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 Fourth Quarter and Full Year 2019 Financial Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]Element wishes to remind listeners that some of the information in today's call includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties, and the company refers you to the cautionary 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 Mr. Jay Forbes, President and Chief Executive Officer. Please go ahead, sir.
Thank you, operator, and good evening to all of you joining us on the call to discuss our fourth quarter and full year 2019 results, the continued and significant progress that we're making in advancing our strategic plan and our decision to write-down 19th Capital and accelerate the wind-down and runoff of this noncore business. Element's impressive fourth quarter financial results capped an outstanding 2019 for our Fleet Management business as we continue to deliver for all of our stakeholders. We grew core assets under management 11% or $1.7 billion on a constant currency basis in 2019, finishing the year with $16.7 billion of global assets under management. Our core business achieved 10% quarter-over-quarter and 35% full year-over-year increases in adjusted operating income at year-end. Annual free cash flow increased 59% or $169 million year-over-year, driven by this improved operating performance. Powered by our people and focused on our clients, we exceeded our original year-end transformation goal by more than 30%, actioning a cumulative $131 million of annual run rate pretax profit improvements through our transformation program. Our client retention rates returned to historical levels in all of our geographies in 2019, and we enjoyed growth from new client wins in all 5 countries. As evidenced by our outstanding balance scorecard results throughout 2019, we're delivering a more consistent, superior client experience and exceptional value for our clients, which, in turn, is earning our clients' loyalty, reflected in improving Net Promoter scores in all of our geographies. Through our expanded approach to syndication, we substantially derisked and deleveraged Element's balance sheet in 2019, while generating a profitable new stream of revenue for the business. The syndication, enhanced profitability and rising free cash flow all contributed to lowering Element's tangible leverage ratio over the course of 2019, earning a BBB investment-grade rating from S&P in the fourth quarter and paving the way for our company to issue bonds in the U.S. unsecured debt market in the first half of this year. And of course, in 2019, we demonstrated our ability to support and service a rapid growth and deployment of a mega fleet, Armada. We will apply many of the skills we're developing and the lessons we're learning from this relationship as we embark on our enhanced go-to-market strategy in 2020 and begin our pivot to growth. While we have much to celebrate as we reflect on 2019, I want to acknowledge and address our decision regarding 19th Capital and the $194 million of noncash after-tax charge we recorded against these noncore assets in Q4. This was a necessary step to bring closure to Element's ill-fated and costly investment in 19th Capital and to afford our executive team 100% focused on the exciting future of our core Fleet Management business. Recall that we initiated a formal process to expedite the sale of 19th Capital in the fourth quarter of last year. Although the process attracted nearly 50 potential buyers and multiple serious expressions of interest, we have been unsuccessful in securing a sale on acceptable terms. The ongoing swift and steep deterioration of used Class 8 truck market conditions has had a meaningfully negative impact on interest and valuations. This, coupled with the price discovery inherent in the sales' process, resulted in our writing down the assets and shifting efforts to accelerate the runoff of 19th Capital portfolio, including wrapping up the pace of liquidation, reducing the scale of operations and engaging with third-party lenders. Following the Q4 charge, 19th Capital's assets are valued at approximately $133 million on our balance sheet and the value of 19th Capital's third-party lender debt is $122 million. In other words, we don't see any further meaningful value for Element in this asset. This write-down also means that we've addressed the potential for future associated financial risk to Element. I want to be clear about the following: the charge against Element's noncore assets in the fourth quarter has no impact on our 2020 adjusted EPS guidance of $1 to $1.05. Conversely, our return on equity actually benefit from the write-down of the noncore assets, and thus, we continue to target between 13% and 13.5% ROE exiting 2020. And while the write-down increased our tangible leverage ratio as at the end of 2019, the ongoing successful execution of our syndication strategy, coupled with the power of our Fleet Management platform to generate earnings and free cash flow, underpin our confidence in Element's tangible leverage ratio continuing its descent to our target 6x ratio. In fact, absent charge against the noncore assets in the fourth quarter and excluding the impact of our nonrecourse warehouse credit facility dedicated to Armada, we would have actually achieved the 6x target on December 31, 2019. Returning to the subject of our core Fleet Management business, I'd like to comment on our progress on each of the 3 waves of opportunity that we've identified for our company. As you'll recall, the first of these waves is our transformation. In the fourth quarter, we actioned to incremental $29 million of annual run rate pretax profit improvement initiatives, bringing our cumulative total to $131 million. Initiatives actions as at December 31, 2019, improved Element's operating income by $71 million in 2019, and these same initiatives are expected to deliver approximately $98 million of operating income enhancement in 2020. Further, having invested $130 million in our transformation program as at year-end 2019, we have up to $50 million more budgeted for onetime investments in support of our transformation activities in 2020. As we enter the final phase of transformation, which we refer to as building for the future, I couldn't be happier with the incredible efforts put forth by our organization. We set the ambitious target of $100 million of profit improvements action by the end of 2019. We surpassed that target 3 quarters of the way through the year. We raised the bar a little higher to $120 million actioned by the end of the year and then maturely overachieve that stretch target as well. Importantly, our primary agenda in 2020 will remain on completing the transformation of our core business and delivering a more consistent, superior client experience. I have no doubt we will action the remaining $49 million of profit improvement initiatives this year and deliver a good amount of enhancement from transformation to our operating results, and I look forward to celebrating the successful conclusion of the journey in approximately 10 months' time. But we will not rest between now and then. All of our accomplishments in 2019 put Element in an excellent position to achieve our goals in 2020, the first and foremost of which is transformation. But in addition to transformation, we have our second wave of opportunity continuing to swell, and that is the combination of an expanded approach to syndication that we took in 2019 as well as scaling with our large, fast-growing client, ArmadaIn the fourth quarter of 2019, we syndicated $964 million of assets and, in the process, generated over $27 million of revenue for our business. As you know, we syndicate 100% of the leases we originate for Armada, and as noted in our MD&A, our Q4 syndication volumes reflected an increase in Armada activations. This was to be expected, given the seasonal nature of Armada's vehicle delivery needs. We also expect Q4 to bring a healthy demand for fleet assets from syndication buyers approaching their fiscal year-ends, and the market did not disappoint in that regard. We filled some of that demand with assets that attracted a slightly lower price than we saw in the first 3 quarters of 2019. Nevertheless, it made good sense to lean into that demand given the relationships that we're building with syndication market participants as well as our rapid deleveraging agenda ahead of the anticipated U.S. bond market offering later this year. We continue to strengthen our understanding of the market for our assets and to build our syndication capabilities. Quarterly syndication will remain a profitable source of quality, recurring revenue for Element throughout 2020. And not unlike 2019, you can expect that there will be a degree of variability from quarter-to-quarter in syndicated asset volumes and yield, but we continue to target syndication of approximately $2.5 billion in assets for the full year 2020. We expect that syndication will be more heavily skewed towards Armada assets as the last of the 2019 orders make the way into 2020 activations, and we syndicate 100% of those activations to both manage credit concentration as well as to maintain capacity on our balance sheet to accept further vehicle orders as that client continues to build up their fleet. Our relationship with Armada remains dynamic and rapidly evolving. It also represents an incredible opportunity for us to grow Element, not just financially, but also operationally. In Armada, we're working with one of the most admired and successful companies in the world, nurturing and learning from this client relationship over the course of 2019 has undoubtedly been a highlight of the year for our organization. The third wave of opportunity we have identified for Element is strong, sustainable organic revenue growth, a top, a best-in-class operating platform solidified by our transformation. As we detailed last quarter, we performed a comprehensive in-depth study of the North American market for Fleet Management services and financing in late 2019. The resulting insights into segmentation, penetration, pricing and industry dynamics, have informed our enhanced go-to-market strategy, which we're beginning to implement now in 2020. Achievement of our strategy will result in Element generating net revenue growth of 4% to 6% annually beginning in 2021. The 6 planks of our growth strategy, are holding market share through best-in-class client retention, improving sales force effectiveness, better managing client profitability, converting self-managed fleets in targeted marketed segments into Element clients using our strengthened financial position and a compelling value proposition and leveraging Element's market leadership position in Mexico and Australia, New Zealand. We encourage you to think of the sixth plank of our growth strategy as option value. And that is the addition of our Armada-like mega fleets to our client roster. The success of this pursuit could drive annual net revenue growth above the 4% to 6% range. Subsequent to quarter end, we announced organizational changes that will position Element to capture these growth opportunities in the U.S. and Canada. We have combined our enterprise and mid-market commercial teams into a single commercial organization with a dedicated focus on identifying and winning new clients in the enterprise, mid-market, government and mega fleet market segments. Under the leadership of David Madrigal, who is appointed Chief Commercial Officer. David built Element's high-performing Mexico team from ground up, delivering double-digit growth in that market over the last 4 years and solidifying our company's reputation as the industry leader in that region. We're fortunate to have someone with David's leadership ability and business acumen in the Chief Commercial Officer role, given the importance of our growth strategy in the U.S. and Canada. The decision to create the CCO role was informed by many factors, including a decision of our EVP of Enterprise Sales, Jon Parker, to leave Element for some well-deserved time off. John's 25-year tenure with GE with 10 of those years of Fleet Management has been a real enabler for us. And to that end, I want to personally thank Jon for his dedication to Element and for his many contributions to this company's success. This is a good time to highlight the growth momentum already demonstrated by our full year 2019 core results as compared to 2018. 21% growth in originations, 11% constant currency growth and assets under management, 14% growth in net revenue, comprised of 2% growth in net financing revenue, despite steady volumes of earning asset syndication, 8% growth in servicing income and more than a sixfold growth in syndication revenues. As you know, these growth figures and the delivery of operating cost savings by our transformation program combined to increase core adjusted operating income by 35% in 2019. And all of this is helping to further elevate the free cash flow profile of our business. Free cash flow increased 59% to $456 million in 2019. As I said last quarter, this growing profile is likely to put our Board of Directors in the enviable position of having to consider capital allocation options in the not-so-distant future. With all that said, I'd like to turn it over to Vito to provide some greater detail on our financial results.
Thank you, Jay, and good evening, everyone. I'm pleased to be with you to talk through what we feel are a strong set of Q4 2019 operating results, bringing to close an outstanding fiscal 2019 for Element. Positioning the company to continue the momentum into 2020. Let me start off by walk you through the key elements of our Q4 core adjusted operated income P&L. As noted in our disclosures, our Q4 '19 core fleet adjusted operating income was $142.6 million or $0.24 per share, representing an increase of 43.6% versus prior year, and 9.9% versus prior quarter. On a full year basis, we increased our core adjusted operating income by $134 million to $521.1 million or $0.88 EPS. We delivered strong results across all lines of the P&L. One of the first place as we start when we look at the underlying trends and health of our business is the performance of our assets under management. It's a key barometer of future earnings momentum. Fleet Management finished the year with $16.7 billion assets under management, an increase of $1 billion or 6% from $15.7 billion at December 31, 2018. On a constant currency basis, the year-over-year increase was approximately $1.7 billion or 11%. As it relates to Q4 activity specifically, our AUM grew by $540.6 million or $700 million on a constant currency basis. That represents a 3% increase over 2019 Q3 levels or 4% on a constant currency basis and our second consecutive quarter of meaningful AUM expansion. Originations in Q4 aggregated to $2.2 billion, a 22% increase over the Q4 2018 levels and 5.7% increase from our strong performance in Q3. This brings total originations for 2019 to $7.85 billion a 21% increase over 2018. What does this tell us? Significantly improved client retention in the U.S. and Canada, new client wins in all geographies and our ability to scale our capabilities and execute on the opportunity provided by Armada. Section 5 of our supplementary information document provides a more detailed view of the quarterly progression of both assets under management and net earning assets. Let me now turn to the core P&L items. Our core net revenue in Q4 2019 was $257.6 million, a 16.6% increase versus prior year and a 5.3% increase from Q3. Core net revenue for 2019 was $988 million, up $123 million or 14.2% from 2018. I'll now touch on each of the 3 components of our core net revenue line: financing, service and syndication. Net financing revenue of $101.3 million in Q4 increased slightly more than 2% compared with both the prior quarter and the prior year. This is an impressive result, particularly when one takes into account that our average net earnings assets declined by $241.7 million from Q3 2019 and $748.7 million from Q4 2018, tracing, of course, the increased syndication activity supporting our balance sheet strategy and the targeted reduction of tangible leverage. The resulting NIM increases of 13 bps and 26 bps from Q3 2019 and Q4 2018, respectively, are reflective of the continued growth of assets and higher-yield geographies within our portfolio as well as the very beginnings of our work towards better-managed client profitability. On a full year basis, our net financing revenue was $405 million, an increase of $7.6 million from 2018. Let's move on to servicing income. Net servicing income for Q4 2019 was $128.8 million, representing an increase of $6.6 million over Q3 2019, mainly driven by higher revenues across multiple products as well as the impact of seasonally lower maintenance and titling volumes in Q3 2019. Year-over-year performance showed similar growth of servicing income, excluding the seasonal impact, an increase of $9.3 million or 8% over Q4 2018, across numerous products resulting from continued progression and transformation initiatives as well as in organic growth in our U.S. and Canadian business. We continue to be very pleased with our progression in service income. Finally, our third revenue component, syndication. Volumes increased again this quarter to $964 million, giving us a total volume of $2.9 billion assets syndicated in 2019. As Jay mentioned, we continue to see healthy demand for these assets translating to $27.5 million in syndication revenue for Q4 2019, up 19.3% from Q3 2019, and bringing us to a total syndication revenue of $89.6 million for 2019. Syndication activity levels will continue to be subject to quarterly variability, particularly in account of the seasonal nature of Armada's vehicle delivery needs. And I characterized Q4 levels as on the high end of the spectrum. Accordingly, we expect to see a reduction of syndication revenue in Q1 2020. I'd like now to turn your attention to our core fleet expenses, and I'll direct you to Section 2 of our supplementary. Core adjusted operating expenses in Q4 aggregated to $115 million for the quarter, a decrease of $6.6 million from Q4 2018 and relatively flat compared to Q3 2019. The savings over last year are primarily due to set transformation, offset by investment and strategic growth areas, Armada, Mexico and syndication capabilities. Similarly, full core adjusted operating expenses declined by $11 million, with the transformation benefits partially offset by growth investments as well as some FX headwind. Our transformation efforts, I simply couldn't be more pleased and huge kudos to our entire team at Element. By the end of 2019, we had actioned $131 million of initiatives, $11 million more than our increased target of $120 million. Our core operating expenses benefited an incremental $3 million from transformation savings in Q4, bringing our full year total OpEx savings delivered by transformation to just under $40 million, with $31 million of additional operating income improvement delivered to net revenue for the full year, that's the $71 million total of operating enhancement delivered by transformation in 2019. Please see Section 1 specifically of our supplementary for a breakdown of this math. Jay spoke to our key balance sheet metrics. Again, we have made and will continue to make great progress through 2020 and our achieve -- our desired tangible leverage of sub-6 as well as access to U.S. unsecured debt market on the back of strong investment-grade ratings across our suite of rating agencies. The 7.11x reported tangible leverage at year-end, of course, reflects the impact of the additional 19th Capital write-down recorded in Q4. The noncash after-tax charge of $194 million reduces our tangible equity and in isolation has a 0.6x upward impact on tangible leverage. Also, as noted in Section 6 of the supplementary, the impact of the nonrecourse debt related to Armada amounts to a further 0.5x increased potential leverage. Jay spoke at length about 19th Capital and the effect on our results. The pretax charge of $260 million is reported on its own line in the statement of operations as impairment of 19th Capital and, of course, is the main driver of our lower IFRS net income for the year and our IFRS net loss for the quarter. The after-tax impact of this impairment is $194 million. Also, I wanted to direct you to Footnote 7 in the financial statements, which gives you more details on the assumptions used in the calculation of the impairment loss. Let me also make mention of how we're tracking on our onetime transformation-related investments. In Q4, we recorded $29 million of onetime investments, bringing the full year 2019 total to $91 million, and that's $130 million total since the beginning of transformation. Our Q4 onetime transformation investments were predominantly professional fees to our transformation partners and employee incentives associated with meeting transformation targets. Before I hand the call back to Jay, and consistent with my comments on last quarter's earnings call, I want to reiterate 3 other very important metrics. First, our consolidated return on equity was 12.6% for Q4. Excluding the impact of '19, ROE would have been 12.3% for Q4, which is in line with our expectations, and we remain on track to achieve our targeted range of between 13% to 13.5% exiting 2020. Secondly, consolidated free cash flow is set out in Section 4 of our supplementary information document, amounting to $125.3 million in Q4, an increase of $35.6 million or 39.5% year-on-year. And finally, as Jay indicated, 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 $1.05.With that, Jay, I'll hand it back to you.
Thanks, Vito. In 2019, our organization demonstrated its ability to set ambitious targets, focus on execution and over-deliver for our stakeholders. In 2020, we look to bring the same energy and focus to our endeavors. We will complete our transformation program having fortified Element's industry-leading operating platform. We will further strengthen and deleverage Element's investment-grade balance sheet by continuing to syndicate core assets and reduce our tangible leverage ratio as well as by issuing bonds in the U.S. unsecured corporate debt markets in the first half of the year. The proceeds of our issuance will allow us to retire convertible debentures due in June 2020, replaced with a more economical source of financing and, thereby, lower our overall cost of capital as well as improving liquidity for the long term. Finally, we'll begin to pivot to growth in 2020, ramping up our clearly articulated plans to deliver 4% to 6% net revenue growth annually, beginning in 2021. Now it’s my pleasure to open the floor to your questions. Operator?
[Operator Instructions] Our first question comes from Geoff Kwan with RBC Capital Markets.
My first question was just around the customer wins. You made some references to it on the origination side, but are you able to kind of clarify? Did you have any new customer wins in Q4? And if there's any color you can provide around that? And then on Armada, can you comment on the growth potential beyond what I think the initial order was kind of around 20,000 vehicles?
Geoff, in terms of customer wins, we enjoyed wins in each of the 5 countries in Q4. And all the while experiencing customer retention at more traditional rates. And so as a consequence, our net revenue gains in Q4 were impressive and strong and creating nice momentum as we think about 2020 and this pivot to growth. Regarding Armada, again, as you well know, we operate under a strict confidentiality agreement with that particular client. And so we have to be very discrete in terms of information that we share. The expectation that we have is that this is a fast-growing organization that is looking to build out very, very sizable fleets of delivery vehicles. And as their primary conduit for accomplishing that, we expect to be quite busy in 2020 fulfilling that particular need.
Okay. And then on the 19th Capital, can you talk about like where the write-down is today relative to, say, like the highest kind of expression of interest value you got whether or not the value that you got it is probably somewhere around salvage value or wholesale? And just trying to understand like what kind of has to happen if you had to take another write-down?
Yes. So as we hinted in our Q2 results call, we have begun to see the deterioration in market demand and pricing for Class 8 used trucks in the United States. And we're quite sure whether this was an aberration over the summer months or whether this was the beginning of something. And as it gathered momentum and took forward in Q4, it became very obvious to us that systemically demand had shifted and was not likely to come back in any strong fashion anytime soon, and coincident with the price discovery that we were able to have as a consequence of the sale process, we had a clear view in terms of both the market demand and pricing for these assets. Having undertaken the sale process having received strong interest and yet, not being able to translate that into a sale transaction at a value that we thought was appropriate for the assets, we've made the difficult decision to move to an accelerated wind-down of the business and to take the charge that we've disclosed for Q4. That resulting valuation on our books of $133 million represents our view of the liquidation value and an accelerated wind-down mode. And so it is reflective of the difficult environment that we see in the marketplace and the expectation that, that challenged market will remain much through the liquidation process.
Okay. That's helpful. And if I can just ask one last question. Is there any sort of guidance you can give on syndication levels expected for 2020, even ballpark? And just broadly speaking on the strategy, is it -- obviously, Armada's driving that. But to the extent that it would be used for where you're exceeding single name limits for your ABS? Or is it possible that might evolve into more of a broader funding source in terms of increasing the funding diversification?
So in terms of syndication, we would expect plus or minus $2.5 billion of volume in 2020. It will skew a little heavier towards Armada, given the orders that we received in 2019 that have yet to be activated. So it will be more pronounced in terms of our Armada makeup of the syndicated vehicles. And any year thereafter, we would generally expect that it would be roughly a portion 50-50 between Armada and the core business. In terms of syndication, for us, the whole genesis behind the syndication was Armada. Given the sizable order intake that we have, given the production and up-fitting period in which we need to hold that asset, we're just not in a position. And given the sheer volume of the program that is envisioned by them, we're not in a position where we can take the exposure of holding that asset on their books through our securitization. And as a consequence, I've made the decision to establish the syndication program that allows us to sell the related asset to a third party and take it off our books, which then gives us the opportunity to accept orders for new production and to fund through the nonrecourse facility, kind of the work in progress, that -- which has been drafted by the OEM, but yet has not been built through to Armada. And lastly, we do see this very much as a complementary source of funding for the business. I think the team has done a brilliant job of building out our securitization capabilities. Syndication gets added to that and with the inaugural issue of a U.S. debt instrument that will give us yet another funding source for the business. And when we come back to our ability to put forth a compelling value proposition to our clients and the ability to deliver consistent access to cost-efficient capital, we see syndication as a means of facilitating that.
Our next question comes from Paul Holden with CIBC.
A couple of questions on the net interest margin to start because there was a noticeable increase this quarter. So I guess the first question is regarding the sustainability of that. You pointed out that it was partly due to higher-margin business and nondomestic markets. Is that a sustainable trend?
It is.
Yes.
Okay. And then normally, when we've seen a large amount of interim funding, that has had a negative drag on the NIM. Is that a correct characterization? And therefore, once these Armada warehouse number sort of normalize, NIM could expand even further? And if that's the case, when should we expect the Armada-warehoused or interim-funded volumes to normalize?
So I'm not sure of that relationship that you speak of. So let us maybe take that one away for a reflection in consideration. That's not an observation that we've made. And as you can appreciate, and if you go back a couple of investor iterations of our investor presentation deck, where we kind of map out on a time horizon, the continuum, whereby we accept an order, place that order with the OEM that vehicle's manufacture goes to up-fitting, it gets delivered, and then it is in the billing cycle for a full month before it's eligible for syndication. When you look at that period of time, the minute we draft it, we have an interim funding obligation. As it relates to Armada, that's funded on a nonrecourse basis through the funding facility for all of our other business that is funded on our own working capital. And so we would expect, as the organization continues to grow and enjoy success that interim funding will continue to grow. And we will work with the OEMs and up fitters to try and condense that amount of time that it takes to kind of work its way through that aspect of the time continuum. But the interim funding is very much like originations, a precursor of growth in terms of our assets under management.
Okay. Let me ask a question, a piece of the question a little bit differently. In terms of the interim funding, you are paying interest on that interim funding but not collecting any revenue against it. Is that correct?
That's not correct.
Okay. Okay. Never mind that. Next question, 19th Capital. So the expected time line from winding these assets, if I recall correctly, originally, it was roughly a 3-year process. Now that you said you're going to accelerate that process, we should assume something less than 2 years, given a year has already passed. Is that fair?
Yes. And we would expect by the end of this year and certainly by Q1 of 2021, that it will be complete.
Good. And then just in terms of your tangible financial leverage and achieving that target of less than 6. Is that still an attainable target by end of 2020.
It is. Again, unexpected setback in terms of 19th Capital. But as you look at the impact, I think it was better part of 62 basis points of drag. So the 7.11 would have been closer to 6.5 in terms of our tangible leverage ratio. So when we look at our plans for 2020, the cash flow being generated by the business, the profitability of the business, coupled with the syndication program. Yes, the 6 is still attainable. And it's certainly our goal to reach that level.
Okay. Great. And just one last quick one for me. With the $122 million of third-party debt associated with 19th Capital, is there any recourse to Element, if the asset sales do not fully recover that $122 million?
There is not.
Our next question comes from Tom MacKinnon with BMO.
So when you look at your tangible leverage target of 6x for the end of 2020, does that include any of that warehouse stuff with Armada? Or is that generally the higher number that we'd be looking at, excluding that?
It is the higher number, excluding that. So it is the unadjusted number, we will try to reach.
The unadjusted number. The one that's over 7 right now, correct?
That is correct.
And so when you do hit your target, what are your plans here? You've got exceptional amount of free cash flow, kind of a high-class problem to have, but how should we be thinking about the company post hitting that goal?
Yes. So that's the capital allocation decision that I referenced. The Board will have the enviable position of piling on as the next couple of quarters unfold. The piece that I will like to remind our investors is that we're still in the midst of a wholesale transformation of the business. And the good news is we're making tremendous progress, and we're getting tremendous insights in terms of the business. And whether that's a deeper richer understanding of all the levers that are available to us to improve the client experience and the profitability of that experience for investors through to Armada and dealing with someone of that scale entering an industry through the syndication and all the new learnings that are coming as we build up demand. I mean we are the largest constituent in the fleet syndication marketplace. We're building out demand for this. We're qualifying supply for this, and we're learning to better manage spread realization through the process. So it's all to say for all the progress that we've made, we're still learning. We're still gaining insights. And so much like we've approached everything to this point in time. We advance. We cultivate those learnings. And then we use the insights from those learnings to sharpen our focus, sharpen our direction and much will be the same in terms of capital allocation. So as we, again, mature the syndication, as we continue to grow with Armada and as we wrapped up the transformation and as we begin the all-important pivot to growth, every single one of those different ways is going to help inform what we have available in terms of capital and how we might best want to deploy that capital to the benefit of our shareholders.
And were any of the originations wins in the quarter, were any of the -- were they just sort of -- maybe existing clients, wins from other FMCs, or to what degree were you able to sort of penetrate the self-managed fleet market?
Yes. So it would be more along the lines of renewals and steels as opposed to, broadly speaking, self-managed. Self-managed in Canada and the U.S. and Australia, New Zealand is exactly what we're talking about in terms of this pivot to growth and expect us to build out the capabilities, think salesforce incentives, think both sales force training, structure, et cetera, throughout 2020 as we begin this pivot to growth and capitalize on this transformed strengthened operating platform. Mexico is a lone exception. Mexico pivoted to growth and, in particular, to self-managed fleet acquisition a number of years back, and they continue to do just wondrous things in that marketplace. It really is quite impressive. And again, as we've talked about in the past, it has absolutely informed our thinking in terms of the art of the possible in other geographies.
Okay. And the last one is, you mentioned you'd be tapping the debt market in order to fund some of these converts that are coming due in June. How should we be thinking about that? Like half a quarter, all, 2/3, any idea?
Well. Yes. No, we would want to essentially take out the entirety of -- which now is around about $567 million of convertible debentures. We want to take out the entirety of those, and we'll do so through some combination of internally generated cash flow and proceeds from the inaugural U.S. bond issue.
Right. But no more converts?
No, no, no. Listen, as we talked before, we do not see convertible debentures as appropriate for our structure on a number of dimensions, not the least of which is cost basis. So when we look at the spread differential in terms of unsecured U.S. bonds versus convertible debentures, it's a pretty straightforward decision for us given our investment-grade status...
And how much would be the sub-debt versus the free cash flow of the $567 million?
TBD on that. I think that's just -- when we get out there into the market, we'll -- there's a lot of things impacting the market, and we'll make a decision at that particular point in time based on a number of variables.
Our next question comes from Mario Mendonca with TD Securities.
Two questions. One, last quarter, you were helpful in helping us understand how much the amount of expenses associated with bonuses and other variable comps that were treated as below-the-line items. Was there a material amount this quarter you could highlight?
Yes. Mario, thank you. Note 27 in the financial statement gives you the detail a little in respect to the breakdown of transformation. And there, you will see us note that the -- effectively the incentive component of the $91 million total transformation costs in fiscal '19. $14.2 million was the amount of employee incentives and $5.7 million of that would have been a Q4 amount.
Okay. That's very helpful. And then the next question is -- sort of it's a tough one because I'm struggling to think through, and hopefully, you can help me. The securitization market for the -- for fleet was proved to be awfully resilient during the financial crisis, and that's going way back. What I'm struggling with is whether the syndication market for fleet will exhibit the same sort of resilience if we encounter a financing strain that we saw say, back in 2008 or 2009 or maybe something less relevant -- less intense than that. And sort of along those lines, could you describe or quantify how much of the fleet syndication market, does EFN currently accounts for?
Yes. I can understand why you're having a difficulty sussing this out because we encountered the same difficulties as we began this exercise basically a year ago, a little more than a year ago, and what you probably would have found is that the U.S. market for fleet syndications was roughly $15 billion -- excuse me, $15 billion a year. And we use a number of CAD 20 billion. And as you think about the size of that market, and what it is comprised of when we're out there doing the better part of the CAD 3 billion, and let's assume that, that CAD 3 billion was additive to the CAD 20 billion that already exists. You got a market size of roughly CAD 23 billion. We constitute, let's call it, 1/8 of that market, okay? And as we studied that market and looked at the resiliency of that market through the economic downturn. What we did see is some pullback in terms of the size of the market. What we couldn't determine was whether that was supply or demand related. So did demand fall away or did supply fall away? We don't know. So our approach here, quite simply, is we are going to grow the size of the market. We're going to diversify the constituents within the market. And we are going to ensure that our product going into that market is well known, well received and highly valued such that if there is any degradation, there will be a flight to quality, and ours will be the product that will be still sought in that marketplace. Obviously, through securitization, through the U.S. bond market, through our senior line, we will have alternative facilities in place should we need to bridge any market demand deficiency in the short term, but it's our belief that our reputation, the quality of our instruments and our unique pay system that we have that looks after all the administration of the underlying leases makes us a very, very attractive product in that marketplace, and thus, we'll be able to sustain demand throughout every cycle.
That was very helpful. One other thing, if I could. And I'm not sure if someone asked this already, I might have missed it. The -- what I think a few of us referred to as the syndication margin where you take the syndication revenue and divide it by the assets that was syndicated. That number was lower this quarter than what we've seen in the past. Is that a direct reflection of having syndicated far more Armada assets in the quarter than in prior quarters?
Yes. So actually, the $285 million that we had in terms of yield in Q4 was actually nearly bang on the Q2 yield. So it's not the market. Now in fairness, we would have thought Q4 would have yielded higher because of the value of the tax benefits and their appeal and usability in terms of net present value to the investors. So it was a little lighter than what we had anticipated. As we signaled at the outset of the program, yield will vary quarter-to-quarter based on credit quality, interest terms, their remaining asset lives. They all factor into this. And so to your point, mix matters. And maybe with that, I'll -- I should leave it, maybe, at that.
Okay. So it's not clear whether that's Armada or not, we'll just have to see how that plays out over time. Is that fair?
That's fair.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant evening.