Earnings Call: Q3 2019

Nov 7, 2019

Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management Third Quarter twenty nineteen Financial Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask for analysts to ask questions. Element 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 you to the cautionary statement and risk factors of its most recent MD and A and AIF for 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 of any forward looking statements will prove to be correct. Element's earnings release, financial statements, MD and A, supplementary information document and today's call include references 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 would now like to turn the call over to Jay Forbes, President and Chief Executive Officer. Please go ahead, sir. Thank you, operator, and good morning to all of you joining us on the call to discuss our third quarter results, the progress we continue to make on our transformation and our outlook on the growth capabilities of our business. Since our last call in August, Element employees have continued to outperform expectations on our twenty seven month client centric journey to transform and to strengthen our organization. With thirteen months of work under our belts, we're quickly approaching the halfway point in our transformation, and I'm pleased to say that we're continuing to deliver for all of our stakeholders on all fronts. In the third quarter, our core business achieved quarter over quarter and year over year increases in adjusted operating income. We surpassed our year end 2019 transformation goal of actioning $100,000,000 in annual run rate pretax profitability improvements and increased our cumulative targets by 20% from $100,000,000 to $120,000,000 by the end of this year and from $150,000,000 to $180,000,000 by the 2020. We continue to syndicate tranches of our core earning assets to derisk our balance sheet, reducing our tangible leverage ratio while generating profitable new revenues, and we completed our in-depth examination of The U. S.-Canada market for fleet services. And based on the resulting insights and our views on the Mexican and ANZ market prospects, we believe that Element is capable of achieving global revenue growth of four to 6% annually. Lastly, we felt a great deal of pride and excitement with last week's announcement that Standard Employers initiated coverage of Element with a BBB investment grade credit rating with a stable outlook. This milestone furthers our stated objective of issuing bonds in The U. S. Unsecured corporate debt markets in the 2020 and speaks volumes to how far we've come in the past year. As I wrote to my letter to shareholders this quarter, I view the opportunity presented by Element's ongoing successful transformation program as the first of three waves of opportunity for our organization. Each subsequent wave builds on the learnings, improvements and momentum generated by the preceding wave. Transformation is the opportunity for Element to focus on its industry leading fleet management platform and to deliver the superior client experience our company is known for with consistency. This transformation has been our singular focus since we announced the program in October. And what a remarkable success it has been and continues to be. In the third quarter, we actioned an incremental $17,000,000 of profit improvement initiatives, bringing our cumulative total to $102,000,000 as of September 30. The initiatives action to date will improve Element's operating income by at least $70,000,000 in 2019 and by at least $90,000,000 in 2020. In other words, the improvements we are making to our business on behalf of our clients are also delivering improvement to Element's bottom line, and we're enjoying a healthy return on our investment in SAME. Having now surpassed our year end 2019 goal of $100,000,000 in action profit improvement, it bears repeating. We've increased our target to $120,000,000 for the end of this fourth quarter, and we've upsized our total transformation target from $150,000,000 to $180,000,000 of action run rate pretax profit improvements by year end 2020. We expect this 20% increase in our 2020 target to require a commensurate increase in onetime investments in transformation as well, moving the cumulative anticipated investment from 150,000,000 up to $180,000,000 As the first of three big waves of opportunity for Element, our transformation program is both growing and cresting. I couldn't be happier with the incredible efforts put forth by our employees, the outstanding leadership of my executive colleagues, and the resulting progress for our organization. Building on learnings, improvements, and momentum generated by our transformation, we identified a second wave of opportunity for Element. One comprised of syndication and working with at large, rapidly growing clients that we've been telling you about, and let's refer to them as Armada. The second wave of opportunity is building momentum. In the third quarter, we syndicated approximately $700,000,000 of fleet assets and in the process reduced our tangible leverage and generated over $23,000,000 of high margin revenue. In doing so, we achieved a tangible leverage ratio of 6.74 as at September 30. If we were to exclude the non recourse warehouse credit facility we created for our audit from the tangible leverage calculation, the adjusted ratio would fall to 6.39. The investment grade credit rating we received from S and P last week is in large part a result of the deleveraging already achieved by our syndication efforts. The S and P rating furthers the pursuit of our stated objective to issue bonds in The U. S. Unsecured corporate debt market in the first half of next year. Issuing bonds would allow us in turn to mature our capital structure by replacing our convertible debentures due in June 2020 with a more economical and appropriate form of financing. The end results in the not too distant future as a lower overall cost of capital for Element and a further strengthened and derisked balance sheet. Clearly, the second wave of opportunity for Element, syndication and Armada will continue to swell for us in 2020 and beyond. It is promising and exciting, and the associated teams are invigorated by the sheer scale and potential of the second wave of opportunity. The third wave of opportunity for Element is now on the horizon, and it is a strong, sustainable organic revenue growth. Our solid progress on the first two waves has encouraged us to advance our thinking regarding the nature and the rate of growth Element should aspire to achieve a top solidified, transformed operating platform and a strengthened, derisked balance sheet. Led by our commercial teams and with cross functional collaboration from across our businesses, we have completed a comprehensive study of The U. S.-Canada market for fleet management services. This study involved gathering and analyzing data regarding market segments, part penetration, pricing, and other industry dynamics gleaned from literally months of research as well as over 50 in-depth interviews with clients, prospective clients, and industry experts. The resulting insights are underpinning the development of our enhanced go to market strategy, which will take full advantage of Element's evolved capabilities as a result of the transformation. Based on the learnings to date and considering the growth prospects in both Mexico and ANZ, we believe that Element is capable of achieving global revenue growth of four to 6% annually. We anticipate being able to generate this growth by holding market share through improved client retention, by optimizing our sales processes with respect to existing and new clients throughout North America, better managing client profitability, leveraging our leadership position in the fast growing Mexican fleet market, using the company's strengthened financial position to convert self managed fleets to outsource programs in both private and public sectors and the periodic addition of mega fleets such as Armada. Our third quarter core business results contain glimpses of this growth potential. 11% growth in year over year Q3 net revenue and net servicing income 11% growth since this time last year in assets under management 31% growth in year over year Q3 adjusted operating income 42% growth in year over year Q3 originations and a remarkable 61% year over year growth in assets under management by our colleagues in Mexico, who continue to leverage Element's international platform to offer clients competitive economics and unmatched services. Our third wave of opportunity for long term growth is only beginning to take shape. There's every reason to believe we will have all it takes to fulfill our market leading platform's ample potential in 2020, 2021 and beyond. Before I turn the call over to Vito, a few comments on our formal process of selling nineteenth Capital. As we mentioned on the call last quarter, we've seen a softening of demand and thus pricing for our idle assets in nineteenth Capital over the last few months on accounts of the impact of tariffs and trade spats and a lot of trucked production by OEMs. Without knowing whether the current market softness is temporary or the new normal, we believe that it makes good sense to maximize the value of this noncore asset and enable Element leadership to remain focused on the three waves of substantial opportunity in front of our core business. We've not set a time frame for disposition. We commit to updating the market when a course of action has been decided. Until then, we don't intend to comment further other than to say that any disposition of nineteenth Capital will have zero impact on our current and future transformation success, on our continued deleveraging and the plans to further strengthen our balance sheet and lower our cost of capital or on our 2020 EPS guidance. With that, I'll invite Vito to provide you greater detail on our financial results. Thank you, Jay, and good morning, everyone. It is great to be with you this morning to talk through our Q3 results and the progress we are indeed making in our transformation strategy. Exciting times at Element these days, and thanks to the tremendous work and commitment of the entire team at Element, we have generated tremendous momentum. As you will have seen within our disclosures, our Q3 twenty nineteen core fleet adjusted operating income was $129,800,000 or $0.22 EPS, a meaningful increase of 30.5% versus prior year and 2.4% versus prior quarter. The strong performance is being driven by several factors. Let me start with a view of the movement in net earning assets in the quarter. I refer you to Section three point zero in our supplementary information, which walks you from an ending Q2 twenty nineteen position of $12,300,000,000 in core and of period earning assets to $12,000,000,000 as at the end of Q3. A point to note here is that notwithstanding syndicated volumes of 700,000,000 in the quarter, core earning assets reduced by only $300,000,000 due to strong activations of $1,600,000,000 offset by amortization of $900,000,000 and dispositions of $400,000,000 Another very strong indicator of our progress is, of course, originations. In Q3, originations totaled $2,100,000,000 41.7% increase over prior year and 16.2% increase over prior quarter. On a year to date basis, originations now total $5,600,000,000 a 20.4 increase over prior year. As we continue with our syndication strategy, assets under management becomes an increasingly important metric for us to focus on, and Section three point three and three point four of our supplementary provides detail on how this has progressed by quarter. Our core assets under management at the end of Q3 were $16,200,000,000 which represents a significant increase of $700,000,000 from last quarter. So whether you're talking about net earning assets, originations, assets under management, the strong performance across all of these metrics is reflective of continued success of our client retention efforts, first meaningful quarter of our MADA originations, strong growth in Mexico, and importantly, growth in all our geographies. Let me now turn to some of the P and L highlights for the quarter. Our core net revenue was $244,500,000 in Q3 twenty nineteen, an 11.1% increase, dollars 24,400,000.0 versus prior year, and down slightly, 3,900,000.0, from Q2 levels. As you're aware, the components of our core revenue are financing, service and syndication. Let me touch briefly on each of these. Net financing revenue was $99,200,000 in the quarter, a reduction of $3,200,000 or 3% from Q2 twenty nineteen, resulting, of course, from lower average net earning assets of $390,000,000 or 3%, a consistent NIM percentage. Q3 twenty nineteen was down $4,700,000 from Q3 twenty eighteen, mainly driven by the lower net earning assets due to syndication, combined with the effects of the previously disclosed one time swap gain in 2018 of $4,000,000 Overall, we remain pleased with our net financing revenue performance. Turning to net service income for Q3, dollars 122,200,000.0 representing a decrease of $2,100,000 over Q2 twenty nineteen, mainly driven by lower volumes due to seasonality, impacting maintenance and vehicle titling. While quarter over quarter performance was impacted by normal seasonality, year over year performance was not and showed strong growth of £12,400,000 or 11.3% over Q3 twenty eighteen across numerous products resulting from the continued progression and transformation initiatives as well as organic growth in our North American business. Now looking at the third revenue component, syndication. As Jay mentioned, Q3 volumes aggregated to approximately $700,000,000 down 7.7% from Q2, but syndication revenue increased 6.2% this quarter to a total of 23,100,000 The higher yield we realized on the syndicated assets in Q3 is reflective of high quality assets and the continued expansion of qualified syndication investors. Moving on to our core fleet expenses, and I'll direct you to Section 2.1 in our supplementary. Core adjusted operating expenses in Q3 aggregated to $114,700,000 for the quarter, a decrease of $7,000,000 from Q2 twenty nineteen and $6,000,000 from Q3 twenty eighteen. As you may recall, Q2 twenty nineteen was impacted by an adjustment in the amount of $4,200,000 to our year to date accrual related to our anticipated year end paper performance compensation as well as the timing of professional fees, which increased $3,100,000 During Q3, we continued to see improvements in operating expenses of 2,400,000 compared to Q2 that are directly attributable to our transformation program and $1,800,000 positive impact from currency exchange rates. Offsetting these savings are $1,800,000 in investments in growth areas, including ramping up our support for Armada as well as our continued growth in Mexico. Turning to the balance sheet quickly. Jay spoke to the impact that both syndication and improved earnings are having on our tangible leverage. Section point four point zero, excuse me, of our supplementary tracks the quarterly movement in our tangible leverage. We ended Q3 at six point seven four x, and we're targeting less than 6x at the end of quarter twenty twenty. Adjusting for our nonrecourse warehouse facility credit facility, our tangible leverage would fall to 6.39 this quarter. The investment grade rating we received from S and P, coupled with the existing investment grade ratings from Fitch, DBRS and Kroll, position us extremely well moving forward. Commensurate with an improving cash flow profile and a rapidly deleveraging profile, access to the unsecured debt market will give us flexibility and the opportunity to mature our capital structure moving forward. A few quarters back, Jay announced the forthcoming retirement of our EVP Treasurer, Karen Martin. The time has drawn near. Karen and her team have truly been the architects of the tremendous progress we have made across our balance sheet initiatives. Karen, it's been an absolute pleasure working alongside you for the last fourteen months, and I personally wanna thank you for your friendship, your patience, and I wish you all the best in your retirement. Before I hand the call back to Jay, consistent with my comments on the Q2 twenty nineteen earnings call, I do want to mention a couple of other very important metrics. Our consolidated return on equity was 11.5% for Q3 twenty nineteen. This is in line with our expectations for the quarter and continues to put us on track to achieve our target range of between thirteen and thirteen point five exiting 2020. And secondly, consolidated free cash flow in Q3 as depicted in section six of our supplementary information amounted to $122,000,000 an increase of $61,800,000 or 103% year over year. Lastly, remind you that this time there's no change in our 2020 EPS outlook. We expect to generate after tax adjusted operating income per share in the range of $1 to $1.05 With that, Jay, I'll hand the call back to you. Thanks, Vito. Listen, I couldn't be more pleased with the progress of our business and the efforts of our employees on all fronts. We're working hard, we're outperforming targets, and we're generating results for all of our stakeholders, our clients, our business, our investors, and indeed each other. Element is a more engaging and rewarding place to work, thanks to our people. While all of this is gratifying, our agenda remains fixed. We remain focused on our clients whose experience is at the heart of the transformation. We remain dogged in our pursuit of action profit improvements and delivering the associated benefits to our bottom line. We remain committed to further strengthen and delever our balance sheet, all the while lowering our cost of capital. And we remain determined to meet the needs and indeed exceed the expectations of Armada. With that, let's open up the floor to your questions. Thank you. We will now begin the analyst question and answer session. Our first question comes from Paul Holden with CIBC. Please go ahead. First question is with respect to the increased guidance around the transformation plan and the organic growth expectations, but then the 2020 adjusted EPS guidance not changing. Just wondering if you can kind of square that up for us. Maybe it's just simply a matter of timing, but would like to understand that a little bit better. Yes. Paul. Yes, when we come back to the $30,000,000 increase in transformation profitability improvements to be actioned in, 2020, a lot of that is very much related to timing. So, they're of generally the same ilk of the type of savings that we have been generating throughout 2019. So think about revenue growth through revenue assurance, think direct cost savings, through strategic sourcing, think OpEx reductions in terms of indirect procurement. And so a number of those items would have a bit more of a lag than if this was organizational changes and rules being eliminated and salary savings hitting the bottom line, almost immediately thereafter. And so it is very much, a bit of a lag. We envision tackling much of that in the 2020. And as a consequence, its full impact will be felt more in 2021 than 2020. Got it. That makes sense. And sort of the follow-up to that, Jay, you mentioned that your required investments would also be increasing by $30,000,000 Can you give us a sense of the nature of those investments specifically, what the $30,000,000 will be allocated to? Yeah. Again, it would have a very similar flavor to the spend that we're looking at in 2019, and skewing a little bit more towards, professional fees, especially IT consulting as we, effect process change, to create that kind of long lasting nature of the savings that we have identified, especially as we look at revenue assurance and strategic sourcing. Okay. Got it. What particularly caught my attention in your prepared remarks and in the press release was the comment around the Board considering options around best allocation of excess capital. I know that's something for the future. But I want to ask a couple of questions there, given it piqued my interest. Does that suggest you would contemplate M and A? It never seems to me that that was a big part of the go forward strategy here, but wondering if that's changed. And if it's not, what kind of past allocation of excess capital might you be considering? Yeah. So, you know, it's a little hard on the head to conceive, you know, this organization being in a position to think about the need for, and thus the options that are available to it, to allocate capital having, about a year ago, issued $345,000,000 worth of new equity. That was a point in time, allow us to indeed stabilize the balance sheet and of course, the efforts that we have undertaken, the combination of transformation and the cash flow productivity that has generated for the business, coupled with syndication, our ability to delever the balance sheet And lastly, through, the monetization of noncore assets, we have materially, decreased the indebtedness of the organization. And as we looked, over the course of 2020, see a continued decline. We're looking at a sub-six times tangible leverage ratio exiting 2020, and so quickly getting to the point optimum leverage. And at that point in time, obviously, we'll be in a position to have excess equity. And with a strong underlying cash flow profile of the business, an opportunity to you know, utilize that excess equity capacity, generally, in one of three ways, dividends, share buybacks, and or investments. You know, again, you know, this will be a decision that the board considers in 2020, and we'll be back to you in terms of the results of that deliberation. I I would, you know, signal that we are in the midst of transforming the business. We have stabilized it. We are strengthening it. And it's through the strengthening process making the platform more scalable as well as more resilient. And so while it is capable today of bearing a much heavier load than what might have been the case in the past, it is still strengthening. And so the organic growth prospects that we've highlighted for you in our disclosures this quarter are indicative of our bet. We believe there's ample low risk opportunity for strong profitable growth in this business through an organic growth strategy. And as a consequence, acquisitions are not in our purview at this particular point in time. Got it. And one final question for me on the same thing, the capital strength. How do you think about the $575,000,000 of converts coming due in June 2020, the free cash flow you're generating in the business, but now the flexibility to issue subordinated debt? I mean, my numbers would suggest that you could refinance the majority of the sub debt, or repay it with internally generated free cash flow. Is that assumption, correct? And how are you thinking about it? So, you know, as we've articulated in the past, we do not see the convertible debenture as either a cost efficient or appropriate component of our long term capital structure. And so removing the 575,000,000 of converts coming due next year from the capital structure has always been an ambition harbored by this leadership team, that the ability now to access The U. S. Bond market gives us a means to, readily facilitate that. As you well note, we have very strong cash flow, generating capabilities within the organization. And that will certainly be directed towards retiring some of the £575,000,000 At the same time, we think it's important to gain access to The U. S. Bond market as yet another funding facility for this organization, and we'd intend to have an issuance in that market in the first half of twenty twenty. Got it. Thank you very much. I'll leave it there. Thank you. Next question is from Geoff Kwan with RBC Capital Markets. Please go ahead. Hi, good morning. My first question was just your reference to growing the top line starting 2020 of the four percent to 6% and specifically the commentary around mega fleets and in sourcing. My thought was that this part of the industry tends to be a harder area to penetrate and try and win over those customers. I'm just wondering from your perspective, obviously, the company is in a much better position today than before, but what's driving your thought process on how you're able to penetrate these companies, whether or not that it is self managed or the mega fleets. Your references to contract wins and if there's any sort of line of sight on on stuff you think you have a good handle on, but have you been able to to win any of these types of customers so far? Yeah. Good morning, Jeff. And perhaps if if you would allow me, I'll just take a couple minutes maybe to share for for all, some of the details that we're going to be able to communicate to you with regards to the market analysis that we have recently conducted. So, you know, as we looked at The US Canada fleet market, we've determined that there's an estimated 21,000,000 vehicles in fleets across The United States and Canada, and that this, you know, fleet represents approximately 18,000,000,000 to $20,000,000,000 in annual net revenue opportunity for FMCs. A goodly amount of that remains self managed, I. E. Not, in the hands of FMCs. And so there's a large unpenetrated market that is available. For us, we have, traditionally targeted several sub segments. We've identified 16 different segments within this U. S. Canada marketplace. We've traditionally targeted a subset of that 16 segments, roughly one fifth of that market, about $4,000,000,000 of addressable revenue is what we've targeted. And with as you think about that $4,000,000,000 of addressable market, about half of it remains self managed. And this is the context, if you will, in which I will offer a response to your question. As we think about our growth strategy, the periodic addition of mega fleets and tackling self managed fleets are are two of the six different means by which we see this organization growing at a rate of four to 6%, a year. Our our first and foremost, this is about retention, keeping what we have, by delivering that consistent, superior client experience. We also see short term an opportunity to elevate our sales force effectiveness, and in doing so, the productivity and closing rate of that group so that we capture our fair share of opportunities. And the third piece that is, again, more immediate and thus capable of delivering short term growth is a focus on increasing client profitability. And there, I think share of wallet is a prime example. The other three aspects, one of which is Mexico, are more long term in nature. And so when we think about Mexico and the growth prospects that we've enjoyed to date, we continue to see a market that's expanding rapidly and offers continued opportunity for outsized growth. And then we round out with self managed fleets and the opportunity to address large and mid market fleets with a sales leaseback proposition, to take those fleets into the FMCs sphere, and in doing so, provide leasing and servicing, to these organizations that, to this point, have, owned and managed their own fleets. And we've done a great deal of work to understand, the value proposition that will be required by, clients, prospective clients in these two segments and are comfortable that we have not only the attributes, but indeed can build the associated capabilities, to be successful in converting these fleets from self managed, to clients of this organization. And then, you know, the much like we did with Armada, you know, we will position ourselves with a select group, a very finite population of potential mega fleet clients, organizations that whose size of fleet, whose complexity of needs are such that they're few and far between, the wrong relationships that need to be cultivated. And so that will be a parallel strategy, as we think about growth, alongside the other five thrusts that I've articulated. Okay. And so it something that the company has done since you've joined that puts you in a better position to capture? Or is it maybe there hasn't been as much focus trying to capture? I'm just trying to understand, what's changed as to how you think you can kinda capture those specific clients? Because presumably they're self managing for a reason. Yeah. I I'd say that, you know, the industry the industry has focused a lot of energy on the those organizations that have outsourced their fleets to FMCs and, you know, so a lot of energy has been devoted to stealing share as opposed to actually growing the market. And and again, for us, when we look at the addressable market, in the segments that we're that we're already concentrating in, we estimate the self managed fleets to be half the market. And those segments we're not participating in, rough, rough, rough two thirds of the market remains self managed. So we think there's an opportunity, to sharpen our value proposition, build out our sales force capabilities, to be more aggressive in selling into the c suite with a a very discreet value proposition, that will be compelling for the client and compelling for our investors. Have you had any conversations with these types of customers that give you that, you know, I'll call it, I guess, confidence that you think can make some inroads in that part of the market? Yeah. Okay. Just one last question I had was on on page 18 of the presentation. It was talking about seeing the first material impacts on the revenue side in 2020. Is that really a function of the areas that you've talked about that have been driving that? Is it going be like through higher originations? Is it service revenues, clients like Armada? Just trying to get a better sense as to where we see the growth within the various revenue buckets that you've got. Yes. You know, we're not going provide much more in the way of guidance and detail around that. But suffice it to say, as some of the aspects of the growth strategy are very short term in nature, allow us to get that secure those quick wins, build that confidence, build that momentum, and others are gonna require a little bit more, time upfront to, again, finalize the go to market plans, structure, compensation structures to provide the necessary training and development for our sales force, to ensure that they're, that they are well prepared for the opportunities we see in a large addressable market. Okay, great. Thank you. Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead. Good morning. Can you guys hear me okay? Yes. Yes. Thanks. Just really quickly on nineteenth Capital. Dollars $260,000,000 is what I saw in the Q2 slide for the residual value. Is that number still appropriate to use? I I'm yeah. I I'm not quite sure, what you're referencing, but, you know, for us, we we don't break that out per se, but, house or house, that that works. I'll try to be more more specific. On your Q2 slides where you said repositioning nineteenth Capital, you made a reference to we expect to recover as much as $100,000,000 of the $260,000,000 residual value. I I guess the question is, is is the residual value still $2.60, and how much of the 100,000,000 have you recovered? Yeah, Mario. It's Vito here. The what we've got in respect to the $2.60, we've got third party liability of approximately, call it, $1.40 and assets of roughly 400,000,000. So that $2.06 that's the reference to the February, and that still totally applies. In respect to the 100,000,000 that we had targeted, to date, we've collected approximately $60,000,000 of that $100,000,000 Okay. So that's not bad. Jay, you said exiting that business or getting rid of selling nineteenth Capital should have no effect on your leverage ratio. Would it be more appropriate to say that it could have no meaningful effect on your leverage ratio? Because presumably, if you sell it for less than the carrying value, it'd be at least a modest effect. Yeah. Exactly. And so, you know, what we're saying is, it has no impact on our continued deleveraging of the business. Okay. That that's helpful. And then Our communication program, our cash flow generation, is has the the sufficient magnitude and velocity, such that we could absorb any, write down of that asset should one, be required. Yeah. It that totally makes sense to me. You referred to four to 6% revenue growth going forward. That number also makes a lot of sense to me, but more for 2021 because I would have guessed that in 2020, there's still a lot of momentum from the syndication activities. So wouldn't it be fair to say that the 2020 revenue growth still looks north of 4% to 6%, it's more 2021 in a more steady state environment? Do you think that's right? I'll leave that to you. So for us, we're guiding you to a mid- to long term growth prospect for the organization and the rationale behind that in terms of the six different growth initiatives that we have. We certainly have great and strong momentum coming out of 2019 as it relates to, this whole new line of revenue being syndication. But Jeff, we're comfortable with the 4% to six percent guidance. Okay. Let me ask you in a different way. Is there any reason why syndication activity might decline from the current level the levels we've seen over the last two quarters? So what we, when we talked about syndication as an introductory conversation earlier this year, we offered a little bit of insight in terms of how we're thinking about syndication. And we started that house or mouse, we think we'll do 2 and a half billion dollars worth of syndication volume this year and in future years. So, you know, in terms of of sheer volume, we signaled that feels like a an appropriate level of activity that we could contemplate in 2019 and beyond. And then we said in terms of of yield on that volume, that will be a function of mix. And that mix in turn will be a function of Armada as well as the core assets, non Armada assets that we will syndicate. And the last thing we said about yield was that it, it will generally hold true in terms of consistency quarter over quarter, save q four, which tends to be a stronger year given year end tax planning needs of syndication investors. And so that that's that that that as as memory serves me, those were some of the points that we raised on syndication to help you better understand kind of this novel approach that we're taking to the business and to allow you to look at 2019, and extrapolate as to how that might, translate into 2020 results. Yeah. I I I guess we'll just I think you've given enough information. We have to just play with the numbers ourselves now, so I appreciate that. One final thing is, and far be it for me to impose my view on what should be treated as core or noncore, but but I certainly do have a view. Why would things like bonuses incentives in a given quarter be treated as noncore? And in a previous quarter, the bonuses and incentives were treated as core, so core expenses that is. Like, what changed in your view that would would cause a change and and what is core versus noncore? So I I I think there may be confusion here on your part, and apologies if we contributed to that. So so core noncore is the domination of the fleet management services business versus, for all intents and purposes, nineteenth Capital. And there would be no, bonuses attributed to nineteenth Capital that would ever be associated with the performance in the core business. So in terms of below the line in OpEx, As we look at below the line and the onetime investment that we're making in the business to generate the one fifty, now one eighty, of annual profitability improvements, we apportion the that piece of the annual incentive program that our employees are earning as a result of their, contribution to the transformation objectives. That piece falls below the line and is included with the other transformation program onetime investments, recognizing that, obviously, they won't be continuing, post 2020. So perhaps that's the the the piece that you're relating to. But for absent clarification, any bonus that is earned as a consequence of the core business falls to the core business results. Yeah. And I'll just add to that, Mary. I'm happy to also take it offline and provide you a bit more detail. Absolutely no inconsistency quarter to quarter. And and secondly, the accrual through the above the line is running at rates that in in excess of what a one time bonus would be across the organization. Okay. So Let me just ask it this way. On page 14 of your MD and A, says, additionally, these costs include transformation related costs, including bonus incentives and accruals associated with meeting transformation related targets. So I get what your point is here because they all relate to the transformation. Can I just ask it this way? How much how what was the quantum of bonus and expenses that were allocated to transformation related target or expenses in the quarter? On a year to date on a year to date basis, that transformation line clearly is majority of that line, relates to obviously severances and, and professional services. On a year to date basis, the bonuses being, attributed to transformation aggregate to 8 and a half million dollars year to date. And then just just clearly, you would expect that 8 and a half million dollars of bonuses to go away once the transformation is complete then? Absolutely. 100 Yeah. And and and for even greater clarity, the accrual above the line is Right. Higher than one would expect. You you know, we we provide the balanced scorecard as part of the supplemental disclosure. You can see, just how many of those metrics are outstanding. That in turn is a direct, contribution of our employees in terms of their energies, their intellect against, these few things that matter most to all of our stakeholders, and they're absolutely killing it. The performance that we're seeing in the organization is just nothing short of amazing. And with our tight alignment of pay and performance, our employees will be amply rewarded for their considerable effort, and that is reflected above the line in terms of an accrual for a short term incentive program that is well beyond the norm, and that is represented below the line for that portion of the SDIP program related to achieving the outstanding transformation benefits that they are. Our next question is from Brenna Phelan with Raymond James. Please go ahead. Hi, good morning. Hi Brenna. So one clarification question on the growth strategy and your identified addressable market that increased from 20% to 30%. Is that you is that moving down into small, medium sized fleets? Or is that you think you can address more segments? Or is that additional services that you think you can provide? Yeah. So it is, moving into adjacent segments, but those adjacent segments will not be small or micro. They will be, other adjacencies that we've, identified as we segmented the market into 16, different subsegments. Okay. Thank you. And turning to the free cash flow per share number of $0.28 in the quarter, the level of the noncash revenue expense adjustment of 33,900,000.0. Is that acceleration somewhat sustainable given what you've done to improve your profitability as the business continues to scale? Or maybe some color on the moving parts in that number? Yeah. Faye Brenda, thank you. Clearly, there's some lumpiness in that aspect of the the free cash flow, some seasonality. And, you know, I would say that, you know, I'd point you more directly to the increase in operating income as a a better proxy, obviously, for free cash flow improvement. And and maybe as we move into q four, across all these metrics, we'll also be showing a bit of a trailing twelve months, which I think gives us a bit of a more representative view of trending. So I'll stay away from the particulars from a, you know, an account on account basis, what drove that 30,000,000 on a quarter to quarter basis, but I'd call it effectively seasonal and timing. Okay. And then as you look to spending more on IT to better equip the organization to scale, how do you think about the ultimate breakdown of your expense base in fixed versus variable? How should we be thinking about operating leverage opportunity that you intend to build out? So as you will probably note, we've gone from 45% AOI margins this time last year to 53%. So we've had this significant margin expansion. And it has been doing in part to that combination of both growing the top line as well as driving down operating expenses. For us, everything that we're doing in terms of the stabilization and the strength of platform is done in the context of scalability. And so we believe that there's a number of different functionalities that the organization performs on behalf of its clients that are indeed readily scalable. Some aspects of our model, such as FPS, the actual client interface, is less scalable with each new client that comes on. There's a need for, additional FPS. So again, we would anticipate, that this is a model that will scale nicely, but we will nonetheless see some incremental expenses associated with growth. And in particular, you know, as you want to observe this, take a look at Mexico. So Mexico, we're seeing phenomenal growth there. It has increased its net earning assets. They effectively doubled them over the last two years. It is, in no way, shape, or form, doubled as staff complement or run rate operating expenses. We see some growth in Mexican, OpEx, but, nowhere near the growth that we're seeing in terms of originations or revenue. And so, again, there will be, kind of an underlying tenet of everything that we're doing, we're working to create an automated platform that scales well, but there will be, some incremental OpEx associated with growth. Thank you. That's very helpful. And last one for me. In your revenue growth goalposts of that 4% to 6%, is there anything in there that contemplates an initiative or a focus on electric vehicles? Thank you for raising that. You know, we we've talked about this on a a number of calls, and and I would have said to you that in my travels across the five regions that we operate and talking with clients from a variety of industries in those geographies. In recent quarters, the discussion around electric vehicles has been rather muted. It's interesting. Over the course of the last quarter, are starting to pick up, accelerate in terms of greater interest, not yet adoption, not even yet experimentation, but a greater interest in understanding, you know, the current state, the evolution, cost comparisons in terms of total cost of ownership of an ICE versus an electric vehicle. And so, you know, as a consequence, as part of our growth initiative, we will be dedicating, resources within our organization, to broaden, our understanding, of the economics associated with this, broaden, you know, our understanding of of the likelihood of adoption, across a variety of different, industries, as well as, you know, strengthening our ties to the OEMs, of electric vehicles as we prepare for the inevitable, shift, as as more of our clients contemplate adoption through pilot of electric vehicles go forward. Okay. So not specifically forming part of that four to 6%, but you're thinking about it? Yeah. We the electric vehicles would not, unto themselves, you know, rank as a a seventh area of growth for us as we think about the four to 6%. You know, three years from now, yeah, I think you're you're gonna see that emerge as an area that we will be working with our clients to advance their thinking, advance their adoption. But there's still a fair amount of of, one, cost differentiation, and two, intransigence on the part of clients to consider pilot on long life scale adoption of electric vehicles. Our next question from Jamie Gloin with National Bank Financial. Please go ahead. Hi, good morning. Is there any price inflation embedded in the 4% to 6% growth? And if so, how much? There is, and and there's a fair degree of complexity associated with that inflationary component depending on whether we're talking services or financing. So let's let's leave it that that has been considered as part of the equation, and and maybe Mike can get into the the the detail with you offline. Okay. And then, with respect to the comment around share of wallet, are you able to put some context around that, in the sense that, let's say, a typical Element client has 10 services outsourced and Element is providing three, four, five. Can you give us a little bit of a reference to what what that can mean? Yeah. And it's interesting. Depending on what geography you're in, our penetration of services varies considerably. So in some markets, the finance contract dominates, and services are are are kind of an all saran if they're even a consideration. And so we see submarkets, where, we we have a a significant book of business from the financing side of the house and actually do very little in the way of services. And so we see an opportunity, obviously, to take the innate abilities, support systems that we have put in place, to rapidly introduce and promote adoption of those services in those areas. Further, there are some markets that, certain of our services are far more penetrated than others, understanding why and leveraging those learnings for, again, promoting greater adoption in in the remaining geographies makes great sense for us. And lastly, we have we have a variety of clients that are services only, enjoy those relationships greatly, love ROV profile of those. And at the same time, there's an opportunity for us to put our balance sheet to work on their behalf and drive financing revenues for our organization. So, you know, again, looking at the full gamut of services that we provide, looking at the much stronger offering that we have to provide as a result of the efforts that we have undergone throughout 2019, we're feeling, very good about our opportunities to introduce proposition by way of incremental service offerings to our clients across the five geographies in which we will operate in. Okay. I'll leave it there. Thanks. Thank you. Our next question is from Tom MacKinnon with BMO Capital Markets. Please go ahead. Yes. Thanks very much. Good morning. Just on the revenue, 4% to 6% annual growth beginning in 2020. Just to be clear, I assume by revenue, you mean net revenue, which includes net financing revenue, servicing revenue, and syndication revenue? We do indeed. Okay. And then how much of the in terms of the profitability improvements, exiting 2019 at 01/20 and exiting 2020 at January, that's 60 improvement throughout the course of 2020. How much of that is in OpEx? And how much of that is in this net revenue? Tom, maybe I'll take that one, and thank you for giving me the opportunity. I think it's important, and this harkens back to some of the EPS questions that we're getting around why haven't you increased your EPS guidance. Really refer you, we've done we've got some really good feedback, obviously, from our supplementary. And I wanna just draw a couple of distinctions. One point zero talks to action versus delivery. And and, of course, you know, action is effectively as defined there in one point zero, which is when we take all steps required for an initiative to effectively deliver value. So when you hear us referring to the one zero two, which is actioned to date, and the one twenty, which we expect you know, is our projection for actioned through the 2019, and the one eighty, which is now the increased actioned through the period twenty twenty twenty. It's just that. It's actioned, and that that's reflected in 1.1. What we do for you in 1.2 is take the one zero two that we've actioned to date and then give you a profile of how that is gonna make its way through delivery in our p and l. And this is what Jeff Jay would have referenced, of course, in in his commentary, and we continue to be very, very transparent about it. So I'll take you there for a moment at 1.2, and you see that the one zero two action, as of now, will deliver $70,000,000 in f nineteen with 38 of that being OpEx reduction. So call it just between 5060%. And then of the one zero two action, we're saying 90, so an incremental $20,000,000 in 2020 related to what we've actioned to date. Clearly, we anticipate the action more, so the f twenty number will have the impact of that. So we're not giving guidance, so we're not giving you visibility to, hey. Of the one eighty, what is OpEx? But if you use the the detail that we're providing in what we've actioned to date and and the p and l components that we're providing there on one two, it's a it's a fair proxy. Okay. Now then assuming this OpEx is 50 to 60% of this stuff, then you're you're getting you have revenue improvements in your throughout this transformation. You're driving it back to four to 6%. Yeah. Just back to the four to 6%. You're gonna get a good chunk of this driven by just your transformation, you know, initiatives, at least in 2020 and maybe a bit into 2021. The four to six, to what extent I I look at this as being after you're finished with all this optimizing stuff that's it's embedded in your January target by the 2020. Because if if it didn't, we would assume that this 4% to six might even be a little bit lower post these improvements you get. Yes. Again, Tom, for us, we are guiding, you and the market, to expect 4% to 6% annual, net revenue growth for the organization beginning in 2020. Feeling very comfortable with that. And further, you know, have identified the pathways, by which we are are we drive our comfort, and recognize that the mix in terms of those six pathways will likely evolve, as we build our momentum, establish, our capabilities, and, go after, some of the longer term prospects that we've identified. Okay. All right. Thanks then. Thank you, Our next question is from Jeff Fenwick with Cormark Securities. Please go ahead. Hi there. I think a lot of the questions have been answered already. I guess maybe one question in that revenue discussion is just preference in terms of the mix and the nature of the revenue, meaning, you've been allowing the earning assets to taper a little bit as you're targeting your leverage, goal, a little more syndication revenue, obviously, that. As you go forward and you get to those leverage goals, are we going to see that inflection point where you begin to build assets on the balance sheet again? Or is there some preference in terms of mix between the two as we go forward? Yes, Geoff. As we remarked a little earlier, we would anticipate $2,500,000,000 a year of volume that we would do through syndication, recognizing the economics associated with that are rather compelling. So we put that out there as a bit of soft guidance, if you will, in terms of helping you understand the syndication profile for the business. And as we said when we introduced syndication, we're still going to use securitization as a funding vehicle, still very happy to hold those assets on our balance sheet. For us, having the duality of funding sources makes a lot of sense, especially as we're staring into a rather uncertain economic outlook. Having funding diversity recognized in the criticality of being able to finance our clients' fleets and those originations on an annual basis. It just makes sense for us to have that diversity diversification, and as a consequence, continuity of access to, funding. Fair question. And maybe just one last one here. The 180 targeted spending through next year, in aggregate. So as we enter 2021, does that all just go to zero then? Are we not anticipating we're we're basically saying that's the drop dead date for the transformation spend, and and we should be good to go starting Jan one, 2021. Thanks for raising that. You know, as we communicated from the outset, this is a twenty seven months, undertaking. It began 10/01/2018. It will finish 12/31/2020. And so, you know, as we've always done, we we temper, you know, our our you know, the performance, the progress that we've been able to make to this point in time. Couldn't be more pleased, couldn't be a greater source of pride for us in terms of what our colleagues have been able to accomplish. And yet, we do have five more quarters to complete as we think about this transformation journey. It will end 12/31/2020 complete in terms of the objectives that we've set for ourselves to deliver that consistent client experience, the modernization of the and stabilization of the underlying platform of the business, the strengthening of the balance sheet, all of that will be complete. And with that completion, the completion of the onetime investments to afford our investors, the 108,000,000 of run rate profitability improvement that we're committing to. Okay. Thank you. That's all I had. Thank you. This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.