Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management Third Quarter 2019 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 for analysts to ask questions. To join the question queue, you may press star one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star zero. 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&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&A, supplementary information document, and today's call include references to non-IFRS measures, which management believe 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&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 27-month client-centric journey to transform and to strengthen our organization. With 13 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 CAD 100 million in annual run rate pre-tax profitability improvements, increased our cumulative targets by 20%, from CAD 100 million to CAD 120 million by the end of this year, and from CAD 150 million to CAD 180 million by the end of 2020. We continued to syndicate structures of our core earning assets to de-risk our balance sheet, reducing our tangible leverage ratio while generating profitable new revenues. We completed our in-depth examination of the U.S.-Canada market for fleet services. 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 4% to 6% annually.
Lastly, we felt a great deal of pride and excitement with last week's announcement that Standard & Poor's 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 first half of 2020 and speaks volumes to how far we've come in the past year. As I wrote in 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 of last year, and what a remarkable success it has been and continues to be. In the third quarter, we actioned an incremental CAD 17 million of profit improvement initiatives, bringing our cumulative total to CAD 102 million as of September 30th. The initiatives actioned to date will improve Element's operating income by at least CAD 70 million in 2019 and by at least CAD 90 million 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 CAD 100 million in action profit improvement, it bears repeating. We've increased our target to CAD 120 million for the end of this fourth quarter, and we've upsized our total transformation target from CAD 150 million-CAD 180 million of action run rate pre-tax profit improvements by year-end 2020.
We expect this 20% increase in our 2020 target to require a commensurate increase in one-time investment. As well, with the cumulative anticipated investment from CAD 150 million up to CAD 180 million. 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 that large, rapidly growing client that we've been telling you about. Let's refer to them as Armada. The second wave of opportunity is building momentum.
In the third quarter, we syndicated approximately CAD 700 million of fleet assets, and in the process, reduced our tangible leverage and generated over CAD 23 million of high-margin revenue. In doing so, we achieved a tangible leverage ratio of 6.74 as at September 30th. If we were to exclude the non-recourse warehouse credit facility we created for Armada from the tangible leverage calculation, the adjusted ratio would fall to 6.39. The investment-grade credit rating we received from S&P last week is, in large part, a result of the de-leveraging already achieved by our syndication efforts. The S&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 result, in the not too distant future, is a lower overall cost of capital for Element and a further strengthened and de-risked 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 atop a solidified, transformed operating platform and a strengthened, de-risked 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, our 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 4%-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 outsourced 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. 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 19th Capital. As we mentioned on the call last quarter, we've seen a softening of demand, and thus pricing, for our idle assets in 19th Capital over the last few months on accounts of the impact of tariffs and trade spats, and a lot of truck 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 non-core 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 timeframe 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 19th Capital will have zero impact on our current and future transformation success, on our continued de-leveraging, 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, 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 '19 core fleet adjusted operating income was $129.8 million, or CAD 0.22 EPS, a meaningful increase of 30.5% versus prior year, 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 3.0 in our supplementary information, which walks you from an ending Q2 2019 position of CAD 12.3 billion in core end-of-period earning assets to CAD 12 billion as at the end of Q3. A point to note here is that notwithstanding syndicated volumes of CAD 0.7 billion in the quarter, core earning assets reduced by only CAD 0.3 billion due to strong activations of CAD 1.6 billion, offset by amortization of CAD 0.9 billion and dispositions of CAD 0.4 billion. Another very strong indicator of our progress is, of course, originations. In Q3, originations totaled CAD 2.1 billion, 41.7% increase over prior year, and 16.2% increase over prior quarter. On a year-to-date basis, originations now total CAD 5.6 billion, 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. Section 3.3 and 3.4 of our supplementary provides detail on how this has progressed by quarter. Our core assets under management at the end of Q3 were CAD 16.2 billion, which represents a significant increase of CAD 700 million from last quarter. 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 Armada's originations, strong growth in Mexico, and importantly, underlying growth in all our geographies. Let me now turn to some of the P&L highlights for the quarter. Our core net revenue was CAD 244.5 million in Q3 2019, an 11.1% increase, CAD 24.4 million versus prior year, and down slightly CAD 3.9 million 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 CAD 99.2 million in the quarter, a reduction of CAD 3.2 million or 3% from Q2 2019, resulting, of course, from lower average net earning assets of CAD 390 million or 3%, a consistent NIM percentage.
Q3 2019 was down CAD 4.7 million from Q3 2018, mainly driven by the lower net earning assets due to syndication, combined with the effects of the previously disclosed one-time swap gain in Q3 of 2018 of CAD 4 million. Overall, we remain pleased with our net financing revenue performance. Turning to net service income for Q3, CAD 122.2 million, representing a decrease of CAD 2.1 million over Q2 2019, 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 CAD 12.4 million or 11.3% over Q3 2018 across numerous products, resulting from the continued progression and transformation initiatives, as well as organic growth in our North American business. Looking at the third revenue component, syndication. As Jay mentioned, Q3 volumes aggregated to approximately CAD 700 million, down 7.7% from Q2, but syndication revenue increased 6.2% this quarter to a total of CAD 23.1 million. 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 CAD 114.7 million for the quarter, a decrease of CAD 7 million from Q2 2019, and CAD 6 million from Q3 2018.
As you may recall, Q2 2019 was impacted by an adjustment in the amount of $4.2 million to our year-to-date accrual related to our anticipated year-end pay for performance compensation, as well as the timing of professional fees, which increased $3.1 million. During Q3, we continued to see improvements in operating expenses of $2.4 million compared to Q2 that are directly attributable to our transformation program, and $1.8 million positive impact from currency exchange rates. Offsetting these savings are CAD 1.8 million 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 4.0 of our supplementary tracks the quarterly movement in our tangible leverage.
We ended Q3 at 6.74x, and we're targeting less than 6x at the end of quarter 2020. Adjusting for our non-recourse warehouse credit facility, our tangible leverage would fall to 6.39 this quarter. The investment-grade rating we received from S&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 de-leveraging 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. That time is drawing 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 14 months, and I personally want to 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, and consistent with my comments on the Q2 2019 earnings call, I do want to mention a couple of other very important metrics. Our consolidated return on equity was 11.5% for Q3 2019. This is in line with our expectations for the quarter and continues to put us on track to achieve our target range of between 13 and 13.5 exiting 2020.
Secondly, consolidated free cash flow in Q3, as depicted in Section six of our supplementary information, amounted to CAD 122 million, an increase of CAD 61.8 million or 103% year-over-year. Lastly, I 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 CAD 1-CAD 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 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 de-lever our balance sheet, all the while lowering our cost of capital. 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. To join the question queue, you may press star one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star two. We will pause for a moment as callers join the queue. 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.
Yeah. Good morning, Paul. When you come back to the CAD 30 million increase in transformation profitability improvements to be actioned in 2020, a lot of that is very much related to timing. They're of generally the same ilk of the type of savings that we have been generating throughout 2019. Think about revenue growth through revenue assurance, think direct cost savings through strategic sourcing, think OpEx direct procurement. A number of those items would have a bit more of a lag than if this was organizational changes and roles being eliminated and salary savings hitting the bottom line almost immediately thereafter. It is very much a bit of a lag. We envision tackling much of that in the second half of 2020, and as a consequence, its full impact will be felt more in 2021 than 2020.
Got it. That makes sense. Sort of the follow-up to that, Jay, you mentioned that your required investments would also be increasing by CAD 30 million. Can you give us a sense of the nature of those investments, specifically what the CAD 30 million will be allocated to?
Yeah. 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, and 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, want to ask a couple of questions there, given it piqued my interest. Does that suggest you would contemplate M&A? It never seems to me that that was a big part of the go-forward strategy here, wondering if that's changed. If it's not, what kind of best allocation of excess capital might you be considering?
Yeah. It's a little hard on the head to conceive 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 CAD 345 million worth of new equity. That was a point in time allow us to indeed stabilize the balance sheet and in the 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 non-core assets, we have materially decreased the indebtedness of the organization. As we looked over the course of 2020, we see a continued decline. We're looking at a sub six times tangible leverage ratio exiting 2020.
Quickly getting to the point of 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 utilize that excess equity capacity generally in one of three ways, dividends, share buybacks, and/or investments. Again, this will be a decision that the board considers in 2020. We'll be back to you in terms of the results of that deliberation. I would signal that we are in the midst of transforming the business.
We have stabilized it. We are strengthening it. It's through the strengthening process, making the platform more scalable, as well as more resilient. 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. The organic growth prospects that we've highlighted for you in our disclosures this quarter are indicative of our bent. We believe there's ample low risk opportunity for strong, profitable growth in this business through an organic growth strategy. As a consequence, acquisitions are not in our purview at this particular point in time.
Got it. Thank you. One final question for me on the same thing, the capital strength. How do you think about the CAD 575 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? 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?
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. Removing the CAD 575 million Converts coming due next year from the capital structure has always been an ambition harbored by this leadership team. The ability now to access the U.S. bond market gives us 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 CAD 575 million. At the same time, we think it important to gain access to the U.S. bond market as yet another funding facility for this organization, and would intend to have an issuance in that market in the first half of 2020.
Got it. Thank you very much. I'll leave it there.
Thank you.
Our 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 4%-6%, and specifically the commentary around mega fleets and insourcing. 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's in a much better position today than before, but what's driving your thought process and how you're able to penetrate these companies, whether or not that is self-managed or the mega fleets? Your references to contract wins, and if there's any sort of line of sight on stuff you think you have a good handle on, but have you been able to win any of these types of customers so far?
Good morning, Geoff. Perhaps if you would allow me, I'll just take a couple minutes maybe to share 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. As we looked at the U.S., Canada fleet market, we've determined that there's an estimated 21 million vehicles in fleets across the United States and Canada, and that this fleet represents approximately CAD 18 billion-CAD 20 billion 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, or about CAD 4 billion of addressable revenue is what we've targeted. As you think about that CAD 4 billion of addressable market, about half of it remains self-managed. 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 two of the six different means by which we see this organization growing at a rate of 4%-6% a year. 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. The third piece that is, again, more immediate and thus capable of delivering short-term growth is a focus on increasing client profitability. There, think share of wallet as a prime example. The other three aspects, one of which is Mexico, are more long-term in nature. 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. We round out with self-managed fleets, and the opportunity to address large and mid-market fleets with a sale- leaseback proposition to take those fleets into the FMC sphere.
In doing so, provide leasing and servicing to these organizations that, to this point, have owned and managed their own fleets. We've done a great deal of work to understand the value proposition that will be required by 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. Much like we did with Armada, we will position ourselves with a select group, a very finite population of potential mega fleet clients, organizations whose size of fleet, whose complexity of needs are such that they're few and far between. They're long relationships that need to be cultivated. That will be a parallel strategy as we think about growth, alongside the other five thrusts that I've articulated.
Okay. Is it something that the company has done since you've joined that puts you in a better position to capture? 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 capture those specific clients, because presumably they're self-managing for a reason.
Yeah, I'd say that the industry has focused a lot of energy on those organizations that have outsourced their fleets to FMCs. A lot of energy has been devoted to stealing share as opposed to actually growing the market. For us, when we look at the addressable market in the segments that we're already concentrating in, we estimate the self-managed fleets to be half the market. In those segments we're not participating in, rough, two-thirds of the market remains self-managed. 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 very discrete 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, I'll call it, I guess, confidence that you think can make some inroads in that part of the market?
Yeah.
Just one last question I had was 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? If it can be 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.
Yeah. We're probably not going to provide much more in the way of guidance and detail around that, but suffice it to say, some of the aspects of the growth strategy are very short-term in nature, allow us to secure those quick wins, build that confidence, build that momentum, and others are going to require a little bit more time upfront to, again, finalize the go-to-market plan, structure compensation structures that provide the necessary training and development for our sales force to ensure that they're 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?
Yep.
Yeah.
Thanks. Just really quickly on 19th Capital. CAD 260 million is what I saw on the Q2 slides for the residual value. Is that number still appropriate to use?
I'm not quite sure what you're referencing, but for us, we don't break that out per se, but how else that works.
I'll try to be more specific. On your Q2 slides where you said repositioning 19th Capital, you made a reference to, we expect to recover as much as CAD 100 million of the CAD 260 million residual value. I guess the question is the residual value still CAD 260, and how much of the CAD 100 million have you recovered?
Yeah, Mario, it is Vito here. What we have got in respect to the 260, we have got third-party liability of approximately, call it 140, and assets of roughly CAD 400 million. That is the reference to the 260, and that still totally applies. In respect to the 100 million that we had targeted, to date, we have collected approximately CAD 60 million of that 100 million.
Okay. That's not bad. Now, Jay, you said exiting that business or selling 19th 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? Presumably, if you sell it for less than the carrying value, there'd be at least a modest effect.
Yeah, exactly. What we're saying is it has no impact on our continued deleveraging of the business.
Okay. That's helpful.
Our certification program, our cash flow generation has the sufficient magnitude and velocity such that we could absorb
That totally makes sense to me. You refer to 4% to 6% revenue growth going forward. That number also makes a lot of sense to me, but more for 2021, because I would've guessed that in 2020, there's still a lot of momentum from the syndication activities. 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. 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. Yeah, we're comfortable with the 4%-6% guidance.
Okay. Let me ask it 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?
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. We think we'll do CAD 2.5 billion worth of syndication volume this year and in future years. In terms of sheer volume, we signaled that feels like an appropriate level of activity that we could contemplate in 2019 and beyond. We said in terms 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.
The last thing we said about yield was that it will generally hold true in terms of consistency quarter over quarter, save Q4, which tends to be a stronger yield given year-end tax planning needs of syndication investors. 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 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 non-core, but I certainly do have a view. Why would things like bonuses and incentives in a given quarter be treated as non-core, and in a previous quarter, the bonuses, incentives were treated as core? Core expenses, that is. What changed in your view that would cause a change in what is core versus non-core?
I think there may be confusion here on your part, and apologies if we contributed to that. Core/non-core is the delineation of the fleet management services business versus, for all intents and purposes, 19th Capital. There would be no bonuses attributed to 19th Capital that would ever be associated with performance in the core business. In terms of below the line in OpEx, as we look at below the line and the one-time investment that we're making in the business to generate the CAD 150, now CAD 180 of annual profitability improvements, we apportion 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 one-time investments, recognizing that obviously they won't be continuing post-2020. Perhaps that's the piece that you're relating to. For absolute clarification, any bonus that is earned as a consequence of the core business falls to the core business results.
Yeah, I'll just add to that, Mario, happy to also take it offline and provide you a bit more detail. Absolutely no inconsistency quarter to quarter. Secondly, the accrual through the above the line is running at rates that in excess of what a one-time bonus would be across the organization.
Let me just ask it this way. On page 14 of your MD&A it says, "Additionally, these costs include transformation related costs, including bonus incentives and accruals associated with meeting transformation related targets." I get what your point is here because they all relate to the transformation. Can I just ask it this way? 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 basis, that transformation line clearly is the majority of that line relates to obviously severances and professional services. On a year-to-date basis, the bonuses being attributed to transformation aggregate to CAD 8.5 million. Year-to-date.
Just clearly, you would expect that CAD 8.5 million of bonuses to go away once the transformation is complete, then?
Absolutely.
100%.
Yeah.
Okay.
For even greater clarity, the accrual above the line is.
Running hot.
Much higher than one would expect. 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 the 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. With our tight alignment of pay and performance, our employees will be amply rewarded for their considerable effort. 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 STIP program related to achieving the outstanding transformation benefits as they are.
Okay, thank you. That totally satisfies my questions. Thank you, appreciate it.
Welcome. Mario.
Our next question is from Brenna Phelan with Raymond James. Please go ahead.
Hi, good morning.
Hi, Brenna.
One clarification question on the growth strategy and your identified addressable market. That increase from 20% to 30%, 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. It is moving into adjacent segments. 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 sub-segments.
Okay. Thank you. Turning to the free cash flow per share number of CAD 0.28 in the quarter, the level of the non-cash revenue expense adjustment of CAD 33.9 million, 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, Phelan. Brenna, thank you. Clearly, there's some lumpiness in that aspect of the free cash flow, some seasonality, and I would say that I'd point you more directly to the increase in operating income as a better proxy, obviously, for free cash flow improvement. Maybe as we move into Q4, across all these metrics, we'll also be showing a bit of a trailing 12 months, which I think gives us a more representative view of trending. I'll stay away from the particulars from an account basis, what drove that CAD 30 million on a quarter-to-quarter basis, but I'd call it effectively seasonal and timing.
Okay. As you look to the Enhanced Profitability Plan, 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 the operating leverage opportunity that you intend to build out?
Yeah. As you will probably note, we've gone from 45% to AOI margins this time last year to 53%. We've had this significant margin expansion. It has been due 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 strengthening of the platform is done in the context of scalability. 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.
Again, we would anticipate that this is a model that will scale nicely, but we will nonetheless see some incremental expenses associated with growth. In particular, as you want to observe this, take a look at Mexico. We're seeing phenomenal growth there. It has increased its net earning assets as they effectively doubled them over the last two years. It has in no way, shape, or form doubled its 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. Again, there will be, as kind of an underlying tenet of everything that we're doing, we're looking to create an automated platform that scales well, but there will be some incremental OpEx associated with growth.
Thank you. That's very helpful. Last one from me. In your revenue growth goalposts of that 4%-6%, is there anything in there that contemplates an initiative or a focus on electric vehicles?
Thank you for raising that. We've talked about this on a number of calls, and I would've said to you that in my travels across the five regions that we operate in, 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, things are starting to pick up, accelerate in terms of greater interest. Not yet adoption, not even yet experimentation, but a greater interest in understanding the current state, the evolution, cost comparisons in terms of total cost of ownership of an ICE versus an electric vehicle.
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 our understanding of the likelihood of adoption across a variety of different industries as well as strengthening our ties to the OEMs of electric vehicles as we prepare for the inevitable shift as more of our clients contemplate adoption through pilot of electric vehicles going forward.
Okay. Not specifically forming part of that 4%-6%, but you're thinking about it.
Yeah. The electric vehicles would not unto themselves rank as a seventh area of growth for us as we think about the 4%-6%. Three years from now, yeah, I think you're going to see that emerge as an area that we will be working with our clients to advance their thinking and advance their adoption. There's still a fair amount of, one, cost differentiation, and two, intransigence on the part of clients to consider pilot, let alone wide-scale adoption of electric vehicles.
Okay. Thank you very much.
Thank you.
Our next question is from Jaeme Gloyn with National Bank Financial. Please go ahead.
Hi. Good morning. Is there any price inflation embedded in the 4%-6% growth? If so, how much?
There is, and there's a fair degree of complexity associated with that inflationary component, depending on whether we're talking services or financing. Let's leave it that that has been considered as part of the equation, and maybe Mike can get into the detail with you offline.
Okay. 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 that can mean?
Yeah. It's interesting. Depending on what geography you're in, our penetration of services varies considerably. In some markets, the finance contract dominates, and services are kind of an also-ran if they're even a consideration. We see some markets where we have a significant book of business from the financing side of the house and actually do very little in the way of services. We see an opportunity, obviously, to take the innate abilities, the support systems that we have put in place, to rapidly introduce and promote adoption of those services in those areas. Further, there's some markets that certain of our services are far more penetrated than others. Understanding why and leveraging those learnings.
Again, promoting greater adoption in the remaining geographies makes great sense for us. Lastly, we have a variety of clients that are services only. Enjoy those relationships greatly. Love our profile with those and at the same time, there is an opportunity for us to put our balance sheet to work on their behalf and drive financing revenues for our organization. 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 a compelling value proposition by way of incremental service offerings to our clients across the five geographies in which we 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.
Yeah. Thanks very much. Good morning. Just on the revenue 4%-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. How much of the, in terms of the profitability improvements exiting 2019 at CAD 120 and exiting 2020 at CAD 180, that's CAD 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. Thank you for giving me the opportunity. I think it's important. This hearkens back to some of the EPS questions that we're getting around why haven't you increased your EPS guidance? We've got some really good feedback, obviously, from our supplementary. I want to just draw a couple of distinctions. 1.0 talks to action versus delivery. Of course, action is effectively as defined there in 1.0, which is when we take all steps required for an initiative to effectively deliver value. When you hear us referring to the 102, which is actioned to date, and the 120, which is our projection for actioned through the end of 2019, and the 180, which is now the increased actioned through the period 2020, it's just that, it's actioned, and that's reflected in 1.1.
What we do for you in 1.2 is take the 102 that we've actioned to date and then give you a profile of how that is going to make its way through delivery in our P&L. This is what Jay would've referenced, of course, in his commentary, and we continue to be very transparent about it. I'll take you there for a moment on 1.2, and you see that the 102 actioned as of now will deliver CAD 70 million in FY 2019, with 38 of that being OpEx reduction. Call it just between 50% and 60%.
Of the 102 actioned, we're saying 90, so an incremental CAD 20 million in 2020 related to what we've actioned to date. Clearly, we anticipate to action more, so the FY 2020 number will have the impact of that. We're not giving guidance, so we're not giving you visibility to, hey, of the CAD 180, what is OpEx? If you use the detail that we're providing in what we've actioned to date and the P&L components that we're providing there in 1.2, it's a fair proxy.
Okay. Assuming this OpEx is 50%-60% of this stuff, you have revenue improvements.
[crosstalk]
Yeah, just back to this 4%-6%. You're going to get a good chunk of this driven by just your transformation initiatives at least in 2020 and maybe a bit into 2021. The 4%-6%, I look at this as being after you're finished with all this optimizing stuff that is embedded in your 180 target by the end of 2020. If it didn't, we would assume that this 4%-6% might even be a little bit lower post these improvements you get.
Yeah. Again, Tom, for us, we are guiding you and the market to expect 4%-6% annual net revenue growth for the organization beginning in 2020. Feeling very comfortable with that, and further have identified the pathways by which we derive our comfort. 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 offsetting 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? Is there some preference in terms of mix between the two as we go forward?
Yeah, Jeff. As we remarked a little earlier, we would anticipate CAD 2.5 billion a year of volume that we would do through syndication, recognizing the economics associated with that are rather compelling. 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. 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, recognizing 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 diversification, and as a consequence, continuity of access to funding.
Great question. Maybe just one last one here. The CAD 180 target of spending through next year in aggregate. As we enter 2021, does that all just go to zero? Are we not anticipating? We're basically saying that's the drop-dead date for the transformation spend, and we should be good to go starting January 1, 2021.
Thanks for raising that. As we communicated from the outset, this is a 27-month undertaking. It began October 1st of 2018. It will finish December 31st, 2020. As we've always done, we temper 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. We do have five more quarters to complete as we think about this transformation journey.
It will end December 31st, 2020, complete in terms of the objectives that we've set for ourselves to deliver that consistent client experience, the modernization and stabilization of the underlying platform of the business, the strengthening of the balance sheet. All of that will be complete. With that completion, the completion of the one-time investments to afford our investors the CAD 180 million 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.