead.
Yes, thanks very much.
So when you look at your tangible leverage target to six times for the end of 2020 does that including the that warehouse stuff with the Armada or is that generally the higher number that we'd be looking at excluding that.
It is the higher number excluding yet so it is the under adjusted number if you haven't adjusted number the one that over seven right now correct and that is correct and that so when you do hit your target.
What are your plans here, you've got to becoming a free cash flow.
You know kind of a high class problem to have but how should we be thinking about the company post.
Hitting that goal.
Yes so.
That's a capital allocation.
Vision that I referenced the board will have the.
Enviable position.
Timing on.
The next couple of quarters on fault.
The piece that I like to remind our investors is that.
We're still in the midst of a wholesale transformation of the business and.
The good news is we're making tremendous progress and we're getting tremendous insights in terms of the business, whether that's a deeper.
Richer understanding of all believers that are available to us to improve the client experience on the profitability of that experience for our investors.
Through to our model and dealing with someone up that scale entering an industry through to syndication and all the new learning centers are coming as we build out demand I mean, we are the largest constituent end the fleet syndication marketplace or building out demand for this.
We are qualifying supply for this summer for learning to better.
Manage spread realization through the process. So that's all to say for all the progress that we've made we're still learning, we're still gaining insights and so.
Yes, so much like Weve approached everything to this point in time on we advance we cultivate those learnings and then we use the the insights from those learnings to sharpen our focus to sharpen our direction and much more being the same in terms of capital allocation. So as we.
Again been sure.
The syndication as we continue to grow with our model as we wrap up the transformation.
And as we begin this all important pivot to growth every single one of those.
Different ways is going to help inform.
What we have available in terms of capital and how we might best want to deploy that capital.
To the benefit of our shareholders.
Thanks, and we needed originations wins in the quarter, where any though.
They just.
Existing client wins from other.
[music].
Fmcs door.
What degree re able to sort of penetrate the self managed fleet market.
Yes.
So it would be more along the lines of renewals and steels as opposed to.
Broadly speaking self managed.
Self managed to Canada than Us and Australia, New Zealand.
Is it exactly what we're talking about in terms of this pivot to growth and expect us to build out the capabilities.
Thanks.
Salesforce and sent US think both salesforce training structure et cetera.
Throughout 2020, as we begin this pivot to growth plan and capitalize on this transformed.
Strengthened operating platform.
Mexico Us alone exception Mexico.
Pivot to growth and and in particular too.
Self managed fleet acquisition.
A number of years back and they continue to.
To do just wonder swings in that marketplace.
Really is quite impressive and again as we've talked about in the past. It is absolutely informed our thinking in terms of the are so the possible in other geographies.
Okay. Thanks in the last one is you mentioned you'd be tapping the debt market in order to.
Fund some of the that converts that are coming due in June.
Should we be thinking about that like half a quarter all two thirds.
Oh, yes, no we would want to essentially to take out the entirety of.
Which now is around both $567 million so convertible debentures.
We want to take up the entirety of those and we'll do so through some combination of internally generated cash flow and proceeds from they.
General Us partnership.
Right, but no more convert.
No no no no no it listen to it as we've talked before we do not see convertible debentures as.
Appropriate for our structure on a number debenture, it's not the least the which is cost basis. So.
Welcome to spread differential in terms of unsecured U.S. bonds versus convertible debentures pretty straight forward decision for us given our investment grade status.
How much would be sub debt versus the free cash flow.
Okay by 67.
TBD on that I think thats, just when we get out there into the market well a lot of things that back in the market and we'll make a decision at that particular point in time based on a number of variables.
Okay. Thanks, very much thanks, Tom.
Our next question comes from Mario Mendonca with TD Securities. Please go ahead.
Good evening two good questions. One last quarter you were helpful in helping us understand how much they amount of expenses.
Associated with bonuses and other variable comp that were treated as below the line items were there any missouri in a material amount. This quarter you can highlight.
Yes, Mario Thank you.
No 27 into financial statements gives you the detail a little in respect to the breakdown of transformation and there you will see US note that the effectively the incentive component of the 91 million total.
Transformation costs.
In fiscal 19, 14.2, where the the amount of.
Employee incentives and 5.7 of that would have been Inc. Q pharma.
Okay. That's very helpful and then.
Next question.
Thats it thats, a tough one because I I'm struggling to think through and hopefully can help me the securitization market for the the for fleet was proves to be awfully resilient.
During the financial crisis, and that's going way back.
What I'm struggling with is whether the syndication market for fleet.
We will exhibit the same started resilience if we encounter.
A fight financing strain that we saw.
Hey back in 2008, or 2009, or maybe something less relevant less less intense than that.
It's sort of a lot of like that those lines can you describe.
Quantify how much of the fleet syndication market. The ZFN currently account for.
Yes, I can understand why you're having a difficult to sustain the so because we encountered at the same difficulties as we began this exercise basically a year ago low little more than a year ago and.
What you probably would have found to set the the us market for fleet Syndications was roughly 15.
Billion.
Dollars.
Excuse if a $2 billion a year.
And.
Yes.
We use a number 20 billion Canadian.
And as you think about the size of that market and.
And what it is comprised of.
When we're out there doing.
The better part of 3 billion Canadian.
And let's assume that that $3 billion was additive to the 20 billion that already exist that you've got to market size of roughly 23 billion reconstitute.
Call it eight from for that market.
Right.
And as we studied that market and looked at.
The resiliency of that market through the economic downturn, what we did see us some pull back in terms of the size of that market.
What we couldn't determine was whether that was supply or demand related so did demands fall away.
Or did supply fall away, we don't know.
So our approach here quite simply is we are going to grow the size of the market, we're going to diversify.
The constituents within the markets and we are going to.
Ensure that our product going into that market.
As well know well received in highly valued such that if there is any degradation there will be a flight to quality hours for the.
The the product that will be still sought in that marketplace. Obviously.
Through securitization through the rest bond market through our senior mine, we will have alternative facilities in place should we need to bridge any.
Market demand deficiency in the short term.
But it's our belief that our reputation the quality of our instruments and and our unique.
Hey system that we have that loss after all the administration.
The underlying leases.
Makes us a very very attractive.
Product in that marketplace of us, we'll be able to sustain.
Demand throughout every cycle.
I was very helpful. One other thing if I could.
Not sure if someone asked this already I might've missed it.
This is.
What I'm glad I think a few of us refer to as the syndication margin retake the syndication revenue divided by the assets that were syndicated that number it was lower this quarter and we've seen in the past.
Is that a direct reflection of having syndicated far more armada assets in the quarter than in prior quarters.
Yes, so actually the to 85 that we had in terms of yield in Q4 was actually nearly bang on the Q2 yield.
So it's not other market now in fairness, we would have thought Q4 would have yielded higher because of the.
The value of the tax benefits and and third appeal and usability.
In terms of net present value to the investors. So it was a little lighter than what we'd anticipated.
As we signaled at the outset of the program.
It will vary quarter to quarter based on credit quality interest terms.
They are remaining asset lives.
They all factor in system, so to your point mix matters, and maybe with that I'll hop I should leave as baby.
Yes.
Okay. So it's not clear whether that's our modern we'll just have to see how that plays out over time is out there.
That's fair.
Okay. Thanks.
Thanks.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant evening.
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