INVESTOR PRESENTATION - Element Financial Corporation

I N V E S T O R P R E S E N TAT I O N
J A N U A R Y, 2 0 1 5
elementcorp.com
Certain information in this presentation is forward-looking and related to anticipated financial performance, events and strategies. When used in
this context, words such as “will”, “anticipate”, “believe”, “plan”, “intend”, “target” and “expect” or similar words suggest future outcomes.
Forward-looking statements relate to, among other things, Element Financial Corporation’s (“Element”) objectives and strategy; future cash flows,
financial condition, operating performance, financial ratios, projected asset base and capital expenditures; Element’s anticipated dividend policy;
anticipated cash needs, capital requirements and need for and cost of additional financing; future assets; demand for services; Element’s
competitive position; and anticipated trends and challenges in Element’s business and the markets in which it operates.
The forward-looking information and statements contained in this presentation reflect several material factors and expectations and assumptions of
Element including, without limitation: that Element will conduct its operations in a manner consistent with its expectations and, where applicable,
consistent with past practice; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing
(and in certain circumstances, the implementation of proposed) tax and regulatory regimes; certain cost assumptions; the continued availability of
adequate debt and/or equity financing and cash flow to fund its capital and operating requirements as needed; and the extent of its liabilities.
Element believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable
but no assurance can be given that these factors, expectations and assumptions will prove to be correct.
By their nature, such forward-looking information and statements are subject to significant risks and uncertainties, which could cause the actual
results and experience to be materially different than the anticipated results. Such risks and uncertainties include, but are not limited to, operating
performance, regulatory and government decisions, competitive pressures and the ability to retain major customers, rapid technological changes,
availability and cost of financing, availability of labour and management resources and the performance of partners, contractors and suppliers.
Readers are cautioned not to place undue reliance on forward-looking statements as actual results could differ materially from the plans,
expectations, estimates or intentions expressed in the forward-looking statements. Except as required by law, Element disclaims any intention and
assumes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
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elementcorp.com
North American Equipment Finance Experts
Element Financial
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$10.5 billion total assets
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$4.0 billion market capitalization
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TSX composite index member
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FTSE Global Equity index member
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1,750 employees
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Canadian Head Offices Toronto (Corporate)
Montreal (Aviation)
Mississauga (Fleet, Commercial & Vendor)
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US Head Offices
Philadelphia, PA (Commercial & Vendor)
Baltimore, MD (Fleet)
Stamford, CT (Structured Finance)
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Corporate Governance
Board of Directors Additions
William Lovatt
Richard Venn
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40 year career in investment management
●
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Executive Vice President & Chief Financial
Officer of Great-West Lifeco
40 year career in commercial, investment
& merchant banking
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Chairman & CEO CIBC’s investment bank
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Led CIBC’s Corporate Development Group
for 10 years
— $1 Trillion in assets
— GWL, Canada Life, London Life & Irish Life
●
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Bank of Canada, Department of Finance
elementcorp.com
Investment Highlights
Why is EFN ranked “Buy” by 12 out of 12 analysts?
1. Element is delivering quality asset growth from four proven business verticals
2. Growth is geared to US commercial, industrial, transportation & manufacturing sectors
3. Increased leverage with lower funding & operating costs are driving rising ROE
4. Annuity-like cash flows from credit-worthy customers across diversified industries
5. Fee income is enhancing money-over-money returns from finance assets
6. Industry consolidation continues to surface acquisition opportunities
7. Management is very experienced and personally invested in the Company
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Element’s Business Model
We work closely with our funding partners (lifecos & banks) …
… to align their investment objectives …
… with Element’s lending criteria & process.
Duration
•
•
•
• Secured lending
Validating investments for annuities,
structured settlements and group life
and health products
Alternative asset class not correlated
to commercial or residential real
estate
• 48 to 60 month fully amortizing
Currency
• Manufacturer remarketing support
• High barriers to entry
Capital friendly
Interest Rate
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• Forward commitments
• Service differentiation
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Element’s Growth
Total Assets
2011
2012
2013
June 30, 2014
September 30, 2014
$47 Million
$428 Million
$1.8 Billion
$4.2 Billion
$10.5 Billion
 Toronto Stock Exchange
listing under EFN
 Capital Aerospace
Team
 Nexcap Finance
 Alter Moneta
 TLS Fleet
 EFN added to the TSX
Composite Index
 Co-Active Capital
Partners
 GE Capital Canadian Fleet
Services
 Trinity Industries Alliance
expansion
 Celadon Group
 PHH Acquisition
 3.47:1 Tangible Leverage
 $1.2 billion originations
 Bridger
 CargoJet
 Bush Truck Leasing
 GE Capital Helicopter
Portfolio
 Trinity Industries Alliance
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Strategically Positioned in Four Verticals
FLEET MANAGEMENT
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RAILCAR FINANCE
COMMERCIAL & VENDOR FINANCE
AVIATION FINANCE
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Return on Equity by Vertical
9
Fleet
Aviation
Rail
Commercial &
Vendor
Consolidated
Portfolio Allocation
59.1%
10.5%
10.4%
20.0%
100%
Financial Revenue
8.50%
6.65%
7.44%
7.52%
8.00%
Debt Cost
1.86%
5.10%
4.26%
3.93%
2.68%
Net Interest Margin
6.71%
3.33%
4.25%
4.18%
5.63%
Operating Expenses
3.38%
0.70%
0.92%
2.00%
2.57%
Net Income Yield Before Tax
3.33%
2.64%
3.32%
2.18%
3.06%
Advance Rate
96.0%
65.0%
75.0%
85.0%
88.4%
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Factors Driving ROE Growth in 2015
Organic Origination Growth 
Gross Average Yield
Average Cost of Funds

Average OPEX

Loss Provision (20 year average)
Tax Provision (deferred for 20 years)
Return on Assets
Fee-based Income

Leverage

Return on Equity
10

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Growth of the North American Equipment Finance Industry
Equipment Leasing Industry to Exceed US$0.9 Trillion by 2014
●
●
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New business volumes grew 9.3% in 2013
over 2012
Independent lessors grew new business
volumes 17.2% in 2013 versus 11.3% for
captives and 6.2% for Banks
New business in the small-ticket segment
grew 14.3%, in the mid-ticket segment by
8.5% and the large-ticket segment by 6.8%1
Source:
Note 1:
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9.3% Growth in US New Business
17.2% Independent Lessor New Business Growth
14.3% Small-ticket (US$25K to US$250K) New Business Growth
2014 Equipment Leasing & Finance Foundation – 2014 State of the Equipment Finance Industry
Small-ticket - US$25,000 to US250,000; Mid-ticket - US$ 250,000 to $5,000,000; Large-ticket - more than US$ 5,000,000
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North American Equipment Finance Industry
Strong Demand for New US Industrial Capacity
“Momentum in the US economy is strengthening. Meanwhile, in response to increased
confidence and rising demand, business investment is growing more rapidly.”
Bank of Canada
Monetary Policy Report
October 2014
“The US industrial machine is facing very tight capacity at the same time as growth is ramping
up. This has unshackled investment, and this time, it’s no day pass.”
Export Development Canada
Global Export Forecast
Fall 2014
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US Energy Production/Consumption
Lower energy benefits US industrial growth
“U.S. production will average 9.3 million barrels a day in 2015 – up from 8.6 million in 2014.”
U.S. Energy Administration
December 12, 2014
“U.S. gasoline demand is climbing at a rate well above its recent five-year average.”
Amrita Sen
Oil Economist
December 10, 2014
“Everyone in (US) manufacturing is smiling at the moment because manufacturers benefit twice from
cheaper oil – it costs less to run the plant and input materials cost less.”
Institute for Supply Management
Wall Street Journal
December 2, 2014
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Portfolio Diversification Mitigates Sector Risk
* Petroleum industry
represents < 4% of
Earning Assets
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Growth Drivers – Equipment Age/Efficiency
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Growth Drivers – GDP & Capital Investment
2013 Results
•
•
•
•
•
•
2015 is poised to be a breakout year for the U.S.
economy, with growth expected to top 3%
The U.S. economy has not attained this rate
since 2005
Overall, we expect the strengthening labor
market to propel GDP growth to 3.3% in 2015,
which is slightly above consensus forecasts
Equipment and software investment increased
9.3% in Q3 of 2014 after expanding 9.6% in Q2
Looking ahead, we expect growth in equipment
and software investment to moderate
somewhat, as it is unlikely to keep up the
strong pace seen in Q2 and Q3
We expect growth to be 5.9% in 2014 and
forecast 6.0% growth in 2015.
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US GDP (real)
2.2%
2
US Equipment
Investment
4.6%
3
Equipment Finance
Volume
9.3%
2014E
2015E
2016E
2017E
2018E
2.2%
3.1%
3.0%
3.0%
2.7%
Source: International Monetary Fund ; Equipment Leasing & Finance Foundation; US Department of Commerce
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Growth Drivers – GDP & Capital Investment
The (US) Commerce Department revised
up its estimate of gross domestic product
growth to a 5-per-cent annual pace, citing
stronger consumer and business spending
than it had previously assumed.
Reuters
December 23, 2014
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US Commercial & Vendor Originations
293% CAGR
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North American Portfolio Diversification
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Balance Sheet Capacity
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Portfolio Quality
Allowance for Credit Losses
as a % of Finance Receivables
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Contractual Delinquencies
As a % of Finance Receivables
September 30, 2014
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Increased Balance Sheet Scale
Larger scale drives growth across all verticals
●
Railcar Finance, Aviation Finance, Vendor Finance to benefit from balance sheet scale
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Raises overall transaction size limits and single obligor limits
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Higher commitment capacity to take deals “off the street” and deliver commitments and advisory services
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More on balance sheet financing with annuity income versus lower up front returns from syndication
RAILCAR FINANCE
Bridger – $220 million driven by railcar expertise
VENDOR FINANCE Celadon – $100 million driven by size, scope and products
AVIATION FINANCE CargoJet – $100 million driven by aviation expertise
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Increased Leverage & ROA Drives ROE
Annual Return on Average Assets
2.3%
2.5%
2.75%
Leverage
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3:1
9.2%
10.0%
11.0%
4:1
11.5%
12.5%
13.8%
5:1
13.8%
15.0%
16.5%
6:1
16.1%
17.5%
19.3%
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2015 Outlook
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Business Verticals
Fee Income Revenue Streams
2014
FLEET MANAGEMENT
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48% fee / 52% finance
Enhance services
New service offerings
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~3% OPEX
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Managed & advisory funds for investors
Transportation assets (rail/aviation)
EFN pari passu 10% to 15%
$10 mln to $200 mln transaction size
Fund size - $500 mln to $2 bln
Minimal OPEX <0.5%
Placement, structuring & management
fees ~$20 million per annum
—
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STRUCTURED FINANCE UNIT
(3rd Party Funds)
40% fee / 60% finance
Fuel, maintenance , data
+ 3% OPEX
2015
N/A
Toll roads, telematics. cameras
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Balance Sheet Outlook
December 31, 2015 (estimated)
Finance Assets & Operating Leases
Other Assets
$12.5 billion
$1.5 billion
$14.0 billion
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Debt
$10.8 billion
Equity
$2.9 billion
Leverage
3.72:1
Tangible Leverage
4.35:1
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Balance Sheet Outlook
Increase Leverage and Lower COF
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Increase senior bank line to $2 bln by year end 2014
Exit 2015 with tangible leverage at ~4.4:1
Secure additional IG rating
Diversify funding with access to rated MTN market
Bring overall average cost of funds down by 10 to 15 basis points
elementcorp.com
2015 Outlook
Organic Originations
FLEET MANAGEMENT
~ $2.6 billion
40%
RAIL FINANCE
COMMERCIAL & VENDOR FINANCE
~ $1.3 billion
20%
~ $1.6 billion
25%
AVIATION FINANCE
~ $1.0 billion
15%
$6.5
billion
Up
36%
over
2014
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2015 Outlook
Origination Distribution & Seasonality
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2015 Outlook
Earnings
$0.99 Operating EPS
$1.33 Pre-Tax EPS
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QUESTIONS
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