Element Fleet Management Corp. (EFN) Earnings Call Transcript & Summary

Good afternoon. Welcome to the Element Fleet Management Corp. Annual Meeting. I would now like to turn the meeting over to the secretary of the meeting, David Colman. Sir?

Thank you very much. Good afternoon. My name is David Colman. I'm the Executive Vice President and General Counsel of Element Fleet Management Corp. I would like to briefly read the following forward-looking information statement before turning the meeting over to David Denison as chair of the meeting. In the course of today's meeting, directors or officers of the corporation may, in their remarks or in response to questions, make certain statements which are forward-looking statements and are prospective. Forward-looking statements are neither promises nor guarantees but are subject to risks and uncertainties that may cause the actual results, performance or achievements of the corporation or developments in the corporation's business or its industry to differ materially from the anticipated results, performance, achievements or developments expressly or implied by such forward-looking statements. A more detailed discussion of risk factors affecting Element's business and industry can be found in the corporation's most recent annual information form and management's discussion and analysis. Forward-looking statements are based on management's beliefs and opinions at the time the statements are made, and undue reliance should not be placed on any of these forward-looking statements. There should be no expectation that these forward-looking statements will be updated or supplemented as a result of changing circumstances or otherwise, and other than as required by applicable laws, the corporation disclaims any obligation to do so. We will now proceed with the formal business of the meeting, and I will turn the meeting over to Element's Chair of the Board, David Denison.

Thank you, David, and good afternoon, ladies and gentlemen. Welcome to the 2020 Annual General Meeting of the shareholders of Element Fleet Management. I'm David Denison, Chair of the Board of Element. This year, to deal with the unprecedented public health impact of the COVID-19 pandemic and mitigate the risk to the health and safety of our communities, shareholders, executives, employees and other stakeholders, the meeting is being held as a virtual meeting. Nevertheless, this meeting will still provide our shareholders with the opportunity to participate, submit questions and vote. Given the virtual format of today's meeting and in order for us to expediently undertake the business to be conducted at this meeting, we would request that shareholders who have specific comments or questions on a formal item of business make such written submissions now, clearly identifying the applicable item of formal business. During the course of this meeting, at the appropriate time, such submissions will be addressed prior to voting on the applicable motions. Following the formal business of the meeting, we will have a question-and-answer session. If you have any questions not specifically relating to an item of formal business to be discussed at today's meeting, please feel free to submit those questions at any time during the course of this meeting, and we'll do our best to ensure that such questions are addressed at the conclusion of the meeting. Shareholders can submit questions by clicking on the message icon, typing in and then submitting your questions. We'll do our best to answer all shareholder questions. But if for any reason we're unable to do so during the meeting, we'll endeavor to follow up with shareholders after the meeting. Before proceeding with the formal business of the meeting, I'd like to take this opportunity to introduce the directors and officers of the corporation who are joining us today. In addition to myself, the following directors are on the line: Jay Forbes, President and CEO of Element; Andrew Clarke; Paul Damp; Keith Graham; Alex Greene; Joan Lamm-Tennant; Rubin McDougal; and Andrea Rosen. I'd also like to formally introduce Israel Kaufman, our newly appointed Executive Vice President and Treasurer, to all shareholders of today's meeting, Mr. Kaufman's extensive treasury and financial experience of leading financial services companies will be a strong complement to the skills and backgrounds of our other officers, and we look forward to his continuing contributions to Element. I'd also like to introduce the officers joining us today. In addition to Jay Forbes and Israel Kaufman, we also have Vito Culmone, Executive Vice President and Chief Financial Officer; Jim Halliday, Executive Vice President and Chief Operating Officer; Jacqui McGillivray, Executive Vice President and Chief People Officer; Vineet Gupta, Executive Vice President and Chief Technology Officer; Chris Gittens, Executive Vice President, Strategic Partnerships; David Madrigal, Executive Vice President and Chief Commercial Officer; David Colman, Executive Vice President and General Counsel; and Aaron Baxter, Executive Vice President, Custom Fleet, Australia and New Zealand. Let's now proceed to the business at hand. We have 4 matters of formal business to conduct today, the presentation of our 2019 financial statements, the election of directors, the reappointment of the corporation's auditors, and consideration of the advisory resolution on the corporation's approach to executive compensation. Once the formal business of the meeting has been completed, the management team will briefly report on the business and financial performance of the corporation for the past year and Element's strategic direction for the future. There will then be the opportunity to ask questions. So with that introduction, I'll now call the meeting to order. I'll preside as chair of this meeting; and I'll ask David Colman, Executive Vice President, General Counsel of Element, to act as secretary of the meeting. I hereby appoint Computershare Trust Company of Canada to act as scrutineer for this meeting. Computershare is represented by Bryce Docherty and Louise Waltenbury. The secretary has advised me that the notice calling this meeting together with a form of proxy, the management information circular and, if requested, the financial statements of Element as at and for the year ended December 31, 2019, and auditors' report thereon have been sent to each director of the corporation, the auditors of the corporation and each intermediary and registered holder of common shares of the corporation as of March 30, 2020, the record date for this meeting. Additional copies of these materials are also available online on the corporation's SEDAR profile at www.sedar.com. I'll dispense with the reading of the notice of the meeting. The scrutineer has provided me with a preliminary report on attendance at this meeting. With over 85% of Element's common shares represented either in person or by proxy, I declare that the requisite quorum of shareholders is present and I declare that the meeting is duly and properly constituted for the transaction of business. I direct that the confirmation of mailing of the notice of the meeting received by Computershare and the scrutineers' complete report on attendance be annexed to the minutes of the meeting. Further, in order to expedite the proceedings, I have requested that David Colman, Executive Vice President, General Counsel and Corporate Secretary of Element, make the requisite motions during the meeting, and we will dispense with the seconding of motions. As previously noted, shareholders may make comments or ask questions specific to these motions prior to the vote. Given that this is a virtual meeting, the voting at today's session will be conducted by online ballot for all matters. If, as a registered shareholder or duly appointed proxy holder, you are using your control number to log into the meeting and you accept the terms and conditions, you will be provided the opportunity to vote by online ballot. If you've already voted by proxy and you vote again during the online ballot during the meeting, your online vote will revoke your previously submitted proxy. If you have already voted by proxy and do not wish to revoke your previously submitted proxy, please do not vote again during the online ballot. The polls will be opened for all items of business to be voted on at the same time. This will allow you to vote on each item immediately, or if you prefer, you may wait until the conclusion of discussion on each item prior to casting your vote. The items of business to be voted on and your available voting options will be visible on the voting panel on your screen. To submit a vote, please click on the voting choice displayed on your screen. Once discussion has concluded on all items of business, we will provide a few additional moments to enter your votes. I'll then declare voting closed on all matters of business. The results of the votes on each matter will be announced prior to the close of the meeting given the time required for the scrutineers to tabulate the online voting results. I now declare the online voting polls open on all items of business. The secretary has the minutes of the last meeting of shareholders of the corporation. We will dispense with the reading of the minutes of such meeting. The first item of business is the presentation of the corporation's consolidated financial statements as at and for the year ended December 31, 2019, and the auditors' report thereon. We will dispense with the reading of the auditors' report. Our next item of business is the election of directors of the corporation. The Board has fixed the number of directors to be elected at 9. Pursuant to our advanced notice bylaw, there have been no director nominations put forward other than the directors nominated on behalf of management as set out in our management information circular. Accordingly, in the interest of expediency, I will ask David Colman to make the nominations.

Mr. Chair, I nominate those persons specified in the management information circular delivered with the notice of meeting, namely Andrew Clarke, Paul Damp, David Denison, Jay Forbes, Keith Graham, Alexander Greene, Joan Lamm-Tennant, Rubin McDougal and Andrea Rosen, to serve as directors of the corporation and to hold office until the next annual meeting of shareholders or until their successors are duly appointed or appointed in accordance with the articles and bylaws of the corporation.

So as previously noted, since there were no prior nominations under advanced notice bylaw, I declare the nominations closed. I now request a motion that the 9 persons nominated as directors of the corporation be so elected.

I am David Colman and I so move.

Mr. Moderator, can you please advise whether any questions have been received from the participants of this meeting?

There have been no questions.

Thank you. In accordance with the corporation's majority voting policy, we will have individual voting for directors to be conducted by way of online ballot. As previously noted, if you have already voted by proxy and you vote again through the online ballot during the meeting, your online vote during the meeting will revoke your previously submitted proxy. And if you've already voted by proxy and do not wish to revoke your previously submitted proxy, please do not vote again during the online ballot. Registered shareholders and duly appointed proxy holders can choose to vote by online ballot now by selecting the applicable voting options. I'll announce results of the vote at the conclusion of the meeting. We'll now move to the reappointment of auditors. May I have a motion that Ernst & Young LLP be reappointed as auditors of the corporation until the next annual meeting of shareholders or until the successor is appointed and that the Board of Directors are authorized to fix the auditors' remuneration.

I am David Colman and I so move.

Mr. Moderator, can you please advise whether any questions have been received from the participants of this meeting.

There have been no questions received.

Given that, we will conduct the vote by way of online ballot. I will also announce the results of this vote at the conclusion of the meeting. We'll now move to consideration of the advisory resolution on the corporation's approach to executive compensation. As described in the management information circular sent to shareholders with the notice of this meeting, shareholders are asked to approve the resolution on the corporation's approach to executive compensation. This vote is advisory only and nonbinding on the corporation and the Board. However, it will influence how the Board and the Compensation and Corporate Governance Committee look at compensation in the future, and the Board believes that this say-on-pay vote is good governance and allows our shareholders to provide specific feedback on the corporation's compensation practices. This advisory resolution is set out on Pages 12 and 13 of the circular. To be approved, the advisory resolution must be passed by a majority of the votes cast at this meeting. May I have a motion that the advisory resolution as set out in the circular be passed as an ordinary resolution of the shareholders of the corporation.

I am David Colman and I so move.

Mr. Moderator, can you please advise whether any questions have been received from the participants at this meeting.

There have been no questions received.

Given that, we will conduct the vote by way of online ballot. The polls on all items of business will remain open for another short while. For those of you who have not yet voted on all the items of business, please do so now. And we will take a short pause while the polls close and the results are tabulated by the scrutineers. [Voting]

So I can confirm that the polls are now closed and the scrutineers have tabulated the results. I'm pleased to confirm that all matters have passed with over 95% approval of shareholders. Accordingly, as a result, I hereby declare the directors elected, the auditors reappointed, and the advisory resolution on executive compensation approved. The detailed voting results will be filed on SEDAR and disclosed in a press release promptly following this meeting. Mr. Moderator, can you please advise whether any other formal business has been properly brought before this meeting?

There has been no other business properly brought before the meeting.

Thank you. Given that, that therefore concludes the formal business brought before the meeting. I wish to thank all of you for attending today, and I now declare this meeting to be terminated. As noted previously, however, we would now like to take the opportunity to provide our shareholders with an update on Element's financial results and the execution of our strategic plan. And I'll now turn the meeting over to Jay Forbes, our President and Chief Executive Officer.

Thank you, Mr. Chairman. And thanks to all of you for joining us today at our annual meeting of shareholders, which we're holding virtually for the first time ever to help ensure that we all stay healthy and safe because at a time like this, the health of our colleagues, clients, neighbors, friends and families must be our first priority. That's been our focus at Element as this pandemic has unfolded: ensuring the health and well-being of our people and the strength of our business to weather this storm. I'm very pleased to tell you that on both counts, we are in excellent condition. Our people are safe, and 98% of them are working from home. Moreover, they are doing so with no loss of productivity and enjoying the experience. Thanks to technology that connects us no matter where we are and thanks to the professionalism of our people, we're making the very best of this difficult situation. Our business is fundamentally safe and sound. While we will not be unscathed by this global pandemic and the associated economic slowdown, in many ways, our learnings thus far from this experience have only given me and my leadership team more confidence in the stability and resilience of our business model. We are well positioned to withstand these uncertain times and emerge with momentum because of all we have accomplished to date and executing on our strategic plan to transform our fleet management business and to strengthen and derisk our balance sheet. We have done this together, aligned in our priorities and focused on our goals thanks to the strategic clarity we have created throughout our organization with the implementation of our balanced scorecard in early 2019. With that in mind, I'd like to spend a few moments discussing those accomplishments before I go on to talk about where we stand today and perhaps, more importantly, where we are going. We advanced our transformation significantly in 2019, thereby strengthening our core business and ensuring we can provide to existing and potential clients the consistent superior experience that has been our overarching goal from the very outset. This has resulted in significant improvements in our operational effectiveness, our productivity and employee engagement. This, in turn, has led to a dramatic improvement in client retention and our Net Promoter Scores. We further reduced our tangible leverage, creating a true investment-grade balance sheet. Element received a BBB investment-grade rating from S&P in Q4 2019, while Fitch affirmed its BBB+ investment-grade rating and improved its outlook to stable. These 2 new U.S. investment-grade ratings paved the way for Element to issue bonds in the U.S. unsecured corporate debt markets when the conditions are right for doing so. In 2019, we also built our syndication capabilities, creating a dependable source of profitable revenue and funding while mitigating client concentration risk, and we successfully scaled with the rapidly growing client that we refer to as Armada. These actions drove dramatic improvements in our financial results. Earnings from our core business rose 35% in 2019 to $521 million. This included $71 million of operating income enhancement from our transformation program. Core assets under management grew $1.7 billion or 11% on a constant currency basis to $16.7 billion, reflecting improved client retention, new client wins in all geographies and continued expansion of our Armada relationship. Syndication, enhanced profitability and rising free cash flows in 2019 all contributed to derisking and deleveraging Element's balance sheet from 7.8x tangible leverage at the end of 2018, down to 7.1x at the end of 2019. Further, our planned actions for the remainder of this year should allow us to achieve our all-important target of sub-6x tangible leverage on exit from 2020. What we could not have known was how important our achievements in 2019 and early 2020 would be to enabling Element to successfully weather the gathering storm. Our transformation has taught our people to be even more creative, more adaptive and more client-centric, attributes that are very helpful as we adjust our ways of doing business and help clients manage through this new dynamic. Add that to a strengthened operating platform and balance sheet, and we are in a very good position. In fact, our experience with COVID-19 to date underscores what we have long understood about Element, that this is a business model with innate defensive qualities that have only been enhanced by virtue of our transformation plan. These attributes are important to reiterate. Blue-chip clients provide strong counterparty credit. Approximately 2/3 of our net earning assets are leased to investment-grade or equivalent-rated clients. Our widely distributed client base mitigates industry concentration risk. Our vehicles are essential to our clients' ability to generate revenue and to maintain their operations. And the nature of our assets and the consistent superior service we deliver result in annual client retention levels of approximately 98%. Secure in the knowledge that our business is built to withstand economic disruptions, we are staying the course strategically and maintaining our long-term focus. Our existing plan is appropriate for these times and will position us well because it is our belief that post pandemic, our existing blue-chip client base will still need mission-critical services and sales vehicles and even some will require more. Our value proposition will have even more appeal as organizations with self-managed fleets seek alternative funding sources and pursue opportunities to drive down their costs and to reduce their administrative burden. And as a market leader, we will be best placed to serve current and prospective clients given our scalable platform, substantial purchasing power, ready access to capital and well-established network of vehicle manufacturers and service providers. With that in mind, we are managing through the current crisis with a view to preserving Element's opportunities for long-term success. That means we will continue to make the necessary investments and relationships with our clients, in our people and in our business. Specifically, it's in times like this that we believe we have an opportunity to forge even deeper loyalty by ensuring that we are there for our clients and by helping them manage through the impacts on their business. With approximately 1 million vehicles under management, we have unparalleled knowledge and relationships that we're making available to clients as we guide them through these uncertain times. In the first quarter alone, we identified more than $600 million in cost-saving opportunities for our clients, 1/3 of which have already been actioned. You can imagine how valuable that is to our clients navigating this uncertain environment. Further reporting our balance sheet to work for select clients as we invest in the relationship to the mutual benefit of both parties. By way of example, we have a client involved in a significant public infrastructure build that is now delayed by a number of months. This client is an A-grade credit and came to us seeking to extend the term of their lease agreements, and we did because it was in the mutual interest of both the client and Element. We're also investing in our people. Element's employees are a true source of competitive differentiation. Our clients tell us this often, and I can tell you as CEO, nothing makes me prouder. Accordingly, it would be penny wise and pound foolish to do anything to jeopardize the industry-leading skills, experience and insight that make us so valuable to our clients. So we're making the investment to maintain the continuity of our workplace and our workforce through this event. That means that other than the planned evolution of our workforce contemplated by the transformation program, we're not forecasting any layoffs or furloughs as a result of the pandemic. In the meantime, we're redeploying our people to rapidly advance our transformation. And that brings me to our investment in our business. We will make the full $180 million of onetime investments to bring the transformation of our fleet management business to a successful conclusion by year-end. This will cement our industry-leading, consistent, superior client experience and generate $180 million in annual run rate pretax profitability improvement. We will also continue to invest in our syndication capabilities and our Armada operating capabilities to support those 2 areas of growth. Finally, having identified significant growth opportunities that we believe can deliver 4% to 6% annual net revenue growth in normal market conditions, we will rapidly build out our commercial capabilities so that we can fully capitalize on those when normalcy returns and, in some cases, potentially sooner. Of course, we will be financially disciplined as we've always been, but we won't rationally cut costs or make other decisions designed to cushion our earnings for a few quarters at the expense of growth for years to come. The steps we have taken over the past 19 months have positioned us well to withstand the financial pressures of this pandemic. We are prepared for the worst and are readying for the inevitable opportunities that will come thereafter. I'd like to close my remarks by saying some thank-yous on behalf of all of us at Element Fleet Management. First, I extend our best wishes to those vital workers on the front lines who are doing so much every day to keep us safe from COVID-19 and to help us find a way to the other side of this pandemic. We are truly grateful. To our shareholders, thank you for your ongoing belief and support. To our Board of Directors, thank you for your continued wisdom and counsel. To our clients, thank you for giving us an opportunity to help you achieve your goals. And lastly and all importantly, thank you to all the people at Element who have done so much to help our business and our clients succeed in these extraordinary circumstances. With that, I'll turn the podium back over to our Chairman for the question-and-answer portion of the meeting.

Thanks very much, Jay. We'd now like to invite any supplemental questions from shareholders or proxy holders present at the meeting. As with our normal physical meetings, we'll observe the same protocols of appropriateness and relevance to the meeting, but rest assured we'll not be attempting to limit or filter legitimate questions and we'll do our best to address all issues raised. As previously noted, to the extent that we're unable to respond to a submitted question, we'll endeavor to follow up with you immediately after this meeting. So if you do wish to ask a question, please click on the message icon, type in your question and submit it. Mr. Moderator, can you please advise whether any questions have been received from the participants of this meeting?

Mr. Chair, no questions have been received.

Okay. Thank you. So on behalf of the Board and management of the corporation, I'd like to thank all of our shareholders as well as others who have joined us today for your support and your attendance at this meeting and importantly your support for Element as an organization. With that, we'll call this portion of the meeting to a conclusion. And once again, thank you very much for your attendance.

Ladies and gentlemen, this does conclude your Element Fleet Management Corp. Annual Meeting. You may now disconnect.