Element Fleet Management Corp
TSX:EFN
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Element Fleet Management Corp
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Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management First Quarter 2021 Financial and Operating Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] 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-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&A. I would now like to turn the call over to Jay Forbes, President and Chief Executive Officer of Element. Please go ahead.
Thank you, operator, and thanks to all of you joining us this evening. Frank and I will be sharing tonight's call with Aaron Baxter, the President of Custom Fleet, which is Element's business in Australia and New Zealand. We'd like to use our time with you to touch on Element's first quarter results, including a drill down by Aaron on our ANZ performance, the solid progress that we've made in advancing our strategic priorities in the quarter, as well as an outlook on the balance of 2021, including our perspective on the global microchip shortage, its potential disruption to our OEM supply chain and the resulting potential impact on our originations. Before I begin discussing our results, I do want to acknowledge the continued presence of COVID-19 in our communities. And in doing so, I want to express my heartfelt gratitude on behalf of everyone at Element Fleet Management, to the health care professionals and so many other essential workers who continue to brave the front lines and advance the global vaccination effort. The first quarter of 2021 represented Element's first 3 months of business following the conclusion of our very successful client-centric transformation program. And the Q1 results were an encouraging demonstration of Element's performance capabilities atop our transformed operating platform and against the backdrop of our fortified financial position. We grew global net revenue 4.4% in Q1 on a year-over-year basis before the significant impact of a strengthened Canadian dollar on our results. Even with the FX impacts, we were able to grow net revenue by approximately 1% over Q1 2020. We delivered $137 million of adjusted operating income for the quarter which is a 10.8% improvement over Q1 of last year before the impact of FX and equivalent to $0.22 per share. We expanded our operating margin by 180 basis points from our Q1 2020 results to some 55.2% in Q1 of this year. Our pretax return on common equity improved 30 basis points quarter-over-quarter to 14.3%, and we expect ROE to continue to improve this year as we progress our capital-lighter business model. And our strong cash flow generation enabled us to return more than $100 million of excess equity to our shareholders in the quarter through share buybacks and a further $50 million in the month of April. Frank will talk you through all of our results in great detail shortly. In the meantime, allow me to reiterate Element's 3 strategic priorities for 2021 and elaborate on the progress that we've made in advancing each of them thus far this year. The first priority is the aggressive pursuit of organic growth opportunities across our global footprint. We believe Element can generate 4% to 6% annual net revenue growth from these organic opportunities in normal market conditions. Although many dimensions of our current operating environment are far from normal, and I will come back to this point momentarily, our commercial teams are nonetheless delivering on the promise of profitable organic revenue growth. Net revenue for Q1 in ANZ and Mexico grew 35% and 22%, respectively, year-over-year. And we've spoken about before, these regions were able to begin executing our global growth strategy months and even years earlier than our business in the U.S. and Canada. And therefore, we view ANZ and Mexico's successes as harbingers of the growth to come in our domestic markets. In the U.S. and Canada, where our growth plan is still in its relatively early stages of execution, our Chief Commercial Officer, David Madrigal, and his team grew our deal pipeline, while improving pipeline velocity by 10%, which reduces the time from deal preparation to contract finalization by over 4 weeks on average. The product of these efforts is on display in our supplementary disclosure documents this quarter. Globally, we closed 25% more deals last quarter than we did in Q1 of last year. More importantly, those deals represent a significant increase in units of revenue opportunity for Element. Now we classify a unit of revenue opportunity as either a lease or single fleet service to be provided in respect of a unique vehicle. In the case of a lease, the revenue opportunity is realized on lease activation and for the duration of the lease term. In the case of service revenue opportunities, realization depends on the nature of this service. As you can appreciate, the degree of impact that a potential revenue unit is going to have on our results and the timing of that impact are going to vary. Not every unit is at equal value from a profitability, return on equity or even a cash flow perspective, such as the nature of the broad array of services that we offer our clients. However, by closing on over 120,000 units of revenue opportunity in the first quarter of this year, our commercial teams are clearly demonstrating their commitment to and their ability to execute our global growth strategy in all 3 regions in which we operate. Now there's a part 2, if you will, to this first strategic priority, and that is the magnification of that 4% to 6% net revenue growth into high single-digit, low double-digit operating income growth, atop our transformed and scalable operating platform. This magnifying effect was on full display in the first quarter. We enjoyed 55.2% operating margins and delivered 6.2% adjusted operating income growth on a year-over-year basis or 10.8% adjusted operating income growth before FX. Our second strategic priority is the advancement of a capital-lighter business model through increased service penetration and syndication activities, both of which enhance returns on equity. We made solid progress on this priority in the quarter, taking full advantage of the demand in the syndication marketplace to bring forward volume into Q1, syndicating just over $1 billion worth of our U.S. lease book. We syndicated to a combination of first-time buyers and familiar investors. We continue to grow our roster of interested investors in our fleet assets from just 10 in Q1 2019 to over 28 institutions today and an amount that is still growing. We also continue to successfully introduce new client names to our syndication investors. In the first quarter, we showed 9 additional client names to our syndication investors for the first time. We view this as a positive development of our syndication program, as syndication increases the velocity of our cash flow and it allows us to reinvest in the business without increasing our equity base or to return such capital to our shareholders. In terms of service penetration, which generates revenue that requires only a modest amount of net working capital to support, we continue to be successful at offering our existing clients the opportunity to benefit from incremental Element services. These additional services lower clients' total cost to fleet operations, which is our chief value proposition. The results of this capital-lighter business model is enhanced returns on equity as evidenced by our 30 basis point improvement on this metric in Q1 over the prior quarter. As we noted in our press release this evening, we expect to be able to continue enhancing our pretax return on common equity throughout 2021. Our third and final strategic priority is the growth of free cash flow from our business and the predictable return of excess equity to our investors by repurchasing shares and paying and growing our common dividend. Element repurchased nearly 8 million common shares for cancellation in the first quarter, returning over $100 million in cash to shareholders. We returned an additional $50 million by way of further repurchases in the month of April. We're just past the halfway point of our initial NCIB period and have already repurchased 2.7% of Element's common shares at prices that we view as attractive. We anticipate continuing to be active buyers of EFN between now and the end of this NCIB period in November. And as previously indicated, we envision buybacks to be a regular ongoing part of Element's return of capital strategy, along with growing common dividends as we generate improving cash flow. With that, I'll turn the call over to Frank to discuss our Q1 results in more detail. And then to Aaron, who can discuss some of what we're seeing in ANZ, which was also the topic of my CEO letter to shareholders this quarter. Frank?
Thank you, Jay, and good evening, everyone. I'm happy to be here with you to talk through our Q1 2021 results and the solid progress we made advancing our strategic priorities in the quarter. In regards to adjusted operating income and ETR, as Jay noted, our adjusted operating income for Q1 was $137.3 million, which is a 6.2% increase year-over-year and 10.8% increase before the impact of changes in FX on that comparative basis. As we have noted in our disclosures this quarter, FX had a meaningful impact on results and is likely to continue to be a headwind, at least for the balance of this year. Adjusted earnings per share of $0.22 were flat from Q1 last year, which is a function of the increase in our effective tax rate on AOI, up to 23.4% in Q1 2021. While we're on the topic, I recommend modeling our adjusted EPS based on a 23% to 25% effective tax rate in 2021. This is a reflection of the increased income levels we are achieving post transformation and the mix as we grow disproportionately in relatively higher tax jurisdictions, namely ANZ and Mexico this year. Remember that the cash tax we pay is a lot less than the tax line items on our income statement. As such, we believe free cash flow per share is a better metric than adjusted EPS when evaluating the underlying performance of our business. We originated $1.3 billion of assets in the quarter, a $100 million decline quarter-over-quarter and a $744 million decrease year-over-year. Historically, Q1 originations have been lower than the preceding Q4 and client deferred orders that went unplaced last year continued to impact originations in Q1 this year. The strengthening of the Canadian dollar against the U.S. dollar and Mexican peso also softened our reported origination volumes. The year-over-year originations comparison for Q1 was impacted by the timing of Armada volumes in addition to FX. Armada originations were minimal in this Q1 due to order timing, which was not the case in Q1 of last year. In addition, the strengthening of the Canadian dollar against both the USD and Mexican peso had an even greater dampening impact on reported origination volumes year-over-year than quarter-over-quarter. As we mentioned in March and continues to be the case, we're receiving record order volumes this year. In a normal environment, those would be reflected in Q2 and subsequent quarter origination results. However, as Jay will say more about shortly, the global lack of microchip availability is already stretching the typical order to origination time frame with several OEMs announcing some level of production curtailment in Q2. So our client demand is strong. And the origination volume is coming, but accurate forecasts of timing are difficult to provide in this fluid environment. We saw a $15.7 million year-over-year increase in net financing revenue for Q1. Before the impact of FX, net financing revenue was up $18.2 million on the same basis, an increase of nearly 20%. This is despite the reduction of our net earning assets due to the successful execution of our capital-lighter strategy. A $15.6 million of the NFR increase year-over-year is attributable to a combination of the $12.1 million provision for credit losses that we took in Q1 of 2020, based on the time the impact of COVID-19 uncertainty on our credit risk loss models, and the $3.5 million reversal of that provision back into Q1 2021 net financing revenue, based on the remarkably strong credit and collections performance of the business over the last 12 months. We maintain a $13.7 million allowance for credit losses currently, which is over $5 million more than the prior -- that prior to the onset of the pandemic. We expect the strong credit performance of the business to continue, and therefore, the allowance to continue trending debt towards or below historical levels over the balance of this year. Before the impact of the provision for credit loss, Q1 net financing revenue was virtually flat with Q1 2020, which was unaffected by the emerging pandemic at the time. Further controlling for FX, Q1 net financing revenue was up 2.5% year-over-year. We also materially improved our funding costs in the quarter, which we report as interest expense. Those decreased by $50.8 million compared to Q1 of last year, while our net interest income and rental revenue only decreased $35.1 million on the same basis. As a percentage of or yield on average net earning assets in the quarter, net financing revenue was 4.38%, which is 118 basis point improvement over Q1 2020. This is a result of a deleveraged balance sheet and lower cost of funding on the remaining indebtedness, the impact of the provisions for credit loss on the numerator as previously discussed, the growth of higher-yielding net earning assets in Mexico and ANZ as a percentage of total net earning assets and, as Aaron will tell you more about shortly, strong gain on sale performance on vehicles in Australia, New Zealand, the only jurisdiction where we take residual risk. Servicing income decreased $6.2 million year-over-year for Q1 before the impact of changes in FX, which increased the delta to $11.4 million on an as-reported basis. Although we saw vehicle usage rates improve over the course of the quarter, and that trend continued in April and into May, vehicle usage has yet to fully recover to pre-pandemic levels. That said, we do anticipate Q1 service revenue to be the low point for this line item this year. Turning to syndication revenue. We syndicated just over $1 billion worth of assets in Q1 and generated $23.1 million of revenue, which is $3 million less than same quarter prior year on $182 million more volume. Syndication is a cornerstone of our capital-lighter business model, and we leaned into demand for our assets in Q1, as Jay mentioned. Although we price our leases such that we are willing to hold them on the balance sheet for the duration of their term, we also have the capability to test for superior economic value in the syndication market. If the economics of syndicating a lease is superior to holding it on book, we proceed to syndicate. Syndication revenue is highly accretive to our return on equity, which was 14.3% for Q1, and we expect continued enhancement of that metric through the balance of this year. As we've communicated in the past, syndication revenue yield is going to vary quarter-to-quarter based on the mix of assets syndicated in the relevant period. That said, we think the 2.3% we earned in Q1 is a relatively normalized yield for the balance of this year, all else being equal. We are continuing to explore the expansion of syndication on a geographic rating and client name basis. Our operating margin expanded 177 basis points quarter-over-quarter and 292 basis points year-over-year to 55.2% for Q1 2021, underscoring our transformed industry-leading scalable operating platform. Q1 adjusted operating expenses were down $6.6 million year-over-year, $3.8 million of which is independent of favorable FX. While we expect operating leverage to improve quarterly in year-over-year terms based on revenue growth and operating expense containment, the favorable evolution in our allowance for credit losses in the first quarter likely made our 55.2% operating margin in Q1 a high point for this year. Finally, regarding free cash flow and return of capital for the quarter, we generated $0.23 of free cash flow per share, exceeding our adjusted EPS of $0.22, and this is virtually always the case. However, the $0.23 result was a decrease of $0.06 per share from Q1 2020 free cash flow. A onetime carryover payment of 2020 cash taxes in New Zealand this quarter and lower originations year-over-year in the quarter as previously discussed caused by -- combined to cause the decrease. FX also negatively impacted free cash flow by approximately $0.01 per share. Notwithstanding these headwinds, between dividends and buybacks, we've returned over $180 million of cash to common shareholders year-to-date. That should give you an indication of our level of confidence in our ability to manage the current economic environment this year, our growth strategy, the capital-lighter business model and the resilience of Element's ability to generate free cash flow going forward. With that, I'd like to turn the call over to Aaron Baxter to tell you about Custom Fleet's Q1 results in more detail.
Thank you, Frank, and good morning, everyone. Very much appreciate the opportunity to share with you Custom Fleet's strong Q1 '21 results and the progress we've made on our growth strategy in the quarter. All of the figures I'm going to reference are in Australian dollars. So from a net revenue perspective, Custom Fleet generated $49.4 million of net revenue for the quarter, which is 35% more than Q1 '20 and 15% more than Q4 '20. Net financing revenue grew 56% year-over-year, primarily driven by the strength of the Australian and New Zealand secondary market. The microchip shortage in Asia, where the vast majority of the vehicles we deal are manufactured has constrained new vehicle supply and driven up demand and pricing of used vehicles. This, coupled with recent improvements to our remarketing strategy and channels, is resulting in more sales to consumers and has allowed us to improve our gain on sale for Q1 '21 by 133% over Q1 last year. Excluding gain on sale, we grew net financing revenue by 20% year-over-year, driven by increased margins and reduced funding costs. Service revenue in ANZ was $14.7 million in Q1. This was 5% up year-over-year and 18% up versus the prior quarter. This increase is attributable to continued increasing product penetration, particularly our accident management business and our telematics offering, coupled with implemented conquest new business wins, which has translated into 9% unit growth for the year. As Jay wrote in his letter to shareholders this quarter, Custom Fleet is being built on 40 years of history in Australia and New Zealand, with clear points of competitive advantage, including scale and automation of our operating system; an unparalleled client experience; a really smart, diverse and engaged employee base; and an extensive network of service partners. We've been able to build on this foundation in a number of ways as a result of being part of the Element family. Custom Fleet participated in the transformation, which we were in the midst of undertaking at a local level when Jay actually took the reins at Element in June of 2018. Custom Fleet's transformation benefited tremendously from the learnings and the collaboration which we were able to engage in with the North American business, going through its own client-centric reset. We have taken advantage of the global organization's investment-grade balance sheet and ample access to cost-efficient funding to win self-managed clients via sale and leaseback. And 2 great examples are the Salvation Army in Australia and Oranga Tamariki in New Zealand. And we're deploying the growth plan and strategy that David and Manuel pioneered in Mexico to great effect, which was enhanced after our visit to Mexico City in early 2020. So following that visit, we quickly adopted Mexico's best practices, continued to refine our back-office capabilities and heavily invested in sales force effectiveness so that we would be poised for stronger, profitable revenue growth in 2020. So after 18 months executing what is now the global Element growth strategy, Custom Fleet is very much in an optimal and scalable position. Our pipeline of confirmed orders is the highest it's ever been. Our service revenue is growing through a combination of new client wins and deepening share of wallets. The quality of the portfolio has improved, with historically low levels of delinquency. Our Net Promoter Scores are consistently strong. And we have not lost any material clients in 2020 through the pandemic, and that remains true in '21 today. The last thing I'll say is in relation to electric vehicles, and I'll be brief because I know Element has spent a lot of time with investors on this topic already. I can tell you from the front lines of fleet electrification from New Zealand that this is an exciting wave of changing growth opportunity for our industry. It's good for our clients, good for our people, good for our business and naturally good for the environment. It will be good for our investors too. Element is well positioned to lead the industry through the electrification of automotive fleets, and we will continue to deepen our client relationships in the process. So with that, I'll turn the call back over to Jay, and thank you.
Great to hear firsthand from you the successes that you and the team in ANZ have enjoyed there, and thanks for joining us. Before we open the floor to questions, let me say a few words about market conditions, which are abnormal in a number of respects. The continuing strengthening of the Canadian dollar is one of those abnormalities. Current indications are that the Canadian dollar will remain unusually strong against the U.S. dollar, in particular, for the balance of this year. While we believe this is a temporary state of affairs, we're targeting year-over-year net revenue growth of 4% to 6% in 2021 before the impact of changes in FX. The COVID-19 pandemic also continues to make for abnormal market conditions. Vehicle usage rates improved throughout Q1, and that trend has continued post quarter end. Nevertheless, usage remained below Q1 2020 or pre-pandemic levels in the quarter. As Aaron has indicated, used vehicle markets are incredibly strong right now, especially in Australia and New Zealand as a result of these microchip shortages. And because we bear the residual risk -- value risk of our client vehicles in ANZ, we are earning unprecedented gains on the sale of those vehicles at the end of their lease terms. Unfortunately, those are not normal market conditions for Custom Fleet. In the U.S. and Canada, and to a lesser extent in Mexico, the same microchip shortage is slowing the ability of OEMs to convert the significant volume of client orders that we are placing into delivery-ready vehicles. From where we stand today, we see varying degrees of impact at different OEMs, and the big 3 U.S. automakers said as much on their earnings calls last week. The upshots range from 0 to 50% production volume headwinds in Q2, the present quarter, where headwinds are the strongest. OEMs expect to catch up on production volumes almost fully by Q4. All OEMs are prioritizing the production of higher-margin vehicles, such as the trucks, vans and SUVs that align with the strong majority of our clients' needs, which leaves Element less exposed than broader vehicle markets to the chip shortage impacts. Moreover, OEMs have generally maintained their fleet allocations year-to-date and have committed to continue to do so for the remainder of the year. This is because FMCs like Element are the OEMs' most reliable repeat customers at scale. Our clients continue to exhibit very strong appetites to place orders. This is no surprise. These assets are critical to their business operations and their ability to generate and sustain their own revenues. As such and as expected, based on the volume of deferred client orders from 2020, we've built the largest first quarter order book Element has seen in 4 years. We've been advising our clients to be decisive and place vehicle orders as soon as they can commit. We're recommending that our clients take the same approach to model year 2022 vehicles, and orders for those can be placed as soon as June and July with some of our OEM partners. We've also helped many clients meet their needs by evaluating, recommending and ultimately executing on alternative solutions such as different models from different manufacturers. This is all part of Element's value proposition. Our network of supply partners is vast and our expertise is deep, and we help make those complex circumstances easier for our clients to navigate. Recognizing this microchip situation is very fluid, there is the potential for up to $200 million of originations to slip from Q2 to Q3. In closing, notwithstanding the many and varied abnormal economic impacts of the pandemic, we continue to advance our strategic priorities, and we see ample evidence of the near and long-term viability of this growth strategy. Accordingly, we expect to grow net revenue 4% to 6% in 2021 before the impact of changes in FX. We expect to expand our operating margins and translate this growth into higher growth in AOI, to improve our ROE through migration to a capital-lighter business model, driven by both growth in service revenue and higher syndication volumes and generate strong underlying cash flow and return the same to our shareholders through dividends and share buybacks. We will continue to deliver a consistent superior service experience to our clients. We will continue to improve the effectiveness and efficiency of our market-leading business, and we will continue to prioritize the safety and well-being of our people who truly are our greatest competitive advantage. With that, let's open the floor to questions. Operator?
[Operator Instructions] The first question comes from John Aiken with Barclays.
Frank, I want to start off with you, if I may. In terms of the cash taxes paid in, I think, it was New Zealand, can you -- first, are you able to quantify it? And secondly, can you give us a little color as to what was driving the situation?
Yes. Well, it's driven by the profitability in New Zealand, and effectively, you have the accumulation of those cash taxes in the fourth quarter, which then rolled over into the first quarter. So it materially impacted our cash taxes for the quarter, John. That being said, we still are targeting $40 million to $50 million total cash taxes for the year to plus or minus order of magnitude $7 million to $10 million per quarter for Q2 through Q4.
Great. And then obviously, a commensurate increase to free cash flow moving forward to the remainder of the year.
Correct.
Jay, if I could, the disclosure that you had in terms of the timing of the service revenue and financing revenue between U.S. and Canada and ANZ and Mexico, I find that very interesting. Is there -- what's driving the difference between the 2 regions? Is it regulatory? Or is it just structure of the marketplace?
John, structure of the marketplace. In Canada and the U.S., it's very normal when you steal share, for instance, to immediately take on the services function on behalf of that new client within a quarter or 2. So the transition of maintenance, accident management, tolls and violations, et cetera, migrates from the incumbent to us. When we win that client mandates and within a quarter or 2, we're operational and move them off of the competitor platform onto our platform and we begin to generate that service revenue. Winning that mandate to look after the origination and maintenance of leases for that new client folds in. So the incumbent keeps the existing book of assets that they have manage those from a lease point of view on behalf of the client. We, as that asset matures and needs to be sold and replaced, look after that sale, the origination of -- the ordering and origination of that new vehicle and build our book over 3 or 4 years' time. So that's kind of the established market protocol in Canada and the U.S. Aaron, maybe you could just highlight the differences that have emerged in the Australia, New Zealand marketplace.
Yes. Sure, Jay. And if you look at our service revenue profile, as the fleet starts to ramp up, our service revenue progressively ramps up in value commensurate with the scaling of the units and the scaling of the fleet. So very good summary from you, Jay.
The next question comes from Paul Holden with CIBC.
So first question is with respect to servicing income. And Jay, I know you gave us a number of things to think about in terms of the potential recovery there. So if I think about it just getting back to prepandemic usage levels, which it will, I think, sometime soon, hopefully, and then the growth and the size of the fleet from a servicing perspective, should I not think about the potential for servicing income to be somewhere higher than it was prepandemic. And I guess what I'm looking for is help in gauging that delta once usage gets back to normal or pre-pandemic type level, like potentially how much higher could servicing income be based on the growth in your fleet?
We're very bullish in terms of service revenue growth opportunity within the organization, Paul. And it is due to a number of the factors that you've highlighted. So one, there's just the normalization of consumption as our current book of clients fully utilize those assets that form their portfolio. Secondly, the revenue assurance activities that we undertook through transformation allowed us to plug a number of leaks, that, again, with full utilization of the existing fleet will result in better yield on those assets. Thirdly, we have had opportunity to exert some pricing increases into the model. And as a consequence, we would expect those to flow through as incremental yield as well. And then over and above that, we have been doing a fair amount of work in the first quarter on both penetration and utilization. And we see a fair amount of white space within the portfolio -- global portfolio to not only sell more services to existing clients, but to increase the utilization of those services. And when I say utilization, for instance, when we have a driver of a client vehicle who is getting maintenance work done outside our network that is harmful to the value proposition of reducing the total cost of ownership of that fleet, it hurts our client, but it also hurts our revenue. And so having our drivers utilize the network of service providers that we have established is a win-win for both the client and for our organization. Over and above that, when we think about penetration, as we've talked before, we see even more white space in the markets outside of U.S. and Canada, in Mexico in particular. Manuel and the team have done a great job of introducing a number of new service offerings into that market, have found strong receptivity. And again, with a good size embedded fleet in that marketplace, the opportunity to add to what has traditionally been a leasing market, add more service offerings into that marketplace offers yet another opportunity to penetrate that white space that we see in services. So yes, we continue to await resumption and some degree of normalcy in terms of the entirety of our fleet being fully operational. But as both Frank and Aaron have indicated, we're quite encouraged by what we've seen in Q1 April in terms of, again, a return to normalcy and strong trend lines in terms of the consumption of services.
Okay. So if I interpret your answer correctly then and think about it, relative to your 4% to 6% overall revenue growth, this objective, this should be at least at the higher end of that range, if not possibly higher?
Yes. I won't comment specifically on that, but I would call your attention to Section 1 2 of the supplemental, where we've given some additional disclosure around deals that closed in the quarter. And when we say deals that close, these are deals that entered contract. These aren't work in progress. These are signed contracts. And as you will see on the number of revenue units that we've added, which will be a combination of lease revenue units, maintenance revenue units, accident management revenue units, et cetera, you could see that the book of business built very nicely in Q1. And again, remember, this is with an organization that -- operating in an industry where 11- or 12-month sales cycles is the norm. So knowing that we were just beginning to spool up the U.S. Canada operations in the second half of last year gives you an indication of the early traction that they have had and the continuing traction that Mexico and ANZ have had in terms of new opportunities, a number of which would be service-related.
Okay. Okay. And I do have a second question, and this will be a quick one. It's just when I think about the additional performing credit allowances that you're carrying, that $13.5 million, what would sort of be the key triggers there for potential releases? Is it simply further updates to economic assumptions? Or does it have to be something that's maybe more specific to Element's actual credit experience?
I think it's more the latter than the former, although the former will obviously inform that decision. But you would point to the delinquency rate and record low delinquency rates. You look at our impaired receivables that at the end of the quarter was $16 million, and subsequent to the quarter dropped to $4 million against the $90 million figure a year ago. You look at the performance of the portfolio, the quality of the underlying asset and actually the improvement of the credit quality of the portfolio year-over-year. It stands in a better position today than it has before. So I think that will inform the decision in terms of releasing more of the allowance for credit losses.
The next question comes from Geoff Kwan with RBC Capital Markets.
I have a question on originations. I'm just curious how your origination expectation for 2021 at the start of the year kind of compares to what it is today? I know you mentioned kind of the shift of the $200 million. But just wondering if you still think given everything going on that you can still hit your origination, what your internal target would have been? But also two was on Amazon -- or I mean, sorry, Armada. Again, given the chip shortage, what kind of gives you confidence that they'll be able to hit their origination target for 2021?
Yes. Geoff, I would say when we look at, for instance, Q1 originations, this is a historically low quarter for us in terms of originations and generally is the quieter quarter for originations for the organization. On top of that, obviously, we had the deferral of orders from 2020 that also impacted the Q1 originations, throw in FX impacts. And year-over-year, Armada was also a heavy contributor to a lower level of originations in Q1 of 2021. There were virtually no originations this quarter versus the first quarter of 2020. So I wouldn't look at Q1 as necessarily an indication of what our expectations or performance would be for the remainder of the year. We, again, booked the biggest order book in 4 years for Q1, just an outstanding quarter in terms of those deferred orders coming home to roost, the eagerness of our clients to place their orders and get an allotment of vehicles. We're very encouraged by that as a sign of what we may be able to expect in terms of an origination performance this year. At the same time, the big unknown is this microchip shortage. We've been on this issue for 6 months, been working hand in glove with the OEMs since December of last year to try and size this, try and prepare for this. We've been out in front of this with our clients. And hence, the building of the order book over the last 4 months. And based on everything that we have been told, based on everything that we have read, we can see some slippage from Q2 to Q3 in the neighborhood of $200 million is our best estimate at this point in time. But all the assurances that we have been provided would suggest that this is a quarter-by-quarter slippage within the year, and it should melt into 2022. Might that occur? Listen, this is a very dynamic topic. It's unknown, unforeseen and never encountered before. So it's hard to predict with any degree of precision how this will all unfold. In talking with Jim Halliday, our Chief Operating Officer, who lived through the Great Recession in this industry, he was amazed by how quickly the OEMs bounced back after the Great Recession despite all the financial issues that they were dealing with to ramp up production and to meet the insatiable consumer demand for vehicles. So fingers crossed, this is another one of those moments where they rise to the occasion, overcome the shortfalls and produce such that we can indeed have all the order book that we have successfully built get built in terms of new vehicles. So again, we really didn't want this. We felt like we were off to such a great start. This introduces a degree of uncertainty. We're working in a collaborative fashion with the OEMs to plan for and to mitigate the impact. And thus far, it feels like a quarter-over-quarter, Q2, Q3 deferral, but we just need to see how this plays out over the course of the coming weeks.
Okay. And just my other question was that new exhibit that you have on the new client wins or expanding of existing relationships, thanks for that disclosure. And I guess the 152 new clients, which is quite, I guess, significant. Essentially when you announced your Q4 results, you announced a number of new client wins. Is it fair to say that there would have been a number of additional ones that have been closed since you reported the Q4 results. But also just wanted to get your latest thoughts on the new customer pipeline, things like around geography, the self-managed opportunity, mega fleets, that sort of thing?
Yes. I think in answer to your first question, yes, I think that's a fair assumption that there are additional deals that have been secured subsequent to our Q4 disclosures. And as we sit here today, really like how the pipeline has developed in each of the 3 regions, very strong. And further, just love how the teams are thinking about velocity and reducing the cycle time from a very elongated 11 or 12 months down to something that could be 10 to 11 months to -- from a deal inception to signed contract. So very encouraged by what we see. Share of wallet? And so maybe I'll start the other way. So self-managed fleets are obvious in terms of our previous discussions and your knowledge of that marketplace and the size of the marketplace. And these would be a combination of vehicle leases and selling services to prospects that have become clients, have converted from self-managed to an FMC client. Market share is obviously stealing share from our competitors, and I'm pleased to say that retention has been very strong on our side. And so our batting average share has been very good in terms of [ win- lose ], very good. And share of wallet is -- bear us a couple of minutes of explanation. So this share of wallet is not only the long-standing clients of Element and maybe offering lease services to a service-only client or offering services to a lease-only client or offering more services to a lease and service client. But for instance, in Mexico, very often, Manuel and the team will work with a self -- with an organization that manages their own fleet, win the mandate for a tranche of that fleet, and that will be -- that first tranche is recognized in the schedule as a self-managed win. As they prove their capabilities and win a second, third, fourth and ultimately, all of the fleet's mandate, that goes into share of wallet. That's how we think about this. So when you look at share of wallet, think about that as a combination of increasing the penetration of our service and lease offerings to our long-standing organization or the clients, but also selling and winning more of the mandates of these self-managed fleets that we've been able to identify and get a toe in the door.
The next question comes from Jaeme Gloyn with National Bank Financial.
First question is around the net interest margin. Obviously, a really great job on the cost of debt and cost of fund side. On the top line, I just want to get a sense as to maybe the contributing factors to the increase there. Can you break out the contribution of the reserve release, the impact of gain on sale in Australia, New Zealand and also the impact of mix shift as Mexico, Australia, New Zealand increase?
Absolutely.
Frank, if you -- yes.
Sure. I can take that, Jay. And typically, we wouldn't break out those components for that. But as you know, we did break out the provision for credit loss. So that was a $3.5 million benefit there. There has been some very good positive momentum on gain on sale at Australia, New Zealand, as Aaron has pointed out, the strength of that market as well. So without getting into the specifics, I think you've hit on some of the key points. But underlying the strength really is the core business and what we've been able to do both from the top line piece of the origination side as well as the -- both the quantum -- managing the quantum and the cost of our debt over the term, which has expanded those margins materially. So I think that's where you see a lot of it now. If you were to look just at the provision for credit loss, which we did disclose on a year-over-year basis, that would contribute a reasonable, call it, 50-ish basis points of the improvement year-over-year, if you were to back out that $12 million charge last year and then put back in the 3.6 -- back up the $3.6 million in this quarter. But you'd still have a very significant improvement in your NFR yields for the business.
And Frank, that's really -- to your point, once you strip out the allowance for credit loss variance and normalize this for FX, you're still 2.5 percentage point year-over-year growth in net financing revenue and a continued expansion of the net interest margin. And again, it does come back to this mix and the continuous syndication of the lower margin U.S. portfolio and the rapid growth in the ANZ and Mexican portfolios, both of which have superior yields on their portfolios compared to the U.S. And then obviously, the continued success that we've had in both reducing the quantum of indebtedness on our books down to 5.5, 6x tangible leverage at quarter end, but also the cost taking out over $1 billion of high-cost financing from that structure. So all contributing to a very impressive [ one. ]
Okay. Great. And second question, still, I guess, in the same vein, but around the leverage of 5.5, 6 as you just mentioned. How are you thinking about that for the rest of the year? Is this the type of buffer that you're comfortable with running at, given you were at 5.7 last quarter? Or how should we think about leverage going forward here as the economy continues to reopen?
Jay, would you like to take the first crack at that?
Sure. Yes. So Jaeme, as you know, our long-standing objective was to hit that 6x tangible leverage, delighted that we were able to do so as part of the transformation of the organization. And it's our belief that plus or minus 20, 25 basis points, we should be at or around that to maintain, if not indeed enhance the credit rating that we have with the various debt rating agencies. So call it, 575 to 625 is kind of our comfortable landing zone. And recognizing that FX and syndication volumes can rapidly move that around. We feel that, that 40 or 50 basis point range around the 6x tangible leverage is where we'd ideally like to be. With the strengthening of the Canadian dollar and the continued strengthening of the Canadian dollar, that is taking us down to a lower level of tangible leverage than what we expected or wanted, recognizing that there is a inefficiency for being underlevered. And so we -- and again, our fundamental assumption is that the strengthening of the Canadian dollar is temporary. It will, in time, weaken against the U.S. dollar and we'll be back to "more normal" levels of relationships between the 2 currencies. So expect that we will probably end up closer to the 5 75 perhaps in the 6x tangible leverage as we go through 2021, recognizing that part of the performance that you're seeing is directly related to the FX situation and the strength in the Canadian dollar. And given that, that will reverse in due course, we won't want to be overly aggressive in our share buyback. So again, we'll probably run a little less levered than what we had planned, but we're talking here 10 or 20 basis points from where we would otherwise plan.
The next question comes from Tom MacKinnon with BMO Capital.
So Just a question on the free cash flow and just the relationship that it bears to the -- to your reported number or your adjusted operating number, I guess. If I look 5 months or 5 quarters ago, it was $0.07 -- free cash flow was $0.07 above that number, then it was 6, then it was 3, then it was 2, then it was 1. Now I can understand there's a little bit of this New Zealand tax noise that might make it more like the free cash flow being more like if it wasn't for that, maybe about $0.03 above your AOI per share. But why is that -- what -- how should we be thinking about free cash flow relative to the AOI per share. Should it just be like a couple of pennies above or $0.03 above? And -- or should it actually start trending up to be higher, like the $0.06 and $0.07 a share above as it was about a year ago?
Yes. Tom, when you look at the schedule in the supplemental that breaks it out, you can see actually there's a high degree of congruency in terms of the inputs to that schedule and the financial reporting of the organization. The one line that has changed materially over that period of time is this plus or minus other noncash items. And behind that is originations. Originations is a very cash-accretive exercise for this organization. It's cash accretive in that it represents an opportunity for this organization to generate a lot of revenue through the acquisition, interim funding and delivery of vehicles that gets deferred and amortized over the life of the lease. And as you think about that source of revenue, we get all the cash through these various revenue sources all at once, but it is actually deferred and amortized over the life of the lease. And so that creates a very substantial differential between reported earnings and cash flow. The reported earnings, obviously are delayed over, on average, 41 months, whereas the cash gets recognized right away. And so the pullback in originations has, in effect, unwound some of that upfront benefit, where we don't have all of that revenue associated with the acquisition, upfitting, interim funding, remarketing of that vehicle for the client. So as originations come back to normal levels, you would expect that line to come back to a more normalized level akin to what we've enjoyed in the past as opposed to what we've enjoyed in the more recent quarters.
That's very helpful. And just as a follow-up, I think, Jay, when you said -- when you reported the fourth quarter results, when you talked about $100 million in originations slipping from the first half to the second half, you said there would be no material financial impact. And I assume -- are you sticking with the no financial material impact now that, that number has moved up to $200 million, and it sort of moving between the second and the third quarter? Or are there any other things that would be materially impacted as a result of the chip pushout in terms of originations.
Yes. With regards to the guidance that we have provided around the nature and extent of revenue growth, the nature and extent of AOI growth, the free cash flow, all holds, the major amendment was indeed 4%, 6% revenue growth. It's there. It's just going to be masked by virtue of the strength in the Canadian dollars and the erosion due to FX, but the underlying growth as you're seeing in the results that we've shared with you is there. So the model is being proven out. As Frank has noted, there's a few things in the first quarter that aren't necessarily indicative of what you should expect for the year. So while we do expect an expansion in the operating margin, 55.2% is definitely a high point. And so we think we've given you a number of different data points that will allow you to better calculate how this all should flow through to your models. That said, the premise that we set forth is intact, save the caveat that the 4% to 6% revenue growth will be on a constant currency FX-neutral basis as opposed to nominal.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Forbes for any closing remarks.
Thank you, operator. And more importantly, thanks to all of you for joining us today. We appreciate the opportunity to discuss these results in greater detail and look forward to any follow-up questions that you might have of us. In the interim, stay well.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant evening.