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 Third Quarter 2022 Financial and Operating Results Conference Call. [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 these statements are reasonable, it can give no assurance that the expectations reflected in any forward-looking statements will prove to be correct.
Element's earnings press release, financial statements, MD&A, supplementary information document, quarterly investor presentation and today's call include references to non-GAAP measures, which management believes are helpful to present the company and its operations in ways that are useful to investors. A reconciliation of these non-GAAP measures to IFRS measures can be found in the MD&A.
I would now like to turn the call over to Jay Forbes, President and Chief Executive Officer of Element. Please go ahead, sir.
Good morning to all of you joining us on the call to discuss another record set of quarterly results for Element, our full year 2023 results guidance and outlook and a few familiar topics we want to reiterate to stakeholders given the current macroeconomic environment. Frank and I will be very brief upfront to afford ample time for your questions this morning.
As you can imagine, we're very pleased with Element's third quarter performance, which is the direct result of our people's ongoing hard work and sharp focus on our clients and their needs. We expect element to perform even better next year as reflected in the 2023 guidance that we've offered, which Frank will take you through momentarily.
Management and the Board recently completed our annual review process where we reconfirmed the organization's continued commitment to our 3 strategic priorities being organic revenue growth, a top of a scalable operating platform, advancing a capital-lighter business model and returning excess equity to our shareholders.
We updated our 3-year forward view of our performance on key metrics by which we measure achievement against these priorities and our optimism and confidence are evident in 2 outcomes. First, we're increasing our baseline expected organic net revenue growth range from 4% to 6%, to 6% to 8% annually. This is based on the demonstrated capabilities of our commercial organization everywhere we operate as well as our confidence in sustained demand for Element's compelling client value proposition. Second, the Board has endorsed management's outlook on resulting free cash flow generation per share and increased the common dividend 29%, reflecting same from $0.31 to $0.40 annually per share.
Let me turn it over to Frank now to discuss our Q3 results and next year's guidance.
Thank you, Jay, and good morning, everyone. Q3 was another record quarter, and it's great to be able to continue demonstrating Element's ability to deliver on our client value proposition and generate value for our shareholders in the process. I'm going to talk exclusively about our organic results for the quarter, which means they exclude the contribution of net revenue that we don't expect to generate next year or in future years. I'm also going to say growth exclusively in constant currency. U.S. dollar strengthened against the Canadian dollar throughout the quarter, which benefited Q3 2022 over both prior quarter and prior year results. Constant currency eliminates those benefits making for cleaner comparability between periods.
As you'll hear, even after you control for these tailwinds of nonrecurring revenue and favorable FX, pure third quarter performance was outstanding. We grew net revenue 10.2% over Q3 last year, and our scalable operating platform magnified that into 16.3% adjusted operating income growth. Operating margins expanded 288 basis points from last year to 54.2% for the quarter. After-tax adjusted earnings per share were $0.26 for Q3, a $0.05 per share or 24% improvement over Q3 last year. And again, just a reminder that I'm siting organic results in constant currency throughout here.
Double-clicking on year-over-year net revenue growth. It was primarily driven by services revenue, which is a pillar of our capital-lighter business model. Services revenue was up 16.4% from Q3 last year, reflecting all 3 forms of share of wallet growth; one, penetration with existing clients who are increasingly turning to Element services for help managing their growing fleet operating costs; two, increased utilization of our vehicle maintenance management service, working with clients to drive more proactive maintenance to reduce downtime were more costly repairs given the elevated average age of clients' fleets due to new vehicle production delays; and lastly, inflationary increases in the cost of parts and labor, which benefit Element as a function of our cost-plus business. Please see Section 1.3 of this quarter's supplementary information document for more details of services revenue growth.
The second pillar of our capital-lighter business model is syndication. We syndicated $599 million of assets in the third quarter and generated $13.5 million of syndication revenue or a 2.25% yield on the assets we syndicated. We were able to deliver this volume in yield despite rising rates due to the attractiveness of this very low risk asset class to our syndication partners, by syndicating more floating rate leases and by leveraging our bespoke hedging program to protect deals of known fixed rate syndication names from the time between lease activation and syndication.
Syndication is an economically beneficial and reliable source of recurring high-margin revenue for Element, accelerating the velocity of net revenue and cash flow, allowing for investment in the business. We're returning capital to shareholders via dividends and share repurchases, thereby driving higher ROE and free cash per share growth.
Let me round out my comments on net revenue by noting the 5.4% year-over-year growth in net financing revenue or NFR. Q3 performance was stronger this year than last year due to increased gains on sale in ANZ and Mexico, and improvements in yield on our net earning assets, which is largely a function of proportionate mix shifts in favor of ANZ and Mexico assets as we syndicate U.S. assets and now some Canadian leases. It's important to note that we expect NFR to soften materially in the fourth quarter this year because the $9 million onetime benefit in this Q3 will not recur next quarter, and there is some pressure on our interest expenses from increasing our local currency funding structure in Mexico, as previously discussed.
We also anticipate gains on sale in ANZ to moderate in Q4, which is common for that market due to the combination of summer and Christmas holidays. This puts additional pressure on Q4 NFR. We are forecasting full year 2023 NFR as essentially flat year-over-year. This is largely a consequence of the planned increase in syndication volumes. Both our net financing revenue and syndication forecasts are tied to OEM production, enabling the achievement of our originations forecast.
The outlook for NFR is also a product of increasing our local currency funding in Mexico in 2023. All the other components of NFR, including gains on sale are expected to grow full year over full year next year. We view lagging into Mexico funding as a strategic evolution of our business. Given the anticipated continued annual double-digit growth of our Mexico platform for the foreseeable future, we believe it's prudent to mitigate FX risk, exposure risk.
Lastly, with respect to Q4 2022 results we can expect adjusted operating expenses at the high end of the range implied by our guidance. This is a strategic decision. With line of sight to materially more long-term organic annual growth than we previously thought possible, we want to ensure our commercial teams are appropriately resourced to anchor this trajectory. Accordingly, we will be reinvesting some of the nonrecurring revenue earned this year into commercial capabilities over the next 5 quarters beginning this Q4 2022.
Having said that, we expect to continue to expand our operating margins year-over-year in 2023. Returning to our Q3 2022 results, our net revenue growth at top a scalable operating platform primarily driven by the capital lighter side of our business model generated $0.34 of organic free cash flow per share in the third quarter, which is $0.07 per share more than Q3 last year. Our per share metrics are held by repurchases pursuant to our NCIB, which will renew this year for the remainder of 2022 and better part of 2023. The combination of common share buybacks and dividends in Q3 had us return $92.3 million in cash to our investors. That return of capital will remain generous going forward given yesterday's announcement of our 29% common dividend increase to $0.40 per share annually. $0.40 per share puts us right in the midpoint of our 25% to 35% payout range based on last 12 months' free cash flow per share.
In addition to predictable and predictably growing common share dividends as well as buybacks, we will return capital to our preferred share investors next year and in 2024 with the redemption of our remaining outstanding 3 series of preferred shares, thereby further optimizing our capital structure and benefiting our common shareholders.
Finally, as promised last quarter, we are providing full year 2023 results guidance, which is detailed throughout yesterday's disclosures. We expect 2023 originations of approximately $7.5 billion to $8 billion in keeping with our belief that OEM production volumes will begin to normalize by the second half of next year.
Tracking the anticipated growth in originations with robust demand continuing for our assets, we plan to syndicate $4 billion to $4.5 billion of assets, predominantly in the U.S., but also again in Canada next year, and we are actively working towards Mexico's syndications in 2024.
All told, we expect to deliver strong results and growth with net revenue of $1.14 billion to $1.17 billion in net revenues, operating margins of 54% to 55%; adjusted operating income of $615 million to $645 million; adjusted EPS of $1.12 to $1.17 per share and free cash flow of $1.45 to $1.50 per share for the full year 2023. These results are in constant currency based on a Canadian exchange dollar of CAD 1.29, which is our proxy for the full year 2022 average exchange rate. Should Canadian to U.S. dollar exchange rates stay at current levels that will provide upside to our reported earnings relative to guidance.
Relative to the top end of our 2022 organic guidance, our 2023 guidance implies 6% to 9% net revenue growth approximately 100 basis points of operating margin expansion and 16% to 20% cash flow per share growth. We anticipate reporting full year organic results in March that are at or near the top end of our current 2022 guidance range.
Before I turn it back to Jay, I want to say how much I look forward to seeing as many of you as possible in person at this management team's first-ever Element Investor Day, which will take place on Tuesday, November 29, at the Design Exchange venue in Toronto and simultaneously online. Please take a moment to preregister your intent to participate even if you only plan to join us virtually. There are hyperlinks to registration process in yesterday's news release of our Q3 results and on our IR website.
Back to you, Jay.
Thanks, Frank. I'm equally excited for our Investor Day at the end of the month. We have a talented lineup of our senior leaders thoroughly preparing to deep dive on multiple areas of Element's business for you, and it's going to be a great event. Knowing the scope of the content that we're writing for Investor Day, I want to focus my few remaining remarks on topics that we don't plan to spotlight again in 3 weeks' time.
The first is automotive OEM production capacity. Our outlook has not changed from that which we shared with you this time last year, which is that we expect OEM production volumes to normalize in the second half of next year. The recovery in supply volume through the end of 2023 underpins our $7.5 billion to $8 billion origination guidance as well as our ability to syndicate $4 billion to $4.5 billion of lease assets, as Frank has mentioned.
On both counts, the demand is undeniable. Our clients continue to place orders sustaining our $2.9 billion global backlog and our syndication investors continue to demonstrate their appetite for assets in the U.S. as well as now in Canada.
Second topic I want to cover off is industry consolidation. It's encouraging to see new investors discover and indeed endorse what we've known and been acting on for years, namely the attractive dynamics of our industry and resilience of the fleet management business model. We believe further consolidation within our industry by established long-term return-driven investors bodes well for the health of the industry and as market leader, the health of Element's business. Moreover, the current round of industry consolidation has and will continue to afford us ample opportunity to steal market share as other FMCs are forced to focus on the complexities of integration or acclimating to new ownership.
That chapter of Element story is behind us, so we can maintain a singular focus on delivering a consistent superior service experience that makes the complex simple for our current clients as well as our future client prospects. Again, for the record on this subject, we have been happy to be sitting on the sidelines as this deal making has taken place. We see no need for Element to pursue higher risk inorganic growth when an estimated half to 2/3 of the addressable markets in which we operate remain unpenetrated and we have a proven strategy and ability to convert self-managed fleets into Element clients across those markets.
The third and final category of topics I want to remind you of is Element's proven resilience in the face of macroeconomic trends that challenge many other organizations. In fact, our business benefits from some of these dynamics. The best example is inflation. Our cost-plus business model results in net revenue growth with the rise of vehicle, parts and labor costs. At the same time, our market leading scale and strategic consulting services both of which you'll hear much more about in our Investor Day, make our client value proposition even more compelling in an inflationary environment.
With approximately 1.5 million vehicles under management. We have deep data to inform cost optimization strategies, significant purchasing power to drive down price for clients and an extensive service supplier network to afford client options that are both cost efficient as well as convenient further drivers. This unparalleled ability to lower the total cost of operating a fleet helps Element's commercial efforts during economic downturns as well. Businesses that currently self-managed their fleets are particularly interested in the cost-saving advantages associated with outsourcing. Rising interest rates make our securitization and syndication enabled financing all the more compelling to clients as well as prospects. And that said, our net financing revenue performance is largely agnostic interest rate movements by virtue of our match funding strategy.
And finally, our largely blue-chip client base, our disciplined underwriting process, which is focused on credit quality first, collateral, a distant second as well as the criticality of fleet vehicles to the business of our clients allow Element to boast negligible levels of real economic loss in the rare case a client does default. I'll dive deeper into all these features of our business model in my letter to shareholders this quarter.
In closing, I hope to see you in person at our Investor Day, where we'll show you how each of our 5 organic revenue growth drivers work. Our scalable operating platform underpins a consistent superior client experience, all the while expanding operating margins and how we advance our capital-lighter business model to enhance return on equity, and liberate cash flow to return to our shareholders. I'm confident you'll leave our Investor Day with a better understanding of the unique characteristics of Element's business and a deeper appreciation for the compelling attributes of our value proposition.
For now, let's turn it over to your questions.
[Operator Instructions]. The first question comes from Geoff Kwan of RBC Capital Markets.
You've talked for a while a bit about having your sales team focus on market share wins, given there was a significant opportunity there. And at the same time, self-managed fleet opportunity was a bit hampered by things like you couldn't travel or companies did wanted actually see people in person. And I know you talked about it a little bit in the opening remarks, but can you give a little bit more detail on the progress winning your self-managed fleet clients? And also how you're allocating the priorities of the sales team between market share wins versus self-managed fleet targets?
And yes, I would say to begin with the easing of restrictions that we've seen throughout 2022, that we've seen a commensurate increase in the mobility of our sales force and as consequence their ability to engage with both prospective clients that are currently clients of our competitors as well as self-managed fleets that own and operate their own fleets. And so the environment has been far more facilitative in terms of an opportunity for our people to engage firsthand with client prospects, and we've seen that in terms of the number of meetings, face-to-face meetings that are being taken as well as the number of client prospects that are showing up at industry forms and events as they educate themselves on the benefits that might accrue with them outsourcing the fleets to organizations like ourselves. So absolutely, from a macro perspective, very facilitative for increased levels of engagement of our commercial team with client prospects.
At the same time, as we introduce the value proposition to those clients, I would say the macroeconomic environment is also been quite enabling in terms of the receptivity that our commercial people are seeing in terms of client approaches. Our ability to reduce -- materially reduce the total cost of operation of those fleets in times of greater inflation is compelling. Our ability to provide cost effective access to capital is all the more compelling. And many of these organizations are also wrestling with their own ESG agendas, looking at sustainability and thus wondering whether pathway to electrification might bring in our ability to help them make a more informed decision has also been a major opportunity to both open the door and further discussions with them.
So I'd say, yes, we're absolutely seeing an increased ability, an increase to engage this self-managed fleet opportunity, an increase interest on their part in terms of the macroeconomic environment and how our value proposition and our ability to convert those is also well evident not only in Mexico, where we traditionally have done very well in this marketplace, but more recently in U.S. and Canada, where we've also been able to convert these prospects into our bonafide clients consuming both financing as well as services from our organization.
Okay. And just my other question was just about this whole reallocating some of the onetime revenues from this year into higher OpEx over the next 5 quarters to drive that higher organic revenue benchmark. It's going to dampen kind of your 2023 EPS guidance, but really more I wanted to get some clarity as to what are you spending on the higher OpEx? I know Frank had a little bit of comments with it. Is it more salespeople? Is it changes to systems? Or just what exactly are you spending this money on that is going to drive the higher organic revenue growth?
Yes. So Geoff, as we began this pivot to growth back in 2021. For us, it was going to be kind of business as usual in Mexico and sustaining 20% annual revenue growth in that region. It was throttling the revenue growth in ANZ, recognizing where they stood in terms of the readiness of their platform and more so kind of the rebuilding and reinvigoration of our U.S. Canadian commercial efforts. And everything that we have seen over the last 7 quarters has been very encouraging, not only in terms of the -- our value prop and its relevancy in the market. And its continued relevancy given the macroeconomic shifts that we've seen, it is also very much a reflection of the ability of our commercial organization to quickly growing its capabilities and attack these market opportunities that are available to us.
And so as we think about enlarging our growth ambitions from 4% to 6%, to 6% to 8%. We want to make sure that we're properly resourced on every dimension of the business. So as Frank has indicated, commercial, absolutely, we want to add to the bench of talent that we have to fully address all the market opportunities that we're servicing. We also want to make sure that when we are successful in stealing share, converting a self-managed fleet that our operations teams have the necessary resources to ensure that they enjoy that consistence of pure client experience through the onboarding process and through the early quarters of living with us as a new outsourced partner.
We also want to make sure the rest of the organization's capabilities are properly sized for the enlarged ambitions that we have around growth. And something as simple as contracting. As you think about entering into contracts with these counterparties and managing those contracts just having the legal resources, the bandwidth such that we can reduce the cycle time through the contracting process with the client. So that, again, we can sign those contracts, onboard those clients and begin to properly service them as we go forward. So think of this largely commercial, supplemented with operational and some additional corporate bandwidth ambitions around this growth agenda.
The next question comes from Graham Ryding of TD Securities.
The pie chart on Slide 15, it does suggest it's a very large opportunity for you in the self-managed fleet area. Can you give us some context of how much of your growth currently is coming from penetrating that self-managed market or perhaps with the guidance that you've given over next year or even the medium term, what's your expectation for how much of that self-managed fleet is going to contribute to that growth?
Well we haven't broken out with specifics, let me give you maybe a bit of a perspective on a regional basis. So as we think about Mexico, traditionally, we've been able to grow that business 20% a year in terms of revenue growth and on top of their scalable operating platform, magnify that in terms of its operating income contribution to the organization. They've been able to achieve that through record high levels of retention. So growing by not shrinking in the first place, by stealing share from other FMCs as well as banks in the Mexico market and equally from share -- or excuse me, from self-managed fleets, converting the fleets of large multinationals operating in that country as well as large domestic entities, converting those fleets that are our owned and operated into clients of Element. And so they have a demonstrated track record of drawing from all those sources of revenue growth.
For them, the real opportunity to go forward is not only to sustain their ability to steal share and grow in self-managed. But indeed, to increase service attachments through share of wallet. So increase penetration, utilization as well as pricing opportunities around services.
If you go over to ANZ, ANZ would have concentrated historically more towards stealing share and retention in 2021 when they did their pivot to growth. They went fairly aggressively into self-managed fleets and secured a number of notable wins in that space and continue to do so today. Further, they're also advancing the government sector as a key area of focus there. And we have -- we sit on a number of panels or exclusive fleet management company or a number of government entities in both Australia and New Zealand.
You come back to the U.S., historically, we have skewed more towards share wallet retention and stealing shares, the primary drivers of our organic revenue growth. Self-managed fleets weren't really an area of concentrated focus for this organization. Under David Madrigal's leadership, we've rebuilt the entire the commercial function in the U.S. and Canada, developed a minimal viable product, if you will, throughout 2021, took that into market in 2022 and have refined it over the course of the last 3 quarters. And in doing so, have been able to gain confidence and insight in terms of the market opportunities that are available, particularly in self-managed fleet. If you roll that all up to a kind of a global perspective, we said, hey, we're going to start by getting industry-leading market retention up even higher, and we're fast approaching 99% across our platform. And so that has been a thrust over the last 7 quarters, and that has manifest itself in a material increase in retention and one that we think we'll be able to sustain and go forward.
The second big thrust for us was share of wallet, going deeper with existing clients, recognizing that we have a relationship with them. They trust us, they value the relationship. And so that will be a great way for this new reinvigorated sales effort to kind of cut their teeth as we grow revenue. And so share of wallet has certainly been a big driver of that.
With -- in all markets, we see -- we have seen and have availed ourselves of opportunities to steal share as some of our competitors altered or entered into a fairly ambitious integration agendas. And we would expect the share of wallet and stealing share to be short to midterm drivers of the 6% to 8% revenue growth that we're seeing, especially given the macroeconomic environment that we're forecasting. The -- and then self-managed fleets for us is key to the long-term growth that we see in this business. And again, based on the learnings that we gained in both Mexico and ANZ, the early successes that we've been seeing in U.S. and Canada. We expect that to fuel the bulk of our 6% to 8% revenue growth long term.
So that's how we're kind of looking into. We're legging into this with retention and share of wallet, amplifying that through stealing share all the while building our capabilities, building our pipeline for self-managed fleets, all of which are manifest themselves in notable results that encouraged us to lift our long-term guidance in terms of revenue growth.
The next question comes from Paul Holden of CIBC.
A couple of quick ones for me. I guess, first off, how should we think about share repurchases in 2023? And I guess the context of the question is twofold. One is you're going to want to build some capital to call the preferred shares, which you've already highlighted is your intention. And then two, we have this proposed tax on share buybacks in Canada as well. So any commentary on how you're looking at that tax might be incremental and helpful as well.
Paul, this is Frank. So think about our return of capital, remember, we have north of $500 million of cash flow every year. And what we look at is -- think about it this way, dividend. So we've made a material increase in our dividend of roughly 29% and really have leaned into that consistent return of capital through the dividend as we move forward here. And that dividend, we anticipate to grow over time, consistent with our free cash flow per share growth.
Second, as you pointed out, would be the preferred shares. And then as always, the last piece of the lever is the NCIB. So we've guided due to roughly 385 million to 395 million shares outstanding at the end of the year, so midpoint of roughly 390 , and we anticipate acting on that NCIB aggressively as we see the opportunities to repurchase shares come up.
In regards to the proposed tax legislation at a 2% excise tax, we've seen in the U.S., no impact really of excise tax, and we don't believe that, that would have any impact on our behavior in regards to buying back our shares, given the perspective that we think that they are significantly undervalued in the market.
Understand. And then as we look out to 2024 and your intention of calling those preferred shares, how should we think about the impact to the tangible financial leverage given one of the reasons they exist is to sort of help that ratio. Does the target change at all given the strong underlying fundamentals of the business? I personally would probably argue you could probably operate with a higher leverage and maintain your investment-grade rating, but would love to hear your perspective on that.
Yes. No. As we sit here today, and remember, last year, we increased our leverage from 6 -- roughly 6.0% target to 6.5%. The current thinking is 6.5% is the right leverage level for us. It gives us ample room to continue to repurchase shares, in the preferreds and otherwise. And so we think that, that kind of keeps intact or potentially gives us upside in regards to our ratings profile as we move forward here and mature the business and continue to show the significant recurring revenue streams and the safety in the overall business profile. But as of now, 6.5% is what we're targeting at. We came in lower than that, obviously, in this quarter.
The next question comes from Jaeme Gloyn of National Bank Financial.
First question, just looking at the vehicles under management disclosures in the sub-pack, noticed the decline of serviced only. Is this -- I guess, maybe any color on what drove that decline? Is there just usual volatility or seasonality in customer selecting services in Q2 versus Q3, and then they kind of add them back on later on. What's actually driving that? And how should we think about that going forward?
The introduction and the subsequent reporting and management performance metrics has been at the heart of our successful repositioning development first through transformation and now obviously through this pivot to growth. We found that the adoption of a very finite set of metrics aligns the organization and promotes accountability, which obviously drives better decision-making and better performance. And I think BBAM is a perfect example of how the adoption of a new strategic measure of the long-term success can lead to better decision-making within the organization.
As you know, we introduced this about 12 months ago and it has already revealed insights into our business, leading to better decision-making around operations as well as commercial.
And maybe specifically to your question, recent analysis, BBAM profitability, that our teams are undertaking. And the attachment -- service attachment rates identified a small handful of large legacy clients, clients that we lost prior to 2019 who are still purchasing 1 or 2 services from us at below market rates and unable to pure sufficient revenue to warrant our continued provision of services, we off-boarded these clients completely. And well we have a tangible example, we had 1 client, 30,000 service units that we offloaded in June. And those 30,000 units, we're generating $9,000 of revenue on an annual basis. So again, for us, it is focusing the organization on a few key metrics that really drive the business, deepening their knowledge of the business. And as a consequence making better business decisions. So for us, very, very pleased with the 4% year-over-year that we've been able to attack and expect minor variations as the organization embraces and continues to manage performance metric.
Okay. Great. Yes, that number should be more stable going forward that note is the takeaway. And that also leads into my second question, which was -- is focused on service revenues per vehicle under management and obviously trending higher, and in particular, I guess, even if you're excluding some of the onetime items. Clearly, some of these profitability initiatives around the vehicles under management is helping to drive that, obviously, inflation as well. But I guess the question is really getting to how sustainable is that service revenue per vehicle under management line? And how do you see that trending over the next several quarters?
Yes. So again, stepping back at 30,000 , quite sustainable in the context as we think about clients taking more and more services. It's a rare situation where a client adopts managed maintenance, managed accident, the tolls and violations and then off that platform. The value that is created is so compelling that it's rare to see a client consuming those types of services. So once the client has taken that service attachment, there's a very, very high probability that they will consume that for the entirety of their existence as a client. And so as we step up service attachments, we would not expect any type of regression in terms of those number of attachments being lowered further as we think about inflation and the pricing power that we enjoy as a consequence of the consistent superior client experience, that's another lever for revenue growth into the future.
Now the noise, short term, is just going to be the evolution of services as we think about originations, getting back to normal levels and growing at the levels that we forecast for 2023. We would expect more remarketing, more registration and services of that nature, which will be quite additive. And at the same time, we would expect some service revenues, managed maintenance as those older vehicles get replaced by newer vehicles. That will come down a little bit.
So there will be some noise short term as we migrate from a heavy proportion of total net revenue that include gain on sales moving to financing revenue that is on gains on sale. But if -- again, stepping back, yes, we would expect that the -- all the factors that I have spoken to in terms of the increase in the number of attachments, the flow-through of pricing through inflation as well as price increases, we'll be quite additive to revenue growth as we go forward.
The next question comes from Tom MacKinnon of BMO Capital Markets.
The question is really on the raising of the net revenue growth benchmark. That's materially up from your 4% to 6% previous guide. So going up to 6% to 8% now and longer term. And I guess I'm wondering how you're able to -- what gave you confidence in what is deemed to be a pretty noisy 2022? You've got OEM capacity issues, you got other noise that you've just mentioned in the previous question, you've got nonrecurring items in 2022 as well. So how are you able to sort of sift through that?
And then what can you point to us that really highlights the fact that you're able to raise this benchmark net revenue growth percentage? Is -- if you could just give us some of the highlights there that you were seeing that it kind of looked through this noise and look through these OEM capacity issues in 2022 that -- or within the business that's able to -- that you're able to have confidence in giving this increased benchmark?
When we set the 4% to 6% benchmark in terms of the long-term growth for the organization. There were 2 things that underpin that together with a question mark. So what underpinned that was our confidence in being able to set forth and deliver with a high degree of consistency, a compelling value proposition around our ability to reduce the total operating cost of the fleet, the ability to provide ready access to cost-efficient capital and our ability to help our clients and client prospects migrate to electrified fleet over time. So we knew that was a compelling value proposition that give us confidence around 4% to 6% growth.
Further, as we thought about the addressable marketplace, depending on the geography, anywhere from 1/2 to 2/3 of the market was unpenetrated. These were self-managed fleets. So we knew that existed as well. And those 2, again, combined gave us a great deal of confidence in terms of the size of the pie that was available to us. The question mark was our ability to effectively address those opportunities. We knew we had the market. We knew we had a compelling value proposition for that marketplace.
Question on to what degree will we be able to avail ourselves of this market opportunity. And for us, what has given us confidence to step up that 4% to 6%, to 6% to 8% growth is the progress that we have seen, progress that we have sustained in Mexico, the progress that we've seen in ANZ and perhaps most materially, the progress that we are witnessing in U.S. and Canada. As we think about that team and what we've been able to do in terms of both growing vehicles under management as well as growing share of market -- excuse me, share of wallet. It is really quite amazing to see how far they've come in such a short time in terms of the capabilities of our commercial organization, is the operational capabilities of the organization to quickly ingest and onboard these client wins.
So that was the piece for us, Tom, that was really kind of the question mark around the 4% to 6%. We knew there was a market. We knew we had a compelling value proposition to take to that market, to steal share, to deepen share of wallet, to penetrate those self-managed fleets. The question was how fast and to what extent would we be able to build out the commercial capabilities complemented by the operational capabilities to properly secure those client wins. And based on what we've seen in particular, over the last 3 quarters in U.S. and Canada based on what we continue to see under Manuel Tamayo's leadership in Mexico and the 20% revenue growth that we're getting in that market coupled with what we're seeing with Chris Tulloch and the great team in ANZ, yes, that's what is given us the confidence to increase our long-term view to 6% to 8%.
Okay. That's great. And it'd be great to see everybody that you're having increased confidence in your Investor Day at the end of November. And the second question is why -- in your guidance for 2023, why are you using sort of an outdated exchange rate of CAD 1.29? Granted, we would probably see upside if that exchange rates we're closer to the current CAD 1.35 or something that it's at right now. So just wondering why you put -- why you used an outdated exchange rate, if you will, when you provided that guidance?
So beginning last year, we started reporting all of our earnings on a constant currency basis for comparability. And so our current forecast, and we don't forecast next year's exchange rate. We don't want to be in the [indiscernible] business. But when we look at this year and know where exchange rates are, we believe there'll be a roughly CAD 1.29. So what that does for you is put on an apples-to-apples basis before any FX impact what the pure performance of the business is year-over-year. And so that's why we use that. So again, it's just us using our constant currency convention for comparability purposes because our crystal ball is no better than anyone else's in regards to what next year's exchange rates will be.
The next question comes from Stephen Boland of Raymond James.
Couple of quick ones. We're hearing in other leasing sectors, especially in equipment that a lot of companies are kind of delaying their purchase decision, I guess, if you can call it a purchase leasing decision, maybe not leasing as many pieces of equipment, are you seeing that in the fleet business in terms of customer that normally would lease 1,000 vehicles in a year is cutting back with the higher interest rate environment?
No, to the contrary when they're looking at the ongoing operating costs of an aging fleet, there's a great impetus on their part to order replacement vehicles on a timely basis. And obviously, the delays that we've been experiencing over much of the last 7 quarters have just added to their woes. So now we're actually seeing the very opposite. We're seeing an increase in demand for replacement vehicles.
Okay. That's great. And then second question is more on the funding side. We have seen some disruption in the U.S. with some of the securitization markets. I don't know if you're seeing -- I know you've got pretty robust syndication numbers out there. Is -- have you seen any kind of disruption coming into the fleet type securitization vehicles in the U.S.?
Yes. So this is Frank. We've seen spreads expand across all financing markets. And I don't think we're unique to that nor is fleet unique to that from that perspective. That being said, with $2.2 billion in committed capital that's undrawn, significant liquidity to run the business. And with the syndication component of that, continue to bide our time to enter the markets on a more opportunistic basis from a securitization perspective.
So we -- so yes, the answer is yes, we've seen spreads expand from the historic lows that we saw last year. But that being said, we have no burning need to go to any of those markets during this period of dislocation and we'll be able to go in more opportunistically as the interest rate volatility environment stabilizes and those spreads come back to more reasonable levels.
And Frank as point of emphasis, huge demand for this product in the securitization market. We just are choosing not to avail ourselves of that market in pricing.
Yes, that's a great point. The market -- all of our markets are wide open and available to us, just not at prices we're all that interested in now given our liquidity perspective position and our syndication capabilities.
Okay. And just a Part B to that, the syndication market, obviously, with rates moving up, your clients have got -- I believe that they do have like hurdle rates that they have to achieve in the syndication is -- if you're not moving up your rates as quick, just say the overall interest rates, is that margin -- should we expect some compression on the syndication numbers that you gave out?
Yes. What I would say is, think about it this way, we have put in place a number of mechanisms to mitigate the interest rate volatility. And this is really all about interest rate volatility because our leasing rates go up as benchmarks go up over time. So we always capture that inherent spread there. So it's the volatility from the time of activation to the time of syndication, which causes some issues. And it's the mix of both the credit quality and the floating versus fixed rate component of what we ultimately syndicate, which impacts yields. So it's a bit of a complex question. But as rates begin -- so our bespoke hedging program protects us and mitigates the impact of those rising rates so that we can capture the spread and don't get beat on the timing between that activation and syndication should rates move.
Once rates stabilize, then yields will go back into place, and those hedges won't be as necessary as we move forward here to take advantage of that. But in the near term, what you see is us syndicating more floating rate and syndicating names in which we are doing bespoke hedging. So net-net, strong volatility to put minor compression on yields, but we still feel pretty good about our rough, rough plus or minus 2% on the portfolios we take out there over the course of any given year.
The next question comes from Shalabh Garg of Veritas Investment Research.
Good segue on the syndication question. So syndicated assets are approximately 40% of your total assets. What do you think is the ceiling for that? Like how high can this as a percentage of fixed total vehicle assets, can it be?
I mean we're very comfortable with our guidance of $4 billion to $4.5 billion, which is materially higher than what we're going to syndicate this year. And again, when we look at syndication, we look not only at managing tangible leverage, but optimizing our tax position so that we retain enough of the depreciation tax shield to provide the benefit on our cash taxes. And remember, we talk a lot about the difference between our book earnings per share and our free cash flow per share and the differential of that, which is real economic value is the lower amount of cash taxes versus book taxes that we pay there.
So it's really important to understand there's 2 levers there. But again, we believe the $4 billion to $4.5 billion, very, very doable. Originations come in, we will be able to syndicate those levels and have a high degree of confidence in doing so.
That makes sense. So do you think you can do a similar amount of syndications in 2024 and beyond? Or do you think it will come back down to the previous guidance of $2.5 billion a year?
No, we would anticipate because of the -- both our growth, importantly, and the reduction that's needed in the backlog and the shadow demand that we see where more orders, the demand is very strong, but there's no order book to place them, that should keep origination very high and growing as we move forward into 2024 and beyond. And syndications will keep pace with that growth in originations as we move forward.
The next question comes from Graham Ryding of TD Securities.
I just wanted to get some color on your origination guidance. Is it fair to think that, that's going to be back-end weighted in terms of volumes as you expect the OEM production capacity to open up in the second half of next year? And then related to that, how much of the backlog do you expect to work through next year? Should that normalize by the end of the year? Or is that still going to persist into 2024, do you think?
Graham, I think an answer to your first question, yes, we expect it to be more back-end loaded as the OEMs continue to ramp up the productive capacity in the first half and once established in that begin to draw down the backlog. I would say to you -- and we talked about order backlog as a new concept that we introduced last year. We also talked about this shadow order backlog that Frank just referenced. We would expect that our order backlog will begin to be drawn down in 2023. And it's more a function of the order backs of the OEMs being constrained as opposed to actually orders flowing through.
So our shadow order backlog is actually building a pace with the order backlog that you've seen being built through our disclosures. As the order backlog is drawn down in 2023, we actually expect our shadow order backlog will increase as a function of the demand that we're seeing within our client base, both internal growth as well as growth from acquired clients coupled with the fact that the OEMs will be regulating and limiting the amount of orders that they will accept. And so we would expect that, as Frank has indicated, 2024 will be yet another robust year in terms of originations for the organization as we continue to draw down the backlog that was unfilled in 2023.
Our last set of questions will come now from Jaeme Gloyn of National Bank Financial.
I did want to touch back on that origination theme as well. So I guess a 2-part question. One, first part, is there anything in your conversations with the OEMs that is maybe hinting at any risk of, let's say, OEM production still being slow for the full year 2023? And I'm thinking about maybe even some microchip shortages again as we're hearing some stuff out of Asia and the impacts of, let's say, onboarding microchip production?
And then the second part of the question is in terms of the origination and backlog unwind and how that flows into operating income at a very high margin. How much of that is built into the forecast for 2023 versus getting pushed out into 2024, which could drive even more margin improvement in that year?
Yes. I think as we think about originations and our thesis, we envisioned microchips being a lesser issue as we progress through 2022 and that has played out largely consistent with that theme. So the OEMs had bought forward their production needs around the microchips to the extent that they could, and we're seeing that manifest itself in terms of increased vehicle deliveries to us. So again, that has played out very much in keeping with the thesis that we shared with you this time last year.
We hinted earlier this year that the shutdowns in China would have impact on OEM production this year, the extent to which we weren't quite sure. And that, again, has turned out to be the case, we will hit our originations numbers this year, but the they were somewhat impacted in terms of the of the possible, by virtue of the production shutdowns in China and the impact -- the cascading impact that, that had on the OEM supply chains.
The -- as we think about 2023 and microchips being a lesser issue again by virtue of the buying flow or the productive capacity of the foundries coupled with in anticipation of the lockdowns in China being again, a lesser impact on OEM production. The only other issue that has kind of materialized over the summer is just labor and the ability of the OEMs to have sufficient labor pools to keep the manufacturing capacity increasing to the levels that we expect. We've factored all those variables into our outlook for 2023 and the guidance of upwards of $8 billion worth of originations. Feeling very confident in terms of the organization's ability to receive vehicles in those quantities throughout 2023, recognizing that we will exit the year with both a significant order backlog and exit 2023 year with a significant order backlog and an even more significant shadow order backlog that won't be satiated until 2024.
So the guidance that we provided to you around originations underpins our outlook in terms of revenue and profitability for 2023, and we have a high degree of confidence in terms of that number. And we would expect that this will be yet another strong tailwind for 2024 as we exit 2023 with more productive capacity. But still a very large unsatiated order and shadow order backlog.
I think on this the wild card in this that again, as we think about upside, downside around origination, I say I do think if we indeed see the onset of any type of recession that tamps down consumer demand for vehicles, I think it's a plausible expectation that, that productive capacity will move from satiated the retail channel to satiating the fleet channel. And so if we do see a fairly significant economic downturn that constrains consumer demand, then it would be our expectation that, that productive capacity would shift to satisfying the order backlog of fleet management companies like ours, which could be an accelerant in terms of increased originations and drawing down the order backlog and shadow order backlog that we have.
Again, we -- as Frank acknowledged, we're not in a position here to forecast next year's FX rate or the probability or extent of an economic recession. But as we think about our planning, that is a potential tailwind in terms of originations and getting more vehicle deliveries into that there was some softening of retail demand for vehicles.
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.