Element Financial Corporation

TSX : EFN


Element Financial Corporation

August 12, 2014 17:31 ET

Element Delivers $0.14 of Free Operating Cash Flow EPS in Q2 on $4.1 Billion of Earning Assets

-- After Tax Adjusted Operating EPS of $0.11 in line with consensus

-- Growth in all four verticals in Q2 adds $0.8 billion in organic originations

-- Yield on average earning assets remains stable at 6.96% versus 6.98 % in Q1

-- Interest expense on average earning assets decreases to 2.42% from 2.55% in Q1

-- Adjusted operating expense ratio continues to decline to 2.19% from 2.22% in Q1

TORONTO, ONTARIO--(Marketwired - Aug. 12, 2014) - Element Financial Corporation (TSX:EFN) ("Element" or the "Company"), one of North America's leading equipment finance companies, today reported financial results for the three-month and six-month periods ending June 30, 2014 with organic originations of $0.8 billion contributing to a 7.9 percent increase in the Company's total earning assets to $4.1 billion as at June 30, 2014 versus $3.8 billion as at March 31, 2014.

Free operating cash EPS was $0.14 for the three-month period and $0.27 for the six month period ending June 30, 2014. Based partly on the continued growth of the Company's book of railcar assets combined with the growing book of earning assets, the Company is not expected to pay cash taxes for the next twenty years. After tax adjusted operating income per share was $0.11 for the three-month period and $0.21 for the six-month period ending June 30, 2014 in line with the consensus of analyst estimates.

"Organic origination volumes were strong across each of our four business verticals in Q2 setting Element up to exceed the $3.9 billion pre-PHH origination target that we had established for 2014," said Steven Hudson, Element's Chairman and CEO. "Trinity industries recently affirmed that US$1 billion of rail car leases are expected to flow to Element in 2014 and we are aiming to exceed this target," added Mr. Hudson.

While Element's Aviation and Rail verticals have predictable annual origination volumes, these can be subject to less predictable quarter to quarter variances. The Aviation order book tends to see the strongest closings in the fourth quarter accounting for up to 40 percent of annual volumes. Rail originations, which flow to Element in large aggregated transactions, to a lesser extent can also affected by some seasonality.

The Company's US Commercial & Vendor Finance unit reported new originations of $213.3 million for the three month period ending June 30, 2014 versus $160.5 million originated in the preceding quarter. Originations from Element's Canadian Commercial & Vendor platform were $158.4 million versus $141.0 million in the previous quarter. Aviation Finance reported originations of $149.4 million in Q2, including $32.4 million of a $100 million facility approved for CargoJet during the period, versus originations of $96.2 million in the preceding quarter. Element's Fleet Management unit reported originations of $138.2 million in Q2 versus $113.4 million in the preceding quarter. The Railcar Finance vertical, which reported $131.2 million of new railcar leases in Q1 in addition to the acquisition of a US$396 million portfolio of existing railcar leases from Trinity Industries, contributed $133.2 million of new railcar leases in Q2. Organic originations, excluding acquisitions, from all four verticals for the period amounted to $793 million in Q2 for a 23 percent increase over the $642 million of organic originations in the previous period.

Financial revenue for the three-month period ending June 30, 2014 was $75.1 million or 7.91 percent of average earning assets versus $66.5 million in the previous quarter or 7.90 percent of average earning assets. Interest expense was $23.0 million for the three-month period ending June 30, 2014 or 2.42 percent of average earning assets versus $21.5 million in the previous quarter or 2.55 percent of average earning assets. Net financial income for the three-month period ending June 30, 2014 was $52.1 million for the quarter versus $45.0 million in the preceding quarter.

The Company's adjusted operating expense ratio continued to decline during Q2 to 2.19 percent of average earning assets versus 2.22 percent in the preceding quarter and is on track to achieve the post PHH integration target ratio of 2.0 percent by the end of 2014.

The Company's allowance for credit losses was $11.8 million or 0.37 percent of finance receivables as at June 30, 2014 versus $11.1 million or 0.40 percent as at March 31, 2014 resulting from slightly lower write-offs during the quarter on larger earning assets base. Delinquencies remained constant during the quarter at 0.40 percent of total finance receivables as at June 30, 2014 compared to 0.40 percent as at March 31, 2014.

At the end of the period, the Company had total available sources of capital of $2.52 billion versus $1.37 billion at the end of the preceding period as a result of the expansion of the Company's senior revolving credit facility which added $800 million in additional availability and the Company's US revolving secured borrowing facility which was increased by $350 million to accommodate the growing origination in the US Commercial and Vendor business. The Company's average financial tangible leverage ratio was 1.79:1 as at June 30, 2014 compared to 1:80 at March 31, 2014. Subsequent to the end of the quarter, on closing the acquisition of PHH Arval and the financing associated with this acquisition, Element's financial tangible leverage increased to 3.57:1 resulting from the higher debt advance rate on those specific assets and is expected to reach 4.0:1 by the end of 2014.

"The Company has reinforced its capital structure and negotiated improved terms to its senior revolving credit facility that enable Element to gain access to longer-term and lower-cost rated debt market facilities," noted Mr. Hudson. "Work is well-advanced in discussions with our rating agencies and we expect to be actionable in these rated debt markets by the fourth quarter of this year," added Mr. Hudson.

At the end of the period, the Company had 189.5 million common shares outstanding as well as 4.6 million preferred Series A shares, 5.1 million preferred Series C shares and 5.0 million preferred Series E shares outstanding.

Unaudited Interim Statements and MD&A

Element's unaudited interim financial statements and related management discussion and analysis as at and for the three-month and six-month periods ended June 30, 2014 have been filed on SEDAR (www.sedar.com).

Conference Call

A conference call to discuss the results with analysts will be held on Wednesday, August 13, 2014 at 8:00 a.m. ET. The conference call can be accessed by dialing the following numbers:

North America Toll-Free: 1-866-696-5910 passcode 8764790

Local & International: 1-416-340-2217 passcode 8764790

The call will be recorded and can be accessed until August 27, 2014 by dialing 905-694-9451 or 1-800-408-3053 and entering the pass code 9173123.

Non-IFRS Measures

The Company's unaudited condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and accounting policies adopted are in accordance with IFRS.

The Company believes that certain Non-IFRS Measures can be useful to investors because they provide a means by which investors can evaluate the Company's underlying key drivers and operating performance of the business, exclusive of certain adjustments and activities that investors may consider to be unrelated to the underlying economic performance of the business of a given period. Throughout this Press Release, management used a number of terms and ratios which do not have a standardized meaning under IFRS and are unlikely to be comparable to similar measures presented by other organizations. A full description of these measures can be found in the Management Discussion and Analysis that accompanies the financial statements for the quarter ended June 30, 2014.

The following table provide a reconciliation of non-IFRS to IFRS measures related to the Company:

As at and for the
three months ended
As at and for the
six months ended
$ thousands (except % and per share amounts) June 30, 2014 March 31, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Reported and adjusted income measures
Net income (loss) A 11,128 15,836 (13,882 ) 26,964 (9,197 )
Adjustments:
Share-based compensation 3,661 4,194 2,818 7,855 4,270
Amortization of intangible assets from acquisitions 835 1,026 343 1,861 682
Integration costs - - 5,000 - 8,000
Transaction costs 13,107 - 20,500 13,107 20,500
Provision (recovery) of income taxes 2,603 5,246 (282 ) 7,849 2,285
Adjusted operating income B 31,334 26,302 14,497 57,636 26,540
Provision for taxes applicable to adjusted operating income (6,279 ) (5,647 ) (4,046 ) (11,926 ) (7,445 )
After-tax adjusted operating income D=B-C 25,055 20,655 10,451 45,710 19,095
Selected cash flow amounts
Free operating cash flow B 31,334 26,302 14,497 57,636 26,540
Selected statement of financial position amounts -
Finance receivables, before allowance for credit losses (1) E 3,164,453 2,996,601 2,174,650 3,164,453 2,174,650
Allowance for credit losses F 11,767 11,086 10,973 11,767 10,973
Finance receivables, net (1) G=E-F 3,152,686 2,985,515 2,163,677 3,152,686 2,163,677
Equipment under operating leases (1) H 909,783 813,480 - 909,783 -
Total earning assets I=G+H 4,062,469 3,798,995 2,163,677 4,062,469 2,163,677
Average earning assets, net J 3,795,053 3,365,598 1,546,145 3,578,232 1,471,585
Goodwill and intangible assets K 182,804 180,674 182,673 182,804 182,673
Accounts payable and accrued liabilities L 103,976 112,590 80,917 103,976 80,917
Secured borrowings M 2,356,990 2,467,016 1,539,011 2,356,990 1,539,011
Unsecured convertible debentures N 299,264 - - 299,264 -
Total debt O 2,656,254 2,467,016 1,539,011 2,656,254 1,539,011
Average debt P 2,509,655 2,182,433 1,093,655 2,346,948 1,089,666
Total shareholders' equity Q 1,726,331 1,610,781 879,560 1,726,331 879,560
Preferred shares R 357,243 235,142 - 357,243 -
Common shareholders' equity S=Q-R 1,369,088 1,375,639 879,560 1,369,088 879,560
Average common shareholders' equity T 1,371,122 1,356,019 635,079 1,366,362 548,494
Average total shareholders' equity U 1,622,345 1,504,591 635,079 1,563,793 548,494

Non-IFRS and IFRS Key Annualized Operating Ratios and per Share Information:

As at and for the
three months ended
As at and for the
six months ended
$ thousands (except % and per share amounts) June 30, 2014 March 31, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Free operating cashflow per share [basic] (1) (B-Y)/W $ 0.14 $ 0.13 $ 0.11 $ 0.27 $ 0.22
After-tax adjusted operating income per share [basic] (D-Y)/W $ 0.11 $ 0.10 $ 0.08 $ 0.21 $ 0.16
Key annualized operating ratios
Financial leverage ratio (O)/Q 1.54 1.53 1.75 1.54 1.75
Tangible leverage ratio (O+L)/(Q-K) 1.79 1.80 2.32 1.79 2.32
Average financial leverage ratio P/U 1.55 1.45 1.72 1.50 1.99
Allowance for credit losses as a percentage of finance receivables F/E 0.37 % 0.37 % 0.50 % 0.37 % 0.50 %
Adjusted operating income on average common shareholders' equity (B-Y)/T 7.90 % 7.04 % 9.13 % 7.46 % 9.68 %
Adjusted operating income on average earning assets B/J 3.30 % 3.13 % 3.75 % 3.22 % 3.61 %
After-tax adjusted operating income on average common shareholders' equity (D-Y)/T 6.07 % 5.37 % 6.58 % 5.71 % 6.96 %
After-tax adjusted operating income on average earning assets D/J 2.64 % 2.45 % 2.70 % 2.55 % 2.60 %
Per share information
Number of shares outstanding (including special warrants) V 189,503 189,503 155,116 189,503 155,116
Weighted average number of shares outstanding [basic] W 189,503 189,215 129,362 189,360 118,597
Weighted average number of shares outstanding [diluted] X 194,808 194,114 129,362 194,698 118,597
Cumulative preferred share dividends during the period Y $ 4,254 $ 2,442 $ - $ 6,696 $ -
Net income (loss) per share [basic] (A-Y)/W $ 0.04 $ 0.07 $ (0.11 ) $ 0.11 $ (0.08 )
Net income (loss) per share [diluted] (A-Y)/X $ 0.04 $ 0.07 $ (0.11 ) $ 0.10 $ (0.08 )
Book value per share S/V $ 7.22 $ 7.26 $ 5.67 $ 7.22 $ 5.67
(1) Prior period free operating cashflow per share [basic] has been restated for the change in definition applied in the current period.

Selected Financial Information and Financial Ratios

The following table summarizes key financial data to be read in conjunction with the unaudited interim condensed consolidated financial statements of the Company as at and for three months ended June 30, 2014, March 31, 2014 and June 30, 2013. Such financial statements are prepared in accordance with IFRS and are reported in Canadian dollars.

As at and for the
three months ended
As at and for the
six months ended
(in $000's for stated values, except ratios and per share amounts) June 30, 2014
$
March 31, 2014
$
June 30, 2013
$
June 30, 2014
$
June 30, 2013
$
After tax adjusted operating income (loss) per share (basic) 0.11 0.10 0.08 0.21 0.16
Free operating cash flows per share (basic) 0.14 0.13 0.11 0.27 0.22
Financial revenue 75,077 66,500 33,960 141,577 65,798
Adjusted operating income 31,334 26,302 14,497 57,636 26,540
After tax adjusted operating income 25,055 20,655 10,451 45,710 19,095
Income/(loss) before taxes 13,731 21,082 (14,164 ) 34,813 (6,912 )
Net income/(loss) 11,128 15,836 (13,882 ) 26,964 (9,197 )
Total assets 5,483,252 4,234,963 2,533,370 5,483,252 2,533,370
Finance receivables, net 3,152,686 2,985,515 2,163,677 3,152,686 2,163,677
Equipment under operating leases 909,783 813,480 - 909,783 -
Total earning assets 4,062,469 3,798,995 2,163,677 4,062,469 2,163,677
New originations 792,603 1,084,014 397,896 1,876,617 694,147
Loan acquisitions - - 488,692 - 572,735
Secured borrowings 2,356,990 2,467,016 1,539,011 2,356,990 1,539,011
Convertible debentures 299,264 - - 299,264 -
Total debt 2,656,254 2,467,016 1,539,011 2,656,254 1,539,011
Average finance receivables 2,993,305 2,811,352 1,546,145 2,899,728 1,471,585
Average equipment under operating leases 801,748 554,246 - 678,504 -
Average earning assets 3,795,053 3,365,598 1,546,145 3,578,232 1,471,585
Average debt outstanding 2,509,655 2,182,433 1,093,655 2,346,948 1,089,666
Number of shares outstanding (including special warrants) 189,503 189,502.737 155,115.941 189,503 155,115.941
Weighted average number of shares outstanding (including special warrants) 189,503 189,214.813 129,362.171 189,360 118,596.525
Weighted average number of shares outstanding [diluted] 194,808 194,113.733 129,362.171 194,698 118,596.525
Total shareholders' equity 1,726,331 1,610,781 879,560 1,726,331 879,560
Average common shareholders' equity 1,371,122 1,356,019 635,079 1,366,362 548,494
Net income (loss) per share [basic] 0.04 0.07 (0.11 ) 0.11 (0.08 )
Net income (loss) per share [diluted] 0.04 0.07 (0.11 ) 0.10 (0.08 )

The following table summarizes key operating ratios to be read in conjunction with the unaudited interim condensed consolidated financial statements of the Company as at and for the three months ended:

As at and for the
three-month periods ended
As at and for the
six months ended
June 30, 2014 March 31, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Ratios
Financial leverage ratio (2) 1.54 1.53 1.75 1.54 1.75
Tangible leverage ratio (3) 1.79 1.80 2.32 1.79 2.32
Average financial leverage ratio 1.55 1.45 1.72 1.50 1.99
Allowance for credit losses as a percentage of finance receivables 0.37 % 0.37 % 0.50 % 0.37 % 0.50 %
Annualized credit loss provision as a percentage of average finance receivables 0.52 % 0.43 % 0.28 % 0.47 % 0.36 %
Portfolio average remaining life (in months, excluding equipment under operating leases) 27.3 28.8 22.6 27.3 22.6
Adjusted operating income on average common shareholders' equity 7.90 % 7.04 % 9.13 % 7.46 % 9.68 %
Adjusted operating income on average earning assets 3.30 % 3.13 % 3.75 % 3.22 % 3.61 %
After-tax adjusted operating income on average common shareholders' equity 6.07 % 5.37 % 6.58 % 5.71 % 6.96 %
After-tax adjusted operating income on average earning assets 2.64 % 2.45 % 2.70 % 2.55 % 2.60 %
Book value per share $ 7.22 $ 7.26 $ 5.67 $ 7.22 $ 5.67
(1) All are ratios presented on an annualized basis.
(2) Financial leverage ratio is computed as total debt (the sum of secured borrowings and extendible convertible debentures) divided by total shareholders equity.
(3) Tangible leverage ratio is computed as the sum of secured borrowings, convertible debentures and accounts payable and accrued liabilities, divided by shareholders equity less goodwill and intangible assets.

Results of Operations - For the three months ended June 30, 2014, March 31, 2014 and June 30, 2013 and six months ended June 30, 2014 and June 30, 2013

The following table sets forth a summary of the Company's results of operations for the three months ended June 30, 2014, March 31, 2014 and June 30, 2013 and six months ended June 30, 2014 and June 30, 2013:

For the
three-month periods
ended
For the
six month periods ended
(in 000's for stated values, except per unit amounts) June 30,
2014
$
March 31,
2014
$
June 30,
2013
$
June 30,
2014
$
June 30,
2013
$
Net Financial Income
Interest income 51,547 48,545 29,564 100,092 56,437
Rental revenue, net (1) 14,501 10,174 - 24,675 -
Total interest income and rental revenue, net 66,048 58,719 29,564 124,767 56,437
Interest expense 22,985 21,533 9,212 44,518 18,255
Net interest income and rental revenue, net before provision for credit losses 43,063 37,186 20,352 80,249 38,182
Provision for credit losses 3,868 2,958 1,099 6,826 2,670
Net interest income and rental revenue, net 39,195 34,228 19,253 73,423 35,512
Other revenue items 12,897 10,739 5,495 23,636 12,031
Net financial income 52,092 44,967 24,748 97,059 47,543
Operating Expenses
Salaries, wages and benefits 12,564 12,567 7,994 25,131 15,156
General and administration expenses 8,194 6,098 2,257 14,292 5,847
Share-based compensation 3,661 4,194 2,818 7,855 4,270
24,419 22,859 13,069 47,278 25,273
Business acquisition costs
Amortization of intangibles from acquisition 835 1,026 343 1,861 682
Integration costs - - 5,000 - 8,000
Transaction costs 13,107 - 20,500 13,107 20,500
13,942 1,026 25,843 14,968 29,182
Net income/(loss) before taxes 13,731 21,082 (14,164 ) 34,813 (6,912 )
Tax expense/(recovery) 2,603 5,246 (282 ) 7,849 2,285
Net income/(loss) for the period 11,128 15,836 (13,882 ) 26,964 (9,197 )
Net income/(loss) per share [basic] 0.04 0.07 (0.11 ) 0.11 (0.08 )
Net income/(loss) per share [diluted] 0.04 0.07 (0.11 ) 0.10 (0.08 )
(1) Rental revenue, net is represents rental income earned on equipment under operating leases, less depreciation.

Overall Performance Highlights

The Company's earning assets, consisting of the Company's Finance receivables and Equipment under operating leases, have grown substantially during the period to June 30, 2014 to $4,062.5 million from $3,002.3 million reported at December 31, 2013. The growth over December 31, 2013 is primarily due to the combined effect of the total new originations for the year in the amount of $1,876.6 million, helped by the large contribution of the Trinity vendor program, net of repayments, syndication activities, amortization of equipment under operating leases and changes in foreign exchange rates of $816.4 million.

The Company is reporting a net income of $11.1 million for the three months ended June 30, 2014, compared to $(13.9) million in the comparative period ended June 30, 2013, and $15.8 million in the immediately preceding quarter ended March 31, 2014. Net income for the six month period ended June 30, 2014 was $27.0 million, compared to $(9.2) million for the comparative six month period ended June 30, 2013. Basic net income per share was $0.04 for the three-months ended June 30, 2014, compared to $(0.11) for the comparative period ended June 30, 2013 and $0.07 for the immediately preceding quarter ended March 31, 2014. Basic net income per share for the six month period ended June 30, 2014 was $0.11 versus $(0.08) for the comparative six month period ended June 30, 2013. The improved results over the comparative periods are due to the timing of business acquisition costs which do not relate to maintaining operating activities and were incurred in the previous quarter but not in the current quarter.

As indicated previously, management believes that adjusted operating income is the most appropriate operating measure of the Company's performance as it excludes non-cash items related to share-based compensation and business acquisition costs which do not relate to maintaining operating activities. For the three months ended June 30, 2014, the Company is reporting adjusted operating income of $31.3 million and after-tax adjusted operating income per share of $0.11, compared to $14.5 million in adjusted operating income or $0.08 in after tax operating income per share for the comparative three months ended June 30, 2013, and compared to $26.3 million in adjusted operating income or $0.10 in after tax operating income per share for the immediately preceding quarter ended March 31, 2014. For the six month period ended June 30, 2014, the Company is reporting adjusted operating income of $57.6 million and after-tax adjusted operating income per share of $0.21, compared to $26.5 million and $0.16 per share in the comparative six month period ended June 30, 2013.

As indicated previously, Management also believes that Free Operating Cash Flows and Free Operating Cash Flows per Share as described in the Non-IFRS Measures section of this MD&A are a key statistics to properly assess the operating performances of the Company to mostly reflect the substantial value being created by the very long deferral of cash income taxes and the investment value produced by that deferral. So, while the Company is reporting after-tax adjusted operating income per share of $0.11 and $0.21 for the three and six months ended June 30, 2014, free operating cash flows per share reaches $0.14 and $0.27 per share, respectively.

Consolidated Financial Position

The following table sets forth a summary of the Company's consolidated financial position as of the dates presented:

As at
(in 000's for stated values, except per unit amounts) June 30,
2014
$
March 31,
2014
$
December 31,
2013
$
Cash 35,727 42,093 12,401
Restricted cash 141,035 102,066 103,550
Cash held in escrow 929,834 - -
Finance receivables 3,152,686 2,985,515 2,763,228
Equipment under operating leases 909,783 813,480 239,055
Derivative financial instruments 525 1,129 -
Deferred tax assets 29,761 31,729 28,231
Non-portfolio assets 283,901 258,951 308,188
Total assets 5,483,252 4,234,963 3,454,653
Accounts payable and accrued liabilities 103,976 113,254 80,917
Subscription receipts escrow liability 929,834 - -
Secured borrowings 2,356,990 2,467,016 1,893,910
Convertible debentures 299,264 - -
Derivative financial instruments 37,437 7,747 3,014
Deferred tax liabilities 29,420 36,165 30,156
Total liabilities 3,756,921 2,624,182 2,007,997
Shareholders' equity 1,726,331 1,610,781 1,446,656
Total liabilities and shareholders' equity 5,483,252 4,234,963 3,454,653

About Element Financial Corporation

With total assets in excess of $10 billion, Element Financial Corporation is one of North America's leading equipment finance companies. Element operates across North America in four verticals of the equipment finance market - Commercial & Vendor Finance, Aviation Finance, Railcar Finance and Fleet Management.

This release includes forward-looking statements regarding Element and its business. Such statements are based on the current expectations and views of future events of Element's management. In some cases the forward-looking statements can be identified by words or phrases such as "may", "will", "expect", "plan", "anticipate", "intend", "potential", "estimate", "believe" or the negative of these terms, or other similar expressions intended to identify forward-looking statements, including, among others, statements regarding new originations in the current quarter, the anticipated pipeline of prospective transactions, and proposed purchases of portfolios of finance assets. The forward-looking events and circumstances discussed in this release may not occur and could differ materially as a result of known and unknown risk factors and uncertainties affecting Element, including risks regarding the equipment finance industry, economic factors, risks related to completion of the proposed purchases of portfolios of finance assets, and many other factors beyond the control of Element. No forward-looking statement can be guaranteed. Forward-looking statements and information by their nature are based on assumptions and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statement or information. Accordingly, readers should not place undue reliance on any forward-looking statements or information. A discussion of the material risks and assumptions associated with this outlook can be found in Element's 2013 MD&A, and 2013 Annual Information Form, all of which have been filed on SEDAR and can be accessed at www.sedar.com. Accordingly, readers should not place undue reliance on any forward-looking statements or information. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made and Element undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Contact Information