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Element Fleet Management Corp
Symbol EFN
Shares Issued 437,682,397
Close 2020-05-11 C$ 9.77
Recent Sedar Documents

Element Fleet earns $79.35-million in Q1

2020-05-11 17:30 ET - News Release

Mr. Jay Forbes reports

ELEMENT REPORTS SOLID FIRST QUARTER RESULTS AND TRANSFORMATION PROGRESS; REITERATES CONFIDENCE IN RESILIENT BUSINESS

Element Fleet Management Corp. has released its financial results for the first quarter ended March 31, 2020, and has provided an update on continued progress on its transformation program.

Highlights:

  • First quarter core adjusted operating income increased 10.5 per cent over the first quarter of 2019 to $135-million, equivalent to 23 cents on a per share basis;
  • Transformation program actioned cumulative $146-million of run-rate profit improvement initiatives and delivered $29-million of operating income enhancement in the first quarter -- both ahead of plan;
  • First quarter originations of $2.0-billion with contributions from all five geographies drove core assets under management to $17.8-billion at quarter-end;
  • Element has committed, undrawn liquidity of over $5.5-billion at March 31, 2020; ready access to U.S. bond, term ABS (asset-backed security) and syndication markets; and dependable operating cash flow;
  • Withdraws 2020 adjusted EPS (earnings per share) guidance and increases allowance for credit losses to $20-million given the uncertainties associated with the economic impact of COVID-19;
  • Subsequent to quarter-end, sold the assets of 19th Capital and settled third party debt.

Element's market-leading core fleet business generated adjusted operating income of $134.8-million, or 23 cents per share, in the first quarter of 2020. On a year-over-year basis, core adjusted operating income increased $12.8-million or two cents per share from the first quarter of 2019. The first quarter of 2020 included $29-million of operating income enhancement delivered by transformation. On a consolidated basis, the company reported first quarter net income of $79.4-million or 16 cents per share.

Element is withdrawing its 2020 adjusted EPS guidance given the uncertainties of the economic impact of COVID-19 on the company's clients and therefore its business. The company's first quarter results include a $12-million provision for credit losses (PCL), increasing its balance sheet allowance for credit losses to $20.0-million or 0.16 per cent of total finance receivables before the allowance.

"Our unwavering focus on delivering a consistent, superior experience across our blue-chip client base yielded another solid quarter for our core business," said Jay Forbes, president and chief executive officer of Element. "The benefits of our ongoing work to transform our organization and strengthen and deleverage our investment-grade balance sheet are not only evident in our Q1 results, but also in the continuity of our operations, our abundant liquidity and the performance of our people in the face of COVID-19.

"In the final weeks of Q1, our organization quickly adapted to the new realities of life during the pandemic," continued Mr. Forbes. "As I communicated last month, our business remains safe and sound. Nearly all our employees are working remotely and continue to do so safely and productively. Our people, processes and systems are supporting our clients as they address the challenges and opportunities that COVID-19 presents for their businesses.

"The results that we released today include an increase in our allowance for credit losses, reflecting our best estimate of the potential impact of this event on our business. While near-term uncertainties have compelled us to withdraw 2020 guidance, and our forthcoming quarterly results in 2020 will no doubt also be impacted by reductions in our clients' activity, in many ways our learnings thus far in Q2 have only given me and my leadership team more confidence in the stability and resilience of our business model," Mr. Forbes added. "Element is ready to emerge from this disruptive period with momentum, and I believe the opportunities for our business may be even greater in the fullness of time as a result of the economic consequences of the COVID-19 pandemic."

Transforming the core

Element outperformed its transformation targets in the first quarter of 2020, actioning a cumulative $146-million of annual run-rate, pretax profit improvements at March 31, 2020. Initiatives in the quarter included further revenue assurance measures, direct cost improvement through strategic sourcing and operational cost savings from organizational simplification.

Subsequent to quarter-end, Element surpassed the $150-million mark for annual run-rate, pretax profit improvements actioned through its transformation efforts. This is a noteworthy milestone because it was the company's original end-of-2020 target for the entirety of its transformation program. Element increased that target by 20 per cent in the third quarter of 2019, and remains well on track to action $180-million of profit enhancements by the end of 2020.

Transformation initiatives actioned to date delivered $29-million of operating income benefit in the quarter -- $5-million more than previously projected, with added impacts to first quarter service income and syndication revenue.

Strengthening the balance sheet

Element continues to take steps to further strengthen its investment-grade balance sheet. The syndication market has remained open to Element throughout the COVID-19 crisis, including to date, and the company syndicated $834-million of assets in the first quarter, generating $26.1-million of revenue transacting with familiar as well as new buyers.

Profitable results, free cash flow and syndication all contribute to deleveraging and derisking Element's balance sheet. The company reported tangible leverage of 7.45 times at the end of the first quarter, an increase of 0.34 from the fourth quarter of 2019 driven solely by the strengthening of the U.S. dollar against the Canadian dollar. Excluding foreign exchange volatility, as well as the impact of Element's non-recourse warehouse credit facility (which exclusively finances presyndication assets for Armada (1)), the company's tangible leverage ratio at March 31, 2020, would have been 6.35. Element continues to target sub-6.0-times tangible leverage by the end of 2020.

Subsequent to quarter-end, Element further derisked its investment-grade balance sheet by establishing a $560-million committed credit facility underwritten by four leading banks, which can be used as required to retire the company's outstanding convertible subordinated debentures maturing in June, 2020. Element still intends to issue senior unsecured term debt in the U.S. bond market in 2020, while recognizing that market conditions may not be attractive in the short term for the company's inaugural offering. Element has the luxury of time, with ready access to approximately $5.5-billion of contractually committed, undrawn financing capacity.

Pivoting to growth

Element made organizational changes in the first quarter that will better position the company to capture the many opportunities it identified last year in sizing and mapping the North American market for fleet management services, an exercise that has informed the company's enhanced go-to-market strategy.

As previously communicated, Element combined its enterprise and midmarket commercial teams in the United States and Canada into a single commercial organization in the first quarter of 2020, under the leadership of David Madrigal, who was appointed chief commercial officer. Mr. Madrigal built Element's high-performing Mexico team from the ground up, delivering double-digit growth in Mexico over the last four years and solidifying the company's reputation as the industry leader in the region.

The new commercial organization has also been reconfigured, with regional, government and "mega fleet" sales teams focused on profitable revenue growth; a dedicated client account management team within the commercial group; and strengthened sales force effectiveness and marketing functions.

With this work complete and as previously communicated, Element expects to achieve annual net revenue growth of 4 to 6 per cent in normal market conditions. The company will do so by: (i) holding market share through best-in-class client retention; (ii) improving sales force effectiveness; (iii) better managing client profitability; (iv) converting self-managed fleets in targeted market segments into Element clients, using the company's strengthened financial position and a compelling value proposition; and (v) leveraging its market leadership position in Mexico and Australia/New Zealand (ANZ). Element will also pursue additional, Armada-like "mega fleet" opportunities, the success of which could drive results above 4- to 6-per-cent annual net revenue growth.

Note:

  1. "Armada" is the term Element uses to reference one client in particular that the company does not name due to the client's desire for confidentiality.

19th Capital

Subsequent to March 31, 2020, the company sold the assets of 19th Capital and settled third party debt at a discount. The net impact of the sale of 19th Capital's assets and the settlement of debt will result in an expected after-tax loss of approximately $15-million (including closing and severance costs), which will be recorded in the company's interim condensed consolidated financial statements for the second quarter ending June 30, 2020.

                                              FINANCIAL HIGHLIGHTS
                       (in thousands of dollars for stated values, except per-share amounts)

                                                                          Three-month periods ended
  
                                                             March 31, 2020     Dec. 31, 2019     March 31, 2019
Consolidated results
Net income (loss) for the period                                $    79,358     $    (116,978)       $    80,473
Earnings (loss) per share (basic)                                      0.16             (0.29)              0.16
Net revenue                                                         247,239           256,509            242,227
Adjusted operating expenses (1)                                     117,917           118,123            120,273
After-tax adjusted operating income
attributable to common shareholders (1)                              94,491           101,772             89,448
After-tax adjusted operating income
per share (basic) (1)                                                  0.22              0.23               0.21
Core fleet management operations
Net revenue                                                         249,201           257,554            237,702
Adjusted operating expenses (1)                                     114,435           114,957            115,709
After-tax adjusted operating income
attributable to common shareholders (1)                              98,928           105,205             89,480
After-tax adjusted operating income
per share (basic) (1)                                                  0.23              0.24               0.21
Net interest and rental revenue margin or NIM (1)                     3.30%             3.37%              3.16%
Total average net earning assets (1)                             11,773,564        12,011,258         12,988,903
End-of-period assets under management (1)                        17,780,139        16,710,402         15,492,500


1. Non-IFRS (international financial reporting standards) measures.

Core fleet management operations

The accompanying table summarizes results from the company's core fleet management operations.

(in thousands of dollars for stated values,                               Three-month periods ended 
except per-share amounts) 
                                                             March 31, 2020     Dec. 31, 2019     March 31, 2019
Net revenue
Net interest income and rental revenue                              191,399           208,302            216,643
Interest expense                                                     94,132           107,040            114,112
Net financing revenue                                                97,267           101,262            102,531
Servicing income, net                                               125,847           128,754            117,959
Syndication revenue, net                                             26,087            27,538             17,212
Net revenue                                                         249,201           257,554            237,702
Adjusted operating expenses (1)
Salaries, wages and benefits                                         73,195            76,002             78,221
General and administrative expenses                                  31,299            28,818             27,748
Depreciation and amortization                                         9,941            10,137              9,740
Adjusted operating expenses (1)                                     114,435           114,957            115,709
Adjusted operating income (1)                                       134,766           142,597            121,993
Provision for taxes applicable to
adjusted operating income                                            24,932            26,367             21,349
After-tax adjusted operating income (1)                             109,834           116,230            100,644
Cumulative preferred share dividends                                 10,906            11,025             11,164
After-tax adjusted operating income
attributable to common shareholders (1)                              98,928           105,205             89,480
After-tax adjusted operating income
per share (1) (basic)                                                  0.23              0.24               0.21

1. Non-IFRS measures.

Commentary on core results

Element originated $2.0-billion of core assets this quarter, $195-million less than last quarter and $318-million more than the first quarter of 2019. The quarter-over-quarter reduction in originations was on account of lower seasonal Armada originations, offset partially by continued strong growth in Mexico and non-Armada U.S. originations. On a year-over-year basis, the 19-per-cent increase was fuelled by strong growth in the U.S. (including Armada), as well as Mexico and Canada.

Given the temporary closures of several OEM (original equipment manufacturer) production facilities, the company expects its second quarter originations to be meaningfully lower than the first quarter 2020 and second quarter 2019 levels.

Core average net earning assets decreased $237.7-million quarter over quarter and $1.2-billion year over year as a result of Element's syndication activity. Core end-of-period AUM (assets under management) growth quarter over quarter, on a constant-currency basis, was $200-million; quarter-over-quarter core AUM growth of $1.1-billion on its face was materially enhanced by foreign exchange. AUM has grown $1.9-billion or 12 per cent since the first quarter of 2019 on a constant-currency basis. AUM growth is broken down further in the company's supplementary information document (available on its website).

Net financing revenue decreased $4.0-million quarter over quarter and $5.3-million year over year due to the incremental $11.7-million provision for credit losses taken this quarter in response to the COVID-19 pandemic. (Absent COVID-19, the provision for credit losses this quarter would have been $400,000.) Please see the company's discussion of this provision, and the resulting quarter-end balance sheet allowance for credit losses, under "Allowance for credit losses" in the "Fleet management portfolio details" section of the first quarter 2020 MD&A (management's discussion and analysis).

Excluding the impact of the additional provision for credit losses this quarter, net financing revenue performed well, increasing by $7.7-million quarter over quarter and $6.5-million year over year, benefiting primarily from more efficient financing of working capital.

Excluding the impact of the additional provision for credit losses this quarter, Element's net interest and rental revenue margin (or NIM) would have been 3.70 per cent.

While the company expects short-term pressure on net financing revenue in the second quarter of 2020 from deferred originations and delayed gain on sale revenue from Mexico and ANZ stemming from COVID-19, this should be partially offset by lower overall interest expenses, as the working capital typically required to finance originations -- and pay clients' incurred service expenses ahead of billing clients for same -- remains undrawn from Element's senior credit facility.

Net servicing income for the first quarter of 2020 fell $2.9-million quarter over quarter despite the positive impacts of transformation and foreign exchange. The decrease was in part due to lower volumes in March as a result of COVID-19 and in part due to normal seasonal volume reduction from the fourth quarter of 2019 to the first quarter of 2020. On a year-over-year basis, net servicing income improved this quarter by $7.9-million or 7 per cent over the first quarter of 2019, with both organic business performance in all geographies and transformation contributing to growth across multiple product categories.

Over all, Element anticipates a meaningful reduction of net servicing income in the second quarter of 2020 due to the broad public health measures implemented to combat the COVID-19 pandemic. Fewer miles driven by the company's clients will impact service income from fuel, maintenance, accidents, and tolls and violations services, and an oversupply of used vehicles for sale and reduced auction house capacity in the United States and Canada will delay the realization of remarketing service income.

The syndication market remains open and Element is successfully expanding its universe of investors. The company syndicated $834-million of assets in the first quarter of 2020, $130-million fewer than in the fourth quarter of 2019 and $345-million more than in the first quarter of 2019. Both fluctuations were driven primarily by Armada activations, which were higher in the fourth quarter of 2019 than expected steady-state quarterly Armada volume, while Armada activity was relatively nascent in the first quarter of 2019. Syndication revenue decreased $1.5-million quarter over quarter, while improving as a percentage of assets sold. The company is anticipating some level of softness in syndication revenue in the second half of this year as it faces a step-down in interest rates.

Adjusted operating expenses were effectively flat quarter over quarter and down $1.3-million from the first quarter of 2019. Transformation savings on salaries, wages and benefits were partially offset by merit increases and the growth of the company's Armada and syndication teams. General and administrative expenses increased on account of investments in the growth of Element's business in Mexico and capabilities to meet Armada needs, in addition to higher professional service fees in the quarter. The strengthening of the U.S. dollar against the Canadian dollar had a negative impact on quarter-over-quarter operating expenses.

Dividends declared

The company's board of directors has authorized and declared a quarterly dividend of 4.5 cents per outstanding common share of Element for the second quarter of 2020. The dividend will be paid on July 15, 2020, to shareholders of record as at the close of business on June 30, 2020.

Element's board of directors also declared dividends on Element's preferred shares as shown in the accompanying table.

Series        TSX ticker        Amount      Record date      Payment date

Series A        EFN.PR.A    $0.4333125    June 12, 2020     June 30, 2020
Series C        EFN.PR.C     $0.388130    June 12, 2020     June 30, 2020
Series E        EFN.PR.E     $0.368938    June 12, 2020     June 30, 2020
Series G        EFN.PR.G     $0.406250    June 12, 2020     June 30, 2020
Series I        EFN.PR.I     $0.359375    June 12, 2020     June 30, 2020

The company's common and preferred share dividends are designated to be eligible dividends for the purposes of Section 89(1) of the Income Tax Act (Canada).

Dividend reinvestment plan

Element adopted a dividend reinvestment plan to be administered by Computershare Trust Co. of Canada (the plan agent), which became effective beginning with the fourth quarter dividend of 2018. A complete copy of the plan is available on Element's website and the plan agent's website. Shareholders should carefully read the complete text of the plan before making any decisions regarding their participation in the plan. To be eligible to participate in the plan, shareholders must be resident in Canada. Shareholders resident outside Canada (including shareholders who are non-residents of Canada or partnerships other than "Canadian partnerships" (all within the meaning of the Income Tax Act (Canada)) or that are U.S. persons (within the meaning of Regulation S under the Securities Act of 1933 of the United States)) are not eligible to participate in the plan.

Chief executive officer's letter to shareholders

"My fellow shareholders,

"I hope this note finds you and yours well as we all work to understand and adapt to the COVID-19 pandemic and the resulting impact on lives and ways of life.

"The unprecedented nature and far-ranging effects of the pandemic demand a deeper level of executive engagement in the day-to-day operations of the business that might make it difficult to step back and think long term. But we must, and we are.

"Our first priority has been to ensure that Element Fleet Management is well fortified to withstand all threats: Our people are safely and productively working from home, the business is delivering a consistent level of operational excellence for our clients, and our liquidity and access to capital have been further strengthened. Having confirmed that the business is properly safeguarded, we broadened our focus to ask ourselves an important question: What does this event change regarding our overarching strategy of ensuring the future success of Element by transforming our business, further strengthening our balance sheet and pivoting to growth?

"The answer is nothing. While there will be long-lasting changes as a consequence of this pandemic, the needs we address in the markets we serve will remain fundamentally unaltered. Our strategy will remain both relevant and capable of delivering great value for all of our stakeholders in a post-pandemic world.

"We feel very fortunate to have a plan that is appropriate for these unprecedented times, and even more fortunate that we have the ability to stay true to executing this strategy given all the upheaval around us. For many companies, and indeed whole industries, that is not the case; the aftershocks of this event will result in a fundamental shift in how their offerings are produced, delivered and/or consumed.

"While we will feel the short-term impact of the economic downturn wrought by COVID-19, the innate defensive attributes of Element's business model -- coupled with the work we have done to transform the business and strengthen our liquidity and financial position -- see us well positioned for what we anticipate the fleet management business will look like on the other side of this pandemic.

"Our existing blue-chip client base will still need mission-critical service and sales vehicles to support their operations. Some clients will need even larger fleets. Further, we believe an already compelling value proposition will have even more appeal as organizations with self-managed fleets seek alternative funding sources and pursue opportunities to drive down costs and reduce administrative hassle. In short, we believe our fleet financing and management services will remain in high demand.

"And as the economy restarts, as market leader we will be best placed to serve current and prospective clients given our scalable platform, substantial purchasing power, ready access to capital, and well-established network of vehicle manufacturers and service providers.

"With a strong belief in both the need and our ability to 'stay the course,' we are managing through this current crisis with a view to preserving Element's opportunities for long-term success. That means that, notwithstanding any short-term pressures, we will continue to invest in our relationships with our clients, in our people and in our business.

"Our clients

"We believe this is a time when we can truly shine for clients, deepening relationships for the long term. With approximately one million vehicles under management, we have an unparalleled base of knowledge and relationships that we are making available to our clients as we guide them through these uncertain times. In the first quarter alone, we identified $604-million in cost-saving opportunities for our clients, a third of which is already being actioned.

"Further, we are putting our balance sheet to work for clients as we invest in the relationship to the mutual benefit of both parties. Case in point: One of our clients is involved in a significant public infrastructure build that is now delayed by a few months. This client is an 'A' credit, and they are building something vital. They came to us, seeking to extend the term of their lease agreements. And we did, to the benefit of both the client and Element.

"Our people

"Element's employees are a true source of competitive differentiation; our clients repeatedly tell us this, and I have witnessed it firsthand -- with great pride -- on many occasions.

"Recognizing the value of our people -- and after evaluating the trade-off of short-term financial gain versus preserving our capabilities for organic growth opportunities that exist across all five countries we operate in -- we have chosen to invest in our people by maintaining the continuity of our work force through this event.

"That means that other than the planned evolution of the work force contemplated by the transformation program, we are not forecasting any layoffs or furloughs as a result of the pandemic. We will continue to retain the industry-leading skills, experience and insight that make us so valuable to our clients.

"We are also spending time on envisioning what the operating model of the future might look like. Eighty-six per cent of our people recently responded to a survey on well-being and told us that they are really enjoying working from home (WFH), citing increased productivity, the absence of commute time and proximity to family. We want to capture this feedback and the other learnings from WFH to design a better employee experience (and thus a better client experience).

"Our business

"We will complete the full $180-million of investment to bring the transformation of our fleet management business to a successful conclusion by the end of the year, cementing an industry-leading consistent, superior client experience and generating $180-million in annual run-rate profitability improvements.

"We will also continue to invest in our syndication capabilities and Armada operating capabilities to support these two sources of growth that emerged in 2019. Further, having identified significant organic growth opportunities that can contribute 4 per cent to 6 per cent in annual net revenue growth, we will rapidly build out our commercial capabilities so that we can fully capitalize on same.

"While we will of course be disciplined in our spending, we will not rashly cut costs in response to this event. Simply stated: We will not make decisions designed to cushion our earnings for a few quarters at the expense of growth for years to come.

"Our ability to make these investments in pursuit of our long-term objectives is -- in large part -- due to our financial discipline. We have made 'strengthening the balance sheet' a strategic imperative from the very outset of our transformation journey. The steps we have taken over the past 18 months have -- unbeknownst to us at the time -- positioned us well to withstand the financial pressures of this pandemic. Additionally, the planned actions for the remainder of the year will allow us to further strengthen our financial position, achieving our all-important target of sub-6.0-times tangible leverage.

"While we all want for a very different world than that we currently occupy, 'this too shall pass.' We have prepared for the worst and are readying for the inevitable opportunities that will come thereafter.

"Wishing good health to you and your families,

"Jay Forbes, president and CEO of Element"

Conference call and webcast

A conference call to discuss these results will be held on Monday, May 11, 2020, at 7 p.m. ET. The conference call and webcast may be accessed as follows:

Webcast:  on-line

North America toll-free:  1-800-319-8560

International:  1-604-638-5345

Passcode:  86810 followed by the pound sign

The webcast will be available on the company's website for three months. A taped recording of the conference call may be accessed through June 11, 2020, by dialling 1-800-319-6413 or 1-604-638-9010 and entering the access code 4429.

Element's unaudited interim condensed consolidated financial statements and related MD&A as at and for the three-month period ended March 31, 2020, have been filed on SEDAR.

About Element Fleet Management Corp.

Element is a leading global fleet management company, providing world-class services and financing for commercial vehicle fleets. The company enjoys scale and leadership in key markets, a top-tier client base, strong cash flow and ready access to capital, and an investment-grade balance sheet. Element's suite of services spans the total fleet life cycle -- from acquisition and financing to program management and remarketing -- helping clients optimize performance and improve productivity.

We seek Safe Harbor.

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