Element Fleet Management Corp
TSX:EFN
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
21.0403
29.74
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Element Fleet Management Corp
You don't have any saved screeners yet
Welcome to the Element Fleet Management Third Quarter 2019 Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. [Operator Instructions] To remind listeners that some of the information in today's call includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties and the company refers you to the cautionary statement and risk factors of its most recent MD&A and AIF for a description of these risks, uncertainties and assumptions. Although management believes that the expectations reflected in the statements are reasonable, it can give no assurance that the expectations of any forward-looking statements will prove to be correct. Element's earnings release, financial statements, MD&A, supplementary information document and today's call include references to non-IFRS measures, which management 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. Please go ahead, sir.
Thank you, operator and good morning to all of you joining us on the call to discuss our third-quarter results, the progress we continue to make on our transformation and our outlook on the gross capabilities of our business. Since our last call in August, Element employees have continued to outperform expectations on our 27 months client-centric journey to transform and to strengthen our organization. 13 months of work under our belts were quickly approaching the halfway point in our transformation and I'm pleased to say that we're continuing to deliver for all of our stakeholders on all fronts. In the third quarter, our core business achieved quarter-over-quarter and year-over-year increases and adjusted operating income. We surpassed our year-end 2019 transformation goal of actually $100 million in annual run rate pre-tax profitability improvements and increased our cumulative targets by 20% of $100 to $120 million by the end of this year and from $150 million to $180 million by the end of 2020. We continue to syndicate tranches of our core earning assets to de-risk our balance sheet, reducing our tangible leverage ratio, while generating profitable new revenues. And we completed our in-depth examination of the US-Canada market for Fleet Services and based on the resulting insights and our views on the Mexican and ANZ market prospects, we believe that Element is capable of achieving global revenue growth of 4% to 6% annually.Lastly, we felt a great deal of pride and excitement with last week's announcement that Standard & Poor's initiated coverage of element with a BBB investment grade credit rating with a stable outlook. This milestone furthers our stated objective of issuing bonds in the US unsecured corporate debt markets in the first half of 2020 and speaks volumes to how far we've in the past year.As I wrote in my letter to shareholders this quarter, I viewed the opportunity presented by Element's ongoing successful transformation program as the first of three waves of opportunity for our organization. Each subsequent wave builds on the learnings, improvements and momentum generated by the preceding wave. Transformation is the opportunity for element to focus on its industry leading fleet management platform and to deliver the superior client experience our company is known for with consistency.This transformation has been our singular focus since we announced the program in October of last year and what a remarkable success it has been and continues to be. In the third quarter, we actioned an incremental $17 million of profit improvement initiatives, bringing our cumulative total to $102 million as of September 30. The initiatives action to date will improve Element's operating income by at least $70 million in 2019 and by at least $90 million in 2020. In other words, the improvements we are making to our business on behalf of our clients are also delivering improvement to Element's bottom line, and we're enjoying a healthy return on our investment in the same.Having now surpassed our year-end 2019 goal of 100 million in action profit improvement, it bears repeating. We've increased our target to $120 million for the end of this fourth quarter and we've upsized our total transformation target from $150 million to $180 million of action run rate pre-tax profit improvements by year-end 2020.We expect this 20% increase in our 2020 target to require commensurate increase in one-time investments and transformation as well with the cumulative anticipated investment from $150 up $280 million. As a first, three big ways of opportunity for Element. Our transformation program is both growing and cresting. I couldn't be happier with the incredible efforts put forth by our employees, the outstanding leadership of my executive colleagues and the resulting progress for our organization.Building on learnings, improvements and momentum generated by our transformation, we identify the second wave of opportunity for Element; one comprises syndication and working with at large rapidly growing client that we've been telling about and let's refer to them as our model. The second wave of opportunity is building momentum. In the third quarter, we syndicated approximately $700 million of fleet assets and in the process reduced our tangible leverage and generated over $23 million of high-margin revenue. In doing so, we achieved a tangible leverage ratio of 6.74 as at September 30. If we were to exclude the non-recourse warehouse credit facility we created for Armada from the tangible leverage calculation, the adjusted ratio would fall to 6.39. The investment grade credit rating we received from S&P last week is in large part a result of the deleveraging already achieved by our syndication efforts. The S&P ratings furthers the pursuit of our state of the project to issue bonds in the US unsecured corporate debt market in the first half of next year. Issuing bonds will allow us in turn to mature our capital structure by replacing our convertible debentures due in June 2020 with a more economical and appropriate form of financing.The end result in the not too distant future, there is a lower overall cost of capital for Element and the further strengthened and de-risked balance sheet. Clearly, the second wave of opportunity for Element syndication and Armada will continue to swell first in 2020 and beyond. This promising and exciting and the associated teams are invigorated by the sheer scale and potential of the second wave of opportunity.The third wave of opportunity for element is now on the horizon. And it is a strong sustainable organic revenue growth. Our solid progress in the first two waves has encouraged us to advance our thinking regarding the nature and the rate of growth Element should aspire to achieve the top solidified transformed operating platform and a strengthened de-risk balance sheet. Led by our commercial teams and with cross-functional collaboration from across our businesses, we have completed a comprehensive study of the US calendar market for fleet management services.This study involved gathering and analyzing data regarding market segments, part penetration, pricing and other industry dynamics gleaned from literally months of research as well as over 50 in-depth interviews with clients, prospective clients and industry experts. The resulting insights are underpinning the development of our enhanced go-to-market strategy, which will take full of element to evolve capabilities as a result of the transformation.Based on the learnings to date and considering the growth prospects in both Mexico and ANZ, we believe that Element is capable of achieving global revenue growth of 4% to 6% annually. We anticipate being able to generate this growth by holding market share from improved client retention, by optimizing our sales processes with respect to existing and new clients throughout North America, better managing client profitability, leveraging our leadership position in the fast growing Mexican fleet market, using the company's strengthened financial position to convert self-managed fleets to outsource programs in both private and public sectors, and the periodic addition of mega fleets, such as Armada.Our third quarter core business results contain glimpses of this growth potential; 11% growth in year-over-year Q3 net revenue and that servicing income, 11% growth since this time last year and assets under management, 31% growth in year-over-year Q3 adjusted operating income. 42% growth in year-over-year Q3 originations, and a remarkable 61% year-over-year growth and assets under management by our colleagues in Mexico. We continue to leverage Element's international platform to offer clients competitive economics and unmatched services. A third wave of opportunity for long-term growth is only beginning to take shape. But there is every reason to believe we will have all it takes to fulfill our market leading platforms ample potential in 2020, 2021 and beyond.Before I turn the call over to Vito, a few comments on our formal process of solid 19th Capital. As we mentioned on the call last quarter, we've seen a softening of demand and thus pricing for our idle assets in 19th Capital over the last few months. On accounts of the impact of tariffs and trade spats and a lot of truck production by OEMs.Without knowing whether the current market softness was tempered or the new normal, we believe that it makes good sense to maximize the value of this non-core asset and enable element leadership to remain focused on the three waves of substantial opportunity in front of our core business.We've not set a time frame for disposition. We commit to updating the market when a course it has been decided. Until then, we don't intend to comment further, other than to say that any disposition of 19th Capital will have zero impact on our current and future transformation success on our continued deleveraging and the plans to further strengthen our balance sheet and lower our cost of capital on our 2020 EPS guidance.With that, I'll invite Vito to provide you greater detail on our financial results.
Thank you, Jay, and good morning everyone. It is great to be with you this morning to talk through our Q3 results and the progress we are indeed making in our transformation strategy, exciting times in Element these days, and thanks to the tremendous work and commitment of the entire team at Element, we have generated tremendous momentum. As you all have seen within our disclosures are Q3 '19 core fleet adjusted operating income was $129.8 million or $0.22 EPS, a meaningful increase of 30.5% versus prior year and 2.4% versus prior quarter. This strong performance is being driven by several factors, Let me start with a view of the movement in net earning assets in the quarter. I refer you to Section 3.0 in our supplementary information, which walks you from an end in Q2 '19 position of $12.3 billion in core end of period earning assets to 12 billion as at the end of Q3.The point to note here is that notwithstanding syndicated volumes of 0.7 million in the quarter, core earning assets reduced by only $0.3 billion due to strong activations of $1.6 billion, offset by amortization of $0.9 billion and dispositions of 0.4 million. Another very strong indicator of our progress is of course originations. In Q3, originations totaled $2.1 billion, 41.7% increase over prior year and 16.2% increase over prior quarter.On a year-to-date basis, originations now total $5.6 billion, a 20.4% increase over prior year. As we continue with our syndication strategy, assets under management becomes an increasingly important metric for us to focus on, and Section 3.3 and Section 3.4 of our supplementary provides detail on how this has progressed by quarter. Core assets under management at the end of Q3 were $16.2 billion, which represents a significant increase of $700 million from last quarter.Whether you're talking about net earning assets, originations, assets under management, the strong performance across all of these metrics is reflective continued success of our client retention efforts, first meaningful quarter of Armada originations, strong growth in Mexico and importantly underlying growth in all our geographies.Let me now turn to some of the P&L highlights for the quarter. Our core net revenue was $244.5 million dollars in Q3, 2019, an 11.1% increase, $24.4 million versus prior year and down slightly $3.9 million from Q2 levels. As you're aware, the components of our core revenue are financing service and syndication. Let me touch briefly on each of these. Net financing revenue was 99.2 million in the quarter, a reduction of $3.2 million or 3% from Q2, 2019, resulting of course from lower average net earning assets of $390 million or 3%. The consistent NIM percentage. Q3, 2019 was down $4.7 million from Q3, 2018, mainly driven by the lower net earning assets due to syndication, combined with the effects of the previously disclosed one-time swap gain in Q3 of 2018 of $4 million. Overall, we remain pleased with our net financing revenue performance.Turning to net service income for Q3, $122.2 million, representing a decrease of $2.1 million over Q2, 2019, mainly driven by lower volumes due to seasonality, impact in maintenance and vehicle titling. While quarter-over-quarter performance was impacted by normal seasonality, year-over-year performance was not and showed strong growth of $12.4 million or 11.3% over Q3, 2018, across numerous products resulting from the continued progression and transformation initiatives as well as organic growth in our North American business.Now looking at the third revenue components indication, as Jay mentioned, Q3 volumes aggregated to approximately $700 million, down 7.7% from Q2, but syndication revenue increased to 6.2% this quarter to a total of $23.1 million. The higher yield, we realized on the syndicated assets in Q3 is reflective of high-quality assets and the continued expansion of qualified syndication investors.Moving on to our core fleet expenses, and I'll direct you to Section 2.1 in our supplementary, core adjusted operating expenses in Q3 aggregated to $114.7 million for the quarter, a decrease of $7 million from Q2, 2019 and $6 million from Q3, 2018. As you may recall, Q2 2019 was impacted by an adjustment in the amount of $4.2 million to our year-to-date accrual related to our anticipated year-end pay performance compensation as well as the timing of professional fees which increased $3.1 million.During Q3, we continued to see improvements in operating expenses of $2.4 million compared to Q2. There are directly attributable to our transformation program and $1.8 million positive impact from currency exchange rates. Offsetting these savings are $1.8 million in investments in growth areas including ramping up our support for Armada as well as our continued growth in Mexico.Turning to the balance sheet quickly, Jay spoke to the impact of both syndication and improved earnings are having on our tangible leverage. Section 4.0 of our supplementary tracks the quarterly movements in our tangible leverage. We ended Q3 at 6.74x and we're targeting less than 6x at the end of quarter 2020.Adjusting for our non-recourse warehouse facility, credit facility or tangible leverage would fall to 6.39 this quarter. The investment grade rating we received from S&P coupled with the existing investment grade ratings from Fitch, DBRS, and Kroll position us extremely well moving forward, commensurate with an improving cash flow profile and a rapidly deleveraging profile access to the unsecured debt market will give us flexibility and the opportunity to mature our capital structure moving forward.A few quarters back, Jay announced the forthcoming retirement of our EVP Treasurer. Karen Martin. Her time is drawing near. Karen and her team have truly been the architects of the tremendous progress we have made across our balance sheet initiatives. Karen, it's been an absolute pleasure working alongside you for the last 14 months, and I personally want to thank you for your friendship, your patience, and I wish you all the best in your retirement.Before I hand the call back to Jay and consistent with my comments on the Q2 2019 Earnings Call. I do want to mention a couple of other very important metrics. Our consolidated return on equity was a 11.5% for Q3 2019. This is in line with our expectations for the quarter and continues to put us on track to achieve our target range of between 13 and 13.5, exiting 2020 and secondly consolidated free cash flow in Q3 as depicted in Section 6 of our supplementary information amounted to $122 million, an increase of $61.8 million or 130% year-over-year.Lastly, I remind you that at this time, there is no change in our 2020 EPS outlook, we expect to generate after-tax adjusted operating income per share in the range of $1 to (indicernible) with that, Jay, I'll hand the call back to you.
Thanks, Vito. I couldn't be more pleased with the progress of our business and the efforts of our employees on all fronts. We're working hard we're outperforming targets and we're generating results for all of our stakeholders, our clients, our business, our investors and indeed each other. Element is a more engaging and rewarding place to work. Thanks to our people.All of this is gratifying, our agenda remains fixed. We remain focused on our clients whose experience is at the heart of the transformation. We remain (indicernible) in our pursuit of action, profit improvements, and delivering the associated benefits to our bottom line. We remain committed to further strengthen and de-lever our balance sheet, all the while lowering our cost of capital and we remain determined to meet the needs and indeed exceed the expectations of our audit. With that, let's open up the floor to your questions.
Thank you. (Operator Instructions). Our first question comes from Paul Holden with CIBC. Please go ahead.
First question is with respect to the increased guidance around the transformation plan and the organic growth expectations, but then the 2020 adjusted EPS guidance not changing, just wondering if you can square that up for us, maybe just simply a matter of timing, but we would like to understand that a little bit better.
Good morning, Paul. Yeah, we come back to the $30 million increase in transformation profitability improvements to be actioned in 2020. A lot of that is very much related to timing. So generally the same (indiscernible) type of savings that we have been generating throughout 2019, so think about revenue growth through revenue assurance, think direct cost savings through strategic sourcing, pick OpEx reductions in terms of indirect procurement, So a number of those items would have a bit more of a lag, than if this was organizational changes and (indiscernible) nominated and salary savings hitting the bottom line almost thereafter. And so, it is very much a bit of a lag, We envision tackling much of that in the second half of 2020, and as a consequence, its full impact will be felt more in 2021 than 2020.
Got it. That makes sense. And sort of the follow-up to that, Jay, you mentioned that you're required investments will also be increasing by $30 million. Can you give us a sense of the nature of those investments, specifically what the $30 million will be allocated to.
Yeah, again it had a very similar flavor to the spend that we're looking at in 2019 and just giving a little bit more towards professional fees, especially IT consulting as we effect process change to create that kind of a long-lasting nature of savings that we have identified, especially as we look at revenue assurance and Strategic Sourcing.
Okay, got it. What particularly caught my attention in your prepared remarks and in the press release was the comment around the Board considering options around best allocation of excess capital. I know that's something for the future, but want to ask a couple of questions there given it piqued my interest, does that suggest you would contemplate M&A, it never seems to me that that was a big part of the go-forward strategy here, but wondering if that's changed, and if it has not, what kind of past allocation of excess capital might you be considering.
Yeah. So it's a little hard on the head to conceive this organization to be in a position to think about the need for and thus the options that are available to allocate capital having but a year ago, issued $345 million worth new equity, that was a point in time, allow us to indeed stabilize the balance sheet and of course the efforts that we have undertaken, the combination of transformation in the cash flow productivity that is generated for the business, coupled with syndication, our ability to de-lever the balance sheet, and lastly through monetization of non-core assets, we haven't materially decrease the indebtedness of the organization and as we locked over the course of 2020, see a continued decline, we're looking at a sub-6 times tangible leverage ratio exiting 2020 and so quickly getting to the point of optimum leverage and at that point in time, obviously, we'll be in a position to have excess equity and with the strong underlying cash flow profile of the business, an opportunity to utilize that excess equity capacity generally in one of three ways dividends, share buybacks and or investments.Yeah, again, this will be a decision that the Board considers in 2020 and we'll be back to you in terms of the results of that deliberation. I would signal that we are in the midst of transforming the business, we have stabilized it, we are strengthening it and through the strengthening process making the platform more scalable as well as more resilient and so while it is capable today bearing a much heavier load than what might have been the case in the past, it is still strengthening and so the organic growth prospects that we've highlighted for you in our disclosures this quarter are indicative of our event . We believe there is ample low-risk opportunity for strong profitable growth in this business through our organic growth strategy.And as a consequence, acquisitions are not in our purview at this particular point in time.
Got it, thank you. And one final question for me on the same thing, the capital strength; how do you think about the 575 of converts coming due in June 2020, the free cash flow, you're generating the business but how the flexibility to issue subordinated debt. I mean, my numbers would suggest that you could refinance the majority of the [indicernible] or repay it with internally generated free cash flow, is that assumption correct, and how are you thinking about it.
So, as we have articulated this in the past, we do not see the convertible debenture as either a cost-efficient or appropriate component of our long-term capital structure. So we're moving the 575 million of converts coming due next year from the capital structure, has always been an ambition harbored by this leadership team. The ability now to access to US bond market consistently means to readily facilitate that. As you well know, we have very strong cash flow generating capabilities within the organization and that will certainly be directed towards retiring some of the $575 million, at the same time we think it's important to gain access to the US bond market as yet another funding facility for this organization and would tend to have an issuance in that market in the first half of 2020.
Got it. Thank you very much. I'll leave it there.
Thank you.
Our next question is from Geoff Kwan with RBC Capital Markets. Please go ahead.
Hi, good morning. My first question was just a reference to growing the top line starting 2020 of the 4% to 6%, and specifically the commentary around mega fleets and in-sourcing, my thought was that this part of [indiscernible] tends to be a harder area to penetrate and trying to win over those customers. I'm just wondering from your perspective, obviously, the Company is in a much better position today than before, but what's driving your thought process and how you're able to penetrate these companies whether or not, that is a self-managed or the mega fleets and your references to contract wins and if there is any sort of line of sight and stuff you think you have a good handle on, but have you been able to win any of these types of customers so far?
Yes, good morning, Geoff. In fact, if you would allow me, I'll just take a couple of minutes maybe to share for all some of the details that we are going to be able to communicate to you with regards to the market analysis that we have recently conducted. So as we look at the US-Canada fleet market, we have determined that there's an estimated 21 million vehicles in fleets across the United States and Canada and that this fleet represents approximately $18 billion to $20 billion in annual net revenue opportunity for FMCs; a goodly amount of that remains self-managed, ie, not in the hands of FMCs and so there's a large unpenetrated market that is available. For us, we have traditionally targeted several sub-segments. We've identified 16 different it's within this US capital market place, we've traditionally targeted the subset of that 16 so segments and roughly one-fifth of that market, about $4 billion of addressable revenue as what we have targeted and as you think about that $4 billion of addressable market, about half of it remains self-managed and this is the context, if you will, which I will offer a response to your question.So as we think about our growth strategy, the periodic condition of mega fleets and tackling self-managed fleets are two of the six different means by which we see this organization growing at a rate of 4% to 6% a year. First and foremost, this is bulky retention, keeping what we have by delivering that consistent superior client experience. We also see, short-term, an opportunity to elevate our sales force effectiveness and in doing so the productivity and closing rate of that group, so that we capture our fair share of opportunities, and the third piece, there's again more immediate and thus capable [indiscernible] short-term growth is a focus on increasing client profitability and there I think share of wallet is a prime example.The other three aspects, one of which is Mexico are more long-term in nature, so when we think about Mexico in the growth prospects that we've enjoyed to date, we continue to see a market that is expanding rapidly and offers continued opportunity for upsize growth and then we round up with self-managed fleets and the opportunity to address large and mid-market fleets with the sales leaseback proposition to take those fleets into the FMCs, and in doing so provide leasing and servicing to these organizations to this point of have owned and managed their own fleets.And we've done a great deal of work to understand the value proposition that will be required by prospective clients in these two segments and are comfortable that we have not only the attributes but indeed build the associated capabilities to be successful in converting these fleets from self-manage to clients of this organization. And then much like we did with Armada, we will position ourselves with a select group, very finite population of potential mega fleet clients, organizations whose size of fleet, whose complexity of needs are such that there are few and far between the wrong relationships that need to be cultivated and so that will be a parallel strategy as we think about growth alongside the five trusts have articulated.
Okay. And so it's something that the company has done since you've joined that puts you in a better position to capture or is it maybe there hasn't been as much focus trying to capture. I'm just trying to understand what's changed as to how you think you can kind of capture those specific client, because presumably there are self-managing for a reason?
Yeah, I'd say that the industry has focused a lot of energy on those organizations that have outsourced their fleets' FMC's and have not a lot of energy has been devoted to stealing share as opposed to actually growing the market. And again, for us when we look at the addressable market in the segments that we're already concentrating in, we estimate the self-managed fleets to be half the market and those segments were not participating in, rough, rough, rough two-thirds of the market remains self-managed.So we think there's an opportunity to sharpen our value proposition, build out our sales force capabilities to be more aggressive in selling into the [indiscernible] with a very discrete value proposition that would be compelling for the client and compelling for our investors.
Have you had any conversations with these types of customers that give you that, I guess confidence that you think can make some inroads in that part of the market?
We have.
Okay. Just one last question I had was on page 18 of the presentation, was talking about seeing the first material impacts on the revenue side in 2020, is that really a function of the areas that you've talked about that have been driving that, is it , can be like through higher originations, is it service revenues, clients like Armada, just trying to get a better sense as to where we see the growth within that various revenue buckets that you've got?
Yeah, we're probably not going to provide much more in the way of guidance in detail around that. But suffice it to say, some of the aspects of the growth strategy are very short term in nature, allow us to secure those quick wins, build that confidence, build that momentum and others require a little bit more time upfront to, again, finalize the go-to market plan structure, compensation structures that provide the necessary training and development for our sales force to ensure that they are well prepared for the opportunities we see in the large addressable market.
Okay, great. Thank you.
Thank you.
Our next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning. Can you guys hear me okay?
Yes.
Yeah, Mario.
Thanks. Just really quickly on 19th Capital. $260 million is what I saw in the Q2 slides for the residual value, is that number still appropriate to use?
I'm not quite sure what you're referencing, but, for us, we don't break that up per se, but [indiscernible] that works.
I'll try to be more specific. On your Q2 slides where you said repositioning 19th Capital, you made a reference to, we expect to recover as much as $100 million of the $260 million residual value. I guess the question is, is the residual value still $260 million and how much of the $100 million have you recovered?
Yes, Mario, it's Vito, here. What we've got in respect to the $260 million, we got third-party liability of approximately, call it, $140 million, and assets of roughly $400 million, so that's the reference to the $260 million and that still totally applies. In respect to the $100 million that we had targeted, to-date, we've collected approximately $60 million of that $100 million.
Okay, that's not bad; now, Jay, you said you said exiting that business or selling 19th Capital should have no effect on your leverage ratio, would it be more appropriate to say that it could have no meaningful effect on your leverage ratio, because presumably if you sell it for less than the carrying value, there would be at least a modest effect?
Yes, exactly. And so what we're saying is, it has no impact on our continued deleveraging of the business.
Okay, that's helpful. And then...
Our communication program, our cash flow generation has sufficient magnitude and velocity such that we could absorb any write-down of that asset should one required.
Yeah, that totally makes sense to me. You referred to 4% to 6% revenue growth going forward. That number also makes a lot of sense to me, but more for 2021 because I would have guessed that in 2020, there's still a lot of momentum from the syndication activities. So, wouldn't it be more fair to say that the 2020 revenue growth still looks north of four to six. It's more 2021 in a more steady state environment.Do you think that's right?
I'll leave that to you. So for us, we're guiding you to a mid to long-term growth prospect for the organization and and the rationale behind that in terms of the six different growth initiatives that we have, we certainly have great and strong momentum coming out of 2019 as it relates to this whole new line of revenue being syndication, but Geoff we're comfortable with the 4% to 6% guidance.
Let me ask you in a different way, is there any reason why syndication activity might decline from the current level, the levels we've seen over the last two quarters.
So, when we talked about syndication as an introductory conversation earlier this year, we offered a little bit of insight in terms of how we're thinking about syndication, and we started that [indiscernible] think we'll do $2.5 billion worth of syndication volume this year and in future years. So, in terms of sheer volume, we signaled that feels like an appropriate level of activity that we could contemplate in 2019 and beyond. And then we said in terms of yield on that volume that will be a function of mix and that mix in turn will be a function of Armada as well as the core assets, non-Armada assets that we will syndicate. And the last thing we said about yield was that it will generally hold true in terms of consistency quarter-over-quarter, say Q4 which tends to be a stronger year given year-end tax planning needs of syndication investors.And so, as memory serves me, those were some of the points that we raised on syndication to help you better understand kind of this novel approach that we're taking to the business and to allow you to look at 2019 and extrapolate as to how that might translate into 2020 results.
I think you've given enough information, we have to just play with the numbers ourselves, so I appreciate that. One final thing is, and far be it for me to impose my view on what should be treated as core, non-core, but I certainly do have a view why would things like bonuses and incentives in a given quarter be treated as non-core, and in the previous quarter, the bonuses and incentives were treated as core, so for expenses [indiscernible], what changed in your view that would cause a change and what is core versus non-core?
I think there may be confusion here on your part and apologies if we contributed to that. So, core, non-core as the delineation of the fleet management services business versus for all intents and purposes 19th Capital, and there would be no bonuses attributed to 19th Capital that would ever be associated with solid performance in the core business. So, in terms of below the line [indiscernible] as we look at below the line and the one-time investment that we're making in the business to generate from 150, now 180 annual profitability improvement, we [indiscernible] that piece of the annual incentive program that our employees are earning as a result of their contribution to the transformation objectives, that piece falls below the line and is included with the other transformation program one-time investments recognizing that, obviously, they won't be continuing post 2020.So, perhaps that's the piece that you are relating to, but I have some clarification, any bonus that is earned as a consequence of the core business [indiscernible] to the core business results.
Yeah, and I'll just add to that I am very unhappy to also take it offline and provide you some bit more detail; absolutely no inconsistency quarter-to-quarter. And secondly, the accrual through above the line is running at rates in excess of what a one-time bonus would be across the organization.
Okay. Let me just asked it this way. On page 14, of your MD&A, additionally, these costs include transformation-related costs, including bonus incentives and accruals associated meeting transformation-related target, so I get what your point is here because they all relate to the transformation. Can I just ask this way, what was the quantum of bonus and expenses that were allocated to transformation-related expenses in the quarter?
On a year-to-date basis, that transformation line clearly is the majority of that line that relates to obviously severances and professional services. On a year-to-date basis, the bonus is being attributed to transformation aggregate to $8.5 million, year-to-date.
And then just, clearly, you would expect that $8.5 million of bonuses to go away once the transformation is complete, though?
Absolutely. 100%. Yeah, and for even greater clarity, the accrual above the line is higher than one would expect. Yeah, we provide the Balanced Scorecard as part of the supplemental disclosure, you can see just how many of those metrics are outstanding, that in turn is the direct contribution of our employees in terms of their energies, their intellect against these few things that matter most to all of our stakeholders and their absolutely [indiscernible] performance that we're seeing in the organization is just nothing short of amazing and with our tight alignment to pay and performance, our employees will be absolutely rewarded for their considerable effort and that is reflective above the line in terms of an accrual for short-term incentive program that is well beyond the norm, and that is represented for local line for that portion of the stiff program related to achieving outstanding transformation benefits as they are.
Okay thank you, that totally satisfies my questions. Thank you. Appreciate it.
Our next question is from Brenna Phelan with Raymond James. Please go ahead.
Hi, good morning. So one clarification question on the growth strategy and your identified addressable market that increased from 20% to 30%, is that moving down into small/medium-sized fleets or is that you think you can address more segments or is that additional services that you think you can provide?
Yeah. So it is moving into adjacent segments, but those adjacent segments will not be small or micro, there will be other adjacencies that we've identified as we segmented the market into '16 different sub-segments.
Okay. Thank you. And turning to the free cash flow per share number of $0.28 in the quarter, the level of the non-cash revenue expense adjustment of$33.9 million, is that acceleration somewhat sustainable given what you've done to improve your profitability as the business continues to scale? Or maybe some color on the moving parts in that number.
Yes. Brenna, thank you, clearly, there is some lumpiness in that aspect of the free cash flow, some seasonality and I would say that, point to more directly the increase in operating income as a better proxy, obviously, for free cash flow improvement, and maybe as we move into Q4 across all these metrics will also be showing a bit of a trailing 12 months, which I think gives us a bit of a more representative view of trending.So, I'll stay away from the particulars from an account-on-account base, what drove that $30 million on a quarter-to-quarter basis, but I'd call it effectively seasonal and timing.
Okay, and then, as you look to the enhanced profitability plan, spending more on IT to better equip the organization to scale, how do you think about the ultimate breakdown of your expense base for fixed versus variable? How should we be thinking about the operating leverage opportunity that you intend to build out?
Yes, so as you will probably note, we've gone from 45% AOI margins this time last year to 53%. So we've had a significant margin expansion and in part 2 of that combination of both growing the top line as well as driving down operating expenses.For us, everything that we're doing in terms of the stabilization and the strengthening of the platform is done in the context of scalability, and so we believe that there is a number of different functionalities that the organization performs on behalf of its clients that are indeed readily scalable.Some aspects of our model, such as FPS, the actual client interface, is less scalable with each new client that comes on. This should need 4 additional FPSs. So again, we would anticipate that this is a model scale nicely. But we will nonetheless see some incremental expenses associated with growth, and in particular, as you want to observe this, take a look at Mexico, so Mexico we seeing normal growth there, it has increased its net earning assets, they effectively doubled them over the last two years, it is in no way, shape or form doubled the staff complement to our run rate operating expenses. We see some growth in Mexican OpEx, but nowhere near the growth that we're seeing in terms of originations or revenue.And so again, there will be kind of a underlying [indiscerniable} we're doing, we're looking to trade an automated platform that skills well, but there will be some ncremental OpEx associated with growth.
Thank you. That's very helpful, and last one from me in your revenue growth goalposts of about 4% to 6%. Is there anything in there that contemplates an initiative or focus on electric vehicles?
Well, thank you for raising that,we've talked about this on a number of calls, and I would have said to you that in my travels across the five regions we operate and talking with our clients from a variety of industries in those geographies, in recent quarters the discussion around electric vehicles has been rather muted. It's interesting over the course of the last quarters things are starting to pick up, accelerate in terms of greater interest, not yet adoption, not even yet experimentation, but a greater interest in understanding the current state, the evolution, cost comparisons, in terms of total cost of ownership of a nice versus an electric vehicle, so US consequence is part of our growth initiative, we will be dedicating resources within our organization to broaden our understanding of the economics associated with this, broaden our understanding of the likelihood of adoption across a variety of different industries as well as strengthening our ties to the OEMs of electric vehicles as we prepare for the inevitable shift as more of our clients contemplated adoption through pilot of electric vehicles going forward.
Okay, so not specifically forming part of that 4% to 6% but you're thinking about it.
Yeah, the electric vehicles would not and to themselves rank a seventh area of growth for us as we think about the 4% to 6% ,three years from now, yeah I think you're going to see that emerge as an area that we will be working with our client to advance [indiscernible] and advance sort of adoption, but there is still a fair amount of one cost differentiation into intransigence on the part of clients to consider pilot on a long wide-scale adoption of electric vehicles.
Okay, thank you very much.
Thank you.
Our next question is from Jaeme Gloyn with National Bank Financial. Please go ahead.
Hi, good morning. Is there any price inflation embedded in the 4% to 6% growth, and if so, how much.
As there is, and there is a fair degree of complexity associated with that inflationary component depending on whether we're talking services or financing, so let's leave it that has been considered as part of the equation and maybe I can get into the the detail with you offline.
Okay. And then with respect to the comment around share of wallet, are you able to put some context around that, in the sense that let's say a typical Element client has 10 services outsourced and Element is providing 3, 4, 5, can you give us a little bit of a reference to what that could be?
Yeah, it's interesting, depending on what geography you are in, our penetration of services varies considerably, so in some markets, the finance contract dominates and services kind of also ran if they are even a consideration, and so we see some markets where we have a significant book of business from the financing side of the house and actually do very little in the way of services, and so we see an opportunity obviously to take the innate abilities, the support systems that we have put in place to rapidly introduce and promote the adoption of those services in those areas.Further, there are some markets, certain of our services are far and more penetrated than others, understanding the why and leveraging those learnings or again promoting greater adoption in the remaining geographies makes great sense for us. And lastly, we have a variety of clients at our services only, enjoying those relationships greatly [indiscernable] profile of those, in the same time there's opportunity for us to put our balance sheet to work on their behalf and drive financing revenues for our organization. So, again looking at the full gamut of services that we provide, looking at the much stronger offering that we have to provide as a result of the efforts that we have undergone throughout 2019, we're feeling very good about our opportunities to introduce a compelling value proposition by way of incremental service offerings to our clients across the five geographies in which we operate in.
Okay, I'll leave it there. Thanks.
Thank you.
Our next question is from Tom MacKinnon with BMO Capital Markets. Please go ahead.
Yeah, thanks very much. Good morning. Just on the revenue 4% to 6% annual growth, beginning in 2020 and just to be clear, I assume by revenue, you mean net revenue, which includes net financing revenue, servicing revenue, and syndication revenue.
We do indeed.
Okay. And then how much of the, in terms of the profitability improvements exiting 2019 at 120 and exiting 2020 at 180, that's 60 improvement throughout the course of 2020. How much of that is in OpEx and how much of that is in this net revenue?
Tom maybe I'll take that one and thank you for giving me the opportunity, I think it's important and this [indiscernible] back to some of the EPS questions that we're getting around and why haven't you increased your EPS guidance, really we've got some really good feedback, obviously, from our supplementary and I want to just draw a couple of distinctions, 1.0 talks to action versus delivery and of course action is effectively as defined their in 1.0, which is when we take all steps required for an initiative to effectively deliver value. So, when you hear us referring to the 102, which is action to date in the 120 which is our projection for action through the end of 2019, and the 180, which is now the increased actioned through the period 2020 , it's just that action and that's reflected in 1.1. What we do for you in 1.2 is take the 102 that we've actioned to date and then give you a profile of how that is going to make its way through delivery in our P&L, and this is what Jay would have referenced of course in his commentary and we continue to be very, very transparent about it.So I'll take you there for a moment, 1.2, and you see that the 102 action, as of now, we'll deliver $70 million in FY19 with 38 of that being OpEx reduction, so call it just between 50% and 60% and then of the 102 action, we're seeing 90, so an incremental $20 million in 2020, related to what we've actioned to date, clearly we anticipate to action more so the F20 number will have the impact of that. So we're not giving guidance, so we're not giving you visibility of the 180, what is OpEx, but if you use the detail that we're providing in what we've actioned to date and the P&L components that we're providing there in 1.2, it's a fair proxy.
Okay. Now, then assuming this OpEx is 50% to 60% of this stuff and you have revenue improvements in units.
Yeah, we driving it back to 4% to 6%.
Yeah, just back to revenue 4% to 6%, you're going to get a good chunk of this driven by just your transformation initiatives, at least in 2020 and maybe a bit into 2021; the 4% to 6%, to what extent. I look at this as being after your finished with all this optimizing stuff that is embedded in your 180 target by the end of 2020, because if it didn't, we would assume that this 4% to 6% might even be a little bit lower post these improvements you get.
Again Tom, for us, we are guiding you in the market to expect 4% to 6% annual net revenue growth for the organization beginning in 2020, feeling very comfortable with that and further I have identified the pathways by which we derive our comfort and recognize that the mix in terms of those six pathways will likely evolve as we build our momentum establish our capabilities and go after some of the longer-term prospects that we've identified.
Okay, all right, thanks.
Thank you.
Our next question is from Jeff Fenwick with Cormark Securities, please go ahead.
Hi, there. I think a lot of the questions have been answered already. I guess maybe one question in that revenue discussion is just preference in terms of the mix in the nature of the revenue, meaning you've been allowing the earning assets to taper a little bit as you're targeting your leverage goal a little more syndication revenue, obviously offsetting that. As you go forward and you get to those leverage goals, are we going to see that inflection point where you begin to build assets on the balance sheet again or is there some preference in terms of mix between the 2 as we go forward?
Yeah, Jeff. As we remarked a little earlier, we would anticipate $2.5 billion a year of volume that we would do through syndication recognized and the economics associated with that are rather compelling. So we put that out there as bit of a soft guidance, if you will, in terms of help me understand syndication profile for the business. And as we said when we introduced syndication, we're still going to hear securitization as a funding vehicle, still very happy to hold those assets on our balance sheet for us having the duality of funding sources makes a lot of sense, especially as we are staring into rather uncertain economic outlook, having funding diversity recognized on the criticality of being able to finance our clients' fleets and those originations on an annual basis, it just makes sense for us to have that diversification and as a consequence continuity of access to funding.
last question. I mean just one last one here. The 180 target of spending through next year in aggregate, so as we enter 2021, does that all just go to zero then, are we not anticipating, we're basically saying that's the drop-dead date for the transformation spend and we should be good to go starting Jan 1, 2021.
Thanks for raising that; as we communicated from the outset, this is of 27 months undertaking, it began October 1, 2018, it will finish December 31 2020. And so as we've always [indiscernible] the performance, the progress that we've been able to make to this point in time couldn't be more pleased, couldn't be. It couldn't be a greater source of pride for us in terms of what our colleagues have been able to accomplish and yet we do have five more quarters to complete as we think about this transformation journey. It will end December 31, 2020, complete in terms of the objectives that we've set for ourselves to deliver that consistent client experience, the modernization and stabilization of the underlying platform of the business, the strengthening of the balance sheet; all of that will be complete and with that completion, the completion of the one-time investments to afford our investors the $180 million run rate profitability improvement that we're committing to.
Okay, thank you. That's all I had.
Thank you.
This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.