Element Financial's (ELEEF) CEO Steven Hudson on Q4 2015 Results - Earnings Call Transcript

| About: Element Financial (ELEEF)

Element Financial Corporation (OTC:ELEEF) Q4 2015 Earnings Conference Call March 2, 2016 5:30 PM ET

Executives

John Sadler - Senior Vice President, Corporate Affairs and Investor Relations

Steven Hudson - Chief Executive Officer

Bradley Nullmeyer - President

Dan Jauernig - Chief Operating Officer

David McKerroll - President, Rail and Aviation

Michel Beland - Chief Financial Officer and Chief Administrative Officer

Analysts

Geoffrey Kwan - RBC Capital Markets

Paul Holden - CIBC World Markets

Mario Mendonca - TD Securities

Tom MacKinnon - BMO Capital Markets

Vincent Caintic - Macquarie Securities Group

Nick Stogdill - Credit Suisse

Operator

All participants, please stand by, your conference is ready to begin. Good afternoon, ladies and gentlemen. Welcome to the Fourth Quarter Results Analyst Call. I would now like to turn the meeting over to Mr. John Sadler, Senior Vice President, Corporate Affairs and Investor Relations. Please go ahead, Mr. Sadler.

John Sadler

Thank you, Valarie. Good afternoon, ladies and gentlemen. Thank you for participating in our conference call to discuss Element’s full year and fourth quarter results for the period ending December 31, 2015.

Joining us today to discuss these results are Steven Hudson, Element’s CEO; Brad Nullmeyer, Element’s President; David McKerroll, President of Element’s Rail and Aviation verticals; Michel Beland, Chief Financial Officer; Dan Jauernig, Element’s Chief Operating Officer.

A news release summarizing our full year and fourth quarter financial statements was issued earlier this afternoon, and the financial statements and MD&A for the three months and year-ending December 31, 2015 have been filed with SEDAR. This information is also available on our website at www.elementcorp.com. As well, a presentation that accompanies management’s comments has been posted into our website in PDF format. This is located in the presentation section of our website and we invite you to open it now.

Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I’ll refer you to the cautionary statement section of our 2015 MD&A for a description of such risks, uncertainties and assumptions.

Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectations of any forward-looking statements will prove to be correct.

You should also note the company’s earnings release, financial statements, MD&A, and today’s call include references to a number of non-IFRS measures which we believe help to present the company and its operations in ways useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in our MD&A.

With these introductory comments complete, I’ll now turn the call over to Steven Hudson, CEO.

Steven Hudson

Thank you, John. And let me first apologize for the half-hour delay. We had a little IT glitch getting out the press release. We also understand that this call stands between you and a glass of wine. So with that, we’ll get on with it.

Setting aside our exciting strategic separation, fourth quarter was another quarter where we delivered as promised, some would even say boring, the $0.35 of after-tax adjusted operating income versus $0.26 in the - sorry, $0.35 of after-tax adjusted income versus $0.26 in the preceding quarter and $0.19 in the same quarter last year.

The Q4 2016 benefited from some one-time non-recurring tax rate. If you look at that $0.03 beat that we posted for the quarter, approximately $0.02 of that beat was the one-time tax benefits. The $0.01 was to improved operations. Book value came in at a little over of $13.43, $13.50. Total earning assets were at $20.5 billion at the end of the year. Originations exceeded $2.5 billion, a little higher than the $2.4 billion consensus.

Turning to Slide 6 in the presentation, we’re happy to report, and Brad and Dan will speak to this in their business, but GE Fleet integration is proceeding on plan. The annualized savings now have been increased to $100 million, hopefully little more to come, but $100 million as of this evening.

Arrears fell from 20 basis points to 16 basis points at the end of the fourth quarter. We were successful as reported earlier on closing $3.2 billion of Chesapeake II, which is an important vehicle, because it provides undoubted funding to our core Fleet business at very impressive yields.

Now, the company has maintained its $6 billion of committed available liquidity to fund the growth in 2016 and into 2017. And our rail portfolio stood with 99%-plus utilization for the quarter.

Turning to Page 7 on our strategic separation, we’ve announced our commitment to establish two market-leading public companies. The first is the world’s largest publicly-traded fleet management company with pristine credit quality, undoubted funding and strong revenue growth with significant portion coming from our fee revenues.

The second is the North American leader, growth leader in commercial finance, a company that will transition into asset management with a very strong balance sheet. We’ve been pleasantly surprised by the positive stakeholder feedback we had hoped for, but it was nice to see it. We’ve seen a significant price appreciation. Since the announcement, we’ve also anecdotally have seen long holder shareholder participation increase in Element’s stock, as well the two rating agencies that publish in us have put us on review for positive outlook.

And I believe this separation will also provide a single focus, almost a laser-like focus and execution for our two businesses going forward.

Turning to Page 8, significant and continuing organic growth year over year, this is growth that is currency neutral and removes the acquisition. Brad will speak to it, later Dan. But Fleet came in at 5% year-over-year organic growth on its assets. I think the fee revenue in Fleet was very impressive.

Turning to Page 9, we continue to have a very dominant business in the Fleet and Rail. The purple, green part shows those two components. All businesses continue to have very strong originations in the fourth quarter.

On Page 10, all the business units continue to perform on plan. As a result, our consolidated results met or exceeded our expectations; as I mentioned earlier $0.35 of after-tax adjusted operating income, which demonstrates the full effect and power of the acquired GE Fleet business.

A note that we made earlier in Q3, we were successful in closing - Michel and Karen were successful in closing Chesapeake II on December 16. That allow us to replace the higher cost acquisition debt that we had used in the interim period. If had closed that at the beginning of the quarter, the earnings per share would have been up by $0.025.

I mentioned the tax benefit that we enjoyed in the fourth quarter. Leverage is relatively unchanged for the quarter as well return on assets would have been 3.5%, if the Chesapeake II had closed earlier in the quarter. It’s good to report that those expenses - interest rate savings produced by Chesapeake II are now in the bank.

And I mentioned that integration is now tracking at $100 million. We’re pleased to report that integration is 70% complete.

Turning to Page 11 on revenue mix, our trend to more fee income continues with 40% of our total revenue spend coming out of fee in last quarter, of course, for 2015. It’s also important to note that, I’ll steal little bit of Brad’s thunder, but 49% of Fleet’s Q4 revenue was from fee income, something that we had highlighted as a benefit of the GE transaction and that’s now coming to fruition.

Turning to Page 12, the U.S. market remains, our core market was 73% of our earning assets invested in that market. It’s also interesting to note that Canadian market has decreased from 36% now to 16% effective December 31, 2015.

On Page 13, continuing update on our oil and gas exposure, the company has approximately 8% of its assets and that’s lent or leased to oil and gas credits. I would note that 6% of that aids are to credits that are AA through BB+. In the Fleet business, the average duration of our leases is approximately two years to investment grade credits like that of Schlumberger.

In David’s oil and gas business, we have long term - the youngest crude by rail fleet in North America, and with credits like that of Sunoco. So we’re confident. We’re obviously vigilant on the oversight of this business, but we’re comfortable with our exposure and continue to perform as promised. Now, Brad, I’ll pass it to you.

Bradley Nullmeyer

Great, thank you, Steve. I’ll speak about Fleet Management first, starting on Slide 15. We are once again pleased with our performance of our Fleet Management group. Our year-over-year growth and total earning assets on a currency neutral basis and after excluding the assets acquired from GE was 5.4%. Our revenue yields increased 30 basis points over the prior quarter, primarily as a result of the addition of the Australian and New Zealand businesses.

Our fleet funding structure, Chesapeake II, our rated ABS facility closed on December 16, 2015. For comparative purposes, had this been in place for the entire fourth quarter, our fleet NIM and ROAA each would have been increased by 30 basis points.

I’ve shown this on a pro-forma basis for comparative purposes on Slide 15. New originations in the quarter were strong at just over $1.6 billion of new vehicles being funded during the quarter. At this time, I’d like to have Dan Jauernig, our Chief Operating Officer, provide an update on the fleet integration process and our path to our fleet ROA.

Dan Jauernig

Thanks, Brad. As noted on Page 16, we’ve made significant progress in our integration efforts since our last update. Our original targeted annualized integration savings was between US$90 million to US$95 million within 18 months of the acquisition. That target was broken down between three primary work streams; cost of funds, purchasing and revenue synergies; and business operations. Based on the work done to-date with the integration teams and procurement, business operations, IT and treasury, we are now updating our integration savings to US$100 million by the end of 2016.

Broken down as follows; one, the cost of funds reduction, as Steve noted earlier, was completed in Q4 2015 with the completion of the second credit rating of the Element Financial in the launch of Chesapeake II on December 16; total annualized savings of $18 million will be realized in 2016 from the initiatives.

Two, purchasing and revenue synergies; all major procurement contracts have either been executed or fully negotiated. And as a result, synergies have been validated. The combined purchasing and revenue synergies began at start of this year and will ramp up during the course of 2016 to hit full-year annualized synergies of US$51 million by the end of the year.

And finally, business operations, this work-stream was scheduled from day-one to take longer with the target completion date of early - with target completion date of late Q3, early Q4 2016; having said that, significant work was done since the last update, between business operations and IT to identifying and document all product definitions that require IT development work. IT development work commenced in Q4 and is continuing.

Overall, this work-stream is on track and on budget. Based on the work done to-date, we have identified the full year synergies of $31 million out of an original target of $35 million for this work-stream, but work is ongoing. And we expect to identify additional synergies in business operations as we move closer to our target date for completion in late Q3.

As we noted on our last call, we have a customer integration advisory board that we established immediately after we announced the acquisition of GE Fleet. The client advisory board is made up of 23 customers from diverse industries across North America. We have regular meetings with them to keep them apprised of our integration efforts and to get their valuable insights and guidance on everything from our product features and service delivery to our systems development and customer-facing tools. We will continue with these valuable client meetings throughout our integration process to keep them informed of our progress.

All of our integration IT projects are well underway and upon completion they will position Element Fleet Management for more efficiencies and the ability to leverage technology as a competitive advantage.

Turning to Page 17, we’ve updated Fleet’s ROA walk from where it finished in Q4 2015 to where we expect it will be at the end of 2016. Once all of the integration work is completed and the full year run rate of US$100 of synergies are fully incorporated, Fleet’s ROA will be approximately 4% plus in 2017. As noted previously by Brad, Fleet’s Q4 2015 adjusted ROA was 3.2%. This includes the full year benefits of the cost of funds reduction noted on Page 16. However, if you then incorporate the full-year synergies of the purchasing and business operations of US$82 million, it will add 80 basis points to our ROA by the end of 2016.

Finally, we continue to expect to grow our fleet management fee revenues at a slightly faster pace than our total earning assets, which should help to lift our return on assets, resulting in a plus 4% ROA heading into next year.

And with that update, I’ll turn it back to, Brad.

Bradley Nullmeyer

Thank you, Dan, for that update. Our entire team is fully focused on completing the integration in a timely and efficient manner. Once complete our investment in a single customer-focused platform in technology will pay large dividend as we rollout new product offerings and enhancements out to our customers.

We continue to execute in our growth opportunities in our Fleet business. And on Slide 18 we can see that our fleet management fees have risen to just over $100 million in the quarter. We earn revenue in two general categories, lease revenue, which is earning finance spread income on vehicles released to our customers, and management service fees. We earn these for providing value-added services to our customers.

Our service fee revenue for the year is approximately 40% of our total revenues and 49% in the fourth quarter with an increasing trend to be over 50% of our total Fleet revenues.

We continue to operate under a culture of continuous improvement and industry innovation. Element Fleet is in a very strong position and poised for growth. The separation of the Fleet business as announced will allow us to concentrate the fleet management efforts on Fleet and Fleet alone.

On Slide 19, I’ve outlined some of Element’s Fleet’s key strengths. We have combined offerings that are best-in-class and provide a compelling value proposition to our customers and our partners. Our scale provides us a significant purchasing power through an extensive supplier network, with the ability and the desire to reinvest in our technology platforms.

We have the largest set of global industry-specific benchmarking data for our consulting practice. We are able to offer an integrated global product that we offered our customers in over 45 countries.

In addition, fleet-only businesses have proven to be resilient through economic cycles, including the 2008, 2009 financial crisis. Fleet companies, including those that we acquired experienced stable and resilient fleet revenues even during tough economic times due to pristine credit quality, stable funding sources and a shift that occurs naturally between service income and interest income.

Lastly, I want to take a moment to highlight a few of our many experienced fleet business leaders that are engaged to across our entire fleet business. I specifically listed only four senior managers on Slide 20. Kristi Webb, the former President and CEO of GE Fleet; Jim Halliday, the former President and CEO of PHH Fleet; Dan Jauernig, the former President and CEO of Cars.com; and I. All of us have deep roots in the fleet management space and have proven abilities to transform businesses through the use of technology.

Our Commercial & Vendor Finance team on Slide 21, in the U.S. increased originations in the fourth quarter of 2015 to $322 million from $258 million in Q4 2014, a 24% increase in the quarter. On a sequential basis quarter over quarter, we systematically reduced our funding activity in the quarter from one single vendor to remain within our concentration limits.

In Canada, we saw the effects of the rightsizing of our origination platform for the market opportunities that we have spoken about in previous quarters with $99 million of new originations booked in the quarter. Our net interest margin fluctuates quarter by quarter based upon the timing of participation income.

We continue to reduce our OpEx to 1.6% while returning an ROAA of 3.5%, higher on a full-year basis than last year and higher than Q4 of 2014. And although we do not specifically disclose our number of vendor relationships, we did sign three new vendor programs during the quarter, one of which is expected to generate in excess of $100 million annually when it comes on-stream.

As a closing comment, we are pleased with the results of both our Commercial & Vendor business and our Fleet Management businesses, and the returns and the growth prospects for the future. We are excited about the future both of these businesses as we move to separate them, allow them to be solely focused on their core businesses only.

With that, I’d like to turn the call over to David McKerroll.

David McKerroll

Thanks, Brad. I will begin with Slide 23. On February 16, we announced the strategic shift with respect to our Aviation business; firstly, the wind-down of our on balance sheet general aviation business; and secondly, continued focus on asset management.

After intensive review of general aviation, we concluded it was best to wind down this business. Our general aviation business has a financial leverage of less than 2 to 1, which produces a much lower ROE than we can achieve in the asset management business. The portfolio, we managed down over time in order to maximize our return. However, we intend to maintain key vendor relationships that generate significant fee opportunities.

The wind-down on portfolio will be completed through a combination of transferring assets to Element managed funds, asset sales and syndications, and managing down assets to maturity. The chart on the right hand side of the slide gives an approximate breakdown of our wind-down activities in 2016.

Turning to Slide 24, going forward we’ll be focused on asset management and aviation. We successfully demonstrated our ability to originate structure and launch funds within the commercial aviation sector with the closing of ECAF 1, Elements $1.6 billion fund of 48 commercial aircraft that closed last year.

Element received advisory fees for structuring the deal and we are receiving ongoing management fees for the life of the fund. We will be creating a family of ECAF funds following on the success of that first fund. We’re working to close a $1 billion fund in the second quarter, and additional $1.5 billion fund either in the fourth quarter or early in the first quarter of next year.

On Slide 25, provides the summary of the financial results of our aviation business for the quarter ended December 31. These were in line with our expectations. During the fourth quarter aviation generated $305 million in originations as compared to $397 million during the same period last year.

Originations in this vehicle have historically varied from quarter to quarter and are typically concentrated in the fourth quarter which explains the big jump from third quarter to fourth quarter. The increase in revenue yields to 8.3% in the fourth quarter compared to the third quarter was due to syndication fees earned during the quarter.

This uptick in revenue relates to the volume generated primarily through the key vendor relationships that we intend to maintain going forward. The financial results for our Rail Finance vertical are summarized on Slide 26. The improvement in revenue yields was due to the sale of some railcars during the fourth quarter that generated a gain.

The sale was part of our ongoing efforts to optimize our portfolio with respect to lessee and industry concentrations. In the fourth quarter in 2015, we completed our initial program with Trinity, we announced in the fall that we extended our program in Trinity and we will continue to originate railcars from Trinity, but at a more moderate pace.

The extension will provide $1 billion of railcars over four years. We estimate originations from Trinity with approximately $200 million in 2016. Over the last 12 months we’ve been gradually building our internal rail capabilities and now expect to generate half of our 2016 volumes from direct leasing activities outside of the Trinity program.

Our direct origination capabilities will allow us to continue to diversify our portfolio and take advantage of opportunities in the marketplace from a number of different sources. We anticipate that our rail origination volume from Trinity and from our direct originations will be heavily weighted to the second-half of this year.

Turning to Slide 27, there has been a lot of discussion in the financial media about exposures of finance companies to the oil markets. We’ll not be originating any energy related cars in 2016. But we would like to point out and highlight that our existing railcars, carrying crude or petroleum, have a number of strong attributes.

First, our cars are very young, with an average of 1.7 years. Our lessees are very strong credits and are dominated by high investment-grade multinational oil majors. The average remaining lease term of our crude by rail portfolio is five years and we have no leases up for renewal in 2016 and only a minimal up for renewal in 2017. So the current down-cycle in the price of oil should not affect Element’s portfolio yield for the foreseeable future.

With that, I’d like to turn it over to Michel Beland.

Michel Beland

Thank you, Dave. Take you to Slide 29 that looks at some of the key operating results for the fourth quarter of 2015. Overall, all metrics for the quarter were positively impacted by the acquisition of GE Fleet at the end of Q3, 2015. Our financial revenues for the three-month period ended December 31, 2015 increased to $400 million from the $258.5 million in the previous quarter, generating net financial income of $290 million for the quarter versus $185 million in the preceding quarter.

Adjusted operating expenses were up $128 million during the fourth quarter versus $78 million in the immediate previous quarter. Adjusted operating income before income tax increased by 51% to $162 million during the fourth quarter versus $107 million in the previous quarter. After tax adjusted operating income was $143 million versus $87 million in the preceding quarter, positively impacted by the one-time advantageous funding structure of the U.S. portion of the GE Fleet acquisition through the closing at a Chesapeake II facility.

Take you to Slide 30, which provides a number of operational yields, expressed as a percent of average earning assets during the quarterly periods. Financial revenue as a percent of average earning assets was 8.34% during the Q4 versus 7.96% in the previous quarter. This 38 basis point improvement is attributable to the higher level of syndication activities, and other revenues item during the quarter.

Interest expense as a percent of average earning asset was 2.43% in Q4, versus 2.27% during the previous quarter. This increase in average cost was expected and arose from using temporary bank financing versus the more permanent ABS funding to facilitate acquisition of GE Fleet during the quarter.

Chesapeake II permanent funding facility, which provided for less expensive and a permanent funding arrangement for newly acquired fleet business, was only introduced at the end of December 2015, and its benefits will be seen starting in Q1 2016. Given the quarterly improvement in gross yield by 38 basis points offset the 16 basis point increase in funding costs, average net financial margin improved during Q4 by 22 basis points from the 5.69% in Q3 to 5.91% in Q4.

Offsetting this improved margin yield, adjusted operating expense increased by 22 basis points to 2.61% of average earning assets for the fourth quarter versus 2.39% during the third quarter. This increase was due to our fleet business representing a greater proportion of total earning assets during the quarter with fleet higher cost base, reflecting a heavier focus on service for its customers.

However, it is important to know that a majority with the expected operating synergy arising out of the integration of GE Fleet acquisition are yet to be reflected in this number and will be realized throughout 2016.

As a net financial margin improvement of 22 basis points was offset by the 22 basis point increase in operating expense, adjusted operating income before income tax was unchanged at 3.3% of average earning assets during the fourth quarter. However, the Chesapeake II funding arrangement in place during entire fourth quarter, right in the last day of 2015, Element’s adjusted operating income before income tax as a percent of average earning asset by that improved by 20 basis points from the reported 3.3% to 3.50%.

On Slide 31 which give you an overview of the company’s balance sheet as of December 31, 2015. Total assets were $25.2 billion at the end of the quarter, an increase of almost 7% since the end of Q3. This increase during the fourth quarter was a combined result of organic growth and the positive impact of the U.S. dollar, which increased by 3.7% between September 30, 2015 and December 31, 2015, which accounted approximately for 2.5% of the growth.

Book equity increased by $341 million during the fourth quarter, again due to the quarter’s net income as well as the growth in the other comprehensive income largely due to higher levels of unrealized foreign currency gain given the strength of U.S. dollar versus the Canadian dollar. Element’s tangible leverage ratio was 4.57 times at the end of 2015 compared to 4.53 times at the end of September 2015 and 3.72 at the end of 2014.

The company expects this leverage ratio to continue to increase through 2016, as the company continues to expand from organic growth and continue to deploy its available borrowing capacity.

Take you to Slide 32, where we summarize the return on equity measures. Before tax adjusted operating income returns on average shareholders’ equity improved to 12.57% during the fourth quarter versus 11.22% during the third quarter and improvement of 135 basis points, reflecting primarily the impact of the GE Fleet acquisition. After tax adjusted operating income as a return on average common shareholder’s equity improved by 214 basis points to 11.08% during Q4 from the 8.94% reported during Q3.

Again, this improvement is largely due to the one-time nonrecurring benefit generated by the advantageous funding structure of the U.S. portion of the GE Fleet acquisition.

On Slide 33, we’ll provide some per share metrics. Book value per share increased to $13.43 at the end of 2015 versus $12.56 reported at the end of Q3 from net income generated during the quarter. After tax adjusted operating income per share was $0.35 during the fourth quarter versus $0.26 during the preceding quarter and ahead of consensus of $0.32 a share.

Free operating cash flow per share over adjusted operating income before income tax increased to $0.40 per share in Q4 versus $0.32 a share during the previous quarter. On Slide 34, we’ll provide a summary of the quarterly trend of non-current and impaired asset as a percent of finance receivable. Both non-current and impaired receivables at 16 and 3 basis points respectively are at the lowest point of the company’s history and reflect the high-quality nature of the customers underpinning our finance receivable.

Allowance for our credit losses of 19 basis points or 0.19% of total finance receivable provides additional protection to the balance sheet. And we believe the allowance to be conservative, given the quality of our customer base and may be subject to further downward adjustment as we finalize the purchase allocation of the GE Fleet.

In terms of our liquidity, Slide 35 show that the company will have access to over $11 billion in source of capital in 2015 and 2016 to fund its business plan through 2017 from $6.3 billion in currently available liquidity and from funds available from operations. Our liquidity position is summarized further in terms of our balance sheet capacity on Slide 26. This slide shows that we have existing funding facility amounting to just over $25 billion of which $6.3 billion was available at the end of December 2015.

But this graph does not illustrate also the incremental funding capacity that’s available to Element through the rated asset backed securities market which we utilize on a regular basis to permanently fund the accumulated portfolios of rail and fleet assets.

Slide 37 and 38 demonstrate our commitment toward ensuring that Element’s assets are match funded to expected currencies, interest rates and term to maturity.

I’ll turn the call over back to Steve.

Steven Hudson

Thank you, Michel. Now, let me, before I conclude, just return to the strategic separation. We began this process to unlock value by creating, first and foremost, the world’s largest publicly-traded fleet company with stable growth, pristine credit quality and high recurring - high-margin recurring fee income. As well, we are creating a high-growth commercial finance business transitioning to an asset manager with a strong investment-grade balance sheet.

Although we’re still finalizing the structure which will be tax neutral and cost effective to our shareholders, actions are already being taken separation. In the last week, reporting lines were realigned and Brad’s team has been established and my team has been established. Both rating agencies have put us on review for positive, which hopefully is reflective of our upgrade and ability to leverage fleet.

The companies will be run independently, Brad leading the Fleet business, myself leading the Commercial Finance business. The boards will be independent and there will be no crossed service or funding arrangements between the two companies. Preferred shares will remain with the existing issuer, that is Element Fleet Management, and the same will apply to the convertible debentures. Obviously, that conversion rate will be adjusted for the business that’s transferred out into the commercial asset business.

Consolidated EPS, for the time being, remains at $1.61 basic. We will be providing guidance in the first week of May when we report Q1 on EPS for both businesses, but expect that to be strong and robust based upon the quality of both of these businesses. And we maintained our earlier commitment to revise the - or to set aside a more formal dividend policy of the company in the fourth quarter to reflect the strong cash flow from both businesses. You can read into that an increase in dividend.

Turning to Page 41, some timeline and some commitments, we’ve obviously announced the transaction. On the fourth week of March, we’ll be announcing the leadership and governance structure. The first week of May, which will be the first quarter results, you will see supplementary disclosure as if the business is separated, which will include summary financial statements, KPIs and financial forecasts.

The same will apply to the second quarter, which will be announced second week of August, while we have the same disclosure on summary financial statements, KPIs and forecasts. And finally, in September, when the transaction is approved and closed, you will see an announcement on the formal dividend policy for both of those companies.

I would add that, we’ve been flattered by some of the remarks in - by our analysts and by people who follow the company. We’ve put a sample of those on Page 42. We do realize that there’s hard work between now and September, but we believe that we are well-positioned to accomplish that and deliver as we have in our past promises to our stakeholders.

Let me make three summary comments on the strategic separation. First, I am very excited to lead the Commercial Finance team. This feels exactly like 2009. We are seeing opportunities to buy portfolios of very seasoned businesses at or below book value. It’s a tremendous time to be in the commercial finance market. I look forward to growing that company.

Second, we are blessed by having, I don’t know if Brad doesn’t like this term but I’ll use it anyhow, by having the dream-team in the Fleet business. You look to Brad’s experience with D&H, when he oversaw the transition from what was a traditional check business to a fully integrated North American comprehensive financial technology company supporting the financial services industry.

Dan’s experience at Cars.com, where he created several billion dollars of value for the shareholders is an interesting - will certainly play into this. That’s not taking away from the experience that Kristi, the knowledge that Kristi and Jim have on the connected card and shared mobility. So you couldn’t ask from my perspective for a better team to lead the Fleet side. Obviously, I’ll be sticking around just to prod them a bit on continued growth and keeping my investment.

And finally, the big announcement is that, Brad and I now have a formed a wager as a result of last night’s board dinner, where we - Brad and I wagered a duck dinner. The only question is where the venue of that duck dinner will be. And the bet is on who creates the most relative value in the first year and who creates the most relative value in the second year.

I look forward to winning, Brad. On Page - it’s a good thing that Brad’s mic is off.

On Page 44, to summarize, guidance of $1.61, expected update in that guidance on the release. The first quarter results, again, strong and robust. We are proceeding under Dan’s leadership on the integration and it’s been great. And hopefully, we’ll see the $100 million number nudge up, but Dan’s not willing to make that commitment, yet, but we’ll continue poking him.

Rail portfolio under David leadership is at 99% utilization. That’s we don’t believe there’s anyone else in the industry that has the utilization like that. We mentioned our modest exposure to energy and the fact that the majority of that exposure is to large investment grade credits The $6 million of committed funding is a mantra that is important and it’s a fed staff commitment. That’s a commitment by the company that will remain in place for both the business as they go through the separation.

And we are on track to delivering the separation to our shareholders in September of this year.

With that, operator, that would conclude our formal remarks. And we would be happy to open the call to questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Geoff Kwan from RBC Capital Markets. Please go ahead.

Geoffrey Kwan

Hi, good afternoon. Just the first question I had was there seems to be a fair bit of debate around, what’s going on with the U.S. economy. Just wanted to get maybe a little bit more color than you’ve given already just in terms of what you’re seeing out there, maybe more at the grassroots level in your various businesses?

Steven Hudson

Hi, Geoff, it’s Steve. I’ll start and I’ll let then pass to Brad. But we are not seeing evidence of the slowdown or the recession. As you know we are by credit definition our philosophy have been resource - we just haven’t been in the resource sector. Where we have been, it’s to very large credit, relatively short-terms. But the commercial industrial sector, if you look to Bobcat, look to Doosan Industries, look to others, we just haven’t seen evidence of it, Geoff.

And on the same side look to the quality of our credit book. You’ll see that manifest itself on more volumes, which we haven’t seen, see itself manifest in higher arrears, which we’re not seeing. So we’re just not seeing it. Brad, did you want to…?

Bradley Nullmeyer

Yeah, Geoff, it’s Brad. I would echo those comments. Again, we haven’t seen it. Our recent portfolio performance is spectacular. Again, the products that we offer are to a very upper-end scale of client, especially in the Fleet business that wants large fleets. Again, we haven’t seen degradation in either performance or our ability to add new products into those clients.

Geoffrey Kwan

Okay. And the second question I had is, as you guys look at over the next 12 months and taking a look at, call it, the revenue or the interest income yields on this segment that you can have going forward, whether or not it’s a pricing thing, a mix issue. I mean, do you see much movement either way over the next 12 months.

Steven Hudson

I think, Geoff, it’s going to be, as the past is reflective of the future, we’re not going to see significant movement. You will see, which I think this quarter demonstrated is, I think it’s pretty very impressive that Brad and Dan, Kristi and Jim delivered 49% of their revenue in fee income. That’s a significant tick-up from Q3. So that’s a really important driver for Fleet.

But in terms of lease yields, I think it’s more the same. We also didn’t mention, Geoff, to your other question about the economy. Brad’s team, his former team, now my team, closed on three vendor arrangements in the quarter. We are not at liberty to publish them, but they are closed and they will add additional $200 million to $300 million of volume on exclusive basis for the company.

Geoffrey Kwan

Okay. And then just one last question I had was, just as you’re creating these new funds going forward on the asset management side, how does that kind of get accounted for from a financial reporting standpoint? Is it going to come in as originations that gets syndicated and then kind of take in some of the asset management and deal income?

Steven Hudson

Yes. We’re obviously going to follow model of assets owned and assets under management. So think of balance sheet where we have owned assets and the off balance sheet which will be managed to assets. And then, the income coming off it will be a flow of the management fees, our modest retained equity piece and then performance. The management fee will be based on it plus the performance fee, plus the return on our equity piece.

Geoffrey Kwan

And, sorry, so - let’s say you’re doing an aviation or another fund, as you aggregate those portfolio of assets that’s not going to be on your balance sheet?

Steven Hudson

No, it’s…

Geoffrey Kwan

Or it is and then you put it off balance sheet as you do the funds.

Steven Hudson

We’re the fund manager with a little bit of risk in the game as a co-investor in equity. So those will be off balance sheet, but we’ll report them. Geoff, you will see them in the note and you’ll be able to track asset in our management as if, quote unquote, we own them in terms of performance asset growth and all those good things that go with it.

Geoffrey Kwan

Okay. Great. Thank you.

Operator

Thank you. The next question is from Paul Holden from CIBC World Markets. Please go ahead.

Paul Holden

Thanks. Good evening. First question I want to ask you is with respect to credit performance, but specifically on the C&V and Aviation businesses. So you’ve given us a good overview of credit performance for the portfolio as a whole, but just want to ask on trends in those two businesses and what you kind of expect for loss provisioning in 2016.

Michel Beland

Yeah. It’s Michel. I think, we have - we just went over the slide that shows the quality of our book. And that reflects, obviously, the addition of the GE Fleet business. But we have not seen any increases in arrears anywhere in the portfolio. And what I indicated earlier that 19 basis points provision at the end of the year is most likely overstated. And probably will be subject to take-back into - well, partly a reversal as we finalize the GE book. But certainly in neither Aviation and the Commercial & Vendor we seen any deterioration of the credit, and…

Steven Hudson

And then, Paul, our move on Aviation to move to a fund based business from an asset or leasing basis on our balance sheet wasn’t driven by credit quality. That book is performing as promised, as you know it’s really driven by - solely driven by return on equity. And that a lease - Aviation lease on our balance sheet requires $0.35 of equity, equivalent in David’s fund is $0.05 to $0.075. And that’s a far better way to deploy our capital on a go-forward basis.

Paul Holden

Got it. All right, so just want to be clear here, because again within pretty much all of the major banks are seeing an uptick in credit losses are lease provisioning and you are not expecting or seeing the same?

Steven Hudson

No. We are not.

Paul Holden

Okay, good. And then, in terms of Fleet Management fees, I think the expectation was for a lower mix out of the GE Fleet business, something more like 35%. So if we take the blend of your sort of your legacy or PHH business and the GE, what is expected, a lower number this quarter? So maybe you can help us out and give us either an organic growth rate for your previous existing Fleet business or maybe the contribution from GE?

Bradley Nullmeyer

Yes. Paul, we don’t specifically disclose the growth rate, but you’re right, the GE business as a standalone business had a lower percentage of its revenue. And you saw in the quarter we have moved that up. So what you’ve seen as a result of using some of the GE products that they had and some of the PHH products that they had under Element, putting those together and putting those into each other’s client base, we’ve been able to drive that penetration in some growth rates. That’s why you’ve seen the uptick from the 47% on a weighted average basis figure up to 49%, and then the movement up in the GE book.

If you remember back in the original time when we talked about GE, the acquisition date, we talked about that number backed then and talked about moving that up. So we’ve just seen the planned movement of that number up as a percentage, up to the 49% in the quarter. And then, we intend to keep moving that into the 50% range as we get into 2016.

Paul Holden

Yes, got it.

Steven Hudson

Paul, your observation of past was kind of where is the fee income. And it took some time to rejig compensation focus and other things. And I believe what you’re seeing now in fourth quarter going forward is the - all the effort paying off on the realigning.

Paul Holden

Okay. So that is good to see. And then, a final question is with respect to the retained vendor programs for Aviation that was discussed in the presentation. So I just want to get a better understanding exactly how the retained vendor programs work and the - I guess, most importantly the funding that will go into those off balance sheet. Sounds like they are off balance sheet, maybe you can just clarify.

Steven Hudson

Yes. Those - of the current on balance sheet exposure, Paul, it’s $1.3 billion. There’s approximately $300 million that we do on sales financing of a BARJ [ph] aircraft. It’s not - BARJ credit is for corporations acquiring BARJ aircraft. That’s been a very successful program to us, notwithstanding the $0.35 of equity we have to put up. It’s actually, I will say profitable. I am sure that BARJ is listening and their clients, but it’s a profitable piece. So that part does meet the hurdle of over 3% ROA and leverage. Even though the leverage is less, we can still touch and feel 14% to 16% return.

Paul Holden

I see. Thank you, that’s all the questions I had.

Operator

Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca

Good afternoon. There is first a question from Slide 26, right of the value you referred to. So in the first bullet it says, gain on sale of a lease to assist with portfolio diversification. If you could just quantify that for me, the extent to which that added to revenue in earnings?

David McKerroll

Yes. It’s Dave. We sold some rail cars and we had a small gain of about $4.5 million…

Mario Mendonca

Is that after tax?

David McKerroll

Pardon me.

Mario Mendonca

Is that after tax?

David McKerroll

That’s - no, it’s pre-tax.

Mario Mendonca

Pre-tax, okay.

David McKerroll

Pre-tax, so that’s, I mean, the yields in rail are pretty constant. So the little blip up there is just - is from the sale.

Mario Mendonca

And the revenue contribution is - that would be the revenue and the pre-tax gain, the $4.5 million?

David McKerroll

That’s correct.

Mario Mendonca

Okay. Slide - actually, no, you really answered that. The - and this is probably for Steve. You referred to the $1.61 that you are reiterating that guidance. And then, it seems like there is some words around that I am struggling with. It says, it’s subject to a component variation FX and tax rate. FX I get. Component variation, what do you mean by that?

Steven Hudson

Yes. Let me just back up on Rail, because I’ll come back to the $1.61 on guidance. On the rail side, because our portfolio now has maturity from time to time Dave will clip some assets where we want to maintain our diversification. So I can’t say that every quarter, but every quarter or two or three you’ll see a modest amount of railcar sales. That’s all driven by maintaining diversification by car type.

Mario Mendonca

Okay.

Steven Hudson

There were some settlement expenses against that gain, pre-tax. It would bring it down a bit less. We can follow up with you on that.

Mario Mendonca

Okay.

Steven Hudson

With respect to the $1.61 that was forecast that $1.28, $1.29 FX. So obviously, the FX would push that $1.61 up and we’ll be speaking about that in the first part of May. A small offset, but not a full offset would be that as we become a dominant - Brad’s business becomes a dominant U.S. business, you would expect the tax rate to increase on that business. And we will be guiding you to an effective tax rate of 25%. We’re still in the midst of our tax planning Mario, so that will be finished by the first part of May.

And we’re hopeful we can minimize a substantial portion of that. We might do better than $0.25 of tax rate.

Mario Mendonca

And then…

Steven Hudson

And then, finally, Mario, there is likely to be some expense savings coming out of the separation. There will be some modest one-time cost to get it done, but we’re going to do things like the commercial finance company can afford a $1 million CEO. So my comp will come down as we build the business and other matter. So those three things will be reflected in that May announcement.

Mario Mendonca

Does that what you refer to when you’re saying component variation?

Steven Hudson

Yes.

Mario Mendonca

Okay. And then, finally the ABS market, so the fleet ABS market U.S., it seemed a little shaky at the beginning of the year and then things seem to settle down little bit. How would you characterize that market now? Could you go to that market now and could you raise capital or reflect in that market right now?

Bradley Nullmeyer

Hi, Mario, it’s Brad. So the answer is yes to those questions. You saw the Chesapeake II facility being closed. We’re at the recent conference last few days in the States, the ABS conference. Our product is very well respected in the marketplace. There is actually one of the rating agencies put a piece last week about how our - particularly our product was as good or better than some of the other ABS from a credit point of view, but actually provided a better relative return.

So, yes, we can go to the market, we will go to the market. The Chesapeake II structure has allowed us to become a programmatic type issuer, where three times a year, staying away from U.S. holidays, three times a year we will be an issuer of paper and we will issue approximately $2 billion to $2.5 billion of that paper every year. So, yes, it’s open. We will be assessing it and that’s had been very well accepted in the marketplace.

Steven Hudson

Mario, I would add, in the last three weeks, I don’t want to talk about competitors, but two of our competitors have issued - in the fleet side have issued ABS notes in size.

Mario Mendonca

So would that be the really larger ones or…

Steven Hudson

Yes. Yes.

Mario Mendonca

Okay.

Steven Hudson

We can give you the reference…

Mario Mendonca

I think I got what you’re talking about.

Steven Hudson

Yes. And when those come in those spreads were 30 to 40 basis points wider than they were in December. Now you got mechanisms to pass some of that along, big chunk of that. The market is opened. People are hunting for a little more yield. I’m not sure interest rates are settling down. But as you know, we’re not an opportunistic issuer. We go as we match our book.

Mario Mendonca

Sure. And if I could just - there was just one other, just occurred to me, on the rail side so there are some leases that are maturing in 2017. You said a small amount. Is there any way you could help us understand how - what that would mean to the lease rate in rail specifically from those maturities?

David McKerroll

Yeah. It’s Dave. When we talk about - we talked specifically about the CBR portfolio, in an overall portfolio we only have about 7% of our leases renewing this year.

Mario Mendonca

Of the rail portfolio?

David McKerroll

Of the entire rail portfolio. So in terms of we’re leasing, that’s why when you see, when you look at rail portfolios. I mean, things don’t change that quickly and especially ours, because we’re still new. And we probably have long remaining leases than lot of other of our competitors. So you only have 7% of your portfolio turning over…

Mario Mendonca

In 2016?

David McKerroll

In 2016.

Mario Mendonca

And then 2017?

David McKerroll

You’re not going to see much change in yield.

Mario Mendonca

Okay. And then in 2017, similar number, 7%...

David McKerroll

2017 is actually a similar number.

Mario Mendonca

Okay. Thanks again.

Operator

Thank you. The next question is from Tom MacKinnon from BMO Capital Markets. Please go ahead.

Tom MacKinnon

Yeah. Thanks very much. Good afternoon. I think, Steve, you alluded to an organic growth rate in fleet assets of somewhere around 5%. Just if you can put some color on what you think that would be going forward, what some of the drivers of that would be and whether that organic growth rate in Fleet assets included the impact of currency or not?

Steven Hudson

Yes. So the - first of all, the latter part, Tom, is that that’s currency neutral and removing any benefit of acquisition, so it’s like-to-like, it was 5.5%. We have consistently, Brad and myself and Dan, have got it people to 5% to 7%, maybe a little higher in asset growth. The secret recipe here is that fee revenue is growing higher and revenue will grow higher than the 5%. That guidance has been in the 7% to 9% range.

And that - obviously, that excludes any rollups that we might do through 2016.

Tom MacKinnon

Okay. And then the other thing, just on the tax rate, if I back out the one-time kind of tax impact, I think we are probably more or like in the about 18%-ish range maybe for the quarter. How are we thinking that we should - this should be moving up more towards 25% just because you’ve got more and more fleet income, is that what we should be thinking about that or should we just kind of - how should we look at ratcheting up to this 25 number that you’re talked about?

Michel Beland

Yes. Hi, Tom, it’s Michel.

Tom MacKinnon

Yes.

Michel Beland

I think certainly the rate at this point in time based on the tax - the initial tax line that we’ve done, the rate for next year will probably be trending more around the 25% or closer to that number. And that’s really as a result of the acquisition of GE, where now you’ve got a larger portion of the book-of-business that’s sitting in the U.S., which has the highest tax rate of all the jurisdictions we’re in.

And also, I guess, we have a small book in Australia, New Zealand and also at a rate that’s in mid-30s. So the combination of all this will increase the tax, consolidated [ph] tax for 2016 above where we have. As Steve says, we are completing our tax filing now, and then hopefully, we can get a number lower than that, but that’s our target for at this point in time.

Steven Hudson

I guess, that’s the headwind, Tom. The tailwind is obviously the FX is positive for us. So going back to - I think it was Mario’s earlier comment, we are very confident with $1.61. We think that will be robust and strong, when we announced the breaking of the two businesses, the EPS coming out of them.

Tom MacKinnon

Okay, great. Thanks.

Operator

Thank you. The next question is from Vincent Caintic from Macquarie Investments. Please go ahead.

Vincent Caintic

Hey, thanks so much, guys. I have two questions, one for each upcoming CEO, Brad first. The Fleet Management business originations were better than I expected. And I think the fee growth was better than investors had expected. And I was just wondering if you can give us color from on the ground, how are account approaching you for business, how do you see account wins growing and also the penetration of fees growing this year?

Bradley Nullmeyer

And so, thanks for that question. Steve mentioned the two growth rates of the net book value of your assets and the management fees that we are looking forward. We have the integration that we need to complete. We have a very robust sales cycle, where we have a number of clients many of them on or list that are in that 80% bucket we sometimes talk about. If you look at our wheel of fleet lessors, ourself and our competitors, in the traditional fleet business we’ve always talked about that above being 20% of the addressable market.

So two things have happened; one is we’ve been able to take some of those services from each of PHH and GE and drive those into the other books; secondly, we continue to have success in adding new clients on through that 80% and also deeper penetration. And the result of all that, as we expect the growth rate, as Steve talked about 5% to 7% range in net book value in the 7% - it’s a 9% management fees to continue.

We will be able to grow that at higher rate in my view once our integration is fully completed. And once we can roll out what will be the best by far management system in the world. And we really feel strong when that we’ll able to crack the code on a lot more penetration of those clients. The net result of that is, because of management fee difference in the margin that our producers translate into a higher EPS growth than just those two put together.

Vincent Caintic

Got it. Thanks very much, Brad. And then for, Steve, I appreciate your comments on this looking like 2009. And I think it’s probably even better than that, but still we see attractive properties out there, yet being kind of an industry you see that - the industries are doing well, whether it’s the aircraft leasing business or equipment financing or C&V, railcar, so forth. I was just wondering, if you can give some kind of macro or industry color, why these values are out there and what you see as attractive?

Steven Hudson

Thanks, Vincent. The - without getting into competitive stands, we are in the number of three players in the U.S. from vendor finance. Number one, number two - number one for sure has just gone through an ownership change. When anything goes through an ownership change of that size, there’s always opportunity in that ownership change. I’ll kind of - sales finance company as we believe are better run by non-banks as opposed to banks. That’s a philosophical statement, because we have only one product to sell.

Our product is sales finance on behalf of Bobcat or on behalf of Doosan or on behalf of the trailer manufacturer. We don’t have - we do not have competing products that may get in the way the relationship between a manufacturer and its customers. So we are in, I think, a superior position. So I think that market shift will create opportunities for us, Vincent. There are also some things going on with number two, rumor to be going on with number two, the second shift, if you will.

And that’s where the opportunity aligns. Lots of comments about what’s - in Canada with the announcement of Rynet [ph] or when leasing, up for sale and others, we’ll pick our spots. We’ve always been I think very good on value. We’ll tilt towards more U.S. opportunity than Canadian opportunity. We do take a book on every opportunity comes along and nothing else to benchmark our business. But we think there is some significant multibillion type opportunities in the U.S. marketplace.

Vincent Caintic

Got it. Thanks very much, guys.

Operator

Thank you. The next question is from Nick Stogdill from Credit Suisse. Please go ahead.

Nick Stogdill

Hi, good evening. Just two quick questions. On the Fleet ROA with most of the synergies looking like they’re being achieved in the first part of 2016, is it fair to assume the ramp to the 4% ROA will happen in the first half of the year?

Dan Jauernig

Hi, it’s Dan. It’s actually - when you look at the three buckets of work-streams, the cost of funds will ramp evenly throughout the year. The procurement savings will ramp starting slower in Q1 and Q2 and ramping up later in the year, so that by the end of 2016 we’ll be on a full run-rate of $51 million.

And then, you look at the last bucket of $31 million, the business operations, since the portfolio won’t merge until the end of Q3, early Q4, that won’t be realized until the end of 2016. But we’ll be on a full run-rate benefit of $31 million in 2017. So that ROA walk that we did, we are going to exit 2016 at plus 4% ROA. So we’ll have the full-year benefit of that in 2017.

Nick Stogdill

Yes, so we…

Steven Hudson

When we report 1Q on early May, we will be giving you guidance on the ROA by the businesses quarter-by-quarter.

Nick Stogdill

Okay, great. Thank you. And then, just on the - I know this for you, Steve, or for Brad, on the reduced funding in the single vendor program, is there any more color you can add and is that - are there other industries where you could be pumping up against limits or things like that?

Steven Hudson

I think it’s - as a new CEO of that business I’ll take the question. But it’s not similar to Dave’s business, where you’re running a very diversified rail book. You have to stay focusing on diversification by asset type. We love the credits, but we are singly focused on diversification by asset type. After 30 years of being in the business, it’s one of the few things that - one of the many things that we’ve learnt - I think you’ve got look to the overall asset growth and the quality of the book. I think both of those are exceedingly strong.

Nick Stogdill

Okay. Thank you.

Operator

Thank you. There are no further questions registered at this time. I will now like to turn the meeting back over to Mr. Sadler.

John Sadler

Thank you very much, operator. And thank you, ladies and gentlemen, for joining us on this conference call. We look forward to connecting with you again when we report our first quarter results in May.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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