Q1 2021 Element Fleet Management Corp Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the element fleet management first quarter, 'twenty, 'twenty, one financial and operating results conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the prepared remarks, there will be an opportunity for analysts to ask questions.
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Element 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 statements and risk factors in its year end and most recent M. D N a as well as his most recent E F for a description of these risks uncertainties and assumptions.
Although management believes that the expectations reflected in these statements are reasonable it can give no assurance that the expectations reflected in any forward looking statements will prove to be correct.
Elements earnings press release financial statements MD&A supplementary information document.
The Investor presentation, and today's call include references to non I F. R. S 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 <unk> measures to Ifr S measure measures can be found in the M. D N a.
I would now like to turn the call over to Jay Forbes.
Our president and Chief Executive Officer of element.
Please go ahead.
Thank you operator.
And thanks to all of you joining us this evening.
Frank and I will be share tonight's call with you from Baxter for the present.
From fleet, which is element business in Australia, and New Zealand.
We'd like to use our time with you just touch on element first quarter results, including a drill down by Arizona AMC performance the solid progress.
Made in advancing our strategic priorities in the quarter as.
As well as they don't walk on the balance of 2021, including our perspective on the global Microchip shortage.
Potential disruption to our OEM supply chain.
Resulting potential impact on our originations.
Before I begin discussing our results I do want to acknowledge the continued presence of COVID-19 on our communities.
Doing so I want to express my heartfelt gratitude on behalf of everyone at all.
Fleet management to the health care professionals and so many other receptor workers, who continue to brave the front line and is that just the global vaccination effort.
First quarter of 2021 represented elements first three months of business. Following the conclusion of our very successful.
<unk> centric transformation program.
And the Q1 results.
Encouraging demonstration of element performance capabilities atop our transformed operating platform and against the backdrop of our fortify its financial position.
We grew global net revenue four 4% in Q1 on a year over year basis before the significant impact of the strength in Canadian dollar on our results.
What's the FX impacts we were able to grow net revenue by approximately 1% over Q1 2020.
We delivered $177 million of adjusted operating income for the quarter, which is a 10, 8% improvement over Q1 of last year before the impact of FX and equivalent to 22 per share.
We expanded our operating margin by 180 basis points from our Q1 2020 results to some 55, 2% in Q1 of this year.
Our pre tax return on common equity improved 30 basis points quarter over quarter to 14, 3%.
<unk> ROE to continue to improve this year as we progress our capital lighter business model.
And our strong cash flow generation enabled us to return more than $100 million.
Excess equity to our shareholders in the quarter through share buybacks and a further $50 million in the month of April.
Frank will talk you through all of our results in greater detail shortly.
In the meantime allow me to reiterate Ellen.
Element three strategic priorities for 2021 and elaborate on the progress that we've made in advancing each of them. Thus far this year.
The first priority is the aggressive pursuit of organic growth opportunities across our global footprint.
We believe element can generate 4% to 6% annual net revenue growth from these organic opportunities in normal market conditions.
Although many dimensions of our current operating environment are far from normal and it will come back to this point momentarily.
Our commercial teams are nonetheless, delivering on the promise of profitable organic revenue growth.
Net revenue for Q1, and ANZ in Mexico grew 35, 22% respectively year over year.
And we've spoken about before these regions were able to begin executing our global growth strategy Matson EBIT years earlier than our business in the U S from Canada, and therefore review ANC and Mexico's successes as harbingers of the growth to come in our domestic markets.
In the U S and Canada, where our growth plan is still in its relatively early stages of execution, our chief commercial officer, David Madrigal and his team grew our deal pipeline, while improving pipeline velocity by 10%, which reduced the time from deal preparation to contract.
High value station by over four weeks on average.
The product up these efforts is on display in our supplementary disclosure documents this quarter.
Globally, we closed 25% more deals last quarter than we did in Q1 of last year.
More importantly, those deals represent a significant increase in units of revenue opportunity for element.
And we classify a unit of revenue opportunity as either a lease or single fleet service to be provided in respect to be unique vehicle.
In the case of the lease the revenue opportunity is realized on lease activation and for the duration of the lease term.
In the case of service revenue opportunities realization depends on the nature of the service.
As you can appreciate the degree of impact that a potential revenue unit is going to have on our results and the timing of that impact is going to vary.
Every unit is of equal value from a profitability return on equity or even a cash flow perspective, such as the nature of the broad array of services that we offer our clients.
However by closing on over 120000 units of revenue opportunity in the first quarter of this year. Our commercial teams are clearly demonstrating their commitment to <unk>.
And their ability to execute our.
Our global growth strategy in all three regions in which we operate.
Now Theres a part two if you will to this first strategic priority and not just the magnification of that 4% to 6% net revenue growth into high single digit low double digit operating income growth on top of our transformed and scalable operating platform.
This magnifying effect was on full display in the first quarter. We enjoyed 55, 2% operating margins and delivered six 2% adjusted operating income growth on a year over year basis, or 10, 8% adjusted operating income growth before FX.
Our second strategic priority is the advancement of our capital lighter business model through increased service penetration and syndication activities, both of which enhanced returns on equity.
We made solid progress on this priority in the quarter, taking full advantage of the demand in the syndication marketplace to bring forward volume into Q1.
Syndicated in just over $1 billion worth of our U S lease book.
We syndicated to a combination of first time buyers and familiar investors. We continue to grow our roster of interested investors in our fleet assets from just 10 in Q1 2019 to over 28 institutions today and an amount that is still growing.
We also continued to successfully introduce new client names to our syndication investors in the first quarter. We showed nine additional client names tour syndication investors for the first time.
We view this as a positive development of our syndication program.
Indication increases the velocity of our cash flow and allows us to reinvest in the business without increasing our equity base or to return such capital to our shareholders.
In terms of service penetration, which generates revenue that requires only a modest amount of net working capital to support.
We continue to be successful at offering our existing clients the opportunity to benefit from incremental element services.
This additional services lower clients' total cost of fleet operations, which.
As our chief value proposition.
The results of this capital lighter business model is enhanced returns on equity as evidenced by a 30 basis point improvement on this metric in Q1 over the prior quarter.
As we noted in our press release. This evening, we expect to be able to continue enhancing our pretax return on common equity throughout 2021.
Our third and final strategic priority is to growth of free cash flow from our business and the predictable return of excess equity to our investors by repurchasing shares and paying and growing our common dividend.
Element repurchased nearly 8 million common shares for cancellation in the first quarter, returning over $100 million from cash to shareholders.
Returns and additional $50 million by way of further repurchases in the month of April.
We're just.
Past the halfway point of our initial and CIB period.
Already repurchased two 7% developments common shares at prices that we view as attractive.
We anticipate continuing to be active buyers of <unk> between now and the end of this NCB and CIB period in November and as previously indicated we envision buybacks to be a regular ongoing part developments return of capital strategy, along with growing common dividends as we generate improving.
Cash flow.
With that I'll turn the call over to Frank to discuss our Q1 results in more detail and then to era, who can discuss some of what we're seeing in ANZ, which was also the topic of my CEO letter to shareholders this quarter.
Frank.
Okay.
Thank you Jay and good evening everyone.
I'm happy to be here with you to talk through our Q1 2021 results and the solid progress we made advancing our strategic priorities in the quarter.
With regards to adjusted operating income in ETR.
As Jay noted our adjusted operating income for Q1 was $137 3 million, which is a six 2% increase year over year and 10, 8% increase before the impact of changes in FX on net comparative basis.
As we've noted in our disclosures this quarter FX had a meaningful impact on results and is likely to continue to be a headwind at least for the balance of this year.
And earnings per share of 22 were flat from Q1 last year, which is a function of the increase in our effective tax rate on a line up to 23, 4% in Q1 2021.
While we're on the topic I recommend modeling our adjusted EPS based on a 23% to 25% effective tax rate in 2021.
This is a reflection of the increased income levels, we are achieving post transformation and the mix as we grow disproportionately and relatively higher tax jurisdictions, namely ANZ in Mexico. This year.
Remember that free cash tax we pay is a lot less than the tax line items on our income statement.
As such we believe free cash flow per share is a better metric than adjusted EPS when evaluating the underlying performance of our business.
We originated $1 $3 billion of assets in the quarter of $100 million declined quarter over quarter, and a $744 million decrease year over year.
Historically Q1 originations have been lower than the preceding Q4 income.
Clients deferred orders that one unplaced last year continued to impact originations in Q1 this year.
The strengthening of the Canadian dollar against the U S dollar and Mexican peso also softened our reported origination volumes.
The year over year originations comparison for Q1 was impacted by the timing of our motto volumes. In addition to FX.
Originations were minimal in this Q1 due to order timing, which was not the case from Q1 of last year and.
In addition, the strengthening of the Canadian dollar against both the USD and Mexican peso had an even greater dampening impact on reported origination volume year over year from quarter over quarter.
As we mentioned in March and continues to be the case, we're receiving record order volumes next year.
In a normal environment those would be reflected in Q2 and subsequent quarter origination results.
However, as Jay will say more about shortly the global lack of microchip availability is already stretching the typical order to origination timeframe with several Oems announcing some level of production curtailment in Q2.
So our client demand is strong and the.
The origination volume is coming.
But accurate forecast and timing are difficult to provide in this fluid environment.
We saw a $15 $7 million year over year increase in net financing revenue per coupon.
Before the impact of FX net.
Net financing revenue was up $18 2 million on the same basis, an increase of nearly 20%.
This is despite the reduction of our net earning assets due to the successful execution of our capital lighter strategy.
$15 6 million of the Nf bar increase year over year is attributable to a combination of the $12 1 million provision for credit losses that we took in Q1 of 2020.
Based on the time the impact of COVID-19 uncertainty on our credit risk loss models.
And the $3 $5 million reversal of that provision back into Q1 2021 net financing revenue.
Just on the remarkably strong credit and collections.
<unk> of the business over the last 12 months.
We maintained at $13 $7 million allowance for credit losses, currently which is over $5 million more than the prior.
Prior to the onset of the pandemic.
We expect the strong credit performance of the business to continue and therefore, the allowance to continue trending that towards or below historical levels over the balance of this year.
Before the impact of the provision for credit loss Q1, net financing revenue was virtually flat with Q1, 2020, which was unaffected by the emerging pandemic at the time.
Further controlling per FX Q1, net financing revenue was up two 5% year over year.
We also materially improved our funding costs in the quarter, which we reported net interest expense.
Those decreased by $58 million compared to Q Q1 of last year.
While our net interest income and rental revenue only decreased $35 1 million on the same basis.
As a percentage of hub or yield on average net earning assets in the quarter net financing revenue was $4 three 8%, which is a 118 basis point improvement over Q1 2020.
This is a result of a deleveraged balance sheet and lower cost of funding on the remaining indebtedness.
The impact of the provision for credit loss on the numerator as previously discussed.
The growth of higher yielding net earning assets in Mexico, and AMC as a percentage of total net earning assets.
And as Aaron will tell you more about shortly.
Gain on sales performance on vehicles in Australia, and New Zealand, the only jurisdiction, where we take residual risk.
Servicing income decreased $6 2 million year over year for Q1 before the impact from changes in FX, which increase the delta to $11 4 million on an as reported basis.
Although we saw vehicle usage rates improve over the course of the quarter and that trend continued in April and into May vehicle uses usage has yet to fully recover to pre pandemic levels.
That said, we do anticipate Q1 service revenue to be the low point for this line item this year.
Turning to syndication revenue, we syndicated just over $1 billion worth of assets in Q1 and generated $23 1 million of revenue, which is $3 million less in same quarter prior year on a 182 million more volume.
Syndication is a cornerstone of our capital light business model and we leaned into demand for our assets in Q1 as Jay mentioned.
Although we price our leases such that we are willing to hold them on balance sheet per the duration of their term. We also have the capability to test for superior economic value in syndication market.
The economics of syndicating, the lead to superior to holding it on book We proceed to syndicate.
Syndication revenue is highly accretive to our return on equity.
Which was 14, 3% per Q1, and we expect continued enhancement of that metric through the balance of this year.
As we've communicated in the past syndication revenue yield is going to vary quarter to quarter based on the mix of assets syndicated in the relevant period.
That said, we think the two 3% we earned in Q1 is a relatively normalized yield for the balance of this year all else being equal.
We are continuing to explore the expansive syndication on the geographic <unk>.
Rating and client name basis.
Our operating margin expanded 177 basis points quarter over quarter, and 292 basis points year over year to 55, 2% for Q1, 2021, underscoring our transform industry, leading scalable operating platform.
Q1, adjusted operating expenses were down $6 $6 million year over year, $3 8 million of which is independent of favorable FX.
While we expect operating leverage to improve quarterly year over year terms based on revenue growth and operating expense containment.
The favorable evolution in our allowance for credit losses in the first quarter likely made or 55, 2% operating margin in Q1, a high point for this year.
Finally regarding free cash flow and return of capital for the quarter, we generated 23 of free cash flow per share exceeding our adjusted EPS of <unk> 22.
And this is virtually always the case.
However, the 23 net result was a decrease of <unk> <unk> per share from Q1 2020 free cash flow.
A onetime carryover payment of 2020 cash taxes in New Zealand this quarter and lower originations year over year in the quarter as previously discussed.
Caused by combine to cause the decrease.
FX also negatively impacted free cash flow by approximately <unk> <unk> per share.
Notwithstanding these headwinds between dividends and buybacks, we've returned over $180 million of cash to common shareholders year to date.
That should give you an indication of our level of confidence in our ability to manage the current economic environment. This year.
Our growth strategy, the capital light business model and the resilience of element ability to generate free cash flow going forward.
With that I'd like to turn the call over to Aaron Baxter to tell you about custom fleet Q1 results in more detail.
Thank you Frank and good morning, everyone.
Very much appreciate the opportunity to share with you a custom fleet strong Q1, 'twenty one results and the progress we've made on our growth strategy in the quarter all of the figures I'm going to reference are in Australian dollars. So from a net revenue perspective custom fleet generated $49 four.
Net revenue for the quarter, which is 30 bought the same more than Q1, 'twenty and 15% more than Q4 'twenty.
Net financing revenue grew 56% year over year, primarily driven by the strength of the Australia and New Zealand secondary market the market chip shortage in Asia, where the vast majority of the vehicles wait deal with the manufactured has constrained new vehicle supply and driven up demand and pricing abuse.
Vehicles.
This coupled with recent improvements to our right marketing strategy in channels is resulting in more sales to consumers and that's allowed us to improve the gain on sale for Q1, 'twenty one by 133% over Q1 last year.
Excluding <unk>, we grew net financing revenue by 20% year over year, driven by increased margin and reduced funding costs service revenue in <unk> was $14 7 million in Q1, this was 5% up year over year, and 18% up versus the prior quarter.
This increase is attributable to continued increasing product penetration, particularly how accident management business and our telematics offering coupled with implemented conquest, new business wins, which is translated into 9% unit growth for the year.
As Jay Rosen these letter to shareholders. This quarter custom fleets being built on 40 years of history in Australia, and New Zealand with clear points of competitive advantage, including Scotland automation of our operating system and unparalleled client experience are really smart diverse and engaged in.
<unk> price and an extensive network of service partners with being able to build on this foundation and a number of ways. As a result, I think part of the element family cuts.
Custom fleet participated in the transformation, which we're in the midst of undertaking at a local level when Jay actually took the reins at element in June of 'twenty I day.
Custom fleet transformation benefited tremendously from the learnings and the collaboration which we're able to engage them with the north American business going through its own client centric reset we've taken advantage of the global organization investment grade balance sheet and ample access to cost.
Patient funding to win self managed clients buy sell and lease back.
And two great examples of the Salvation Army in Australia, and <unk> in New Zealand.
We are deploying the growth plan and strategy that debate and man well pioneered in Mexico to great effect, which was in hard stops per hour visit to Mexico City in early 2020.
So following that visit we quickly adopted Mexico as best practices continued to refine our back office capabilities and heavily invested in sales force effectiveness. So that we would be poised for strong GAAP profitable revenue growth in 2020.
So after 18 months executing what is now the global element growth strategy custom fleet is very much in an optimal and scalable position our pipeline of confirmed orders is the highest its ever been at.
Service revenue was growing through a combination of new client wins and deepening share of wallets. The quality of the portfolio has improved with historically low levels of delinquency.
Net promoter scores are consistently strong and we have not lost any material clients in 2020 through the pandemic and that remains true in 'twenty One Tonight.
The last thing I'll say is in relation to electric vehicles and I'll be brief because theyre not element has spent a lot of time with investors on this topic already I can tell you from the front lines of fleet electrification from New Zealand that this is an exciting why that change in growth opportunity for our industry. It is.
Good for our clients good free people good for our business and naturally good for the environment. It will be good from Vestas to.
Element is well positioned to lead the industry through the electrification of automotive fleets and we will continue to deepen our client relationships in the process.
So with that I'll turn the call back over to Jay and thank you.
Great to hear firsthand from you the successes that you and the team and have enjoyed there and thanks for joining us on.
Before we open the floor to questions. Let me say a few words about market conditions, which are abnormal and a number of respects the continuing strengthening of the Canadian dollar's one of those abnormalities current indications are that the Canadian dollar will remain unusually strong against the U S dollar in particular.
For the balance of this year, while we believe this is a temporary state of affairs, we're targeting year over year net revenue growth of 4% to 6% in 2021 before the impact of changes in FX.
The COVID-19 pandemic also continues to make for abnormal market conditions vehicle usage rates improved throughout Q1 and that trend has continued post quarter end. Nevertheless usage remain below Q1, 2020 or pre pandemic levels in the <unk>.
Order.
As Aaron has indicated used vehicle markets are incredibly strong right now, especially.
In Australia, and New Zealand as a result of these micro chip shortages and because we bear the residual risk value risk of our clients vehicles.
Z.
We are earn a unprecedented gains on the sale of those vehicles at the end of their lease terms. Unfortunately, those are not normal market conditions for custom fleet.
In the U S from Canada and to a lesser extent in Mexico. The same microchip shortages slowing the ability of Oems to convert a significant volume of client orders that were placed into delivery ready for vehicles from where we stand today, we see varying degrees of impact of different Oems and the bill.
Three U S automakers set us much on their earnings call last week.
The upshot range from zero to 50% production volume headwinds in Q2, the present quarter.
Were headwinds are the strongest Oems expect to catch up on production volumes almost fully by Q4.
All Oems are prioritizing the production of higher margin vehicles.
Such as the trucks and Suvs that align with the strong majority of our clients' needs, which leaves element less exposed from broader vehicle markets to the chip shortage impacts.
Moreover, Oems are generally maintained their fleet allocation share to date and have committed to continue to do so for the remainder of the year. This is because fmc's like element are the Oems most reliable repeat customers at scale.
Our clients continue to exhibit very strong appetites to place orders. This is no surprise.
Assets are critical to their business operations and their ability to generate and sustain their own revenues as such and as expected based on the volume of deferred client orders from 2020, we built the largest first quarter order book element as seen in four years.
We've been advising our clients to be decisive and place VF orders as soon as that can commit we're recommending that our clients take the same approach to model year 2022 vehicles and orders for those can be placed as soon as June and July with some of our OEM partners.
We've also helped many clients meet their needs by evaluating recommending and ultimately executing on alternative solutions such as different models from different manufacturers. This alternative elements value proposition our network supply partners is vast and our expertise is deep.
And we hope to make those complex circumstances easier for our clients to navigate.
Recognizing this microchip situation is very fluid there is the potential for up to $200 million of.
Of originations to slip from Q2 to Q3.
In closing notwithstanding the many and varied abnormal economic impacts of the pandemic, we continue to advance our strategic priorities and we see ample evidence of the near and long term viability of this growth strategy.
Accordingly, we expect to grow net revenue, 4% to 6% in 2021 before the impact of changes in FX.
We expect to expand our operating margins and translate this growth into higher growth and OE.
To improve our ROE through migration to a capital light business model driven by both growth in service revenue and higher syndication volumes and generate strong underlying cash flow and returns to our shareholders through dividends and share buybacks.
We will continue to deliver a consistent superior service experience to our clients. We will continue to improve the effectiveness and efficiency of our market leading business and we will continue to prioritize the safety and wellbeing of our people who truly are our greatest competitive advantage.
With that let's open the floor to questions.
Operator.
Thank you we will now begin the analyst question and answer session.
As a reminder, in order to reward our analyst day, the opportunity to ask questions element kindly request the analysts limit themselves to two questions and line of dialogue with management.
Shannon analysts have additional questions. Please rejoin the queue.
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The first question comes from John Aiken with Barclays.
Please go ahead.
Good evening.
I wanted to start out with you if I may in terms of the cash taxes paid.
I think it was new Zealand can you per.
First are you able to quantify it and secondly can you give us a little color as to what was driving the situation.
Yeah, well, it's driven by the profitability in New Zealand and effectively you have the <unk>.
The accumulation of cash taxes in the fourth quarter, which then rolled over into the first quarter, so they've materially impacted our cash taxes for the quarter, Jon that being said.
We still are targeting $40 million to $50 million total cash taxes for the year. So.
Plus or minus order of magnitude $7 million to $10 million per quarter for Q2 through Q4.
Great and then obviously wasn't commensurate.
<unk> free cash flow moving forward.
Under the year correct.
If I could.
The disclosure that you had in terms of the timing of the service revenue and net financing revenue between.
U S and Canada and Mexico.
That's very interesting.
What's driving the difference between the two regions is it regulatory or was it just structure of the marketplace.
So John the structure of the marketplace.
In Canada the U S.
It's very normal when you steal share for instance to immediately take on the services.
Function on behalf of that new client within a quarter or two so the transition of maintenance accident management tolson violations et cetera migrates from the incumbent to us.
When that client mandates and within a quarter or two we're up operational and move them off of the.
<unk> platform onto our platform and we begin to generate that service revenue.
Within that mandate to to look after the <unk>.
Origination and maintenance of leases for that new client.
Fold since so the incumbent keeps the existing book of assets that they have manage those.
From a lease point of view on behalf of the client we as that as.
Asset matures and it needs to be.
Sold and replace look after that sale the origination of the ordering and origination of that new vehicle and build our book over three.
Three or four years time, so thats kind of the established market.
Protocol in.
In Canada, and the U S and maybe you could just highlight the differences that.
That have emerged from the Australia, and New Zealand marketplace.
Yeah sure Jay and if you look at as service revenue profile as the fleet starts to ramp up as service revenue progressively ramp it ramps up in value.
Commensurate with the scaling of the units and the scaling of the fleet.
Very good summary from UGI.
Great. Thanks, Thanks, I'll re queue.
The next question comes from Paul Holden with CIBC.
Please go ahead.
Thank you good evening.
First question is with respect to.
Servicing income and Jay I know you gave us a number of things to think about in terms of the potential recovery there.
So if I think about it just getting back to pre pandemic usage levels, which it will I think sometime soon hopefully.
And then the growth in the size of the fleet from a servicing perspective.
Should I not think about the potential for servicing income to be somewhere higher than it was pre pandemic and I guess, what I'm looking for is help in gauging that delta once usage gets back to to normal pre pandemic type levels.
Potentially how much higher could servicing income.
Based on the growth in your in your fleet.
We're very bullish in terms of service revenue growth opportunity within the organisation Paul.
And it is due to a number of the factors that you've highlighted so one there is just a normalization of of consumption.
Our current book of clients fully utilize those assets.
Form their portfolio.
Secondly, the.
Revenue assurance activities that we undertook through transformation allowed us to plug a number of leaks that again with full utilization of the existing fleet will result in better yield on those assets thirdly, we.
We have had the opportunity to observe some.
<unk> increases into the model.
And as a consequence, we would expect those to flow through.
As incremental yields as well and then over and above that.
We have been doing a fair amount of work in the first quarter.
<unk> penetration and utilization and we see a fair amount of white space within the portfolio global portfolio to not only sell.
<unk> more services to existing clients, but.
But to increase the utilization of those services and when I say utilization for instance, when we have a.
A driver of our client vehicle, who is getting maintenance work done outside our network that is harmful.
To the value proposition of.
Reducing the total cost of ownership of that fleet.
It hurts our client, but it also hurts our revenue and so having our drivers.
Utilize the network of service providers that we have established as a win win for both per client and for our organization on.
Over and above that when we think about penetration as we've talked before.
We see.
Even more white space in the markets outside of the U S and Canada and Mexico in particular.
Manuel and the team have done a great job of introducing a number of new service offerings into that market have found strong receptivity and again with the.
Good size embedded fleet in that marketplace, the opportunity to add to what has traditionally been a leasing market add more service offerings into that marketplace offers yet another opportunity to penetrate that white space that we see in services. So yup.
The.
We continue to wait.
Resumption has some degree of normalcy in terms of.
Of.
The entirety of our fleet being fully operational.
But as both Frank.
And they are and have indicated.
Quite.
We are quite encouraged by what we've seen in Q1 April.
In terms of again, a return to normalcy and strong trend lines in terms of the consumption of services.
So if I interpret your answer correctly then.
And think about it relative to your 4% to 6% overall revenue growth.
This should be at least at the higher end of that range, if not possibly possibly higher.
Yes.
The comment specifically on that but I would call your attention to <unk>.
Section one two of the supplemental where we've given some additional disclosure around deals that closed in the quarter and we see deals that close. These are deals that are entered contract. These arent.
Work in progress these are signed contracts and as you will see.
On the number of revenue units that we've added which will be a combination of of lease revenue units maintenance revenue units.
Excellent management revenue units et cetera, you could see that the book of business built very nicely.
In Q1.
And again remember this is an organization that is operating in an industry, where 11 or 12 months sales cyclosis norm. So.
Knowing that we were just beginning to spool up the U S. Canada operations in the second half of last year gives you an indication of the early traction, but they have had in the continuing traction that Mexico and ANZ ahead in terms of.
Of new opportunities.
A number of which would be service related okay.
Okay. Thank you. Thank you have a second question on this would be.
A quick one is just when.
When I think about the additional performing credit allowances.
That youre carrying that $13 5 million, what would sort of be the key triggers there for potential releases is it simply.
Further updates to economic assumptions or does it has to be something that's maybe more specific to element to actual credit experience.
I think it's more the latter than the former or the former we'll obviously inform that decision.
But you would point to.
The delinquency rate on record low delinquency rates look at our impaired receivables.
At the end of the.
Quarter was $16 million and subsequent to the quarter dropped to $4 million. So I guess, the $90 million figure a year ago.
You look at the performance of the portfolio the quality of the underlying asset and actually the improvement of the credit quality of the portfolio.
Year over year.
Dan.
Better positioned today than it has before so I think that will inform.
The decision in terms of releasing more of the allowance for.
Credit losses.
Alright, great. Thank you for your time.
I don't Paul Thank you.
The next question comes from Geoff Kwan with RBC capital markets. Please go ahead.
Hi, good evening.
Question on originations.
Curious how your origination expectations for for 2021 at the start of the year.
Compares to what it is today I know you mentioned kind of shifted the $200 million.
I'm just wondering if you still think given everything going on that you can still hit your origination what your internal target would have been but also to was on Amazon or I mean, sorry, Armada and <unk>.
Again, given the chip shortage.
What kind of gives you confidence that they'll be able to hit their origination target for 2021.
Yeah.
Good evening, Jeff.
I would say when we look at for instance, Q1 originations.
This is a historically low quarter for us.
In terms of originations.
Generally as the quieter quarter for originations for the organization.
Of that obviously, we had the.
They.
Deferral of orders from 2000.
<unk> that also impacted the Q1 originations.
And FX impacts and year over year.
Our model.
Was that also a heavy contributor to a lower level of originations in Q1 of 2021.
There are virtually no originations this quarter versus.
The first quarter of 2020 so.
I wouldn't look at Q1.
As necessarily an indication of what our expectations or performance would be for the remainder of the year.
We again.
But the biggest order book.
In four years for Q1.
Just an outstanding quarter in terms of those deferred orders coming home to roost.
The eagerness of our clients to place orders and get an allotment of vehicles.
Very encouraged by that as a sign of what we may be able to expect in terms of origination performance. This year.
At the same time.
The big unknown is this microchip shortage, we've been on this issue for six months been working hand in glove with the Oems since December of last year to try and size. This try and prepare for this we have been out in front of this with our clients and hence.
The building of the order book over the last four months.
And.
Based on everything that we have been told based on everything that we have red.
We can see some slippage from Q2 to Q3 in the neighborhood of $200 million is our best estimate at this point in time, but all of the assurance that we have been provided would suggest that this is a quarter by quarter slippage within the year and it shouldnt melt into <unk>.
1022 might that occur.
This is a very dynamic.
Topic.
No unforeseen and never encountered before so its hard to two.
Predict with any degree of precision how this will all unfold.
Talking with Jim Halliday, our Chief operating officer, who lived through the great recession in this industry.
He was amazed by how quickly the Oems bounce back after the great recession. Despite all the financial issues that they were dealing with to ramp up production to meet the insatiable consumer demand for vehicles. So fingers crossed this is another one of those moments where they brought us.
Vacation overcome the shortfalls in and produce such that we can indeed have all of the order book that we have successfully built.
Get built in terms of new vehicles. So.
Again.
Really didn't want this we felt like we were off to such a great start. This introduces a degree of uncertainty we're working.
Collaborative fashion.
The Oems too.
Planned for to mitigate.
The impact.
And thus far it feels like a quarter over quarter Q2 Q3.
But.
We just need to see how this plays out over the course of the coming weeks.
Okay. Thanks, and just my other question was.
Net new exhibit that you have under new client wins or expanding the existing relationships and thanks for that disclosure and I guess the 152.
New clients, which is quite significant.
Yes, essentially.
When you announced your Q4 results you announced a number of new client wins is it fair to say that they would have been a number of additional ones that have been closed since you reported Q4 results, but also just wanted to get your latest thoughts on the new customer pipeline things like around geography to self managed opportunity mega fleets that sort of thing.
Yes, I think the answer to your first question, Yes, I think thats a fair assumption that there are additional deals that.
<unk> had been secured subsequent to our Q.
Q4 disclosures.
And as we sit here today.
Really like how the pipeline has developed in each of the three regions very strong.
Further just love how the teams are thinking about velocity.
And reducing the cycle time from a very elongated 11, or 12 months down to something that could be 10 to 11 months.
Two from deal inception to signed contract so very encouraged by what we see.
Share of wallet.
And so maybe I start the other way so self managed fleets are obvious in terms of of our previous discussions and your knowledge of the.
Marketplace from the size of the marketplace and this would be a combination of via polices and selling services too.
Prospects that have become clients of converted from self managed to an FMC client.
Market share is obviously stealing share from our competitors and I'm pleased to say that retention has been very strong on our side.
And so our batting average shares has been very good in terms of with loose very good.
And share of wallet is.
A couple of minutes of explanation. So this share of wallet is not only the long standing clients of element in <unk> and <unk>.
Maybe offering lease services to a service only client or offering services to a lease only client or offering more services to our lease and service client, but for instance in Mexico.
We often manuel and the team will work with the self with an organization that manages their own fleet.
When the mandate FERC tranche of that fleet.
And that will be that first tranche is recognized in the schedule as a self managed to win.
As they.
Prove their capabilities.
And when a second third fourth and ultimately all.
Of the fleet mandate that goes into share of wallet.
That's how we think about this so.
When you look at share of wallet think about that as a combination.
Increasing the penetration of our service and lease offerings to our longstanding organization or the clients, but also selling and winning more of the mandates of the self managed fleets that we've been able to identify and get a toe in the door.
Okay, great. Thank you.
The next question comes from Jamie <unk> with National Bank financial.
Please go ahead.
Yeah. Thanks, good evening.
Good evening.
First question is.
It was around the net interest margin, obviously, a really great job on the cost of debt.
And cost of fund side.
On the on the top line I, just want to get a sense that too.
Maybe the contributing factors to that to the increase there can.
Can you break out the contribution.
The reserve release, the impact of gain on sale in Australia, New Zealand and also the impact of Nexgen.
Yeah.
Mexico, Australia, New Zealand increase.
Absolutely yes.
Yes.
Sure I can take I can take that day and.
Typically we wouldn't break out those components for <unk>.
Sure.
But as you know we did breakout the provision for credit loss, so that was three.
$3 $5 million benefit there.
There's been some very good positive momentum on gain on sale at Australia, New Zealand as Darren has pointed out.
Strength of that market as well.
So without getting into the specifics I think you've hit on some of the key points, but underlying the strength really is.
Core business and.
What we've been able to do both from the top line piece of the origination side.
As well as.
The.
Both the quanta managing the quantum and the cost of our debt.
The term, which has expanded those margins materially so I think thats, where you see a lot of it now if you were to look just at the provision for credit loss, which we did disclose on a year over year basis that would that would contribute.
You know a reasonable call it.
50 ish basis points of the improvement year over year, if you were to back out that 12.
$1 million charge last year, and then put back in the three six back out the $3 6 million in this quarter, but you'd still have a very significant improvement in your MSR.
<unk> for the business.
And Frank.
Really to your point once you strip out the.
Allowance for credit loss variance.
Normalized <unk> per FX are still two five percentage points year over year growth.
<unk>.
In net financing revenue and a continued expansion of the net interest margin and again it does come back to.
This mix and the continued syndication of the lower margin.
S portfolio.
And the rapid growth in the AMC.
Mexican portfolios, both of which have superior yields on their portfolios compared to.
The U S and then obviously the continued.
Success that we've had in both reducing the quantum.
Of indebtedness on our books down to $5 five six times tangible leverage at quarter end, but also the cost.
Taking out over $1 billion of high cost financing from that structure. So.
All contributing to.
Very impressive.
Okay great.
Second question still so I guess in the same vein, but.
Around the the leverage of 5556 as you just mentioned.
Or are you thinking about that for the rest of the year.
What type of buffer that you're comfortable with running that given we were at 5.7 last quarter or how should how should we think about it.
The leverage going forward here as with the coffee.
It continues reopened.
Okay would you like to.
Take the first crack at that.
Sure Yeah.
So Jamie as you know our longstanding objective.
Our objective was to hit that six times tangible leverage delighted that we were able to do so as part of the transformation of the organization and its our belief that plus or minus 2025 basis points, we should be at or around that to maintain if not indeed enhance.
The credit rating that we have with the various debt rating agencies. So.
Call. It $5 75 to 625 is kind of are comfortable landing zone.
And recognizing that FX and syndication volumes can rapidly move that around we feel that that 40 or 50 basis point range around.
The six times tangible leverage is where we would ideally like to be.
With the strength of the Canadian dollar and the continued strength in the Canadian dollar.
That is taking us down too.
A lower level of tangible leverage than what we expected or wanted recognizing that there is a <unk>.
Inefficiency for being under Levered.
And so.
And again, our fundamental assumption is that the strength of the Canadian dollar is temporary.
It will in time weakening against the Euro.
Dollar.
We'll be back to quote unquote more normal levels.
Of.
The relationships between the two currencies.
So <unk>.
Expect that.
We will probably end up closer.
To the debt.
The $5 75, perhaps in the six times tangible leverage as we go through.
2021 recognizing.
Recognizing that a part of the performance that you are seeing is directly related to.
The FX.
Situation and the strength of the Canadian dollar and given that that it will reverse in due course.
I want to be overly aggressive in our share buyback.
Again, we will probably run a little.
Less levered.
Then what.
What we had planned but we're talking here 10, or 20 basis points from where we would otherwise plan.
Okay that makes sense.
Yes completely thank you.
Perfect.
The next question comes from Tom Mackinnon with BMO capital.
Please go ahead.
Yes, Thanks, Scott, Thanks, very much and good afternoon.
Alright, yes, it's good evening bye now around now or it's even good morning in Australia as well so.
Yes.
So just.
Just a question on the free cash flow and just the relationship that it bears too.
To your.
What what how how should we be thinking about free cash flow relative to the a M. A Y a per share should it just be like a couple of pennies above or three cents above and or should it actually start trending up to be higher like six or seven cents per share above as it was about a year ago.
Yeah, Tom when you look at the schedule in the supplemental that breaks it out you can see actually theirs.
High degree of Congruency in terms of the inputs to that schedule land the financial reporting of the organization.
The the one line that has changed materially over that period of time is plus or minus other noncash items.
And.
And behind that is originations originations is a very cash accretive.
Exercise for this organization.
It's cash accretive in that it represents.
An opportunity for this organization to generate a lot of revenue through the acquisition.
Interim funding.
Delivery.
Of vehicles.
That gets deferred and amortized over the life of.
The of the leaks.
And as you think about that source of revenue.
Get all the cash through these various.
Revenue sources all at once.
But it is actually deferred and amortized over the life of the lease and so you have.
That creates a very substantial differential.
Between reported earnings and cash flow the reported earnings obviously.
Our delays over on average 41 months.
Whereas the cash gets recognized right away and so the pullback in originations.
As in effect.
Unwound some of that upfront benefit.
Where we don't have all of that revenue associated with the acquisition up fitting interim funding remarketing.
Of that vehicle.
For the client so.
As originations come back.
Two normal levels, you would expect that line to come back to a more normalized level akin to what we've enjoyed in the past as opposed to what we have.
Jordan and the more recent quarters.
Yes. Thanks, that's very helpful and just as a follow up I think Jay when you said when you reported the fourth quarter results when he talked about.
100 million in originations slipping from the first half to the second half.
Said there'd be no material financial impact and I assume.
Are you sticking with no financial or material impact.
Now that that number has moved up to $200 million.
Moving between the second and third quarter or are there any other.
Things that would be materially impacted as a result.
The push out in terms of originations.
Yes.
Regards to the.
The guidance that we've provided around the ne.
The nature and extent of revenue growth, the nature and extent of Oi growth free cash flow.
All hold see major amendment was indeed.
46% revenue growth it's there.
Just going to be masked by virtue of the strength of the Canadian dollars and the erosion due to FX, but the underlying growth as youre seeing in the results that we've shared with you is there. So the model is being proven out.
Frank as noted Theres a few things.
In the first quarter that arent necessarily indicative of what you should expect for the year or so.
While we do expect.
Spansion.
The operating margin.
<unk> five point.
2%.
It's definitely a high point.
And.
So we think we've given you.
A number of different data points that will allow you to better.
Calculate how this all should flow through to your models that said.
The premise that we set forth. This is attacked save the caveat that the 4% to 6% revenue growth will be on a constant currency FX neutral basis as opposed to nominal.
Okay. Thanks very much.
Thank you.
This concludes the question and answer session I would now.
Like to turn the conference back over to Mr. Forbes for any closing remarks.
Thank you operator, and more importantly, thanks to all of you for joining US today, we appreciate the opportunity to discuss these results in greater detail.
And look forward to any follow up questions that you might have of us and the interim stay well.
This concludes today's conference call you may disconnect your lines.
Thank you for participating and have a pleasant evening.
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