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Edited Transcript of EFN.TO earnings conference call or presentation 27-Oct-20 11:00pm GMT

·62 min read

Q3 2020 Element Fleet Management Corp Earnings Call Toronto Nov 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Element Fleet Management Corp earnings conference call or presentation Tuesday, October 27, 2020 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jay A. Forbes Element Fleet Management Corp. - CEO, President & Executive Director * Vito Culmone Element Fleet Management Corp. - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Geoffrey Kwan RBC Capital Markets, Research Division - Analyst * Jaeme Gloyn National Bank Financial, Inc., Research Division - Analyst * John Aiken Barclays Bank PLC, Research Division - Director & Senior Analyst * Mario Mendonca TD Securities Equity Research - MD & Research Analyst * Paul David Holden CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research * Stephen Boland Raymond James Ltd., Research Division - MD & Equity Research Analyst * Tom MacKinnon BMO Capital Markets Equity Research - MD & Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management Third Quarter 2020 Financial and Operating Results Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) Element wishes to remind its 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 statement will provide -- will prove to be correct. Element's earnings press release, financial statements, MD&A, supplementary information document, quarterly investor presentation and today's call include references to non-IFRS measures, which management believes are helpful to present the company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in the MD&A. I would now like to turn the call over to Jay Forbes, President and Chief Executive Officer of Element. Please go ahead. -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [2] -------------------------------------------------------------------------------- Thank you, operator, and thanks to all of you for joining us this evening to discuss our third quarter results, our achievement of long-standing strategic objectives as well as our thinking and progress on more recent strategic priorities now that transformation is coming to an end and our capital allocation strategy, namely the planned return of capital to shareholders by way of dividends and share buybacks. Before I begin with our results, I want to express immense gratitude on behalf of everyone at Element Fleet Management, to the health care professionals and so many other essential workers on the front lines of the COVID-19 pandemic. These are difficult, challenging times, and we're fortunate to have such selfless, caring people, putting themselves in harm's way to assist those in need. Thankfully, everyone here at Element is keeping well. While our business has not gone unscathed by the circumstances created by COVID-19, our blue-chip client base, diversified across industries and geographies, and our resilient business model underpinned another solid quarter of both operating and financial performance. Our adjusted operating income increased 16% quarter-over-quarter and 1% year-over-year. We produced $0.22 of adjusted EPS in the quarter, $0.03 more than the prior quarter and flat to prior year. And we generated $108 million or $0.25 per share in free cash flow in the quarter, an 80% increase from Q3 2018 when we first began this transformation journey. Vito will walk you through our results in greater detail, but I'm proud to say that they are reflective of an organization that has remained centered on its purpose in spite of the relentless challenges borne from COVID-19. Our people have remained singular in their focus, delivering a consistent, superior client experience as they kept our clients' fleets and drivers safer, smarter and more productive. Our clients are hugely appreciative, and so am I. Delivering that consistent superior client service experience has been the bedrock of our transformation program, which is now over 2 years running and just 2 months away from a very successful conclusion. In Q3, Element surpassed our transformation end goal of actioning $180 million in annual run rate pretax profitability improvement with a cumulative $189 million of such initiatives actioned by quarter end. And while we may have matched and indeed surpassed our year-end objective, we think there's a bit more gas left in the tank. And so we will keep our foot firmly on the accelerator to bring the transformation to a strong and successful close in December. Converting actioned items into bottom line improvements is, of course, the real measure of success. And in Q3, we delivered $35 million of operating income benefit and expect to have delivered $130 million in total by year-end. That's $130 million of benefit to be realized in 2020 against $189 million of actioned improvements to September 30, meaning there's approximately $60 million of additional bottom line enhancements to be delivered in our income statement in 2021 and beyond through higher revenue, through higher earnings, free cash flow and operating leverage. And while the transformation and our significant investment to achieve the same will cease at the end of the year, the cultural shift that has been fostered within the organization will live on. Our people are more curious. They ask more questions. They probe. They test long-held beliefs. They're better equipped with both tools and mindsets to analyze and address the opportunities that they can now surface on their own. To sustain and advance this culture of continuous improvement, we've stood up a center of operational excellence, and you can read about this in the MDA this quarter and about a few of the early quick wins that this center for operational excellence has been able to deliver. A second objective we've had since the fall of 2018 is to strengthen Element's financial position. Our target tangible leverage ratio of just below 6 represents the optimal point for Element's balance sheet to remain squarely investment-grade without being inefficiently underlevered. I'm delighted to report that we achieved this objective in the third quarter, attaining a 5.92 tangible leverage ratio. Knowing we would do so and with a clear line of sight to additional opportunities for debt reduction in the fourth quarter, we redeemed $172.5 million of Series G preferred shares, further maturing our capital structure by eliminating our most expensive tranche of preferred shares. We believe it is important to seize the opportunity to redeem these preferred shares, given the window for doing so efficiently only opens once every 5 years. That said, we remain on plan to end the year with a sub-6x tangible leverage ratio. Based on the clear pathway to success on all 3 of our initial strategic objectives, we elected to accelerate Element's pivot to growth in both North America and Australia / New Zealand. And while these are early days, we're seeing evidence by way of client wins and renewals that reinforce our confidence in the success of this organic growth strategy. When I joined Element in mid-2018, Aaron Baxter and his talented team in Australia and New Zealand, where we go to market as Custom Fleet, were well down the road with the local transformation of their own operating model. We quickly aligned our ambitions under the Element global transformation strategy, rapidly advancing Custom Fleet's activities by making supportive onetime investments from our global transformation budget. The result was effectively a fully transformed Custom Fleet by the end of 2019 and thus, our readiness to aggressively pivot to organic growth at the beginning of this year. As you may recall from last quarter's disclosures, by midyear, Custom Fleet has secured the business of 2 of Australia's largest supermarket chains, the primary being Coles, for whom we're building what is effectively, by local market standards, a mega fleet. In August, the team was awarded sole supply of The Salvation Army's Australian fleet, one of the largest not-for-profit operations in that part of the world. And as part of this arrangement, we executed a sale and leaseback with the charity, providing them with a cash infusion from the sale of their vehicles and giving them financial capacity by taking their assets on to our balance. We also had a substantial service win in ANZ in the quarter, which is detailed in our disclosures. I'll just call out that it's a 7,800-unit fleet that we're going to be servicing, which is a large-scale enterprise account even by North American standards. I couldn't be more pleased with the eager embrace and the decisive actioning of the growth strategy that Aaron and the team have displayed, and it's all the more impressive when you consider Australia has been battling wildfires in January and the coronavirus as early as February this year. But with gradual economic recovery starting sooner in that region than here in North America and with our colleagues at Custom Fleet having been at the ready to capitalize on opportunities, the success that they're enjoying today was really only a matter of time. We feel the same way about our commercial efforts here in Canada and the U.S. Q2 featured a number of sizable client wins and renewals, some of which we shared with you in our July disclosures. Our large successes in the U.S. and Canada in the third quarter were on the retention front. This is as crucial as any other plank in our growth strategy. The most important prerequisite for growth in the first place is ensuring we don't shrink. Throughout the quarter and since, we have remained aggressively active on all 4 domestic fronts of our growth strategy, better managing client profitability, improving sales force effectiveness, converting self-managed fleets in target market segments into Element clients and maintaining best-in-class client retention. We continue to build momentum towards new client wins. We're at the ready to seize these opportunities as they present themselves and to create new opportunities for our business. As the economy recovers and prospective clients find their feet, our compelling value proposition will gain traction. We are seeing it already in the activity levels of our commercial marketing and strategic consulting teams and in the tone and substance of the virtual meetings that we're having with business and government leaders. The opportunities, as we've illustrated in the past, are significant, with over $3 billion of annual net revenue available to be earned just by converting self-managed fleets in familiar and adjacent market into Element clients. The potential upside is undeniable. Mexico is another proof point for us. As you may recall, it was Element's business in Mexico that originated the strategy that we're using in the rest of North America and in ANZ. Our business in Mexico continues to fire on all cylinders, notwithstanding the relatively late arrival of COVID-19 in that geography. Originations in local currency are up 14% year-to-date compared to the same period last year. Mexico, built on our current growth strategy, has proven its effectiveness many times over and continues to drive outsized growth as a result of that strategy. ANZ is now proving the model's portability into different marketplaces. And we're executing diligently in the U.S. and Canada with the right leadership, the right people, the right incentives and the right sales support system. Given these strong, self-financing organic growth prospects for Element in all 3 of our operating regions, a successful transformation program that is drawing to a close, the proven attainability of our sub-6 tangible leverage target, the scalability of our transformed operating platform, the successful expansion of our syndication program and the support of a capital-lighter business model and given our outlook for strong prospective earnings and cash flow growth that will result from all of the aforementioned, we think that we're at a point where the highest potential for additional value creation is returning excess equity to shareholders via regular dividend increases and share repurchases. My leadership team will always reinvest in our business, as needed, to sustain and optimize Element's consistent superior client service experience. However, the onetime investments we've been making over the last 2 years to enable transformation will no longer be required next year, and our platform has modest ongoing reinvestment requirements. Our annual sustaining capital expenditures, largely technology-related, are expected to be plus or minus $45 million annually. We've also been reinvesting cash in the business over the last 2 years as part of deleveraging our balance sheet. Using quarterly cash flow to rapidly reduce liabilities has accelerated our journey to sub-6x tangible leverage. We expect to be back below 6x tangible leverage by the end of this year, and we do not intend to delever much further. As a result, reinvestment of cash into the business for this purpose will effectively cease this year. We also have our syndication capabilities to fund growth, advancing our capital-lighter business model, enhancing return on equity and ensuring ample cash flow available for distribution to shareholders. With the transformation completed and the balance sheet strengthened, Element will enter 2021 with strong growth prospects and a scalable operating platform that will combine to deliver growth in earnings and cash flow, neither of which will be encumbered by transformation investments or debt repayments at a burden the last 2 years. We believe the highest potential for value creation is to return the resulting free cash flow to common shareholders by way of dividends and share buybacks. Driving free cash flow is now at the heart of how Element thinks about creating value for its shareholders. We will focus on the levers mentioned, including growth, scalability and syndication, to continue to drive increasing cash flows that we can share with our investors. This focus will take the form of 3 clear strategic priorities in 2021 and beyond. The first priority is the aggressive pursuit of organic growth across our footprint and the demonstration of Element's operating platform scalability, as we magnify 4% to 6% annual revenue growth into high single-digit to low double-digit annual operating income growth. The second of our priorities is to advance a capital-lighter business model that enhances return on equity. Of course, this means our syndication program will continue to grow and expand. But there's also a focus on increasing the breadth and penetration of our service and solution offerings, which represent high ROE sources of revenue for this organization. Our third strategic priority is to achieve high single-digit to low double-digit annual growth in free cash flow and predictably return excess capital to common shareholders by way of dividends and share buybacks. You'll hear more about our concerted efforts to protect and grow our Element cash flows in future quarters. With that introduction, I'll turn the floor over to Vito to give you his insights on our third quarter results and take a deeper dive into some of the areas that I've shared. Vito? -------------------------------------------------------------------------------- Vito Culmone, Element Fleet Management Corp. - Executive VP & CFO [3] -------------------------------------------------------------------------------- Thank you, Jay, and good evening, everyone. It's a true pleasure to -- for me to step through the highlights of our Q3 operating results and also expand on several other important areas, including our evolving relationship with Armada, how we're thinking about our capital-lighter business model and why we believe it's value accretive, our free cash flow and, of course, our return of capital plans. Overall, I must say that we continue to be very pleased with our operating results pretty well across the board. Q3 represents our second full COVID quarter. And the results, the insights, the learnings we continue to glean all point to continued confidence in the fundamentals of our business and the future prospects for our firm. Let me first begin by speaking to the performance of our credit and collections functions and related key metrics in the quarter. Simply said, we couldn't be more pleased. Our reported delinquencies at quarter end are in line with pre-COVID levels, and our impaired receivables at quarter end are now lower than they were pre-COVID. We reduced our reported delinquencies by 70% from $35.3 million at the end of Q2 to $10.5 million as at September 30, a significant improvement. And keep in mind that those reported delinquencies values reflect the aggregate net investment in finance receivables attributable to a client's whole account, much more than the amount to the client they're delinquent on. The actual total amount outstanding from clients in arrears at quarter end was $900,000, which is far below the pre-COVID levels and an incredible outcome, thanks to the hard work of our collections team and the cooperation, of course, of our respective clients. Our credit team delivered results that were equally impressive in the quarter. Total impaired receivables declined by $78 million or 69% quarter-over-quarter. The resulting impaired receivables balance at quarter end was $34 million. That's an approximately $20 million improvement on pre-COVID levels of impairment in 2019. This reduction was made possible by 3 clients emerging from bankruptcy in Q3 and repayments from clients and asset sales across the remainder of the impaired accounts. Section 10 of our supplementary gives you a monthly view of our progress over the course of the quarter. We had no material write-offs in Q3, and we do not expect any material credit losses on the accounts that remain impaired. For the time being and given the continued uncertainty regarding the duration of the pandemic, we are remaining conservative in terms of our allowance for credit losses. It stands, as of Q3, at just under $19 million, and it's materially unchanged from where we started the quarter. Last quarter, you heard me speak to the very modest payment deferrals we granted to clients, and I'm pleased to report that they have largely been repaid. There's only $6 million remaining receivable at the end of the quarter out of the $23 million that we extended. There have been no departures from repayment plans along the way, and there have been no further extensions granted. In a nutshell, very, very pleased across collections and credit performance. Let me now turn to our Q3 operating results. Adjusted operating income for the quarter was $129 million, and that's equivalent to $0.22 on a per share basis. That's a 16% or $18 million increase over the last quarter. Adjusted EPS is up $0.03. And on a year-over-year basis, we achieved a $1.3 million AOI increase from Q3 2019. The first item that I would like to address in our operating results is servicing income. But before doing so, it's important that I pause and highlight the changes to our Armada business arrangement. As we shared in our written disclosures today, that client relationship is growing. It's deepening. It's maturing and evolving, none of which comes at us as a surprise. You will recall that early last year, Element began working with Armada to quickly build from scratch what will soon be one of the largest commercial fleets in North America. To facilitate this rapid expansion, we developed and resourced a myriad of operational and financial capabilities to address our model's unique needs. Having achieved a quick and successful launch of the client's initial ambition and with the better part of 2 years of experience working together, we have aligned on changes to our operating relationship that will see Armada own self-finance vehicles they will order from Element going forward, while we focus solely on the provision of a growing set of fleet solutions for Armada. This evolution of the Armada relationship aligns with our strategic designs on a capital-lighter Element business model that enhances return on equity. Our modest election to self-finance obviates the necessity of our USD 1 billion dedicated credit facility for Armada, which required up to approximately USD 150 million of balance sheet equity to preserve our tangible leverage ratio. The only material impacts of this evolution in our relationship with Armada in 2020 will be as follows: the substantial reduction of debt and the corresponding reduction in equity required as we wind down the dedicated credit facility, which will materially reduce tangible leverage; and the acceleration of income of approximately $8.8 million, which is recorded in this quarter's Q3 servicing income. In 2021 and beyond, we expect this evolution to have the following impacts: the elimination of as much as USD 1 billion of interim financing requirements; an expansion in the number of units under management and the opportunity to expand the breadth of service offerings for this growing fleet; and the loss of syndication revenue on the sale of Armada assets to third parties, which will be partially offset by the planned increase in syndication of other client assets. More on this later. We will focus on the design and delivery of sophisticated fleet services and solutions for Armada's already sizable and still growing fleet, which is currently the single largest consumer of Element's services. We expect this to remain the case as Armada's fleet and consumption of Element's services continue to grow for years to come. With this as important background and context, let's turn back to discussing our servicing income results for the quarter. We generated $124.7 million of service income, $10.2 million more than last quarter and $2.6 million more than Q3 2019. As I mentioned, $8.8 million of the servicing income in the quarter was accelerated income, resulting from Armada's purchase of the vehicles owned by Element not yet syndicated. Excluding the accelerated $8.8 million, servicing income increased $1.4 million quarter-over-quarter in Q3. That's in spite of an approximately 4% headwind from the strengthening of the Canadian dollar against the U.S. dollar in the quarter. As you look at our Q3 earnings, I would remove the $8.8 million from the servicing income base going forward. And accordingly, it's fair to knock off $0.01 and think of our run rate adjusted operating income for Q3 as $0.21 and not the reported $0.22. In terms of year-over-year performance, servicing income, excluding Armada, in Q3 was down 5%, which is an improvement on last quarter's 8% year-over-year decline. Overall, we continue to generate stable recurring revenues across our portfolio of client services. Approximately 1/3 of our servicing income is subscription-based and, therefore, less variable, with the balance being driven by clients' vehicle usage. Contributions to servicing income were marginally higher quarter-over-quarter from maintenance, fuel, tolls and violations and remarketing, while accident and related revenue and telematics contributors decreased slightly. Section 8 of our supplementary information document provides more detail. It's encouraging to see improvement on average in the clients' vehicle usage as well as remarketing performance over the course of Q3. That said, and with the noteworthy exception of remarketing, the reversion towards 2019 activity levels continues to be gradual. We're pleased with the trajectory and is confident as a business can be right now that these improvements will continue. So we'll stop just short of trying to forecast the rate of change. Let's now turn to net financing revenue. Net financing revenue increased $2.7 million year-over-year and $2.6 million quarter-over-quarter. The year-over-year increase represents particularly strong performance for 2 reasons: First, net earning assets decreased by 13% over the same period; and secondly, our Q3 2019 net financing revenue benefited from $9.2 million of contribution from 19th Capital, a noncore business we were running off at a time and looking to exit at this time last year. And of course, we've successfully done so. Excluding the 19th Capital net financing revenue contribution from prior year Q3 results, net financing revenue in Q3 this year increased $11.9 million or 13% on a comparable basis. Net financing revenue increased $2.6 million quarter-over-quarter despite syndication, resulting in a 6.3% decline in net earning assets over the same period. And this increase is largely due to improved interest expense management and improved gain on sale revenue, driven by both increased volume and further pricing improvements. We continue to experience a strong secondary market for vehicles across all of our geographies. Again, we provide additional data points in Section 8.3 of our supplementary information document. Let's turn to our syndication results for the quarter. Our syndication revenue in Q3 was $15.2 million, a 48% increase over prior quarter. We syndicated $600 million of assets in this quarter, including $89 million to new buyers. The $600 million volume was a 20.8% decrease from quarter, resulting in a meaningful improvement in our syndication revenue as a percentage of assets syndicated from 1.36% in Q2 to 2.53% in Q3. The syndication market remains wide open to us, and demand for our assets is robust. This has been the case all year. The most significant factor driving improved Q3 over Q2 performance was the gradual lowering of investor hurdle rates over the course of the quarter. In addition, we were able to syndicate an improved mix of assets in Q3 versus the prior quarter. This is an opportune time for me to expand on what I noted earlier referring to our capital-lighter business model going forward. While our both secured and unsecured financing will remain centerpieces of our funding structure, we're advancing a capital-lighter strategy that will reduce the amount of equity required to support the assets we fund. We will become capital-lighter through the greater use of syndication as a financing solution for our clients; the sale of our fleet assets to a third-party on a nonrecourse basis, which allows us to reduce the amount of financing, both debt and equity, we carry on our balance sheet while still retaining the client relationship and the opportunity to deliver a full suite of fleet servicing solutions. I've already spoken to how the change in the Armada business arrangement will be a perfect example of the benefits of being capital-lighter. Being capital-lighter not only frees up cash for distribution to shareholders, it also amplifies the impact of revenue growth and operating leverage by enhancing return on equity. Let me now turn to free cash flow. Our free cash flow per share tends to exceed our adjusted EPS by a healthy margin, and Section 2.1 of our supplementary outlines the underlying drivers of this over the last several quarters. Free cash flow per share in Q3 was $0.25, again, ahead of our reported adjusted EPS of $0.22. On a quarter-over-quarter basis, free cash flow per share was essentially flat, and this was primarily driven by the timing of cash tax payments. In Section 2.1 of the supplementary, you'll see an unusually low cash tax paid last quarter and an unusually high cash taxes paid this quarter. This is driven by tax payment deferrals granted last quarter by government in response to the economic impacts of COVID. Those tax payment deferral windows closed this quarter, so we're playing catch up and paying close to twice the cash taxes we normally would. Normalizing Q2 and Q3 free cash flow for this tax timing difference, free cash flow per share would have been $0.24 last quarter and $0.26 per quarter in this quarter, solid results reflecting improving business performance. Let me now move on to a brief discussion of originations. So our originations volume in Q3 of $1.28 billion was essentially flat quarter-over-quarter, particularly when accounting for the FX impact of the Canadian dollar strengthening against the U.S. dollar. Digging further, however, there are some encouraging trends. If you exclude our model volumes from this quarter and prior periods, originations in the U.S. and Canada increased more than 11.5% quarter-over-quarter and are flat year-over-year. Further adjusting for FX, the quarter-over-quarter growth was approximately 15%, so some very nice growth ex Armada there. Origination volumes in the quarter were partly driven by unfilled orders and pent-up demand from Q2, when the OEM production facilities were closed and some clients' delayed fleet vehicle replacements while they focus on other aspects of their business impacted by COVID. U.S. and Canadian originations growth, excluding Armada, in the quarter was also partly driven by the gradual recovery we have been seeing in our domestic client base, which is slower in some parts of the country than in other parts. In Mexico, although originations declined 20% quarter-over-quarter, as COVID arrived in that region rather later than elsewhere in North America, we expect a quick recovery and are already seeing positive signs subsequent to quarter end. Year-to-date at September 30, the originations in Mexico were up 14% over the same period in 2019. And in ANZ, origination volumes increased 22% quarter-over-quarter, as Custom Fleet continues its swift recovery from the impacts of COVID-19. Importantly, we have seen no meaningful increase in instances of de-fleeting across our client base. This tells us that while some client demand for new vehicles is either practically delayed or cautiously deferred right now, there's no decline in the need for fleets. That underpins our confidence in the gradual recovery of origination volumes over the next few quarters. You'll note a decline in our assets under management in Q3 even with steady originations since Q2. And this, of course, is the effect of amortization. And what's important to keep in mind is that this doesn't represent fewer vehicles, and it doesn't represent lower servicing income. As you can see on Section 4.5 of the supplementary, the amortization of AUMs outpaced our originations volume in the quarter, contributing to the $700 million AUM decline from Q2 on a constant currency basis. The simplest explanation for this is Armada. We originated particularly large volumes of vehicles for Armada in the second half of last year and the first quarter of this year. That was proverbial pig in the python. And as Armada origination volumes had slowed in the last 2 quarters, which we knew was coming, amortization of their large volume of existing vehicles continues and has begun to outpace new originations. Before I move to the last major component of my prepared remarks, our capital distribution story, let me highlight a couple of housekeeping matters. You may have noticed a different acronym than simply ROE through other disclosures today. And that is PRoCE, which stands for pretax return on common equity. We believe the formula behind our pretax return on capital -- common equity metric is an improvement on our historical calculation of ROE in 2 respects. First, we use a trailing 4-quarter average in the numerator to better represent true trending business performance by reducing the impact of individual quarterly results. And secondly, the numerator is the trailing 4-quarter average of pretax adjusted operating income, which better represents true business performance by eliminating the noncash impact of our effective tax rate, or ETR, on the numerator. Why is pretax AOI a better representation of Element's true business performance? Because there's a material difference between: One, the performance impact of tax implied by our effective tax rate, again, a noncash factor; and two, the performance impact of our real cash tax expense, which is much lower. Due to the accelerated tax depreciation and treatment of fleet assets on our balance sheet, our earnings are significantly shielded from cash income tax obligations. The largest component of the cash taxes that Element does pay is the Article 6.1 tax on our preferred share dividends. As we continue to mature our capital structure, those preferred share dividend amounts will decrease, reducing our cash tax costs even further. By calculating the return on our common equity using a pretax numerator, quarter-to-quarter variances are more accurate representations of Element's true business performance. In terms of effective tax rate, while in 2020 our estimated effective tax rate will likely fall in the 18% range, I'd like to guide you to model 21% to 22% in 2021, reflecting variances in our year-over-year income and other tax-related adjustments, again, all the more reason to focus on free cash flow per share. The last big topic I want to speak to this evening, of course, is our return of capital plans and expand on what Jay has said. Given the clear path to fulfillment of our 2018 strategic ambitions, the scalability of our transformed operating platform, the strength of our burgeoning syndication program, the enhanced clarity in the company's relationship with Armada, the scale of the opportunities presented by our accelerated pivot to growth across our footprint and the ensuing outlook for strong prospective earnings and cash flow growth, we have arrived at that point with the highest potential for additional value creation that lies in the return of capital in excess of that required to maintain our target sub-6 tangible leverage ratio to common shareholders by way of dividends and share buybacks. And today, we are pleased to announce a 44% increase to the company's common dividend from $0.18 to $0.26 annually per share effective immediately and, therefore, to be reflected in the Q4 2020 common dividend authorized and declared today to be paid in respect of Q4 2020 in January 2021. With this increase, Element's common dividend represents approximately 30% of the company's last 12 months adjusted earnings per share, which is the midpoint of the 25% to 35% payout range we plan to maintain going forward. And secondly, we are announcing the elimination of our DRIP program and the establishment of a normal course issuer bid to repurchase EFN common shares over the next 12 months, our first year of what we envisioned to be a regular ongoing program, subject to TSX approval and the terms and limitations applicable to such bid. Those are the end of my prepared remarks, operator. And with that, Jay and I are very much looking forward to the questions and further discussion. So back to you, operator. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Paul Holden with CIBC. -------------------------------------------------------------------------------- Paul David Holden, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [2] -------------------------------------------------------------------------------- I guess, the big question I would like to ask you is how we get a better sense of the impact on originations and syndication volumes given the change in the Armada relationship. And maybe the starting question for me is, is Q3 a good indication of what syndication might look like ex Armada going forward? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [3] -------------------------------------------------------------------------------- Paul, in terms of volumes, origination and syndication, how they might be impacted by Armada, even though we're not going to finance Armada's vehicles on a go-forward basis, we are going to procure those vehicles for those -- for that entity. And so these will constitute originations by our organization as we enter them into our service unit count. And so expect Armada acquisitions to constitute originations, if you will, on a go-forward basis. In terms of syndication volumes, with the final syndication activity that will take place mostly through this year, there shouldn't be much, if any, carryover into Q1. That will end our financing activities with Armada as it relates to their fleets and thus, any syndication of their particular units. That said, as we've identified in the past, we've been able to grow the syndication market, grow the appetite for our core fleet assets. And it would be our intention to maintain syndication volumes at that $2.5 billion of annual volume level that we had previously guided the market to. So expect that the -- whatever shortfall in volumes that might arise from Armada will be made up in terms of syndication of non-Armada assets. -------------------------------------------------------------------------------- Paul David Holden, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [4] -------------------------------------------------------------------------------- That is very helpful. Second question then, I guess, and still related to Armada is just to get a little bit of a better sense around that servicing income opportunity. Would you say that, that servicing income relative to assets would be in line with the rest of the -- your AUM? Or is it currently a little bit lower with an opportunity to grow it to a number that's more in line with the rest of the AUM? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [5] -------------------------------------------------------------------------------- As you know, we're under confidentiality agreement with this entity and, hence, the use of Armada as part and parcel of our descriptor for this organization. Let's just say that as we entered that relationship and introduced the scale and the economies of scale that come with the purchasing power that we have, given the size of fleets that we administer, given the reach that we have in terms of a national network of service providers that can service a very diverse driver base that Armada would have, the people, the processes and systems that we put in place over decades to ensure this all works in a coordinated, smooth manner, that is a real substantial value proposition that Armada has been introduced to, has appreciated and has made very good use of over the course of the last 2 years. So it's our expectation, Paul, that as we continue to work with that organization, as we continue to deepen the relationship, as they continue to better understand what direct ownership of their fleet will entail, that will create more and more opportunities for us to, one, expand the array of service offerings that we provide them to alleviate their own unique pain points; and secondly, as they continue to grow with this strategic initiative, both in the U.S. and in other jurisdictions, that there's ample opportunity for us to participate in that growth. And so we see from a servicing income perspective an opportunity to materially grow the volume of transactions by virtue of an increase in the unit count of the fleet that we have the privilege of managing, coupled with the breadth of service offerings that we can devise and provide to that organization. And lastly, I would say from my economic and strategic point of view, we're very pleased with the nature and the extent of the relationship that we have been able to create with this organization over the course of the last 20 months. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- The next question comes from Mario Mendonca with TD Securities. -------------------------------------------------------------------------------- Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [7] -------------------------------------------------------------------------------- Jay, if we could go to guidance you've offered in the past about expenses. You talked about how $180 million felt like the right amount of investment spending, and that anything above that amount would not be treated as noncore. So this quarter, obviously, you saw some opportunities and you took advantage of them. How do I -- we look at Q4? Is that another quarter where investment spending could be well in excess of, in aggregate, the $180 million you originally targeted and then dropping off to 0 in Q1 of 2021? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [8] -------------------------------------------------------------------------------- Yes. Mario, and perhaps just to align here on this point, when we spoke of the $180 million of benefit run rate profitability improvement that we intended to action, we also spoke in concert with that benefit a onetime cumulative cost of $180 million. And that $180 million, that onetime investment that we're making in this transformation, would all fall below the line. That philosophy, that guidance that we provided from the outset, we've held true to that. And so all costs, all onetime investments that we're making in respect of transformation, will fall below the line in 2020. And so to the extent that there are some incremental run rate profitability improvements that can be made in the fourth quarter, and they, in turn, demand some incremental onetime investment, whatever that is in the fourth quarter will indeed fall below the line as part of that onetime investment. That program, the transformation of this organization, the attainment of what is now clearly going to be more than $189 million of run rate profitability improvement and the associated onetime investment will end in December of this year. We will start the next year. There will be no onetime investment requirements whatsoever. Instead, we'll have the very positive legacy of $130 million of impact that -- in 2020 that will carry forward and $60 million of actioned but not yet realized benefits that will flow into 2021 in subsequent years as those actions are converted into realized bottom line enhancements. -------------------------------------------------------------------------------- Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [9] -------------------------------------------------------------------------------- Okay. Before I go to my second question, I just want to be clear, though, that we are looking at a number that is -- it will be in excess of $180 million because you're at $188 million now. Presumably, there'll be more in Q4. I want to be clear that I am looking at the right numbers. Like the number now cumulatively is $188 million. Is that right? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [10] -------------------------------------------------------------------------------- That is correct. Yes, absolutely. -------------------------------------------------------------------------------- Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [11] -------------------------------------------------------------------------------- Let me go to my second question then. It really -- this is a much more sort of broad question. You talk about 4% to 6% revenue growth looking forward and, say, low -- or high single-digit, low double-digit operating earnings growth on a go-forward basis. But the way I look at it is there's still a lot of changes in this company, not the least of which is this change with Armada. When you offer that outlook of 4% to 6% revenue growth and high single-digit, low double-digit operating earnings growth, is that something that you think we can apply in 2021 given all the changes that are under foot, not the least of which, obviously, is COVID-19 as well? Is that something we can apply to '21? Or would you have us think of that as a longer-term goal? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [12] -------------------------------------------------------------------------------- No. That's applicable for 2021. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- The next question comes from Geoff Kwan with RBC. -------------------------------------------------------------------------------- Geoffrey Kwan, RBC Capital Markets, Research Division - Analyst [14] -------------------------------------------------------------------------------- Just going back to the Armada disclosures that you had. You say in the press release, you expect the relationship to continue to grow for years to come. And by putting it in the press release, would it be fair to say that based on your discussions with Armada that they're willing to partner with Element Fleet for fleet services, call it, on a -- over a multiple-year basis? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [15] -------------------------------------------------------------------------------- Absolutely. Yes, absolutely. No, this is a -- as we have offered up as a characterization of relationships in this industry, they are multiyear and it's probably as common as it is uncommon to see multi-decade relationships. For all intents and purposes, this is a business process outsourcing. So there is absolutely the financing component, but then there is the entrusting of all that functionality of managing a productive fleet operation that is being outsourced to a fleet management company like ourselves. And so yes, you enter into these arrangements with the full belief that they're going to be multiyear and a reasonable expectation that they could be multi-decade. And that was the construct of the arrangement that we envisioned with Armada, and it is evolving quite nicely. -------------------------------------------------------------------------------- Geoffrey Kwan, RBC Capital Markets, Research Division - Analyst [16] -------------------------------------------------------------------------------- Okay. And then just my second question is, how would you describe the progress and your confidence right now about Element's ability to win these self-managed mega fleets? And how would you say that's changed versus the past 1 to 2 quarters? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [17] -------------------------------------------------------------------------------- I'd say still remain very confident, and the confidence is rooted in the knowledge of the size of the unaddressed market. So anywhere from 1/2 to 3/4 of the markets that we currently serve are unpenetrated by fleet management companies. Those fleets are owned and they're operated by organizations, businesses, governments that haven't entertained in outsourcing of either the financing or the operation of those fleets. And again, as we think about the world in which we're living in and all the economic difficulties that businesses are having in terms of securing alternative access to capital, securing cash, driving out operating costs, 3 fundamental tenets of our value proposition, we think that it will have even more appeal and given circumstances of the current economic environment and as we've talked before, that which gives rise to perhaps an even more compelling value proposition. Also, in the form of disclosure and fairness, introduces a bit of a headwind in that, gosh, it's going to be more difficult to engage, more difficult to build a relationship, more difficult to interact with counterparties and prospective clients given the limitations of personal interactions. And so net-net-net, we feel that the current circumstances favor and add, if you will, to an even more compelling value proposition. And then it comes -- if that is the realism of the situation, then it comes to what is our belief in our ability to execute. And I think over the last 2 years, you have seen this organization assess, embrace and march forward in a -- I think, in a balanced, thoughtful manner towards the accomplishment of many difficult objectives and methodically overcome and realized on each one of those objectives. And so I think our ability to figure a way to maximize our opportunities in the self-managed fleet are very strong. Thirdly, I would point to, obviously, we have a track record, a well-established track record of doing so in Mexico. We have a very early track record, interesting proof point in the portability of this concept into the Australian and New Zealand market. And as we've shared with you, by virtue of the investments that we made in the first half, was to be magical in the U.S. and Canada, that we're set up for success and getting some early feedback, that would say, yes, we're definitely on the right track. So as we always want to do, we will coach this all, and these are early days. But we're every bit as encouraged as we would have been 6 months ago, as we would have been a year ago and perhaps more encouraged than a year ago, given the progress that we -- early progress that we've shown in ANZ and the fact that a lot of the heavy lifting to position us for success has been done in the U.S. and Canada. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- The next question comes from John Aiken with Barclays. -------------------------------------------------------------------------------- John Aiken, Barclays Bank PLC, Research Division - Director & Senior Analyst [19] -------------------------------------------------------------------------------- I was hoping to get a little more color around the normal course issuer bid that you've announced. You've given us your goal in terms of the payout ratio for the dividend. But is there any sort of cap or any sort of minimum that you're looking in terms of the buyback, augmenting the return of cash or capital back to shareholders? Because you note that the increase in the dividend is only about 30% in terms of the payout ratio. But if we look on a similar calculation in terms of free cash flow, we're running below 25%. So is there any indication in terms of the level that you're willing to return capital through the buyback and what type of parameters that may be under? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [20] -------------------------------------------------------------------------------- Yes. John, no, we haven't provided any parameters in terms of the NCIB and a minimum or a maximum or even a target as to what we would like to accomplish. I will say that we intend to seek TSX approval immediately, and we would time the program to go live to coincide with the reattainment of the sub-6x tangible leverage that we are planning on for the end of this year. And then I would say to you, as you contemplate that range in your own mind solving for X, keep in mind that having attained the 6x tangible leverage and having line of sight to doing so again by year-end, it is our goal to be at that 6x tangible leverage hereafter. And so that is going to inform us in a not insignificant way just how much capital is going to be available to allocation to shareholders. And having set the dividend policy, I think you could probably solve for X in terms of the range of share buybacks that we would contemplate executing in any given year. -------------------------------------------------------------------------------- John Aiken, Barclays Bank PLC, Research Division - Director & Senior Analyst [21] -------------------------------------------------------------------------------- Understood. And I think I put myself in with a group of people that are not trying to rush Vito out the door. But are you able to give us an update in terms of how the Board search is going for his replacement as CFO? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [22] -------------------------------------------------------------------------------- Yes. Thank you. Well, we have engaged an external party, been working with them over the course of the last 2 months. And I would say to you, it's an international search. And there's usually a little bit of a learning curve to climb in terms of who is this organization. And as they begin to learn more about our industry, this company within this industry and the journey we've been on and perhaps as importantly the new journey that we're embarking on, there's a tremendous amount of interest. So yes, we'll try and keep you apprised of that as we go forward. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- The next question comes from Stephen Boland with Raymond James. -------------------------------------------------------------------------------- Stephen Boland, Raymond James Ltd., Research Division - MD & Equity Research Analyst [24] -------------------------------------------------------------------------------- First question is just back on Armada. I'm not sure if you mentioned why Armada is going to self-finance going forward. Is this capital -- or they have, I guess, a better cost of capital? Or is there something to do with their fleet -- the ownership of their fleet out in the market? Is it something to do with the actual receivables out there? I'm just wondering if you did mention that. I don't remember hearing that. -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [25] -------------------------------------------------------------------------------- No. We didn't. And I guess, it would somewhat depend on who you would speculate Armada is. And if you -- again, depending on who it is, if they ended up with an A credit, and we are a BBB credit, yes, that might suggest that their cost of capital would indeed look different than ours and perhaps would offer a better set of economics as compared to us being the middleman in the syndication transaction. -------------------------------------------------------------------------------- Stephen Boland, Raymond James Ltd., Research Division - MD & Equity Research Analyst [26] -------------------------------------------------------------------------------- Okay. And just like as a part B to that, does that mean like if the as they wanted to gain scale, do they need your procurement services to deal with the OEMs if they're still doing the same volume going forward? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [27] -------------------------------------------------------------------------------- Yes. So regardless of how big they grow, they would still not even constitute a small competitor to Element in terms of number of units under management, and that unit count matters in terms of scale. As we've discussed in the past, it's a true barrier to entry into the industry. And thus, it's a true barrier for organizations to realize the full economic benefit of owning, even by comparative standards, a large fleet. In comparison to the size fleet that we have now, we're able to procure vehicles, parts, services at far more attractive rates. Further, as you think about it, it's not only the absolute economic value that is derived in terms of that purchasing power, but it's the ability to coordinate. So we have qualified thousands of service providers, parts suppliers across the United States. And so we can quickly point their driver network to those preferred suppliers that can provide, a, the economic benefits; b, better service in terms of front-of-the-queue positioning and comfort that their vehicles are going to get a speedy turnaround and, as a consequence, will have a low downtime. The other piece of this is just the whole coordination of all this. As you think about the thousands of vehicles scattered across all the different states and needing to maintain those, to fuel those, to get those vehicles to the drivers, to get those vehicles from the drivers and to auction, that coordination in and of itself is no small feat. And the expertise that we have developed, the -- yes, the people and their experience, the supporting processes and systems that we put in place aren't easy to replicate. And so that all combines into a value proposition that is really quite compelling and, further, gets tailored to serve the very unique needs of this organization in a manner that, again, would be very difficult to replicate. -------------------------------------------------------------------------------- Stephen Boland, Raymond James Ltd., Research Division - MD & Equity Research Analyst [28] -------------------------------------------------------------------------------- Okay. And just my second question, just on the acceleration of that $8.8 million in service revenue related to Armada. Is that just that making you whole on a gain of sale or a fee that you would have earned on syndicating those -- that part -- their part of their fleet to them? Or what's that $8.8 million related to specifically? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [29] -------------------------------------------------------------------------------- Vito, do you want to? -------------------------------------------------------------------------------- Vito Culmone, Element Fleet Management Corp. - Executive VP & CFO [30] -------------------------------------------------------------------------------- Yes. Happy to, Jay. I mean, I think it's important. Again, we're bound by confidentiality. Stop short of giving you details in respect to our pricing arrangements with Armada or our any other valued client, we called out the $8.8 million, of course, because it is associated with the acquisition of those and the eventual sellback or buyout back to Armada. It's a fairly significant amount, and we wanted to call it out. And of course, it represents vehicles that were effectively, not exclusively but effectively, in the funnel. And accordingly, it was very important that we call it out and guide you to remove it from your base, if you will. But we'll stop short of characterizing the components of our contractual arrangement, of course, with clients. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- The next question comes from Jaeme Gloyn with the National Bank Financial. -------------------------------------------------------------------------------- Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [32] -------------------------------------------------------------------------------- First question is related to the net interest margin, up more than 30 basis points in the quarter. Looks like a bunch of that was driven by some pretty good success on the gain-on-sale income for ANZ assets. I'm just wondering if you can quantify maybe some of the, let's call them, onetime items that we're factoring into this quarter and the sustainability of that NIM rate from Q3. -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [33] -------------------------------------------------------------------------------- Yes. I'll let Vito get into a few details on this, Jaeme. But stepping back, you've seen a very positive progression in terms of our net interest margin for the organization, and I think that reflects a number of different factors and some of which manifest itself in the continuing expansion that you're seeing here. So one is mix and a greater proportion of higher-yielding assets out of Mexico and ANZ as part of the interest -- net interest revenue being generated by the business. The second key component is, again, this -- as part of the transformation, we had mentioned that while OpEx is going to be a beneficiary in terms of some of the run rate profitability improvement actions that we take, so are our direct costs and, in particular, cost of financing. And under Izzy's leadership, he's continued to tear this apart, better understand our capital structure, understand the most cost-efficient means of financing our assets and improve the velocity of our cash flow. And as a consequence, you're seeing a lower cost of capital against consistent revenue streams, which is leading to this NIM expansion. Vito, did you have any other thoughts that you might want to offer? -------------------------------------------------------------------------------- Vito Culmone, Element Fleet Management Corp. - Executive VP & CFO [34] -------------------------------------------------------------------------------- Thank you, Jay. You talked about the interest expense management. As you've alluded to, kudos to the Izzy and his group, the treasury team. The -- in relation to gain on sale, Aaron, in fact, gave the Board an update today as we were talking about our business, and the market remains strong. We've been very, very strategic about how we've been managing our remarketing efforts, including targeting distribution channels. So I have a high degree of confidence that from what we can see, remarketing both from a volume and a pricing perspective will carry into next year. And the only other item I'd mention that we didn't call out or in our disclosures is geographic mix, if you will. A little bit more in Mexico, a little bit of -- more of ANZ, a little less of U.S.A./Canada in relation to the earnings asset base also helps our NIM percentage. -------------------------------------------------------------------------------- Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [35] -------------------------------------------------------------------------------- Great. And the second question is with respect to the syndication revenue or, I guess, the syndication yield. Can you give us any color on how that's performed early in Q4 on October syndicated volumes? Is that 2.50% level, is that sort of like a baseline for go-forward core fleet assets being syndicated? Or should we expect a further rebound as those hurdle rates increase? Or is this more or less the run rate? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [36] -------------------------------------------------------------------------------- Yes. Maybe, Jaeme, I'll just talk about Q3 and big picture. So Q3, as we think that was part of our Q2 disclosure, we saw a strengthening of the syndication market. Demand has always been there every day, every week, every month of 2020. So there hasn't been an issue there. And in fact, we've been actually able to grow demand and expand the base of syndication investors quite nicely and have transacted with same. So demand has remained very strong for us and continue to be strong in Q3. What we did see in Q3 that, again, we had forecasted was a return to more normal fee levels, as the restrictions that had been put in place in the second quarter by a number of our investors in this group were relaxed or suspended. So let's say that Q3 was ascending back to normal quite nicely for us. And then as we go forward, acknowledging that Armada is no longer going to provide a deal flow for us in terms of syndication, we intend to make that up through the syndication of non-Armada assets. And we'd guide the market to remain at that $2.4 billion, $2.5 billion worth of transaction volumes in any given year. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- The next question comes from Tom MacKinnon with BMO Capital. -------------------------------------------------------------------------------- Tom MacKinnon, BMO Capital Markets Equity Research - MD & Analyst [38] -------------------------------------------------------------------------------- Just going back to the evolution of the Armada relationship. As I see it, so you've lost a syndication revenue associated with Armada. You've got some potential for other services associated with it, but you also mentioned that the evolution of the new relationship will lead to an expansion in the number of units under management with Armada. Is that -- what would be driving that? Does that mean that they would -- you would have more units with Armada than you would have had you continued to syndicate the assets on behalf of Armada? How should we be thinking about that? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [39] -------------------------------------------------------------------------------- No. No, it is -- Armada is rapidly building out their fleet from scratch. And as a consequence, the unit count will expand rapidly, and our ability to provide them with the existing services would obviously grow. And our opportunity to provide them with new services is also out there. So no, there is no unit count growth that comes as a consequence of the cessation of syndication activities. -------------------------------------------------------------------------------- Tom MacKinnon, BMO Capital Markets Equity Research - MD & Analyst [40] -------------------------------------------------------------------------------- It's just that you mentioned in the release that Element expects the evolution have the following impacts, and one was an expansion in the number of units. So I take it that the evolution would -- an evolution or no evolution, you would still have an expansion in the number of units under management with Armada regardless. Is that correct? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [41] -------------------------------------------------------------------------------- Yes. Sorry if that was a bit confusing. So let me restate. As we manage this organization holistically and recognize that we have a large balance sheet, put a lot of capital to work for our clients, we want to make sure that, that capital is earning a fair rate of return. And so as we look at the provision of financing, whether it's interim financing, as we bridge from origination to syndication, or whether that's financing, as we hold that asset on balance sheet for the entirety of the term, we want to make sure that our shareholders are receiving a fair rate of return. And this client, we had plus or minus $1.5 billion worth of capital, debt and equity that was being deployed in support of financing activities as we originated through this syndication. And so we will no longer syndicate those assets. We will still originate those assets, order those assets, process those assets and deliver those assets to Armada. But Armada will now take ownership of those assets and finance those assets, which will obviously bring to an end our syndication activities. And we'd expect the bulk of that to occur in Q4 in terms of bringing that to a close. So we will be relieved of revenue, syndication revenue, but we'll also be relieved of the necessity to keep a large bridge financing and the intended equity in support of that bridge financing, which will give us an opportunity to delever the balance sheet and have excess cash available for redeployment. On the operating side of things, again, we began working with this organization in February of 2019. We originated and serviced the first tranche of assets in 2019. We had a second large tranche of assets in 2020, and it's our expectation there will be new tranches of assets for years to come. That will have the privilege of servicing on their behalf, and that will provide that growing stream of existing services to a growing pool of units and afford us the opportunity to go deeper in that relationship and generate new solutions and new sources of revenue for this organization. Does that clarify for you, Tom? -------------------------------------------------------------------------------- Tom MacKinnon, BMO Capital Markets Equity Research - MD & Analyst [42] -------------------------------------------------------------------------------- That's very good. And the second question is just with respect to the tax guide of 21% to 22% for 2021. I assume that if the U.S. does increase corporate taxes from the 21% range to the 28%, we -- that, that guidance would change. And if the corporate taxes do increase from -- to 28%, does that have any impact on the cash taxes you pay or any impact on your free cash flow? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [43] -------------------------------------------------------------------------------- I'll offer the answer to the second and let Vito to comment on the first. No, these are effective tax rates, so these are for accounting purposes. The only material cash tax that we pay is in respect to Part VI.1 on our preferred shares and having redeemed $172.5 million worth of those shares. Then obviously, the preferred dividends go forward are going to be less. And the Part VI.1 taxes that they generate and the related expenditure will lessen as we go forward. Vito, I'll let you wade in, in terms of U.S. elections, effective tax rates and potential changes. -------------------------------------------------------------------------------- Vito Culmone, Element Fleet Management Corp. - Executive VP & CFO [44] -------------------------------------------------------------------------------- Yes. I think the second part of the -- your question, Tom, is a more important one. The one that Jay addressed, we don't anticipate any changes to the free cash flow tax profile, which is important. And you're absolutely right. In respect of the guidance that we provided, the 21% to 22%, that assumes a large part of the current tax regime, if you will, and that usually does not contemplate any changes to corporate tax rates in the U.S. And if that transpires, of course, we'll update accordingly. -------------------------------------------------------------------------------- Tom MacKinnon, BMO Capital Markets Equity Research - MD & Analyst [45] -------------------------------------------------------------------------------- All right. And just as a comment, the only really thing we get in terms of your free cash flow is this exhibit 2.1 in your supplement in your operating results. I think as the more and more emphasis comes on free cash flow, it will be good to see how this exhibit could tie directly to the cash flow statement and the financial statements just with the beginning and ending cash position. I think that would just provide a little bit more clarity as to some of the movements in cash. So just some comments there. Maybe you've got something to say about that or maybe that's in the works. -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [46] -------------------------------------------------------------------------------- Yes. No, good suggestion, and we actually were giving that some consideration. And thanks for the push in that direction. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- The next question comes from Paul Holden with CIBC. -------------------------------------------------------------------------------- Paul David Holden, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [48] -------------------------------------------------------------------------------- Just have one follow-up, since the Part VI.1 tax has come up at least a couple of times in this call now, is maybe you can give us a sense of what your target capital allocation would be, including pref shares. Like do they have a permanent home in the capital structure of Element? Or is it something you will look to completely eliminate in due course as redemptions come up? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [49] -------------------------------------------------------------------------------- Yes. Paul, I think the team has done a great job of evolving the balance sheet in short order and allowing us to truly be the investment-grade balance sheet that we had aspired to. And I think the step that we took to -- no sooner had we gotten to the sub-6 tangible leverage ratio, and what was our first action but to take out the Series G pref shares, recognizing the high costs, recognizing the cash tax associated with them. And recognizing as this balance sheet has matured, as we have become a U.S. debt market issuer, that type of expensive capital has less of a role to play. And I'd say, we've taken out, I think it's -- we're over $1 billion now of high-cost capital, and we will continue to seek opportunities going forward to mature the capital structure, drive down our total cost of capital and have a balance sheet that is truly representative of the investment-grade entity that we are. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- The next question comes from Mario Mendonca with TD Securities. -------------------------------------------------------------------------------- Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [51] -------------------------------------------------------------------------------- I'll try to be quick because I know we're getting a little late here. The -- Jay, when you talk about the revenue growth for the company looking forward, I can't help but look at the main source of that revenue, which is still your core earning assets and also the core fleet assets under management. So in the case of earning assets, that number has obviously been coming down. It's down something like almost $3 billion since sometime in 2018, and the fleet assets under management have also been shrinking for the last couple of quarters. So it's difficult to see where the growth comes from when 2 major sources of balance sheet growth, or maybe it's off-balance sheet in the case of the assets under management, aren't growing. So help me think through these two. In the case of earning assets, would I be correct in saying that, that number likely trends down from here, unless originations really ramp up? -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [52] -------------------------------------------------------------------------------- Yes. I don't want to get into specific guidance on that, Mario. But as we have articulated, we envision a 5-plank growth strategy, that it means improving the yield on the existing asset base and with the existing clients as well as expanding our reach into those self-managed fleet markets like we have done in Mexico, like we're doing in ANZ and which we have begun to do in the U.S. and Canada. And so for us, again, recognizing that our revenue is net revenue, we look at the revenue growth in the context of those opportunities I just mentioned. We look at continuing to drive down our cost of capital and expansion of our net interest margin. And through that, we would expect that we're going to be able to actually grow net finance revenue as we go forward, even with an enhanced level of syndication of assets that would have otherwise have been unbooked. And then service revenue, again, has been a -- our growth there has been a function of both unit count as well as revenue per unit, if you will, and improving the yield on each one of those assets in terms of our pricing, in terms of the value proposition. And so we look at the 4% to 6% growth is -- in the mid to long term is a very modest objective. We will have some headwind going into 2021 with the loss of Armada syndication revenue. That will obviously be a drag. But we are anticipating, obviously, a continuing recovery from the coronavirus and a more normal stream of originations in 2021 than what has been the case this year. So yes, there's -- happy to go through this in greater detail with you. But as you look at the recent history and what we've been able to do when we turned our attention towards growth, I think you'll see the 4% to 6% is readily achievable. -------------------------------------------------------------------------------- Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [53] -------------------------------------------------------------------------------- Okay. And just one final point of clarification. You said that the originations for Armada will continue to be reported as origination in your fleet assets under management, so I understand that. But those originations obviously won't become activations. I guess that's the way to think about it, the origination... -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [54] -------------------------------------------------------------------------------- Exactly. -------------------------------------------------------------------------------- Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [55] -------------------------------------------------------------------------------- That's -- Okay. That -- I get it now. -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [56] -------------------------------------------------------------------------------- Yes. So they will -- when you think about it, they will be originated and they will be sold. So they'll be in and out, they will, as you say, constitute part of your -- theoretically, under your assets under management and that we are providing the services for those assets. But yes, we will be charged with the procurement, interim financing and ultimately, the delivery of those vehicles to the drivers on behalf of Armada, who will then take full ownership of those vehicles. -------------------------------------------------------------------------------- Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [57] -------------------------------------------------------------------------------- Okay. I think the reconciling item for me to really understand it was it doesn't flow through activations. But we clearly will see it in the originations. I think I get it now. -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [58] -------------------------------------------------------------------------------- You got it, exactly. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- This concludes the question-and-answer session. I would like to turn the call back over to Mr. Forbes for any closing remarks. -------------------------------------------------------------------------------- Jay A. Forbes, Element Fleet Management Corp. - CEO, President & Executive Director [60] -------------------------------------------------------------------------------- Thank you, operator. And just want to say thank you, appreciate you staying late. Appreciate your interest in the organization, and we look forward to going a little bit deeper on some of these topics with you in the coming days. All the best to you and yours. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant evening.