Q1 2022 Element Fleet Management Corp Earnings Call
Speaker 1: I PR.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management's first quarter 2022 financial and operating results conference call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the prepared remarks, there will be an opportunity for analysts to ask questions.
Operator: [music]
Operator: Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management first quarter 2022 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 analyst to ask questions. To join or re-join the question queue, you may press star, then one on your telephone key pad.
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Operator: 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 MDNA, as well as its most recent AIF for a description of these risks and certainties and assumptions. Although management believes that the expectations reflected in the statements are reasonable, it can give no assurance that the expectations reflected in any forward-looking statements will prove to be correct.
Operator: 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 risks factors in its year end and most recent MDNA, as well as its most recent AIF, for a description of these risks, uncertainties and assumptions. Although management believes that the expectations reflected in the statements are reasonable, it can give no assurance that the expectations reflected in any forward looking statements will prove to be correct.
Speaker 3: These statements are based on assumptions that are subject to significant risks and uncertaingencies.
Speaker 3: And the company refers you to the cautionary statements and risk factors in its year end and most recent mdna, as well as its most recent aiif, for a description of these risks and certainties and assumptions. Although management believes that the expectations reflected in the statements are reasonable, it can give no assurance that the expectations reflected in any forward looking statements will prove to be wrong, will prove to be correct.
Operator: Element's earnings press release, financial statements, MDNA supplementary information document, quarterly investor presentation, and today's call include references to non-GAAP 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-GAAP measures to IFRS measures can be found in the MDNA. I would now like to turn the call over to Jay Forbes, President and Chief Executive Officer of Element. Please go ahead.
Operator: Element`s earnings press release financial statements, MDNA, supplementary information documents, quarterly investors presentation in today's call include references to non-GAAP measures, which management believes are helpful to present the company and its operations in ways that are useful to investors.
Speaker 3: Which management believes are helpful to present the company and its operations in ways that are useful to investors.
Speaker 3: A reconciliation of these non-GAAP measures to IFS measures can be found in the mdna.
Operator: A reconciliation of these non-GAAP measures to IFRS measures can be found in the MDNA.
Speaker 3: I would now like to turn the call over to Jay forb's prescedent and Chief Executive Officer of element.
Operator: I would now like to turn the call over to Jay A. Forbes, President and Chief Executive Officer of Element. Please, go ahead.
Speaker 3: Please go ahead.
Jay A. Forbes: Thank you operator, and good morning to all of you joining us today. Frank and I will be brief with our remarks, affording us plenty of opportunity for questions and discussion.
Speaker 5: Frank and I will be brief with our remarks, affording us plenty of opportunity for questions and discussion.
Jay A. Forbes: Thank you, operator, and good morning to all of you joining us today.
Jay A. Forbes: Frank and I will be brief with our remarks, affording us plenty of opportunity for questions and discussion.
Jay A. Forbes: We entered this year with strong conviction. That was the return to pre-pandemic client activity levels and the gradual improvement in vehicle production by the OEMs, 2022 would be a good year for element, and would, in turn, set the stage for a great 2023. That conviction was evident in the two-year forward guidance we provided last November, which certainly was a first for this company and indeed the first for me.
Jay A. Forbes: We entered this year with strong conviction. That was the return to pre-pandemic client activity levels, and the gradual improvement in vehicle production by the OEMs. 2022 would be a good year for Element and would, in turn, set the stage for a great 2023.
Speaker 6: That conviction was evidident in the two year for guidance we provided last November , which certainly was a first for this company and indeed the first for me.
Jay A. Forbes: That conviction was evident in the two-year forward guidance we provided last November, which, certainly, was a first for this company, and indeed, the first for me.
Jay A. Forbes: This confidence is borne out of the extensive knowledge of the business management has acquired, strengthening every facet of our business model through the 27-month transformation journey, stress testing, and adapting that business model throughout the pandemic, rebuilding our commercial capabilities as we pivoted to growth, and by devising novel approaches supporting our clients through the global vehicle production shortages.
Jay A. Forbes: This confidence is born out of the extensive knowledge of the business management has acquired, strengthening every facet of our business model through the 27 month transformation journey, stress testing and adapting that business model throughout the pandemic, rebuilding our commercial capabilities as we pivoted to growth and by devising novel approaches to supporting our clients through the global vehicle production shortages. The last four years have provided us with a whole host of challenges that have deepened our understanding of our business, and, in particular, its resilience through times of great uncertainty, and its ability to create sustainable value for shareholders through the generation of consistent, predictable earnings and cash flow.
Jay A. Forbes: The last four years have provided us with a whole host of challenges that have deepened our understanding of our business and, in particular, its resilience through times of great uncertainty and its ability to create sustainable value for shareholders through the generation of consistent, predictable earnings and cash flow.
Jay A. Forbes: That said, the results of the last two years were good, by virtue of a rare set of externalities, under-represented the true potential of this business model. For instance, we designed and built a robust operating platform that could deliver a consistent, superior client experience and scale to meet our organic growth ambitions. Only to see a 20% decrease in client activity at the onset of the pandemic that obscured the power of this platform to create meaningful value.
Jay A. Forbes: That said, the results for the last two years, while good, head by virtue of a rare set of externalities, underrepresented the true potential of this business model.
Speaker 5: For instance, we designed and built a robust operating platform that could deliver a consistent, superior client experience and scale to meet our organic growth ambitions. Only to see a 20% decrease in client activity at the onset of the pandemic that obscured the power of this platform to create meaningful value.
Jay A. Forbes: For instance, we designed and built a robust operating platform that could deliver a consistent, superior client experience and scale to meet our organic growth ambitions.
Speaker 6: Only to see a 20% decrease in client activity at the onset of the pandemic that obscured the power of this platform to create meaningful value.
Jay A. Forbes: Only to see a 20% decrease in client activity at the onset of the pandemic, that obscured the power of this platform to create meaningful value.
Jay A. Forbes: We rebuilt our commercial capabilities from the ground up to capture these organic revenue growth opportunities, only to see tens of millions of dollars in revenue deferred when OEMs were unable to produce sufficient vehicles to match our sales wins. We knew that it was just a matter of time before what we as management saw so clearly was evident to all.
Jay A. Forbes: We rebuilt our commercial capabilities from the ground up to capture these organic revenue growth opportunities, only to see tens of millions of dollars in revenue deferred when OEMs were unable to produce sufficient vehicles to match our sales wins.
Speaker 7: We knew that it was just a matter of time before what we as management saw So clearly was evident to all.
Jay A. Forbes: We knew that it was just a matter of time before what we, as management, saw so clearly, was evident to all.
Jay A. Forbes: With the release of these first quarter results and the upward revision of our 2022 guidance, Elements' power to deliver against our strategic ambitions is now on full display. We're growing vehicles under management now approaching one point five million vehicles by stealing share and converting self-managed fleets.
Jay A. Forbes: With the release of these first quarter results and the upward revision of our 2022 guidance, Element's power to deliver against our strategic ambitions is now on full display. We're growing vehicles under management, now approaching 1.5 million vehicles, by stealing share and converting self-managed fleets.
Jay A. Forbes: We're growing service penetration using targeted campaigns to expand our share of wallet. We're increasing the utilization of these services as client activity returns to, or indeed exceeds, pre-pandemic levels. We're improving the profitability of these services by leveraging the scalable operating platform developed through transformation. And we're advantaged by inflation, as our cost-plus model benefits from increases in fuel, parks, and labor prices.
Speaker 5: We're increasing the utilization of these services as client activity returns to, or indeed exceeds, prepandemic levels.
Jay A. Forbes: We're growing service penetration using targeted campaigns to expand our share of wallet.
Jay A. Forbes: We're increasing the utilization of these services as client activity returns to, or indeed exceeds, pre-pandemic levels.
Speaker 5: We're improving the profitability of these services by leveraging the scalable operating platform developed through transformation.
Jay A. Forbes: We're improving the profitability of these services by leveraging the scalable operating platform developed through transformation.
Speaker 5: And we're advantaged by inflation, as our cost-plus model benefits from increases in fuel, parks and labor prices.
Jay A. Forbes: And we're advantaged by inflation, as our cost-plus model benefits from increases in fuel, parts and labor prices.
Jay A. Forbes: This has, in turn, yielded a first quarter performance that includes 6% net revenue growth quarter-over-quarter, 485 basis points of expansion in operating margin, and 16.6% AOI growth quarter-over-quarter, 29 cents of free cash flow per share, and 15.8% pretax return on equity.
Jay A. Forbes: This is, in turn, yielded first quarter performance that includes 6% net revenue growth quarter-over-quarter, 485 basis points of expansion in operating margin, and 16.6% AOI growth quarter-over-quarter, 29 cents of free cash flow per share, and 15.8% pre-tax return on equity.
Jay A. Forbes: Perhaps the only surprise for us in these results was the speed at which they arrived. While we knew that the overhang of the pandemic on client activity levels would fully recede and that OEMs would gradually source sufficient semiconductor chips to restore their production capacity and to grow our originations, we were less sure as to how these factors would play out in concert with our commercial successes and operational capabilities.
Jay A. Forbes: Perhaps, the only surprise for us in these results was the speed in which they arrived. While we knew that the overhang of the pandemic on client activity levels would fully recede, and that OEMs would gradually source sufficient semiconductor chips to restore their productive capacity and to grow our originations, we were less sure as to how these factors would play out in concert with our commercial successes and operational capabilities.
Speaker 5: we were less sure as to how these factors would play out in concert with our commercial successes and operational capabilities.
Speaker 3: we were less sure as to how these factors would play out in concert with our commercial successes and operational capabilities.
Jay A. Forbes: Having never before enjoyed 2021 levels of commercial success, stealing other FMC's clients, penetrating the self-vanish fleet market, and, most of all, converting share of wallet opportunities, we underestimated the speed at which the business was capable of onboarding and activating this many new vehicles under management and this many new client service additions.
Jay A. Forbes: Having never before enjoyed 2021 levels of commercial success, stealing other FMC's clients, penetrating the self-vanished fleet market and, most of all, converting share of wadded opportunities, we underestimated the speed at which the business was capable of onboarding and activating this many new vehicles under management, and this many new client service additions.
Speaker 6: We underestimated the speed at which the business was capable of onboarding and activating this many new vehicles under management in this many new client service additions.
Speaker 3: we underestimated the speed at which the business was capable of onboarding and activating this many new vehicles under management in this many new client service additions.
Jay A. Forbes: Simply put, great people, supported by transformed processes and systems, converted revenue unit wins into revenue growth in record time and, given the recurring nature of these leases and services, the revenue levels we achieved in the first quarter are sustainable through 2022 and beyond, prompting us to increase this year's guidance.
Jay A. Forbes: Simply put, great people, supported by transformmed processes and systems, converted revenue unit wins into revenue growth in record time and, given the recurring nature of these leases and services, the revenue levels we achieved in the first quarter are sustainable through 2022 and beyond, prompting us to increase this year's guidance.
Jay A. Forbes: Our bullish outlook for 2022 is further bolstered by two additional observations. Firstly, everything we've seen over the last six months has been reinforcing of our thesis of a gradual return to full OEM production by mid-2023, resulting in 10% to 14% year-over-year growth in our originations, on route to some 37% to 47% year-over-year increase in 2023. We're holding guidance on originations constant in the $5.5 to $5.7 billion range, with any unforeseen downside risk arising from China lockdowns or geopolitical issues being offset by larger-than-expected price increases in modeling year 23 vehicles.
Speaker 5: Firstly, everything we've seen over the last six months.
Jay A. Forbes: Our bullish outlook for 2022 is further bolstered by two additional observations.
Speaker 6: Has been reinforcing of our thesis of a gradual return to full OEM production by mid- 2023, resulting in 10% to 14% year-over-year growth in our originations, on route to some 37% to 47% year-over-year increase in 2023.
Jay A. Forbes: Firstly, everything we've seen over the last six months has been a reinforcing of our thesis of a gradual return to full OEM production by mid-2023, resulting in 10% to 14% year-over-year growth in our originations, on route to some 37% to 47% year-over-year increase in 2023.
Speaker 3: Has been reinforcing of our thesis of a gradual return to full OEM production by mid- 2023, resulting in 10% to 14% year-over-year growth in our originations, on route to some 37% to 47% year-over-year increase in 2023.
Speaker 5: We're holding guidance on originations constant in the five point five to $5.7 billion range, with any unforeseen downside risk arison from China lockdowns or geopolitical issues being offset by larger-than expected price increases in modeling year 23 vehicles.
Jay A. Forbes: We're holding guidance on origination`s constant in the $5.5 to $5.7 billion range, with any unforeseen downside risk arisen from China lockdowns or geopolitical issues being offset by larger than expected price increases in model year 2023 vehicles.
Jay A. Forbes: Secondly, the drivers behind our surge and service revenues have [inaudible], have never before managed fleets through 24-month global pandemic. We didn't know exactly how or when the recovery in client service utilization would transpire. Today, we can safely say the recovery has arrived. Service fleet vehicles are playing catch-up on lost productivity during the lowest mobility phases of the pandemic, and sales fleets are now back on the road with regularity, with a corresponding consumption of applicable services. Further substantially longer wait times for replacement vehicles have resulted in the oldest average age of fleets in our history. This vehicle aging is driving more frequent and higher cost maintenance, as well as greater fuel consumption. And with OEM production capacity showing no signs of deviating from the recovery trajectory that we're anticipating, we expect that we will have well over a year of continued older vehicle service utilization ahead.
Speaker 5: Have never before managed fleets or 24 month global pandemic. We didn't know exactly how or when the recovering client service utilization would transpire.
Jay A. Forbes: Secondly, the drivers behind our surge and service revenues have legs, have never before managed fleets over 24 month global pandemic. We didn't know exactly how or when the recovering client service utilization would transpire.
Speaker 3: Have never before managed fleets or a 24 month global pandemic. We didn't know exactly how or when the recovering client service utilization would transpire.
Speaker 6: Today we can safely say the recovery has arrived.
Speaker 6: Service fleet vehicles are playing catch-up on lost productivity during the lowest mobility phases of the pandemic, and sales fleets are now back on the road with regularity, with a corresponding consumption of applicable services.
Jay A. Forbes: Today we can safely say the recovery has arrived.
Jay A. Forbes: Service fleet vehicles are playing catch-up on lost productivity during the lowest mobility phases of the pandemic, and sales fleets are now back on the road with regularity, with a corresponding consumption of applicable services.
Speaker 5: Further substantially longer wait times for replacement vehicles have resulted in the oldest average age of fleets in our history. This vehicle aging is driving more frequent and higher cost maintenance, as well as greater fuel consumption. And with OEM production capacity showing no signs of deviating from the recovery trajectory that we're anticipating, we expect that we will have well over a year of continued older vehicle service utilization ahead.
Jay A. Forbes: Further substantially longer wait times for replacement vehicles have resulted in the oldest average age of fleets in our history.
Speaker 6: This vehicle aging is driving more frequent and higher cost maintenance, as well as greater fuel consumption.
Jay A. Forbes: This vehicle aging is driving more frequent and higher-cost maintenance, as well as greater fuel consumption.
Speaker 5: And with OEM production capacity showing no signs of deviating from the recovery trajectory that we're anticipating, we expect that we will have will over a year of continued older vehicle service utilization ahead.
Jay A. Forbes: And with OEM production capacity showing no signs of deviating from the recovery trajectory that we're anticipating, we expect that we will have well over a year of continued older vehicle service utilization ahead.
Jay A. Forbes: Finally, the penetration in utilization driving service revenue growth are going to be further propelled by inflation. I addressed this as a topic in my letter to shareholders this quarter, and so I won't be overly repetitive here. Suffice it to say I don't think many of us predicted inflation taken root this quickly and impacting costs this drastically within the first few months of 2022 alone.
Jay A. Forbes: Finally, the penetration and utilization driving service revenue growth are going to be further propelled by inflation.
Speaker 5: I daddress this as a topic in my letter to shareholders this quarter, and so I won't be overly repetitive here. Suffice it to say I don't think many of us predicted inflation taken root this quickly and impacting costs as drastically within the first few months of 2022 alone.
Jay A. Forbes: I address this as a topic in my letter to shareholders this quarter, and so I won't be overly repetitive here. Suffice it to say I don't think many of us predicted inflation taking root this quickly and impacting cost as drastically within the first few months of 2022 alone. Element's value proposition to lower clients` total cost of fleet operations becomes even more compelling in this environment, and our cost plus business model also benefits, both of which are sustainable tailwinds.
Jay A. Forbes: Element's value proposition to lower client's total cost of fleet operations becomes even more compelling in this environment, and our cost-plus business model also benefits, both of which are sustainable tailwinds. I believe Element is a rare example of a business where net revenue benefits both directly and indirectly from inflation and to a greater extent than our operating expenses will be impacted. This is yet another salient characteristic of the truly special business model that we enjoy here at Element. With that, I'll turn things over to you Frank to discuss a few particulars of the first quarter and our revised fully-year 2022 guidance.
Speaker 10: I believe element is a rare example of the business where net revenue benefit both directly and indirectly from inflation and to a greater extent than our operating expenses will be impacted. This is yet another salient characteristic of the truly special business model that we enjoy here at element.
Jay A. Forbes: I believe Element is a rare example of a business where net revenue benefits both directly and indirectly from inflation and to a greater extent than our operating expenses will be impacted. This is yet another salient characteristic of the truly special business model that we enjoy here at Element.
Speaker 5: With that, I'll turn things over to you Frank to discuss a few particulars of the first quarter and a revised full year 2022 guidance.
Speaker 4: of the truly special business model that we enjoy here at Element.
Jay A. Forbes: With that, I'll turn things over to you, Frank, to discuss a few particulars of the first quarter and a revised full year 2022 guidance.
Frank A. Ruperto: Thanks Jay, and good morning everyone. As promised, I'll be brief, and then we'll open up the line to your questions. I want to reiterate that our Q1 results were not only strong, but also demonstrate the capability and resilience of our scalable business model and the value proposition we bring to clients in these ever-changing times.
Frank A. Ruperto: Thanks Jay, and good morning everyone. As promised, I'll be brief, and then we'll open up the line to your questions.
Speaker 12: I want to reiterate that our Q1 results were not only strong, but also demonstrate the capability and resilience of our scalable business model and the value proposition we bring to clients in these ever-changing times.
Frank A. Ruperto: I want to reiterate that our Q1 results were not only strong, but also demonstrate the capability and resilience of our scalable business model and the value proposition we bring to clients in these ever-changing times.
Frank A. Ruperto: First quarter net revenue was up 4.9% year-over-year and 6.2% quarter-over-quarter. Net financing revenue contributed to that growth, itself growing 3.7% year-over-year and 7.4% quarter-over-quarter. As you saw in our supplementary, gains on sale or GOS from AMZ in Mexico continue to outperform their prior period contributions to NFR. Although we expected this to moderate in our previous outlook, it hasn't happened.
Speaker 13: Net financing revenue contributed to that growth, itself growing 4% year-over-year and 7% quarter-over-quarter.
Frank A. Ruperto: First quarter, net revenue was up 4.9% year-over-year and 6.2% quarter-over-quarter.
Frank A. Ruperto: Net financing revenue contributed to that growth, itself growing 3.7% year-over-year and 7.4% quarter-over-quarter.
Speaker 13: As you saw in our supplementary gains on sale or GOS from amz and Mexico continue to outperform their prior period. Contributions to NR.
Frank A. Ruperto: As you saw in our supplementary, gains on sale or GOS from ANZ and Mexico, continue to outperform their prior period contributions to NFR.
Speaker 14: Although we expected this to moderate in our previous outlook, it hasn't happened.
Frank A. Ruperto: The current OEM constraints and shortages of vehicles in the regions where we take residual value risk continue to ensure a very strong secondary market. We continue to move lower than normal volume due to pure vehicles being returned to us but at very high prices. The return of OEM supply to normal levels will moderate these gains over time. However, with more new vehicles, we will also have more end-of-lease vehicles to work with, and we expect demand to remain healthy for the foreseeable future.
Frank A. Ruperto: Although we expected this to moderate in our previous outlook, it hasn't happened.
Frank A. Ruperto: The current OEM constraints and shortages of vehicles in the regions where we take residual value risk continue to ensure a very strong secondary market.
Speaker 13: We continue to move lower than normal volume due to pwer vehicles being return to us, but at very high prices.
Speaker 13: The return of OEM supply to normal levels will moderate these gains over time. However, with more new vehicles, we will also have more end-of-lease vehicles to work with, and we expect demand to remain healthy for the foreseeable future.
Frank A. Ruperto: We continue to move lower than normal volume, due to pure vehicles being returned to us, but at very high prices.
Frank A. Ruperto: The return of OEM supply to normal levels will moderate these gains over time.
Frank A. Ruperto: However with new, more new vehicles, we will also have more end-of-lease vehicles to work with, and we expect demand to remain healthy for the foreseeable future.
Frank A. Ruperto: I want to compliment our teams in AMZ and Mexico on the work they've done to diversify their used vehicle sales channels in each region. This diversification work alone generates better price realization. Combined with undersupply, this diversification will help keep GOS strong for full-year 2022, relative to prior years, including last year.
Frank A. Ruperto: I want to compliment our teams in ANZ and Mexico on the work they've done to diversify their used vehicle sales channels in each region.
Speaker 14: This diversification work alone generates better price realization.
Speaker 13: Combined with undersupply, this diversification will help keep God strong for full year 2022, relative to prior years, including last year.
Frank A. Ruperto: This diversification work alone generates better price realization.
Frank A. Ruperto: Combined with under supply, this diversification will help keep GOS strong for full year 2022, relative to prior years, including last year.
Frank A. Ruperto: With respect to capital light services revenue, Jay identified the buckets driving growth, which I'll reiterate as penetration, utilization, and inflation. You can see in our supplementary how each of those contributed to services revenue growth of 15.2% year-over-year and 6.6% quarter-over-quarter for Q1. The same three factors are going to keep services revenue healthy and growing for the foreseeable future: advancing our capital lighter business model and enhancing ROE.
Speaker 12: Jay identified the bucket driving ACH growth, which I'll reiterate as penetration.
Frank A. Ruperto: With respect to capital light services revenue. Jay identified the bouquet driving ACH growth, which I'll reiterate as penetration, utilization and inflation.
Speaker 14: Utilization and inflation.
Speaker 5: Jay identified the bucket driving ACH growth, which I'll reiterate as penetration.
Speaker 14: You can see in our supplementary how each of those contributed to services revenue growth of 15.2% year-over-year and 6.6% quarter-over-quarter for Q1.
Speaker 5: Utilization and inflation.
Frank A. Ruperto: You can see in our supplementary how each of those contributed to service revenue growth of 15.2% year-over-year and 6.8% quarter-over-quarter for Q1.
Speaker 14: The same three factors are going to keep services revenue healthy and growing for the foreseeable future: advancing our capital lighter business model and enhancing ROE.
Frank A. Ruperto: Syndication is the second for us of that capital lighter model and we've written and spoken a lot in the last two quarters about the incomparable contributions of syndication to our growth and return of capital strategies. Syndication revenue decreased materially in Q1 year-over-year, which was as planned. We have pulled forward volume into a very strong Q1 of last year but did not anticipate or have a repeat of that experience. We have a more balanced quarterly volume of syndication planned for this year.
Speaker 14: Syndication revenue decreased materially in Q1 year-over-year, which was as planned. We have pulled forward volume into a very strong Q1 of last year but did not anticipate or have a repeat of that experience.
Speaker 12: We have a more balanced quarterly volume of syndication plan for this year.
Frank A. Ruperto: Briefly, on adjusted operating expenses in Q1 and this year as a whole, we saw sequential moderation in salaries, wages, and benefits in the first quarter as we continue to increase efficiencies. However, as signaled in our MDA, that line item will step up modestly next quarter as 2022 merit and pay equity-driven compensation increases impact the whole quarter versus only the month of March in Q1.
Speaker 13: On adjusted operating expenses in Q1 and this year as a whole. We saw sequential moderation and salaries, wages and benefits in the first quarter as we continue to increase efficiencies.
Speaker 13: However as signaled in our MDA, that line item will step up modestly next quarter as 2022 merit and pay equity-driven compensation increases impact the whole quarter, versus only the month of March and Q1.
Frank A. Ruperto: For 2022, adjusted operating expense will grow. We are not immune to inflation or the increased cost of returning to business as usual that includes, for instance, travel and promotional spend. The fundamental premise of our scalable operating platform is that net revenue can and will outgrow OpEx expanding operating margins over time.
Speaker 12: The fundamental premise of our scalable operating platform is that net revenue can and will outgrow OpEx expanding operating margins over time.
Frank A. Ruperto: I would also flag the reality that we are operating with a cost base supporting materially more business volume than we are seeing hit the top line due to the OEM production delays and the deferral of significant revenue, operating income, and free cash flow into future quarters and years.
Frank A. Ruperto: Lastly, considering the sustainable trends in our Q1 results, as you'll have seen in our disclosures, we've revised our guidance for full-year 2022. We anticipate growing annual net revenue 4%-6% and our scalable operating platform magnifying that into 4.5-7.5 adjusted operating income growth, implying a 52.5 to 53.5 percent operating margin.
Speaker 13: We anticipate growing annual net revenue 4% - 6% and our scalable operating platform magnifying that into four point five cent to seven point five adjusted operating income growth, implying a fifty-two point a half to 53 and a half percent operating margin.
Frank A. Ruperto: We anticipate 9% to 14% adjusted EPS growth in 2022 and an effective tax rate of 25.5-26.5 percent and weighted average common share count for the year between 390-400 million shares.
Frank A. Ruperto: Similarly, we expect free cash flow per share to grow 10% to 15% to a 1.16 to a 1.21 per common share for the year. All of our guidance is in constant currency.
Speaker 14: All of our guidance is in constant currency.
Frank A. Ruperto: We have not revised our 2023 guidance. We will do this later this year and share it with you. However, we believe our strong Q1 results and increased 2022 guidance materially de-risk that existing 2023 guidance. In particular, because the broad-based strength we are seeing in Q1 was not envisioned or factored into the 2023 guidance put forward last year, we will be reviewing that 2023 guidance as we move forward and will provide an update later in the year. With that operator, let's please open the line for questions.
Speaker 13: However we believe our strong Q1 results and increased 2022 guidance materially derisk that existing 2023 guidance.
Speaker 13: In particular, because the broad-based strength we are seeing in Q1 was not envisioned or factored into the 2023 guidance put forward last year.
Speaker 12: We will be reviewing that 2023 guidance as we move forward and will provide an update later in the year.
Speaker 15: With that operator. Let's please open the line for questions.
Operator: Thank you. We will now begin the analysts' question and answer session. In order to afford all analysts the opportunity to ask questions, Element kindly requests that analysts limit themselves to two questions and live dialogue with management.
Operator: Should analysts have additional questions, please rejoin the queue. To join or rejoin the queue, you may press star then one on your telephone keypad. You will hear it on acknowledging your request. If you are using a speaker phone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two.
Speaker 3: You may press star than one on your telephone key pad. You will hear its on acknowledging your request.
Speaker 3: If you are using a speaker phone, please speak up your handset before pressing any keys.
Speaker 3: Do we draw your question? Please press star than to.
Operator: The first question comes from Shaoff Quan with RBC Capital Markets. Please go ahead.
Speaker 3: Lease, go ahead.
Multiple speakers: [Shaoff Quan] Hi good morning. [Jay Forbes] Good morning.
Shaoff Quan: My first question was Jay since you reported the Q4 2021 results, what would be the incremental data points you've gotten in terms of the returns to normalized OEM production levels and what have you heard that gives you maybe a bit more optimism and conversely, anything that gives you a little bit more concern around the trajectory? I know you talked about the overall trajectory, I think is staying the same but just wondering if there are incremental data points on both sides.
Jay A. Forbes: Yeah, I think there are a number of incremental data points since announcing our guidance for 2022 and 2023 last November. We finished Q4 stronger than we anticipated at higher production levels and thus higher origination levels than what we had anticipated. So, while Q4 was indeed a trough for OEM production, it wasn't as deep a trough as we had originally envisioned. Secondly, our thesis had Q1 being a material step-up from Q4 in terms of quarter-over-quarter increases in production volumes and continuity of production by each of the major OEMs and that played out very well in terms of Q1 and origination results, and as we just wrapped up April, another month of data points that were encouraging and reinforcing of our thesis. So, as we think about that original hypothesis and how it was going to play out ever than that we have seen to date is consistent with that thesis and thus we expect a full recovery of productive capacity by the OEMs by mid-2023 and as a consequence that their ability to start to draw down this very large or the backlog that we have built. We have not seen innocent in terms of the European conflict or the shutdowns in China manifest themselves in any decrease in either year-to-date production or production outlook, but obviously those are factors or wild cards and no one can fully understand their implications. The comfort that we derive as an offset to that is we are expecting price increases in model year 2023 vehicles that will be in excess of what we would have projected as part of our planning for 2022 and 2023 and so, to the extent that that holds and there is any headwinds coming out of the macro-economic or geo-political situation again, we believe that there are sufficient opportunities in terms of price increases that would offset that. So feeling very bullish in terms of that, 5.5 to 5.7 billion of originations for year 2022.
Shaoff Quan: Okay and just my second question was with the increased 2022 guidance but keeping the 2023 unchanged, so I guess the way to think about this is if you continue to execute on your growth strategy, is it more likely that there would be upside as opposed to downside share 2023 guidance?
Speaker 20: So I guess is the way to think about this is if you continue to execute on your growth strategy.
Speaker 21: Is it more likely that there would be upside as opposed to downside share 2023 guidance?
Jay A. Forbes: Very much so. So the revenue growth drivers that we're seeing in the model and, in particular, on the services side, these are new services taken up by our clients and higher utilization of those services and then, when you mix in the inflation component that we expect to see throughout 2022 again, we're building a base of service revenue that should exit 2022 at a level in excess of what our expectations would be, and so we will enter 2023 with a higher jump-off point than was originally anticipated when we offered up 2023 guidance back in November of 2021.
Multiple speakers: [Shaoff Quan] Okay great, thank you. [Jay Forbes] Thank you.
Operator: The next question comes from John Aiken with Berkeley's. Please go ahead.
John Aiken: Good morning Jay. In terms of taking a look at the order backlog, I know remaining [inaudible] is far from a reason to panic, are we expecting on a go-forward basis of OEMs ramp-up production, are we expecting the backlog to drop off a little faster than had previously been anticipated? And as well, can you talk about, I guess, the shadow backlog in terms of the orders that are out there that can't be placed with OEMs? How is that looking since the fourth quarter?
Jay A. Forbes: And when we think about order backlog and the continuity of that balance issue, rightly identified two critical factors: supply and demand. Maybe I'll speak to demand first and demand continues to be robust. As we've gone out to our clients, guided them in terms of the order banks being opened by the OEMs this month and continuing through June and July, helping them understand their vehicle needs, get their orders in the queue so they get first call on the productive capacity that is going to be opening up with model year 2023 has been kind of a full court press here over the last couple of months. And I will tell you, even in the face of potential meaningful price increases in the vehicles, there's been no hesitation whatsoever in terms of our client base in putting fourth orders in desperate need of replacement vehicles, those that are in service of long [inaudible] consuming again excessive amounts of maintenance and gas and risking downtime-a very costly aspect of fleet operations. So as a consequence of all those factors, we're seeing demand very strong, no relenting in demand from the client base whatsoever from what we would have expected back in November, and we saw that in terms of basically a flat quarter-over-quarter order backlog of $2.9 billion, even despite originations that were stronger than perhaps we had expected. On the supply side, referencing the answer I provided Jeff, again, all the data points that we are seeing are upholding the thesis of yup this will be a 5.5 to 5.7 billion year originations. And again, while we don't see much in the way of risk to that at this point in time, some potential upside comes with the [inaudible] year 2023 price increases that we're now being guided to. So I'm feeling very good about the order backlog and again it will vacillate. It wouldn't surprise us in Q2 to maybe have a slight pulldown on that as the order banks open up later in the quarter and originations are strong through the quarter. That said, if the OEMs open up those order banks a little earlier, we might be able to see sustained order backlog or maybe an increase. It just really depends. The pivotal factor here is really the timing of those order banks being opened by the OEMs. Demand remains strong and delightfully, production is increasing.
Speaker 24: Quarter over quarter order backlog of $2.9 billion, even despite originations that were stronger than perhaps we had expected on the supply side. Referencing the answer they provided Jeff again, all the data points that we are seeing upholding the thesis of this will be a 5, five to five Dot: $7 billion your originations and again, while we don't see much in the way of risk to that at this point in time, some potential upside comes.
Speaker 25: With the moly year 23 price increases that we're now being guided to. So I feeling very good about the order backlog and and again it will vacillate. It wouldn't surprise us in Q2 two maybe have a slight pulldown on that as the order banks open up later in the quarter and originations are strong through the quarter. That said, if the OEMs our open up those order banks a little earlier, that we might be able to see sustained order backlog or maybe in an increase. It just really depends. The pivotal factor here is really the timing those order banks being openened by the OEMs. Demand remains strong and delightfully, production is increasing.
John Aiken: Great, thanks Jay. And for my second question, Frank, thank you very much for the vehicles under management disclosures, its going to be helpful. I understand that this is a moving forward metric, but can you give us a sense because when we look at the dollars per vehicle management, in terms of both revenue and operating income, obviously we can see the leverage that is there, but the leverage that we saw on the operating income per vehicle this quarter, was this unusual or is this a trend that you've been seeing over the last [inaudible]?
Frank A. Ruperto: Yeah, so again, it is a new metric for us and so we're growing into our skin on this as well as you and taking the learnings that we're finding from this new metric as is. I don't believe it is a surprise that as you look at your vehicles under management and we see the type of share of wallet gains that we have benefited from by definition of share of wallet is going to increase your revenues per at least that existing base of vehicles that are there as we move forward here. It will depend on how quickly we onboard new clients and new vehicles and what the level of services are on coming into that from a proportional basis as we move forward. But again, I think it gives us a great opportunity to measure those share of wallet penetrations and anticipate seeing that statistic being a metric that we can help the analyst community and the investor community really measure the growth and the profitability of the business.
Jay A. Forbes: And Frank if I could build on that, the other piece of this is utilization. So when we think about that [inaudible] revenue program certainly got a big boost in terms of service revenue as we had increased penetration, increased utilization, and inflation. And so John some of that step up was absolutely getting back to 100% plus transaction volumes. And I referenced this in my CEO letter to investors this quarter that as we reflected on the Q1 results and reflected on the journey of transformation- I mean it was predicated on building the scalable operating platform. We were halfway through that transformation journey and we had 20% of our transaction volumes basically evaporate overnight with a shelter-in-place stay-at-home mandate to adopt throughout our five geographies. And so it has been a patient journey that we've been on in these last two years as we waited for a return to normal levels of consumption and activity within our client base. And that's what you're seeing in part in terms of this big increase in revenue per vehicle under management is that restoration of normal utilization and as Frank has pointed out, this has always been about creating a scalable operating platform that we'll be able to adjust that for to 6% annual revenue growth without a commensurate increase in costs and its ability to do so will be reflected in that adjusted operating income per vehicle under management as we go forward.
John Aiken: Great. Thanks, guys, I'll re-queue.
Operator: The next question comes from Jane Gloin with National Bank Financial. Please go ahead.
Jane Gloin: Yeah, good morning. I wanted to stay on the vehicles under management disclosure and looking at the breakdown: serviced-only vehicles showing pretty rapid growth over the last couple of quarters, but serviced and financed fairly flat. So I'm wondering if you could give us a little bit more color as to what's driving that I guess dislocation between the two lines.
Jay A. Forbes: Good morning, Jane. And in terms of vehicles under management and this initial disclosure that we provided, I will note that there is a goodly amount of service only vehicles under management there. Think about that maybe as two segments: the first being a little under half of that would be represented by clients that only consume services for the vehicles, but these are clients that we actually do finance other vehicles with and this is not a typical, for instance, in our Mexico business unit, where we'll get a total hold in terms of the financing business, but they'll provide us with full mandates in terms of services for the entirety of a fleet and will earn our way into the other aspect of the financing business.
Speaker 6: The first being, you know, a little under half of that would be represented by clients that only consumes services for the vehicles. But these are clients that we actually do finance other vehicles with and you know this is not a typical, for instance, in our Mexico business unit, where we'll get a totalhold in terms of the financing business, but they'll provide us with full mandates in terms of services for the entirety of a fleet to earn our way into the other aspect of the financing business.
Jay A. Forbes: The other slightly more than half would represent basically service-only clients. These would be large clients that have their own ready access to cost effective financing, decided to keep those asses on book and rely on us only for maintenance, managed fuel, manage accidents, title registration and other services of that nature, and our motto would be a perfect example of that. And then if we step back and say ok, when you look at that, services versus services and financing versus financing only, you come back to the second core tenet of our strategy, that being a capital lighter business model and a desire to go deeper in terms of services as a growing and greater representation of our revenue. As we go forward, services recognizing the low capital intensity associated with that there is something that we have a strong bias in terms of our pursuit and its evident in terms of the results you're seeing in the deal under management.
Jane Gloin: Okay, great thanks for that color. The second question was on the order backlog. I would have expected a dip this quarter with most of the books closed, so the fact that it remained flat is that an indication of your clients shifting their orders from one OEM perhaps to another and trying to just prime their pump that way? And with that comment, I understand that some books are open already for the 2023 model year, can you give us any color as to what level of price increases have been pushed through on those books that have opened?
Speaker 30: I understand that some books are open already for the 2023 model year. Can you give us any color as to what level of price increases have been pushed through on those books that have opened?
Jay A. Forbes: We would have shared kind of the same view going into Q1, we would have thought with plus or minus 85% of the order banks closed that our shadow order backlog would have been building but we would have been unable to place those orders. As it turns out, the mix of orders that we needed to place actually meshed well with kind of the 15% order banks that were open, a few or banks that were supposedly closed, miraculously opened, and so as a consequence we were able to place more orders than what we anticipated. Secondly, we do also work with a few large clients that are very acquisitive in nature and they have bought companies recently and as they buy those companies and they immediately turn over the fleets to us and we will do a sales lease back on those and that will be a source of originations for us and so that'll also help bolster Q1 originations. And absolutely, in terms of shifting demand, if someone has a need for like duty pick up and an order or bank is closed, GM, that is open- then absolutely we will shift that demand from one OEM to another to ensure that that vehicle is manufactured and delivered on a timely basis. So a lot of different things coming into play but in the end demand was incredibly robust, very pleased with what we're seeing in the shadow order backlog and eagerly awaiting the opening of the production order banks at the end of the month. We have a couple a very important ones, including GM, subverado and [inaudible] pickup, which is a mainstay in our fleet, so that opens later this month and we've been building demand to place those orders in the order bank as that opens up.
Multiple speakers: [Jane Gloin] And sorry, are you able to help us think through what level of price increases are coming through on these 2023 model years that have opened up? [Jay Forbes] Again at this point in time, one, we believe that it will vary perhaps materially by model. Two, it will impact not only MSRP but also the purchase discounts that we've been able to secure for individual clients. So we would expect higher on the former, lower on the latter, and it will vary from model to model. But we're hearing [inaudible] in the range of five to 10% increase in vehicle pricing for model year 2023. Again, we will give you some additional color on that when it becomes obvious to us. To say the least, we're eagerly looking forward to some of these order banks opening up into to see what's on store in terms of these price increases.
Multiple speakers: [Jane Gloin] Thank you very much. [Jay Forbes] Thank you.
Operator: The next question comes from Paul Holden with CIBC. Please go ahead.
Paul Holden: Yeah, thank you. Good morning. You provide a geographic segmentation of revenue growth and that shows that all of your year-over-year revenue growth was generated by Mexico and ANZ, I'm curious on the North American piece in terms of when we should expect revenue growth to resume and what are the key drivers to get that revenue growth positive again?
Jay A. Forbes: Good morning, Paul. In a nutshell, OEM production is ramping back up. That is the only thing holding back North America on the services front, [inaudible] in the commercial team but just been throttling it in terms of share of law that wins within our existing client base. They've been aggressively stealing share, converting South vantage fleets and all the while maintaining or bettering industry average in terms of retention. So in terms of the levers for revenue growth, they're all in place, they're all being pulled. The piece that is missing here is we can't deliver against the NFR opportunity given the shortage of vehicles that are be constrained by OEM production delays. So as the OEMs ramp up their production, they were able to fulfill the orders that have been taken, earned 2021 and Q1 2022, you can expect to see both the revenue cash flow profile of Canada and the US reflect the underlying revenue generation efforts that have taken place and unlike ANZ where they've in [inaudible] great vehicle shortages, obviously, we take no residual value risk in North America, we do in ANZ and that has been to our advantage with this unique circumstance as that shortage of vehicles that have constrained NFR for them has been offset in ANZ by the gain of sales, we just don't have that same opportunity in Canada, the US. In Mexico, again, very different marketplace and vehicles were much more readily available. They were slower to come, they saw their cycle time expanded from order to origination, but nowhere near what we saw in the US and Canada and as consequence, they were able to basically fuel the engine growth that they have put in place with deliveries in keeping with with historical norms. So it is really that simple. The services side of it: we couldn't be more pleased with the penetration utilization, the inflation that we're seeing drive in the US-Canadian service revenue and honestly, couldn't be pleased in terms of the sales wins but just not translating to revenue because they're being deferred.
Frank A. Ruperto: Jay, I'll just add two quick points to that. When you look back at Q1 2021 and I just referenced in my commentary earlier in the call- we pulled forward significant syndication volume in Q1 of last year because of the strong market roughly differential of $9.3 million and we also had a release of the provision for credit loss of 3.7. So if you were to normalize that Q1 2021 number for those two items, you would actually see some material growth in the US market.
Paul Holden: That's helpful, thank you. So the second question, going back to credit provisioning, there is a very broad concern in the marketplace over the potential for a recession, and let's just call that a 2023 recession for argument's sake. We haven't really seen Element as a public company go through what I'd called a regular recession, the pandemic was unique in nature. It'd be very helpful, I think, to get your thoughts around how your 2023 guidance might be impacted if we go into sort of a traditional recession next year, not necessarily putting exact numbers behind it, but to what extent might it toggle the EPS?
Speaker 32: We haven't really seen element as a public company go through what I'd called a regular recession pandemic was unique in nature.
Speaker 12: It'd be very helpful, I think, to get your thoughts around how your 2023 guidance.
Speaker 32: Might be impacted if we go into sort of a traditional recession next year, not necessarily putting exact numbers behind it, but to what extent might it toggle the EPS?
Jay A. Forbes: Not maturely. So I would argue that the pandemic is actually a great example of an early and vicious onset of a recessionary period. Come March of 2020, I mean, everything came to abrupt halt. The capital market ceased up and if you could get financing, it was at ridiculously high pricing and yet we maintained ready access to multiple funding sources, including securitization, syndication in the US bond market, and reasonable pricing, so ready access to capital. Secondly, what we discovered with the model is in times of recession, economic downturns, we actually increase the velocity of our free cash flow as our working capital position monetizes, and so we actually have cash accretion in a recessionary period as opposed to cash utilization. So, from a balance sheet point of view, no issue. We stress test the portfolio going into the pandemic. Again, that shock--miniscule in terms of basis points of credit losses through that period the portfolio was and had performed beautifully. So, from a balance sheet point of view, ready access to capital, stress test the asset and it held up wonderfully. Then, as we think about the income statement in revenue again our proposition is we reduced the total cost operation of our clients' fleets by using our scale, as these organizations would enter, we'll say under your hypothesis of a 2023 recession, they'll be looking at for cost with opportunities. Our ability to use our scale to help them be more productive in terms of the management operation of the fleets, I think offers a very, very good value proposition. Further, we have 5500 clients across 700 industries, so we're not overly exposed to any one industry or segment. And then again, if you think about the nature of the underlying services and the ability to reduce that total cost of ownership through manage maintenance, manage fuel, manage accident again, each of them has strong value as organizations look to reduce their cost and maintain an optimal cost structure going into a recessionary environment. So we feel very good about the business model, both on the balance sheet and the income statement in terms of its ability to continue to perform very well even with the onset of a recessionary environment.
Speaker 6: Not mureally.
Speaker 18: So I would argue that the pandemic is actually a a great example, a early and busious on set of a recessionary period come March of 2020. I mean, ever thing came to a ought capital marke sees that. And if you could get financing, it was that you know ridiculously high pricing and yet we maintain ready access to multiple funding sources, including securitization, syndication in the? U's bond market and reasonable pricing. So already, access to capital. Secondly, what we covered with the model is, in times of recession, economic downturnms, we actually increase the velocity of our free cash flow as our working capital position mtizes And so we actually have cash accretion in a recessionary period as opposed to cash utization. So, from a balance sheet point of view, no issue. We stress test the portfolio going into the pandemic. Again, that shock use, you know, minis cal in terms of basis pointints of credit losses through that period. The portfolio was, was perform and had perform beautifully. So, from a balance sheet point of view, ready access to capital, stress test the, the assettsand and ever than held up. You know wonderfully. Then, as we think about the income statement in revenue, you know for again our, our proposition is we reduce the total cost operation of our clients fleets, by using our scale, as these organizations would enter, will say, under your boposices of a 2020 three recession, they'll be looking at for cost. That would opportunities, our ability to use our scale to help them be more productive, and terms of the management operation that fleets, I think offers a very, very good value proposition. Further, you know we have 5500 clients across 700 industryes, So we're not exposed, overly exposed to any one industry or segment. And and then again you, if you think about the nature of the underlying services and the ability to reduce that total cost of ownership through manage maintenance, manage vieel, manageed accident again, each of them has know strong value as organizations of to reduce their cost in a and maintain optimal cost structure going into a recessionary environment. So we feel very good about the business model, both on the balance sheet, in the income statement, in terms of its ability to continue to perform very well even with the onset Re ation recessionary environment.
Multiple speakers: [Paul Holden] Sorry, I have to ask a follow-up. If I think about those impacts, then you think it's fair to characterize that guidance range that maybe if we get a recession maybe be more at the lower end of the range but still within the range, would that be a relatively fair characterization? [Jay Forbes] Yeah, we're looking into the 2023 guidance. For this call, we gave you an update in terms of 2022, we'll bring forward guidance for 2023 later this year and at that point in time, we will factor in the very positive momentum that is built here in Q1 that is underpinned and we'll look for even better 2022, and we'll offer up some thoughts in terms of our view as to 2023, the likelihood of a recession in the markets that we're dealing with then and how that might impact the look for 2023.
Multiple speakers: That's great. Okay, thank you. [Jay Forbes] Thank you, Paul.
Operator: The next question comes from Tom McKinnon, with BMO capital. Please go ahead.
Tom MacKinnon: Yeah, good morning and thanks for taking my questions. The first is with respect to the merit and pay equity increases that came into effect March 1st of 2022. And you mentioned there's a step-up in OpEx in the second quarter as a result of this. Just for modeling purposes, how should we be looking at those pay increases and how do they compare with inflation?
Frank A. Ruperto: Yes, what I would tell you is the best way to do that is that, first of all, the comparison to inflation, I think they're relatively in line- merit plus pay equity, et cetera- relatively in line with inflation. We pay our people fairly and we've got great people on board. In regards to modeling, the best thing that I can point you to is look at the operating margins we've put out in our revised guidance and look at the revenue growth that you have there and then you can discern what total OpEx is. We've given some guidance before about depreciation on how that steps up year-over-year as we'll start to navigate that component of it. But that margin will allow you to dial in based on your perspective where within that margin, our operating expenses will fall, and that's the 52.5 to 53.5% adjusted operating margin.
Tom MacKinnon: Okay, that's great. And just can you quickly remind us about the depreciation step up year-over-year that's going to run faster than the rest of OpEx, is that correct?
Frank A. Ruperto: It's going to run faster because if you remember it didn't step up till Q3 of last year, so we'll get the full impact of that plus a bit more. So call it in the $8 million range.
Tom MacKinnon: Great. And then the second question is with respect to the gain on sale we see in Mexico and, I guess Australia and New Zealand in particular, if I look at Australia and New Zealand do you think it was a little bit higher than anticipated? I mean we had there's some seasonality there, there are some extreme weather events, how would you characterize the first quarter for gain on sale, particularly in that region, and would we anticipate something even higher than that in the second or third and fourth quarter? My guess is this one is probably a little bit outsized at least in terms of Australia and New Zealand, the first quarter numbers in terms of gains and sales that is.
Frank A. Ruperto: Yes, so we continue to see that strengthening despite the fact that we said earlier, our outlook for this year when we put our guidance in place was for a bit of a moderation on that ANZ gain on sale component of it. We believe that the gain on sale has some legs for two reasons: one is obviously the demand remains high and some of the weather events that destroyed roughly 25,000 vehicles over there have increased the demand for the used vehicles there and then compiled with the lack of OEM new product coming in. So two things that I think will give our ANZ and our overall GOS legs here-and I'm going to say higher or lower but strong- are: one, that demand that we see, which will continue in the lack of supply. Two is, as the new model years come out, the price increases that we will see on those model years will obviously underpin higher used vehicle prices. And then thirdly, eventually, when those OEM originations begin to show up in greater quantity we will have more vehicles to sell into the used vehicle market. So we will see first a shifting of price but an increase in volume which should help protect that gain on sale for some period of time.
Speaker 13: We will have more vehicles to sell into the used vehicle market. So we will see first a shifting of price but an increase in volume which should help protect that gain on sale for some period of time.
Tom MacKinnon: Okay, thanks.
Operator: The next question comes from [inaudible] with [inaudible] Investment Research. Please go ahead.
Unknown Speaker: Thank you and good morning. So I want to pivot back to utilization rates, it seems like aging [inaudible] proves majority of the growth and utilization rates. Do you think is there any further talk from utilization now?
Jay A. Forbes: So utilization was a big contributor to this. I don't want to underplay penetration and inflation plays a role as well, but utilization was an important part of this and it was really kind of twofold. So one was that final return to normal consumption levels by both service and sales fleets to pre-pandemic levels, and then it was the utilization that came as consequence of: one- the growth in the the vehicles under management throughout 2021 and the increased consumption of maintenance in particular, but also accident services, long-term rentals, and other services that we provide that had even more value as a fleet becomes more age. And so, as we think about that dynamic throughout the remainder of this year and into 2023, to the extent that we continue to have vehicle shortages that aren't able to originate normal levels vehicles deliveries then yes, we're going to have increasing utilization of these types of services by these older vehicles until they ultimately get replaced.
Multiple speakers: [Unknown Speaker] So once we have passed the backlogs and once the OEM productions are normalized majority of the growth in utilization would come from high [inaudible] management, right? Am I getting that right? [Jay Forbes] Yes, once we are back to normal levels and we have replaced these fleets and we are kind of back to our average 41 months of average amortization, then yes, we would expect that preventors of maintenance and and continuing maintenance would step back down to normal levels, obviously at higher price points, given the inflation that we anticipate will happen. At the same time, remember as those service revenues return to normal, those service revenues that are being held back will also return to normal and think, for instance, remarketing, so right now by virtue of fewer vehicles being originated, we have fewer vehicles being sold and so we're not able to earn the remarketing fees on those vehicles for our clients. So expect as utilization returns to normal for some of our services, utilization will also return for normal for other of our services that are under utilized given the production shortages- and that will counterbalance any degradation in service revenue.
Speaker 5: will also return to normal and think, for instance, remarketing, so right now by virtue of fewer vehicles being originated, we have fewer vehicles being sold and so we're not able to earn the remarketing fees on those vehicles for our clients. So expect as utilization returns to normal for some of our services, utilization will also return for normal for other of our services that are under utilized given the production shortages- and that will counterbalance any degradation in service revenue.
Multiple speakers: That's helpful. And I just wanted to get a sense on the outlook on NCIB activity given the redemption of the preferred shares that's expected in this quarter. So do you expect based on the guidance, that's like 390 to 400 million shares outstanding by the end of the year, which is approximately 2.5% of the outstanding shares, do you expect to fulfill that? Is there anything that can hold you back from hitting those targets on the lower end of that range? [Jay Forbes] Not that we expect to be able to fulfill that and obviously, redeeming the press share in the next month, I guess $150 million press share has been kind of something that we've held out to something that we wanted to target in terms of reducing our overall cost of capital and so we'll divert monies that we would have otherwise used to buy back common shares to retire those press shares and otherwise are holding to that 390 to 400 million share count for the year.
Frank A. Ruperto: And Jay, I would just point out that's an average share count for the year, so obviously to hit 390 we would be materially below the 390, et cetera.
Unknown Speaker: Okay, that's actually helpful. Thank you.
Operator: The next question comes from Mario Mendonca with TV Securities. Please go ahead.
Mario Mendonca: Good morning. So Jay, it sounds like things are functioning really well, maybe a little bit ahead of plan. It strikes me that as OEM production increases and originations increase, the need for funding will obviously increase. Are you seeing anything on the funding side, or what can you tell us about funding right now? Number one, markets appear to be really strong and open, but we are seeing LIBOR start to increase fairly meaningfully. What do you feel about funding right now and ESN's capacity to pass on the higher cost of funding, particularly when funding demands really start to ramp up later this year?
Multiple speakers: [Frank Ruperto] Yes, So Jay, I'll take that one. [Jay Forbes] Go ahead, Frank. Mario, what I would tell you is, remember our business model is effectively interest rate agnostic. That means that when we originate a new lease vehicle, that origination pricing is underpinned by the current market rates that are in effect at the time. And so, as we fund those simultaneously to those originations, or roughly simultaneous to, we then have that matched funding that we talk about in all of our disclosures as we move forward here. The one thing I would say is we do see ample funding capacity in the market for us through all of the vehicles that we have explored and currently utilize. Additionally, we continue to see a strong syndication market which again, not only allows us to de-lever but it is a funding source as we cycle that cash back through the business to then go do future originations.
Multiple speakers: [Mario Mendonca] So is it your view then that the environment is such that ESN can pass on all of the increased cost of funding, there's no need to absorb--There have been scenarios in the past where companies have had to absorb some of the increase of funding costs. It seems like your view is there's more than sufficient to pass those costs on. [Jay Forbes] That is correct. There is no issue there whatsoever and in conversations with our clients as we queue up the 2023 model here and socialize what we expect to be meaningful MSRP increases and associated interest rate increases, again, the clients understand that and there's been no diminished interest in placing those orders. Demand remains very strong. So again, the model designed that we, as Frank said, are agnostic in terms of interest rates up or down, for us, this match funding philosophy has served us very well, something that we manage to religiously.
Mario Mendonca: Okay, one quick follow-up then, more of a modeling question. I understand that your gain on sale was strong this quarter and that you see it continuing somewhat. Were there any other sort of unusual fee or net financing revenue or other sort of revenue items that came through that were sort of lumpy or unusual this quarter? And I'm asking because these moves are meaningful and I want to make sure I'm modeling this out appropriately.
Frank A. Ruperto: No, nothing that I would say is materially unusual in the quarter that isn't underpinned by the overall strength we're seeing in utilization, we're seeing in the marketplace, and the delay in certain OEM deliveries.
Mario Mendonca: Okay, thank you. I appreciate it.
Operator: Once again, analysts who have a question may press star then one. This concludes the question-and-answer session. I would like to turn the call over to Mr. Forbes for any closing remarks.
Speaker 2: This concludes the question and answer session. I would like to turn the call over to MR Forbes for any closing remarks.
Jay A. Forbes: Just to say thank you, I appreciate you joining us today and I look forward to our follow-up discussions.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Speaker 2: The.