Q4 2023 Element Fleet Management Corp Earnings Call

Operator: Good morning, ladies and gentlemen, and welcome to Element Fleet Management's fourth quarter and full year 2023 Financial and Operating Results Conference Call. At this time, all participants are in listen-only mode, and you are reminded that this call is being recorded. Following the prepared remarks, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star, then one.

Good morning, ladies and gentlemen, and welcome to element fleet management fourth quarter and full year 2023 financial and operating results conference call.

At this time all participants are in listen only mode and you are you are reminded that this call is being recorded following the prepared remarks, there will be an opportunity for analysts to ask questions to join the question queue. You May Press Star then one.

Operator: In the event you need assistance during the call, you may signal an operator by pressing the star key followed by zero. Element wishes to caution listeners that today's information contains forward-looking features. The assumptions on which they are based and the material risks and uncertainties that could cause them to differ are outlined in the company's year-end and most recent MD&A, as well as its most recent AIF. Although management believes that the expectations expressed in these statements are reasonable, actual results could differ materially.

In the event you need assistance during the call you may signal, an operator by pressing star key followed by zero.

Element wishes to caution listeners that todays information contains forward looking statements that assumptions on which they are based in the material risks and uncertainties that could cause them to differ are outlined in the company's year end and most recent MD&A as well as its most recent yeah.

Management believes that the expectations expressed in these statements are reasonable actual results could differ materially.

Operator: The company also reminds listeners that today's call references certain non-GAAP and supplemental financial measures. Management measures performance on a reported and adjusted basis and considers both to be useful in providing readers with a better understanding of how it assesses results. Reconciliation of these non-GAAP financial measures to IFRS measures can be found in the company's most recent MD&A. I would now like to turn the call over to Laura Dettori-Etenazio, President and Chief Executive Officer of Element. Please go ahead.

The company also reminds listeners that todays call references certain non-GAAP and supplemental financial measures.

It's been measures performances performance on a reported and adjusted basis and considers both to be useful in providing readers with a better understanding of how it assesses results.

Reconciliation of these non-GAAP financial measures do I have far as measures can be found in the company's most recent MD&A.

I would now like to turn the call over to Laura to Tori <unk>, President and Chief Executive Officer of element.

Please go ahead.

Laura Dettori-Etenazio: Thank you, Operator, and good morning, everyone. Thank you for joining us this morning. 2023 has been a year of record-setting results that translated into real value for our shareholders. Our team delivered on our growth levers with the addition of 155 new clients for the year, of which 45% were self-managed conversions. We also increased our share wallet gains across all geographies by 28% over last year. Our sales conversion rates are up, and we have a very healthy pipeline. Our sales team drove net revenue to an all-time high of $1.3 billion for the year, and we delivered adjusted earnings per share of $1.32. We returned $345 million to our shareholders by way of increased common share dividends, share repurchases, and preferred share redemptions.

Thank you operator, and good morning, everyone. Thank you for joining us this morning.

2023 has been a year of record setting results that translated into real value for our shareholders.

Our team delivered on our growth lever with the addition of 155, new clients for the year of which 45% were self managed conversion.

We also increased our share of wallet gains across all geographies like 28% over last year. Our sales conversion rates are up and we have a very healthy pipeline. Our sales team drove net revenue to an all time high of $1 $3 billion for the year and we delivered adjusted earnings.

Per share of $1 32.

We returned $345 million to our shareholders by way of increased common share dividend share repurchases and preferred share redemption.

Laura Dettori-Etenazio: We generated record revenue results, and we continue to have a lot of opportunities for further growth and optimized performance in the years ahead. Additionally, we're making solid strides with our three key strategic initiatives that we shared with you last quarter. You'll recall we committed to centralizing accountability for our U.S. and Canadian leasing operations, established a strategic sourcing presence in Asia, and Advanced Digitization and Automation. Now, with regard to leasing, we're set to be operational by mid-year in Ireland, a globally renowned leasing center of excellence. Last week, our Head of Leasing, Chris Gittens, and I had the opportunity to visit our new location. We met with local officials and spent time with the first five of approximately 70 employees that will work in our Dublin office.

We generated record revenue results and we continue to have a lot of opportunity for further growth and optimize performance in the years ahead. Additionally, we're making solid strides with our three key strategic initiatives that we shared with you last quarter, you'll recall, we committed to central.

Accountability for our U S and Canadian leasing operations established a strategic sourcing presence in Asia.

And advanced Digitization and automation.

Now with regards to leasing we're set to be operational by mid year in Ireland, a globally renowned leasing center of excellence.

Last week, our head of leasing, Chris Gittens, and I had the opportunity to visit our new location, we met with local officials and spent time with the first five of approximately 70 employees that will work in our Dublin office.

Laura Dettori-Etenazio: I have no doubt that under Chris's leadership, our team will elevate our clients' leasing experience, standardize and optimize their operations and pricing discipline, and further maximize the value of our portfolio. Now turning to Asia and establishing a strategic sourcing presence. We recently welcomed our newest executive based in Singapore who will run this initiative. She has previous experience in fleet management, including a strong tech background and a proven track record in strategy development and execution. She brings a wealth of knowledge and expertise about the region and the industry, and she'll undoubtedly be a great asset to Element.

I have no doubt that under Chris's leadership that our team will elevate our clients' leasing experience standardize and optimize their operations and pricing discipline and further maximize the value of our portfolio.

Now turning to Asia, and establishing a strategic sourcing presence. We recently welcomed our newest executive based in Singapore, who will run this initiatives.

She has previous experience in fleet management, including a strong <unk> background and a proven track record on strategy development and execution.

She brings a wealth of knowledge and expertise to both the region and the industry and she'll be a great asset element with her arrival will expand and improve our clients' access to new vehicles and further provide our business with the economic benefits of sourcing at scale and given nation's global leadership position.

Laura Dettori-Etenazio: With her arrival, we'll expand and improve our clients' access to new vehicles and further provide our business with the economic benefits of sourcing at scale. And given Asia's global leadership position in the development and production of EVs, this aligns perfectly with our clients' commitment to sustainability and decarbonization. For these initiatives, we do remain on track to deliver the profitable revenue growth and operational efficiencies that we committed to last quarter, which was on a run rate basis, generating between $40 to $60 million of revenue and $30 to $50 million of adjusted operating income by 2028. As I shared last quarter, we added strong expertise to our team with a new Chief Digital Officer and a new Chief Information Officer. Their mandate is to elevate the client experience, deliver more data-driven insights, and simplify the complexities of managing large-scale fleets. Their work will help us increase our client net promoter score. This year, while we did make progress moving our score from 39 to 41, it was slightly below the bar that we raised for 2023.

On the development and production of <unk> this aligns perfectly with our clients' commitment to sustainability and decarbonization.

For these initiatives, we do remain on track to deliver the profitable revenue growth and operational efficiencies that we committed to last quarter.

Which was on a run rate basis.

Generating between $40 million to $60 million of revenue and $30 million to $50 million of adjusted operating income by 2028.

And with regards to our third strategic initiative to advanced Digitization and automation as I shared last quarter, we added strong expertise to our team with our new Chief Digital officer, and a new Chief Information Officer.

Their mandate is to elevate the client experience deliver more data driven insights and simplify the complexities of managing large scale fleets.

Their work will help us increase our client net promoter score this year, while we did make progress moving our score from 39 to 41. It was slightly below the bar that we raised for 2023.

Laura Dettori-Etenazio: We're going to continue to challenge ourselves by raising expectations further. And so, for 2024, we set our targeted client net promoter score at 50. As the EV mobility and connectivity landscape evolves, accelerating our digital user experience and automating how we serve is an imperative to further optimize our operations, enhance our client-centric business model, and accelerate future growth prospects. In the year ahead, we will build on our momentum with a client-centric approach and a sharp focus on our key initiatives to position Element for a sustainable future, one that delivers long-term value creation for our shareholders. And with that, I'll hand it over to Frank to cover the financials. Thank you, Laura, and good morning, everyone.

So we're going to continue to challenge ourselves by raising expectations further and so for 'twenty 'twenty four we set our targeted client net promoter score at 50.

As the E mobility and connectivity landscape evolves accelerating our digital user experience and automating how we serve is an imperative to further optimize our operation enhanced our client centric business model and accelerate future growth prospects in.

In the year ahead, we will build on our momentum with our client centric approach and a sharp focus on our key initiatives to position element for a sustainable future one that delivers long term value creation for our shareholders and with that I'll hand, it over to Frank to cover the financials. Thank you Laura and good morning, everyone.

Frank A. Ruperto: Looking back at 2023, we delivered another record-setting year for Element. These results also reaffirm our continued commercial success and provide us with the financial flexibility to invest in our business and return capital to shareholders in 2023. Before diving into 2023 results and achievements, I'd like to draw attention to three notable reporting First, we continue to call out the non-recurring set-up costs in connection with the strategic initiatives in leasing and sourcing that we announced last week. Q4 and 2023 included $14.6 million and $18.5 million, respectively, in such one-time items. We anticipate that the vast preponderance of the estimated remaining $12 million will be completed by Q2.

Looking back in 2023, we delivered another record setting year for Ela. These results also reaffirm our continued commercial success and provide us with the financial flexibility to invest in our business and return capital to shareholders in 2024.

Before diving into 2023 results and achievements I want to draw attention to three notable reporting items.

First we continue to call out the nonrecurring setup costs in connection with the strategic initiatives and leasing in sourcing that we announced last quarter.

Q4 in 2023 included $14 6 million and $18 $5 million, respectively, and such one time items, we anticipate that the vast preponderance of the estimated remaining 12 billion will be completed by Q2.

Frank A. Ruperto: By excluding one-time revenues of $25 million in 2022 and one-time costs of strategic initiatives of $18.5 million in 2023, these adjusted figures provide a more accurate picture of our underlying performance. As such, the growth measures I cite on today's call will be on an adjusted basis. Second, to simplify and streamline reporting, beginning this quarter, we are reporting our financial results both as reported in accordance with IFRS and as adjusted, which are non-GAAP financial measures.

By excluding onetime revenues of 25 million in 2022, and one time cost of strategic initiatives of $18 5 million in 2023. These adjusted figures to provide a more accurate picture of our underlying performance.

The growth measures I stayed on today's call will be on an adjusted basis.

Second to simplify and streamline reporting commencing this quarter, we are reporting our financial results. Both as reported in accordance with I F RF and as adjusted which are non-GAAP financial measures last evening's MD&A in earnings release included a comprehensive reconciliation between the two.

Frank A. Ruperto: Last evening's MD&A and earnings release included a comprehensive reconciliation between the three. Third, starting next quarter, we will transition all our financial reporting to the U.S. dollar, further enhancing our financial reporting process. In anticipation of this transition, we've prepared unaudited quarterly financial highlights for both 2023 and 2022 in U.S. dollars, which are available in the supplementary information on our website, as well as a comparison of growth rates and margins between our reported figures, constant currency, and U.S. dollars, all on an adjusted basis. Additionally, we have provided our 2024 guidance in U.S. dollars. The decision to transition to U.S. dollar reporting is supported by the fact that over 60% of our revenues are derived in U.S. dollars. This change will significantly reduce the impact of currency fluctuations on our reported earnings relative to our current Canadian dollar reporting. Despite this change, Element will remain a Canadian company listed on the TSX, with its shares quoted in Canadian dollars.

Third starting next quarter, we will transition all our financial reporting to the U S. Dollar further enhancing our financial reporting process.

In anticipation of this transition we've prepared unaudited quarterly financial highlights for both 2023 am 2022 in U S dollars, which are available in the supplementary information on our website as well as a comparison of growth rates and margins between our reported figures constant currency and you.

Dollars all on an adjusted basis.

Additionally, we have provided our 2024 guidance in U S dollars.

The decision to transition to U S dollar reporting to supported by the fact that over 60% of our revenues are derived in U S dollars.

This change will significantly reduce the impact of currency fluctuations on our reporting reported earnings relative to our current Canadian dollar reported.

Despite this change element will remain a Canadian company listed on the <unk> with its shares quoted in Canadian dollars.

Frank A. Ruperto: With that said, let's now turn to our 2023 results in Canadian dollars. We delivered record-setting results for revenue, services revenue, adjusted operating income, adjusted operating margins, adjusted EPS, and adjusted free cash flow per share. Net revenue grew 16.9% year-over-year, led largely by a 19% year-over-year increase in capital light services revenue. Positive operating leverage contributed to adjusted operating income of $715.8 million in 2023, delivering an adjusted operating margin of 55.3%. Adjusted egress grew $0.27 to $1.32, while adjusted free cash flow per share increased 27.5% to $1.67 per share. However, growth in capital light services revenue outpaced overall net revenue growth during the same period.

With that said lets now turn to our 2023 results in Canadian dollars we.

We delivered record setting results for revenue services revenue adjusted operating income adjusted operating margins adjusted EPS and adjusted free cash flow per share.

Revenue grew 16, 9% year over year led largely by a 19% year over year increase in capital light services revenue.

Positive operating leverage contributed to adjusted operating income of $715 8 million in 2023, delivering an adjusted operating margin of 55, 3% adjusted.

Adjusted EBITDA grew 27 cents to $1 32.

Adjusted free cash flow per share increased 27, 5% to $1 67 per share.

Growth in capital Light services revenue outpaced overall net revenue growth during the same period.

Frank A. Ruperto: The growth in services revenue can be attributed to several factors, including increased penetration and utilization rates from existing clients and higher origination volumes. Furthermore, services revenue is also benefiting from the addition of new clients with higher services attachment levels. We expect services revenue to continue growing in the low double-digit range, supported by enhanced commercial efforts and growing originations from strong client demand as OEM production capacity and prior supply chain constraints are showing increasing signs of normalization. We grew net revenue 15.6% year over year, which was driven by growth in net earning assets resulting from increased originations across all geographies, higher gains on sale, and growth in higher yielding assets in Mexico. This growth was partly offset by higher year-over-year interest expense in connection with increasing credit spreads in 2023.

Both in services revenue can be attributed to several factors.

Increased penetration and utilization rates from existing clients.

Origination volumes.

Furthermore services revenue is also benefiting from the addition of new clients with higher services attachment rates.

We expect services revenue to continue growing in the low double digit range supported by enhanced commercial efforts and growing originations from strong client demand as OEM production capacity and prior supply chain constraints are showing increasing signs of normalization.

We grew net revenue 15, 6% year over year, which was driven by growth in net earning assets, resulting from increased originations across all geographies.

Gain on sale.

And growth in higher yielding assets in Mexico.

This growth was partly offset by higher year over year interest expense in connection with increasing credit spreads in 2023.

Frank A. Ruperto: Remember, we are protected from base rate moves given our lease contracts and match funding. That said, maintaining access to diversified sources of cost-efficient capital is strategically important. During 2023, we made the strategic decision to increase our liquidity, giving a significant increase in forecasted origination. As a result, we ended the year with $6.4 billion of committed, undrawn liquidity across various funding facilities.

Remember, we are protected to base rate moves given our lease contracts and match funding.

That said maintaining access to diversified sources of cost efficient capital is strategically important.

In 2023, we made the strategic decision to increase our liquidity given the significant increase in forecasted originations as.

As a result, we ended the year with $6 $4 billion of committed undrawn liquidity across various funding facilities.

Frank A. Ruperto: We expect modest net financing revenue growth in 2024 due to expected growth in net earning assets. The yield on net finance revenue will moderate in 2024 due to a decrease in gain on sale, increased credit spreads on terming out our debt, higher standby costs associated with our enhanced liquidity position, as well as the redemption of the preferred shares with term debt, thereby moving the associated costs from below the tax line up to the interest expense. Now, let's delve into the second pillar of our capital-light strategy, syndication. We grew 2023 syndication revenue 7.3% year-over-year on record volumes of $3.4 billion. Syndication remains an important funding mechanism for us, providing convenient access to cost-effective off-balance sheet capital.

We expect modest net financing revenue growth in 2024 due to expected growth in net earning assets.

Net finance revenue will moderate in 2024 due to a decrease in gain on sale increased credit spreads spreads on terming out our debt.

Your standby costs associated with our enhanced liquidity position as well as the redemption of the preferred shares with term debt, thereby moving the associated costs from below the tax line up to the interest expense line.

Now, let's delve into the second pillar of our capital later strategy syndication.

We grew 2023 syndication revenue seven 3% year over year on record volumes of $3 4 billion.

Syndication remains an important funding mechanism for us providing convenient access to cost effective off balance sheet capital.

Looking ahead, we anticipate modest growth in syndication volume for 2024, roughly consistent with our growth in originations.

Frank A. Ruperto: Looking ahead, we anticipate modest growth in syndication volume for 2024, roughly consistent with our growth in origination. Moving on to adjusted operating expenses for the year, we saw year-over-year growth of $70.8 million, or 14%, to $578.3 million. 2.9% lower than our net revenue growth and consistent with our expectation of growing revenues faster than expenses. This increase can be attributed to several factors, including higher depreciation and amortization from prior capital investment in our business, higher wages in connection with ongoing investments in our people and our businesses that are expected to contribute to long-term growth, and general cost inflation. Wage increases and depreciation accounted for 30% of the year-over-year increase.

Moving onto adjusted operating expenses for the year, we saw year over year growth of $70 8 million or 14%.

Two $578 $3 million.

Two 9% lower than our net revenue growth and consistent with our expectation of growing revenues faster than expenses.

This increase can be attributed to several factors, including higher depreciation and amortization from prior capital investments in our business higher wages in connection with ongoing investments in our people and our businesses that are expected to accrete to long term growth and general cost inflation.

Wage increases in depreciation accounted for 30% of year over year increase.

The remaining year over year increase reflects our ongoing investments in commercial capabilities with net revenue contributions more than outpacing these investments.

This has contributed to a 110 basis point expansion in our adjusted operating margin to 55, 3% in 2023.

Frank A. Ruperto: The remaining year-over-year increase reflects our ongoing investments in commercial capabilities, with net revenue contributions more than outpacing these investments. This has contributed to a 110 basis point expansion in our adjusted operating margin to 55.3% in 2023. We will continue to invest in our business to ensure we are well positioned to exceed the expectations of our clients and position Element for continued expected net revenue growth of 6-8% in the future. Full year adjusted EPS was $1.32 per share, a $0.27 increase year-over-year, and full year adjusted free cash flow per share was $1.67, a $0.36 increase year-over-year.

We will continue to invest in our business to ensure we are well positioned to exceed the expectations of our clients and position element for continued expected net revenue growth of 6% to 8% in the future.

Full year adjusted EPS were $1 32 per share a 27% increase year over year and full year adjusted free cash flow per share was $1, 67% to 36% increase year over year.

Adjusted free cash flow per share was positively impacted by higher originations and the positive cash flow benefits that come with them as well as lower cost to acquire new business.

We've returned a total of $229 $8 million of cash to shareholders through dividends and buybacks of common shares this year and.

$344 8 million to all shareholders, which is inclusive of our 115 billion dollar series a preferred share redemption in Q4.

Frank A. Ruperto: The adjusted free cash flow per share was positively impacted by higher originations and the positive cash flow benefits that come with them as well as lower costs to acquire new business. We've returned a total of $229.8 million of cash to shareholders through dividends and buybacks of common shares, and $344.8 million to all shareholders, which is inclusive of our $115 million Series A Preferred Share Redemption Income. We reaffirmed our 2024 guidance provided last quarter, and we remain confident in our ability to deliver on this guidance. To recap, we expect full year 2024 to deliver the following financial results in Canadian dollars. Net revenue of between 1.365 and 1.390 billion dollars Adjusted operating margins of 55 to 55.5 percent Adjusted operating income of 750 to 770 million, adjusted EPS of between $1.41 and $1.46 and free cash flow of $1.75 to $1.80 per share, originations between $9.5 and $10 billion, and a modest increase in share count as our convertible debentures convert into approximately $14.6 million common shares.

We reaffirmed our 2024 guidance provided last quarter and we remain confident in our ability to deliver on this guidance.

To recap, we expect full year 2024 to deliver the following financial results in Canadian dollars net revenue of between $1 36, five and $1 three $9 billion.

Adjusted operating margins of 55 to 55, 5% adjusted operating income of $7 $50 million to $770 million.

Adjusted EPS of between $1, 41, and $1 46, and free cash flow of $1 75 to $1 80 per share.

Originations between nine five and $10 billion.

A modest increase in share count as our convertible debentures convert into approximately 14 6 million common shares.

We have also provided the U S dollar flipping of the above ranges in our disclosure documents to match our change in reporting currency beginning in Q1 2024.

Before I turn the call back to Laura for closing remarks, there are a couple of additional points I would like to address.

First we anticipate total capital investment requirements to remain relatively consistent with 2023 at around $110 million.

We expect capex to be weighted heavier growth relative to prior years.

Second our cash tax rate in 2023 was 12, 7% and we expect that to increase modestly in 2024 and grow to the OECD minimum rate of 15% overtime as previously discussed this.

This rate is expected to remain well below our adjusted effective tax rate, which we forecast to be approximately 25% in 2024.

Frank A. Ruperto: We have also provided the U.S. dollar equivalent of the above ranges in our disclosure documents to match our change in reporting currency beginning in Q1 2020. Before I turn the call back to Laura for closing remarks, there are a couple of additional points I would like to make... First, we anticipate total capital investment requirements to remain relatively consistent with 2023 at around $110 million. We expect CapEx to be weighted heavier to growth relative to the prior year. Second, our cash tax rate in 2023 was 12.7%, and we expect that to increase modestly in 2024 and grow to the OECE minimum rate of 15% over time, as previously described. This rate is expected to remain well below our Adjusted Effective Tax Rate, which we forecast to be approximately 25% in 2020. With that, I will turn it back to Laura.

With that I will turn it back to Laura.

Frank I do want to take a moment to thank our element team members for their hard work and dedication.

And each other our people's commitment to delivering a great client experience is absolutely instrumental to our success.

As you've seen together, we created significant value for shareholders, while effectively managing our operating margins.

We're investing in elements future and we look forward to the opportunities ahead.

Operator that does conclude our prepared remarks. So we can now open the call for questions.

Thank you.

Yeah.

Adolescents, who recently joined the question queue. You May Press Star then one on your telephone keypad.

You'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any Keith.

Vitale. Your question. Please press Star then two.

The first question comes from Geoff Kwan.

Please go ahead.

Hi, good morning.

My first question was I just wondering if you can confirm to me on the origination side. So I I think was prior to Q4 'twenty three when you reported the.

Laura Dettori-Etenazio: Thanks Frank. I do want to take a moment to thank our Element team members for their hard work and dedication to our clients and each other. Our people's commitment to delivering a great client experience is absolutely instrumental to our success. As you've seen, together, we created significant value for shareholders while effectively managing our operating market. We are investing in Element's future, and we look forward to the opportunities ahead. Thank you. Analysts who wish to join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any key.

When you reported quarterly results the origination numbers included Armando, but for Q4, 'twenty three and going forward guidance all that other stuff being workstations are now excluding armada because if if that is correct.

If you did report originations, including Armada.

Then the rotation that you showed in the quarter I think it's 2 billion would've been maybe.

Maybe better than what consensus numbers, where and.

And also is there a number you can give for the Q4.

Three originations that included you know.

Customers that youre doing originations and kind and whatnot.

Operator: To withdraw your question, please press star then 2. The first question comes from Jeff Kwan. Please go ahead. Hi, good morning.

Yeah, Jeff. So if you look back at the sub supplements for the last year on a quarterly basis.

You've been reporting.

Jeff Kwan: My first question was, I'm just wondering if you can confirm to me on the origination side. So I think it was prior to Q4'23 when you reported quarterly results, the origination numbers included Armada, but for Q4'23 and going forward guidance, all that other stuff, the originations are now excluding Armada, and if you did report originations including Armand, then the origination that you showed in the quarter, I think it was $2 billion, would have been... It may be better than the consensus numbers were. And also, is there a number you can give for Q4?

Armada over that timeframe going forward, including our guidance our XR motto.

And so we've done that so what you see for our guidance. This year would be consistent with what is in the supplement over the past year and.

And we've moved away from reporting Armada, because we view originations is a very good indicator of what your lease revenue and potential syndication opportunity is and as you know back in 2020, or so are modest started to own their own vehicles, and so that number no longer really impacts our financials.

Materially from an origination perspective.

Frank A. Ruperto: 23 originations that included, you know, customers that you're doing originations in kind. Yeah, Jeff, so if you look back at the supplements for the last year on a quarterly basis, we've been reporting ex armamenta over that time frame going forward, including our guidance ex armamenta. And so we did that.

So that's kind of where we would be on that on that number.

From that perspective.

Okay.

And just my second question was just if you can give an update on the self managed.

Initiative.

What the vehicles under management.

Today, and if there's just any anecdotes colored trends momentum in terms of the pipeline.

Yeah, Good morning, Jeff.

Frank A. Ruperto: So what you see for our guidance this year would be consistent with what is in the supplement over the past year. And we've moved away from reporting Armata because we view originations as a very good indicator of what your lease revenue and potential syndication opportunity is. And as you know, back in 2020 or so, Armata started to own their own vehicles.

Theyre actually looking really good I mean, I did share my prepared remarks that when we look at the year 2023, 45% of.

Our new clients, we are in the self managed space. So that's looking good.

I would tell you we have an incredibly healthy pipeline.

So that's also looking very promising we've got a higher conversion rate in the self managed space and we're starting to see I'm gonna see tighter cycle times in terms of converting.

Laura Dettori-Etenazio: And so that number no longer really impacts our financials materially from an origination perspective. So that's kind of where we would be on that number from that perspective. Okay. And my second question was just, if you can give an update on the self-managed Initiative, what the vehicles under management are today, and if there's just any anecdotes, color, trends, or momentum in terms of the pipeline. Yeah, good morning,

Converting our clients.

So that's all good so all of that again leads the lead that we should be in a really good position to deliver in 2024, you don't provide Ah I guess that detailed breakdown from a volume perspective in terms of what falls in what bucket, but I can tell you that.

Laura Dettori-Etenazio: Things are actually looking really good. I mean, I shared in my prepared remarks that when we look at the year 2023, 45% of our new clients will be in the self-managed space, so that's looking good. I tell you, we have an incredibly healthy pipeline, so that's also looking very promising. We've got higher conversion rates in the self-managed space, and we're starting to see, I'm going to say, tighter cycle times in terms of converting a client. So that's all good. So all of that, again, leads us to believe that we should be in a really good position to deliver in 2024. We don't provide, I guess, that detailed breakdown from a VUMP perspective in terms of what falls in what bucket, but I can tell you that our outlook is very positive from a self-managed conversion possibility perspective. Thank you very much.

Our outlook is very positive from a self managed conversion a possibility perspective.

Okay. Thank you very much.

The next question comes from Graham Ryding with TD Securities. Please go ahead.

Yeah.

Oh, Hi, good morning, maybe I'll just stick on the on the same theme, but just go a slightly different direction. So.

There is obviously in the slides you highlight a huge opportunity in the self managed fleet space.

What are the typical barriers or friction that's holding back such a big part of the market in there and they are choosing not to outsource to either yourself or a competitor.

Asked another way why is there still over 50% 60% of these markets that are self managed and cause I think you did lay out some pretty compelling points of why.

They should be converting to an outsource model.

Yeah, Hi, Graham I'm, it's a good question for the time I spent with the team.

Not just meeting our existing clients, but even had the opportunity to go on a few pitches I would say are always a little more difficult when it comes to the self managed fleet in that a lot of times, we're speaking with the fleet managers themselves.

Graham Riding: The next question comes from Graham Riding with T-Securities. Please go ahead. Hi, good morning.

Laura Dettori-Etenazio: Maybe I'll just stick on that same theme, but just go in a slightly different direction. So, obviously, in the slides, you highlight a huge opportunity in the self-managed fleet space. What are the typical barriers or friction that's holding back such a big part of the market, and why are they choosing not to outsource to either yourself or a competitor? Or, asked another way, why is there still over 50-60% of these markets that are self-managed?

And so we're talking to people telling them that essentially we think we can help them do a better job that they're doing if they were to do it on their own and so that is I'm going to say the first hurdle to overcome.

Fleet managers then.

Again, the amount of savings they can provide might not always be in that top three expenses that you would see when you're an executive.

Graham Riding: And because I think you do lay out some pretty compelling points about why they should be converting to an outsourced model. Hi Graham, it's a good question. For the time I've spent with the team, not just meeting existing clients but even having the opportunity to go on a few pitches, I would say it's always a little more difficult when it comes to the self-managed fleet, in that a lot of times we're speaking with the fleet managers themselves.

And so for the fleet manager to take what is the critical operation and to take the risk of outsourcing and they're being in the state it's a big risk that they're taking.

And so what we see are tend to see a much longer cycle time, where we spend a lot of time with the fleet manager to gain their trust to lessen and see just what kind of value add we can offer. So that's why it's a little tougher to get in and that's why I say it takes longer if you will to convince someone.

Laura Dettori-Etenazio: And so we're talking to people, telling them that essentially we think we could help them do a better job than they're doing if they were to do it on their own. And so that is, I'm going to say, the first hurdle to overcome. Fleet managers then again the amount of savings they can provide might not always be in that top three expenses that you would see when you're an executive and so for the fleet manager to take what is a critical operation and to take the risk of outsourcing and there being a mistake it's a big risk that they're taking and so what we see or tend to see are much longer cycle times where we spend a lot of time with the fleet manager to gain their trust to let them see just what kind of value-add we can offer so that's why it's a little tougher to get in and that's why I say it takes longer if you will to convince someone, And it's also why we see, I'm going to say, longer periods of time to grow a share of wallet in that we'll usually start with a service, and then over time as we improve our ware, these fleet managers will then look to give us more from an outsourcing perspective. So it's just a bit tougher, to do the convincing, if you will.

And it's also why we see I'm gonna stay longer periods of time to grow our share of wallet in that will usually start with the service and then over time as we prove our where are these fleet managers will then look to give us more from an outsourcing perspective, so it's just a bit tougher.

Do the convincing if you will I hope that answers your question.

Yeah, Yeah, that's a that's helpful.

One more if I could can you just frankly speak for you I guess can you remind us why your implied growth in 2024 for free cash flow per share is lower than what you're expecting for EPS growth.

Yeah, So I'll say two things one is.

We have not revised our guidance.

We've got one month of results under our belt here and so we'll look at that when we get to our Q1 earnings we did and very strongly on free cash flow for the year based on continued strong originations and a good mix of originations, which increased our free cash flow for 2023.

Graham Riding: I hope that answers your question. Yeah, yeah, that's helpful. One more if I could. Can you just, Frank, this will be for you, I guess.

As well and then additionally, we continue as I referenced in the prepared remarks to see a modest increase in cash tax rate.

Frank A. Ruperto: Can you remind us why your implied growth in 2024 for free cash flow per share is lower than what you're expecting for EPS growth? Yeah, so I'll say two things. One is... We have not revised our guidance. We've got one month of results under our belt here, and so we'll look at that when we get to our Q1 earnings. We did end very strongly on free cash flow for the year based on continued strong originations and a good mix of originations, which increased our free cash flow for 2023 as well. Additionally, as I referenced in the prepared remarks, we continue to see a modest increase in cash tax rates over the next several years as we get closer to that OECD minimum rate of 15%.

Over the next several years as we get closer to that OECD minimum rate of 15%.

But stay tuned on you know the overall perspective in regards to guidance as I said, where we're highly confident in the numbers, we have out there and look forward to talking.

Talking to you in the first quarter.

Okay understood. Thanks.

The next question comes from Tom Mackinnon with BMO capital markets. Please go ahead.

Yeah. Thanks, very much a question just about the service revenue.

Frank A. Ruperto: But stay tuned on the overall perspective in regards to guidance. As I said, we're highly confident in the numbers we have out there and look forward to talking to you in the first quarter. Okay, understood. Thanks. The next question comes from Tom McKinnon with BMO Capital Markets. Please go ahead.

It kind of flat quarter over quarter, just modestly up you've had some pretty good quarter over quarter momentum.

Near quarters was there anything that you would call out a specific to the fourth quarter no more more seasonality than anything.

We've got obviously the shorter days because of the holidays.

Like across the globe. So that's really the major driver we continue to see good utilization increases within the business on a year over year basis, and we expect we would expect that to continue and as we look out next year, we feel good about.

Tom McKinnon: Yeah, thanks very much. A question just about the service. What? Now more seasonality than anything, you know, we've got obviously shorter days because of the holidays and the like across the globe, so that's really the major driver. We continue to see good utilization increases within the business on a year-over-year basis, and we expect, would expect that to continue, and as we look out next year, we feel good about an estimated double-digit service revenue growth. That's great. And then Frank, just with respect to your pair of remarks. I think you mentioned that, and let us know about Bob Bailey and Evan Knight. 11. That doesn't sound modest to me, but... How would you characterize it? I guess you're the Cajun bro.

An estimated.

Double digit service revenue growth double digit service revenue growth.

Okay. That's great. That's great just with respect to your prepared remarks, I think you mentioned that.

Uh huh.

Modest growth indications you said, that's consistent with growth in originations.

The growth in originations ex Armada that you're.

Riding to a for 2023, there were $8 5 billion and now you're looking at nine.

9.5 to 10 billion for 2024 that's.

Anywhere between 11, 710% growth.

That doesn't sound modest to me, but.

How would you characterize it.

I guess, where the case, yes.

Frank A. Ruperto: I'm modest relative to the growth we had this year in syndication volume, which is what I would say. We do believe that that syndication volume will be consistent with the origination growth. Okay, good. And with respect to service, then, he said a low double-digit range.

I I I modest relative to the growth we had this year in syndication volume, which is what I would say, we do believe that that syndication volume will be consistent with the origination growth.

Okay great.

And with respect to service than that I think you said low double digit range as.

Frank A. Ruperto: What would drive service? revenue. Sounds like there's, with increased penetration, originations, and new clients selecting more. How would you gauge service revenue growth in relation... Yeah, I guess I would say often that origination growth is somewhat decoupled from service revenue growth because we look at that more from our net financing revenue component of it. We still believe that, despite increased originations, the fleets that we're managing from a services perspective remain aged quite a bit, and therefore, we believe service revenues will continue to be very strong, and it will take quite a long time for those, and there will be a gradual decline in the age of those vehicles, so we feel pretty good about where our focus is on service revenue growth from a growth perspective. Given that they're aged, would you anticipate the growth to be higher than the original growth? stick with this low-double pitch.

What would drive service.

Yeah.

It sounds like there's with increased penetration originations and new clients selecting more services.

How would you gauge service revenue growth in relation to the origination growth.

Yeah, I I guess I would say is often thats origination growth.

Is somewhat decoupled from service revenue growth because we look at that more from a net financing revenue component of it we still believe that despite increased origination the fleets that we.

We're managing.

Managing for.

The services perspective remain aged up quite a bit and therefore, we believe service revenues will continue to be very strong and I will take quite a long time for those and it'll be a gradual decline in the age of those vehicles. So we feel pretty good about where our focus is on service revenue growth from a growth perspective.

Given that their age would you anticipate the growth to be higher than the origination growth or just stick with this low double digit range.

Frank A. Ruperto: I would stick with the numbers that we gave you. All right, thanks so much. The next question comes from Jamie Goring with National Bank Financial. Please go ahead.

I would stick with the numbers that we gave you.

Okay.

Alright, thanks, so much.

The next question comes from Jamie Cook with National Bank Financial. Please go ahead.

Jamie Goring: Just wanted to get your take on the gain on sale this quarter. Again, still elevated in line with some of the previous quarters. So what are you seeing there from a pricing and a volume perspective that keeps that gain on sale still elevated? Yeah, so what we've seen in A and Z is a moderation in pricing offset by the return of vehicles, so higher volumes in the gain on sale, and we would expect that to continue next year. In Mexico, where we also have a gain on sale opportunity, we've seen, as we've grown that business, more opportunities to take advantage of gain on sale in regards to the Mexico assets. That all being said, we are forecasting a decrease in gain on sale next year, which would be one of the headwinds that I referenced in regards to our NFR, our net finance revenue yield. Okay, understood. In terms of that net financing revenue, did I understand that you're getting to, on a dollars basis, kind of flattish net financing revenues, and that reflects the decline in yield that you're talking about here, offset by the growth in on-balance sheet assets? Am I understanding that correctly? I would say modest growth in net financing revenue. Cut.

Yes. Thanks.

Just wanted to get your take on the gain on sale. This quarter again still are still elevated.

In line with some of the previous quarters. So what are you seeing there from a from a pricing and a volume perspective.

That keeps that gain on sales so still elevated.

So what we've seen in ANZ and some moderation in pricing to offset by the return of vehicles. So higher volumes in the gain on sale and we would expect that to continue next year.

In Mexico, where we also have gain on sale opportunity we've seen as we've gotten.

<unk> grown that business more opportunities to take advantage of gain on sale in regards to the Mexico assets that all being said we are forecasting.

A decrease in gain on sale next year, which would be one of the headwinds.

References in regards to our <unk>, our net finance revenue yields.

Yeah.

Okay understood.

In terms of that net financing revenue did I did I understand that the youre guiding to.

Dollars basis kind of flattish in that financing revenues in that that reflects the decline in yields that you were talking about here.

Offset by the.

The growth and on balance sheet assets am I understanding that correctly I would say modest growth in net financing revenues.

Okay, So low single.

Frank A. Ruperto: Okay. My other question, somewhat tied together, I guess, just wanted to get a little bit more color on the share base compensation increase substantially during the quarter. Was there anything sort of, let's say, one-timey in there, or is that reflective of share base comp that we should expect going forward? And then tied to that, looking at the balance scorecard, net promoter scores, if you can sort of dig into the one-point increase year-over-year, is that something I don't think you're obviously satisfied with, but maybe you can dig into some of the factors and drivers that you' I'll take the first one on the share base compensation.

My my other question.

Somewhat tied together I guess I just wanted to.

Get a little bit more color on the share based compensation in the quarter increased substantially was there anything.

You know sort of let's say one time in there or is that a is that reflective of share based comp that we should expect going forward and then tied to that looking at the balanced scorecard net promoter scores.

You can sort of dig into the one point increase year over year is that something I Havent I don't think Youre, obviously satisfied with but maybe you can dig into some of the factors and drivers that you.

We're looking to to deliver or to improve that that number.

I'll take the first one on the on the share based compensation. So our share based compensation is very tightly aligned to shareholder.

Frank A. Ruperto: So, our share base compensation is very tightly aligned to shareholder revenues. In fact, at the executive level, it's 100 percent aligned to total return to shareholders from that perspective. So, given the results that we have driven that have increased the stock price substantially relative to the TSX, which is how we measure those returns. Those LTIP long-term stocks paid out at a two-times multiple of the original grant, and we continue to accrue for that. We reset one of the grants up by another 50% given the strong stock price accrual in Q4 as well, so there's a one-time catch-up on that that you do see, but it's wholly driven by total return, share price plus dividends relative to the TSX for the vast preponderance of that long-term incentive. You're on it.

In fact at the executive level, it's 100% aligned to total return to shareholders from that perspective, so given.

<unk>.

Given the results that we have driven that has increased the stock price up substantially relative to the Etfs Ax, which is how we measure those returns.

Those are all chip long term stock comp paid out at a two times multiple.

Of the original grant.

And we continue to accrue.

For that.

We reset the one of the grants up by another 50% given the strong stock price accrual in Q4 as well so there's a onetime catch up on that that you do see it but it is wholly driven by shift total return share price plus dividends relative to the <unk> for the best.

Upon rents at that long term setup.

Got it.

Laura Dettori-Etenazio: And I'll take from a net promoter score perspective and on the balance scorecard. So you're right, we... Again, we had given ourselves a higher target at 41 that we slightly missed, and we've increased that target. And so for us, it's really about elevating the client experience and highlighting some of the areas that were a little tougher for us this year and why we didn't hit that score related mostly to, I'd say, our titling and registration where we had, I would say, longer delays when it comes to getting things done for our clients. And we know that we need to do better in areas like digital and automation, just where we can remove But the problem is primarily related to titling and registration of the service. And let me just correct something that I just said. 75% of our compensation is completely tied to stock price performance and dividends, so total return 25% is restricted, so there's no multiplier on that. Thank you very much.

And I'll take from our net promoter score perspective, and the balanced scorecard. So you're right we are.

Again, we have given ourselves a higher target at 41.

We like best buy and we've increased that target and so for us it's really about elevating the client experience and save some of the areas that were a little tougher for us this year and why we didn't hit that score related mostly to I'd say, our titling and registration where we had.

I would say longer delays when it comes to.

Getting things done for our clients.

And we know that so we need to do better in areas like digital and and the automation just where we can remove a SKU more pain points and tried to get our processes going with shorter delays, but the the missed primarily related to a tightening in registration.

And let me just correct something that I, just said, 75% of our of our compensation is completely tied to stock price performance and dividends. So total return 25% is restricted so theres no multiplier on that component.

Okay. Thank you very much.

Yeah.

Stephen Boland: The next question comes from Stephen Boland with Raymond James. Please go ahead. Okay, so my first question is just about the backlog. You know, there was talk that it would normalize to that $800 million range, you know, probably in early 2024. But it still remains very, very elevated.

The next question comes from Stephen Boland with Raymond James. Please go ahead.

Thanks, Rob My first question is just about the backlog.

<unk> talk.

But that would normalize to about $800 million range.

Probably in early 2024, it still remains very very elevated.

Frank A. Ruperto: I'm just wondering, is part of the origination increase, you know, is that assuming a large decline in the backlog? And, you know, in your comments, you're saying you're not going to disclose that information anymore, maybe on a special basis or something like that. What's the logic of not disclosing that as well? We can just have a quick comment on that as well.

I'm just wondering as part of the origination increase you know is that assuming a large.

Declined to the backlog.

And your comments Youre, saying youre not going to disclose that information any more maybe on maybe on a special.

You know basis or something like that what's what's the logic of not disclosing that as well.

We can just quickly comment on that as well so we never disclose backlog in fact, it wasn't even a term we've used internally.

Frank A. Ruperto: Sure. But we never disclosed our backlog. In fact, it wasn't even a term we used internally prior to the pandemic because originations are typically 75 to 90 days in the US and Canada, and originations are the best measure for how the business is overall performing as supply chains are normalizing. And we've come down from, I want to say, somewhere around 220 days in the US and Canada down to roughly 150. And it continues to come down.

Because prior to the pandemic because originations.

Originations are typically 75% to 90 days in the U S and Canada and originations are the best measure for how the businesses overall are performing at.

Our supply chains are normalizing and we've come down from I want to say somewhere around 220 days in the U S. Canada down to roughly 150 and it continues to come down.

Frank A. Ruperto: We believe that that will be a much better indicator of the performance of the business. All that being said, we will carry forecast carrying a significant backlog into 2025 and believe that we will reach equilibrium from a production demand supply in somewhere in Q125, which will then roll off the rest of the backlog as we move forward here. I'd also add that we continue to see very strong demand for client orders, in part because of the age of the fleets that we've suggested and the growth of their underlying businesses. So that is what is driving the backlog discussion as we move forward. Okay, thanks.

We believe that that will be a much better indicator of the performance of the business all that being said, we will carry we forecast carrying a significant backlog into 2025 and believe that we will reach equilibrium from a production demand.

Apply in somewhere in Q1 dollars 25, which will then roll off the rest of the backlog as we move forward here I'd also add that we continue to see very strong demand for client orders.

In part because of the age of the fleets that we've suggested and the growth the growth of their underlying businesses. So.

That is that is what is driving the backlog discussion as we move forward here.

Laura Dettori-Etenazio: My second question is just, you know, one of your new initiatives, you know, with opening the Asian office and going after the OEMs, can you, like, can you explain where you're sourcing from maybe new OEMs or OEMs that have production in North America or just Asia? Are those vehicles expected to be moved into North America or Europe? You know, is that combustion?

Okay. Thanks. My second question is just you know one of your new initiatives.

Opening these the Asian office and going after the Oems can you like can you explain where you know you're sourcing from maybe new Oems or Oems that have production in North America or just Asia.

Are those vehicles expected to be moved into North America or Europe.

You know it was a combustion as it is if he'd be I'm, just trying to get a little bit of a sense what you know.

Laura Dettori-Etenazio: Is it an EV? I'm just trying to get a little bit of a sense of where the movement of, you know, sourcing and where the vehicles end up. Steven.

Where the movement of sourcing and where the vehicles end up.

Ah Yes, Steven.

Laura Dettori-Etenazio: About three-quarters of the sourcing that we do today is from the big three OEMs. We do source from others, particularly when it comes to Australia, New Zealand, and Mexico. And so for us, when we look at Asia and how important they are when it comes to the production of EVs, we think we should have direct relationships with those OEMs as well. And so that's why we're establishing a strategic sourcing presence in Singapore. It allows us to be closer and to develop those direct relationships. And as a starting point where we are buying some of those vehicles, as I said, in Australia, New Zealand, and Mexico. I see it.

About three quarters of the sourcing that we do today are from the big three OEM, we do source from.

From other particularly when it comes to Australia, and New Zealand and Mexico.

And so for us when we look at.

Asia and how important they are.

When it comes to the production of Tvs, We think we should have direct relationships with those Oems as well. So that's why we're establishing a strategic sourcing presence in Singapore. It allows us to be.

Oser into develop those direct relationships.

And as a starting point, where we are buying some of those vehicles as I said in Australia, New Zealand and Mexico.

I see it.

Oems have sorry, I'd like to these Oems hop production capabilities in North America, because we've read articles about.

Laura Dettori-Etenazio: Do these OEMs have production capabilities in North America? Because, you know, we read articles about that the OEMs in Asia have a major price advantage over the ones in North America. So, you know, the domestic OEMs here, I'm just trying to get it.

But the Oems in Asia.

A major price advantaged than the ones in North America. So the domestic Oems here I'm just trying to get at is that the ultimate goal is just to move over into Europe, we'll move it into Australia.

Laura Dettori-Etenazio: Is the ultimate goal just to move them into Europe or move them into Australia? Or, you know, what's the future for these OEMs in North America? I think the future remains to evolve. The vehicles that we mostly serve to our clients are not produced by some of these manufacturers in the U.S. or in Canada. That could change over time. When we look at things today, some of these manufacturers we'd like more direct relationships with do provide vehicles for the Australian, New Zealand, and Mexican markets. And that's our first area of focus. And we would like to have relationships early on so that we're there early as things evolve over time.

Or what's the future for these Oems in North America.

I think the future remains.

To evolve.

The vehicles that we serve are to our clients are not.

Produced by some of these manufacturers.

In the U S or in Canada that could change over time and when we look at things today.

Manufacturers, we'd like more direct relationships with due <unk>.

Provide vehicles into.

Australia, and New Zealand and Mexican markets and that's our first area of focus and we would like to have relationships early on.

So that were there early as things evolve over time.

Operator: Okay, thank you very much. This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day. Thanks for watching!

Okay.

You very much.

This concludes the question and answer session and today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.

Okay.

[music].

Yes.