Element Financial Achieves Breakout Results in 2012

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$58 million in revenue delivers after-tax operating income of $0.14 per share for the year ended December 31, 2012 and $0.06 per share for the quarter then ended

  • Origination volumes were $689.3 million for the year and $233.7 million for the Q4 period
    • Element Finance Q4 volumes increase to $110.4 million or 27% over the previous quarter
    • Element Fleet Q4 volumes increase to $70.8 million or 39% over the previous quarter
    • Element Capital contributes $52.5 million to Q4 originations and expands pipeline to $1.2 billion
  • Element commences process to capitalize new Fund to capture increased Element Capital deal flow
  • Total revenue was $57.9 million for the year and $23.7 million for the Q4 period
  • Financial revenue was $53.0 million for the year and $21.9 million for the Q4 period
  • Operating income was $14.9 million for the year and $6.7 million for the Q4 period
  • After-tax operating income per share was $0.14 for the year and $0.06 for the Q4 period
  • Operating expenses were 3.53% of average portfolio assets for the year and 3.26% for the Q4 period versus 3.36% for the Q3 period
  • Total assets increased by 36% over the immediately previous quarter to $1.5 billion
  • Credit losses and delinquencies remain very low

TORONTO, Feb. 19, 2013 /CNW/ - Element Financial Corporation (TSX:EFN) ("Element" or "the Company"), Canada's leading independent equipment finance company, today reported that record origination levels of $689.3 million contributed to revenue of  $57.9 million, operating income of $14.9 million and operating income per share of $0.14 on an after-tax basis for the twelve month period ended December 31, 2012.

The Company also announced today that it is establishing the Element Equipment Finance Fund (the "Fund") as a funding vehicle to complement the Company's existing securitization and syndication arrangements.  The Fund will be capitalized with equity from Element and debt from Element's institutional funding partners and will specifically focus on secured equipment financing transactions in the $1.5 to $25 million range. With target leverage for the Fund in the range of 70% to 80%, Element believes it can significantly increase returns on the capital it contributes to this funding vehicle.

"To fully benefit from Element Capital's pipeline, I am pleased to report that Element has commenced the process to fund its first $500 million funding vehicle to finance transactions in the $1.5 million to $25.0 million range," said Steven Hudson, Element's Chairman and CEO. "Together with our own additional financial resources and with institutional support, we expect this new fund will provide Element Capital with increased profitability that is currently available for Element Finance's mid ticket business," added Mr. Hudson.

For the three-month period ended December 31, 2012, the Company reported record origination levels of $233.7 million contributing to revenue of $23.7 million, operating income of $6.7 million and operating income per share of $0.06 on an after-tax basis.

Of the $233.7 million of new originations booked in the fourth quarter, Element Finance contributed $110.4 million (47%), Element Capital contributed $52.5 million (23%) and Element Fleet contributed $70.8 million (30%).

Element closed its acquisition of CoActiv Capital Partners Inc. late in Q4 2012. As a result, the origination volumes, revenue, and operating income referenced above only include results from CoActiv's operations for 15 business days for the month of December. Financial contributions from the recently completed acquisition of Nexcap Finance Corporation acquisition are not included in the above referenced figures as this transaction closed after the end of the reporting period.

"Element has deep roots in the development and management of North American vendor finance programs and we are seeing evidence of strong demand for new equipment financings across our chosen market segments," noted Mr. Hudson. "With the full impact of the key acquisitions concluded during 2012, Element should be in a strong position to generate sizable origination growth in 2013," said Mr. Hudson. "In the large-ticket segment, Element Capital has a robust pipeline currently in the range of $1.2 billion and we are also seeing particularly strong demand from established credit worthy accounts for secured equipment financings in the $1.5 million to $25 million range," noted Mr. Hudson.

Average interest income yield for the twelve month period was 8.8% for Element Finance, 7.9% for Element Capital and 6.6% for Element Fleet for an average interest income yield of 7.9%. Other non-interest income from all three business verticals contributed in increasing overall yields, before amortization of lease origination costs and provision for credit losses to 9.3%.

Delinquencies at the end of the year remain low and within Element's target at 0.28% of total finance receivables. "The quality of the finance receivables that we are originating for our balance sheet and for our funding partners remains very strong," said Mr. Hudson. "We expect secured equipment financings to continue to offer low credit losses and superior yields over the duration of their average life relative to comparable public and private debt securities," he added.

Operating expenses as a percentage of average portfolio assets decreased from 3.36% during the previous quarter, to 3.26% for the three month period ended December 31, 2012. Element's financial leverage ratio calculated on tangible assets decreased slightly during the fourth quarter over the previous quarter from 3.19:1 to 2.97:1 as a result of the increased equity resulting from the issue of Special Warrants on November 23, 2012.

"Our focus for 2013 is to deliver improved returns for our shareholders through quality origination growth, reduced operating expense as a percentage of average finance assets and the prudent application of increased leverage on our balance sheet," added Mr. Hudson.

Selected Financial Information and Financial Ratios

The following table summarizes key financial data as at and for the year ended December 31, 2012 derived from unaudited financial statements prepared in accordance with IFRS and are reported in Canadian dollars.

(in $000's for stated values, except ratios and per share amounts)       As at and for the year
ended
December 31, 2012
    As at and for the nine-month
period ended
December 31, 2011
        $     $
After tax operating income (loss) per share (basic and diluted)       0.14     (0.01)
               
Total revenue       57,984     10,386
Operating income/(loss)       14,910     (428)
Operating income/(loss) after taxes       10,941     (1,034)
Income/(loss) before taxes       (11,370)     (7,544)
Net income/(loss)       (6,420)     (6,071)
Total assets       1,508,892     416,715
Finance Receivables, net       1,294,591     231,537
Loan originations                
   New originations         689,330     119,671
   Loan acquisition       756,236     158,474
Secured borrowings       989,128     172,517
Average outstanding finance receivables       621,596     168,099
Average outstanding debt       453,356     119,624
               
Number of Shares outstanding (including Special Warrants)       102,542     66,380
               
Weighted average number of shares outstanding (including Special Warrants)       78,132     33,302
               
Total Shareholders' equity       423,425     238,341
               
Average total shareholders' equity       300,807     91,687
               

The following table summarizes the total origination by vertical for the quarter and the year ended December 31, 2012 and the quarter and the nine-month period ended December 31, 2011:

(in $000's)           For the three-
month period
ended
December 31,
2012
    For the three-
month period
ended
December 31,
2011
    As at and for
the year ended
December 31,
2012
    As at and for the
nine-month period
ended
December 31,
2011
            $     $     $     $
Element Finance           110,381     59,260     339,646     119,671
Element Capital           52,482     --     227,993    
Element Fleet           70,765     --     121,691    
            233,628     59,260     689,330     119,671
                               

Overall Performance Highlights

The Company is reporting operating income of $14.9 million for the year ended December 31, 2012 compared to a loss of $0.4 million during the nine-month period ended December 31, 2011 and after-tax operating income per share of $0.14 compared to a loss of $0.01 per share for the nine-month period ended December 31, 2011.

Total originations were $689.3 million during the year ended December 31, 2012, an increase of 476% or $569.7 million over the originations for the nine-month period ended December 31, 2011. The strong growth in the Company's origination volumes is the continued result of a combination of factors, including an expansion of the Company's in-house sales team, geographic representation across Canada, and the entry into new vertical markets such as healthcare and golf equipment finance. Growth was also driven by the entry into the large equipment financing segment following the formation of the Element Capital vertical in January 2012, which accounted for $228.0 million of the Company's total origination volume for the year ended December 31, 2012. Total originations for the year ended December 31, 2012 were also impacted by the acquisition of TLSI Holdings Inc. ("TLS"), the fleet management company purchased on June 29, 2012 which added $121.7 million of new originations, and the acquisition of CoActiv, primarily a U.S. vendor leasing operation purchased on November 30, 2012, which added $10.8 million of new originations in December 2012.

Total originations from the Company's mid-ticket Element Finance business was $339.6 million during the year ended December 31, 2012, an increase of $220.0 million or 183.8% over the $119.7 million generated during the nine-month period ended December 31, 2011. The acquisition of CoActiv on November 30, 2012 contributed $10.8 million to the total origination of the mid-ticket business for the year and will be a more substantial contributor to new originations in 2013 resulting from a full year's impact. Originations in 2013 should also benefit from the acquisition of Nexcap which the Company concluded on January 13, 2013.

Total originations for the newly acquired TLS fleet management business were $121.7 million during the year ended December 31, 2012 and in line with management's expectation resulting from this acquisition. This vertical should continue to contribute strong originations in 2013 with a full year's impact.

Total originations for the Company's large-ticket Element Capital business was $228.0 million during the year ended December 31, 2012.  As management reported in the past, this business unit will not report even volumes over quarterly periods due to the nature of the business. Element Capital continues to have a strong pipeline which is in excess of $1.2 billion at December 31, 2012.

The Company's finance receivables portfolio of leases and loans has grown substantially during the year ended December 31, 2012 from the $231.5 million reported at December 31, 2011 to the $1,294.6 million being reported at December 31, 2012. This growth is the combined effect of the total new originations for the year in the amount of $689.3 million and the $756.2 million acquired as part of the acquisitions of TLS and CoActiv net of repayments and syndication activities for $382.4 million.

On June 29, 2012, the Company completed the acquisition of TLS for cash consideration of $527.6 million. In connection with this transaction, the Company entered into a $400.0 million revolving term financing facility with a Canadian trust administered by an affiliate of a Schedule 1 bank whereby $439.6 million of finance receivables acquired as part of the TLS acquisition were sold to the trust for cash proceeds of $400 million. On September 6, 2012, the Company increased this secured borrowing facility from $400 million to $435 million to accommodate the growth in the origination activities of this business.

On November 30, 2012, the Company completed the acquisition of CoActiv for cash consideration of $298.3 million.  In connection with this transaction, the Company entered into a $50 million and a US $250 million revolving term financing facilities with a trust administered by affiliates of a Schedule 1 bank whereby $247.8 million of finance receivables acquired as part of the CoActiv acquisition were sold to the trust for proceeds of $199.3 million.

On January 13, 2013, the Company completed the acquisition of Nexcap.

During the year ended December 31, 2012, the Company increased its capitalization by raising on May 31, 2012 and November 23, 2012, a total of $80.9 million and $102.0 million, respectively, net of related after-tax issuance costs from its private placement of 16.6 million and 19.5 million special warrants, respectively. The Special Warrants were exchanged for common shares pursuant to prospectuses filed by the Company dated August 9, 2012 and February 5, 2013 respectively.

In addition, during the year, the Company renewed its funding facilities with the Canadian life insurance companies and increased those related term funding facilities by $165.7 million. As a result, as at December 31, 2012, the Company has access to term funding facilities from the Canadian life insurance companies in a total gross amount of $360.7 million (the "Term Funding Facilities"). As at December 31, 2012, an amount of $223.9 million is available for future draw against these facilities. As a result of the increases in the Term Funding Facilities and the establishment of the revolving facilities being used to finance the TLS and CoActiv assets, the Company now has access to a total of $1,105.5 million in debt financing. In 2012, the Company also increased the revolving facility used to warehouse originations before term out to the different permanent financing facilities to $125 million from the $25 million outstanding at December 31, 2011 to accommodate the increased level of activities.

The allowance for credit losses as a percentage of finance receivables has decreased to 72 basis points as at December 31, 2012 compared to 119 basis points as at December 30, 2011. The decrease in the provision as a percentage of finance receivables reflects (i) the inclusion of the assets of TLS acquired on June 29, 2012 which have a much lower credit loss experience resulting from the different risk profile of that business, and (ii) the addition of the Element Capital assets which are expected to have minimal credit losses.

Element Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
UNAUDITED
[in thousands of Canadian dollars]
         
    As at   As at
    December 31,   December 31,
    2012   2011
    $   $
         
ASSETS        
Cash                     9,997               151,086
Restricted funds               51,279   19,678
Finance receivables          1,294,591       231,537
Accounts receivable and other assets               33,055                 4,739
Notes receivable                7,125                  5,422
Property, equipment and leasehold improvements                  6,485            214
Intangible assets               24,825                     980
Deferred tax assets               16,152                 1,473
Goodwill               65,383                 1,586
              1,508,892                   416,715
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Liabilities        
Accounts payable and accrued liabilities                   68,197                 5,857
Current income taxes payable                 1,860                      —
Derivative financial instruments                    645                       —
Secured borrowings            989,128              172,517
Deferred tax liabilities               25,637                 —
Total liabilities             1,085,467                   178,374
Total shareholders' equity             423,425                   238,341
              1,508,892                   416,715
         

Element Financial Corporation            
CONSOLIDATED STATEMENTS OF OPERATIONS            
UNAUDITED            
[in thousands of Canadian dollars]            
             
    Three-month        
    Period       Year
    ended       ended
    December 31,       December 31,
    2012       2012
    $       $
             
REVENUE            
Interest income - finance receivables   19,990       49,106
Interest expense   6,424       14,724
    13,566       34,382
Provision for credit losses   987       1,957
    12,579       32,425
Amortization of lease origination costs   866       3,021
Amortization of deferred financing costs   448       1,432
    11,265       27,972
Fees and other income   3,767       8,878
    15,032       36,850
             
OPERATING EXPENSES   8,336       21,940
Income before share-based compensation, business
acquisition costs and income taxes
  6,696       14,910
Share-based compensation   920       3,107
Business acquisition costs   13,793       23,173
Loss before income taxes   (8,017)       (11,370)
Income tax benefits   (4,641)       (4,950)
Net loss for the period   (3,376)       (6,420)
After Tax Operating Income per Share   $0.06       $0.14
             

Audited Statements and MD&A

Element's audited financial statements and related management discussion and analysis as at and for the fiscal year ended December 31, 2012 are expected to be issued in March 2013 and will be available on www.sedar.com.  Such financial statements will also be mailed to shareholders in connection with the Company's forthcoming annual general meeting of shareholders.

Incorporation by Reference

The contents of this press release and the financial information contained herein will be incorporated by reference in any prospectus filed by the Company after the date hereof.

Non-GAAP Financial Measure

Operating income, a non-GAAP financial measure, reflects the income generated during the period exclusive of non-cash share-based compensation (employee stock option) expenses and excluding all business acquisition costs that are not considered as operating costs. Management believes that operating income is the true measure of the income and earnings of the Company as it excludes non-cash expenses related to securities component issued under the Company's Employee Stock Option Plan as well as all other non-operating business acquisition expenses that are now being expensed as incurred under IFRS and that would otherwise have been capitalized as part of the acquisition costs under Canadian GAAP.

Operating income after taxes is a non-GGAP financial measure and reflects the Operating income of the Company on an after tax basis from the application of the Company statutory tax rate.

About Element Financial Corporation

With total assets of approximately $1.5 billion, Element Financial Corporation is one of North America's leading independent equipment finance companies.  Element operates across North America in three verticals of the equipment finance market - Element Capital provides large ticket equipment leasing, Element Finance serves the mid-ticket equipment finance market and Element Fleet provides vehicle fleet leasing and management solutions through the Company's TLS Fleet Management division.

Forward Looking Statements

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. 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 the company. 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. 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.

 

 

SOURCE: Element Financial Corporation

For further information:

John Sadler
Senior Vice President
Corporate Affairs & Investor Relations 
(416) 386-1067 ext. 313 
jsadler@elementfinancial.ca

Michel Béland
Chief Financial Officer
(416) 386-1067 ext. 225
mbeland@elementfinancial.ca

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Element Financial Corporation

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