CA - Element Fleet Management Corp. (ELEEF) Q4 2022 Earnings Call Transcript

2023-03-07 13:23:02 ET

Element Fleet Management Corp. (ELEEF)

Q4 2022 Earnings Conference Call

March 7, 2023 08:00 ET

Company Participants

Jay Forbes - President and Chief Executive Officer

Frank Ruperto - Executive Vice President and Chief Financial Officer

Laura Dottori-Attanasio - President and future Chief Executive Officer

Conference Call Participants

Graham Ryding - TD Securities

Paul Holden - CIBC

Jaeme Gloyn - National Bank Financial

Tom MacKinnon - BMO Capital

Presentation

Operator

Thank you for standing by. This is the conference operator. Welcome to the Element Fleet Management Fourth Quarter and Full Year 2022 Financial and Operating Results Conference Call. [Operator Instructions]

Element wishes to remind listeners that some of the information in today’s call includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties and the company refers you to the cautionary statements and risk factors in its year end and most recent MD&A as well as the most recent AIF for a description of these risks and uncertainties and assumptions. Although management believes that the expectations reflected in the statements are reasonable, it can give no assurance that the expectations reflected in any forward-looking statements will prove to be correct.

Element’s earnings press release, financial statements, MD&A, supplementary information document, quarterly investor presentation and today’s call include references to non-GAAP measures, which management believes are helpful to present the company and its operations in ways that are useful to investors. A reconciliation of these non-GAAP measures to IFRS measures can be found in the MD&A.

I would now like to turn the call over to Jay Forbes, President and Chief Executive Officer of Element. Please go ahead.

Jay Forbes

Thank you, operator and good morning to all of you joining us on the call to discuss Element’s strong fourth quarter and record full year ‘22 results. Some early successes in 2023 as the organization capitalizes on the momentum of the previous year and our outlook for the remainder of this year, including our growing conviction in the business’ ability to deliver the high-end of key metrics for full 2023 results guidance.

Joining me on the call this morning as usual is our Executive Vice President and Chief Financial Officer, Frank Ruperto and for the first time, our President and future Chief Executive Officer, Laura Dottori-Attanasio. Like everyone else at Element, I am absolutely thrilled to have Laura as the next CEO of this company. The time we spent together this last month only served to bolster my confidence in both Laura’s ability to lead the continued execution of Element’s organic growth strategy and as importantly, immerse herself into our unique culture, demonstrating acceptance and alignment with the cultural norms that have underpinned Element’s business successes of these last 5 years.

So before we go any further, Laura, why don’t I give you the floor?

Laura Dottori-Attanasio

Thank you, Jay and good morning everyone. I want to start by expressing how grateful I am to you, Jay and Frank and to the board and to all my Element colleagues for the very warm and genuine welcome that I received upon my arrival. I am really honored to be a part of the Element team. And while it’s only been about 3 weeks and I am still early in my learning journey, I am really impressed with our people and our culture as it really is core to our being able to successfully deliver a consistent superior client experience and to execute on our strategy. The transparency with which we operate, I think should really provide our investors with great comfort in their investment. Our strategy is clear and it’s really demonstrated strong performance to-date. Our strategy has also enabled all that the Element team has accomplished over the last few years under Jay’s amazing leadership.

We have everything in place, strong business fundamentals, a clear strategy, the right people, a brilliant culture, a scalable operating platform, and a positive landscape of growth opportunity in the markets we serve. Everything is in place for Element to continue to deliver into the future. Not to mention the free cash flow profile and return to capital opportunities that continue to be incredibly compelling from where I sit. And so finally, I do look forward to meeting with you, our investors and our analysts and learning from you and look forward to working with the team to deliver on our strategy and to profitably grow our business and return to our shareholders.

So, thank you, Jay and back to you.

Jay Forbes

Thank you, Laura. It’s been a real pleasure working shoulder-to-shoulder with you this past month as you establish new relationships and deepen your understanding of our business. I look forward to more of the same in the coming months. Laura will be taking the helm up there, an organization that continues to perform better than ever and moreover could not be better positioned to sustain and build on the success. As you can imagine, everyone at Element is incredibly proud of the record year we delivered for all of our stakeholders in 2022.

Commercial wins and the unique attributes of our business model generated 16.2% year-over year-growth in net revenue. The scalability of our operating platform was evidenced by improvements in both operational efficiency and effectiveness as measured by our Global Balanced Scorecard and translated this 16% net revenue growth into a 22% increase in adjusted operating income. Our capital-lighter business model, improved pre-tax return on common equity drove record 18.6% for 2022. And free cash flow per share growth of 28.6% year-over-year allowed us to increase our common dividend to 29% last quarter, eliminate our Series I preferred shares in the second quarter and returned some $193 million of cash to our common shareholders through buybacks of almost 14 million common shares in 2022 under our NCIB program.

Our remarkable results are not limited to Element’s income statement, balance sheet and supplementary financial metrics. Our clients are receiving a consistent superior service experience, which is evident from the record high net promoter scores we received in 2022 across our business as well as the 99% client retention rate we have attained on that same basis. In fact, Element exceeded target on every one of our 13 Global Balanced Scorecard metrics for 2022 and in doing so, created $1.9 billion of market value for our common shareholders. This degree of outperformance on our Global Balanced Scorecard and associated increase in shareholder value tells us that Element’s three-pronged organic growth strategy is delivering the intended results. And given this tremendous level of success and the positive momentum it has created, Element’s will continue to execute the same winning strategy in 2023 and for the foreseeable future thereafter.

Let me take a moment to elaborate on the momentum we have created and the reasons we think it will continue to build throughout 2023 and let’s start with momentum that we built in commercial. As previously disclosed, 3 months ago, we secured the entire fleet management services and financing mandate for Rentokil Terminix U.S. fleet. This win will add 16,500 vehicles to Element’s vehicles under management, a full 1% growth to fund, while retaining the 4,700 vehicles previously under our management, all with a single client. This is our largest mega fleet win since initiating our pivot to growth strategy back in 2021. It will establish Rentokil Terminix as one of Element’s top 10 clients globally.

While this win was a great way to cap off 2022, 2023 has begun with further notable commercial success. First in January, we were awarded the mandate to be Armada’s official fleet management service provider in Australia and New Zealand as they expand our successful U.S. program partnership into that region. You may recall that our relationship with Armada had already expanded into Mexico last year, where the fleet is growing as we onboard new vehicles. Second, more recently in Mexico, we won the opportunity to provide fleet financing and services to Oxxo, the largest convenience store chain in the country, which is currently self managing their fleet of some 10,000 light and medium duty vehicles. We started with 1,000 vehicles on Element leases and services with the potential to grow our value-added footprint within Oxxo’s mega fleet over the next 3 years.

Third, we recently won the mandate to provide fleet management services to TELUS, a world leading communications and technology company. TELUS would add over 4,000 assets to our BUM count and will become one of the top 5 clients on Canadian soil. This is another mega fleet win for Element by local market standards. Rentokil in the U.S.; Armada in ANZ, Oxxo in Mexico and TELUS in Canada, just four examples of substantial commercial wins in the last 3 months and they show the confidence that clients have in Element managing their large and complex fleets of mission-critical vehicles and doing so at a lower total cost of operations than our competitors or in-house self-management.

We have every confidence in our commercial team’s ability to sustain and build on this momentum and in doing so continue to deliver for our clients, our business and our investors throughout the coming year and beyond. Some of our confidence in ongoing commercial success comes from the convergence of Element’s forward momentum on one hand and beneficial trends in our industry and the broader economy on the other hand. OEM production continues to improve, thereby reducing vehicle delivery delays, as evidenced by our $6.6 billion of originations in 2022 and an expected $7.5 billion to $8 billion of originations in 2023. Our competitors are distracted by new ownership structures and operational integration projects, affording us opportunities to both steal market share and enjoy first-mover advantage at converting self-managed fleets into Element clients.

While our business benefits from inflation due to our cost plus revenue streams, perhaps more importantly, inflation makes our fleet cost saving value proposition all the more compelling. A recessionary environment increases this value to our current and prospective clients, especially self-managed fleets, thereby providing us further offer to introduce to expand our business. Notwithstanding these externalities, the core of my conviction in Element’s ability to sustain our success in 2023 and beyond comes from the fundamentals. Our organization is in the best shape it has ever been by naturally, operationally, culturally and we have never been better equipped to a position commercially. We have the scale advantages of our unmatched service supplier networks and our best-in-class operating platform, which magnifies net revenue growth into superior operating income and cash flow growth.

We have competitive differentiators, most notably, our strategic consulting services teams and Arc by Element, our wing-to-wing EV offering both of which you heard about at our Investor Day last November. And as you saw mentioned heard from at our Investor Day, we have the best executive and senior leaders in our industry, all of them are lined on our three strategic growth priorities. 6% to 8% annual organic revenue growth achieved to top scalable operating platform thereby ensuring profitability and expanding operating margins, a capital lighter business model driven by a focus on service revenue growth and strategically syndicating fleet assets, both of which enhance return on equity. And growing this free cash flow per share, which are returning – let’s return into shareholders first through increasing the common dividend, second through the retiring cost fleet at legacy preferred shares, and third through the repurchasing of common shares pursuant to our rolling NCIB program.

Let me turn it over to Frank now to further discuss our Q4 and full year ‘22 results as well as our outlook for 2023. Frank?

Frank Ruperto

Thank you, Jay and good morning everyone. We had a very strong fourth quarter capping off a record year for Element. As I walk you through our Q4 2022 results, I am going to cite growth on a constant currency basis over Q4 ‘21. The U.S. dollar strengthened materially against the Canadian dollar in 2022, which significantly benefited Q4 2022 results in particular relative to Q4 2021. Constant currency eliminates those benefits making for cleaner comparability between periods. Net revenue grew 12.2% or $31.8 million year-over-year. The biggest driver of which was services revenue growth of 13.9% or $18.2 million from Q4 2021. The drivers of fourth quarter services revenue growth year-over-year are broken out in our supplementary information document and MD&A results commentary.

Element’s scalable operating platform magnified our net revenue growth in the fourth quarter into 14.9% growth in adjusted operating income. Operating margins expanded 120 basis points from Q4 of last year to 51.4% for the fourth quarter this year. Q4 AOI translated into $0.27 of adjusted EPS, which is $0.05 growth year-over-year. Free cash flow per share of $0.30 in Q4 2022 was a $0.01 less than Q4 last year. As you’ll have seen in our free cash flow disclosure in the supplementary, we incurred an above normal amount of cash cost in the fourth quarter of 2022 related to upfront cost associated with a large number of commercial wins we achieved as well as the timing of certain tax payments. These cash flows are typically more spread out across all four quarters.

Q4 2022 versus Q3 2022 or quarter-over-quarter, there was also strengthening of the U.S. dollar against the Canadian dollar. So I am going to say quarter-over-quarter growth for you in constant currency as well. I am also going to exclude the $17 million of non-recurring revenue that we earned in Q3 of this year, such that my comments relate solely to organic growth of the following metrics quarter-over-quarter, again also on a constant currency basis.

Net revenue grew quarter-over-quarter sequentially $8 million or 2.8% driven primarily by net financing revenue growth of $4.3 million or 3.5% and syndication revenue growth of $3.6 million or 25.9%. Adjusted operating income declined by $4.7 million or 3% quarter-over-quarter with adjusted operating expense growth outpacing net revenue growth as expected and previously communicated. As we said in last quarter’s disclosures, we reinvested into our commercial capabilities beginning in the fourth quarter to support our elevated 6% to 8% long-term organic annual net revenue growth target range and take advantage of both the momentum we are enjoying as well as the market opportunities that are being presented as the competitive landscape evolves. We are continuing to invest in commercial capabilities throughout 2023, which will moderate the operating margin expansion our scalable platform is otherwise able to deliver given healthy net revenue growth, which we fully expect and are guiding to.

Turning now to discuss full year 2022 results controlling for FX tailwind and backing out the $25 million of non-recurring revenue earned in 2022, net revenue grew 11.3% from 2021 driven by services revenue growth of 17.7% and NFR growth of 8.2%. 2022 service revenue growth was powered by all three forms of share of wallet expansion. Penetration with existing clients who are increasingly turning to Element’s services for help managing their growing fleet operating costs, increased utilization of our services, including our managed maintenance service, which benefited from more costly repairs, given the elevated average age of client’s fleets due to new vehicle production delays. And third, inflationary increases in the cost of fuel, parts and labor, which benefit Element as a function of our cost plus business.

Our scalable operating platform magnified 11.3% net revenue growth into 14.7% AOI growth or 170 basis points of operating margin expansion to 54.2% for the year. Strong growth in AOI, combined with share repurchases under our NCIB have produced adjusted EPS growth of $0.20 in 2022 to $1.05 per share and free cash flow per share growth of $0.24 in 2022 to $1.31 per share excluding non-recurring items. 2022 services revenue growth, along with the continued strategic syndication of our assets, contribute to the advancement of our capital lighter business model. We syndicated $2.8 billion of assets in 2022 and generated $57.3 million of syndication revenue, a $9.4 million decrease year-over-year. The lower syndication revenue yield on assets syndicated this year is attributable to the volatile interest rate environment, still relatively constrained origination volumes and the absence of any syndication of Armada assets in 2022, which historically commanded higher yields. Syndication remains a key enabler of our capital lighter business model, which enhances our return on equity. As Jay noted, pre-tax return on common equity improved to a record 18.6% at year end 2022, which is 320 basis point improvement over 2021.

Turning finally to our outlook for 2023 as noted throughout our disclosures this quarter, we have confidence in full year 2023 results guidance ranges and growing conviction in the business’ ability to meet the high end of certain of these ranges. We will update our guidance ranges when we report Q1 results. As stated last quarter, we are guiding to $1.14 billion to $1.17 billion of net revenue in 2023, 54% to 55% operating margins, $615 million to $645 million of adjusted operating income, $1.12 to $1.17 of adjusted EPS, and $1.45 to $1.50 of free cash flow per share. This will be underpinned by $7.5 billion to $8 billion of origination volume and between $3 billion and $4 billion of syndication volume. This guidance is based on a Canadian to U.S. dollar exchange rate of 1.29, which was the exchange rate at the time we issued guidance in November, which we acknowledge is 3.5% to 4% below where the Canadian dollar is trading today opposite to U.S. dollar. As always, we do not take a view on future FX rates and therefore focus on our performance on a constant currency basis. Should Canadian to U.S. dollar exchange rates stay at current levels that will provide upside to our recorded results relative to guidance.

On the topic of syndication volume in 2023, we have reduced our expected volume level since we last published this outlook in November. The range reduction from $4 billion to $4.5 billion of syndication volume for 2023 now to $3 billion to $4 billion of syndication volume this year, reflects our strategic decision to hold on book in the short-term some of the leases we would otherwise have planned to syndicate over the course of this year due to volatile rate environment and the desire to optimize syndication yields when we do bring assets to market. These levels are consistent with our growth in originations and would also continue to represent record syndication volumes. We think this is the best course of action for the time being given the volatile interest rate environment and expansion of corporate spreads in excess of historical norms. Recall that we price and originate our leases as a matter of policy on economic terms that we would be willing to hold on book for the entirety of their duration. This is purely a pricing decision as demand for assets and syndication market remains robust.

We believe this demand is likely to increase over the course of the year given our expectation of a decrease in alternative capital deployment opportunities for many of our syndication investors and the attractiveness of our lease assets. We continue to expect growth in vehicles under management for 2023 based on the growing number of commercial wins we are securing. That said, we are likely to see a modest decline in VUM in Q4. We had ended our provision of white label services to competitor and we will see those vehicles with a relatively modest revenue per VUM roll off in the second quarter. While commercial additions will be strong in the quarter, they may not be large enough to offset those lower value units to party. The economic impact to our business will be immaterial and was factored into the results guidance we provided in November.

Lastly, as you update your model for 2023, here are few items that should help. We expect our adjusted effective tax rate to be somewhere between 24% and 26% again in 2023. Many external factors impact us on the margin, including currency and the dispersion of earnings by geography, amongst other variables. We will let you know as we progress through the year if our ETR expectations change. That being said, as you know, ETR is an accounting construct and our actual cash tax obligations remained materially lower. We expect cash taxes to be approximately $55 million in 2023. And finally, we expect sustaining capital investments to remain approximately $55 million in 2023.

With that, let me turn it back over to Jay.

Jay Forbes

Thanks, Frank. Before we open it up for questions, I’d like to give credit for the company’s outstanding performance to my 2,500 colleagues across 5 countries who comprise what we refer to internally as simply our people. I have said it before and you will hear it time and time again about Element, our people are our greatest source of competitive differentiation and the wellspring of our client-centric culture. I want to take this opportunity to thank each and every one of them for their dedication, their agility, their collaboration, not just in 2022 but throughout my tenure here at Element. This organization would not be where it is today without them and Element is what it is today because of them, the undisputed fleet management market leader in every geography we serve. As I prepare to pass the CEO baton to Laura in 2 months’ time, I could not be more excited for this company’s future and have the ultimate confidence that Element will continue its momentum and success in 2023 and beyond.

With that, let’s turn it over to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Graham Ryding of TD Securities. Please go ahead.

Graham Ryding

Hi, good morning. Maybe I will just start with the update on those mega fleet wins year-to-date. Any color that you can provide on what you think those will contribute in terms of revenue growth in 2023?

Frank Ruperto

Good morning, Graham. Yes, we are excited, closing Rentokil Terminix and then quickly following with Armada, Oxxo, TELUS, and many others, the commercials translating from prospect to clients really set us up well for a strong onboarding of these new clients from a services perspective throughout 2023 and then legging into the fleet and financing of those fleet assets as the existing fleet begins to turn over and those new originations are done by our company and funded by our company. So as we have explained in the past, a commercial win give us an opportunity for an immediate onboarding of services and the generation of service revenue. And typically, we are able to onboard these fleets, we begin to produce those revenue within a quarter, no more than two of successfully signing a contract with these large clients and then as say, the finance revenue will begin to eke in and will build over the course of 3 or 4 years as the existing fleet in the hands of our competitors, gets matures and gets replaced by new vehicles on our books.

Graham Ryding

Okay, perfect. So it sounds like with Oxxo and TELUS, you are winning these mandates from competitors as opposed to these being this is in the conversion of a self-managed fleet?

Frank Ruperto

Those two examples are perfect illustration of both concepts. So, TELUS was a steal from a competitor and Oxxo was a self-managed fleet. And the Oxxo is a great example of the strategy that we have successfully deployed in Mexico over the years, one of land and expand. So they will enter into a company like Oxxo who has 10,000 plus vehicles in their fleet. But the company will offer an opportunity for us to enter, take a smaller portion of that fleet and demonstrate our value-add through the provision of both financing and services. And as we demonstrate the value that we can bring through lowering their total cost of operations of that segment of the fleet, we are inevitably awarded with more and more of the fleet mandate for those companies. So yes, those are perfect examples of both stealing share from our competitors, capitalizing on both the strength of our value proposition and some disarray that’s taken place in the marketplace and continued conversion of these self-managed fleets as we help them understand that there is 15% to 20% annualized savings available in trusting their fleets to an organization like ourselves.

Graham Ryding

Okay, that’s great. I will leave it there. I don’t want to get in trouble for asking too many questions. Thank you.

Frank Ruperto

Thank you.

Operator

Our next question comes from Paul Holden of CIBC. Please go ahead.

Paul Holden

Thank you. Good morning. So just want to ask about the guidance on the lower syndication volume. And my question is you didn’t change the net revenue guidance or earnings guidance despite expecting lower syndication?

Frank Ruperto

Yes, so good question. Our business is very strong, and we continue to see strong momentum coming out of ‘22 and going into ‘23, which gives us great confidence. The commercial success continues to add new clients across our portfolio of both leasing and services. And we are onboarding several mega fleets to Jay discussed. And we also continue to see the economic backdrop is conducive to our business. So, when we look at that, we have also discussed this many times our billion – our business has significant resiliency and offsetting countermeasures when we see these things and as we make proactive decisions to wait on syndicating some of the lease assets to optimize our yield. So, we are benefiting in the other revenue streams, as you pointed out, both net financing revenue and in the service revenue in general based on our outlook here. And they continue to be positively impacted by the same economic conditions within which we are pulling back some of the syndication to optimize the yield. And I just want to reiterate, the demand remains high and our access to the syndication market is deep. So, this is a proactive decision deciding to hold back on certain syndication volume until a more opportune time. We do believe the second half of 2023 will provide an opportunity for higher volumes at more attractive yields, as rate expectations begin to settle, and our investor partners look more aggressively for assets to invest in. And just remember, in their shoes, there is pressure on other asset classes, such as mortgages, corporate loans, and consumer vehicle loan volumes, which will benefit our assets as an available source of investment, as well as the added benefit of the tax benefits derived from our product as we get towards year end, for some of these institutions.

Paul Holden

Got it. And then second question is related to operating expenses, there was obviously jump in G&A this quarter and you adjust some of it. So, I guess what I am trying to get at for G&A specifically is, were there sort of some abnormal expenses this quarter or really, what is a good run-rate going forward? And as you think about those investments for future growth, you have highlighted, is this a result of some of those mega fleet wins you talked about or to facilitate further wins or perhaps the answer is both?

Jay Forbes

So, our model is very focused on the scalability aspect, right. So, we always intend to grow our revenues in excess of our G&A, our broad G&A and CapEx or overall OpEx, and therefore expand margins. When you look at our guidance, we are anticipating that to continue next year, albeit not at the level of 170 basis points that we realized in 2022. And the reason is exactly as stated, We are continuing to invest in our commercial growth, because we see significant opportunities in the commercial market based on the competitive landscape, and the economic backdrop that should drive clients to look for ways to lower their overall total cost of ownership, as we move forward here, going there. And so, with that means is, in particular investment into the commercial organization, getting in front of clients, driving more client interactions is a big component of this, to get to that higher growth rates of 6% to 8%, that we raised last quarter from the long-term view of 4% to 6%. So, when we factor all that together, what I would take away is growth in G&A or OpEx consistent with a harder push into the commercial arenas to drive that higher growth rates that we have put forward there. But secondly and very importantly, a continued focus on the scalability of the business so that we can continue to expand margins as that growth begins to generate.

Paul Holden

Got it. Okay. Thank you.

Operator

Our next question comes from Jaeme Gloyn of National Bank Financial. Please go ahead.

Jaeme Gloyn

Yes. Thanks. Good morning. First question is on the gain on sale results in this quarter at picking up quarter-over-quarter. So, just wanted to get a little bit more color as to whether that’s volume driven, if prices are holding in the ANZ, the Mexico market, maybe a little bit more color about how that’s progressing, and your thoughts on that for the next few quarters?

Jay Forbes

Good morning Jaeme. We have been very pleased with the pricing dynamics in the ANZ marketplace, specifically and to a lesser extent in Mexico, in terms of used vehicle pricing holding up well through the cycle. And early indications as we enter 2023, is that will largely continue. We do expect some moderation and potential for smallish declines in ANZ throughout 2023. And that has been factored into our outlook. But as Frank has communicated in past, any degradation that we may see in price per unit should also be accompanied with greater originations which will in turn create greater remarketing opportunities more volume and an opportunity for us to continue to sustain this level of being on sale much through 2023. So, yes, the continued dynamics, both the OEM production and economic outlook are combining to keep useful pricing, robust in both ANZ and Mexico and allowing us to enjoy these extraordinary gains on sale.

Jaeme Gloyn

Okay. Got it. And then the second question, as looking at service revenues, specifically, and against vehicles under management for service only, service finance, so thinking about a service revenue per vehicle under management, that metric is up kind of like 14% to 16% in the last couple of quarters. Are you able to break that down in terms of like, how much is inflationary impacts, how much is penetration impacts, and are these like growth rates on a revenue per vehicle level that are sustainable over the next few quarters?

Frank Ruperto

So, there is a number of different dimensions to that. So, maybe if I could help break it down. So firstly, in the supplementary, we give you a good built, a nice walk in terms of the drivers behind service revenue growth. Then give you an idea from the U.S., Canada perspective in terms of the success that we have enjoyed in penetrating the existing client base with additional services, the utilization of those services, by drivers and clients, as well as pricing actions and inflation. And what that is added to the U.S.-Canadian profile, and then we provide you kind of an aggregate service revenue increase for Mexico and ANZ. So, I think that provides you with some interesting data points that will help you kind of reverse engineer if you will, some of that service revenue per vehicle increase. Secondly, as we talked about Jaeme, the power of introducing metrics like VUM. It encourages the organization to embrace the data and begin to interrogate that data to better understand. And the origins of the data and how we might be able to better manage the performance of the business as we deepen our understanding of some of the key and core drivers of the business. And so as we think about vehicles under management, one of the key learnings that has come out of it for our organization is not all clients are created equal. And as we look at their ROI profiles, we look at their contribution to operating margin. We have found organizations that have been long standing clients that, frankly, just haven’t paid the full price. And as we start to identify those work with those clients, that has given us an opportunity to increase the revenue per client through price increases, or some situation says resulted in those clients leaving the organization given that the economics weren’t satisfactory for us. And hence the evolution, both VUM as a number and metric itself, but also revenue per VUM and the increases that you are seeing. So, expect us to again, continue to work with this concept, to drive its understanding and utilization as a means of furthering and deepening the knowledge of the business our employees have. And with that an expectation that they will take actions in the best interest of not only our clients, but our investors as well.

Jaeme Gloyn

Great. Thanks.

Operator

[Operator Instructions] Our next question comes from Tom MacKinnon of BMO Capital. Please go ahead.

Tom MacKinnon

Yes. Thanks very much. Just a follow-up question with respect to servicing revenue, it was flat quarter-over-quarter. And that’s even with the benefit of currency, helping us in quarter-over-quarter. Can you just remind us a bit on the seasonality, I would have thought the fourth quarter would have had some additional services, perhaps snow tires or something like that would have helped out with servicing revenue on a quarter-over-quarter basis or was there anything unusual in the third quarter that may have upset? Anything, you just remind us a little bit of any seasonality with respect to servicing revenue? Thanks.

Frank Ruperto

Good morning, Tom. Listen, I have that exact same question back in January 2019. As I surveyed the landscape and thought ‘20, the fourth quarter should have been a fairly significant quarter for the company in terms of expenditures like that and living in Canada. Yes, snow tires were front of mind as well. As it turns out, the fourth quarter is actually usually a flat or down quarter, servicing revenue for us costs to currency basis. And we really do miss that kind of two weeks of the holiday season spent in December and it is reflected in kind of that flat quarter. As we look at year-over-year, obviously, we are up 14% on a constant currency basis, 21% before adjusting for FX. So, we are seeing the benefits of our penetration utilization and pricing strategies take hold in terms of this as well as the increase in the vehicles under management and the service attachment says we gain as a consequence of that. So year-over-year, I think is a better way to look at the services revenue for the fourth quarter. And certainly as we think about entering 2023, and what fourth quarter service revenue is telling us big bumps up, very encouraged by the commercial actions that we have been able to take to deepen the share of wallet. We are excited by the increases in vehicles under management that we are seeing and communicated as a few examples of those today. And so very bullish in terms of the service revenue profile for 2023.

Tom MacKinnon

Okay. Thanks. And then the follow-up to with respect to the decision on syndication at least temporarily. How do you balance that with an eye leverage? I think when we initially embarked on this syndication strategy, it was to help decrease the leverage into that tangible leverage metric. Can you remind us, where it is, where you want it to be? And is there any danger that if you keep putting off this syndication, and keep it on book that you might get into an area where that becomes a little bit higher and we should maybe think about it more?

Jay Forbes

Yes. Thanks for the question. I would say a couple of things. One is the answer to your last part of this question, is our concern that the leverage will creep up, the answer is no, we can manage that. And as I pointed out, syndication a huge benefit as a syndication piece is just the velocity of the cash and being able to put it into new deals and let elaborate, so that’s a great observation as well as the P&L impact and the capital lighter component of it. However, the market demand is deep. So, this is a choice on us to hold the assets. If we ever wanted to sell the assets, we believe there is very viable and open market to do that. And we think that demand will continue to improve over the course of the year, our leverage targets 6.25 to 6.75. And as we have plans syndication on a scaled back perspective, what we have done is said we are going to make sure syndication keeps up with the pace of originations. And in doing so that will naturally manage and hold our leverage levels relatively in line with our guidance and our key goalposts in regards to that syndication component. So, we have got a lot of levers, but even with this reduced volume, we did so with an eye the tangible leverage component of it, to ensure that we stay within those boundaries that we have set forth for the investors and the rating agencies.

Tom MacKinnon

Okay. Thanks. Yes. Okay. Thanks. And oh sorry, just on the rating agencies, do they look at this metric or do they – are they more debt to total cap. Yes, how do they interpret this tangible leverage metric that you use?

Frank Ruperto

They look at a host of different metrics depending on which rating agency it is. But I would tell you, our tangible leverage and those that do look at tangible leverage, we are well inside even at our target range, well inside any ratings actions by a significant amount. So, we would like to stay in that very comfortable zone or safe zone of ratings leverage because we know that’s a key business and value driver for a proposition. But we do have material room relative to where the rating agencies whatever, even consider any issues with the leverage component.

Tom MacKinnon

Okay. Thanks.

Operator

This concludes the question-and-answer session and today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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