Q3 2022 Element Fleet Management Corp Earnings Call
Thank you for standing by this is the conference operator.
Yeah, well, let's keep management third quarter, 2022 financial and operating results conference call.
As a reminder, all participants are in listen only mode.
The conference is being recorded.
In your prepared remarks, there will be an opportunity for analysts to ask questions.
Joining rejoin the question queue you May Press Star then one on your telephone keypad.
If you need assistance during the conference call you may signal, an operator by pressing star zero.
Element wishes to remind listeners that some of the information in todays call includes forward looking statements.
These statements are based on assumptions that are subject to significant risks and uncertainties and the company refresh you to the cautionary statements and risk factors, it's year end and most recent MD&A as well as its most recent Aif for a description of these risks uncertainties and assumptions.
Although management believes that the expectations reflected in these statements are reasonable it can give no assurance that the expectations reflected in any forward looking statements will prove to be correct.
Oh screenings press release natural statements MD&A supplementary information document.
The 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.
Alleviation of these non-GAAP measures to ifr as measures can be found in the MD&A.
I would now like to turn the call over to Jay Forbes, President and Chief Executive Officer of Allison.
Please go ahead Sir.
Good morning to all of you joining us on our call to discuss another record set.
Results for element.
Your 2023 results guidance and outlook.
In a few familiar topics, we want to reiterate to stakeholders given the current macroeconomic environment.
Frank and I will be very brief upfront to report ample time for your questions. This morning.
As you can imagine.
Very pleased with government third quarter performance, which is the direct result of our People's ongoing hard work and sharp focus on our clients and their needs.
Yes.
We expect government to perform even better next year as reflected in the 2023 guidance that we've offered which Brian will take you through more materially.
Management and the board recently completed our annual review process, where we reconfirm the organization's continued commitment to our three strategic.
Strategic priorities.
Organic revenue growth on top of a scalable operating platform.
Excuse me our capital light business model.
And returning excess equity to our shareholders.
We updated our three year forward view of our performance.
Key metrics by which we measure achievement against these priorities.
Our optimism and confidence.
Evidence and two outcomes.
First we're increasing our baseline expected organic revenue growth range from 4% to 6%.
6% to 8% annually.
This is based on the demonstrated capabilities of our commercial organization everywhere, we operate as well as our confidence in sustained demand for elements compelling client value proposition.
Second the board has endorsed managements outlook.
Free cash flow generation for sure and increased the common dividend, 29%, reflecting same from 31 to <unk>.
<unk> 40, <unk> annual <unk> per share.
Let me turn it over to Frank now to discuss our Q3 results and next year's guidance. Thank you Jay and good morning, everyone Q3 was another record quarter and it's great to be able to continue demonstrating elements ability to deliver on our client value proposition and generate value for our shareholders in the process I'm going to talk exclusively about aura.
<unk> results for the quarter, which means they exclude the contribution of net revenue that we don't expect to generate next year or in future years, I'm also going to state growth exclusively in constant currency U S. Dollar strengthened against the Canadian dollar throughout the quarter, which benefited Q3 2022 over both prior quarter and prior year.
Our results constant currency eliminates those benefits, making for cleaner comparability between periods.
As Youll hear even after you control for these tailwind of nonrecurring revenue and favorable FX.
Our third quarter performance was outstanding we grew net revenue 10, 2% over Q3 last year and our scalable operating platform magnify that into 16, 3% adjusted operating income growth.
Operating margins expanded 288 basis points from last year to 54, 2% for the quarter.
After tax adjusted earnings per share were <unk> 26 for Q3 of <unk> per share or 24% improvement over Q3 last year and again, just a reminder, that I'm, citing organic results in constant currency throughout here.
Double clicking on year over year net revenue growth. It was primarily driven by services revenue, which is a pillar of our capital lighter business model.
Services revenue was up 16, 4% from Q3 last year, reflecting all three forms of share of wallet growth.
One penetration with existing clients, who are increasingly turning to element services for help managing their growing fleet operating costs.
Increased utilization of our vehicle maintenance management service working with clients to drive more proactive maintenance to reduce downtime where more costly repairs given the elevated average age of clients' fleets due to new vehicle production delays and lastly, inflationary increases in the cost of parts and labor, which benefit element is a fun.
<unk> of our cost plus business. Please see section $1 three a this quarter supplementary information document for more details of services revenue growth.
The second pillar of our capital lighter business model is syndication, we syndicated $599 million of assets in the third quarter and generated $13 $5 million of syndication revenue were $2 two 5% yield on the assets. We syndicate. It we were able to deliver this volume and yield despite rising rates due to the attractiveness of.
This very low risk asset class to our syndication partners by syndicating more floating rate leases and by leveraging our bespoke hedging program to protect yields of known fixed rate syndication names from the time between lease activation in syndication.
Syndication is an economically beneficial and reliable source of recurring high margin revenue for element accelerating the velocity of net revenue and cash flow, allowing for investment in the business with returning capital to shareholders via dividends and share repurchases, thereby driving higher ROE and free cash flow cash per share grew.
<unk>.
Let me round out my comments on net revenue by noting the five 4% year over year growth in net financing revenue oriented far Q.
Q3 performance was stronger this year than last year due to increased gains on sale and ANC in Mexico and improvements in yield on net our net earning assets, which is largely a function of proportionate mix shifts in favor of ANC in Mexico assets as we syndicate U S assets and now some Canadian leases.
It's important to note that we expect <unk> to soften materially in the fourth quarter of this year, because the $9 million one time benefit in this Q3 will not recur next quarter and there is some pressure on our interest expenses from increasing our local currency funding structure in Mexico as previously discussed.
We also anticipate gains on sale in ANC to moderate in Q4, which is common for that market due to a combination of summer and Christmas holidays. This puts additional pressure on Q4 <unk>.
We are forecasting full year 2023, <unk> is essentially flat year over year. This is largely a consequence of the planned increase in syndication volumes, both our net financing revenue and syndication forecast are tied to OEM production, enabling achievement of origination forecasts.
The outlook for <unk> is also a product of increasing our local currency funding in Mexico in 2023, all the other components of <unk>, including gains on sale are expected to grow full year over full year next year.
We view legging into Mexico peso funding as a strategic evolution of our business given the anticipated continued annual double digit growth of our Mexico platform for the foreseeable future. We believe it's prudent to mitigate FX risk exposure risk.
Lastly, with respect to Q4 2022 results. We can expect adjusted operating expenses at the high end of the range implied by our guidance. This is a strategic decision.
With line of sight to materially more long term organic annual growth than we previously thought possible we want to ensure our commercial teams are appropriately resource to anchor this trajectory.
Accordingly, we will be reinvesting some of the non recurring revenue earned this year into commercial capabilities over the next five quarters. Beginning this Q4 2022.
Having said that we expect to continue to expand our operating margins year over year in 2023.
Returning to our Q3 2022 results our net revenue growth a top a scalable operating platform, primarily driven by the capital lighter side of our business model generated 34 cents of organic free cash flow per share in the third quarter, which is <unk> <unk> per share more than Q3 last year our.
Our per share metrics are helped by repurchases pursuant to our CIB, which will renew this year for the remainder of 2022 and better part of 2023.
The combination of common share buybacks and dividends in Q3 had us returned $92 $3 million in cash to our investors.
That return of capital, we remained generous going forward given yesterday's announcement of our 29% common dividend increase to 40 cents per share annually.
<unk> 40 per share puts us right in the midpoint of our 25% to 35% payout range based on last 12 months free cash flow per share.
In addition to predictable and predictably growing common share dividends as well as buybacks, we will return capital to our preferred share investors next year and in 2024 with the redemption of our remaining outstanding three series of preferred shares, thereby further optimizing our capital structure and benefiting our common share.
Our holders.
Finally, as promised last quarter, we are providing full year 2023 results guidance, which is detailed throughout yesterday's disclosures.
We expect 2023 originations of approximately seven $5 billion to $8 billion in keeping with our belief that OEM production volumes will begin to normalize by the second half of next year tracking.
Tracking the anticipated growth in originations with robust demand continuing for our assets, we plan to syndicate $4 to $4 5 billion of assets predominantly in the U S. But also again in Canada next year and we are actively working towards Mexico syndications in 2024.
All told we expect to deliver strong results and growth with net revenue up.
One dot one 4 billion to $1 $7 billion in net revenues operating margins of 54% to 55% adjusted operating income of $6 $15 million to $645 million.
Adjusted EPS of $1 12 to $1 17 per share.
And free cash flow of $1 45 to $1 50 per share for the full year 2023.
These results are in constant currency based on a Canadian exchange dollar one.
<unk> dot to nine which is our proxy for the full year 2022 average exchange rate should Canadian to U S. Dollar exchange rates stay at current levels that will provide upside to our reported earnings relative to guidance.
Relative to the top end of our 2022 organic guidance, our 2023 guidance implies 6% to 9% net revenue growth approximately a 100 basis points of operating margin expansion and 16% to 20% cash flow per share growth.
We anticipate reporting full year organic results in March that are at or near the top end of our current 2022 guidance range.
Before I turn it back to Jay I want to say, how much I look forward to seeing as many of you as possible in person at this management team's first ever element Investor day, which will take place on Tuesday November 29 at the design exchange venue in Toronto and simultaneously online.
Please take a moment to pre register your intent to participate even if you only plan to join US virtually there are hyperlinks to registration process in Yesterdays news release of our Q3 results and on our IR website.
Back to you Jay.
Thanks, Brian I'm equally excited for our Investor day at the end of the bump we have a talented lineup of our senior leaders thoroughly preparing to deep dive on multiple areas developments business for you.
Going to be a great event.
Knowing the scope of the content that we are ready for Investor Day I wanted to focus my few remaining remarks, some topics that we don't plan to spotlight again in three weeks' time.
The first is automotive OEM production capacity.
Our outlook has not changed from that which we shared with you. This time last year, which is that we expect OEM production volumes normalize in the second half of next year.
The recovery in supply volume through the end of 2023 underpins, our seven $5 billion to $8 billion origination guidance as well as our ability to syndicate or to $4 5 billion of lease assets as well.
Frank has mentioned.
On both counts so demand is undeniable.
Clients continue to place orders sustaining our $2 9 billion.
Global backlog and our syndication investors continue to demonstrate their appetite for assets in the U S as well as now in Canada.
Second topic I wanted to cover off this industry consolidation.
It's encouraging to see new investors discover and indeed endorse what we've known them asking on per years, namely the attractive dynamics of our industry and resilience of the fleet management business model.
We believe further consolidation within our industry by establish long term return driven investors bodes well for the health of the industry and as market leader to help of elements business.
Moreover, the current round of industry consolidation has and will continue to afford us ample opportunity to steal market share as other fmc's are forced to focus on the complexities of <unk>.
<unk> or <unk>.
Acclimated to new ownership.
That chapter of element stories behind us. So we can maintain our singular focus on delivering a consistent superior service experience, but.
The complex simple for our current clients as well as our future prospects.
Again for the record on this subject we have been happy.
Be sitting on the sidelines dealmaking has taken place we see no need for element to pursue higher risk inorganic growth when an estimated half to two thirds of the addressable markets in which we operate remain penetrated.
We have a proven strategy and ability to convert self managed fleets into element clients across those markets.
The third and final category of topics I want to remind you there's elements proven resilience in the face of macroeconomic trends challenged many other organizations in fact, our business benefits from some of these dynamics.
The Best example is inflation.
Cost plus business model results net revenue growth with the rise of vehicle parts and labor costs.
At the same time, our market, leading scale and strategic consulting services, both of which Youll hear much more about it in our Investor day.
Our client value proposition, even more compelling in an inflationary environment.
With approximately $1 5 million vehicles under management, we have deep data to inform cost optimization strategies significant purchasing power to drive down price per clients and an extensive service supplier network to afford client options are both cost efficient as well as convenient further drive.
<unk>.
This unparalleled ability to lower the cost of operating our fleet helps element commercial efforts during economic downturns as well businesses are currently self managed fleets are particularly interested in the cost saving advantages associated with outsourcing.
Rising interest rates make our securitization and syndication enable financing all of the more compelling to clients as well as prospects.
That said, our net financing revenue performance is largely agnostic to interest rate movements by virtue of our match funding strategy.
And finally, our largely blue chip client base, our disciplined underwriting process, which is focused on credit.
Quality.
Collateral a distant second as well as the criticality of fleet vehicles to the business of our clients allow element both negligible levels real economic loss in the rare case, a client does default.
I dive deeper into all of these features of our business model in my letter to shareholders. This quarter.
In closing I hope to see you in person at our Investor Day, where we will show you how each of our five organic revenue growth drivers work, our scalable operating platform underpins that consistent superior client experience all the while expanding operating margins and how we advance our capital light business model to enhance.
Turn on equity and liberate cash flow to return to our shareholders.
Confident you'll leave our investor day, with a better understanding of the unique characteristics development business and a deeper appreciation for the compelling attributes of our value proposition.
So now let's turn it over to your questions.
Thank you.
We will now begin the analyst question and answer session.
In order to afford all analysts the opportunity to ask questions ill, let me kindly request and analysts limit themselves to two questions and live dialogue and management.
Analysts have additional questions. Please rejoin the queue.
The joiner rejoin the queue you May press Star then one on your telephone keypad, you will hear a tone acknowledging your request.
If youre using a speakerphone please pick up your handset before pressing any key.
Your question. Please press Star then two.
Our first question comes from Geoff Kwan of RBC capital markets. Please go ahead.
Hi, good morning.
Let's talk for a while about having your sales team focus on market share wins, given there was a significant opportunity there and at the same time something interesting opportunity with bit hampered by things like.
Traveler companies didn't want to necessarily see people in person.
And I know you talked about a little bit and Yoko marks but can you give a little bit more detail on the progress winning self managed fleet clients and also how youre allocating the priorities of the sales team between market share wins versus Salt Lake.
Targets.
Good morning, Jeff.
Yes, I would say.
To begin.
With the easing of restrictions that we've seen throughout 2022.
We've seen a commensurate increase in the mobility of our Salesforce and as a consequence, our ability to engage.
With.
Both prospective clients.
<unk> are currently clients of our competitors as well as self managed fleets.
Owned and operated.
Please so the environment has been far more facilitative in terms, but an opportunity for our people to engage firsthand.
With client prospects, we've seen that in terms of the number of meetings face to face meetings that are being taken as well as a number of.
Client prospects that are showing up at industry forums and events.
As they educate themselves on the benefits that might accrue with them outsourcing.
These two organizations like ourselves so absolutely from a macro perspective.
Baird.
Increased levels of engagement of our commercial team with client prospects at the same time as we introduce.
The value proposition to those clients I would say the macroeconomic environment has also been quite enabling in terms of the rest of activity that our commercial people are seeing in terms of client approaches our ability to reduce materially reduce the total cost of operation of those fleets.
In times of greater inflation.
Compelling our ability to provide cost effective access to capital is all the more compelling and many of these organizations are also wrestling with their own ESG.
ESG agenda looking at sustainability, and thus wondering where the pathway to electrification might bring and our ability to help them make more informed decision is also.
Ben.
Major opportunity to both open the door and further discussions with them. So I'd say, yes, we're absolutely seeing.
A increase of ability.
The increase to engage this.
Self managed fleet opportunity and increase.
Interest on their part in terms of the macroeconomic environment.
And how our value proposition of lines.
Yes.
Our ability to convert those is also well evidenced not only in Mexico, where we traditionally have done very well in this marketplace, but more recently in U S and Canada, where we've also been able to convert these.
These prospects into qualified clients are consuming both financing as well as services from our organization.
Okay. Thanks, and just my other question was.
Just about this whole reallocating some of the onetime revenues.
From this year into higher Opex over the next five quarters.
To try at that higher organic revenue benchmark.
It's going to dampen kind of your 2023, EPS guidance, but really where I wanted to get some clarity as to.
What are you spending on the higher Opex I know Frank had a little bit of commentary.
Is it more salespeople is it.
No changes to systems or what exactly are you spending this money on that thats going to drive the higher organic revenue growth.
Yeah, So Jeff.
We began this pivot to growth back in 2021.
For us it was going to be kind of business as usual in Mexico, and sustaining 20% annual revenue growth.
That region it was roughly the revenue growth.
AMC recognized and where they stood in terms of the readiness of their platform and more so kind of the rebuilding and reinvigoration of our U S. Canadian commercial efforts.
And everyone that we have seen over the last seven quarters.
Has been very encouraging not only in terms of our value prop and its relevancy in the market.
<unk>.
It's continued relevancy given the macroeconomic shifts that we've seen.
<unk> is also very much a reflection of.
The ability of our commercial organization to quickly.
Grow and its capabilities and attack these market opportunities.
That are available to us and so as we think about it.
<unk> our growth ambitions from four to six to 6% to 8% we want to make sure that we're properly resourced on every dimension of the business. So as Frank has indicated commercial absolutely we want to add to the bench of talent that we have to fully address all the market opportunities that we're surfacing.
Also wanted to make sure that when we are successful in.
Stealing share.
Converting a self managed fleet that our operations teams have the necessary resources to ensure that they enjoy that consistent superior client experience through the onboarding.
Process and through the early quarters uplifting with us.
As a new outsource partner we also.
Want to make sure the rest of the organization's capabilities.
Are properly sized for the enlarged ambitions that we have around growth and is something is simply simplest contracting as you think about entering into contracts with these counterparties.
And managing those contracts just having the legal resources the bandwidth such that we can reduce the cycle time through the contracting process with the client.
So that again, we can sign those contracts onboard those clients begin to properly service them as we go forward. So think of this largely commercial supplemented with operational and some.
Additional corporate bandwidth switching.
Our ambitions around this growth agenda.
Okay, great. Thank you.
The next question comes from Graham Ryding of TD Securities. Please go ahead.
Okay.
Hi, good morning.
The Pie chart on slide 15, it does suggest it's a very large opportunity for you in this self managed fleet area can you give us some context for how much of your growth currently is coming from penetrating that self managed market or perhaps with the guidance that you've given over next year or even the medium term what's your.
<unk> for how much that self managed fleet is going to contribute to that growth.
Good morning Graham.
Well, we haven't broken those with specifics, let me give you maybe a.
A bit of a perspective on.
On a regional basis, so as we think about Mexico traditionally we've been able to grow that business, 20% a year in terms of revenue growth.
On top of their scalable operating platform magnify that in terms of its operating income contribution to the organization.
<unk>.
They've been able to achieve that through <unk>.
High levels of retention, so growing by not shrinking in the first place.
By stealing share from other FMC as well as banks in the Mexico market and.
Equally from share or excuse me from.
Self managed fleets converting.
So large multinationals operating in that country as well as large domestic.
Entities converting those fleets are owned and operated into clients of element and so.
They have a demonstrated track record of drawing from all those sources.
<unk> growth for them the real opportunity to go forward is not only to sustain the ability to steal share and grow in the self manage but indeed to increase service attachment through share of wallet, so increased penetration utilization as well as pricing opportunities around services you go over to AMC.
AMC would have.
Concentrated historically.
More towards stealing share and retention in 2021, when they did their pivot to growth. They went fairly aggressively into self managed fleets and secured a number of notable wins in that space and continue to do so today.
There also.
Vaccine.
The government sector is a key area of focus there and we have.
We sit on a number of panels or exclusives.
Fleet management company or a number of government entities in both Australia and New Zealand.
Come back to the U S. Historically, we have skewed more towards.
The share of wallet.
Tension and stealing share as the primary drivers of our organic revenue growth.
<unk> managed fleets.
An area of concentrated focus for this organization under <unk> leadership, we rebuilt the entire view of the commercial function in the U S Canada.
<unk> developed a minimum viable product if you will throughout 2021 took that into market.
<unk> 2022 and have refined it over the course of the last three quarters.
And in doing so have been able to.
Gain confidence and insight in terms of the market opportunities are available, particularly in self managed fleet.
Roll that all up to a kind of a global perspective.
We said, hey, we're going to start by getting industry leading.
Market retention up even higher and we're fast approaching 99% across our platform and so.
That has been a thrust over the last seven quarters and that has manifested itself in a material increase in retention and one that we think we will be able to sustain go forward second big thrust for us the share of wallet going deeper with existing clients recognize that we have a relationship with them. They trust us they value the relationship.
So that will be a great way for this new reinvigorated.
Sales effort to kind of cut their teeth as we grow revenue.
And so share of wallet has certainly been a big driver of that.
In all markets, we see we have seen and have.
Availed ourselves of opportunities to steal share as some of our competitors altered.
Or entered into fairly ambitious integration agenda.
We would expect the share of wallet and stealing share.
To be short to mid term drivers of.
The 6% to 8% revenue growth that we're seeing especially given the macroeconomic environment that we're forecasting.
And then self managed fleets for us is key.
Key to the long term growth that we see in this in this business and again based on the learnings.
We have gained in both.
Mexico and AMC. The early successes that we've been seeing in U S and Canada.
We expect that to fuel the bulk of our 6% to 8% revenue growth long term. So that's how we're kind of looking into where legging into this with.
Retention and share of wallet.
Amplifying that through stealing share all the while building our capabilities building our pipeline for self managed fleets all of which are manifest themselves and notable results that encouraged us to to lift our long term guidance in terms of revenue growth.
The next question comes from Paul Holden with CIBC. Please go ahead.
Good morning.
A couple quick ones for me I guess first off how should we think about share repurchases.
In 2023, and I guess the context of the question is twofold. One is you don't want to build some capital too.
The preferred shares which you've already.
Highlighted is your intention and then two we have this proposed.
Tac on share buyback and Canada as well so any commentary on how you are looking at that tax might be.
That was helpful as well thank you.
Thanks, Thanks, Paul This is Frank.
So think about our return on capital and remember, we have north of $500 million cash flow every year.
What we look at is think about it this way dividend. So we've made a material increase in our dividend of roughly 29% of really have leaned into that consistent return of capital through the dividend as we move forward here and that dividend, we anticipate to grow over time, consistent with our free cash flow per share growth.
Second as you pointed out would be the preferred shares and then as always the last piece of the lever is the CIB. So we've guided you to roughly $385 to 395 million shares outstanding at the end of the year, so midpoint of roughly $3 90.
And we anticipate.
Acting on that and CIB.
Aggressively as we see the opportunities to repurchase shares come up in regards to the proposed tax legislation that are 2% excise tax we've seen in the U S. No impact really of excise tax and we don't believe that that would have any impact on our behaviour in regards to buying back our shares given.
The perspective, but we think that they are significantly undervalued in the market.
I understand.
And then as we look out to 2024.
And your intention of calling those preferred shares how should we think about the impact to the tangible financial leverage given one of the reasons. They exist is to sort of help that ratio.
Target change at all given the strong underlying fundamentals of the business I personally would probably argue you could probably operate with a higher.
Higher leverage and maintain your investment grade rating, but.
Would love to hear your perspective on that.
Yes, no as we sit here today and remember last year, we increased our leverage from six roughly six point no target to six and a half.
Current thinking is six five is the right leverage level for us It gives us ample room to continue to repurchase shares by in the preferreds and otherwise.
So we think that that kind of keeps intact or potentially gives us upside in regards to our ratings profile as we move forward here and matured the business and continue to show the significant recurring revenue streams in the safety and the overall business profile.
As of now six 5% is what we're targeting that we came in lower than that obviously in this quarter.
That's great. Thank you.
The next question comes from Jamie Go line of National Bank Financial. Please go ahead.
Yeah. Thanks first.
First question just.
Looking at the vehicles under management.
Disclosures in the sub pack noticed the decline in service only.
I guess, maybe any color on what drove that decline is theyre, just usual volatility or seasonality in customer selecting services.
In Q2 versus Q3.
And then they kind of add them back on later on what's what's actually driving that and how should we think about that going forward.
Okay. Good.
The introduction and the subsequent reporting and management performance metrics has been at the heart of our successful repositioning development.
First through transformation and now obviously through this pivot to growth.
We found that the adoption of a very finite set of metrics lines organization and promotes accountability, which obviously drives better decision, making and better performance.
<unk> is a perfect example.
The adoption of a new strategic measure over the long term success.
Can lead to better decision, making within the organization as you know we introduced us about 12 months ago.
It has already revealed insights into our business, leading to better decision, making around operations as well as the commercial.
And maybe specifically to your question.
Recent analysis bump profitability that our teams are undertaking and the attachment service attachment rates identified a small handful of large legacy clients.
Clients that we lost prior to 2019.
We're still purchasing one or two services from us at below market rates and unable to sue cure sufficient revenue to warrant our continued.
Provision of services, we offer boarded these clients completely and Broadway a tangible example, we had one client 30000 service units that we Offloaded in June .
In those 30000 units were generating $9000 of revenue on an annual basis. So again for us. It is focusing the organization on acute few key metrics that really drive the business deepening their knowledge of the business and as a consequence, making better business decisions.
So.
Yes for us very very pleased with the 4% year over year volume growth that we've been able to tap.
Expect minor variations as the organization embraces and continues to.
Damage.
Performance metrics.
Okay, great, yes that number should be more stable going forward then.
Takeaway.
And that also leads into.
My second question, which was is focus on service revenues per vehicle under management in.
Trending trending higher.
And in particular, I guess, even if you're excluding some of the onetime items.
Clearly some of these profitability initiatives around the vehicles under management is helping to drive that.
Obviously inflation as well, but I guess the question is really getting to.
How sustainable is that.
Servicing revenue per vehicle under management line in that and how do you see that trending over the next several quarters.
Yes.
So again stepping back at 30000 feet.
Quite sustainable in the context of as we think about clients, taking more and more services.
Rare situation works clients adopt manage maintenance managed accident totals in violation.
Off of that platform. The value that is created is so compelling that it's rare to see a client.
Okay.
Considering those types of services. So once the client is taken that service attachment.
There is a very very high probability that they will consume that for the entirety of their existence as appliance and so as we step up.
Service attachments, we would not expect any type of regression in terms of the number of attachments being forward further as we think about inflation and the pricing power that we enjoy as a consequence of.
The consistent superior client experience, that's another lever for revenue growth into the future now the noise short term is just going to be the evolution of services as we think about.
Originations getting back to normal levels and growing at the levels that we forecast for 2023.
<unk>.
We would expect more remarketing more title and registration.
In services of that nature, which will be quite additive and at the same time, we would expect some service revenues.
Managed maintenance as those older vehicles get replaced by newer vehicles that will come down a little bit so there'll be some noise short term as we migrate from.
A heavy proportion of total net revenue that include gain on sales moving to net financing revenue that is low bond gains of sale.
If you again stepping back yes, we would expect that.
The all of the factors that I've spoken to in terms of the increase in the number of attachments the flow through.
Pricing.
Through inflation as well as price increases will be quite additive to.
Revenue growth as we go forward.
Thank you.
Thanks, James I appreciate it.
The next question comes from Tom Mackinnon with BMO capital markets. Please go ahead.
Yeah. Thanks, good morning.
The question is really on the raising of the net revenue growth benchmark, that's materially up premier $4 to six previous guide.
So going up to 6% to eight now and longer term.
And I guess I'm wondering how are you able to what gives you confidence in what is deemed to be a pretty noisy 2022, you've got OEM capacity issues, you've got other noise that you've just mentioned in the previous question.
Scott.
Nonrecurring items in 2022 as well so how are you able to sort of.
Sift through that and then what can you point to us that really highlights the fact that.
You are able to raise this benchmark.
Net revenue growth.
The percentage is.
If you can just give us some of the highlights there that you were seeing.
It kind of looked through this noise and look through these OEM capacity issues in 2022 that.
Within the business, that's able to that you were able to have confidence in giving this increased benchmark.
Good morning, Tom.
When we set the 4% to 6%.
Benchmark in terms of the long term growth for the organization.
There were two things that underpin that.
With a a question mark.
So what underpinned that was our confidence in being able to set forth and deliver.
With a high degree of consistency a compelling value proposition around our ability to produce a total operating cost of our fleet the ability to provide ready access to cost efficient capital and our ability to help our clients and client prospects migrate.
Two electrified fleet over time, so we knew that was a compelling value proposition that gave us confidence around 4% to 6% growth further as we thought about the addressable marketplace depending.
Depending on the geography anywhere from one half to two thirds of the market was underpenetrated.
<unk> managed fleets. So we knew that exist as well and those two again combined gave us a great deal of confidence in terms of the size of the pie that.
That was available to us the question Mark was our ability to effectively address those opportunities. We knew we had the market. We knew we had a compelling value proposition for that marketplace question.
To what degree what we'd be able to avail ourselves of this market opportunity and and for US what has given us confidence to step up that four to 6% to 6% to 8% growth is the progress that we have seen.
Yes that we have sustained in Mexico, the progress that we've seen in ANZ and perhaps most materially.
The progress that we are witnessing in U S and Canada.
As we think about that team and what they've been able to do in terms of both growing vehicles under management as well as growing share of market excuse me share of wallet.
It is really quite amazing to see how far they've come in such a short term time in terms of the.
The capabilities of our commercial organization very well the operational capabilities of the organization to quickly ingest and onboard these client wins. So that was the piece for US Tom that was really kind of a question mark around the 4% to six we knew there was a market.
We knew we had a compelling value proposition to take to that market to steal share to deepen share of wallet too to penetrate those self managed fleets. The question was how fast.
And to what extent would we be able to build our commercial capabilities complemented by the operational capabilities to properly.
Secure those client wins and based on what we've seen in particular over the last three quarters in the U S and Canada based on what we continue to see under Manwell Tomatoes leadership.
In Mexico in the 20% revenue growth that we're getting in that market, coupled with what we're seeing with Crystal Lake and the great team in ANZ.
What good has given us confidence.
To increase our long term view.
To six 6%.
Okay, that's great.
And it's great.
Great to see everybody that you are having increased confidence in your investor day at the end of November and the second question is why in your guidance for 2023 why are you using as sort of an outdated exchange rate of 129.
Granted we.
Would probably see upside if that exchange rate.
We're closer to the core.
135, or something that it's at right now so.
Just wondering why you put.
<unk>.
A.
And outdated exchange rate if you will when you when you provided that guidance.
So beginning last year, we started reporting all of our earnings on a constant currency basis for comparability and so our current forecast and we don't forecast next year's exchange rate, we don't want to be in the progress the nation business, but when we look at this year and nowhere exchange rates.
We believe there'll be roughly $1 two or not.
So what that does for you is put on an apples to apples basis before any FX impact.
What the pure performance of the business as year over year and.
And so that's why we use that so again, it's just us using our constant currency convention for comparability purposes, because our crystal ball is no better than anyone else's in regards to what next years exchange rates will be.
Yes, okay understood thanks for that alright.
Thank you.
Thanks, Tom.
The next question comes from Steven <unk> Raymond James.
Go ahead.
Four quick ones.
We're hearing and other leasing sector, especially in equipment.
A lot of companies are kind of delaying the purchase decision I guess, you can call in and purchase leasing decision maybe not leasing as many pieces of equipment are you seeing that in the fleet business in terms of customer that normally would.
Lease 1000 vehicles on a year is cutting back with the higher interest rate environment.
Good morning, Stephen no to the contrary.
When they are looking at.
The ongoing operating costs of an aging fleet.
There's a great emphasis on their part too.
Order of replacement vehicles on a timely basis and.
Obviously, the delays that we've been experiencing over much of the last seven quarters have just added to lowest so now we're actually seeing the very opposite we're seeing an increase in demand for replacement vehicles.
Okay. That's great and then second question is more on the funding side.
We have seen some disruption in the U S with some of the securitization markets.
I don't know if youre seeing I know you've got pretty robust syndication on numbers out. There is have you seen any kind of disruption coming into <unk>.
The fleet type securitization vehicles.
In the U S.
Yes. So this is Frank.
We've seen spreads expand across all financing markets and I don't think were unique to that nor is fleet unique to that from that perspective.
That being said with $2 $2 billion in <unk>.
Committed capital that's Undrawn.
Significant liquidity to run the business and with the syndication component of that continue to bide our time.
Two.
Enter the markets on a more opportunistic basis from our securitization perspective so.
So yes. The answer is yes, we've seen spreads expand from the historic lows that we saw last year, but that being said we have no.
Burning need to go to any of those markets. During this period of dislocation and we will be able to go in more opportunistically as the interest rate volatility environment stabilizes and those spreads come back to more reasonable levels and.
Frank as points of emphasis huge demand for this product in the securitization market. We just are choosing not to avail ourselves of that.
Yes, that's a great point the market all of our markets are wide open and available to us just not our prices where all that interested in now given our liquidity perspective position and our syndication capabilities.
Okay and just.
B to the syndication market is obviously with rates moving up your clients have got.
But I believe they do.
Like hurdle rates that they have to achieve in the syndication.
If youre not moving up your regions quick to say is the overall interest rates is that margin should we expect some compression on the syndication numbers that you gave out.
Yes, what I would say is think about it. This way we have put in place a number of mechanisms to mitigate the interest rate volatility and this is really all about interest rate volatility because our.
Our leasing rates go up as benchmarks go up over time, so we always capture that inherent spread there. So it's the volatility from the time of activation to the time of syndication, which causes some some issues and it's the mix of both the credit quality and the floating versus fixed rate component.
What we ultimately syndicate, which impacts yield so it's a bit of a complex question, but as rates begin so our bespoke hedging program protects us.
Mitigates the impact of those rising rates.
So that we can capture the spread.
And don't get Pete on the timing between that activation and syndication should rates move once rates stabilize.
Then yields will go back into place and those those hedges wont be as necessary as we move forward here.
To take advantage of that but in the near term what you see is us syndicating more floating rate.
And syndicating names in which we are doing do you spoke hedging.
Net net.
Strong volatility could put minor minor compression on deals, but we still feel pretty good about our rough rough plus or minus 3% on the portfolios. We take out there over the course of any given year.
Okay. That's helpful. Thanks, guys.
Okay.
The next question comes from Shalin Clark of Barry Just investment research. Please go ahead.
Thank you and good morning.
Good segue on the syndication question so syndicated assets of approximately 40% of your total assets what do you think this though.
Thank for that.
As opposed to engage on.
Eagle assets.
We're very comfortable with our guidance of $4 to $4 5 billion, which is materially higher than what were going to syndicate. This year and again when we looked at syndication, we look not only at managing tangible leverage optimize optimizing our tax position. So that we retain enough up the depreciation tax shield.
To provide some benefit on our cash taxes and remember we talked a lot about the difference between our book earnings per share and our free cash flow per share and the differential of that which is real economic value is the lower amount of cash taxes versus booked taxes that we pay there so.
Really important to understand there's two levers there, but again, we believe the four to $4 5 billion very very doable.
Originations come in we will be able to syndicate those levels and have a high degree of confidence in doing so.
That's helpful. So.
Do you think you can do a similar amount of syndications and grain going forward and beyond.
I think it would come back down to the previous guidance of doing that.
Okay.
We would anticipate because because of the both our growth importantly, and the.
Reduction that's needed in the backlog and the shadow demand that we see more orders. The demand is very strong, but there is no order book to place them that should keep origination very high end.
As we move forward into 2024, and beyond and syndications will keep pace with that growth in originations as we move forward.
Okay. That's helpful. Thank you.
The next question comes from Graham Ryding of TD Securities. Please go ahead.
Yes, I just wanted.
To get some color on your origination guidance is it fair to think that thats going to be backend weighted in terms of volumes.
You expect the OEM production capacity to open up in the second half of next year and then.
Yes.
And related to that how much of a backlog do you expect to work through next year should that normalize by the end of the year or is that still going to persist into 2024 do you think.
Graham I think in answer to your first question, Yes, we expect it to be more back end loaded as.
Oems continue to ramp up the productive capacity in the first half.
Once established in that begin to draw down the backlog.
I would say to you and we've talked about order backlog is a new concept that we introduced last year. We also talked about shadow order backlog that Frank just referenced.
We would expect that our order backlog will begin to be drawn down in 2023, and it's more a function of.
The order backs of the Oems being constrained.
As opposed to actually orders flowing through so our shadow order backlog is actually building.
Our pace with the order backlog that youre seeing in built through our disclosures.
As the order backlog is strong drawdown in 2023, we actually expect our shadow order backlog will increase as a function of the demand that we're seeing within our client base, both internal growth as well as.
Growth from acquired clients, coupled with the fact that the.
Oems will be regulating and limiting the amount of orders that they will accept and so.
We would expect that as Frank has indicated 2024 will be yet another robust year in terms of originations for the organization as we continue to draw down the backlog that was unfulfilled in 2023.
That's helpful. Thank you.
Thank you.
Our last set of questions will come now from Jamie line of National Bank Financial. Please go ahead.
Yes. Thanks.
Did want to touch back on that origination that theme as well. So I guess two part question one first part.
Is there anything in your conversations with the Oems.
That is.
Maybe hinting at any risk of.
Let's say OEM production has still been slow for the full year 2023, and I'm thinking about maybe even some micro chip shortages again as we're hearing some some stuff out of out of Asia and the impacts of let's say Onboarding micro chip production.
And then the second part of the question is in terms of the origination.
Origination and backlog unwind and how that flows into.
Operating income at a very high margin.
<unk>.
How much.
How much of that is built into the forecast for 2023 versus getting pushed out into 2024, which could drive even more margin improvement in that year.
Yes, I think as we think about originations and our thesis we had envisioned microchips being a lesser issue as we progress through 2022 and that has played out largely consistent with that theme. So the Oems had bought forward.
<unk> needs around the micro trips to the extent that they could and we're seeing that manifest itself in terms of increased vehicle deliveries to us.
So yes that has played out very much in keeping with the thesis that we shared with you. This time last year.
We hinted.
Earlier this year that the.
The shutdowns in China would have impact on OEM.
Production this year, the extent to which we were quite sharp and that again has turned out to be the case.
We will hit our originations numbers this year.
A.
They were somewhat.
<unk>.
The impact is in terms of the art of the possible by virtue of the.
Production shutdowns in China, and the impact to cascading impact that that had on the OEM supply chain.
As we think about 2023.
And in microchips being a lesser issue again by virtue of the buying for the productive capacity of the foundries.
With an anticipation of the Lockdowns in China being again, a lesser impact on OEM production. The only other issue that is to kind of materialized over the summers just flavor.
The ability of the Oems to have sufficient labor pools.
To keep their manufacturing capacity increasing to the levels that we expect we've factored all of those variables into our outlook for 2023.
The guidance.
Upwards of $8 billion worth of originations feeling very confident in terms of the organization's ability to receive vehicles in those quantities throughout 2023, recognizing that we will exit the year with both a.
Significant order backlog.
Exit 2023 year with a significant order backlog and an even more significant shadow our order backlog that won't be satiated until 2024. So the guidance that we provided you around originations underpins our outlook in terms of revenue and profitability for 2023, and we have a.
High degree of confidence in terms of that number.
And we would expect that this will be yet another strong tailwind for 2024 as we exit 2023 with.
More productive capacity.
Still a very large and associated order in shadow order backlog.
I think the piece on this.
The wildcard in this set.
Again, as we think about.
Upside downside around origination.
I do think if we indeed see.
The onset of any type of recession that tamps down consumer demand for vehicles I think it's a plausible.
Expectation that that productive capacity will move from.
Associate in the retail channel to associated.
Fleet channel and so if we do see.
Fairly significant economic downturn.
Constraints consumer demand than would be our expectation that productive capacity would shift to satisfy the order backlog.
Fleet management companies like ours, which could could be an accelerant in terms of.
Increased originations of drawing down.
Order backlog of Shadow order backlog that we have again we.
Frank.
Acknowledge we're not in a position here to to forecast next year's FX rate or.
The probability or extent.
<unk>.
Economics.
Recession.
But as we think about our planning.
That is a potential tailwind.
Tailwind in terms of originations and getting more vehicle deliveries ended up there was some softening up retail demand for vehicles.
Thank you.
This concludes the question answer session and today's conference call.
May disconnect your lines. Thank you for participating and have a pleasant day.
Hi.
Yes.
[music].
Okay.
[music].
Okay.
[music].