Amounts in $CAD unless otherwise noted
- Element’s third quarter net revenue grew 19.0% from Q3 last year to a record
$290 .8 million - The Company’s scalable operating platform magnified Q3 year-over-year net revenue growth into superior year-over-year pre-tax income and AOI growth, expanding pre-tax income margin to 49.0% and operating margin by 547 bps to 56.9%
- The 12% reduction in Element’s common share count resulting from the Company’s NCIB – which Element will renew this month – amplified Q3 performance on a per share basis to
$0.25 EPS,$0.30 adjusted EPS and$0.38 FCF per share, or growth of 39%, 43% and 41%, respectively, over Q3 last year - Element advanced its capital-lighter business model in Q3, growing Services revenue 23.8% and Syndication revenue 14.8% year-over-year, which together enhanced Element’s ROE and pre-tax ROE to 11.7% and 17.8%, respectively
- Element announced a 29% increase to its common dividend, from
$0.31 to$0.40 per share annually, which is 30% of its last twelve months’ FCF per share atSeptember 30, 2022 - Element has offered full-year 2023 result guidance representing approximately 6-9% net revenue growth, 7-12% AOI growth, 9-14% adjusted EPS growth, and 16-20% growth in FCF per share over full-year 2022 "organic" results
- The Company will host an Investor Day on
Tuesday, November 29, 2022 inToronto and online, which stakeholders can register to attend by clicking here
Third quarter net income of
“Element powered through the many headwinds confronting businesses in 2022 to deliver record third quarter results, a testimony to the resilience of our business model and the people that serve our clients so well,” said
Full-year 2023 results guidance
Element provided full-year 2022 results guidance last quarter, both including and excluding net revenue (and resulting operating income and cash flow) from Element actions being taken this year that are not expected to generate similar levels of net revenue next year or in subsequent years. The guidance excluding such revenue is 2022 "organic" results guidance.
Element expects to deliver the following results for full-year 20231 | Implied year-over-year growth2 | |
• | Net revenue of | 6-9% |
• | Operating margin of 54-55% | 100 bps |
• | Adjusted operating income of | 7-12% |
• | Adjusted EPS of | 9-14% |
• | Free cash flow per share of | 16-20% |
1. Based on a CAD:USD exchange rate of 1.29:1
2. Year-over-year growth rates are implied based on Element's expectation of full-year 2022 “organic” performance that is at or near the top-end of the Company's 2022 “organic” results guidance ranges.
Both adjusted EPS and FCF per share growth will be aided by common share buybacks under Element's NCIB, the upshot of which is a projected weighted average outstanding common share count of 385-395 million for 2023.
Element expects originations of approximately
The Company provides further details in its Supplementary Information document for the third quarter, available on Element's website.
Profitable revenue growth atop a scalable operating platform
Element's third quarter net revenue grew 19.0% year-over-year (17.0% in constant currency) to
The Company's "organic" Q3 net revenue of
Net revenue growth was demonstrably profitable as year-over-year pre-tax income and AOI growth rates - at 25.4% and 31.7%, respectively - exceeded the year-over-year net revenue growth rate. The same is true of the Company's "organic" results: AOI of
Pre-tax income margin expanded to 49.0% and operating margin expanded 547 basis points year-over-year to 56.9% for the quarter. Q3 "organic" operating margin was 54.2%, representing 281 bps of expansion year-over-year.
Element's Q3 EPS were
A capital-lighter business model
Element's services revenue growth is one of two thrusts of the Company's capital-lighter business model. (Services revenue has much lower funding needs than net financing revenue: only the net working capital required to procure parts and services for clients.)
Third quarter services revenue increased
- The speed at which Element is converting new client and share of wallet wins into active services being provided to new and existing clients (penetration);
- Element clients' increasing use of services (utilization) due to increased vehicle activity levels in general, and - due to the ongoing, unprecedented OEM production delays - the advanced average age of clients' vehicles in particular; and, to a lesser extent,
- Parts and labour cost inflation across Element's networks of supplier-partners.
The Company's Supplementary Information document for the quarter contains further details of Q3 services revenue composition and growth.
Element's syndication of fleet assets to third parties - financial buyers with a lower cost of capital - is the second thrust of the Company's capital-lighter business model.
Element syndicated
Following quarter-end, in October this year, Element syndicated another tranche of Canadian fleet assets, further expanding the market to derive superior economic value from the Company's balance sheet assets.
Element's advance of its capital-lighter business model continues to enhance ROE: year-over-year at
Growing free cash flow per share and the return of capital to shareholders
Element generated
Per share growth is aided by Element’s return of capital to common shareholders through buybacks pursuant to the Company’s NCIB. Combined with Element's common dividend payout, the Company returned
When Element announced the establishment of its NCIB in 2020, the Company noted the program represented the first year of what management envisioned as a regular, ongoing return of capital strategy. Element renewed its NCIB in
Element also announced today a 29% increase to its common dividend, from
With this increase, Element’s common dividend represents 30% of the Company’s last twelve months’ (at
Element expects its common dividend to continue to grow - consistent with FCF per share growth - and thereby become a larger component of the Company’s return of capital strategy.
Further, Element continues to plan to redeem its outstanding preferred share series - at the time but in lieu of rate reset - thereby further maturing and optimizing the Company’s capital structure.
Adjusted Operating Results as reported
Three-month periods ended | Nine-month periods ended | ||||
(in $000’s for stated values, except per share amounts) | 2022 | 2022 | 2021 | 2022 | 2021 |
$ | $ | $ | $ | $ | |
Net revenue | |||||
Servicing income, net | 149,931 | 150,037 | 121,075 | 431,810 | 348,749 |
Net financing revenue | 124,859 | 123,252 | 109,328 | 363,292 | 329,700 |
Syndication revenue, net | 15,998 | 14,844 | 13,937 | 44,619 | 49,891 |
Net revenue | 290,788 | 288,133 | 244,340 | 839,721 | 728,340 |
Adjusted operating expenses1 | |||||
Salaries, wages and benefits | 80,708 | 77,786 | 78,493 | 234,706 | 224,772 |
General and administrative expenses | 29,654 | 28,944 | 24,355 | 86,395 | 77,327 |
Depreciation and amortization | 15,020 | 15,456 | 15,866 | 44,411 | 36,802 |
Adjusted operating expenses | 125,382 | 122,186 | 118,714 | 365,512 | 338,901 |
Adjusted operating income | 165,406 | 165,947 | 125,626 | 474,209 | 389,439 |
Provision for taxes applicable to adjusted operating income | 42,179 | 42,317 | 31,419 | 121,643 | 96,124 |
Cumulative preferred share dividends | 5,923 | 8,103 | 8,103 | 22,129 | 24,309 |
After-tax adjusted operating income attributable to common shareholders1 | 117,304 | 115,527 | 86,104 | 330,437 | 269,006 |
Weighted average number of shares outstanding [basic] | 395,117 | 398,242 | 416,353 | 398,287 | 427,753 |
After-tax adjusted operating income per share1 [basic] | 0.30 | 0.29 | 0.21 | 0.83 | 0.63 |
Adjusted Operating Results in constant currency2
Three-month periods ended | Nine-month periods ended | ||||
(in $000’s for stated values, except per share amounts) | 2022 | 2022 | 2021 | 2022 | 2021 |
$ | $ | $ | $ | $ | |
Net revenue | |||||
Servicing income, net | 149,931 | 152,706 | 124,002 | 431,810 | 353,487 |
Net financing revenue | 124,859 | 123,681 | 109,995 | 363,292 | 329,497 |
Syndication revenue, net | 15,998 | 15,261 | 14,508 | 44,619 | 51,111 |
Net revenue | 290,788 | 291,648 | 248,505 | 839,721 | 734,095 |
Salaries, wages and benefits | 80,708 | 78,716 | 79,904 | 234,706 | 226,949 |
General and administrative expenses | 29,654 | 29,351 | 24,842 | 86,395 | 78,202 |
Depreciation and amortization | 15,020 | 15,695 | 16,180 | 44,411 | 37,186 |
Adjusted operating expenses | 125,382 | 123,762 | 120,926 | 365,512 | 342,337 |
Adjusted operating income | 165,406 | 167,886 | 127,579 | 474,209 | 391,758 |
Provision for taxes applicable to adjusted operating income | 42,179 | 42,811 | 31,908 | 121,643 | 96,696 |
Cumulative preferred share dividends | 5,923 | 8,103 | 8,103 | 22,129 | 24,309 |
After-tax adjusted operating income attributable to common shareholders | 117,304 | 116,972 | 87,568 | 330,437 | 270,753 |
Weighted average number of shares outstanding [basic] | 395,117 | 398,242 | 416,353 | 398,287 | 427,753 |
After-tax adjusted operating income per share [basic] | 0.30 | 0.29 | 0.21 | 0.83 | 0.63 |
____________________
1 Please refer to the Descriptions of Non-GAAP Measures section of the MD&A for a description of this non-GAAP measure.
2 Please refer to the Effect of Foreign Currency Exchange Rate Changes section of the MD&A for reconciliations of certain non-GAAP "constant currency" measures to their counterpart IFRS measures as reported.
CEO LETTER TO SHAREHOLDERS
My fellow shareholders,
With today’s release of our third quarter results and the accompanying provision of our full-year 2023 guidance, it is abundantly clear that Element’s “pivot to growth” has fully taken hold.
Yet, for all the success to date, we are still in the early innings – perhaps even just the first inning – of realizing the full potential of our organic revenue growth strategy. Executing atop our transformed, industry-leading, scalable operating platform, and combined with our capital-lighter business model and return of capital strategies, we believe Element can create consistent and outstanding shareholder value for many years to come.
With a view to sharing the deeper insights that underpin our confidence and excitement about the near- and long-term future of our business, we will be hosting an Investor Day on
The purpose of the event is to give participants “a look under the hood” of our business and to introduce you to a representative sample of the many talented people responsible for Element’s success.
Specifically, we’ll show you how we are successfully executing on each of our five organic revenue growth drivers; how our scalable operating platform underpins a consistent, superior client experience while expanding operating margins; and how we advance our capital-lighter business model to enhance returns on equity and liberate cash flow to return to shareholders.
I am confident you will leave our Investor Day with a better understanding of the unique characteristics of Element’s business and a deeper appreciation for the compelling attributes of our value proposition.
With that ahead of us in three weeks, I want to devote the rest of this letter to (a) giving you a better sense of our latest thinking on (i) OEM production delays and (ii) consolidation in our industry, and (b) providing a summary reminder of how certain macroeconomic dynamics affect our business.
OEM production delays
We continue to maintain regular contact at the highest organizational levels with our North American OEM partners. Production volumes are improving and OEMs’ willingness to take orders is also increasing. We expect to originate approximately 25-35% more new vehicles in 2023 than we will have this year, and 2024 should be another year-over-year improvement. The positive impact of this recovery will be greatest on our business in the
Consolidation in our industry
It is encouraging to see new investors discover and endorse what we have known and been acting on for years: the attractive dynamics of our industry and resilience of the fleet management business model. We believe further consolidation within our industry by established, long-term-return-driven investors bodes well for the health of the industry and, as market leader, the health of Element’s business.
Moreover, the current round of industry consolidation has and will continue to afford us ample opportunity to steal market share as other FMCs are forced to focus on the complexities of integration and/or acclimating to new ownership. Having “been there, done that” five and more years ago, Element can now maintain a singular focus on delivering a consistent, superior service experience that makes the complex simple for clients. Our high (and rising) Net Promoter Scores suggest that word of Element’s strengths continue to travel within – and be well received by – the close-knit community of in-house automotive fleet professionals.
Lastly, we have been quite content to sit on the sidelines as this deal-making has taken place. We see no need for Element to pursue higher-risk, inorganic growth when an estimated half to two-thirds of the addressable markets in which we operate remain unpenetrated and we have a proven strategy and ability to convert self-managed fleets into Element clients across those markets.
How macroeconomic dynamics affect our business
Given the continuing macroeconomic uncertainties, allow me to reiterate some of the features of our business model that position us to withstand (if not benefit from) these ongoing challenges.
1. Rising interest rates are managed through matched funding
We are largely interest rate agnostic given our staunch commitment to matched funding.
Coincident to accepting a client’s vehicle order, we set the terms – interest rate, fixed or floating, and duration – of both the funding we will use to purchase that vehicle and the lease we will enter with the client in respect of that vehicle.
In doing so, we ensure
- the difference (aka. margin) between the interest rate on our funding and the interest rate on the corresponding lease is acceptable to Element, all things considered (eg. client credit quality, industry and business, history with Element, intended vehicle use, etc.);
- the nature of the interest rate on our funding and the interest rate in that lease are the same – either fixed or floating – to ensure our interest margin remains stable for the life of the contract; and
- the duration over which we will repay our funding is the same as the period over which our client will make their lease payments to Element.
As a result, the prevailing interest rate when a client places (and we accept) their vehicle order is largely immaterial to our financing business; we ‘lock in’ our margin/spread on that interest rate for the duration of the lease on the vast preponderance of our assets, and diligently manage this risk-mitigant.
2. Our business benefits from inflation
Inflation contributes to profitable revenue growth both directly and indirectly, with the latter a greater and longer-lasting contribution.
Directly
The majority of Element’s revenue is directly tied to the cost of vehicles and services procured on behalf of our clients. Accordingly, inflationary increases in these costs result in net revenue growth for Element given our cost-plus model.
That said, the inflation dynamic plays out differently between our two largest revenue streams. While Services revenue will see a more immediate impact in those categories that are “Cost +”, Net Financing revenue benefits will be gradual as increased interest income (arising from higher vehicle purchase prices) is driven by Originations and recognized over each lease term.
While inflation will likely outpace our continuous improvement initiatives and result in rising operating costs and capital investments for our business, at approximately 48% and 7% of revenue respectively, Element will nonetheless be a strong net beneficiary of inflationary trends.
Indirectly
Element’s chief value proposition to clients (and prospects) is the material reduction of the total cost of their fleet operations (TCO), and inflation makes this proposition even more compelling.
As vehicle, parts, labour and fuel prices rise, the concessions we procure by leveraging our scale to negotiate with suppliers become even more valuable to clients. We already see increased client/driver utilization of our supply networks given current inflationary trends, as well as clients enrolling in incremental Element service offerings (penetration) to help manage their TCO.
We also see self-managed fleet owners and operators – a key source of long-term growth – more interested in the financial advantages of outsourcing to Element because of these trends.
The financial benefits to Element from inflation remain aligned with our clients’ interests, because our chief value proposition is the material reduction of clients’ TCO – by up to 20% from self-managed fleet levels. This proposition is acutely compelling in an inflationary and/or recessionary environment.
3. Our low-credit-risk assets easily weather downturns
The ~1.5 million vehicles we manage are essential to our blue-chip client base, providing (i) continuity of demand for both vehicle replacements and service consumption, and (ii) a low risk of credit losses.
Our “credit first, collateral second” philosophy will continue to protect our investors from any material escalation of credit losses because of:
- Our focus on maintaining a high credit quality client base;
- Our highly diversified client base, where no single industry accounts for more than 5% of our vehicles under management;
- The protection we see in bankruptcy as our cross-collateralized leases, which underlie mission-critical assets, are typically one of the first contracts affirmed; and
- Our active and efficient management of collateral gaps, which protects us if we have to sell assets in the exceedingly rare case of a client liquidation.
4. Recurring, recession-resistant revenues
Element’s net revenue, operating income and cash flow have proven resilient. Despite COVID-19 lockdowns and “shelter in place” edicts throughout 2020, our annual net revenue declined just 3.1% that year, adjusted operating income declined 2.4% and free cash flow per share decreased
We view the impacts of the pandemic on our 2020 business as akin to a severe economic downturn. Element’s business model withstood those circumstances that year while we accelerated the organization’s transformation program and initiated the pivot to our current, successful focus on organic revenue growth.
Our business model is replete with self-leveling attributes. For instance, as an industry-first delay in vehicle production created an immediate and sustained drop in new vehicle originations (and an attendant deferral of revenue and cash flow), we also experienced (i) an increase in used vehicle values, which generated extraordinary gains on the sale (GOS) of end-of-lease vehicles in ANZ; and (ii) a rapid increase in maintenance and operating costs as fleet vehicles age beyond their optimal point of replacement. The heightened services revenue from maintaining and managing older vehicles, combined with higher net finance revenue from elevated GOS, have largely offset the financial headwinds to Element from the OEM production delays.
* * *
In conclusion, Element remains a business with the remarkable ability to thrive in almost any set of conditions, which we have amply demonstrated in recent years.
This is true because of the industry we lead and the business model we have honed, but most of all because of the incredible people that work at Element.
I look forward to introducing you to some of them in three weeks – on
Until then,
Jay
Conference Call and Webcast
A conference call to discuss these results will be held on
The conference call and webcast can be accessed as follows:
Webcast: | https://services.choruscall.ca/links/elementfleet2022Q3.html |
Telephone: | Click here to join the call most efficiently, or dial one of the following numbers to speak with an operator: |
International: +1-604-638-5340 |
The webcast will be available on the Company’s website for three months thereafter. A taped recording of the conference call may be accessed through
Dividends Declared
The Company’s Board of Directors has authorized and declared a quarterly dividend of
Element’s Board of Directors also declared the following dividends on Element’s preferred shares:
Series | TSX Ticker | Amount | Record Date | Payment Date | |
Series A | EFN.PR.A | ||||
Series C | EFN.PR.C | ||||
Series E | EFN.PR.E |
The Company’s common and preferred share dividends are designated to be eligible dividends for purposes of section 89(1) of the Income Tax Act (
Normal Course Issuer Bids
On
On
The Company applies trade date accounting in determining the date on which a share repurchase is reflected in the consolidated financial statements. Trade date accounting is the date on which the Company commits itself to purchase the shares.
In furtherance of the Company’s return of capital plan, Element intends to renew its Normal Course Issuer Bid (the “2022 NCIB”) for its common shares. If accepted by the TSX, the Company would be permitted under the 2022 NCIB to purchase for cancellation, through the facilities of the TSX or such other permitted means, up to 10% of the public float (calculated in accordance with TSX rules) of Element’s issued and outstanding common shares during the 12 months following such TSX acceptance at prevailing market prices (or as otherwise permitted). The actual number of the Company’s common shares, if any, that may be purchased under the 2022 NCIB, and the timing of any such purchases, will be determined by the Company, subject to applicable terms and limitations of the NCIB (including any automatic share purchase plan adopted in connection therewith). There cannot be any assurance as to how many common shares, if any, will ultimately be purchased pursuant to the 2022 NCIB. If the 2022 NCIB renewal is accepted by the TSX, any subsequent renewals of the 2022 NCIB will be in the discretion of the Company and subject to further TSX approval.
Non-GAAP Measures
The Company’s condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the
The Company believes that certain non-GAAP measures can be useful to investors because they provide a means by which investors can evaluate the Company’s underlying key drivers and operating performance of the business, exclusive of certain adjustments and activities that investors may consider to be unrelated to the underlying economic performance of the business of a given period. Throughout this News Release, management used a number of terms and ratios which do not have a standardized meaning under IFRS and are unlikely to be comparable to similar measures presented by other organizations. A full description of these measures can be found in the Management Discussion & Analysis that accompanies the unaudited interim condensed financial statements for the quarter ended
Element’s unaudited interim condensed consolidated financial statements and related management discussion and analysis as at and for the three- and nine-month periods ended
About
This press release includes forward-looking statements regarding Element and its business. Such statements are based on the current expectations and views of future events of Element’s management. In some cases the forward-looking statements can be identified by words or phrases such as “may”, “will”, “expect”, “plan”, “anticipate”, “intend”, “potential”, “estimate”, “believe” or the negative of these terms, or other similar expressions intended to identify forward-looking statements, including, among others, statements regarding Element’s enhancements to clients’ service experience and service levels; enhancement of financial performance; improvements to client retention trends; reduction of operating expenses; increases in efficiency; EV strategy and capabilities; global EV adoption rates; redemption of the Series I Shares; dividend policy and the payment of future dividends; creation of value for all stakeholders; expectations regarding syndication; growth prospects and expected revenue growth; level of workforce engagement; improvements to magnitude and quality of earnings; executive hiring and retention; focus and discipline in investing; balance sheet management and plans to reduce leverage ratios; anticipated benefits of the balanced scorecard initiative; Element’s proposed share purchases, including the number of common shares to be repurchased, the timing thereof and TSX acceptance of the NCIB and any renewal thereof; and expectations regarding financial performance. No forward-looking statement can be guaranteed. Forward-looking statements and information by their nature are based on assumptions and involve known and unknown risks, uncertainties and other factors which may cause Element's actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statement or information. Accordingly, readers should not place undue reliance on any forward-looking statements or information. Such risks and uncertainties include those regarding the ongoing COVID-19 pandemic, risks regarding the fleet management and finance industries, economic factors and many other factors beyond the control of Element. A discussion of the material risks and assumptions associated with this outlook can be found in Element's annual MD&A, and Annual Information Form for the year ended
Contact:Michael Barrett Vice President, Investor Relations (416) 646-5698 mbarrett@elementcorp.com
Source:
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