Earnings Call: Q1 2020

May 12, 2020

Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management First Quarter twenty twenty Financial Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After prepared remarks, there will be an opportunity for analysts to ask questions. Order to afford all analysts the opportunity to ask questions, Elementor kindly request that analysts limit themselves to two questions in live dialogue with management. Wishes to remind listeners that some of the information in today's call includes forward looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties, and the company refers to you the cautionary statements and risk factors in its year end and most recent MD and A as well as the most recent AIF, a description of these risks, uncertainties and assumptions. Although management believes that the expectations reflected in the statements are reasonable, it can give no assurance that the expectations reflected in any forward looking statements will prove to be correct. Solament's earnings press release, financial statements, MD and A, supplementary information document, quarterly investor presentation and today's call include references to non IFRS measures, which management believes are helpful to present the company and its operations in ways that are useful to investors. A reconciliation of these non IFRS measures to IFRS measures can be found in the MD and A. I'd now like to turn the call over to Jay Forbes, President and Chief Executive Officer. Please go ahead. Thank you, operator, and good evening to all of you joining us this evening on this call. Before I address our Q1 twenty twenty results, I'd like to make two opening remarks. First, on behalf of everyone at Element Fleet Management, I want to express our heartfelt gratitude to the healthcare professionals and many other frontline workers who are caring for our families, our friends and neighbors affected by COVID-nineteen, as well as providing essential services to the rest of our communities. Second, Vito and I plan to keep our comments brief this evening to afford our analyst community more time for questions and answers. Our published disclosures this quarter effectively contain all that we know about the impacts of COVID-nineteen and the current economy on our business right now. So we invite you to digest those over the coming days rather than us trying to convey it all to you in detail during a relatively short time together this evening. With that said, let me thank you all for joining us tonight to discuss Element's first quarter results, the continued progress that we're making in advancing our strategic plan and the early impacts of the economic disruption caused by COVID-nineteen on our people, our clients and our core business. Element's first quarter results demonstrate the progress we have made in strengthening every aspect of our business as we enter the final phase and year of our transformation program. We remain centered on the singular focus we set back in October 2018 to deliver a consistent superior experience to our clients day in and day out. And in the process, enhance Element's annual run rate pretax operating profitability by CAD180 million. And we are well on our way to achieving both outcomes by the end of this year, regardless of the challenges COVID-nineteen might present. Our transformation efforts positively impacted each of our three revenue streams and reduced our operating expenses in Q1 twenty twenty. This helped us generate a 10% year over year increase in adjusted operating income, equivalent to $0.23 per share for our core business and produced free cash flow of $0.29 per share for our consolidated operations this quarter. These results include a CAD12 million provision for credit losses recorded in our core net financing revenue this quarter. This brings our balance sheet allowance for credit losses to CAD20 million or 16 basis points as a percentage of total core finance receivables. By way of reference, the single largest credit loss recorded by our predecessor companies in any given year was nine basis points. While we haven't experienced any credit or collections issues that suggest that our credit losses would be materially higher than those previously experienced, we also have no knowledge of the depth and duration of the pandemic and the ensuing impacts it might have on our clients' operations. Accordingly, we thought it prudent to increase the provision for credit losses given the potential impact Element might experience. I will let Vito delve more deeply into the details of our provision and its impact on our Q1 results shortly. Against the backdrop of global economic disruption and human suffering that COVID-nineteen has wrought, we feel incredibly fortunate to be in the position we are at Element. Our people are safe and productive with 98% of them working remotely as they continue to support our clients. Our clients have been effusive with their thanks as our teams help them manage their fleet needs through these chaotic times. In Q1 alone, we identified more than $600,000,000 of productivity savings opportunities for our clients. Our operating platform is being transformed at an even faster pace than we had thought possible and in turn delivering profitability improvements faster than expected. We hit our original target of CAD150 million in run rate profit improvement late last week. Our investment grade balance sheet continues to strengthen even as we write off the last of the non core investments returning the business to its original premise, an industry leading fleet management company catering to blue chip organizations with mid to large size fleets. And our liquidity continues unabated with consistent operating cash flows augmented by working capital releases and backstopped by CAD5.5 billion of committed undrawn funding facilities. All of this provides us with the conviction and confidence to stay the course on our strategy. As you know, that strategy identifies three waves of opportunity for Element. We identified our first wave of opportunities in the 2018 announcing our three pronged strategy to transform our core business, strengthen our balance sheet and wind down or sell nineteenth Capital. In the 2019, we launched our second wave of opportunity as we secured Armada as a client and rapidly began to scale our operational and syndication capabilities to serve same. And with the nearing prospect of a narrowed strategic focus, a best in industry operating platform and a strengthened financial position, we announced our third wave last fall, a plan pivot to growth. We have reexamined these strategic objectives in the context of a post COVID-nineteen world and believe them to be even more relevant and viable. In short, we remain focused on the long term value creation prospects we've identified for Element, while remaining vigilant and agile as we grapple with the immediate impacts of the pandemic. While we remain confident that 2020 will be a year of great strategic progress for Element, with the core business transformed, tangible leverage sub six times with 19 capital sold and with our pivot to growth launched. 2020 will nonetheless be a year of disappointment regarding our planned growth and profits. While we continue to generate solid profitability this year, our business will not be unscathed by the current circumstances. We can't tell you exactly how our near term quarterly results will be impacted. Frankly, there are just too many variables at play. We have shared with you all that we know today in our Q1 disclosure materials. And as always, we're striving to maximize transparency for you, our stakeholders. However, because so much remains unknown about the scope and duration of this economic downturn, we have withdrawn our year end adjusted EPS guidance. We can tell you Element is fully equipped to endure however long this downturn persists and that we're poised to emerge with momentum when normalcy returns. We can also tell you that we fervently believe Element's value proposition is only being made more compelling by the current environment. Let me say more about that in a moment, but in the meantime, I'll invite Vito to share his views on our Q1 results. Thank you, Jay, and good evening, everyone. I'm pleased to be with you this evening to talk through what we believe are a solid set of Q1 operating results and expand on what we could expect in the next quarter or two. As Jay noted, our core adjusted operating income was $0.23 per share or $134,800,000 for the quarter, a 10.5% increase over the prior year and a 5.5% decrease from the prior quarter. Given the uncertainty associated with the economic impact of COVID-nineteen and its potential impact on our clients, we felt it necessary to increase our allowance for credit losses and these Q1 results reflect a $12,100,000 provision or charge for credit losses bringing our cumulative allowance to a total of $20,000,000 This is the exclusive driver of the quarter over quarter reduction in core AOI. I refer you to Section two point zero of our supplementary document, which unpacks the quarter over quarter AOI change in greater detail. We otherwise had a very solid quarter building on our continued momentum. We'd like to look at our assets under management, so AUMs, as one of the barometers of the underlying health of the business. Our core segment finished the quarter with $17,800,000,000 of AUM, an increase of $1,100,000,000 from the 2019 year end and $2,300,000,000 since Q1 last year. On a constant currency basis, AUM growth was CAD200 million over prior quarter and CAD1.9 billion over the prior year. Originations in Q1 were CAD2 billion, a 9% decrease from last quarter and a 19% increase over Q1 twenty nineteen. The quarter over quarter reduction was primarily a reflection of Armada seasonality. Excluding Armada, there was strong growth in U. S. Originations and in Mexico. Further, as you can see in Section 5.1 of our supplementary, Q1 has had the lowest quarterly origination volume in each of the last two years. So for it to be up $300,000,000 over Q1 of last year is a great result for us. This was fueled by strong originations growth in The U. S, including Armada as well as Mexico and Canada. In terms of what we can expect from originations going forward in Q2, given the temporary closures of several OEM production facilities and the economic uncertainty driven by COVID-nineteen, we do expect a meaningful reduction in originations. Turning to core net financing revenue. The provision for credit losses is booked against this line, and it was the only driver of core net financing revenue decreasing $4,000,000 quarter over quarter and $5,300,000 year over year. Excluding the impact of the extra provision taken this quarter, net financing revenue performed well, increasing by $7,700,000 quarter over quarter and $6,500,000 year over year, benefiting from several factors, including improved working capital management. Our portfolio is blessed with strong credit quality customers in diversified industries and geographies. However, it is difficult at this time to predict the final impact this pandemic will have on our thousands of clients across five geographies and over 700 industries. Our $20,000,000 allowance is based on multiple factors: when applying the expected credit loss model, including macroeconomics the probability of default of our clients, our view of valuations and the loss that would likely result on default. I refer you to Note 3C of our financial statements, where we discuss our allowance methodology in more detail. Further, the 20,000,000 allowance represents 16 basis points as a percentage of total finance receivables before the allowance. Based on the information we've been able to gather, the highest level of actual losses the businesses that now make up Element experienced in a single year was nine basis points, and that incurred in 02/2009, the year of the great financial crisis. Let's now turn to net servicing income for Q1, which fell CAD 2,900,000.0 quarter over quarter. The decrease was in part due to lower volumes in March as a result of COVID-nineteen and in part due to normal seasonal volume reduction from Q4 to Q1. This offset the positive impacts of transformation. On a year over year basis, net servicing income increased 7% with both organic business performance in all geographies and transformation contributing to growth across multiple product categories. We anticipate a reduction in net servicing income for Q2 due to the broad public health measures implemented to combat COVID-nineteen. Fewer miles driven is obviously a factor, and an oversupply of used vehicles in The U. S. And Canada will delay the realization of remarketing income. Turning to syndication. The syndication market remains open to Element, and we are successfully expanding our universe of investors. We syndicated $834,000,000 of assets in Q1, dollars 130,000,000 fewer than last quarter and $345,000,000 more than in Q1 of last year. Syndication revenue decreased $1,500,000 quarter to quarter, but actually increased when measured as a percentage of syndicated assets. We are anticipating some level of softness in syndication revenue in the second half of this year as we face a step down in interest rates. Adjusted operating expenses were effectively flat quarter over quarter and down $1,300,000 year over year. Transformation savings on salaries, wages and benefits were partially offset by merit increases driven by our strong performance last year and the growth of our Armada and syndication teams. General and administrative expenses increased with investments in growing our Mexico business and capabilities to serve Armada in addition to professional fees in the quarter. Section 2.1 of our supplementary walks you through our core OpEx quarter over quarter. A few more things of note before I turn it back to Joe. We remain on track to achieve sub 6x tangible leverage by year end. Our tangible leverage was 7.45x this quarter end, an increase of 0.34 times from prior quarter due solely to the strong appreciation of the U. S. Dollar against our reported Canadian dollar. Excluding FX and the impact of our non recourse credit facility, our tangible leverage this quarter end would have been 6.35x. So we continue to strengthen and do this for balance sheet. Regarding our convertible debentures due next month, you will have seen that we've established a $560,000,000 facility to backstop redemption if required. As we have indicated, we plan to issue U. S. Unsecured bonds in 2020. While market conditions have improved lately, our liquidity profile allows us the luxury of flexibility. We will step into the market at the right time for our inaugural issue. Finally, as you will have seen in our release and disclosed in our financial statements subsequent event note, in Q2, we closed the book on nineteenth Capital by selling the assets of the business and settling third party debt. I'd like to personally thank Heather Tulk, President of nineteenth Capital, her leadership team and all nineteenth Capital employees for their commitment and stewardship of these assets and business over the last several quarters. The net impact of these transactions will result in an after tax an expected after tax loss of $15,000,000 to be recorded in our Q2 accounts. Finally, allow me please to an opportunity to reflect on the undertakings of the last several weeks. Like all businesses all over the world, the leadership and broader team at Ireland have truly doubled down and rolled up their sleeves. We established cash and client response offices that I am confident are best in class practices. What are the outcomes of this in my mind? Immediate benefits are optimal flexibility, greater understanding of key levers and ultimately enhanced confidence in our decision making. Further, there's a real long term benefit as it sharpens long term focus, discipline and competitiveness, which is sustained over time. But perhaps most importantly to me, it's reinforced our confidence in both the resilience of our business and the real value add we are to our clients. With that, I wish you and your loved ones the best of your health as we navigate these uncertain times. And Jay, I'll throw it back to you. Thanks, Vito. As I've previously communicated, we view the current societal and economic circumstances as an event with an ending as opposed to some new normal. While there will be a long lasting change as a result of this pandemic, the needs Element addresses in the markets we serve will remain fundamentally the same. Our existing blue chip client base will still need mission critical vehicles to sustain their daily operations. Some clients will want larger fleets. Others will want to outsource more responsibility for managing their fleets to Element. Others still are only service clients right now are not Element clients at all. Many companies own their own fleets and these self managed fleets represents $2,000,000,000 of untapped annual net revenue potential in The U. S. And Canada alone and in the same market segments Element serves today. To the extent current fleet owners, including governments wish to create balance sheets for budgetary headroom, we have the balance sheet capacity to welcome their vehicles onto our platform. And we have the syndication capabilities to manage any accompanying concentration risk to Element. We also have the liquidity to effect sale leaseback transactions with current owners and the operating experience to execute a seamless transition of responsibility for those vehicles. In sum, we believe our fleet financing and management services will remain in high demand. We would not be in the fortunate position we find ourselves today without having invested in the last nineteen months time and effort into the transformation, the balance sheet strengthening, liquidity improvement, syndication capabilities and the crafting of our growth strategy. Managing through COVID-nineteen would be an entirely different experience at Element if it were not for everything accomplished since the 2018 in accordance with our strategic plan. As a result, I wish to thank our investors, shareholders and lenders alike for your support of Element then, now and in the future. And I wish to thank our people, my colleagues for the energy you bring to your jobs every day in delivering a consistent superior experience and incredible value to our clients. Our business is safe and sound despite these unsettling times and our future remains bright. With that, it's my pleasure to open the floor to any questions you might have. Operator? Thank you. We will now begin the analyst question and answer session. As a reminder, in order to afford all analysts the opportunity to ask questions, Element kindly requests that analysts limit themselves to two questions in live dialogue with management. Should an analyst have additional questions after her or his first two have been answered, please rejoin the question queue. The first question comes from Jeff Kwan with RBC Capital Markets. Please go ahead. Hi, good evening. Just my first question is on the Q2 service revenue. You talked meaningfully lower year over year. Just wondering if you can give a little bit more clarity on that. Is it a range of like mid single digit, low double digit, that sort of thing? And then how much of your service revenues would be dependent on volume or some other level of activity as opposed to some sort of monthly fee that's charged kind of regardless of what's happening? Good evening, Jeff. In terms of service consumption, with a near global move to work from home, we saw a rather abrupt in materials decline in the consumption of maintenance and fuel services as many of the non essential fleets that comprise our portfolio were effectively parked. And so we would expect having seen this materialize towards the end of our first quarter, we would expect that this will have a more pronounced impact as we go through Q2. And as you think about our service revenues and the composition of those revenues, think maintenance, think fuel, think tolls and violations, think collision services, all as being services that we provide that are more attuned to the mileage that the vehicles travel and thus the fact that many of those vehicles are traveling less and indeed a smaller portion of our fleet is effectively parked. Think of a material decline in Q2 service revenues as a direct impact of this pandemic. And maybe just one other point to kind of shape your own thinking around this. In terms of our total fleet, rough, rough, rough 80% of our fleet would be comprised of service vehicles. The other 20% would be sales vehicles. And we would have expected the vast majority of those sales vehicles would have effectively been grounded as a consequence of shelter in place and people working from home, while the other 80% of the fleet would have varying degrees of utilization. Many of those would have been deemed essential services and would have been actively deployed akin to the pace that they were enjoying in the fourth quarter of last year. Others would have been less productive in terms of their utilization. So the portfolio is actually by virtue of that inherent bias to service vehicles is more protected in terms of this step down in terms of service consumption. But nonetheless, we will feel a material deterioration of that revenue in Q2. And sorry, just I mean, I guess, with what you've seen Q2 to date year over year, like it sounds like it's obviously, it's meaningful. Is that like a 20% reduction that you've seen so far, 30%? I'm just trying to get a sense as to or even rough ballpark here. Yes. I think your term meaningful encapsulates it quite well. It was probably the suddenness of this. As a consultant, my colleagues who have far more experience in the industry than me, no one has ever witnessed this type of pullback in services in the history of fleet management. And again, you trace it back to its core elements and you come back to this work from home and a sizable piece of the fleet that is operating at suboptimal capacity. So like everything, we've adjusted to that. We've shipped resources in the organization. And so the surplus resources that we have are actually working to accelerate the transformation of the organization and ensure that we'll be bringing that to the successful close that we had anticipated, both in terms of that consistent superior client experience, but also the realization of the full $180,000,000 of run rate profitability improvement that is actioned. Okay. And just the other question I had was, is there any commentary that you can provide on what's going on with Armada, but also to just any incremental progress with respect to mega fleets? Sorry, could you repeat the last piece of the question? Just if there's been any incremental progress around mega fleets traction trying to get them? Yes, yes. So we wouldn't be able to offer any specific commentary on a industry segment or client. And so I'll hold my remarks on Armada other than to say that the relationship continues to grow and develop. And they, like many other aspects of our fleet or that service component that I referenced earlier And depending on where you are in that continuum, you may have more than full utilization of One's fleet. And then in terms of the mega fleet strategy, we have actually stood up that group. Tom Peterson, who was our EVP of Mid Market, has actually taken the lead for us on that market segment, has put together his team and they are already in the midst of developing marketing plans. So as I say, as we come to grips with the pandemic and the ensuing impacts on our clients, we've been able to actually advance some of our key strategic objectives, not the least of which are transformation and that pivot to growth as we prepare to take full advantage of the transformed operating model and the strengthened balance sheet to actively grow. Thank you. The next question comes from Mario Mendonca with TD Securities. A quick question on sorry, just bear with me here. When you talk about the impairment charge, the $12,100,000 can you offer like what is your best view of the realization of losses? Meaning for every $100 let's say, of impairment, what amount are you contemplating would actually be a credit loss? Because I appreciate fully that there'd be a material recovery that you wouldn't lose 100% of the impairment. But can you help me think through what the recovery would be? Yes, certainly Mario. So a number of consideration points that go into determining what we reference as the gross expected loss. So we'll look at the probability of default for each and every one of our clients. So we assign them a borrower risk rating. That risk rating is set at least annually for each of our clients. And I should appreciate when you go through events like this, they're refreshed accordingly. So we have that probability of default based on these individual borrower risk ratings. And against that, we assess our portfolio position. And as I mentioned in the past, our leases typically kind of average life of forty one months. By the time we hit the twenty six month, we're usually in a surplus position in terms of that asset. And so we're actually have equity and equity position in that asset. And as you can appreciate that equity position, equity surplus builds through to the maturation of that lease. And so when we look at a particular client and the probability of default, we then look at their portfolio position to understand that asset gap and whether we're in a surplus or deficiency. If, for instance, we're in a situation where we see a deterioration or expected deterioration in the credit profile of that client and there is a larger asset gap, very often we'll ask the client to put up a letter of credit for the difference to ensure that we're not overly exposed in terms of a risk of default and or an ensuing of loss by virtue of that gap. So that's how we determine the gross expected loss. We then take our experience and managing through a workout situations, whether it be insolvency or bankruptcy to determine our net expected loss. And typically Mario, as Vito has indicated in his commentary, we are single digit basis points of net expected loss. So while we may have a large default position with an organization that rarely translates into any meaningful net loss as we work our way through the liquidation or bankruptcy process. And I would cite this last quarter offering up a perfect example. So you might have seen where we actually had a fairly significant increase in our delinquencies and as well as our impaired assets. When you look at the impaired assets, the quarter over quarter increase was actually just one client and it was a client that had gone bankrupt. But we had been working with that client all through the process, had seen the declining credit position and secured letters of credit, such that this client whose net exposure to us would be in excess of CAD40 million, actually the net exposure to us is zero because we were able to secure letters of credit and bridge whatever gap existed. So it is a combination of assessing the probability of default, managing the asset value gap and then using our past experience in terms of managing in these types of situations to manage our exposure down such that in any given year, our predecessor companies never recorded any more than nine basis points of net expected loss or effectively credit loss. That's helpful. My second question is sort of related. The assumptions that any company uses vis a vis when the recovery unfolds and how it unfolds, imagine are important to the expected loss that you estimate. And it was helpful in your note where you talk about, I think you make a point that you would expect the reopening of businesses in late September twenty twenty. It's helpful to hear that expectation. But then you also make a point that you expect a return to normal growth in six to nine months. What wasn't clear from reading that note is whether you meant six to nine months from September 2020 or six to nine months from today to see a return to normal? Thank you for clarifying. So we would the six to nine months of return would begin at the September based on our latest view of the world. That's very clear. Thank you again. Yes. Thanks, Gary. Thank you. The next question comes from Tom MacKinnon with BMO Capital. Please go ahead. Yes. Thanks very much. I'm just going to try this service revenue question in a different way. I think on Page 14 in your MD and A, you said that the COVID-nineteen had a 2,000,000 to $3,000,000 negative impact on core adjusted operating income for the quarter, and that was through reduced service income. So if I pretax that, we'll just call it between 3,000,000 and 4,000,000 and that's the last two weeks, that's about $2,000,000 a week. So just on that math, it's about $30,000,000 for the quarter. Does that seem as a way of looking at the reduction in the service income? And have you seen any the pace that you noted in the last two weeks of March, have you noted that accelerating or decelerating as we at least through May now? And I have one follow-up. Tom, I'll let you do the modeling. But maybe in response to your second question, we would have seen a rather abrupt unexpected slowdown in terms of maintenance fuel, collision type of incidents and thus revenue generating opportunities for the organization. So we saw it happened very quickly. But having experienced it, there wasn't a material deterioration beyond that. And so the step down that took place, took place with a degree of immediacy, but there wasn't a significantly pronounced decline thereafter. Okay. That's great. And then with respect to syndication volume, I think you had talked about €2,800,000,000 for 2020. And I was wondering and I think you had sort of said that you expected maybe half or maybe slightly more than half to be related to Armada. I think in your latest conversations, you sort of reconfirmed that. Are you still standing by that for twenty twenty or just not necessarily standing by that, but would you feel that that still seems to be a reasonable number? The indications that we had provided in the past is we thought we would do approximately $2,400,000,000 a year in syndication, split roughly fifty-fifty between Armada and the non Armada piece of the business. And I would say that there will be a bit of a bias here in terms of advancing syndication while the market continues to be as strong in interest and demand as we have experienced in the first quarter. And so again, the difficulty of working in this COVID-nineteen environment is it calls into question every single one of your baseline assumptions. It's really almost unfathomable that we're experiencing as a world what we're experiencing right now. And as a consequence of enduring the unexpected, as I say, it has caused this leadership team to kind of go right back to the studs and reexamine every aspect of the business and test every aspect of the business to ensure the model that we believe offers the resiliency and the predictability that we have been sharing with you is indeed capable of continuing to do that in a world that has been kind of tossed on its ear in the abrupt manner that I've been referencing in this call. And so for us, we're going to have a bias to action here and we're going to have a bias to seize the opportunities when those opportunities are readily available to us. And so when it comes to syndication, recognizing the importance of strengthening the balance sheets and achieving that sub-six tangible leverage target by the end of the year, recognizing the importance of continuing to manage the concentration risk on certain named clients and recognizing the opportunity to feed that market and to grow that market so that it will be there, tough times as well as good times, we may end up going more aggressively on the syndication agenda in 2020 than the CAD2.4 billion that we would have originally guided you to. Thank you. Thank you. The next question comes from Paul Holden with CIBC. Please go ahead. Thank you. So first question is regarding scheduled Will you give us sort of a breakdown or percentage of what was collected in April and May versus what was scheduled? Actually, collections is progressing much in line with expectations. We haven't seen a material deviation in terms of our expected cash flows as they relate to billings and collections. Good. And then second question, Jay, in your shareholder letter, you mentioned that originations in Q2 would be disrupted because of OEM production facility disruptions. That, to me, suggests that this is largely a supply phenomenon. Now I've done it's all supply. Is that fair to characterize based on what you wrote that this might be more of a supply disruption to originations than a demand disruption? I'd love to say that's the case, but no, in fact, we have seen a softening of demand. You can appreciate right now, most organizations are like ours. So again, in all of the contingency planning that we have done, no one envisions something as disruptive and as pervasive in terms of this disruption as this pandemic has brought. And so most organizations I think are like us and they're going right back to the core. They're making sure that everyone is nailed down, everyone is stress test and that their basic business processes are indeed functioning as they were intended to function in times of stress like the one we're in right now. And as a consequence, the notion of placing orders for vehicles just falls low on the priority. So we've been very fortunate. We've seen basically nothing in terms of defleeting. We had one client that lost a contract and will be defleeting as a consequence. But that's the only instance I'm aware of throughout the five countries of any material de fleeting of fleets. So it's not that people are rushing to decrease the size of their fleets, but they are postponing placing orders. Now in truth, Paul, chicken and egg, are they delaying knowing the OEMs are shut down? Perhaps. But again, I think it is quite secondary to just the operational and logistical issues that these organizations are facing as they think about faring their workers between job sites and keeping them safe and healthy in the process. Thank you. Other piece, Paul, just if I could on originations. This is very much a deferral. This isn't a lost opportunity. When we come back to the total cost of ownership, people are originating, ordering new vehicles as consequence of their existing fleet hitting a certain age in terms of miles driven years on the clock that make continued operation of that vehicle more expensive for that organization than retiring that vehicle and replacing it with effectively new technology that's operating at a lower cost. So it's this is a delay in originations as opposed to a loss of originations is the way that we're viewing this, and that would be very much in keeping with the experience back in 2008 to 2010 and the economic downturn and impact it has on originations at that time. Got it. Thank you. Thank you. The next question comes from Jamie Groin with National Bank. Please go ahead. Yes. Hi, good evening. First question is related to the net interest margin in this quarter, excluding the PCLs, would have been about 3.7% on your disclosures, primarily on lower interest rates interest expenses. I'm just wondering if you can give us a little bit more color as to the sustainability of those lower interest expenses flowing through to the NIM in future quarters? And maybe a comment on the impact of gain on sale income in the net interest margin as well. Yes. Perhaps I'll offer a couple of comments and then ask Vito to provide some additional detail. Jamie, as are well aware, the transformation has had multiple focuses not just on cost out, but indeed revenue enhancement. And as we look at that net interest line, it encapsulates a number of different revenue streams and associated costs. We have been actively working to reduce the associated costs as well as to enhance a number of those revenue streams within NEST financing revenue. And as a consequence, what you're seeing is an expansion of the NIM as a direct consequence of the transformation actions that we've taken. We've also obviously had been rapidly growing out our business in other geographies that offer better yield, which has given us a nice increase in mix. And over and above that have been more aggressive in the management of our balance sheet and in particular working capital position, which has allowed us to lower our risk costs or excuse me, our interest costs. And even as you think about that continued journey to that sub-six tangible leverage ratio, that relief of the associated debt results in the lower interest costs that is borne by the organization as well. So a number of different drivers that add to that 3.7% NIM factor that we were able to record for this quarter. In terms on gain on sale, the piece here much like I mentioned to Paul on originations, we're going to see some delay in the recognition of gain on sale where that operates in Mexico and Australia. And so by virtue of the virtual shutdown of many of the auction houses, that remarketing channel is readily available to us to sell those vehicles and thus the associated gain on sale. The realization of that is being deferred until those channels open back up and market stability is attained. So again, like originations, this is more about a deferral in revenue as opposed to revenue foregone. And in terms of timing, we have some indication by virtue of the OEMs opening mid May that the auction houses won't be far behind that. So we're hoping that some degree of normalization takes hold later this month, provides us the facilities to, again, take those cars to market and realize and record the associated gains on disposition. Vito, did you have some other thoughts in terms of the NIM? Hey, Jay. I think you covered it well. Maybe just two additional points there, Jamie. We're very, very pleased with how NIM is progressing. I wouldn't model a 3.7% for the balance of the year. I think it's a bit of a higher watermark for us. Two additional factors that have contributed to the $3700000000.0.01, as you might recall in Q4, we did have a deferred financing fee write off in our Q4 results. So we had a I'll call it a one time charge. So that contributes also to the movement from Q4 to Q1. The additional thing to note is and we've talked about this a little bit is syndication reducing NEAs as you're familiar. But a component of pricing structure has a fleet management fee. And when we syndicate, of course, we don't sell that fleet management fee. That remains with us. So to that extent, you should get everything else being equal a little bit of lift in NIM percentage as you work your way through quarter to quarter as we continue as our NEAs if our NEAs drop resulting from syndication. And Jay, you've already addressed the gain on sale. We will see obviously reduction in gain on sale here in the short term for reasons Jay has articulated. And that would be a headwind to NIM as we move forward with the short term. Great. Thank you. And second question in a similar vein, just looking at the impact of lower interest rates on syndication earned rates. Can you give us a little bit more perspective as to the how much is interest rate driving syndication revenue? I know there's other factors that drive the price and yield that you earn on those syndicated assets such as duration and credit quality and the size of the pool being sold. But you specifically draw out interest rates in this quarter as being a headwind. So can you give us how you're we should expect to see that impact syndication earned rates? Yes. I think you called out a number of the contributing factors that are the ultimate determinants of the fees that we earn on the syndication activities that we carry forward. Interest rate, we are going to see its impact work its way into the fee on a couple of dimensions. Firstly, I think it's going to create a higher hurdle rate in terms of a minimum level of acceptable interest returned that our syndication investors will be willing to take on a syndication transaction. So as we look to move that volume through those channels that we have established and continue to grow, we're going to find a higher price required to clear the market that will compress some of the fee opportunity that we would otherwise have. Secondly, the depreciation shield that is being purchased is of a lesser value at a lower interest rate. And so the combination of those two factors are what's leading us to believe that leading us to believe that we will be a bit more bearish in terms of the syndication fee yield that will be available to us as we make our way into the second half of this year. Okay. And net net net, the higher volume of syndicated assets is likely not enough to offset the negative impact of those factors? Yes. And back one of the big drivers here is obviously one, to syndicate all Armada paper to avoid any name concentration risk. And secondly, our continued pursuit of strength in the balance sheet and achieving that sub six times leverage, tangible leverage. So those are kind of two overarching themes as it relates to syndication. And to the extent that the deal economics are still attractive, happy to put more volume through the channel. But again, to your point, and this takes us back to all of those factors that need to be considered in terms of clients and the credit and the duration. Having that the right mix of factors is probably much more determinant of that ultimate fee revenue that is derived versus the fee rate itself. Great. Thank you very much. Thank you. The next question comes from Jeff Kwan with RBC Capital Markets. Please go ahead. Hi. Jay, you talked about earlier about that abrupt unexpected decline on the service revenue side. Can you clarify, was that kind of in that March time frame? Or was it in April? And if so, when about in April did you see that happen? More so in the March. Okay. And then just my other question was just I missed that earlier. Did you kind of stand by kind of around that 2,500,000,000 on the syndication volume side? And then just adding on, if the mix of vehicles that you're syndicating don't change, Is it just a matter of rates going higher that will bring the syndication rate back to where we would have been last year? Or is there some other factor that would do that? I think the primary determinant is indeed interest rate. If we hold all else equal, the compression that we anticipate is largely interest rate driven and we're just being plowed down into levels that we haven't seen in forever. And that is giving rise to certain behaviors and expectations in the marketplace that we think will again ultimately lead to a compression in our yields on those transactions for the second half of this year. And in terms of volume, Jeff, again, original guidance that we had provided was somewhere in the neighborhood of $2,500,000,000 $2,400,000,000 of volume. As we sit here at this juncture with the profile that we have for the business, with our strong desire to strengthen the balance sheet and move to that sub-six tangible leverage, it feels like we will be north of that $2,400,000,000 for 2020. Okay. And sorry, when we're talking rates, are we talking kind of the risk free rate? Or is it kind of the broader incorporating the spreads in the market? The underlying risk free rate. And off of that, then we have our investors setting their minimal acceptable rates per turn that they need on the transactions. Okay, perfect. Thank you. Thank you. The next question comes from Mario Mendoza with TD Securities. Please go ahead. Quick question on the expense the expenditures that the company incurs to generate the $180,000,000 in cost savings. I recall that the expectation is that you'd spend roughly the same amount to generate that 180,000,000 so $180,000,000 in expenses. By my math, you're at about $177,000,000 now. Is that right? And is the 180,000,000 still an appropriate benchmark to use? Excuse me. Your ratio is 100% correct. So we have been operating from the very beginning. We've got kind of a one:one ratio here for every dollar of run rate profitability improvement actions. We would expect to invest a dollar behind that. And to this quarter, we were able to generate $146,000,000 of excuse me, action $146,000,000 of run rate profitability improvement and did so with $145,000,000 worth of investment. So it will be our expectation, Mario, to exit this year with the full $180,000,000 of run rate profitability actioned and to keep our investment to that same $180,000,000 So the 177,000,000 that I was referring to, I guess maybe the error that I included in Q3 twenty eighteen when I perhaps shouldn't have included Q3 twenty eighteen? No, that's in there. So if you go to our supplemental and you'll see our on Page seven, Schedule 1.4, you'll see our Q1 results, 146,000,000 of firm rate profitability improvement action, 145,000,000 worth of investment and still targeting $180,000,000 worth of investment by the end of the year. So that ratio holds true and it's our ambition to continue to hold that true straight on through completion of the program. Thank you. This concludes the question and answer session. I would now like to turn the call back over to Mr. Forbes for any closing remarks. Thank you, operator. And once again, thanks to everyone for joining us here this evening. Strange times. We appreciate your patience. We appreciate your understanding of our circumstances as, again, we grapple with this rather unforeseen and unexpected pandemic. As always, we'll make ourselves readily available to use by way of follow-up for any additional questions or comments that you might have for me, Vito or Mike. In the interim, wish you and yours very well. Stay safe, stay well, and we'll look forward to talking in the very near future. Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for participating, and have a pleasant evening.