I like that the clock is already ticking.
All right. Well, listen, it's my pleasure to introduce our next speaker, Laura Dottori-Attanasio, President and CEO of Element Fleet Management. Welcome.
Thank you.
So maybe we can kick things off, maybe you level set us in terms of where Element is today, how you see the back half of 2026 shaping up, and really what you're most focused on heading into the next year.
Yeah, absolutely. I guess I'll start maybe with just revisiting the value proposition of the company, because it does feel like we've moved away a bit from that. We've got the largest scale in the fleet management space in North America for commercial leasing. As you know, we've got very strong recurring revenue that's contracted. We've got, I'd say, best-in-class client retention rates, and a very hard-to-replicate infrastructure on which we manage. All of that has, over the years, and continues to generate incredibly beautiful free cash flow, and we've been delivering some pretty solid returns on equity. The core of the business continues to be solid, continues to be resilient, continues to be our focus, which is organic growth.
As I've talked about in the past, we digitize and automate this ecosystem so that we're alive and sustainable for the future of mobility and can offer further types of mobility services. I think you talked about guidance. We did, in the second quarter, reaffirm our guidance for the balance of the year. So feel good about that. Some of the developments may be worth talking about in the market. We are seeing some softening in the market, probably no surprise to anyone with a lot of the economic uncertainty that's out there. We talked a bit about this in the second quarter with our originations that were coming in a bit softer, and we were seeing some, I'm going to say, hesitation and delaying in terms of originations on behalf of our clients. Think that might persist given what we're seeing in the landscape.
On the tech side, we continue to see, I'd say, continued disruption as it relates to technologies that all of us are living through in our various industries. Notwithstanding that, we continue to see great opportunity for the company to grow. Again, when times are tough, that's one of our value propositions, is that we help our clients lower their total cost of fleet operations by anything from 10%-20%. So I think that that's quite compelling. We've been making some good moves on the digitization and automation front so that we're able to play in that mobility solution part of the business.
What we need to do is we just need to do a better job, I'd say, from an execution conversion perspective. While we're growing and we continue to grow, we perhaps haven't been growing at the rate I think that the market was expecting or would like to see, nor have we been growing at our ambition. We have looked at making some changes from, or have made from a commercial effectiveness perspective. Strategic priorities, again, same organic growth. We digitize, we automate, and we've made changes, and that's what we're working towards. All in all, other than stock price, which hurts to look at every day, because I do believe we're trading below our intrinsic value, feeling really good about the company, what we've accomplished, and what we know we'll be able to do into the future.
Okay. Element's continued delivering double-digit earnings growth, but as you mentioned, the stock has lagged. Maybe over the next half hour, let's unpack a few key themes. We'll talk on commercial momentum, we'll talk on technology, M&A, and capital allocation. I think investors have grown increasingly focused on underlying commercial momentum to support future growth. Again, maybe just give us your perspective on how the business is performing in that context, and also what gives you confidence in Element's ability to sustain that midterm growth target.
Yeah. As I said, we reaffirmed guidance, and we have been growing. We continue to grow, albeit perhaps not at the rate that investors were expecting, and we're not growing at our ambition. We have always talked about that mid-range target, which probably worth decoupling the two. I think that's still very feasible to think that this company can grow in that 6%-8% range that we've always talked about. A lot of opportunity, as I said, there's still half of the market doesn't outsource its fleet management, so we continue to have those opportunities and others. That is still there. Where I'd say we're lagging is from an execution or conversion perspective. We have an aspiration to do much better than we've done. We know we need to do better.
We've made some changes from a commercial leadership perspective, essentially to get more rigor into the system so that we've got a better, I'm going to say, pipeline quality, and that we can get better win rates, better conversion rates. I think when I sat on the stage two years ago, I talked about the great opportunity, which is still there, and that some of the things we needed to do is we needed to get better from our win rates and whatnot. I'd say that's one of the things we haven't been able to do. In fact, we probably went more the opposite way in the last year. Some of it was maybe over-indexing on the larger mega accounts as opposed to the more bread-and-butter type of accounts. Normally, the bread and butter is what you focus on. You have a few megas.
If you win, it's great, then you outperform. If you don't, you're fine. You just keep performing. A little over-indexation on that. That didn't help, and that's why we've made some changes. I'm quite confident that we've got the right ones in place for the rigor required for us to, I'm going to say, hit our aspirations. But it is going to take time because we know that we've got long sales cycles times. That was also something I said I'd like to see how we decrease that. That's been much harder to do than I would have ever imagined. Knowing that those sales cycles are longer, I do think it'll take some time to represent in the numbers.
Excellent. Maybe drilling down a little bit more into that commercial momentum at a more granular level as well. I think services revenue growth started to re-accelerate. Vehicles under management continued to grow, but again, originations being a bit of a laggard. How do you see these things evolve, and what gives you confidence in that outlook?
Yeah. Well, maybe working backwards. Originations have been softer. We did say we expect to do better in the second half, and so again, some of the indications are looking positive. That sector, or sorry, we do see softness in the market, and so that does continue to be a bit of a laggard. On the good news front, as you said, we've talked about growing in that 2%-4% range for VUM, and so we have done that, albeit, the aspiration would rather have been on the higher end to that. That's a good thing in that the more VUM that we have, even if we're not growing, we have a lot of white space with the services that we provide to go deeper, and we know that we can sell more services to our existing clients. Service revenue is up, as you said.
I think it's up 8% quarter-over-quarter. So trending well. Forgive me, it's not double-digit growth, but it is good growth. I would just say again to my earlier comment, what we do need to do is just be better on the conversion of that client base and of those services, and that's what we're most focused on doing.
Excellent. I think investors viewed the recent partnership with Waymo really as a validation point in some of that commercial momentum.
Element's capabilities in autonomous mobility. Maybe we can just spend a few minutes and discuss why Element's well-positioned to win in this market, how the economics compare with traditional fleet relationships, and really how you think about the size of the opportunity as the partnership expands beyond San Diego.
Yeah. Great opportunity. Again, we did sign a strategic partnership with them starting with San Diego. I guess I would think of it as maybe a new fleet category, makes it easier. It doesn't change basically what Element is and what Element does really well. In fact, because of the scale that we have and how well we do things, and like with the delivery service providers, Last Mile Rental, some of our investments, it allows us to actually play really well in this space with our scale and our playbook. Super happy with what we have, and we feel that we'll be able to grow that. But we need to get San Diego done first, and again, just make sure we execute on that properly.
Some of these things, of course, like everything, takes time because we have to get the city set up. We've got to get it operational before you start to see the benefits of it. In a perfect world, we would've had that done in the second half of 2026, but that's already looking more like it'll be the first quarter 2027. It's always to allow that things do take time to come through the system. There is some good growth opportunities that we'll have as we get this done and, provided we execute properly, can show that we can do more. It'll be a positive from a revenue growth perspective. The economics are somewhat different.
There's, at least in the beginning, perhaps a heavier operational type component to it, so the margins are a bit different, a bit less, but it's still very good profitable business, and it's more service revenue oriented, which is also a positive.
Excellent. Technology is a major theme and I think an area that Element continues to invest in. We talked in the past on several investments and initiatives, as well as some of the competitive and strategic benefits. I think most recently you announced some direct financial benefits of those investments of about CAD 20 million annualized cost savings for 2027. I think by my math, that's around 3.5% of our OpEx forecast. I guess I'm assuming technology investments will continue, but should investors think of this more as potentially bending that cost curve and getting mid to low single-digit inflation for the year ahead for expense?
So happy to show that for our digitizing and automating and the work that we've been doing. We are seeing that not just convert into some better client experiences, but also efficiencies is the one you pointed out, which is CAD 20 million on an annualized run rate for 2027. Won't be doing the percentages and stuff here now or committing to anything. Other than to say directionally, you're right, it should bend the cost curve over time. We have a really hard-to-replicate infrastructure, which I'm going to say fuels us somewhat from a lot of the tech change, but that's also what we're digitizing and automating, and we still have quite a few humans doing things that we know tech, AI can do better, and that's what we're doing.
As we're doing it, we'll take cost out of the system as we go, but we're just being very, I want to say careful, responsible, that it is a very large and complex infrastructure that we operate in. When we do things, we want to make sure that we're very thoughtful about what we're doing and that it's working as intended. Because we're dealing with not just billions of dollars that come through our rails, but millions and millions of transactions, and so we can't afford to start making mistakes with that. We've been, I'd say, very deliberate and careful about the pace at which we bring on the technology and making sure that it's operating as intended.
Maybe carrying more humans than we might need for a period of time, just to make sure that we've got some of these things operating the way they need to. But directionally, I would expect, and I'm sure all of us see it in everything that we do, with some of what's available out there, it's a lot easier to get a lot more done with technology, and you can offer a much better client experience. That's what we started doing from the moment we went out and acquired some tech capabilities, and that's what we're going to continue to do with the plan. Again, not focused on take cost out. The focus has to be on how do you offer better client experience and grow with this, and at the same time, the benefits are you're more efficient and therefore take cost out of the system.
Okay. I think AI and related disruption fear has certainly been, again, a focus in 2026. Has your thinking on the competitive threat changed at all? What parts of Element's value proposition, in your mind, are hardest for a technology-only competitor to replicate? I am curious also to hear where you have seen the most meaningful improvement so far. Is it client outcomes, employee productivity, or decision quality?
Well, I guess across the board. Again, I would like to think my views evolve over time as things come, but AI, as we always said, is going to be disruptive, not just to fleet management, but to everyone and everything that we do. I think the distinction is you can either try to defend your old tech model or way of doing things, or you adapt and change the system. We have been in that adapt and change, and we started a while ago. I would just say those who incorporate and understand AI and use it, and use it responsibly, I think end up being in the winner category on the go forward. It is those that deny it or do not use it, or are not moving with it.
You do not want to move too fast, but you have to move at the right pace that your client base is ready to go as well, and at the pace that you can responsibly take everything in. Again, I believe that gives us great opportunity to do more. We can offer better client experiences. We can be even faster with offering predictive insights to our clients. These are things machines do a lot better. We have machines that do it for us. We still do some interface via the human in the forms that we deliver it. We can do that differently. We would not just boom overnight, there you go, the people are gone, talk to the machine. Because we have got clients that like to talk to people.
We just have to make sure as we do some of these things, we go at the right pace, and that will keep us in a good place. As far as disruption, AI, you could argue, can disrupt everything. But as I said, we have got this incredibly complex infrastructure that is difficult to replicate, which is why it takes us time to do. It is not like me and my financial model at home, I can hit a button, we are done in five minutes. It is a little more complicated than that. But we have got a lot of pieces of the value chain that are hard to replicate. As you know, from the funding and how the acquisition ordering piece is done, and remarketing and whatnot.
What we are doing is we are taking the AI or automation pieces, and we are putting it in the places where we feel we can get the most client impact first, in terms of better client experience, because that allows you to stay in the game and sell. By definition, you get efficiencies with it. You saw we did one, and we will go through with our DigiAdvisor. Essentially what we had a whole bunch of humans doing, calling shops and doing compliance for spend and enactment of policies for our clients, that is all done on an automated basis. We actually have even more humans if we wanted to, we could take out of the loop. We have purposely chosen not to because we want to keep some in the system to make sure this is rolling as we expect it to roll for a period of time.
But we will have more that we are working on and will be able to do.
Okay. Again, key differentiation here is really within the infrastructure and that ability to be flexible between the human part and leverage the technology versus the competitors. Is that?
Yeah. Look, I think we have got a good moat in that is we are out doing fleet management. We are not just a software as a service company. That part, you are right, you can do all that really easy. But you have got to be able to plug that into the ecosystem and into the infrastructure. Financing and people that need financing does not go away.
People that need the support in terms of what are the specs and how you are going to order them in a vehicle, how are you going to get the upfitting done for your needs? There is still a lot of complexity in that. That can be automated over time and enhanced and supported, which is some of what we are doing, but not replaced overnight. Some of the other aspects of it can be, and those are the things that we are focusing on doing first.
Okay. Internally, the feeling is it productivity? Is it decision quality in terms of when you are leveraging and deployed it within?
I think you get all of it. You get better quality of decisions, for sure. Machines, you give them the right information, I think make better decisions than humans, right? You get more efficiency, better client experience. It allows you to do more. I would say all of the above. Again, if you are doing it the right way.
Okay. Listen, I am going to change gears a little bit and we will talk on M&A and maybe get into capital deployment as well. You recently made an indicative bid or proposal for FleetPartners. Again, while I understand you cannot talk about specifics, what makes this asset, or I will rephrase it, maybe this type of asset, attractive to Element, and why would Australia, New Zealand, why is that a market where you would like to add scale?
Yeah. As we have talked about, organic growth continues to be our focus. That said, when we talked about acquiring capabilities at one point that we needed in the tech side to be able to digitize and automate, so we have done that, and now it is just focusing on converting that into better client service efficiencies, et cetera. We have always said that not interested in traditional M&A per se, unless it allowed us to gain scale in a market where we did not already have large scale. We have got the scale that we need in North America. Australia is the one market where we are the fifth-largest player, and so we know the market well. Strategically, this thought would be an attractive asset for us. It would allow us to bring, if we did, the two companies together to be the second-largest at about 20% market share.
Still a good rate to be able to also continue to grow. We've got one of the best-run companies in Australia from a margin perspective, quality of team. When we look at if we could bring that together, there are some great synergies that look lovely and accretive if we were to bring them together. That is the interest in Australia for looking at a transaction like that. That said, we did go into it very disciplined. We don't have to do it. We thought it looked like a really good opportunity for long-term shareholder value creation. But we did set all of our parameters in place so we don't go into some long-winded bidding war, and we've stayed, I'd say, very disciplined. We're going through the diligence process now.
We decide, actually it all happens, I think tomorrow, on the weekend, sort of are we bidding in round two? What are we bidding? From there, the target will determine who's in the running, and then the next round will go to the end of October, I believe. But we're going to make sure that we make our decisions on a risk-based one. When we look at accretion, we have to take into account that there's integration risk and then really looking at the timing of the synergies. Synergies you get in the first six months are worth a lot more than the ones you can get three years from now. Then just other aspects of the transaction to determine what we think the right course of action is for our shareholders from a capital allocation perspective.
Excellent. Maybe just high level, if you can just kind of remind us, just in terms of characteristics of that Australia, New Zealand kind of market, what makes that kind of unique and different from, I don't know what I'll define as maybe the core North American business?
It's a little different. It's a market in which you take residual value risk that we don't take in the U.S. and Canadian market, for example. A bit of a different model in terms of how you underwrite the deals that you're going to do. There's more of a novated lease type aspect where it's employees that are actually getting leased vehicles because there's some interesting tax advantages for them to do that. There's more of a novated market. That's one of the markets that FleetPartners, we're in it as well, but they're in it probably at a bigger rate than we are. Those would be maybe two of the bigger differences in the market.
Okay. If I am hearing correctly on that, this should not really change the way investors think about Element's appetite for M&A, right? It is still really the view is it is organic growth, it is tuck-in technology investments, and buybacks is the primary use of capital. Is that the way we should think about that?
Yeah, absolutely. Always organic growth. We have talked about this. Our philosophy for capital does not change. We make sure that we are sufficiently capitalized to have a good, acceptable leverage ratio so that we maintain our investment-grade rating to our balance sheet. That is super important. We invest where we think it makes sense for sustainability and growth, and then the rest we give back to shareholders. Either that is by way of dividends, and we have talked about our payout ratio being in that 25%-35% range of last 12 months of trailing, well, last 12 months of free cash flow, and then the rest would be share buybacks. We have not been in the market doing some lately. That is because we have been in blackout while we are in this process.
Excellent. [audio distortion], I think we are keeping you probably fairly busy in terms of one-on-ones, kind of outside of our chat here. Maybe digging into that a little bit. What do you think currently is some of the biggest misconceptions investors really have about Element? Then maybe separately or somewhat related what do you think needs to happen for that stock's PE multiple to re-rate back into that upper teen level where it was?
Well, maybe I will try. I do not know that I would not say misconceptions. I think, from a growth perspective, I think our investors are looking at and we do, we have softer originations and service revenue while growing in VUM, maybe not at the rate that the market was expecting. That might be on us, I think, on how we talk about it. We put out our guidance, but I think expectations were greater than maybe the momentum that is being seen. We need to deliver. I mean, we need to, as I said, we have made some changes to our commercial team to make sure we have got more rigor in the system so we can step it up better. That will take some time to represent, but I think that is one of them, is people are expecting us to continue to deliver well beyond expectations.
I think that's weighing on us, and that's up to us to maybe communicate better or not communicate in a way that people are expecting a lot more in the short term than we're capable of delivering. But we also need to execute better so that we can live up to our own aspiration, because we know we've got a lot of opportunity to grow. Maybe a second one is just on the digitization and automation, and we talk about a lot of the different things that we've done, and maybe it's gotten overly complex with there's this, there's this, there's this, and it feels like a lot of things, with maybe expectations that all of them are like a more traditional M&A with revenue generation coming to add to expectation.
Whereas it's always just been part of, and on us how we talk about it, part of our digitize and automate initiative. When we went out and bought Car IQ, that was acquiring the capabilities that we didn't have in-house and couldn't be doing what we're doing today if we didn't have that and it's just been adding on to that, and we've been out talking about it a lot more, this partnership with Waymo and whatnot, because in the market, we want that prospective client base to see that we're doing cool things on the tech side, and there's a lot more we can do, like we're still in the game for the future wave of mobility. But it has gotten maybe become more of a complex story and taken us away from the foundations of who we are as a company.
I think on us in terms of how we communicate better the market, and then ultimately, I mean, we just have to execute and deliver, and then when we perform the stock market will do what it does. But we've got to focus, as we're doing, on just executing.
Excellent. Well, again, it's been a great conversation, and again, truly thank you again for taking your time out of your day to speak with us and meet with investors. It's always greatly appreciated that you do that. We're going to take a pause for lunch now, which is being served through the atrium. We're going to reconvene at noon with a panel discussion—
Okay.
—which is really digital asset infrastructure, so stable coin, securities, tokenization of real assets. Should be a great panel discussion, and we'll see you then. Thank you.
Thank you, Phil.
Thank you.
Appreciate it.