Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management third quarter 2022 financial and operating results conference call. As a reminder, all participants are in listen only mode, and the conference is being recorded. After the prepared remarks, there will be an opportunity for analysts to ask questions. To join or rejoin the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 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 statements and risk factors in its year-end and most recent MD&A, as well as its most recent 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 reflected in any forward-looking statements will prove to be correct. Element's earnings press release, financial statements, MD&A, supplementary information document, quarterly investor presentation, and today's call include references to non-GAAP measures, which management believes are helpful to present the company and its operations in ways that are useful to investors, or a reconciliation of these non-GAAP 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 of Element Fleet Management. Please go ahead, sir.
Good morning to all of you joining us on the call to discuss another record set of quarterly results for Element, our full year 2023 results guidance and outlook, and a few familiar topics we want to reiterate to stakeholders, given the current macroeconomic environment. Frank and I will be very brief up front to afford ample time for your questions this morning. As you can imagine, we're very pleased with Element's third quarter performance, which is the direct result of our people's ongoing hard work and sharp focus on our clients and their needs. We expect Element to perform even better next year, as reflected in the 2023 guidance that we've offered, which Frank will take you through momentarily.
Management and the board recently completed our annual review process, where we reconfirmed the organization's continued commitment to our three strategic priorities being organic revenue growth atop a scalable operating platform, advancing, excuse me, our capital lighter business model, and returning excess equity to our shareholders. We updated our three-year forward view of our performance and the key metrics by which we measure achievement against these priorities and our optimism and confidence are evident in two outcomes. First, we're increasing our baseline expected organic net revenue growth range from 4%-6% to 6%-8% annually. This is based on the demonstrated capabilities of our commercial organization everywhere we operate, as well as our confidence in sustained demand for Element's compelling client value proposition.
Second, the board has endorsed management's outlook on resulting Free Cash Flow generation per share and increased the common dividend 29%, reflecting same from CAD 0.31 - CAD 0.40 annually per share. Let me turn it over to Frank now to discuss our Q3 results and next year's guidance.
Thank you, Jay, and good morning, everyone. Q3 was another record quarter, and it's great to be able to continue demonstrating Element's ability to deliver on our client value proposition and generate value for our shareholders in the process. I'm going to talk exclusively about our organic results for the quarter, which means they exclude the contribution of net revenue that we don't expect to generate next year or in future years. I'm also going to cite growth exclusively in constant currency. The US dollar strengthened against the Canadian dollar throughout the quarter, which benefited Q3 2022 over both prior quarter and prior year results. Constant currency eliminates those benefits, making for cleaner comparability between periods. As you'll hear, even after you control for these tailwinds of non-recurring revenue and favorable FX, pure third quarter performance was outstanding.
We grew net revenue 10.2% over Q3 last year, and our scalable operating platform magnified that into 16.3% adjusted operating income growth. Operating margins expanded 288 basis points from last year to 54.2% for the quarter. After tax adjusted earnings per share were CAD 0.26 for Q3, a CAD 0.05 per share or 24% improvement over Q3 last year. Again, just a reminder that I'm citing organic results in constant currency throughout here. Double-clicking on year-over-year net revenue growth, it was primarily driven by services revenue, which is a pillar of our capital lighter business model. Services revenue was up 16.4% from Q3 last year, reflecting all three forms of share of wallet growth.
One, penetration with existing clients who are increasingly turning to Element services for help managing their growing fleet operating costs. Two, increased utilization of our vehicle maintenance management service, working with clients to drive more proactive maintenance to reduce downtime or more costly repairs given the elevated average age of clients' fleets due to new vehicle production delays. Lastly, inflationary increases in the cost of parts and labor, which benefit Element as a function of our cost-plus business. Please see section 1.3 of this quarter's supplementary information document for more details of services revenue growth. The second pillar of our capital-lighter business model is syndication. We syndicated CAD 599 million of assets in the third quarter and generated CAD 13.5 million of syndication revenue or a 2.25% yield on the assets we syndicated.
We were able to deliver this volume and yield despite rising rates due to the attractiveness of this very low risk asset class to our syndication partners by syndicating more floating rate leases and by leveraging our bespoke hedging program to protect yields of known fixed rate syndication names from the time between lease activation and syndication. Syndication is an economically beneficial and reliable source of recurring high margin revenue for Element, accelerating the velocity of net revenue and cash flow, allowing for investment in the business or returning capital to shareholders via dividends and share repurchases, thereby driving higher ROE and free cash per share growth. Let me round out my comments on net revenue by noting the 5.4% year-over-year growth in net financing revenue, or NFR.
Q3 performance was stronger this year than last year due to increased gains on sale in ANZ and Mexico and improvements in yield on net earning assets, which is largely a function of proportionate mix shifts in favor of ANZ and Mexico assets as we syndicate U.S. assets and now some Canadian leases. It's important to note that we expect NFR to soften materially in the fourth quarter this year because the CAD 9 million one-time benefit in this Q3 will not recur next quarter, and there is some pressure on our interest expenses from increasing our local currency funding structure in Mexico as previously discussed. We also anticipate gains on sale in ANZ to moderate in Q4, which is common for that market due to the combination of summer and Christmas holidays. This puts additional pressure on Q4 NFR.
We are forecasting full-year 2023 NFR as essentially flat year-over-year. This is largely a consequence of the planned increase in syndication volumes. Both our net financing revenue and syndication forecasts are tied to OEM production, enabling the achievement of our originations forecasts. The outlook for NFR is also a product of increasing our local currency funding in Mexico in 2023. All the other components of NFR, including gains on sale, are expected to grow full year over full year next year. We view legging into Mexican peso funding as a strategic evolution of our business. Given the anticipated continued annual double-digit growth of our Mexico platform for the foreseeable future, we believe it's prudent to mitigate FX risk exposure. Lastly, with respect to Q4 2022 results, we can expect adjusted operating expenses at the high end of the range implied by our guidance.
This is a strategic decision. With line of sight to materially more long-term organic annual growth than we previously thought possible, we want to ensure our commercial teams are appropriately resourced to anchor this trajectory. Accordingly, we will be reinvesting some of the non-recurring revenue earned this year into commercial capabilities over the next five quarters, beginning this Q4 2022. Having said that, we expect to continue to expand our operating margins year-over-year in 2023. Returning to our Q3 2022 results, our net revenue growth atop a scalable operating platform, primarily driven by the capital lighter side of our business model, generated CAD 0.34 of organic Free Cash Flow per share in the third quarter, which is CAD 0.07 per share more than Q3 last year.
Our per share metrics are helped by repurchases pursuant to our NCIB, which we'll renew this year for the remainder of 2022 and better part of 2023. The combination of common share buybacks and dividends in Q3 had us return CAD 92.3 million in cash to our investors. That return of capital will remain generous going forward, given yesterday's announcement of our 29% common dividend increase to CAD 0.40 per share annually. CAD 0.40 per share puts us right in the midpoint of our 25%-35% payout range based on last twelve months Free Cash Flow per share.
In addition to predictable and predictably growing common share dividends as well as buybacks, we will return capital to our preferred share investors next year and in 2024 with the redemption of our remaining outstanding three series of preferred shares, thereby further optimizing our capital structure and benefiting our common shareholders. Finally, as promised last quarter, we are providing full year 2023 results guidance, which is detailed throughout yesterday's disclosures. We expect 2023 originations of approximately CAD 7.5 billion-CAD 8 billion, in keeping with our belief that OEM production volumes will begin to normalize by the second half of next year. Tracking the anticipated growth in originations with robust demand continuing for our assets, we plan to syndicate CAD 4 billion-CAD 4.5 billion of assets, predominantly in the U.S., but also again in Canada next year.
We are actively working towards Mexico syndications in 2024. All told, we expect to deliver strong results in growth with net revenue of $1.14 billion-$1.17 billion in net revenues, operating margins of 54%-55%, adjusted operating income of $615 million-$645 million, adjusted EPS of $1.12-$1.17 per share, and Free Cash Flow of $1.45-$1.50 per share for the full year of 2023. These results are in constant currency based on a Canadian exchange dollar of 1.29, which is our proxy for the full year of 2022 average exchange rate. Should Canadian to U.S. dollar exchange rates stay at current levels, that will provide upside to our reported earnings relative to guidance.
Relative to the top end of our 2022 organic guidance, our 2023 guidance implies 6%-9% net revenue growth. Approximately 100 basis points of operating margin expansion and 16%-20% cash flow per share growth. We anticipate reporting full-year organic results in March that are at or near the top end of our current 2022 guidance range. Before I turn it back to Jay, I want to say how much I look forward to seeing as many of you as possible in person at this management team's first ever Element Investor Day, which will take place on Tuesday, November 29th at the Design Exchange Venue in Toronto and simultaneously online. Please take a moment to pre-register your intent to participate, even if you only plan to join us virtually. There are hyperlinks to registration process in yesterday's news release of our Q3 results and on our IR website. Back to you, Jay.
Thanks, Frank. I'm equally excited for our Investor Day at the end of the month. We have a talented lineup of our senior leaders thoroughly preparing to deep dive on multiple areas of Element's business for you, and it's going to be a great event. Knowing the scope of content that we're writing for Investor Day, I want to focus my few remaining remarks on topics that we don't plan to spotlight again in three weeks time. The first is automotive OEM production capacity. Our outlook has not changed from that which we shared with you this time last year, which is that we expect OEM production volumes to normalize in the second half of next year.
The recovery in supply volume through the end of 2023 underpins our $7 and a half to $8 billion origination guidance, as well as our ability to syndicate $ 4 - $4 and a half billion of lease assets, as Frank has mentioned. On both counts, the demand is undeniable. Our clients continue to place orders, sustaining our $ 2.9 billion global backlog. Our syndication investors continue to demonstrate their appetite for our assets in the U.S. as well as now in Canada. Second topic I want to cover off is industry consolidation. It's encouraging to see new investors discover and indeed endorse what we have known and been acting on for years, namely the attractive dynamics of our industry and resilience of the fleet management business model.
We believe further consolidation within our industry by established long-term, return-driven investors bodes well for the health of the industry and as market leader, the health of Element's business. Moreover, the current round of industry consolidation has and will continue to afford us ample opportunity to steal market share as other FMCs are forced to focus on the complexities of integration or acclimating to new ownership. That chapter of Element story is behind us, so we can maintain a singular focus on delivering a consistent, superior service experience that makes the complex simple for our current clients as well as our future client prospects. Again, for the record on this subject, we have been happy to be sitting on the sidelines as this deal-making has taken place.
We see no need for Element to pursue higher risk inorganic growth when an estimated half to two-thirds of the addressable markets in which we operate remain unpenetrated. We have a proven strategy and ability to convert self-managed fleets into Element clients across those markets. The third and final category of topics I want to remind you of is Element's proven resilience in the face of macroeconomic trends that challenge many other organizations. In fact, our business benefits from some of these dynamics. The best example is inflation. Our cost-plus business model results in net revenue growth with the rise of vehicle, parts, and labor costs. At the same time, our market-leading scale and strategic consulting services, both of which you'll hear much more about in our Investor Day, make our client value proposition even more compelling in an inflationary environment.
With approximately 1.5 million vehicles under management, we have deep data to inform cost optimization strategies, significant purchasing power to drive down price for clients, and an extensive service supplier network to afford client options that are both cost efficient as well as convenient for their drivers. This unparalleled ability to lower the total cost of operating a fleet helps Element's commercial efforts during economic downturns as well. Businesses that currently self-manage their fleets are particularly interested in the cost-saving advantages associated with outsourcing. Rising interest rates make our securitization and syndication-enabled financing all the more compelling to clients as well as prospects. That said, our net financing revenue performance is largely agnostic to interest rate movements by virtue of our matched funding strategy.
Finally, our largely blue-chip client base, our disciplined underwriting process, which is focused on credit, quality first, collateral a distant second, as well as the criticality of fleet vehicles to the business of our clients, allow Element to boast negligible levels of real economic loss in the rare case a client does default. I dive deeper into all these features of our business model in my letter to shareholders this quarter.
In closing, I hope to see you in person at our Investor Day, where we'll show you how each of our five organic revenue growth drivers work, how our scalable operating platform underpins a consistent superior client experience, all the while expanding operating margins, and how we advance our capital-light business model to enhance return on equity and liberate cash flow to return to our shareholders. You'll leave our Investor Day with a better understanding of the unique characteristics of Element's business and a deeper appreciation for the compelling attributes of our value proposition. For now, let's turn it over to your questions.
Thank you. We will now begin the analyst question-and-answer session. In order to afford all analysts the opportunity to ask questions, Element kindly requests that analysts limit themselves to two questions in live dialogue with management. Should an analyst have additional questions, please rejoin the queue. To join or rejoin the queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. The first question comes from Geoffrey Kwan of RBC Capital Markets. Please go ahead.
Hi. Good morning. You've talked for a while about having your sales team focus on market share wins, given there was a significant opportunity there, and at the same time, self-managed fleet opportunity was a bit hampered by things like you couldn't travel or companies didn't want to necessarily see people in person. I know you talked about it a little bit in the opening remarks, but can you give a little bit more detail on the progress winning these self-managed fleet clients and also how you're allocating the priorities of the sales team between market share wins versus self-managed fleet targets?
Morning, Geoffrey Kwan. I would say, you know, to begin with the easing of restrictions that we've seen throughout 2022, that we've seen a commensurate increase in the mobility of our sales force and as a consequence, their ability to engage with both prospective clients that are currently clients of our competitors, as well as self-managed fleets that own and operate their own fleets. The environment has been far more facilitative in terms of an opportunity for our people to engage firsthand with client prospects.
We've seen that in terms of the number of meetings, face-to-face meetings that are being taken, as well as the number of client prospects that are showing up at industry forums and events, as they educate themselves on the benefits that might accrue with them outsourcing their fleets to organizations like ourselves. Absolutely, from a macro perspective, the environment has been very facilitative for increased levels of engagement of our commercial team with client prospects. At the same time as we introduce the value proposition to those clients, I would say the macroeconomic environment has also been quite enabling in terms of the receptivity that our commercial people are seeing in terms of client approaches. Our ability to reduce, materially reduce the total cost of operation of those fleets and, you know, times of greater inflation is compelling.
Our ability to provide cost-effective access to capital is all the more compelling. Many of these organizations are also wrestling with their own ESG agendas, looking at sustainability and thus wondering what a pathway to electrification might bring. Our ability to help them make a more informed decision has also been a major opportunity to both open the door and further discussions with them. I say, yeah, we're absolutely seeing an increased ability to engage this self-managed fleet opportunity and increased interest on their part in terms of the macroeconomic environment and how our value proposition aligns with that.
Our ability to convert those is also well evident, not only in Mexico, where we traditionally have done very well in this marketplace, but more recently in U.S. and Canada, where we've also been able to convert these prospects into bona fide clients consuming both financing as well as services from our organization.
Okay, thanks. Just my other question was, just about this whole reallocating some of the one-time revenues, from this year into higher OpEx over the next five quarters, you know, to drive that higher organic revenue benchmark. You know, it's gonna dampen kind of your 2023 EPS guidance, but really more I wanted to get some clarity as to, you know, what are you spending on the higher OpEx? I know Frank had a little bit of comments. Is it just more salespeople? Is it, you know, changes to systems or just what exactly are you spending this money on that is gonna drive the higher organic revenue growth?
Yeah. Geoffrey Kwan, as you know, as we began this pivot to growth back in 2021, you know, for us it was gonna be kind of business as usual in Mexico and sustaining 20% annual revenue growth in that region. It was throttling the revenue growth in ANZ, recognizing where they stood in terms of the readiness of their platform and more so kind of the rebuilding and reinvigoration of our U.S.-Canadian commercial efforts.
Everything that we have seen over the last seven quarters has been very encouraging, not only in terms of our value prop and its relevancy in the market, and its continued relevancy given the macroeconomic shifts that we've seen, is also very much a reflection of the ability of our commercial organization to quickly grow in its capabilities and attack these market opportunities that are available to us. As we think about enlarging our growth ambitions from 4% - 6% - 8%, we want to make sure that we're properly resourced on every dimension of the business. As Frank has indicated, commercial, absolutely, we want to add to the bench of talent that we have to fully address all the market opportunities that we're surfacing.
We also want to make sure that when we are successful in stealing share, converting a self-managed fleet, that our operations teams have the necessary resources to ensure that they enjoy that consistency of peer and client experience through the onboarding process and through the early quarters of living with us as a new outsource partner. We also, you know, want to make sure the rest of the organization's capabilities are properly sized for the enlarged ambitions that we have around growth. As something as simple as contracting.
As you think about entering into contracts with these counterparties, and managing those, contracts, you know, just having the legal resources, the bandwidth such that we can reduce the cycle time through the contracting process with the client, so that again, we can sign those contracts, onboard those clients and begin to properly service them as we go forward. Think of this largely commercial, supplemented with operational and some, additional corporate bandwidth as we step up our ambitions, around this growth agenda.
Okay, great. Thank you. The next question comes from Graham Ryding at TD Securities. Please go ahead.
Hi. Good morning. The pie chart on slide 15, it does suggest it's a very large opportunity for you in this self-managed fleet area. Can you give us some context for how much of your growth currently is coming from penetrating that self-managed market? Or perhaps with the guidance that you've given over, you know, next year or even the medium term, what's your expectation for how much that self-managed fleet is gonna contribute to that growth?
Good morning, Graham. While we haven't broken those with specifics, let me give you maybe a bit of a perspective on a regional basis. As we think about Mexico, traditionally, you know, we've been able to grow that business 20% a year in terms of revenue growth and on top of their scalable operating platform, magnify that in terms of its operating income contribution to the organization.
They've been able to achieve that through record high levels of retention, so growing by not shrinking in the first place, by stealing share from other FMCs as well as banks in the Mexico market, and equally from share, or excuse me, from self-managed fleets, converting the fleets of large multinationals operating in that country as well as large domestic entities, converting those fleets that are owned and operated into clients of Element. They have a demonstrated track record of drawing from all those sources of revenue growth. For them, the real opportunity to go forward is not only to sustain their ability to steal share and grow in the self-managed, but indeed to increase service attachments through shared wallet, to increase penetration utilization as well as pricing opportunities around services.
If you go over to ANZ would have concentrated historically more towards stealing share and retention. In 2021, when they did their pivot to growth, they went fairly aggressively into self-managed fleets and secured a number of notable wins in that space and continue to do so today. Further, they're also advancing the government sector as a key area of focus there. We sit on a number of panels or exclusive fleet management company for a number of government entities in both Australia and New Zealand. You come back to the U.S. historically, we have skewed more towards shared wallet retention and stealing shares, the primary drivers of our organic revenue growth. Self-managed fleets weren't really an area of concentrated focus for this organization.
Under David Madrigal's leadership, we've rebuilt the entirety of the commercial function in U.S. and Canada, developed a minimum viable product, if you will, throughout 2021, took that into market in 2022, and have refined it over the course of the last three quarters. In doing so, have been able to, I say, gain confidence and insight in terms of the market opportunities that are available, particularly in self-managed fleet. If you roll that all up to a kind of a global perspective, we said, "Hey, you know, we're going to start by getting industry-leading market retention up even higher," and we're fast approaching 99% across our platform.
That has been a thrust over the last seven quarters, and that has manifested itself in a material increase in retention and one that we think we'll be able to sustain going forward. The second big thrust for us was share of wallet, going deeper with existing clients, recognizing that we have a relationship with them. They trust us. They value the relationship. That will be a great way for this new reinvigorated sales effort to kind of cut their teeth as we grow revenue. Share of wallet has certainly been a big driver of that. In all markets, we have seen and have availed ourselves of opportunities to steal share as some of our competitors faltered or entered into fairly ambitious integration agendas.
We would expect the share of wallet and stealing share to be short- to mid-term drivers of the 6%-8% revenue growth that we're seeing, especially given the macroeconomic environment that we're forecasting. Self-managed fleets for us is, you know, key to the long-term growth that we see in this business. Based on the learnings that we gained in both Mexico and ANZ, the early successes that we've been seeing in U.S. and Canada, we expect that to fuel the bulk of our 6%-8% revenue growth long term. That's how we're kind of looking into.
We're legging into this with retention and share of wallet, you know, amplifying that through stealing share, all the while building our capabilities, building our pipeline for self-managed fleets, all of which are manifest themselves in notable results, that encouraged us to lift our long-term guidance in terms of revenue growth.
The next question comes from Paul Holden of CIBC. Please go ahead.
Good morning. Couple quick ones for me. I guess, first off, how should we think about share repurchases in 2023? I guess the context of the question is twofold. One is, you know, you're gonna wanna build some capital to call the preferred shares, which you've already highlighted as your intention. Then two, we have this proposed tax on share buybacks in Canada as well. Any commentary on how you're looking at that tax might be incremental or helpful as well. Thank you.
Thanks. Thanks, Paul. This is Frank. Think about our return of capital, and remember, we have, you know, north of CAD 500 million of cash flow every year. What we look at is, think about it this way, dividend. We've made a material increase in our dividend of roughly 29% and really have leaned into that consistent return of capital through the dividend as we move forward here. That dividend we anticipate to grow over time consistent with our Free Cash Flow per share growth. Second, as you pointed out, would be the preferred shares. As always, the last piece of the lever is the NCIB.
We've guided you to roughly 385 million-395 million shares outstanding at the end of the year, midpoint of roughly 390. We anticipate acting on that NCIB aggressively as we see the opportunities to repurchase shares come up. In regards to the proposed tax legislation at a 2% excise tax, we've seen in the U.S. no impact really of excise tax, and we don't believe that would have any impact on our behavior in regards to buying back our shares, given the perspective that we think that they are, you know, significantly undervalued in the market.
Understood. Then as we look out to 2024 and your intention of calling those preferred shares, how should we think about the impact to the tangible financial leverage, given one of the reasons they exist is to sort of help that ratio? Does the target change at all given the strong underlying fundamentals of the business? I personally would probably argue you could probably operate with a higher leverage and maintain your investment grade rating, but would love to hear your perspective on that.
Yeah, no, as we sit here today, remember last year, we increased our leverage from 6, roughly 6.0 target to 6.5. The current thinking is 6.5 is the right leverage level for us. It gives us ample room to continue to repurchase shares, buy in the preferreds and otherwise. We think that that kind of keeps intact or potentially gives us upside in regards to our ratings profile as we move forward here and mature the business and continue to show the significant recurring revenue streams and the safety in the overall business profile. As of now, 6.5 is what we're targeting at, and we came in lower than that, obviously in this quarter.
Okay. That's great. Thank you.
The next question comes from Jaeme Gloyn of National Bank Financial. Please go ahead.
Yeah, thanks. First question, just looking at the vehicles under management disclosures in the supp pack, notice to decline on service only. Is this, you know, like, I guess maybe any color on what drove that decline? Is there just usual volatility or seasonality in customers selecting services in Q2 versus Q3, and then they kind of add them back on later on? What's actually driving that, and how should we think about that going forward?
Morning, James. You know, the introduction and the subsequent reporting and management performance metrics has been at the heart of our successful repositioning development, first through transformation and now obviously through this pivot to growth. You know, we found that the adoption of a very finite set of metrics aligns the organization and promotes accountability, which obviously drives better decision making and better performance. I think VUM is a perfect example of how the adoption of a new strategic measure of long-term success can lead to better decision making within the organization. As you know, we introduced this about 12 months ago, and it's already revealed insights into our business leading to better decision making around operations as well as commercial.
Maybe specifically to your question, recent analysis of VUM profitability that our teams are undertaking and the attachment service attachment rates identified a small handful of large legacy clients that we lost prior to 2019 who are still purchasing one or two services from us at below market rates. Unable to secure sufficient revenue to warrant our continued provision of services, we off-boarded these clients completely. By the way, as a tangible example, we had one client, 30,000 service units that we offloaded in June, and those 30,000 units were generating CAD 9,000 of revenue on an annual basis. Again, for us, it is focusing the organization on a few key metrics that really drive the business, deepening their knowledge of the business, and as a consequence, making better business decisions.
Yeah, for us, very, very pleased with the 4% year-over-year VUM growth that we've been able to achieve and, you know, expect minor variations as the organization embraces and continues to manage, you know, performance metrics in the future.
Okay. Great. Yeah, that number should be more stable going forward then, is the takeaway. And that also leads into my second question, which was is focused on service revenues per vehicle under management and obviously trending higher. And in particular, I guess even if you're excluding some of the one-time items, clearly some of these profitability initiatives around the vehicles under management is helping to drive that, you know, obviously inflation as well. I guess the question is really getting to, you know, how sustainable is that service revenue per vehicle under management line, and how do you see that trending over the next several quarters?
Stepping back at 30,000 feet, you know, quite sustainable in the context of as we think about clients taking more and more services. It's a rare situation where a client adopts managed maintenance, managed accident, tolls and violations, and then comes off that platform. The value that is created is so compelling that it's rare to see a client cease consuming those types of services. Once the client has taken that service attachment, you know, there's a very, very high probability that they will consume that for the entirety of their existence as a client. As we step up, you know, service attachments, we would not expect any type of regression in terms of those number attachments being lowered.
Further, as we think about inflation and the pricing power that we enjoy as a consequence of the consistent superior client experience, that's another lever for revenue growth into the future. Now, the noise short term is just gonna be the evolution of services as we think about originations getting back to normal levels and growing at the levels that we forecast for 2023. You know, we would expect more remarketing, more title and registration, and services of that nature, which will be quite additive. At the same time, we would expect some service revenues, you know, managed maintenance, as those older vehicles get replaced by newer vehicles, that will come down a little bit.
There'll be some noise short term as we migrate from, you know, a heavy proportion of total net revenue that include gain on sales, moving to, you know, net financing revenue that is low on gains of sale. But if you, again, stepping back, yes, we would expect that all the factors that I've spoken to in terms of the increase in the number of attachments, the flow through of pricing through inflation as well as pricing increases will be quite additive to revenue growth as we go forward.
Thank you.
Thanks, James. Appreciate it.
The next question comes from Tom MacKinnon at BMO Capital Markets. Please go ahead.
Yeah, thanks. Good morning. The question is really on the raising of the net revenue growth benchmark. That's materially up from your 4%-6% previous guide. Going up to 6%-8% now and longer term. I'm wondering how you were able to. What gave you confidence in what is deemed to be a pretty noisy 2022? You've got OEM capacity issues, you got other noise that you've just mentioned in the previous question. You've got non-recurring items in 2022 as well. How are you able to sort of sift through that, and then what can you point to us that really highlights the fact that you're able to raise this benchmark net revenue growth percentage?
If you can just give us some of the highlights there that you were seeing that it kind of look through this noise and look through these OEM capacity issues in 2022 that or within the business that's able to that you're able to have confidence in giving this increased benchmark.
Good morning, Tom. When we set the 4%-6% benchmark in terms of long-term growth for the organization, you know, there were two things that underpinned that together with a question mark. What underpinned that was our confidence in being able to set forth and deliver with a high degree of consistency, a compelling value proposition around our ability to reduce the total operating cost of a fleet, the ability to provide ready access to cost-efficient capital, and our ability to help our clients and client prospects migrate to an electrified fleet over time. We knew that was a compelling value proposition that gave us confidence around 4%-6% growth. Further, as we thought about the addressable marketplace, depending on the geography, anywhere from 1/2 - 2/3 of the market was unpenetrated. These were self-managed fleets.
We knew that existed as well. Those two, again, combined, gave us a great deal of confidence in terms of the size of the pie that was available to us. The question mark was our ability to effectively address those opportunities. We knew we had the market. We knew we had a compelling value proposition for that marketplace. Question, to what degree will we be able to avail ourselves of this market opportunity? And for us, what has given us confidence to step up that 4%-6% to 6%-8% growth is the progress that we have seen, progress that we have sustained in Mexico, the progress that we've seen in ANZ, and perhaps most materially, you know, the progress that we are witnessing in U.S. and Canada.
You know, as we think about that team and what they've been able to do in terms of both growing vehicles under management as well as growing share of market, excuse me, share of wallet, it is really quite amazing to see how far they've come in such a short time in terms of the capabilities of our commercial organization married with the operational capabilities of their organization to quickly ingest and onboard these client wins. That was the piece for us, Tom, that was really kind of the question mark around the 4 - 6. We knew there was a market. We knew we had a compelling value proposition to take to that market to steal share, to deepen share of wallet, to penetrate those self-managed fleets.
The question was how fast, and to what extent would we be able to build out the commercial capabilities complemented by the operational capabilities to properly secure those client wins. Based on what we've seen, in particular over the last three quarters in U.S. and Canada, based on what we continue to see under Manuel Tamayo's leadership in Mexico and the, you know, 20% revenue growth that we're getting in that market, coupled with what we're seeing with Chris Tulloch and the great team in ANZ. Yeah, that's what has given us the confidence to increase our long-term view to 6%-8%.
Okay, that's great. It'd be great to see everybody that you're having increased confidence in your Investor Day at the end of November. The second question is, why in your guidance for 2023, why are you using sort of an outdated exchange rate of 1.29? You know, granted, we would probably see upside if that exchange rate, you know, were closer to the, you know, current 1.35 or something that it's at right now. Just wondering why you used an outdated exchange rate, if you will, when you provided that guidance.
Beginning last year, we started reporting all of our earnings on a constant currency basis for comparability. Our current forecast. We don't forecast next year's exchange rate. We don't want to be in the prognostication business. When we look at this year and know where exchange rates are, we believe there'll be a roughly 1.29. What that does for you is put on an apples to apples basis before any FX impact, what the pure performance of the business is year-over-year. That's why we use that. Again, it's just us using our constant currency convention for comparability purposes because our crystal ball is no better than anyone else's in regards to what next year's exchange rates will be.
Yeah. Okay. Understood. Thanks for that.
All right. Thank you.
Thanks, Tom.
The next question comes from Stephen Boland of Raymond James. Please go ahead.
Four quick ones. We're hearing in other leasing sectors, especially in equipment, that a lot of companies are kind of delaying their purchase decision, I guess, if you can call it a purchase leasing decision, maybe not leasing as many pieces of equipment. Are you seeing that in the fleet business in terms of a customer that normally would lease 1,000 vehicles in a year is cutting back with the higher interest rate environment?
Morning, Stephen. No, to the contrary. You know, when they're looking at, you know, the ongoing operating costs of an aging fleet, there's a great impetus on their part to order replacement vehicles on a timely basis. Obviously, the delays that we've been experiencing over much of the last seven quarters have just added to their woes. No, we're actually seeing the very opposite. We're seeing an increase in demand for replacement vehicles.
Okay, that's great. Second question is more on the funding side. You know, we have seen some disruption in the U.S. with some of the securitization markets. I don't know if you're seeing. I know you've got pretty robust syndication numbers out there. Have you seen any kind of disruption coming into the fleet-type securitization vehicles in the U.S.?
Yeah, this is Frank. We've seen spreads expand across all financing markets, and I don't think we're unique to that, nor is Fleet unique to that from that perspective. That being said, with CAD 2.2 billion in, you know, committed capital that's undrawn, significant liquidity to run the business, and with the syndication component of that, continue to bide our time to enter the markets on a more opportunistic basis from a securitization perspective. Yes, the answer is yes, we've seen spreads expand from the historic lows that we saw last year. But that being said, we have no burning need to go to any of those markets during this period of dislocation.
We'll be able to go in more opportunistically, as the interest rate volatility environment stabilizes and those spreads come back to more reasonable levels.
Frank, as [crosstalk] point of emphasis, huge demand for this product in the securitization [crosstalk] market.
Oh.
We just are choosing not to avail ourselves of that market opportunity given pricing.
That's a great point. The market, all of our markets are wide open and available to us, just not a crisis we're all that interested in now given our liquidity perspective, position and our syndication capabilities.
Okay. Just a part B to that. The syndication markets, obviously with rates moving up, your clients have got, you know, I believe they, you know, do have like hurdle rates that they have to achieve in the syndication. You know, if you're not moving up your rates as quick to say as, you know, the overall interest rates, is that margin, you know, should we expect some compression on the syndication numbers that you gave out?
Yeah. What I would say is, you know, think about it this way. We have put in place a number of mechanisms to mitigate the interest rate volatility. This is really all about interest rate volatility because our leasing rates go up as benchmarks go up over time. We always capture that inherent spread there. It's the volatility from the time of activation to the time of syndication, which causes some issues. It's the mix of both the credit quality and the floating versus fixed rate component of what we ultimately syndicate, which impacts yields. It's a bit of a complex question. As rates begin.
Our bespoke hedging program protects us and mitigates the impact of those rising rates, so that we can capture the spread, and don't get beat on the timing between that activation and syndication should rates move. Once rates stabilize, then yields will go back into place and those hedges won't be as necessary as we move forward here to take advantage of that. In the near term, what you see is us syndicating more floating rate and syndicating names in which we are doing bespoke hedging. Net-net, strong volatility could put minor compression on deals, but we still feel pretty good about our rough, you know, ± 2% on the portfolios we take out there over the course of any given year.
Okay. That's helpful. Thanks, guys.
Thank you.
The next question comes from Shalabh Garg of Veritas Investment Research. Please go ahead.
Thank you, and good morning. Good segue on the syndication question. Syndicated assets are approximately 40% of your total assets. What do you think is the feeling for that? Like, how high can this, as a percentage of your total vehicle assets can it be?
I mean, we're very comfortable with our guidance of CAD 4 billion-CAD 4.5 billion, which is materially higher than what we're gonna syndicate this year. Again, when we look at syndication, we look not only at managing tangible leverage, but optimizing our tax position so that we retain enough of the depreciation tax shield.
Provide the benefit on our cash taxes. Remember, we talk a lot about the difference between our book earnings per share and our Free Cash Flow per share. The differential of that, which is real economic value, is the lower amount of cash taxes versus book taxes that we pay there. Really important to understand there's two levers there, but again, we believe the CAD 4 billion-CAD 4.5 billion very, very doable. Origination come in, we will be able to syndicate those levels and have a high degree of confidence in doing so.
That makes sense. Do you think you can do a similar amount of syndications in 2024 and beyond? Or do you think it will come back down to the previous guidance of CAD 2.5 billion a year?
No, we would anticipate because of both our growth, importantly, and the reduction that's needed in the backlog and the shadow demand that we see. The demand is very strong, but there's no order book to place them. That should keep origination very high and growing as we move forward into 2024 and beyond, and syndications will keep pace with that growth and originations as we move forward.
Okay, that's helpful. Thank you.
The next question comes from Graham Ryding of TD Securities. Please go ahead.
Yeah, I just wanted to get some color on your origination guidance. Is it fair to think that that's gonna be back-end weighted in terms of volumes, as you expect the OEM production capacity to open up in the second half of next year? Related to that, how much of the backlog do you expect to work through next year? Should that normalize by the end of the year, or is that still gonna persist into 2024, do you think?
Graham, I think in answer to your first question, yes. We expect it to be more back-end loaded as the OEMs continue to ramp up the productive capacity in the first half, and once established in that, begin to draw down the backlog. You know, I would say to you, and we talked about order backlog as a new concept that we introduced last year. We also talked about the shadow order backlog that Frank just referenced. You know, we would expect that our order backlog will begin to be drawn down in 2023. It's more a function of the order banks of the OEMs being constrained as opposed to actually orders flowing through. Our shadow order backlog is actually building apace with the order backlog that you've seen being built through our disclosures.
As the order backlog is drawn down to 2023, we actually expect our shadow order backlog will increase as a function of the demand that we're seeing within our client base, both internal growth as well as growth from acquired clients, coupled with the fact that the OEMs will be regulating and limiting the amount of orders that they will accept. We would expect that, as Frank has indicated, 2024 will be yet another robust year in terms of originations for the organization as we continue to draw down the backlog that was unfulfilled in 2023.
That's helpful. Thank you.
Thank you.
Our last set of questions will come now from Jaeme Gloyn at National Bank Financial. Please go ahead.
Yeah, thanks. Did wanna touch back on that origination theme as well. So I guess a two-part question. One, first part, is there anything in your conversations with the OEMs that is maybe hinting at any risk of of let's say, OEM production still being slow for the full year 2023? I'm thinking about maybe even some microchip shortages again, as we're hearing some stuff out of out of Asia and the impacts of, let's say, onboarding microchip production.
The second part of the question is, in terms of the origination and backlog unwind and how that flows into operating income at a very high margin, you know, how much of that is built into the forecasts for 2023 versus getting pushed out into 2024, which could drive even more margin improvement in that year?
Yeah. I think as we think about originations and our thesis, we had envisioned microchips being a lesser issue as we progress through 2022, and that has played out largely consistent with that theme. The OEMs had bought forward their production needs around the microchips to the extent that they could, and we're seeing that manifest itself in terms of increased vehicle deliveries to us. Again, that has played out very much in keeping with the thesis that we shared with you this time last year. We hinted, you know, earlier this year that the shutdowns in China would have impact on OEM production this year, the extent to which we weren't quite sure. That again has turned out to be the case.
We, you know, we will hit our originations numbers this year, but they, you know, were somewhat. You know, impacted in terms of the art of the possible by virtue of the production shutdowns in China and the impact, the cascading impact that had on the OEM supply chains. As we think about 2023 and microchips being a lesser issue again by virtue of the buying flow of the productive capacity of the foundries, coupled with, you know, an anticipation of the lockdowns in China being again a lesser impact on OEM production. The only other issue that has kind of materialized over the summer is just labor and the ability of the OEMs to have sufficient labor pools to keep their manufacturing capacity increasing to the levels that we expect.
We've factored all of those variables into our outlook for 2023, and the guidance of, you know, upwards of $8 billion worth of originations, feeling very confident in terms of the organization's ability to receive vehicles in those quantities throughout 2023, recognizing that we will exit the year with both a significant order backlog and an even more significant shadow order backlog that won't be satiated until 2024. The guidance that we provided you around originations underpins our outlook in terms of revenue and profitability for 2023, and we have a high degree of confidence in terms of that number.
We would expect that this will be yet another strong tailwind for 2024 as we exit 2023 with more productive capacity, but you know, still a very large and unsatiated order and shadow order backlog. I think the other piece on this, you know, the wild card in this that, you know, again, as we think about upside downside around origination and say, you know, I do think if we indeed see the onset of any type of recession that tamps down consumer demand for vehicles, I think it's a plausible expectation that that productive capacity will move from satiating the retail channel to satiating the fleet channel.
You know, if we do see a fairly significant economic downturn that constrains consumer demand, then, you know, it would be our expectation that productive capacity would shift to satisfying the order backlog of fleet management companies like ours, which could be an accelerant in terms of increased originations and drawing down the order backlog and shadow order backlog that we have. Again, as Frank acknowledged, you know, we're not in a position here to forecast next year's FX rate or the probability or extent of an economic recession. But as we think about our planning, you know, that is a potential tailwind in terms of originations and getting more vehicle deliveries in the event there was some softening of retail demand for vehicles.