Q4 2020 Element Fleet Management Corp Earnings Call
Yeah.
[music].
Thank you for standing by this is it.
Conference Operator, welcome to the element fleet management fourth quarter, and full year, 'twenty 'twenty financial and operating results conference call on.
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Element wishes to remind listeners that some of the information in todays call includes forward looking statements.
Statements are based on assumptions that are subject to significant risks and uncertainties on the company refers you to the cautionary statements and risk factors in a tier and in most recent MD&A as well as its most recent Aif.
For a description of these risks uncertainties and assumptions.
Although management believes that the expectations reflected on the statements are reasonable it can give no assurance that the expectations reflected in any forward looking statements will prove will prove to be correct.
<unk> earnings press release financial statements M. D N a supplementary information document quarterly investor presentation and today's call include references to non <unk> measures, which management believes are helpful to present, the company and its operations in ways that are useful to investors or we can sell.
The Asian of these non <unk> measures to EIOPA risk measures can be found in the MD&A I would now like to turn the call over to Jay Forbes, President and Chief Executive Officer of element. Please go ahead.
Thank you all for Eagle.
Thanks to all of you for joining me Vito and our incoming Chief Financial Officer, Frank for hurdle on the call. This evening.
And which we intend to discuss settlement fourth quarter and full year 2020 results for the many successes we've achieved as an organization in 2020.
Already progress from the first two months of 2021.
And our outlook for the balance for the year and beyond particularly with respect to element growth strategy, our return to capital to our shareholders and the opportunity that presents itself in the form of electric vehicles and the gradual penetration of our clients' fleets over the next decade.
Before I begin discussing our results I do want to acknowledge the continued presence of COVID-19 in our communities and express my heartfelt gratitude on behalf of everyone at element fleet management to the health care professionals from so many other essential workers, who continue to brave the front lines from the pandemic.
In advance for global vaccination effort.
[noise] well element business has not gone unscathed by the economic fallout from COVID-19, I think our financial and operating results for 2020 inclusive of the fourth quarter truly bore the resilience of our business model and provide a healthy.
Starting point for our profitable revenue growth ambition for this year.
Elements growing base of over 5500 loyal Blue chip clients is diversified across five countries over 700 industries on approximately 1 million vehicles under management.
The services we provide.
All of those clients and their vehicles are essential mission critical to the client's operations and enterprise jet.
Generating and sustaining revenues and fulfilling their commitments to their customers and stakeholders, the quality and diversity of our client base and the integral nature of our assets and services underpinned the strength and durability of all of its 2020 performance against the backdrop of this global pandemic.
In the fourth quarter of 2020 for our company delivered $132 million of adjusted operating income.
Two 4% increase quarter over quarter and equivalent to 23 per share.
We delivered a 53, 4% operating margin 40 basis point of expansion quarter over quarter, and 980 basis points of improvement over Q4 2018 back when we were setting out on this transformation journey.
We also delivered a 14% pre tax adjusted return on common equity 10 basis points better than last quarter is 320 basis points better than two years ago.
And we also delivered 25 of free cash flow per share.
8% increase from two years ago in Q4 of 2018.
For the full year 2020, we generated 85 of adjusted EPS and $1 to a free cash flow per share just one and three <unk> respectively below our same full year 2019 results in spite of the weight of the global pandemic.
Don will walk you through all of our results in greater detail in a few minutes.
When I sit back and look at the organization's accomplishments in 2020 for countless highlight some milestones that my leadership team and I are proud of.
A handful of those.
Represent overarching themes that really stand out for us.
The first is the pervasive positive influence of our transformation experience on element and our people.
Over the course of 'twenty seven months of transformation.
Made much needed investments in our organization, we retooled and automated hundreds of business processes streamlining systems consolidating policies and procedures and we bolstered our talent roster in the U S and Canada in particular on.
All to ensure that we deliver consistent superior client experience each and every day.
Excuse me.
In the process on this transformation, we also improved our employee engagement levels as measured by our comprehensive annual employee survey over 90% of our people completed the survey and element registered in overall employee engagement score of 86%.
Which is a 700 basis point improvement over the same score at the end of 2019.
Notwithstanding a challenging multiyear transformation agenda and in the midst of a global pandemic I attribute this remarkable improvement in our People's engagement to our HR teams embrace of transformation principles of rigor is led by our Chief people Officer Jacqui Mcgillivray.
Today element is delivering a consistent superior employee experience to mirror the caliber of services for delivering to our clients and this is an example of a very positive influence of transformation.
For the ethos of continuous improvement.
That was a bedrock of our transformation program is one of the gift that will keep on giving at element.
During the fourth quarter element center of operational excellence finalize the implementation of our model to support our business going forward.
We developed a team of dedicated resources to drive continuous improvement at <unk>.
Staff was 12 experienced black belts. They leads large complex projects and supportive elements continuous improvement program and they are aligned across the U S. Canada, Mexico by business area with 25% of the team dedicated to element strategic relationship operations, which includes our <unk>.
Model.
Employee engagement and continuous improvement are just two of the many examples of the positive influence our transformation program has had within element.
Of course, the most obvious impact of the transformation is the program's achievement itself, who would've thought back in the fall of 2018, when we announced our $150 million of annual run rate profitability improvement that we would complete our journey in December 2020, having.
Actually.
<unk> $208 million of profit enhancing initiatives.
This represents a 38% over achievement of this original goal.
What's more $133 million or roughly two thirds of our action value was delivered into operating income in 2020.
When we add to the 700 $777 million of profit enhancement delivered in 2018 in 2019.
Element transformation has improved our operating results by a total of $210 million over the last three years more than covered the $208 million of one time investments that we've made in support of the transformation.
Well. Thanks go out to all 2500 of my colleagues a special Callout is required for Jim Halliday, our Chief operating officer, who set the tone and pace that allowed us to excel as we drove to that consistent superior client experience.
A second theme of accomplishment that stands out to me reflecting on 2020.
Is the continued strengthening of our investment grade balance sheet and the maturing of our capital structure.
We finished the year at 574 times tangible leverage achieving our London stays at sub six times target, while repurchasing 762000 common shares for cancellation in the months of December under our normal course issuer bid.
Over the course of 2020, we exercised two $4 billion of liabilities from element balance sheet, bringing tangible leverage from seven <unk>.
At year end 2019 to where we sit comfortably today below our six times soft ceiling.
All while maintaining shareholder equity essentially flat.
We retired our $567 million of convertible debenture.
In Q2 issuing our inaugural U S investment grade senior notes and supportive same we redeemed our series G preferred shares in full at the end of Q3, eliminating our most expensive series of preferred equity and in Q4, we strategically right sized approximately $2 billion for.
Balding credit facility capacity and wound down the remaining $500 million of capacity in our non recourse facility all of which will materially reduce our cost of funds in 2021 and beyond.
In addition to a material derisking of our balance sheet. These deleveraging efforts will contribute to element net financing revenue growth as we lower the cost of funding our vehicles and expand our debt financing margins.
By way of example, net financing revenue.
It was $4 million higher than Q4 2020.
Then it was in the first quarter of 2019 and that is in spite of a $2 3 billion dollar lower average net earning asset base.
As we advance our capital lighter business model ambitions in 2021 and beyond you can expect our balance sheet to continue to strengthen and mature to remain investment grade and to be available to support our clients' growth ambitions.
The third thing that stood out to me in 2020 as elements preparedness and passion for growth.
In the U S and Canada, we readied our commercial organization in the first half of 2020 and enjoyed some quick wins in the second half of the year, including self managed fleet proof points and competitive wins over fellow fmc's in both countries as well as long term renewals of several significant.
Element <unk> client contracts.
Under the leadership of Davita magical our U S. Canadian commercial team has leaned into the aggressive pursuit of profitable revenue growth across these two countries and we are quickly building up a high quality pipeline in our domestic markets.
Put this into context consider that 50% of the pipeline for the U S and Canada today has been populated in the last six months alone.
Subsequent to year end we.
We have two significant client wins, driven by the U S and Canadian commercial teams to share with you the.
The first is actually a global mandate, one by element and our partner members of the element our Bell Global Alliance.
We were awarded the fleet business on the global Energy Technology company in the oilfield service industry in all five of elements countries of operation and 16 of 17 countries served by our partners at our volume.
This win will add approximately 3900 vehicles, representing approximately 12000 service units to element platform.
In the U S and Canada are slices of that pie represent a combination of renewed vehicles already managed here by element and the addition of approximately five times more vehicles to our domestic roster all of those having been previously managed by another FMC.
Our second significant client win in the first two months of this year.
Owner of one of the largest and most diversified portfolios of energy assets in the U S.
Client chose element is for new fleet solutions provider and will transfer responsibility for servicing approximately 5500 owned vehicles to our scalable platform from another FMC.
This latter win represents approximately 40000, new service units for element.
Without a dollar of capital being advanced which is in keeping with our designs on a capital light business model.
Youll have read my letter to shareholders earlier today and in doing so learned more about the different stages that our commercial teams are at in Mexico, and Australia, and New Zealand and Theyre likely contributions to our 4% to 6% Glu.
Global net revenue growth expectations for 2021.
In short element, Mexico under the leadership of men well to mail continues to enjoy seemingly.
Demand for our financing and service solutions in the country for approximately two thirds of the fleets are in our wheelhouse in terms of self manage target opportunities and on a market in which our brand as the dominant market leader.
Q4, 2020 saw the highest quarterly tick up of services in the year by element, Mexico clients with contracts for more than 6000 service units being initiated.
Latest highlight on the quarter was the extension of our maintenance services program too.
The entire fleet of one of Mexico's largest telecommunications companies.
In Australia, and New Zealand.
We previously disclosed custom fleet has won a number of what should be considered mega fleets by local standards in 2020 in the form of each of Australia's two leading supermarket chains as well as one of the country's largest not for profit organizations.
Aaron Baxter and his leadership team and put all the right pieces in place to accelerate their revenue growth trajectory in 2021 and as of just yesterday. We are another proof point as to the growth opportunities available to us in that market.
Custom please and origin energy.
<unk>, leading energy retailer are working together to provide origins business customers with a one stop shop for electric fleet fleet vehicle procurement management and charging called origin 360 <unk> fleet.
Custom fleet will provide origins business customers were fully managed electric fleet vehicles, and accompanying services, including reporting and insights to help optimize fleet performance as well as emissions reductions.
These will be bundled with origins charging infrastructure.
Carbon offsets and energy solutions, taking the complexity out of making the switch to EPS for <unk> business customers with fleets in Australia.
I know that many of you are hoping to hear more about electric vehicles, and our promise to return to that topic towards the end of our call. However, right now I'm going to turn the floor over to Vito to discuss our 2020 financial and operating results with you.
If you don't.
Thank you Jay and good evening, everyone I'm pleased to be with you to talk through what we feel are really solid set of Q4 2020 operating results bringing.
Bringing to close what I would describe is an incredibly resilient fiscal year 2020 for element.
Setting the stage for profitable revenue.
Our scalable platform in 2021.
Before I dive into the quarter Q full year 2020 highlights from my perspective on some of these are highlights because they are against the backdrop for COVID-19, and all of the economic uncertainty.
We're done.
First of all on a full year basis, our adjusted operating income in fiscal 2020 amount of debt $501 million.
<unk> only a two 4% decline versus fiscal year 2020.
This is remarkable and demonstrates the earnings power embedded in the business model fueled by the benefits from the transformation program.
The business generated $449 million in cash available for debt.
Noted on the back of October increase on global incidence CIB announcement, we launched into our share buyback program.
For the ANZ in Mexico grew all three net revenue adjusted operating income and assets under management in 2020.
Year on year decreases in service revenue and financing revenue on a full year 2020 for bulk from 3% with service revenue decreasing only two 3% from 493 million to $482 million and net financing revenue down only one 3% on.
$411 million from $406 million for 2020 on.
On 12% more net earning assets tracing to our capital lighter model.
On the credit and collection side of things are volume has stood up beautifully notwithstanding the economic pressures on the uncertainty that the pandemic has created.
On a 3% reduction from the delinquent accounts balance at year end 2020 versus 2019.
On a 52% reduction of impaired receivables at year end 2020 versus 2019 for op.
<unk> from $53 5 million to two.
$25 five zone.
And perhaps most notable is the absolute quantum of charge offs net of recoveries for 2020.
Only one $6 million.
<unk> volumes on that so many attributes of our business fundamentals.
Moving the diversity and credit quality of our client fleet and the underlying quality of the asset base essentially use of these assets.
Let's take a closer look at our Q4 results.
Element adjusted operating income for the quarter was $132 1 million equivalent to <unk> 23 on a per share basis, which is a two 4% on $3 million increase over Q3 2020 results.
On a four 6% or $6 3 million on decreased from Q4 2019.
Servicing income was the only revenue stream can decline quarter over quarter on on absolute basis declined 664% or $8 million from Q3 2020.
However, excluding the $8 8 million of accelerated our mono servicing income that we draw your attention to last quarter servicing income group.
Point 8 million quarter over quarter.
On a year over year basis servicing income in the fourth quarter declined by nine 3% or $12 million from Q4, 2019 and that will be the overall vehicle usage levels, which you can see some details on and our supplementary information document.
Net financing revenue increased three 1% or $3 2 million loans quarter over quarter. Despite a $2 one reduction on net earning assets in this indication.
The primary driver on the net financing revenue increases interest expense management and growth in net earning assets in Mexico in particular.
Net financing revenue increased $6 2 million year over year, which represents a particularly strong performance given the net earning assets from that period decreased by 14%.
The increase is mostly attributable to lower cost of funding.
Essentially reduced liability by $2 4 billion in 2020, and as Dave mentioned also moving into the cost of financing the remaining debt.
On this.
Special Kudos to the great work on Disney Kaufman, our EVP treasurer and his talented team. It's also worth calling out the continued growth in net earning assets index.
In the U S, where syndication program is growing and strengthening we syndicated $619 million on assets in Q4, resulting in $23 9 million of syndication revenue.
And this made a material contribution to our balance sheet deleveraging in the fourth quarter.
Syndication revenue grew 57% or $8 6 million loans quarter over quarter and declined 13, 3% from $3 $7 million year over year.
Yield improvement with the most significant driver on the quarter over quarter syndication revenue growth.
Also improved year over year for the fourth quarter.
Syndication revenue benefited from an improved rate environment in Q4, meaning lower industrial hurdle rates over the course of the quarter and increasing demand for element of assets.
Feeding our syndication and net financing revenue streams and to a lesser extent servicing income are on originations, which improved quarter over quarter in Q4.
We originated approximately $1 $4 billion on assets in the quarter, an increase of $107 5 million or eight 4% versus Q3 2020.
U S and Canadian originations increased by four 7% quarter over quarter and this growth was in part driven by unfilled orders and pent up demand tracing back to Q2 2020 on.
Certain OEM production facilities experienced closures.
Although Q4 2020 origination volumes in the U S from can that do not yet represent a full catch up on origination volume the need and the free by the consequences of COVID-19.
Moving on the right direction.
I'll take you back to Q2 2020 originations in the U S and Canada. They were approximately 44% lower than the same quarter in 2019, excluding on mono volume.
Comparison, Q for 2020 originations in Canada U S on our own approximately 10% lower on the same quarter prior year again, excluding our motto.
So on material improvement on origination volumes in the U S and Canada in the second half of 2020.
ANZ origination volumes increased four 7% quarter over quarter we.
<unk> continues its recovery from the impact from COVID-19.
We are also beginning to see the positive impact from our global growth strategy being executed in ANZ, where our commercial efforts are six to nine months ahead of the U S and Canada.
Finally, with respect to originations and discussed last quarter one of the <unk>.
Economic impact of COVID-19 will be more muted in the first half 2020 on Mexico business near experienced setbacks.
In terms of originations volume and.
And as we expected originations in Mexico Congo in Q4.
<unk> 46, 7% from Q3 levels.
On a year over year basis fourth quarter originations were $13 five per.
<unk> higher in Mexico in 2020, and in fact, nearly 1% higher on that.
Ex neutral basis.
Mexico is relentless resilient growth is really a good sign for the future.
On an all geographies they have demonstrated the ability to convert salt managed fleet and those learnings and tools are now being deployed in U S, Canada and Raleigh.
Free cash flow is and will continue to be a key metric for us as a return of capital activities carry on from 2021.
Fourth quarter free cash flow per share was flat versus prior quarter and down from Q4 2019 from.
The timing on sustaining capital investments in 2020 being the main reason for the year over year decline.
Before I hand, it back to Jay let me reflect for a moment on the roof connected on the last few years.
And I think back to the summer of 2018, when we collectively embarked on an ambitious transformation agenda, we knew our efforts on behalf of our clients on employees and shareholders will be rewarded.
But I don't know that any of them is truly appreciated the married with the industry fundamentals.
An element towering leadership position in the margin.
Look we have done have gone full value to element leadership position.
And yet we still have many years of profitable revenue growth and value creation ahead of us.
Today, we have a client centric organization focused on providing consistent superior.
Service experience.
We have a highly scalable operating platform.
We have a stronger and more efficient balance sheet with ready access to capital.
We demonstrated an ability to grow on both Mexico and agency and on the team hungry to do the same amount for us from Canada.
We have some early green shoots.
We generated substantial amount of cash on with minimal capital requirements to global growth agenda, we are committed to distributing such cash by growing dividends and share buybacks.
And I can go on and on and on.
This would have been possible without the unwavering courage commitment and passion on all <unk> employees for this.
Thank you for your trust and confidence and wish you all the very best.
With that on the market.
Yes.
Thank you Vito.
As all of you know Vito has been at the heart of ever some element has accomplished since he joined US as CFO in 2018 as my first tier is provided by the leadership side.
Strategic accounts so.
Horton expertise, what's more all of that comes with a smile and a warm and engaging manner that makes for a joy to be around for stronger as an organization for all that <unk> done for and with us.
As you may have seen in the news last week beta will be leaving element. This month to begin a new role.
A tremendously exciting opportunity.
CFO of MDA.
Calvert MDA as fast increasingly rare breed of proudly Canadian company that is an industry leader in its field.
Personally on behalf of everyone at element in all of our stakeholders I want to say thank you for veto for all of your contributions to our success and we wish you continued success of your own in the next chapter of your career.
Coincident with the Ddos departure, we formally welcomed Frank Rupert.
Into the role of executive Vice President and Chief Financial Officer of element for.
Frank joined US several weeks ago, and we're fortunate to have had Vito on Frank overlap for a bit of time as the co leaders of our finance function.
Subsequently, Frank is very well positioned to receive fees those handoffs shortly and to care for that baton for element.
Frank joined US from bring your advanced materials from New York Stock Exchange losses, Industrial company, where Frank served for many years as CFO and more recently led the company's core business unit.
Proven experience as a public company CFO Frank brings over 30 years of expertise in business from finance as well as proven capability spanning strategic planning Investor Relations capital markets commercial and operations leadership and enterprise risk management.
<unk> skills and expertise will be invaluable as we aggressively pursue organic growth now that we've successfully completed our transformation.
I spent a good deal of time getting to know Frank since we first met late last year. During the interview process and I can tell you is approachable collaborative and humble Frank is a highly curious individual ask great questions and has.
I know <unk> already rolled up his sleeves to work alongside his colleagues and with his team to enable growth and continuous improvement at element.
Frank I'd offer you a few minutes to offer up some initial thoughts Bureau.
Well. Thank you Jay I appreciate the generous introduction and I'm thrilled to have the opportunity to join element at such an exciting time for the business.
To say, thank you to Vito from your time in advice, helping me up the learning curve. These past number of weeks and I would extend those same thanks to all of my executive colleagues had element and the senior leaders have had the opportunity on working with so far.
I can say unequivocally that Vito has put together a strong finance team that has the capabilities to drive element to reach its goals.
I joined element, having learned a lot about the company and the culture over the course of the interview process Importantly, I was specifically attracted to the organic growth opportunity that business has identified having.
Having worked with many companies as an advisor as well as having sat in the CFO and business leadership chairs element is unique in its ability to target and execute on and organic growth initiatives that can deliver on its growth objectives and commitment to shareholder value.
I don't think I fully appreciate on how achievable that opportunity was until I got here last month and have spent time in the business.
Element value proposition for self managed fleet is.
Really incredible in my view and the untapped market in the U S and Canada alone is more than three times the size of our current global net revenue.
So there is no shortage of runway ahead of us.
Mexico in ANZ combined add up to an even greater self managed opportunity and we're well on our way in those geographies.
There is also the macroeconomics of Covid, making our value proposition attractive for prospects, especially in assisting companies access cost efficient funding and enhanced our liquidity through our financing platform.
In addition, there.
There are many sources of revenue growth independent of converting self managed fleet into clients for.
Instance, the continued delivery of transformation initiatives existing client retention and winning managed fleet clients from other fmc's.
Improving client profitability and providing our full portfolio of services to more of our clients and opportunistically identifying and on boarding additional mega fleets.
Finally, the strong cash flow generating capabilities of the business allow for a significant and ongoing return of capital to shareholders for our dividends and share buyback activities.
This return of capital provides investors with a low risk income stream that they can redeploy in turn as they see fit.
Suffice it to say I'm energized might be in here I look forward to meeting our shareholders prospective investors and analysts in the days and weeks ahead and I'm truly grateful for this opportunity.
With that day back to you.
Thanks Frank.
Welcome to the team.
With 2020 behind Us and all three objectives of our 2018 strategic plan crossed off the list, we entered 2021 with the benefits thereof.
A robust and scalable operating platform a true investment grade balance sheet.
<unk> focus on our pure play fleet management business.
Yes, the completion of transformation has a less obvious but no less valuable benefit the considerable resources and capabilities that we're concentrated on transformation for more than the last two years are all being redirected at our new strategic priorities.
The aggressive pursuit of organic growth in all of our geographies and demonstration of the scalability of elements transformed operating platform by magnifying, 4% to 6% annual net revenue growth into high single digit to low double digit annual operating income growth.
<unk> of our capital lighter business model by increasing service penetration and strategically syndicating fleet assets.
Enhancing our return on equity.
And the generation of a high single digit to low double digit annual free cash flow growth and predictable return of excess equity to common shareholders by way of growing dividends and share buybacks.
We have chosen driven for growth as our rallying cry in 2021 signaling our new central purpose for sizable market opportunity that's available to us and our cultivated state of readiness.
It also embodies the momentum we can field in our transformed organization.
For not just ready to grow our top line.
<unk> revenue growth as a primary objective of this organization in 2021.
I refer you to my quarterly letter to shareholders published as part of our press release earlier today, where I've set out my views on a number of dimensions and angles to our 2021 growth ambitions not the least of which are the headwinds and tailwind generated by knock on effects of the pandemic.
These are influence Emerson from semiconductor availability to used vehicle prices to foreign exchange expectations.
We've proven the soundness of the good ship element to weather for our worst storms earlier last year and we will stay on course again in 2021 delivering for our clients our people and our investors.
To address one of those knock on effects of the pandemic share now for global semiconductor shortage affecting motor companies production capabilities remains a fluid situation given the unprecedented nature of the circumstances, but.
What we know today is that element client order volumes placed in January and February of this year.
Higher than in.
In those same months.
Any of the last three years.
Client indications of ordering activity for this month of March suggest that trend will continue.
We expect that there will be some delays in manufacturing. These orders that we have received and that consequently, approximately $100 million of.
Nations could slip from the first half of this year into the second half.
And we don't expect any material financial impact to arise from this delay in originations.
The second topic that has gained momentum during the pandemic. There is a growing commitment to ESG and sustainability in particular across businesses governments and industries.
Element inaugural ESG report is approaching readiness for publication next quarter.
At the risk of front running the environmental pillar of that report.
Want to make a few comments about the growing attention being paid to electric vehicles in the context of our business.
As the fleet solutions market leader everywhere, we operate element is strategically well positioned to support our clients and to lead our industry's throat the gradual electrification of automotive fleet over the next decade.
We are prudently investing to maintain and to improve that position.
We have the inside track by virtue of our experienced some new Zealand for roughly 2% of the 29000 vehicles, we manage our battery electric or plug in hybrid electric vehicles.
At the same time, our strategic alliance with our vault affords us the benefit of their fleet management experience in Europe for both the EV products on offer and the supporting charge infrastructure.
Further ahead than that of North America and Australia.
Our intelligence gathered from these proving grounds tell us that the opportunities associated with increased adoption of electric vehicles.
Excuse me by our clients far outweigh the risk to our business model.
That in fact, the sooner the technology and infrastructure already at scale and our operating geographies the better.
Fundamentally the struggle for fleet operators evaluating the opportunity to electrify is for.
The complexity and the duration of the process.
Cost effective EV adoption requires ongoing data and Intel and intelligence gathering and analysis.
Incremental implementation and persistent change management.
Elements value proposition as a leading provider of outsource fleet services and solutions is grounded in taking that kind of complexity of our clients' plants and managing it for them cost effectively.
Our compelling value proposition centers on data driven strategies to lower clients' total cost of fleet operations and a consistent superior client experience, regardless of our clients' changing needs, which eliminates fleet related administrative burden.
In other words, the fundamentals of our fleet transition from internal combustion engines to battery powered vehicles, requiring analytics and change management.
Element standing value proposition, even more compelling.
The second challenge to fleet electrification dori being the duration of the process.
As further from our control tower.
Remember were already taken proactive steps to advance our clients' interest on this front.
Frankly, these are fully aligned with our own interest in terms of net revenue growth and our ESG agenda for.
For example were rapidly progressing discussions with electric vehicle manufacturers, both traditional Oems and new entrants to the space, which would see element committing to acquire EV volume in exchange for committed access to production capacity much of which is slated to begin.
Coming online towards the end of this year.
We're also advancing working relationships with various infrastructure providers to ensure that the plans we craft to meet our clients' fleet electrification needs can be implemented and are sustainable.
And we're cultivating our industry, leading network of service partnerships to ensure that consistent superior client experience is no different for drivers and fleet managers of electric vehicles than it is for internal combustion engine vehicles.
As police EBIT penetration grows in all of our geographies the attributes that make us the partner of choice for our clients today.
Also ensure elements place as a market leading electric vehicle fleet manager everywhere, we operate.
We are working with dozens of clients on use case assessments pilot programs and transition planning and we have.
All the necessary capabilities to seamlessly add evs to their fleets and to manage same today.
There are currently approximately 500 <unk> in our global fleet, Excluding New Zealand and another 500, plus in New Zealand itself.
Unfortunately, the present state of play suggests that the top and bottom line benefits to element from fleet electrification will remain modest in the short and medium term.
But we're working with our clients and supply chain partners to change that.
In closing 2021 will be another inspiring year for all of us at element as we consistently deliver for our clients return significant capital to our shareholders grow our industry, leading transformed business and continue to create long lasting value for.
All of our stakeholders.
With that let's open the floor to your questions.
Okay.
We will now begin the analyst question and answer session. As a reminder, in order for it all analysts the opportunity to ask questions element kindly request that analysts limit themselves to two questions and dialog with management.
Analysts have additional questions. Please rejoin the queue.
Joanna rejoin the question queue you May Press Star then one on your telephone keypad you will hear.
Sarah Atone acknowledging you on a request if you are using a speakerphone. Please pick up your handset before pressing any key.
You withdraw your question. Please press Star then tier.
Yes.
Your first question comes from Paul Holden with CIBC. Please go ahead.
Thank you good evening.
You mentioned orders in January February and trending in March very positively.
I believe what you said it was the highest <unk> seen in the last three years.
The orders are different than originations, but if I look just back to Q1 last year.
Strong number on originations, partly because of the benefit of our motto volume. So if I'm understanding you correctly, even excluding armada.
Day versus a year ago, Youre still looking at strong order growth.
Yes like for <unk>.
Like comparison Paul.
100%.
<unk>.
The number of orders that we have received thus far in January February are the highest that we've received in any of the last three years and as we.
Continue to explore.
Conversations with clients regarding March orders and as for March Order book continues to build it would appear that that trend is continuing so.
Very strong signal how.
How much of that is attributed to the chip shortage and that our clients wanting to.
<unk> accelerate.
Our 2021 order into the first quarter hard to tell but again encouraging signs in terms of.
The robust demand that we're seeing within the client base in terms of.
Orders that obviously will become originations.
Okay. Okay. That's an important point thank you.
And then I just wanted to talk a little bit about.
The recovery of potential recovery then.
Servicing income.
I mean, you show some useful data in your sub pack, but it really only goes up through December.
I look at mobility trends sort of those reported Apple Google et cetera, everything we're looking at it's showing a nice uptick since the end.
Of 2020, so I'm wondering if your usage data and miles driven data that you're tracking.
Essentially in line with that sort of let's call it low double digit increase in fee at.
The end of the year.
We are encouraged by what we're seeing in the early days of 2021 in terms of that trend line that was quite evident.
After the significant dip that we took in the second quarter of 2020, the resulting trend line that we have been seeing in the business for for gradual return of consumption of services.
Maintenance fuel and others throughout that period.
And so again, we're encouraged by what we're seeing here.
In early 2021.
Yes.
We do think that the.
The success of the vaccination program.
We will allow the economy to come back fully and what's that full resumption of activities.
By our clients.
Importantly, we continue to see no signs within the fleet in terms of de fleeting so on.
Our clients are maintaining the same level of vehicle inventories that they have traditionally maintained.
And beyond the few isolated cases that we've talked about in past calls.
Again, there is no systemic change in terms of.
Fleet size.
Within the client base so.
Again.
<unk>.
No systemic.
The change to the business model as a consequence of the pandemic.
On the demand for services remains strong and with the continued.
Resumption of activities within the economy, we would expect that we will get back to at least the level that we were before and be able to grow beyond that.
Okay I'll stick to my two questions on others.
Others ask thank you.
Thank you Paul.
The next question comes from John Aiken with Barclays. Please go ahead.
Good evening, Jay Thank you for the information on the new client win just a couple questions on the on that first one we look at the.
The global all win I think it was the oil services player I'm, assuming that that holds leasehold receivables and that contract will then fall on over the next couple of years as the.
That was good the leases get get renewed but on the flip side. When you talk about the the player in the U S with the energy assets. That's basically a services contract does that come on board on day, one or do we have.
I guess a gradual.
Rollout on the revenue similar to what we May see if this actually was on leases.
Yes, good evening, John Youre understanding is bang on so when we.
Acquire a new client.
Debt.
In particular client that is currently.
Being served by another FMC service provider.
Earn into their fleet assets over time, so as they replace the existing fleet that is held by the other FMC.
Those new originations come onto our book can we build that lease book over a period of time, so envisioning us, earning our way into the full book over a 345 year period.
When we acquire a new client as it relates to services only.
We usually onboard those and start generating revenue with them within one to two quarters. So they ramp up very quickly.
The one exception that I would point out in terms of that is.
A self managed fleet. So we've identified the self managed fleet.
I have worked with them to understand the benefits of outsourcing.
Their fleet.
Financing and management to us in those situations, it's not uncommon for us to write a check and to buyout their position and their fleet at fair market value and to take that asset on our books as a financing assets.
<unk>, one and so we would be able to.
Effectively build the book.
And start generating both financing and services income within the first quarter or two.
Having signed the contract.
Thanks for the clarification, Jay if I may just one question further when you talked about the.
Avenues for growth on revenues from North America, one of the one of the bullet points I think was improving client.
Retention levels.
Thought that the client retention levels had been brought back to where they were previously but is this on.
An acknowledgment that you can actually improve on that even further and what level of upside can we see from incremental retention because again I thought that that problem had already been solved.
Yes. Your understanding is correct that problem has.
Been solved in that.
Having.
Increased the rate of attrition client attrition when we were experience our difficulties back in 2017 and early 2018.
We built.
Our client retention level back to what is typically viewed as the industry norm plus or minus 98%.
The challenge that we have put to our team given the investments that we've made in our business given the superior.
Client experience that we're able to offer is on an opportunity to redefine.
That level of client retention to indeed increase.
And in particular opportunities to increase that in the U S on Canada, and Mexico and in ANZ, we actually operated at an even higher level of client retention than the 90% and so the challenge too.
Jim holiday in that and the operations team in Canada U S is what what avenues are available to us to take.
<unk>.
Our level of retention, which is admirable for most industries, but actually better risk.
Given the superior operating platform that we have to offer our clients from prospective clients.
Understood. Thanks, Jay I'll re queue.
Thank you.
Okay.
The next question comes from Mario Mendonca with TD Securities. Please go ahead.
Good evening day first a question on the.
On the share based compensation. The number was obviously kind of large this quarter can you describe what happened in Q4 'twenty that would have caused the increase relative to what we've seen over the last few years.
Alright.
And this would be a perfect question to introduce.
CFO.
Refer to affect volume that you feel that one.
Sure. Thanks Ian.
Mario Thanks for the question.
We saw an increase in the <unk>.
Performance share unit component of that.
Net expense of roughly $20 million.
And the result was an increase in the payout factor.
Due to the better anticipated in actual performance relative to target.
Those psus based on the strong performance of the company.
They have reset to a higher level and we took into account those incremental shares equivalents in calculating that number.
<unk> expense was offset slightly by decreases in stock options expense and restricted share units.
For 2020, Psus will be evaluated for their performance back from adjustment at the end of 2021, but really it was.
That increase.
Other than target performance two on.
On those performance share units.
I think you said it related to 2018 in 2019, so it's not it's not the actual stock price, yes, Ben stock price debt went up it was what management interpretation of performance relative to goals is that maybe the right way to look at it.
That is a good way to look at and its actual performance and where those psus.
Performance were relative to target in our estimate on where those would pay out.
And just for clarity what happened in Q4 that caused management to revisit this.
This performance because presumably it wasn't the performance in Q4 this performance would have been.
Earned throughout the year, what was it about Q4 that drove the big income.
Yes, we looked at it at the end of the.
At the end of the year, so we'd like to put a little bit of time.
Between the actual pro for the actual time that the grant is given and then real understanding of what the performance looks like so that we don't end up swinging performance share units back and forth. So again, that's why when we look at the 2020 Psus right, we're not going to look.
At a performance factor adjustment until the end of 2021.
Okay railcar fleet.
B J.
Okay. My last question my bad.
Yeah.
So are there just other factor that comes into play is obviously on <unk>.
Chip awards, and the Finalization of saying Theyre subject to board approval and so we.
Want to bring a full accounting.
Of the performance modification factors to the board for their review and approval.
As part and parcel on the accrual for us.
Hey, Jay.
Final question relates to revenue this quarter, so revenue was down.
4% year over year. This quarter. Your goal is for 46% revenue growth. So obviously, you see something meaningful changing in the next four quarters relative to what happened. This quarter can you give me any guidance or a sense of what's going to be that much better in 2021 that didn't.
Happen in Q4.
Yeah, I think if we.
We tried to illustrate that.
On a number of different forms as part of our disclosures this quarter due to past quarters burial.
When we look at this we think of the business as we've talked before is about rough rough rough $10 billion of gross revenue $9 billion of cost of services on cost of financing to get you to that $1 billion of net revenue that we report.
We guided you that syndication in and of itself is not going to be a contributor to year over year growth and so youre going to be driving.
Your revenue growth from both the increase in your gross lease net finance or excuse me gross financing revenue and your gross services revenue.
As well as.
On a decrease in your cost of services and cost of funding.
And when you take for instance.
$1 billion of debt on your balance sheet.
That's.
There's going to be reflected in a lower cost of financing for the business, which.
Given our disclosures as an offset to the gross revenues.
Thus as a contributor to net revenue.
Revenue growth for the business. So when we look at the recovery from Covid.
19.
We look at the momentum in the business.
In terms of of growth in Mexico.
A 25% CAGR.
Revenue growth figure for the last three years grew 10% last year when you look at ANZ and.
And the growth that we've had there grew 6% last year and is expected to grow.
Much higher in 2021.
When you think about the.
Traction early traction that we're getting in the commercial efforts in Canada and the U S.
Those are all key drivers for us in terms of the expansion of the gross financing and service revenue of the business and against that.
We continue to work with our supplier network to drive down the cost of the services that we procure on behalf of our clients.
Which offers us an opportunity to reduce those cost of sales.
And through the efforts of <unk>.
And the treasury team producing.
Reducing our financing.
<unk>, reducing the cost.
The financing instruments that we have as part of our balance sheet to drive down the cost of financing the leases of the business and so that combination of factors gives us that pathway to the 4% to 6%.
Revenue growth net revenue growth for 2021.
Thank you for that answer I appreciate it.
Is that is that.
Again this is an important topic to us we.
Attempted to to purchase a number of different ways in our disclosures we wanted to make sure that it is indeed well understood.
On that.
Remains a bit.
Of a question Mark in your mind around that.
Well now that you ask it it's hard to imagine growing net financing revenue without some very significant margin expansion and maybe that's the messaging that you're operating that I'm not picking up on that the margin on the net the net financing margins or the NIM.
Looks like you would have to expand a fair bit.
Does the assets themselves don't look like they can grow that.
That broadly given the level of syndication activity, we're seeing or maybe maybe I could just ask one final quick thing.
Do you.
Do you have a level of originations in mind I'm sure you have a level of originations in mind is there anything you can share with us on the level of origination that is consistent with the 4% to 6% or is that not something thats maybe appropriate for this guidance.
Let me come back to the first point that you made because I think it was a question asked and answered.
And we will do so by way of just lifting a quote from my opening remarks.
Net financing revenue.
It was $4 million higher than Q4 2020.
Then it was in Q1 of 2019, despite the fact that we had $2 3 billion.
Of lower average net earning assets.
So.
What we what we've been able to demonstrate is.
<unk> ability to increase yields.
And so we are less reliant obviously originations on our lifeblood to driving net finance revenue for the organization absolutely.
But it is only one.
Piece of the puzzle the others yield and as you start to think about.
The pricing power that comes with the ability to deliver consistent superior client experience.
And power that comes with being able to drive double digit growth in.
Expanding market and you think of book.
<unk> ability to expand margin by lowering the cost of your capital both in terms of the amount of capital you're deploying and what you are paying for that.
There are ample opportunities to drive.
Yield and as a consequence makeup for some of the softness of the originations that have resulted from the pandemic.
Got it thank you.
Thank you.
The next question comes from Geoff Kwan with RBC capital markets. Please go ahead.
Hi, good evening.
My question. My first question was just on.
On the electric vehicle. Thanks for all the disclosures on the comments that you had on there I guess my question is more of a basic level is.
In general based on everything that you know today.
If you had a customer.
Debt had a gas engine fleet and they wanted to electrify the fleet.
<unk>.
And net income perspective for element.
It'd be neutral would it be positive would be negative.
From what we know today it would be positive.
Okay, Okay, and just on the second question I'm sorry.
Okay.
Yes, and maybe just to give you a little bit of color on that so from a macro point of view, it's quite indisputable that the complexities that arise with the shift in technology and make no mistake for both of US. This is a.
Tremendous share.
Shifting technology and when we can.
Talk about the decade timeframe.
Our estimation it is going to take the better part of the decade to two built sufficient momentum to build out.
The charging infrastructure to develop the products to bring to market.
Two two shift culture.
And to drive the right economics to facilitate this is going to be an extensive journey.
From a macro point of view the complexity associated with this.
Transition to this new technology is indisputably beneficial to Fmc's and as a market leader, we think very beneficial.
Two element as you get down to the specifics of it Jeff there is such a significant cost differential.
On the purchase price of the vehicle.
Today that that increase financing revenue that comes with that.
<unk> increased syndication revenue that can come from that opportunity.
Carries a great deal of economic benefit for an organization like ours as we look at servicing income. These vehicles will still day to be maintain our estimations.
We'll run two thirds to three quarters.
Of the.
The cost of a.
Internal combustion engine or on ice vehicle and so the majority of expenditures are truly drivetrain agnostic.
Breaks for Cooper tires.
Cetera. So.
From a maintenance point of view.
There will be less maintenance required for these vehicles, but it will still be a material.
Amount.
<unk> for our clients.
Material revenue source for our business.
The accident management.
Most of the accidents happen when the vehicles stationary electric.
Electric vehicle or ice vehicle.
We will in all likelihood have at least the same rate of accidents and actually the repair cost for an electric vehicle.
Higher for.
For a variety of reasons day, only too happy to get into.
And so we expect that that will be an ongoing source of service revenue for the business remarketing telematics registration title tolls and violations are all going to be independent of the drivetrain of the vehicle.
Fuel for us is not a big source of revenue.
It doesn't top or our top six service revenues and.
It might end up becoming a bigger source of revenue for us as we help these organizations.
Deal with the proliferation of electricity suppliers across the geographies in which they operate.
And over and above that there is we see new opportunities for revenue generation.
For managing tax incentive credits from governments from.
Installing and managing charging infrastructure at our clients place of business or the drivers homes tracking.
Mileage for government reporting into.
Excise taxes, so yes, we are.
Our feeling rather bullish about the economic and environmental benefits that we can advance through the electrification of fleets.
Caution that we put out is this is going to be a gradual evolution in technology.
One of our one of our typical fleet service fleets came to US today and said we want to do a wholesale change out the vehicles arent cheap enough available to them to do so we can procure them.
And so again, it's going to take a.
Yes.
<unk>.
A fair degree of time for this to mature in terms of the availability of vehicles on availability of charging infrastructure.
And the improvement of the economics to drive.
Faster more wholesale adoption of this technology, but we are very well positioned.
Two to benefit from this both economically and environmentally.
Thank you for that that's actually really good my second question was around just with the new client wins like how would you describe.
The potential for more client wins as we look ahead for the next maybe couple of quarters, either new client wins or expanding client relationships.
And then maybe if you can talk about the progress on winning more self managed fleets.
On strong we're feeling very confident in all three regions in terms of the commercial efforts. So.
Mexico is off to a great start they finished 2020 strong.
Lots of momentum and despite COVID-19, continuing to place their environment.
They.
We are off to a very strong start to share and we have high expectations for them in terms of a return to that higher level of.
Double digit growth.
We have typically seen from that organization, so plenty of market opportunity and.
Certainly the right team in place further.
Past conversations we've talked about opex and some increases around growth and some of that going into the Mexico organization.
The team has done a great job for recruiting new talent training that new talent that talent is now being unleashed into new market opportunities that we haven't been able to approach given the limitations of talent.
And so that gives us further.
Conviction in terms of the growth that we will see in Mexico in 2021.
And the team in AMC last year was for first year in which they embrace their growth strategy.
On that is hard and despite wildfires and despite COVID-19.
Posted 6% revenue growth in that market.
And that was the first year of the strategy they intend to grow double digit.
Revenue growth this year and again early days, but we're seeing nothing that would be an impediment for them being able to achieve that and then closer to home U S and Canada.
We have completed the.
The transformation of the commercial group.
Under <unk> leadership as we mentioned these are long sales cycles.
On the rough rough rough 10 months.
From time of identification too.
Contract signing and on an opportunity to begin turn revenue and so the efforts of.
Last year, the second half of last year are starting to appear in terms of some of the results that we communicated earlier today as well as some of the results.
Or continue to mature here in this first quarter, so feeling very good.
I would say that the government sector.
<unk> has been a bit slower to move understandably given their focus is appropriately being placed elsewhere. So we haven't seen as perhaps as much opportunity to engage them in those conversation around the outsource of their fleets to.
Sure.
Innovation.
But that has been more than made up by the interest that we're seeing.
Firstly.
And some of the wins that we're seeing are absolutely steal steal a share in terms of.
Winning over mandates from our competitors, but we're also seeing.
A good evolution of the self managed fleet opportunities. So the team has been quick to identify those equally quick too.
To qualify and advance those.
And we've reported some in some of our jurisdictions.
For the sharing some progress updates as part of our Q1 update.
Perfect. Thank you.
Thank you.
The next question comes from Tom Mackinnon with BMO capital. Please go ahead.
Yes, thanks very much.
First question has to do with the syndication yields that we saw on the quarter.
I think it's like three eight.
Percent like 100 basis points higher year over year on even higher than that quarter over quarter.
Is that sort of an indication of what we should expect going forward naturally this market kind of jumps around a bit but.
Any kind of help you can give us with respect to that.
On an increase in demand and lower investor hurdle rates.
How does.
How is this shaping up in.
2021.
Thank you.
On yield around that level.
More or less attainable for Ya.
Yes, good evening Tom.
We had it.
Very robust syndication returns for Q4.
They I would say that they.
We're desk typical or are indicative of the yields that you should expect on a go forward basis as you noted.
386 was.
A third better than what we had done in Q3.
And even as we look at the year contribution that debt.
For the fourth quarter made to the year.
The yield for syndication of $2 69.
That was just slightly below what we would've done on all of 2019 so no.
We first talked about syndication we spoke up.
The yield will vary.
Based on the assets that are being sold in the duration of those assets.
Credit quality of those assets.
And interestingly the time of year, and so recognizing that on.
There is a fair amount of demand for.
These assets that.
Carry a very attractive tax benefit in.
In the fourth quarter that generally creates a little bit more demand.
A little sharper.
Sure.
<unk> on the part of those wanting to secure those assets for their portfolio. So no I would not point to that yield as being indicative of the yields you should expect on a go forward basis.
I mean is it better than the yield we saw on the third quarter, though on.
On a go forward basis.
Based on demand and lower investor hurdles I guess.
Yes, no for us.
The guidance that we've provided in terms of.
Revenue growth in operating income.
Yes.
Stay within those parameters in terms of the guidance.
Okay and the second question is on Opex and from that.
Transformational.
Summary debt.
Put on.
In the supplement on page six.
Like there's nearly 30 more million in terms of the Opex.
In terms of what you've action on and what you've delivered.
So I.
Like how would you re read that does that mean, if you have 100 million in opex.
Your opex essentially could be that you reported in 2020 that your opex.
Assuming all the debt.
Action gets delivered.
$30 million less assuming no kind of inflation.
And over what time period with Abbvie.
Yes.
I apologize I'm not quite sure what you're referencing maybe I'll.
Let fees or jump and talk specifically to it but.
Maybe just as a.
Overarching comment so we delivered $133 million of operating income benefit.
<unk> transformation to the 2020 results that was a combination of Opex reduction.
As well as net revenue expansion from either revenue assurance activities or a reduction in our cost of financing and or our cost of services. So it's a combination.
Revenue enhancements and Opex reductions that contributed to that $133 billion of benefit to 2020 operating income.
And an important figure to two cash ones ion as the fourth quarter.
Contributed $39 million.
Operating income improvement as a consequence of transformation. So you could extrapolate that multiply by four and get your $156 million and.
And reasonably assume there.
Net for 2021.
Operating income.
It will be better.
By the $1 56 minus the $1 33.
2020.
On for 'twenty.
$3 million.
Improvement in operating income again, some of that will come from Opex reduction some of it will come from.
Higher revenues and lower cost of revenues.
Yes, I mean, you just laid out on.
Laid on all those pieces on the supplement of its just asking a question with respect to one of the pieces on opex, but if I could just squeeze one more on it has to do with the.
Originations in the quarter.
No.
If we annualize those and kind of tried to factor in the fact that you've got some really good momentum running.
We're running at least in January and February and March 2021.
If we annualize the one for five six if you look at how how are you.
Got.
Increased momentum coming in the first couple of months of 2021, how should we be thinking of originations next year.
Think that.
That might be something that.
A lot of the other and we'll start probably trying to working for their models as well.
Yes.
Again, Tom.
We've been rather fulsome in the guidance that we've provided you on your colleagues with regards to our performance next year on their aspirations around 4% to 6% revenue growth.
High single low double digit operating income growth than day.
Equal growth in our free cash flow available to our shareholders. So I won't get into the details around the syndication yields on origination numbers.
Again, we think the guidance that we provided is.
Sufficient to give us some guideposts on which to properly evaluate the performance of the business and to set expectations.
Okay understood. Thanks.
The next question comes from Jamie Glynn with National Bank Financial. Please go ahead.
Yes. Thanks.
Keep it to one question here just thinking through the capital lighter model.
And with the leverage right now at 577 times.
I think the.
Street analysts and maybe investors are getting pretty comfortable with your ability to operate the business at this level.
Are you alright, what are your considerations are you thinking through the possibility of potentially increasing.
Leverage as we become more comfortable with your operating here.
Any thoughts around that.
Yes.
Having just to attain this.
We'd like to live with it for a little bit.
On a fairly monumental for us to take us from seven to eight down to five 7%.
Over the span of the last couple of years.
For us the work that we've done to understand.
On our ideal capital structure and to attain.
The most efficient capital structure for the business.
Strongly suggest in and around six times tangible leverage.
Where we'd want to be and so plus or minus six times is where we are.
<unk> targeting.
It came up a little shy at year end based on some favorable.
<unk> in the U S Canadian dollar.
Exchange rate brought that a little lower than what we would have otherwise anticipated but.
We see no reason to move off of that objective.
Of this.
In and around that six times tangible leverage again, recognizing that that gives us.
The investment grade balance sheet.
Which in turn gives us good standing with our clients walking to have.
The portfolio of finance by an investment grade entity gives us ready access to capital and cost efficient access to capital, which allows us to be more competitive as we look to convert self managed fleets as well as to steal share from competitors.
Okay. Thanks.
Yeah.
There are no more questions in the question queue. This concludes the question and answer session I would like to turn the call back over to Mr. <unk> for any closing remarks.
Just wanted to say thank you appreciate your continued interest and support and we look forward to <unk> with you over the next couple of days to attend to any questions that we werent able to get to Tonight. Thanks for all.
This concludes today's conference call.
May disconnect your line.
Thank you for participating and have a.
Pleasant day.
Okay.
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