Earnings Call: Q2 2019

Aug 1, 2019

Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management Second 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 questions. Please Thank you. Significant risks and uncertainties, and the company refers you to the cautionary statement and risk factors of its most recent MDMA and AIF for a description of these risks, uncertainties, and assumptions. Although management believes that the expectations reflected in these statements are reasonable, it can give no reassurance that the expectations of any forward looking statements will prove to be correct. Element's earnings release, financial statements, MD and A, supplementary information documents and today's call include references to non IFRS measures, which management believes are helpful to present the company and its operations in ways that are useful to investors. A reconciliation of these non IFRS measures to IFRS measures can be found in the MD and A. I would now like to turn the conference 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 this call to discuss our second quarter results and the progress that we continue to make on our transformation. Since our last call in May, we've continued to make great strides on our twenty seven month program to transform and strengthen Element. 10 in, we're seeing accelerating momentum on all fronts. In the second quarter, we delivered quarter over quarter and year over year increases in net revenue and adjusted operating income. We achieved excellent results in terms of our client retention as well as new client wins, significantly lowered our tangible leverage, made significant progress actioning and delivering profitability improvements through our transformation program and deepened our employees' engagement in the pursuit of our strategic objectives. As you know, our singular focus is ensuring the successful execution of our transformation plan, which in 2019 we think about as going back to basics. To that end, in Q2 we identified and actioned an incremental $15,000,000 of annual run rate pre tax profitability improvements. Having actioned $85,000,000 worth of such improvements to date, at the halfway point of 2019, we are fast approaching our target of $100,000,000 of action improvements by year end. Initiatives actioned to date will improve Element's operating income by $65,000,000 in 2019. Approximately CAD16 million of these improvements were delivered in Q2, slightly higher than what we had forecast last quarter. Further, we have invested CAD67 million in our transformation program to date, which is slightly less than expected. In other words, the improvements we're making to the business are creating great value for our bottom line. As you can see from our June year to date balanced scorecard, we're meeting or exceeding the aggressive targets we've set in advancement of our strategic objectives. Client retention is running 102% of target. And while we still have lots of initiatives planned to further improve our systems and processes through the remainder of our transformation, our ability to significantly increase client retention speaks volumes to the meaningful progress we're making towards consistently delivering a superior client experience. Our operational effectiveness and operational efficiency indices are both running materially ahead of their ambitious year to date targets, signaling that we're indeed making the basics better. Our balance sheet continues to strengthen with our tangible leverage ratio at 6.9 as at June 30, down sharply from 7.4 at March 31 and nearly down a full turn since year end. And we generated a return on equity of 11% this quarter off of core adjusted earnings per share of zero two one dollars so a $0.42 core adjusted EPS for the 2019. I can tell you, and hopefully these results show you, that our balanced scorecard and pay for performance systems are doing exactly what they're meant to do. They're aligning the entire focus and resources of the company to advance the few things that truly matter most. And in doing so, they've enabled us to achieve year to date results across every dimension of the business that are simply outstanding. Vito will drive into this more deeply in a moment, but I wanted to do my part to explain the high performance culture we're focusing on and indeed fostering here at Element. We have a strong and well established culture within this organisation, key aspects of which we want to preserve. At the same time, we, both management and the broader employee group, have determined that there are a number of cultural attributes that we will need to nurture to enjoy the full potential that this market leading organisation has available to it. In particular, we want our culture to be more open and transparent, more collaborative and more performance driven and accountable. To facilitate these cultural shifts, we've introduced a number of initiatives, not the least of which is the introduction of a new performance management tool, the balanced scorecard, to measure the annual progress that we're making on the attainment of our strategic objectives and a new annual incentive plan for all employees. And importantly, we've linked these two initiatives with our VALS scorecard performance, forming the basis for determining the annual incentive for every employee, including the executive. As a result, our pay for performance incentive plan aligns our employees in the common pursuit of our strategic priorities and the resultant enhancement to shareholder returns. Based on our business performance year to date and in anticipation of continued strong performance in the second half, we increased incentive compensation accruals this quarter. This increase in incentive compensation accrual is the main reason you'll see higher quarter over quarter operating expenses in the second quarter. This is one of those rare instances where one is pleased to see an unexpected increase in OpEx as it is representative of a business progressively exceeding its aggressive targets in pursuit of long term value creation. As a core fleet management business continues to stabilize and strengthen, we're seeing encouraging signs of growth in the business with more client wins across every geography. Fleet assets under management as at the end of the quarter showed increases across all geographies on a cost to currency basis. In The U. S. And Canada, we're seeing growth from a larger group of clients, including the one large rapidly growing client we first made mention of last quarter. At the same time, we're focused on laying the groundwork for our mid market strategy to generate growth beyond the enterprise segment. In Australia and New Zealand, despite the challenge of both competitive and economic headwinds, we remain pleased with the performance of our custom fleet business. We continue to win new clients and market share while prioritizing earnings over volume in the current business environment. Element Mexico also turned in another quarter of solid growth in earning assets as our team there leverages our international platform to offer clients competitive economics and unmatched services. And our efforts to generate overall growth in the core fleet business are being supported by an increasingly strong balance sheet. Having recently concluded the redemption of $345,000,000 of convertible debentures, our balance sheet is now materially strengthened and de risked from where it sat twelve or even six months ago. That said, we continue to consider ways to deleverage our balance sheet and lower our cost of funding. Thinking about 2020, we're focused on obtaining an additional US credit rating, which will in turn enable us to access The US unsecured bond market. This would allow Element to lower its cost of capital, further bolstering our already strong financial position. To this end, and in alignment with our efforts to manage client concentration risks and accelerate deleveraging, you will recall that last quarter we announced broadening our use of syndication as a source of funding. Syndication continues to generate new material recurring revenue on our income statement. In the second quarter, we syndicated approximately $750,000,000 of assets based on strong demand and supply. In doing so, we decreased tangible leverage by half a turn and generated $21,700,000 of revenue that will flow towards our bottom line. Finally, regarding our non core assets. As previously reported, our interest in the ECAP note was successfully sold in the quarter for proceeds equal to its carrying value of approximately $97,000,000 And a quick update on nineteenth Capital. We received approximately $20,000,000 of cash from the business in Q2, bringing the total cash generated by nineteenth Capital to approximately $50,000,000 which is in line with expectations. Regarding the prospects for cash generation from asset sales in the second half, we've seen some softening of demand and thus pricing over the last couple of months on account of the impact of tariffs and trade spats, a harsh winter, as well as a lot of truck production by OEMs. We're monitoring the market but not seeing anything that impacts our plans for the business as we look to realize the maximum value through an organized wind down. With that, I'll turn it over to Vito to provide greater detail on our financial results. Thank you, Jay, and good morning, everyone. It's great to be with you this morning to talk through our Q2 twenty nineteen results, which continue to show great momentum as we execute against our transformation strategy. As you all have seen within our disclosures, our Q2 twenty nineteen core fleet adjusted operating income was $126,700,000 or $0.21 EPS, up 26.5% versus prior year and 3.8% versus prior quarter. On a year to date basis, our core fleet adjusted operating income of $248,700,000 is up 32% versus the comparative 2018 period. The strong performance has been driven by a number of factors. Let me start with a view of the movement in net earning assets in the quarter. I refer you to schedule 3.2 on our supplementary information, which walks you from an ending Q1 twenty nineteen position of 12,700,000,000.0 in core end of period earning assets to 12,300,000,000.0 as at the end of Q2. The point to note here is that notwithstanding syndicated volumes of 800,000,000.0 in the quarter, core earning assets reduced by only $400,000,000 due to strong activations of 1,900,000,000.0 offset by amortization of $900,000,000 dispositions of $400,000,000 and changes in FX of $200,000,000 This reflects a strong quarter of organic growth across all of our geographies. Furthermore, originations in Q2 totaled 1,800,000,000.0, representing a 5.4% increase over prior year and 2.7% increase on a constant currency basis. On a year to date basis, originations totaled 3,500,000,000, a 10.5% increase over prior year and 6.8% on a current constant currency basis. The strong performance is reflective of the continued success of our customer attrition efforts and the underlying growth in all of our geographies. As we continue with our syndication strategy, assets under management becomes an increasingly important metric for us to focus on. And section three point four and three point five of our supplementary provides details on how this has progressed by quarter. Our core assets under management at the end of Q2 twenty nineteen was 15,500,000,000 a $200,000,000 increase over the Q1 twenty nineteen levels on a constant currency basis. Let me now turn to some of the P and L highlights for the quarter. Our core net revenue in Q2 was 248,400,000.0 a 4.5% increase versus prior quarter and a 15.1% increase versus prior year. As you know, the components of our core revenue are financing, service and syndication. Let me touch on each of these. Our net core financing revenue was $102,500,000 for the quarter, consistent with the prior quarter and slightly up on last year. Given the reduction in earning assets resulting from our syndication strategy, a flat quarter over quarter absolute financing revenue is an impressive result. The factors contributing to this rate improvement include in large part, the benefits of the revenue assurance work described in section one point zero of the supplementary and the higher quarter over quarter activations. Turning to syndication, Q2 volumes aggregated to $752,000,000 bringing our year to date total 1,240,000,000.00. Syndication revenue in the quarter totaled $21,700,000 a $4,500,000 increase or 26% over Q1 total of $17,200,000 We continue to be pleased with the economics we are realizing, recognizing that the yield on these syndicated assets will vary from quarter to quarter based on a number of factors including client and asset mix, lease term, etcetera. Continuing through to the last component of our revenue and that is net servicing revenue in Q2. It amounted to $124,200,000 up five percent versus Q1 twenty nineteen and eleven percent against prior year. Again, impressive result and the factors that contributed to the quarter over quarter increases in service revenue included higher maintenance billings and commission rates, higher fuel revenue from higher gas prices, improvement in our accident and safety management division and overall benefits being driven through transformation. So overall, I must say that although much, much work remains across all elements of our transformation, we are pleased with early indication and results across all of our revenue lines. Let's now turn to our core fleet expenses and I'll direct you to Section 2.1 in our supplementary. Core adjusted operating expenses in Q2 aggregated to $121,700,000 for the quarter, an increase of $6,000,000 from both Q1 twenty nineteen and Q2 twenty eighteen. As Jay has noted, the majority of this increase was driven by an adjustment in the amount of $4,200,000 to our year to date accrual related to our anticipated year end pay for performance compensation. In addition, the other item impact our quarter over quarter increase in reported operating expenses is the timing of professional fees, which increased by $3,100,000 These increases in costs were partly offset by the continued improvements in our transformation program, which drove $8,500,000 of operating expense reductions in the quarter, up 2.1 from the Q1 twenty nineteen levels. Turning to the balance sheet quickly, Jay spoke to the impact of both syndication and improved earnings are driving tangible leverage. Section four point zero of our supplementary tracks the quarterly movement in our tangible leverage. We ended Q2 at 6.92 X and we're targeting less than six point zero X at the end of calendar year 2020. It is important to note that we do expect the path to our year end 2020 target to be nonlinear and fluctuate based on anticipated originations for one large rapidly growing client in particular. Before I hand the call back to Jay, I do wanna mention a couple other very important metrics. Our consolidated return on equity was 11% for Q2 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 1313.5% exiting 2020. And secondly, consolidated free cash flow in Q2. As depicted in Section five of our supplementary information amounted to $108,200,000 an increase of $27,600,000 or 35 percent year on year. And lastly, remind you that there is no change in our 2020 EPS outlook. We expect to generate after tax adjusted operating income per share in the range of $1 to $1.5 With that, Jay, I'll hand it back to you. Thanks, Vito. I couldn't be more pleased with the progress of our business and the efforts of our employees on all fronts. Across Element, there is evidence of undeniable momentum that is steadily translating into results. But even as we celebrate our accomplishments to date, we must acknowledge that our work is far from done. Our focus for the remainder of 2019 is, as it must be, on ensuring this transformation and this year's cumulative $100,000,000 of profitability improvement is actioned, delivered and sustained. When the time comes to begin to pivot to growth in 2020, we will be doing so from the strongest possible position, one of market leadership underpinned by a strong, stable operating platform, offering a consistent and compelling client experience, a lower risk, lower cost capital structure and an engaged employee group that has been energized and strengthened in a successful pursuit of a truly transformed element. We look forward to sharing with you our thoughts on our growth strategy as part of next quarter's disclosure. In closing, I'd like to recognize Kieran Martin, who will be retiring later this year to pursue board work. Karen, who many of you will know, is our treasurer at Element. She has been an important part of our success over the years and in particular a great colleague to me over this past year. I want to thank Karen for all she has done and express the collective gratitude of everyone at Element for her selfless and tireless leadership. Now it's my pleasure to open the floor to your questions. Operator? Certainly. We will now begin the analyst question and answer session. Our first question comes from Geoff Kwan with RBC Capital Markets. Please go ahead. Hi, good morning. Just had a question on the higher compensation with relation to the performance. And just want to understand, was that expected kind of implicit in your guidance? Or would it not necessarily been reflective in the guidance trajectory? So in other words, paying this higher compensation could suggest guidance could be exceeded in 2020? Yes. So good morning, Jeff. The 2020 guidance assumed a normal course, if you will, in terms of variable compensation as it related to bonus plans. And by virtue of the great start that we've been able to get off on in terms of this first half, Obviously we have performed at levels far in excess of what we had planned and that is translating into a higher accrual around what we would anticipate as 2019 annual incentive program. So we budget and would have set guidance for 2020 based on paying annual incentive plan at Target And in 2019, we are certainly in the first half trending well beyond that. Okay. And then my second question was on the client wins that you're getting. Are these you're taking them from competitors? Are they ones that were being done in house that they're now outsourcing? Is this partly your push into the kind of the mid sized space in the industry? Just any color would be helpful. Yes. Truthfully, all of the above. We have held our own in terms of no major client losses in 2019. A great reversal of fortunes that reflects the organization's myopic focus on delivering a more consistent, superior client experience. And then in terms of wins, they've been a combination of taking clients from the competition, bringing clients on board that are new to FMCs and have also been well, there's been perhaps an overweighting to enterprise. There's been good bid market penetration as well. So truly all of the above have contributed to the organic growth that we're seeing. Okay. And if I can sneak in one very last question. Wondering if you can kind of comment that the large client that's growing really fast with you and partly why you're syndicating. Do you see this kind of relationship seeing vehicle growth in 2020? But also two is, do you think that there's an opportunity to work with that client to expand internationally with where they operate outside of The U. S? Yes, we added Slide 18 to the investor presentation deck just to give everyone a comprehensive understanding of the flow from receipt of order to the financing of a vehicle, given the predominance of syndication in 2019 and on a go forward basis. And I think one of the dynamics that will be more apparent as we enter into third quarter is that dynamic of moving from order receipt to being drafted by the OEMs and actually having an origination. And so the impact of this new large fast growing client on the business will probably have greater visibility as we move from that order receipt to the origination, through UpFest, and on to activation. And so as you can appreciate, as you ramp up with a new client, the receipt of the order is an important initiation, if you will, in terms of the relationship with that client and at the same time, it really doesn't manifest itself in tangible results for the organization in a meaningful way until you move through that origination upfit and into the actual lease activation. And so Q3 will allow you an opportunity for greater visibility in terms of the dynamics of that new relationship and how they might play out not only in 2019, but in 2020 as well. And like all of our clients, we love to do business with them internationally. So in those domains in which we operate, we're happy to leverage the relationship that we enjoy in one country to make introductions, to demonstrate our capabilities and to win their trust and thus their business in other domains. And we've been successful in establishing initial relationships in Canada and The US and taking those into Australia, New Zealand and Mexico. Very recently we had a very good relationship in Mexico that allowed us to move into a client position in The United States. And so we absolutely look for those opportunities to work across our five countries with those clients operating international mandates. And where we don't operate, we're delighted to engage with Arbao. We have a very tight go to market strategy with them so that we can offer our clients with far reaching geographical needs, proper coverage in those markets in which we may not have operations. Okay, great. Thank you. Our next question is from Paul Holden with CIBC. Please go ahead. Hi. Morning. So I have a few questions for you related to the operating expenses in quarter. First one is with respect to the professional fees paid. What projects would those be associated with? Hi, Paul. Good morning. It's Vito. You know, a a a series of, I'll call them, ordinary course related, initiatives within the organization and thus that's why they're above the line. You know, clearly having said that, there's been a tremendous amount of activity across all of our corporate services as new leadership team has, you know, taken steps that we believe are necessary to obviously continue to evolve our practices and and and support our initiatives. So nothing unusual that I would call out. You know, I would say, the timing of them are that you got some timing issues. So as I look at q one versus q two, you know, with both with the the timing of some of these professional fees and with the the the bonus accrual that we referred to, you know, if you if you were if you were normalizing q one and q two, and obviously a hypersensitivity and hyper focus on our cost as there should be both internally and externally. And I must say with each passing quarter, get increasingly confident that that we will be at and achieve our, obviously, our targets from a cost basis, you really get to a plus or minus, call it, 118 base, if you will, on a normalized basis, plus or minus $1,000,000 Okay. That's helpful. And I guess part of what I was getting to as well is to see if any any of these professional fees or other, costs related to maybe any ongoing, IT development, whether that's sort of, let's call it, back end work or front end work. Can you can you remind us where you are at in terms of project spend and and any further development on technology capabilities? No. Yeah. Paul Jay here. Good morning. Now these are all legal tax costs of, you know, of that ilk. In terms of IT development, we have set aside a goodly amount of the transformation budget, the $150,000,000 of onetime investment that, we are making to cover the the cost of of both application and hardware upgrades as a consequence of the transformation effort. And we'll also draw on our annual capital investment budget to fund those over the transformation period. So think about, IT as kind of reaching into one or two envelopes, part of the 151 time cost or, the annual capital investment budget for the organization. Professional fees in this organization are, again, slightly more towards lawyers and accountants. Got it. That's helpful. One final question if I can. You had or Vito had really indicated before that this indication yield would bounce around a bit quarter to quarter, but 60 basis point change on 3.5 last quarter. It's a pretty big move. So maybe you can help us think about how we can model this on an average run rate basis going forward? Yes. Thank you. As we did mention, the mix of the assets being syndicated coupled with market dynamics are going to create some variability in fee yield from quarter to quarter. Think about credit quality, Think about, the interest terms, the remaining asset lives as three factors that will create a degree of variability here in terms of that net fee calculation. And so, you know, again, two quarters in and with the mix shifting. So I'll come back to we are moving from, you know, big order intake to bigger originations and upfitting in onto activations with the new strategic relationship. And as we do, that's also going to change the mix in terms of syndication. So let's watch this play out for a couple more quarters, and I think it will be readily apparent as we do how this will kind of settle in in terms of a tighter range on what you can base your models on. Okay. And one follow-up then on that, if can, which is based on your three criteria, you would have had a pretty good idea of how Q2 would have looked. Was there something in Q2 particularly that suggests it was a lower net yield quarter based on those characteristics than what you would normally expect? No. Okay. Thank you. Thank you, Paul. Our next question is from Mario Mendonca with TD Securities. It sounds, Jay and Vito, from some of your comments that things are going to look a little different in Q3 'nineteen. And so what would be helpful to understand is, and I appreciate that you can't give us numbers on how important this new client is, but can you let us know if in Q2, any of that 752,000,000 in syndications, did any portion of that include the new client, or was that all the existing business? Good morning, Merrill. And, yes, in q two, the syndication revenue did include some, contribution from this new strategic relationship. Okay. And and so would it be fair to say that as this new strategic relationship ramps up in q three, that we should be prepared for the syndication yield to continue to trend down? Would that be a fair assumption? So, you know, we put a a number of stakes in the ground in terms of guidance, the 2020 EPS guidance, giving you an idea as to where we're targeting leverage and transformation agenda. So we have a number of stakes out there that I think give you a very good appreciation for the value creation opportunity inherent in the model. And then obviously providing you with these updates to give you tangible proof points about how we're advancing with them. So we wouldn't want to get into specific quarterly guidance in terms of syndication revenues and such. Again, back to Paul's point, have this is about the second quarter As we explained, we're going to be drawing historical assets as well as new originations into the flow. You can expect that that mix will change. And as the program ramps up and the flow of originations builds, we'll be drawing more from new flow as opposed to older originations. That's going to have impact in terms of the fee. So again, back to credit quality, the interest terms, remaining asset lives are kind of the three factors that one thinks about shifting that mix. As the quarters progress, I think it will be more obvious where the shoulders of the road are here in terms of the variability of those fees. And maybe just ask it slightly different way. Would this be the first quarter where the new strategic relationship, appeared in syndications and appeared in originations? Is this sort of the maybe the beginning of that, where we we just start to see the effect of the new relationship? Nope. So that it it it was around in q one as well is what you're suggesting? That is correct. Yes. Okay. And then my final question, you referred to pivoting to growth in 02/2020, and this is more philosophical. You say pivoting to growth. I mean, growth is great right now. So what what do you mean? Are you referring to just being more aggressive on acquisitions, maybe new products, client acquisitions? What what do you mean by pivoting to growth because the growth is fine now? Yeah. So, you know, one of the things that that has been a bit of a source of frustration for the leadership team is the lack of a clear visibility in terms of market dynamics and whether that there's a lot of factoids that float around the industry, but we want to have an in-depth understanding of the market, the market segmentation, the needs of each one of those segments, the competitive dynamics within each one of those segments, and how the needs of those particular market segments mesh with our current capabilities and what they will do to inform the capabilities that we will need to have in order for us to have a compelling value proposition to offer to those segments. And so that's an exercise that we have recently launched as an organization, an in-depth exploration of the Canadian and US marketplace to understand those segments, the needs within those segments and to originate clear go to market strategies for both enterprise and mid market. And so when we think about pivoting to growth, the transformation for all intents and purposes has been designed to stabilize and strengthen the platforms and deliver that consistent superior experience. With that, underway and clear plans to take that through to the 2020, we want to make sure that we're going to leverage this platform and direct its capabilities to those market segments in which again we can offer a differentiated compelling value proposition. So that's a pivot to growth is the deeper understanding of the market, the market dynamics and how we can compete. The shift in our go to market strategy to accommodate the learnings that will come out of that and then the reading of the organisation, the directing of the organisation towards those market opportunities. And so rough, rough, rough timing, we would expect to be in Q3 in a position to share with you our learnings from this exercise, our plans in terms of go to market, so that in turn would be able to allow our investors to understand the mid to long term growth prospects of this industry and this organization within the industry. Our next question is from Jamie Gloyn with National Bank Financial. First question is just on the syndication part of the business. I'm curious to learn if the $750,000,000 done today, is that does that indicate at all that you're tapping into perhaps that expanded markets outside of the $20,000,000,000 that you identify as being core to the fleet lease asset segment. Is there any indication that, that is occurring at this point? Good morning. And I would say, you know, the market that we have identified for you is absolutely the market that we're drawing on. That said, we think that our offering is additive to that market. So, you know, as you know, we have been a bit player in that in the past. We believe that we will be a sizable player, maybe the largest player in that segment as we go forward. And it is our aspiration to greatly enlarge that marketplace by virtue of the introduction of these high quality assets and high quality counterparty credits. So it is the one in the same, but we do expect at the same time that that market will be enlarged by the quality of and size of the program that we have envisioned here. Okay. And second question is on the servicing income during the quarter. A bit of a bump there and on an absolute basis, but also as a percentage of assets under management. I'm just wondering if there's any sort of seasonality related to that rate of revenue as a percentage of earning assets or if there's or not earning assets, sorry, assets under management or if there's anything else going on in quarter that would suggest that's more permanent or will change in future quarters. Yes. There's a as we look at it, as Peter has articulated, kind of two big drivers here, maintenance and fuel. The maintenance piece, unlike Q1 where we had seen a little bit of seasonality, that's not impacting the maintenance revenues in Q2. That said, the fuel revenues are being driven driven by higher U. S. Gas prices quarter over quarter. So under the broad definition of seasonality, there may be a bit of a positive lift in terms of just market dynamics as we see higher U. S. Gas prices. Okay. So we should expect to see that rate of servicing revenue as a percentage of AUM sort of tick up in Q2 and Q3 perhaps and then sort of fade back in Q4 similar to, I guess, like driving miles driven during the year? Is fair that way to look at it? Or are there other things in other parts of the servicing offering that is out there that is gonna create volatility? Yes. So that certainly is one way to look at it. And let's just say that we would anticipate consistent performance from our service product portfolio for the remainder of the year. Okay. Thank you. Thank you. Our next question is from Brenna Phelan with Raymond James. Please go ahead. Hi. Good morning. Morning. So I wanted I wanted to follow-up on the servicing income question. Should we be so helpful guide or commentary that think of it as consistent for the remainder of the year. But as you think about the goal of the transformation project, are you looking to ultimately increase the penetration of services on your asset base? Yes. So as part of the go to market refinement that we plan to do in the second half, certainly as we look at quick wins, one of the areas that will be certainly a pronounced area of focus for us is penetration and looking at the array of service offerings that we have today and how well penetrated they are with our client base. Suffice it to say that work has already begun to understand those dynamics and to provide that information to our sales team so that they can advance some of these more obvious opportunities. Okay. That's helpful. And then you referenced in your your commentary regarding Australia and New Zealand that you are focusing on profitable growth. Is it fair to assume that the competition in those markets is being more aggressive on pricing? And can you tell us what you're seeing across various geographies when you're going to market? Are competitors being aggressive on price? And how how are you thinking about that? Yeah. So, you know, in a and c, you know, we're blessed with the first rate team. Aaron Baxter has put together just a fantastic group of individuals that constitute the executive employee ranks of that organization. That You organization has been in business for more than forty years. They're well steeped in terms of market dynamics. And as a consequence, the first signs of a slowdown in the economy there made some decisions to position themselves to be one, at the forefront of clients' minds as they went out for business and two, to again manage the bottom line ahead of the top line growth. That said, with the disarray that had been introduced into the market through the failed merger of two large competitors, that has created opportunities and we have taken advantage of those opportunities to the benefit of client additions. And the other dynamic that it offer up on ANZ, obviously that's a region where we have residual value risk. The team again, well steeped in terms of managing that risk and the dynamics that we have talked about in the past are actually playing out there consistent with those conversations, I. E. The economy softens, consumers end up instead of buying a new car, looking at a used car and as a consequence used car values are not only holding, but actually appreciating, which is allowing us to continue to produce solid gains on sales and avoid any type of downside in terms of residual risk. So again, very well experienced team doing a great job for us in that marketplace and not seeing prices as a contributor to any type of slowdown in revenue instead kind of a more of the the general economic downturn. In Mexico, again, David Madrigal and the team there just shooting the lights out. I mean, just unbelievable growth. I've spent some time recently with the team in the field visiting with clients, the respect that they have been able to establish with those clients through the delivering of a very strong offering in that marketplace, a deep understanding of their business and a willingness to invest alongside them as serve the Mexico Element Team very well in terms of outperforming that market. And again, we haven't seen anything that would indicate that pricing is coming under any type of pressure there. Pricing in Canada and The US, know, listen, has been and continues to be competitive, which means that you need to have a comprehensive value proposition to put in front of that client. Part of that is that superior client experience, part of it is delivering it in a very consistent fashion, and part of it is being able to deliver the deep insights that are afforded to a company like us that has better, larger data sets that can provide the information to these fleets to lower the total cost of ownership. And so you'll note on one of our balanced scorecard metrics, the magnitude of cost savings that we've been able to identify and share with our clients is one of our measures of success, recognizing that as we think about differentiating ourselves. Again, our scale affords us great insight and being able to harvest those insights from our systems and provide those in a way in which they can be actioned by our clients is a true meaningful differentiator in the marketplace. So, yeah, price has been and will continue to be prominent in terms of the sales routine and yet, being able to demonstrate value through the provision of, high quality superior offerings is really the name of the game. Very helpful. Thank you. And then last one for me. On the tax rate, looked a little bit elevated in the quarter. Was there any any noise there to be aware of? Yeah. Thank you for raising the tax rate. Yeah. Effective tax rate of 19 and a half in the quarter versus 17 and a half for q one. So that did create a bit of headwind of approximately a half a cent EPS, through our q two results. I'd say a couple of things. In in q one, we had some one timers primarily out of the, Mexico group that provided a bit of a one time benefit. And I'd I'd guide you to a, you know, to a 19 call it 19 to 19 and a half for the balance of the year in effective tax rate. Okay. Thank you. Our next question is from John Aiken with Barclays. Please go ahead. Good morning. Just wanted to circle back on the formation of the annual incentive plan again. Vito, just to make sure that I'm crystal clear on this, the $4,200,000 increase in the quarter, did any of that relate to Q1 because this was the plan was implemented this quarter? Or had this plan been in place and we just got a bump on the accrual in the second quarter? The plan was in place from the beginning of the year. However, the adjustment reflects a six month adjustment. So to I think you're asking the question is, how much of that four relates to q one and q two? It relates it to a year to date adjustment. So it's reflective, our view, of a six month incremental cost related to where we project to be vis a vis our original base. That's great. Thank you. And so Vito, the plan then will, I guess, introduce a little more volatility on the compensation expense line To try to get help me map this out, if we were to progress on the object towards the objectives like we've seen to date, what impact would that have in terms of the accrual for bonus plan? And I'm not looking to the $1,000,000 but if we were to progress going forward with this flat line, with this increase, with this decrease, just to get a a little bit of sensitivity around this, if you wouldn't mind. Yeah. I I mean, I think I think, you know, we're gonna stop too short of telling you what we recruit to vis a vis original targets from a overall performance perspective. I'll just take you back to the balanced scorecard. I would guide you to, as the CFO of this organization, I am absolutely delighted that we're accruing more bonus because that's the gift that keeps being given as far as sustainable value creation going forward. So, you know, I'll I'll stay away from the quarter to quarter guidance on EPS, excuse me, on bonus accrual. This is a very good thing for the organization. Okay. And just one last question. When you are analyzing the financial performance of Element, do you look at any metrics like an efficiency ratio or operating leverage when going through? Is that important? Or is that, at this stage in the game, just not really within the metrics? Yeah. John Jay here. It really isn't within the metrics and again, it's back to this competitor set in the absence of any type of tangible competitor set. As we are rather unique out there in the marketplace, any real competitors or private entities and this type of information that would allow us to establish a benchmark and report against that just doesn't exist. So again, our decision early on was let's be readily transparent, let's create the supplemental, let's establish the targets and then provide full and complete visibility of our progress towards those established targets. And so there isn't a benchmark that we're working towards, but instead there is a series of targets that we've set for the organization that we think are the most appropriate to drive the right behaviors, the right outcomes and in the end the right shareholder value creation. As we go through the growth strategy and develop our go to market plans, we'll get an important input to our thinking around the comparator set and who might constitute valid comparisons as we better understand the market, the market dynamics and how we might envision our organic growth profile in the years to come. So with that piece of information coupled with what we've learned about the business thus far, I think we're going to be in a better position to start to point to other organisations that would serve as valid comparators and in doing so then be in a position to say, oh, and this metric, that metric and a third metric would be appropriate for you to use as you assess our performance vis a vis these other comparators. Understood. Thanks, Jay. Thanks, Vito. Thank you. Thank you, John. Our next question is from Tom MacKinnon with BMO Capital Markets. Please go ahead. Yes. Thanks very much. Good morning. Just following on the core OpEx, Vito, there's another segment in that waterfall chart on 2.1 is professional fees and other. We never did see that item in the waterfall chart for the first quarter. So this one's kind of new for us. How should we be thinking about that going forward? Is this going to be $3,100,000 each quarter going forward? And sort of with that all baked into your 2020 guidance as well. Yeah. Totally. I mean, again, bring us back to the 2020 guidance, and and we feel absolutely 100% comfortable with that. We're getting a fairly micro when we're talking about quarter to quarter movements. So what you see us doing is being, very, very obviously transparent, but detail oriented to give the external community as much color as we can. I just bring you back, Tom. This is a quarter over quarter variance. And, and I would say, you know, q one was probably abnormally low on profit fees. Q two is probably abnormally high on profit fees. So as I think about, you know, the smoothing over the course of the calendar year, I think there's probably nothing noteworthy to talk about when it comes to professional fees going forward. Okay. Thanks. Now the interest in net interest income and rental revenue, it's flat quarter over quarter, but the average earning assets were down about 3%. I think Jay had talked about competitive pricing environment, but that sounds like your growth yields are up. So maybe you can just is there anything unusual in the second quarter versus the first quarter there? No. You know, morning, Tom. It's Jay. I'll turn it over to Vito in a second. You know, the the piece that we need to remember is as we think about the transformation agenda, while it has a a deep bias to cost productivity, we also have revenue enhancements there. And one of the areas that we've talked about in the past is revenue assurance and identifying and stopping revenue leakage in the business. And that has been one area. We had talked maybe two quarters ago about the different areas of the business and the yield that we're seeing from the investment of time and resources. And revenue assurance has been one that has overproduced for us in terms of identifying areas in which we weren't billing to the extent that we could, should our clients for the delivery of the services that we are providing to them. And as we think about the revenue picture for the second quarter, some of the lift, some of the improvement in the effective NIM rate is indeed associated with that revenue leakage and addressing that revenue leakage. Yeah. And nothing much more to add, Jay. I just would take you to 1.2 in our supplementary, Tom, where you see us based on the action items of 85,000,000 to date articulate where we believe the resulting delivery of that 85,000,000 is hitting the revenue lines excuse me, hitting our P and L lines and just to Jay's point that know, that falls right to the bottom line. Okay. Thanks. And then finally, with respect to the the servicing income, should I assume we should be looking at at that as a percentage of the total AUM as opposed to just the earning assets. In in a sense, if this company became significantly more in terms of syndicated assets, in particular because of onboarding this, you know, strategic and fast growing client. Would are they would we anticipate any difference in terms of what the service revenue would be on the syndicated portion versus the earning assets portion? Or how should we be looking at that? Yeah. So the the service revenue is agnostic. It doesn't matter whether the asset has been securitized or syndicated. We generate the same service revenue from those assets. And so, yeah, the two kind of are separate and distinct in terms of the choice of funding vehicle, versus the generation of service revenue. So the package is offered to whether you syndicate or whether you lease? Yeah. The the choice to syndicate is ours, and so we will enter into the financing agreement with the client. And then, independent of that, we will decide whether or not we want to put that into our Chesapeake facility and securitize it or whether we want to syndicate that. Our next question is from Jeff Fenwick with Cormark Securities. Just to follow-up on some of the questions on syndication, just a quick one here. When we spoke earlier in the year, you had suggested an annual range on that securitization activity of about, I think, 2,400,000,000.0 was the number you gave us on an annual basis. So given the big uptick we saw in the quarter here, should we be expecting that number to be larger than over the course of 2019? Good morning, Jeff. No. Yes, we had guided you to roughly $2500000000.0.07 50 reflects kind of the maturation of the program and its ramp up and brings us to the $1,200,000,000 year to date, which is kind of halfway through the $2,400,000,000 that we guided you to. So house or mouse, the 2.4 feels good for 2019. And then maybe just big picture on OpEx. When I look back over the last couple of years, the core OpEx has run sort of in a range of about GBP 115,000,000 to 125,000,000 on a quarterly basis. I think, Bidu, you mentioned a normalized rate maybe being something around $118,000,000 And just thinking when you've removed many layers of management and looked for a lot of efficiencies in the business, I would be expecting to see that absolute spend on expenses begin to dip a little more meaningfully. So how should we be thinking about that in terms of those efforts you've been putting in, I guess, reinvestment into other areas of the business like compensation and incenting people and where that that that level of expense should dip and when do we start to see that occur over the next, say, four to six quarters. Yeah. So maybe for clarity and alignment, Vito's comment on the one eighteen was in reference to Q1 and Q2 being kind of if you were to normalize for a couple of the factors that have been the discussion points of the morning. And so I think, again, just want to align and be consistent on that. The 01/2015 in last year was what we would call an abnormally low mark in terms of our run rate. And then broadly, as you step back and think about the productivity of the business and the $65,000,000 of transformation benefit that will impact the bottom line in 2019 alone, we'll reference you back to the $1 to $1.05 EPS guidance for 2020, which reflects again us being able to not only achieve the $100,000,000 of action, the $65,000,000 delivered, but continue that transformative agenda and just continue to identify and deliver meaningful improvements in 2020. Okay. And guess that's the goal for me is to try and square what's happening here on the OpEx line with that EPS guidance And to get there, when I look at it, if you're having modest revenue growth, and it looks like that OpEx number needs to fall fairly reasonably significantly to get you down the path towards hitting that EPS number in '20. Is that fair to say? Yes. And again, good progression on that. And I always kind of like referencing and one of the reasons we put it into the supplementary, our consolidated free cash flow. If you look at Page 15, you'll see a year over year increase in free cash flow of 35%. That's kind of the asset test as to whether or not the stuff is quote unquote real. And 35% increase in the free cash flow, I think it kind of demonstrates just how tangible these improvements are. This concludes the question and answer session. I would like to turn the call back over to Mr. Forbes for any closing remarks. Thanks everyone for joining us this morning. Much appreciate your participation and wish you the very best for the remainder of the summer. This concludes today's conference call. You may disconnect your lines. Thank you for participating,