Q4 2021 Element Fleet Management Corp Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the element fleet management fourth quarter, and full year 2021 financial and operating results conference call.
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.
Join rejoin the question queue you May Press Star then one on your telephone keypad.
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I would like to remind listeners that some of the information in today's call.
Weird looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties.
The company refers you to the cautionary statements and risk factors in the year and most recent MD&A as well its most recent aif or a description of these risks uncertainties and assumptions, although management believes that the expectations reflected in the state.
That's a reasonable it can give no assurance that the expectations reflected in any forward looking statements will prove to be correct.
Earnings press release financial statements and DNA supplementary information document quarterly Investor presentation, and today's call include references to non Ifr estimates yours.
Many of them, which management believes are helpful to present, the company and its operations in ways that are useful to investors.
Constellation is these non <unk> measures well I have forests measures can be found in the MD&A.
Now I'd like to turn the call over to Jay Forbes, President and Chief Executive Officer of Ellington. Please go ahead.
Thank you operator, and thanks for all of you for joining us this morning.
We're going to briefly address all of them as 2021 performance spend its results as well as our outlook on this year and next year, which has not changed since we last spoke to you in November .
Weapons, the majority of our time together.
Available.
For you to ask questions and we'll endeavor to provide as much color and insight as possible in our responses.
Let me start by repeating what I said, when we last spoke which is element as a whole is performing better.
Ever before.
I wish the proof points to this effect, there's three months longer now than it was in November .
Allow me to step back for a moment if you would.
<unk> 2020, we.
We set out three strategic priorities for element in 'twenty to 'twenty one.
The first was to grow net revenue between four and 6% above 2020 levels in constant currency, demonstrating the scalability of our transformed operating platform by Meg to find that growth into superior operating income growth, thereby expanding our operating margins.
What I've seen in our disclosures we succeeded on all counts.
Our second strategic priority for 2021 was to advance our capital light business model through growing services revenue and strategic syndication enhancing returns on equity.
And we did that too.
And our third strategic priority was to grow free cash flow per share.
And return capital to shareholders through growing our common dividend and repurchasing our common shares under in CIB.
As she accomplished.
While achieving these growth objectives as gratifying, we're still amazes me is that our organization accomplished this during the first ever global vehicle production shortage in the history of this industry, which lasted the entirety of 2020 one.
<unk> to persist, albeit to a lesser extent now than before.
Hello, Ms growths from 'twenty to 'twenty, one against the backdrop of unprecedented supply chain disruption.
Fixed to a few things.
It speaks to the determination the agility the accountability of our 2500 employees across the five countries in which we operate.
My executive leadership team and I are tremendously grateful for our people.
Nick.
Accomplish for our clients in 2021.
Although Ms growths in 2020 , one notwithstanding OEM production shortages also speaks to the resilience of this business model.
So yes has been proven two years in row now first against the backdrop of Covid arrival.
And the waves of global Lockdowns in 2020.
And again last year.
This resilience is what gives us confidence in being able to deliver on our outlook for this year as well as 2023.
Lastly, I want to success in 2021 speaks to the crucial role that our services and solutions play for our clients and their businesses well the vehicle supply side of our business was constrained in 2020 one.
We've experienced record levels of demand for vehicles as well as elements expertise and support across the entirety of our client base.
On the subject of demand for vehicles. In addition to the 'twenty to 'twenty. One results, we reported yesterday, our business generated between 40 and $65 million of incremental revenue.
Operating income and cash flow in 2021, which has been deferred as a consequence of OEM production delays.
This value was represented by the excess $1 $9 billion of backlogged vehicle orders placed by element clients as of year end 2021.
These orders are excess and that they're on top of our usual yearend global backlog of approximately $1 billion in order volume.
We continue to forecast this order backlog, having grown further by mid 'twenty two 'twenty three when we expect global OEM production capacity to be back at 100%.
Excess backlog begins to recede.
All of these details are identical to the outlook, we provided in our November public disclosures, if you understand our confidence in the trajectory has been bolstered by our Q4 2021 and year to date 2022 performance in combination with the recent public statements made by several large Oems.
Regarding expected production volume recovers.
Returning to my belief that element has never performed better.
We do offer a few proof points from our 2021 results.
These are in constant currency to eliminate FX translation noise and restricted to our fleet management are core business performance in prior years.
Other words on an apples to apples basis.
Element generated more net revenue in 2021.
Than ever before.
This was driven by more service revenue and more net financing revenue generated in 2020 one than ever before.
We produced more adjusted operating income than ever before.
Our free cash flow and more free cash flow per share than ever before and we returned more cash to common shareholders then element ever has before.
We achieved all time high global net promoter scores for 2020 , one as well as for Q4, 2020 . One specifically this is a truly remarkable achievement for an organization that was receiving negative net promoter scores in some geographies when I joined in 2018.
A world class loyal client base ordered more vehicles from element in 2021 .
Ever before.
On this count we have to exclude our motto. However, if we include our motto 'twenty 'twenty. One was our second best year, our borders and element of history, and a mere $150 million shy of 2019.
Q4, 2021 on its own was the single largest quarter of vehicle orders and elements history by a $400 million margin, regardless of weather or mottos in or out of the data set.
And the list goes on there were a dozen all time highs reached by our commercial teams in 2020 , one to say carried that momentum into this year.
We anticipate we'll be even more successful for our clients and client prospects.
The bottom line remains that element is performing better than ever and perhaps more importantly, we've never been better positioned to sustain and build on this success.
Before I get Frank the floor I wanted to conclude by spotlighting. The watch of arc by element last week, which is our integrated end to end E V offering.
By element builds on our established success with Tvs and all the markets. We serve with special recognition due to our colleagues at custom fleet in New Zealand, where they're offering called D. B plus has been and continues to be the only end to end E V offering in that market for years.
Elements basic value proposition, making the complex simple for our clients is a natively responsive to the challenges of fleet electrification.
And this is a market leading FMC in every region. We serve element is best positioned to support our clients.
Our.
Lead our industry through the gradual electrification of automobile fleets.
We're excited to bring our full service offering to our clients under the banner, ensuring consistency for global clients and developing this offering to be seamless across all of our geographies.
With that I'll turn things over to you Frank.
Thanks, Jay and good morning, everyone I.
I want to make several comments regarding our 2021 results in another few about our outlook for element this year.
After that we'll jump into Q&A.
The last time, we spoke in November .
We gave you some guidance ranges on how we expected Q4 to play out and therefore, how 2021 would look at as a whole.
This ended up outperforming many of those guidance ranges. We are pleased with the outcome and I will provide some insights on our strong performance.
For the month of October 2021 the top five Oems, we do business with in the U S and Canada posted their lowest vehicle production numbers that we have record up.
They were struggling with supply chain issues in the near term outlook was dubious with the consumer holiday season approaching and presumptive routing of microchips, the higher margin in demand consumer electronics.
These changed very quickly in November Oems scheduling and production capacity accelerated materially.
Fly chain raw materials, including microchips ended up being able to support multiple shifts at our Oems and the number of plants worked throughout the U S. Thanksgiving holiday and later into December then it's customary to maximize vehicle production before the end of the year.
With historic order backlogs, the Oems were able to be selective about which vehicles. They produced so they focused on higher margin and less microchip intensive models.
<unk> results in total production numbers.
Any of our clients vehicles fall into the higher margin, but less microchip intensive category as a result.
Originations were above initial expectations in Q4.
Additionally, and this is independent of originations, we were able to implement and start generating revenue on a number of commercial wins that we had assumed would come online in 2022.
Essentially our Q4 outperformance benefited from this timing of originations and implementation of client wins.
But it's also a testament to the performance of our employees, who were able to process. This volume up unexpected originations and onboard new client wins.
As we have told you before originations are very revenue and cash accretive events in our business, especially when you include the knock on effects to services like titling and registering the new vehicle and remarketing of vehicles being replaced.
The outperformance was not 100% driven by incremental originations, but they were significant contributors as what's the anticipated January revenue being earned in December .
Indication revenues for the year were healthy.
The $4.4 million with a full year yield of two 4%.
Q4, syndications were $14 5 million, while achieving a healthy two 9% revenue yield during the quarter.
Notwithstanding the strong syndication revenue yields in both Q4 and Q3 'twenty 'twenty. One we continue to recommend modeling syndication revenue yields closer to 2% going forward and we will let you know this outlook changes.
The other metric that varied modestly from our Q4 guidance was adjusted operating expenses.
Recall that Q3 adjusted Opex included a year to date catch up accrual for short term incentive costs, reflecting strong business performance relative to our balance scorecard Q.
Q4 business performance exceeded expectations on the same basis in Q4 salaries wages and benefits increased quarterly.
Nonetheless, we delivered on our adjusted operating margin guidance for 2021, and adjusted operating income growth continues to outpace net revenue growth.
Amplifying our scalable operating platform.
As you update your models for 2022 based on yesterday's results couple of items that should help.
We remain committed to 2% net revenue growth in constant currency in 2022.
Fight higher than anticipated net revenue in 2020 one.
We expect our adjusted effective tax rate to be somewhere between 25, and 27% in 2020 two.
Many external factors impact us on the margin, including currency and dispersion of earnings by geography amongst other variables. We will let you know as we progress through the year if R E T our expectations change.
That being said as you know effective tax rate is an accounting construct and our actual cash tax obligations remain materially lower.
We expect cash taxes to be in the $50 million to $55 million range for 2022.
We expect to keep our operating margin in line with 2021 despite slower growth.
And we expect sustaining capital investments to be in the $50 million to $55 million range.
Recall that we've already signaled our intention to redeem our series I preferred shares in June this year, which will have a positive impact on our free cash flow per share.
And we are committed to continuing to repurchase shares under our N C. I D.
In addition, our focus on an asset lighter model is enabling the return of cash to shareholders via the M. C I b and our recently increased dividend.
These ongoing returns of capital remain a critical component of our value proposition.
With that operator, let's please open the line for questions.
Thank you.
We will now begin the analyst question and answer session.
Could you afford all analysts the opportunity to ask questions Alan tiny request that analysts limit themselves to two questions and live dialogue with management.
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The first question comes from Jeff one.
Of RBC capital markets. Please go ahead.
Hi, good morning.
When looking at the new client wins and the cross selling that seems to have been accelerating in the past six quarters.
The momentum seems to be broad based but there were two things that stood out.
To me for the Q4 results.
When I look at on the trailing 12 months basis, the revenue units in U S and Canada were up almost 100% year over year.
And the share of wallet was up.
And 60% year over year on the market share win so just wondering how you explain.
Some of the positive momentum you know how much of this is not kind of included in into 2022 2023 guidance because of the chip shortage and how does the pipeline look.
Good morning, Jeff.
Listen.
Really excited.
With the revitalization of our commercial efforts as consequence of our decision to pivot to growth and early Ah.
2021, and you might remember that we began the wholesale overhaul of our commercial function in the U S and Canada.
Mid 2020 in anticipation of going hard on this growth agenda in 2021, and as you called out the results reflect.
The success that debuted magic all those head as our chief commercial officer and revitalizing this commercial function.
Yeah, I would say there are a lot of secrets to the success.
It has come as a consequence of our reorganization and upgrading of the talent the skills.
Our commercial force.
The revamping of their compensation.
And a distinct bias.
Introduced to the sales group in terms of the pursuit of services revenue on a much more aggressive basis and perhaps what has been the case in the past and that ability to increase share of wallet through both penetration.
Our service offerings to.
The entirety of our client base as well as increasingly usage of those services across that client base has been a key part of the success that we see in terms of service revenue growth.
Certainly revenue unit growth in 2021, which in turn we expect to translate into very attractive service revenue growth in 2022 as those sales.
Our.
Transactions are implemented to those services are spooled up with those respective clients. So yeah. This has all been very much. They are both the concerted energies and focus that we brought to the revitalization of our commercial groups across all five countries, but in particular the U S.
In Canada, and the success that they've enjoyed and share of wallet gains with our existing client base as well as stealing share.
Converting self managed fleets and.
And in doing so the provision of services to those new units that we have taken under management.
And then.
Can you give us a progress update on the North American self managed opportunity and are you seeing any early opportunities for market share wins relating to the donlin wheels in a L D lease planes transactions.
Yes.
So.
I would say to you that.
The.
The.
Ready opportunities that had been afforded to us in terms of this focus on share of wallet.
I have.
You know taken a whole lot of the focus a lot of the energy of our sales team is devoted to.
To that.
And I would say further that the OEM production shortages have coupled with the continuing.
Restrictions associated with operating in a pending.
Pandemic World.
Have.
Tempered our efforts around self managed fleets.
All of the opportunity is there and just our ability to access it has been somewhat constrained by our inability to have the face to face meetings with the C. Suite personnel that we believe are the right points of contact to converting their self managed fleets into F. M C clients.
Coupled with the ready success.
<unk> enjoys in terms of increasing share of wallet, so that opportunity for us continues to be real.
We're actively pursuing it and enjoying great success at your CRE.
It was close to the supplementary.
And it will be the backbone of our revenue growth strategy go forward.
But for <unk> 2021 it was a bit tempered.
Given again the restrictions imposed by the pandemic are coupled with the phenomenal success that the team was enjoying in terms of both stealing share.
As well as share of wallet and on the stealing share.
The consolidation of the shifts that we've seen in ownership of certain of our market competitors have given rise to their clients seeking alternative FMC representation recognizing that you know.
The perils in trials of integration can and might be disruptive to.
The client experience that they might enjoy so you know us having.
You come out of that and an offering of first scraped industry.
Leading client experience coupled with the concern that the experience that they are enjoying with their current service provider.
My degrade as a consequence of the integration is certainly giving us opportunities to steal share and again, you'll see it in the numbers. The team has taken full advantage of that.
And if I could just maybe sneak in one last one on an Amazon you're signing Armada and they've talked about their desire to electrify their delivery van fleet.
Evidenced by their order, but it's moving in and more recently still Lantus I just wanted to understand our model's ability to procure our electric delivery vans given the chip shortage in that there's a limited number of Oems that are producing diesel electric delivery vans and are you able to talk about weather Armada. It's facing these same procurement.
Issues for forgetting these electric vans and as Hal has element involved in helping our model with this.
Yeah.
So you know I.
I guess, maybe let me start by saying that we continue to deepen our relationship with our model, which is our largest client as we provide more services to its ever growing fleet.
And further.
Much of the services that we provide to our model our drivetrain exhausting, so whether the Arabian or the Lantus bright trop Fort.
We will service those vehicles much like we do the ice vehicles as we work closely with this organization to achieve their last mile ambitions I say gradually electrify their growing fleet.
They like every other client would be constrained by the strips shortages clearly at their scale.
They attract a disproportionate amount of interest and attention by the Oems, but the simple math has it that every one of our clients is being constrained in terms of their ability to secure.
The necessary vehicles in volume to meet their demand.
Okay. Thank you.
Thank you.
The next question comes from John I can of Barclays. Please go ahead.
Good morning, Frank wanted to I'm talking about syndication I think in the MD&A you talked about a different like there were three.
Classified as portfolio transactions, and if I understand correctly.
We're done to a single buyer can you can you talk about these transactions first where these three transactions all to the same buyer or at least to three different buyers what type of concentration risk does this pose any other syndications and also I think the MD&A mentioned that this has actually resulted in higher yield.
I'm assuming that this is from.
Less costs associated with a simpler process, but is there anything else involved in the the higher yields derived from this yet.
Yeah. Thank you. Thank you sell so the quick answers are these are deals where we may have smaller portfolios of assets that are.
In and amongst themselves.
The the effort the cost and the.
The scale could negatively impact the yield associated with these smaller portfolios. So by pushed putting together a number of these smaller portfolios.
<unk> deals.
Programs into one portfolio we attract.
A broader range of buyers for those portfolios because it's worth their while to look at you know.
Significantly larger portfolios then to look at very small deals as we look at that and so that has two effects one is.
Because you attract more buyers because of the scale of the portfolio. There was more competition for those assets and as a result, you get better yields and better better auction dynamics in regards to those portfolios.
Then secondly, just the ease of doing internally one deal versus doing 12 or 15.
Obviously has its benefits to just from a bandwidth perspective with our syndication partners. So that's really what's going on here with those portfolio deals.
We put them together.
And frankly as this a response to.
The fact that the originations from the Oems have been slower and if that's the case do you expect to need to carry this practice on going forward given the fact sheet at higher yields.
We we expect to carry the practice going forward and this has always been part of the maturation strategy of the syndication a portfolio. So it also allows us to take some of the smaller non investment grade names and combine those with some of the investment grade names in and get better economics there.
So really I would say, it's more part of our ongoing strategy. Its always been on the radar screen and as we continue to.
Mature this market and broaden the buyer universe.
This made sense to come to market with these deals, especially given the yield profile, we were able to.
Access by doing that I would expect that you would continue to see portfolio deals in the future just as we've continued to broaden our syndication strategies over the last several years I'd also add that this week, we were able to do our first Canadian syndication and so.
Again, another step in the maturation process of our syndication platform.
That's quite clear, thanks, Frank and say if I may.
In terms of the return capital to shareholders have been.
Very aggressive on the buyback you've increased the dividend, but it is there it is there any sense.
Sex.
The timing for a review of the dividend by the board or when the management would suggest to the board.
It looks like you've done it in the third quarter for the last couple of times, but given the fact that we've seen our free cash flow very strong this quarter and presumably growing forward are we ever going to need to wait a couple more quarters for the next dividend increase or would this be something that the board or the management team would suggest sooner than that.
Yeah, John I think to your point, we've settled into a comfortable groove here.
Coincident with the release of our Q3 results, we have announced a dividend increase for two years in a row I wouldn't expect that to change materially for 'twenty.
<unk> 2021 given.
Excuse me for 'twenty to 'twenty, two given that we're working our way through the resumption of full productive capacity by the Oems and we'll have a much better view of 2023 is as we enter the second half and thereafter, I think it would be at the board's discretion as to.
The frequency and the timing of those dividend announcements based on a return to to.
More normalized levels of origination and indeed excess originations as we claw back some of that backlog that has built as a consequence of this vehicle shortages.
Great. Thanks, Jay I'll requeue.
Thanks, John .
The next question comes from Jamie Glen of National Bank Financial. Please go ahead.
Thank you and good morning.
Good morning.
I wanted to just dig into some of the yield generated on the rental portfolio. So looking back into 2019 2020. It was kind of running around a 5% revenue yield on now in rental revenue and now were stepping up close to 8% could you could.
Could you break down some of the drivers of that I would assume that Mexico is a big driver, but could you break that out and get us a little bit more color as to why.
The contributing factors and the sustainability of those factors.
Sure.
That's right.
Okay.
So so what I would tell you is that there's a couple of things that are that are driving that obviously geographic growth.
Big positive for that as we see it going forward. Additionally, scarcity of assets.
<unk> is also a driver for that so more competition for scarce assets in regards to that is another driver of it. So in the near term we'd expect it to be a relatively.
System, but we'll keep an eye on that and make sure we update yes, we as the market dynamics change.
If we lose Jamie.
I think so how do you mean jami.
Pardon me Jamie Your line is open. Please go ahead.
Right.
Mr. Glenn.
Well go ahead to the next question Sir. The next question is from Tom Mackinnon from BMO capital. Please go ahead.
Yeah, Good morning, and thanks for taking my question.
I'm just looking at the operating expenses are up 3%, three 5% quarter over quarter, 7% year over year.
I look at the November guidance.
Where you lay out revenue and pre tax operating income you can sort of back into a what you see as being an opex growth there and that would imply about a 2% CAGR in terms of the operating expense growth. So for 2022 and 2023. So I guess the question is.
You know.
How comfortable are you maintaining our operating expenses that are you know at 2% growth rate here going forward when they went up 7% year over year.
2021 when you had some pretty good production.
And they went up three 5% quarter over quarter. So maybe some color on that please thanks.
Sure I'll take a crack at that so when we look at the Opex growth. This year. It really falls into two categories. One is and impacted in the third and fourth quarter salaries and wages. So the outperformance in our business.
Created more short term incentive compensation as we beat balance scorecard met and beat bound scorecard metrics throughout the third and fourth quarter and so adjusted that offset modestly by less long term.
Compensation adjustments if.
If you remember fourth quarter of last year, we had a material adjustment up in the long term incentive plan accruals. This year not so much offset by lower G&A and then a big driver has been the depreciation and amortization as a lot of our new projects have come online in regards to.
A pre 2019 2020 investments that came online in 2020 , one around mid year and many of them coming on at the same point.
In regards to the outlook of 2% growth.
This is one of the number one focus is of the management team cost control of the salary and wages line and the G&A line as we move forward here and so this is an ongoing discussion identified and taking path to drive to those operating expense numbers.
Consistent with the growth.
In those forecasts, so I would tell you that implies.
Target growth and therefore target.
Incentive comp.
We significantly outperform the growth then you might see slightly higher salary and wages, but youll see an increase in your margins because of that outperformance.
So what effectively pay more than pay for itself should that occur, but with our guidance. We feel very strongly that this is a critical area of focus and that we are focused on delivering that those opex numbers for the company.
And Frank if I could just wanted to build on that and maybe take it to a slightly strategic level. So yes, Thomas we shared with you.
Our long term ambition for this organization is to grow revenue at 4% to six percentage translate that revenue growth into a higher level of operating income growth. So we do expect our operating expenses to grow in keeping with our growing business.
But we expect to be able to expand.
Our operating margin like we did in 2021 by 66 basis points to some 52, 6% as we go forward.
The other piece that I want to draw your attention to is in.
In 2021 .
Our operating expenses were in support of that five 5% revenue growth that we achieved plus in support of the revenue growth that has been deferred so we had $45 million to $55 million of additional revenue that we earn.
And that had to be analyzed so ordered.
By our teams and so they had to we had to have the necessary resources in place to earn.
That revenue and so you know rough rough rough there the business grew 10%.
Last year.
Unfortunately, 45 to 55 million or.
4% of that growth ended up getting deferred into future years, and so that's the other piece that isn't necessarily obvious on the disclosures as we needed to have the infrastructure in place and their associated costs of providing for closer to 10% growth in the state of <unk>.
Five 5% growth that we achieved in year plus as you can appreciate with those vehicles not being available we had to expend a great deal of effort on behalf of our clients to help them manage through this industry first a phenomenon, but again was a large call on resources. So.
Coming back for US this is profitable revenue growth and expansion of operating margin over time.
So we would expect our operating expenses to increase as Frank says, we will manage them judiciously in 'twenty to 'twenty two.
As we continue to work through a constrained vehicle environment.
Wherever you know our eye is always on that operating margin as a means of assessing.
Just how well we are evolving.
He bought it and skill of our operating platform.
That's great and then as a follow up.
You had mentioned I believe in the release that our client deal activity is now back or approximating pre pandemic levels. So just in terms of the usage based services that you are and.
Get revenue on them, you know looking at things like fuel and tolls and accidents and maintenance I guess tires things like that are those things are those all back to relatively pre pandemic levels as well, maybe you can highlight which kind of your your services are sort of.
All back to pre pandemic levels.
Yeah. The vast majority of our services are back to pre pandemic levels and to cite a couple of examples that you offered up.
Fuel fuel consumption manage maintenance.
Accidents are incidents.
Some violation.
They are at or approximating the volumes that we would have of activity that we would've seen pre pandemic.
Major area of service revenue for us that isn't as remarketing.
So that inability to have a new vehicle.
<unk> delivered to our clients such that we can take possession and remarket their vehicle in Canada and the U S.
And generate the associated revenue from that.
That is obviously still significantly depressed given the OEM production shortages.
We'll expect remarketing revenue to grow.
From its base of 2021, given our increased expectations around originations in 2022, however, there'll be aspects of the service revenue like remarketing that are still held back by virtue of our inability to secure sufficient vehicles in quantity.
Okay. Thanks for that.
Thank you.
The next question comes from Jamie Wilen of National Bank Financial. Please go ahead.
Yeah. Thanks for letting me back in here. So second question was just going to be on the order backlog and are in your conversations with your with your customers. Obviously, an impressive order backlog building to date.
But in those conversation do you have any sense or any indication how.
How much they essentially pulled forward orders from let's say 23, or 'twenty four or even beyond to just really prime the pump to get ahead of OEM production delays you have a you have a sense as to how much that is driving activity in building a border backlogs today.
Yeah actually we have a good sense of that Jamie and very little of the order backlog that we have built as of December 31, 'twenty to 'twenty one would be.
Pulling forward future orders.
I think in the early days.
Of the vehicles shortage say.
Q2, there probably was a subsequent quarter.
Worth of of of.
Preordering that might've been pulled back by certain of our clients as this has unfolded.
That has settled down substantially and and and and.
In large measure due to a couple of factors one the.
80% of the order banks for our major Oems are closed so we can actually place future orders for future model years, with the Oems, which is giving rise to what we referenced says <unk>.
<unk> order backlog. So in addition to these contractual orders that we have.
Taken and report it to.
We're actually monitoring based.
Based on our knowledge of our clients' fleets.
So they're fearful usage and the optimum point for <unk>.
Tiring that vehicle remarketing that vehicle and having that vehicle replaced by a new vehicle and that Shadow order backlog is building substantially.
Again, we can't place those orders with the Oems until they order Qs open back up which we expect would happen in kind of late spring early summer for some of the models.
Would be of interest to acquire so again as we look at that $2.9 billion of order backlog that has built is that.
December 31 2021.
Roughly 1 billion nine is really access in any given year, we'd exit the year with $1 billion splits of order backlog, so theres nearly $2 billion of order backlog and all of that.
Is vehicles that are required to day by our clients to associate their gross needs or to.
Manage down the total cost of ownership of their fleets and as you can appreciate with a more inflationary environment that we're seeing out there there is a real entrust the real need to have those vehicles delivered asap.
Thank you.
The next question comes from Paul Holden of CIBC. Please go ahead.
Thank you good morning, Nick.
Go back to the discussion around operating expenses and you know I guess I would have.
Any kind of concern around the expense.
Central Park, Florida of expenses, given wage inflation, we're seeing particularly in the U S.
And just wondering what you've accounted for in terms of.
Wage inflation.
And.
I guess thoughts around employee retention in that context.
As well.
Yeah, So perhaps Frank let me start and end of <unk>.
Offer up any additional comments around this so you come to your question is timely Paul we have just gone through.
Our annual.
Performance reviews and.
Compensation discussions with our employee base.
You know we operate with.
And a performance based compensation structure for the entirety of the organization. So every employee participates in an annual short term incentive program. That's based on our balanced scorecard results and one of the reasons why we saw an.
An increase in our operating expenses in Q3, and Q4 of last year was.
The result of that <unk>.
Increased performance that we receive we're seeing.
Regarding the attainment of those balance scorecard objectives and cause I itemized in my opening comments show record high NPS.
Retrofitting operational effectiveness sufficiency top quartile employee engagement scores.
And returns are.
To our shareholders, a cash flow income and keeping with our plan all live to a rather exceptional payout.
Payout on behalf of our entire employee group.
That was shared with our employees.
Earlier this month and in addition, so we're the merit increases for 2022 all of which were very.
Well received by our employees says fair recognition.
Their performance.
An.
Appreciation per se.
You know I would say to you.
The inflationary impacts associated with those wage increases have been factored in to our 2022 and 2023, our guidance that we have provided and the reaction from the employee base.
Regarding <unk>.
Both the merit increases and the performance payments associated with the short term incentive programs were very well received.
And Jay I would just add that.
You know obviously, we have invested in technology.
So we do see the wage increases that Jay has discussed we also see considerable opportunity.
Two.
Find and discover and enact efficiencies.
Around our business.
In part.
As we start to see.
Attrition as most companies are these days we.
We are looking to better.
Efficiencies through every component up our organization leveraging about half practice, but also technology investments we've made into the business.
Okay.
Well. Thank you and then my second question is related to <unk>.
Obviously, you've announced a number of initiatives in that regard recently.
If I think about.
E driving underlying driving trends towards <unk>.
E <unk>.
It would seem like a particularly important initiative or government sponsored fleets, which tend to be mostly self managed I believe do you do you think that over time.
Transition to Evs and your capabilities within that.
Help you penetrate that very large government self managed market.
Very much so Paul I think your observation is spot on.
As governments look to lead on the ESG agenda and in particular around sustainability I think they recognize that they want to need to walk the talk and.
In doing so we will want to consider the electrification of their own.
Our fleets and you know what.
That is readily apparent to us in New Zealand they've been at the forefront of policy designed and adoption around a much more sustainable environment and they'll say cascaded those ambitions.
<unk> through their government departments.
Have sought to lead by example in terms of having at least 30% of their fleet electrified and our custom fleet group in New Zealand has been at the forefront of that now.
Now sits on a number of government panels as an advisor to governments in terms of helping them assess and plan for this evolution. So yes, I think they will be the flag bearer.
Of our fleet electrification go forward and as they do and as they start to appreciate the complexities of evolving from ice to EV.
I think organizations like us will.
It will be in.
In a very good position to provide them counsel.
Provide them services and ultimately provide them a financing for those fleets.
That's great. Thank you I'll leave it there.
Thanks, Paul.
The next question comes from shallow dogs from Veritas investment research.
I had.
Good morning, and thank you for taking my questions. So first thing I did put some provisions for credit losses I see that.
Do you do with Glenn Good. This is the first time.
So any color over there.
On Howard.
How it can chip in the coming months or quarters.
Yeah. So we were we were on the path to reduce the provision for credit loss.
We move forward and then omni Kron came and so we've got two components to our credit loss. One is our statistical piece of this and then some management overlays that we put in place at the beginning of Covid. If you remember in 2020 and we've been peeling those off we have some of those left we were preparing.
To take them off and we tapped the brakes because omicron happened in December .
And wanted to keep an eye on how that could potentially impact some of the business I.
I would say that.
Coming through Omicron, we feel very good about our position here and we continue to take our trajectory.
Hum relieving ourselves with those management overlays as we progress all things being held equal as of today.
Okay. Thank you. My next question is on bird, but it goes so six Craig so those contracts and I had been thinking about or doesn't increase.
Like almost 10% near to where you're not taking into consideration of effects. So just wanted if I in this business.
ANZ subscription program, so how's the pricing or the replay you can get a better deal with it like affect inflation driven.
Is it possible.
Clearly the subscriptions they couldnt exactly book.
Yes, the contracts in ANZ had been designed.
Such that it offers us a great deal of discretion and flexibility in terms of the pricing arrangements and thus we're.
Less exposed to inflationary increases on the associated parts and labor that we procure on a as part of that managed maintenance program.
Okay. Thank you those answers my questions.
Thank you very much.
The next question comes from Geoff Kwan from RBC capital markets. Please go ahead.
Hi, just a couple of follow up questions. One was just given the the Russia, Ukraine situation has there been any insights you've gotten from your disk.
Discussions with people in the industry.
There might be any impact on chip protection, just given the neon production.
That comes out of the Ukraine.
Yeah.
Well, obviously, we're monitoring the situation closely.
And have not yet identified any immediate issues for our business.
Our current understanding is that the primary impact will be on European Oem's manufacturing in Europe that rely on Russia, and Ukraine for certain key ingredients to the automotive supply chain, not the least of which would be palladium with neon gas at <unk>.
<unk> as well as nickel and aluminum so you know.
I would say to that.
The chip shortage of 2021.
Truck.
Most global Oems too.
A very different place in terms of their understanding of their own supply chains and with that increased understanding.
Yeah.
Plans in place.
To minimize disruptions along that supply chain for.
For 2022 2023, as they look to bring back to protect full.
Full productive capacity.
And just my second question was just going back to your comments on Armada. It seemed to me to suggest you have comfort with with line of sight on revenues with them or at least the relationship I just wanted to understand what what's driving that is it.
And because you perhaps renewed your contract with them.
Specific discussions you've had with them about how they view the relationship with element or something else I'm, just trying to get some insights of being a long term partner for them on it.
Yeah.
We have shared in the past we did renew our contract in late 2020 with our model for the continued provision of services and indeed, the expansion of services that we provide to this fast growing fleet that they that they operate.
I would say that under the leadership of Chris Gittens.
We have made just phenomenal in roads in terms of the relationship that we enjoy with this client we have always had the lofty ambition of being a thought leader in the fleet management space for this organization and if you spoke with them I think they would be very forthright in saying.
That is exactly the rule that we fulfill for them, we're working very close partnership to understand their evolving needs and they are evolving and fast evolving.
And then two how does.
And implement timely solutions to enable.
They are strategic pursuit of.
Same day delivery so no the relationship.
Again continues to.
It has never been better.
It's never been more constructive.
And we work in an enviable fashion in terms of the openness transparency.
In the spirit of collaboration.
To affect meaningful solutions on a timely basis for this client.
Great. Thank you.
The next question comes from Stephen Boland from Raymond James. Please go ahead.
Thanks. Good morning, everyone. Just wanted to talk about the backlog again, Jay I think last going into Q4, you provided some guidance.
Where the backlog would be at a Q4, which came in I think a little bit above your guidance, but maybe you could just talk about you talked about the backlog growing till I guess until the I guess the first half of 'twenty. Three so you have some sort of a range.
Range that where you think the backlog will be at that point and then how long does it take to clear to get back to that you know 800 and $900 million normalized amount.
Yeah.
So as we think about the order backlog again. These are contractual commitments that we've made to an OEM to have a vehicle produced.
Which in turn results in the contract we have with our client to except that vehicle alone on production.
And.
Having built to $2 $9 billion in orders that.
That meant that we needed to place and the Oems needed to accept these orders that are client to in turn provide.
Provided us.
We will.
Q1, we have the possibility of being flat or maybe even being slightly down in terms of the order backlog in that we expect the originations.
OEM production to.
Increase in Q1.
And as a consequence draw down some of the order backlog that has built at the same time as I mentioned earlier some 80%.
Of the order banks had been shot by the Oems are not accepting any more orders for model year 'twenty two.
And won't be opening model year 'twenty three order banks until April May June depending on some of the models are or perhaps even a little later again, depending on the models. So we're gonna have this dynamic where we enter Q1 with $2 9 billion.
<unk> order backlog it will be drawn down which is a great thing in terms of originations and some of that will be replenished by new orders that we've been able to place with the Oems.
And that for US is just you know.
A bit of a black box.
Two.
Just how many orders we will be able to place and to the extent that we're not able to place those orders. It is giving rise to this increasing shadow order backlog.
Yeah.
With originations we went to orders we went to order backlogs and now we have to evolve this to have a discussion around shadow order backlog just to give you an idea as to just how complex. This.
This topic has become and again as you can appreciate.
There's no one who has a better understanding of the need for replacement might be of course, if we do and so we have a good clear ideas too.
That vehicle is in need of replacement in winter client would typically signal in order and what we're seeing is that order shadow order back is increasing substantially.
As a consequence of the order backs being closed and us not being able to place the order with the Oems.
And create that contractual chain between us the OEM and the client.
No.
Yes, we would expect.
<unk>.
The order backlog.
Q1.
Could be flattish could be down a little bit could be up a little bit we.
We would expect to see order banks open in Q2.
And again, depending on how quickly the Oems continue to ramp up production there is an opportunity to increase.
The order backlog through Q2 Q3.
Obviously Q4, we would expect a fairly significant increase.
In 2023, so you know if we would expect.
Our.
The Oems continue to ramp up.
The into the first half of 2023, we expect the Oems to be back to 100%.
Productive capacity, which means they will be able to handle the fullness of our current order volume and at that point, we'll be in a position to add additional shifts to start to chew through the order backlog and we expect a goodly amount of that order backlog to be addressed.
In the second half of 2023.
And then equally goodly amount to be addressed in the first half of.
Four before we get to a more normalized.
Level of originations call it second half of 2024.
So again.
We're not seeing anything.
To this point.
That would cause us to.
B the list, but concerned about the guidance that we provided in November visibility.
OEM productive capacity, indeed, if anything what we've seen from the Oems to date, what we're experiencing in the business in the first couple of months of 2022 has been very much in keeping with the thesis that we shared with you.
Okay. That's very helpful. Thanks, Jeff.
Okay.
Given the hour. This concludes today's conference call you may disconnect your lines.
You for participating and have a pleasant day.
Yeah.
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Okay.
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