Element Financial Corporation

TSX : EFN


Element Financial Corporation

May 13, 2014 19:56 ET

Element Tops $1 Billion in Q1 Originations to Deliver $0.10 Adjusted Operating EPS

TORONTO, ONTARIO--(Marketwired - May 13, 2014) - Element Financial Corporation (TSX:EFN) -

  • Strategic acquisitions and strong US demand deliver more than $2 billion of new business in the last two quarters

  • Free operating cash flow increased to $0.14 per share from $0.12 per share in the previous period

  • Aviation pipeline rebuilds to $2.4 billion from $1.5 billion at the end of 2013

  • Adjusted OPEX continues to decline to 2.22% from 2.26% in Q4

Element Financial Corporation ("Element" or the "Company"), one of North America's leading equipment finance companies, today reported financial results for the three-month period ending March 31, 2014 with record originations of $1.1 billion contributing to a 27 percent increase in the Company's total earning assets to $3.8 billion as at March 31, 2014 versus $3.0 billion as at December 31, 2013. After tax adjusted operating income increased by 37 percent to $20.7 million in the three-month period ending March 31, 2014 versus $15.0 million in the preceding period producing $0.10 of after tax adjusted operating earnings per share for the period in line with the consensus of analysts' estimates.

"Element produced strong organic growth in the first quarter to set us on course to exceed our 2014 origination target of $3.86 billion," said Steven Hudson, Element's Chairman and CEO. "I am particularly pleased with the strong demand for new equipment that we are seeing coming out of the US market as businesses replace aging equipment stocks and acquire increased capacity across a wide variety of transportation assets from railcars, to highway trucks, to helicopters," added Mr. Hudson.

The Company's US Commercial & Vendor Finance unit reported new originations of $160.5 million for the three month period ending March 31, 2014 versus $113.4 million originated in the preceding quarter. Originations from Element's Canadian Commercial & Vendor platform were $141.0 million versus $195.9 million in the seasonally strong fourth quarter. Aviation Finance accounted for $96.2 million of Q1 originations, versus $462.4 million in the preceding quarter which had included a US$243 million contribution from the acquisition of GE Capital Corporation's US-based helicopter portfolio. As previously noted, new business volumes in the Aviation Finance unit are expected to be uneven over quarterly reporting periods because of the high value nature of these assets. The Aviation Finance unit's pipeline has expanded to $2.4 billion from $1.5 billion at the end of the preceding quarter. Element's Fleet Management unit reported originations of $113.4 million in Q1 versus $113.8 million in the preceding quarter. The Railcar Finance vertical, which was established in December of 2013 following the launch of Element's strategic alliance with Dallas-based Trinity Industries, contributed $573 million to Q1 originations versus $112 million in the preceding quarter.

"We are seeing significant incremental opportunities within our Railcar Finance unit as the industry accelerates the pace at which it expands and retrofits the North American railcar fleet," said Mr. Hudson. "Our initial estimate is that the incremental capital investment for retrofitting alone amounts to more than US$3 billion, and we are positioning Element to capture share in this market," added Mr. Hudson.

As a result of the growing volume of business generated by the Company's Railcar Finance unit, equipment under operating leases now accounts for more than 21 percent of Element's $3.8 billion portfolio of earning assets. While the payments are the same, the different accounting treatment attributable to operating leases versus financial leases results in the deferral of accounting income into future years. For the quarter ended March 31, 2014, the financial impact of the application of operating lease accounting is a deferral of approximately $3.3 million in accounting income or $0.014 in after-tax earnings per share.

Based on the continued growth of the Company's book of leased assets and the change in the current mix of assets resulting from the addition of longer life assets, primarily railcars, the Company will not be required to pay cash taxes for more than ten years. As a result, the Company is now reporting free operating cash flow and free operating cash flow per share as additional metrics to more appropriately reflect the actual financial return of the overall business. For the three-month period ending March 31, 2014, the Company reported free operating cash flow of $26.1 million or $0.14 per share versus $19.9 million or $0.12 per share for the preceding three-month period.

Financial revenue for the three-month period ending March 31, 2014 increased 31 percent to $66.5 million versus $50.9 million in the previous quarter generating net financial income of $45.0 million for the quarter versus $34.2 million in the preceding quarter. Adjusted operating expenses were $18.7 million for the quarter versus $13.8 million in the previous quarter resulting in adjusted operating income before income taxes of $26.3 million for the current quarter versus $20.4 million for the previous quarter. After tax adjusted operating income was $20.7 million versus $15.0 million in the preceding quarter.

Gross average yield on finance receivables was 8.26 percent for the period ended March 31, 2014 versus 8.47 percent for the immediately preceding quarter reflecting a slight shift in the mix of business. Financial revenue, net of depreciation expense from equipment under operating leases was 7.34 percent versus the 7.53 percent reported for the quarter ended December 31, 2013 again, a slight reduction resulting from the addition of a sizeable rail portfolio during the first quarter.

The Company's adjusted operating expense ratio continued to decline during Q1 to 2.22 percent of average earning assets versus 2.26 percent in the preceding quarter. While the improvement was positive, the introduction of operating leases negatively affected this ratio due to the inherent deferral of income for this category of assets which reduces the value of the asset and thereby increases the expense ratios.

The Company's average financial leverage ratio decreased to 1.61:1 for the quarter ended March 31, 2014 compared to 1.79:1 for the immediate quarter ended December 31, 2013 primarily as a result of the recent issuance of preferred shares in early March 2014. The effect of this de-leveraging resulted in a slight increase in the cost of borrowing to 3.95 percent during the quarter compared to 3.82 percent for the immediately preceding quarter from additional stand-by fees resulting from under-utilization of some of the Company's credit facilities. At the end of the period, the Company had total available sources of capital of $1.37 billion versus $1.83 billion at the end of the preceding period.

"We have an under-leveraged balance sheet and more than $1.3 billion worth of available capital giving us more than enough capacity to fund the new origination growth that we foresee in our current business plan," noted Mr. Hudson. "This capacity also has room to make us actionable on sizeable accretive acquisition opportunities that we continue to explore," added Mr. Hudson.

Total assets increased to $4.2 billion at the end of the quarter versus $3.5 billion at the end of the preceding quarter and book value per share increased to $7.22 versus $7.05 reported at the end of the preceding period.

Delinquencies represented 0.39 percent of total finance receivables as at March 31, 2014 compared to 0.32 percent as at December 31, 2013. At the end of the period, the Company had 189.5 million common shares outstanding as well as 4.6 million preferred Series A and 5.1 million preferred Series C 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 period ended March 31, 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, May 14, 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 2964212
Local & International: 1-416-340-2217 passcode 2964212

The call will be recorded and can be accessed until May 28, 2014 by dialing 905-694-9451 or 1-800-408-3053 and entering the pass code 1944121.

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 March 31, 2014.

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

As at and for the three months ended
$ thousands (except % and per share amounts) March 31,
2014
December 31,
2013
March 31,
2013
Reported and adjusted income measures
Net income (loss) A 15,836 (278 ) 4,685
Adjustments:
Share-based compensation 4,194 4,212 1,452
Amortization of intangible assets from acquisitions 1,026 1,176 339
Integration costs - 200 3,000
Transaction costs - 14,560 -
Provision (recovery) of income taxes 5,246 489 2,567
Adjusted operating income B 26,302 20,359 12,043
Provision for taxes applicable to adjusted operating income (5,647 ) (5,322 ) (3,399 )
After-tax adjusted operating income C 20,655 15,037 8,644
Selected cash flow amounts
Free operating cash flow D 26,139 19,857 12,315
Selected statement of financial position amounts
Finance receivables, before allowance for credit losses (1) E 2,996,601 2,774,299 1,497,598
Allowance for credit losses F 11,086 11,071 10,010
Finance receivables, net (1) G=E-F 2,985,515 2,763,228 1,487,588
Equipment under operating leases (1) H 813,480 239,055 -
Total earning assets I=G+H 3,798,995 3,002,283 1,487,588
Average earning assets, net J 3,365,598 2,454,446 1,396,197
Secured borrowings K 2,467,016 1,893,910 1,033,181
Average secured borrowings L 2,182,433 1,752,400 1,085,630
Total shareholders' equity M 1,610,781 1,446,656 595,913
Preferred shares N 243,160 115,000 -
Common shareholders' equity O=M-N 1,367,621 1,331,656 595,913
Average common shareholders' equity P 1,356,019 977,678 460,946
(1) Prior periods have been reclassified to conform to the current period presentation for equipment under operating leases.

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

As at and for the three months ended
$ thousands (except % and per share amounts) March 31,
2014
December 31,
2013
March 31,
2013
Free operating cash flow per share [basic] D/R 0.14 0.12 0.11
After-tax adjusted operating income per share [basic] (C-T)/R 0.10 0.09 0.08
Key annualized operating ratios
Financial leverage ratio K/M 1.53 1.31 1.73
Average financial leverage ratio L/P 1.61 1.79 2.36
Allowance for credit losses as a percentage of finance receivables F/E 0.37 % 0.40 % 0.68 %
Adjusted operating income on average common shareholders' equity B/P 7.76 % 8.33 % 10.45 %
Adjusted operating income on average earning assets B/J 3.13 % 3.32 % 3.45 %
After-tax adjusted operating income on average common shareholders' equity C/P 6.09 % 6.15 % 7.50 %
After-tax adjusted operating income on average earning assets C/J 2.45 % 2.45 % 2.48 %
Per share information
Number of shares outstanding (including special warrants) Q 189,503 188,935 125,414
Weighted average number of shares outstanding [basic] R 189,215 160,530 107,711
Weighted average number of shares outstanding [diluted] S 194,114 160,530 109,924
Cumulative preferred share dividends during the period T 2,442 312 -
Net income (loss) per share [basic] (A-T)/R 0.07 (0.00 ) 0.04
Net income (loss) per share [diluted] (A-T)/S 0.07 (0.00 ) 0.04
Book value per share O/Q 7.22 7.05 4.75
(1) Prior periods have been reclassified to conform to the current period presentation for equipment under operating leases.

Selected Financial Information and Financial Ratios

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

As at and for the three months ended
March 31, December 31, March 31
(in $000's for stated values, except ratios and per share amounts) 2014
$
2013
$
2013
$
After tax adjusted operating income (loss) per share (basic) 0.10 0.09 0.08
Free operating cash flows per share (basic) 0.14 0.12 0.11
Financial revenue 66,500 50,945 31,838
Adjusted operating income 26,302 20,359 12,043
After tax adjusted operating income 20,655 15,037 8,644
Income/(loss) before taxes 21,082 211 7,252
Net income/(loss) 15,836 (278 ) 4,685
Total assets 4,234,963 3,454,653 1,766,353
Finance receivables, net 2,985,515 2,763,228 1,487,588
Equipment under operating leases 813,480 239,055 -
Total earning assets 3,798,995 3,002,283 1,487,588
New originations 1,084,014 997,172 296,251
Loan acquisitions - - 84,043
Secured borrowings 2,467,016 1,893,910 1,033,181
Average finance receivables 2,811,352 2,398,255 1,396,197
Average equipment under operating leases 554,246 56,191 -
Average earning assets 3,365,598 2,454,446 1,396,197
Average debt outstanding 2,182,433 1,752,400 1,085,630
Number of shares outstanding (including special warrants) 189,503 188,935 125,414
Weighted average number of shares outstanding (including special warrants) 189,215 160,530 107,711
Total shareholders' equity 1,610,781 1,446,656 595,913
Average common shareholders' equity 1,356,019 977,678 460,946
Net income (loss) per share [basic and diluted] 0.07 - 0.04

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

As at and for the three-month periods ended
March 31, December 31, March 31
2014 2013 2013
Ratios
Financial leverage ratio 1.53:1 1.31:1 1.73:1
Average financial leverage ratio 1.61:1 1.79:1 2.36:1
Allowance for credit losses as a percentage of finance receivables 0.37 % 0.40 % 0.68 %
Annualized credit loss provision as a percentage of average finance receivables 0.43 % 0.18 % 0.46 %
Portfolio average remaining life (in months, excluding equipment under operating leases) 28.8 27.8 21.9
Adjusted operating income on average common shareholders' equity 7.76 % 8.33 % 10.45 %
Adjusted operating income on average earning assets 3.13 % 3.32 % 3.45 %
After-tax adjusted operating income on average common shareholders' equity 6.09 % 6.15 % 7.50 %
After-tax adjusted operating income on average earning assets 2.45 % 2.45 % 2.48 %
Book value per share $ 7.22 $ 7.05 $ 4.75
(1) All are ratios presented on an annualized basis.

Results of Operations - For the three months ended March 31, 2014, and December 31, 2013 and March 31, 2013

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

For the three-month periods ended
(in 000's for stated values, except per unit amounts) March 31,
2014
$
December 31,
2013
$
March 31,
2013
$
Net Financial Income
Interest income (1) 48,188 42,286 26,444
Rental revenue, net (1) (2) 10,174 1,058 -
Total interest income and rental revenue, net 58,362 43,344 26,444
Interest expense 21,533 16,745 9,043
Net interest income and rental revenue, net before provision forcredit losses 36,829 26,599 17,401
Provision for credit losses 2,958 1,064 1,571
Net interest income and rental revenue, net 33,871 25,535 15,830
Other revenue items 11,096 8,665 6,965
Net financial income 44,967 34,200 22,795
Operating Expenses
Salaries, wages and benefits 12,567 10,015 7,162
General and administration expenses 6,098 3,826 3,590
Share-based compensation 4,194 4,212 1,452
22,859 18,053 12,204
Business acquisition costs
Amortization of intangibles from acquisition 1,026 1,176 339
Integration costs - 200 3,000
Transaction costs - 14,560 -
1,026 15,936 3,339
Net income/(loss) before taxes 21,082 211 7,252
Tax expense/(recovery) 5,246 489 2,567
Net income/(loss) for the period 15,836 (278 ) 4,685
Net income/(loss) per share [basic and diluted] $ 0.07 - $ 0.04
(1) Prior periods have been reclassified to conform to the current period presentation of equipment under operating leases and related rental revenue, net.
(2) 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 year ended March 31, 2014 to $3,799.0 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 period in the amount of $1,084.0 million, helped by the large contribution of the recently introduced Trinity vendor program, net of repayments, syndication activities and amortization of equipment under operating leases for $312.6 million, and others increases of $25.3 million.

The Company is reporting a net income of $15.8 million for the three months ended March 31, 2014, compared to net income of $4.7 million in the comparative period ended March 31, 2013, and a net loss of $0.3 million in the immediately preceding quarter. Net income per share was $0.07 for the three-months ended March 31, 2014, compared to $0.04 for the comparative period ended March 31, 2013 and a net loss per share of $0.00 for the immediately preceding quarter. The improved results over the comparative period are due to improved operating margins as the Company gains scale and is able to better leverage its fixed cost infrastructure. The improved results over the immediately preceding quarter 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 March 31, 2014, the Company is reporting adjusted operating income of $26.3 million and after-tax adjusted operating income per share of $0.10, compared to $12.0 million in adjusted operating income or $0.08 in after tax operating income per share for the comparative three months ended March 31, 2013, and compared to $20.4 million in adjusted operating income or $0.09 in after tax operating income per share for the immediately preceding quarter ended December 31, 2013.

The above after-tax adjusted operating income per share of $0.10 also reflects the introduction of operating lease accounting which has negatively impacted that number by $0.014. The Company estimates that based solely on an average book of $1 billion of rail cars under operating leases during 2014, income before taxes will be negatively affected by approximately $15 million. As indicated previously, this income is deferred to future periods under the operating lease model but will have negative after-tax earnings per share of approximately $0.06 in 2014 compared to a finance lease accounting basis.

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 the 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 $0.10 for the current quarter ended March 31, 2014, free operating cash flows per share reaches $0.14 per share.

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) March 31,
2014
$
December 31,
2013
$
Cash 42,093 12,401
Restricted cash 102,066 103,550
Finance receivables 2,985,515 2,763,228
Equipment under operating leases 813,480 239,055
Derivative financial instruments 1,129 -
Deferred tax assets 31,729 28,231
Non-portfolio assets 258,951 308,188
Total assets 4,234,963 3,454,653
Accounts payable and accrued liabilities 113,254 80,917
Secured borrowings 2,467,016 1,893,910
Derivative financial instruments 7,747 3,014
Deferred tax liabilities 36,165 30,156
Total liabilities 2,624,182 2,007,997
Shareholders' equity 1,610,781 1,446,656
Total liabilities and shareholders' equity 4,234,963 3,454,653

About Element Financial Corporation

With total assets in excess of $4.2 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.

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