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Edited Transcript of EFN.TO earnings conference call or presentation 10-Aug-17 1:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Element Fleet Management Corp Earnings Call

Toronto Sep 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Element Fleet Management Corp earnings conference call or presentation Thursday, August 10, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley D. Nullmeyer

Element Fleet Management Corp. - CEO and Executive Director

* Daniel A. Jauernig

Element Fleet Management Corp. - President and COO

* Samir Zabaneh

Element Fleet Management Corp. - CFO

* Zev Korman

Element Fleet Management Corp. - SVP, IR

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Conference Call Participants

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* Brenna Phelan

Raymond James Ltd., Research Division - Equity Analyst

* Geoffrey Kwan

RBC Capital Markets, LLC, Research Division - Analyst

* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* John Aiken

Barclays PLC, Research Division - Director and Senior Analyst

* Mario Mendonca

TD Securities Equity Research - MD and Research Analyst

* Nick Stogdill

Credit Suisse AG, Research Division - Research Analyst

* Paul David Holden

CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research

* Stephen Boland

GMP Securities L.P., Research Division - MD & Equity Research Analyst

* Tom MacKinnon

BMO Capital Markets Equity Research - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Element Fleet Management Corp.'s Second Quarter Results Conference Call.

I would now like to turn the meeting over to Mr. Zev Korman, Senior Vice President, Investor Relations. Please go ahead, Mr. Korman.

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Zev Korman, Element Fleet Management Corp. - SVP, IR [2]

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Thanks, Elena. Good morning, everyone, and thank you for joining our conference call today to discuss Element Fleet Management's Second Quarter Results for the 3 and 6 months ended June 30. Joining us today to discuss the results are Bradley Nullmeyer, Chief Executive Officer; Samir Zabaneh, Chief Financial Officer; and Dan Jauernig, President and Chief Operating Officer.

Our news release summarizing the results was issued earlier this morning, and the financial statements and MD&A were filed on SEDAR. The information is also available on our website at www.elementfleet.com, and there's a presentation there that's been posted to the Presentations section as well, and you're invited to open that now.

Before we begin, I want to remind our listeners that some of information we're sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I'll refer you to the cautionary statement and risk factors in the most recent MD&A and annual information form for a description of such risks, uncertainties and assumptions. Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectations of any forward-looking statements will prove to be correct.

You should also note that our earnings release, financial statements, MD&A and today's call include references to a number of non-IFRS measures, which we believe help to present the company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS pressures to IFRS measures can be found in our MD&A.

Now I'll turn the call over to Bradley Nullmeyer, Chief Executive Officer.

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [3]

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Thank you, Zev, and thank you, everyone, for adjusting your time today. We were told not so politely a few days ago that we had a timing conflict with a much bigger market cap company. So we appreciate you adjusting your schedule.

I wanted to take a few minutes to welcome Zev Korman to our team as our Senior Vice President, Investor Relations. He has just completed his first official task, and I think you did it very well. So well done. We're pleased Zev's on board on our team. I'm sure each one of you will be speaking with him in due course. Zev's a talented and experienced senior executive with over 20 years of experience managing investor and corporate communication programs for a wide range of public businesses. Most recently, Zev led the IR function of our portfolio asset management's renewable power platform. We're pleased to have him on board. So welcome.

During the quarter, we segmented our business into core fleet management operations and noncore operations to provide greater focus and transparency on our core fleet business. This is something we announced a few weeks ago. Our Fleet Management operations, which accounts for some 92% of our assets is now reported separately, both for balance sheet and income statement purposes as well as for guidance. We provided a detailed schedule of both segments in our press release and our MD&A and within our financial statements. The noncore operations accounting for approximately 8% of our assets is also shown separately, but due to the uncertain nature of the timing of the income of these assets, we have determined that we will not be providing guidance for 2017 for noncore operations.

Our Fleet Management core operations delivered $0.18 of EPS during the quarter, and we're guiding to $0.71 to $0.73 in 2017 from these core operations. We originated over $1.5 billion of new vehicle purchases during the quarter, and we signed numerous new customers and clients. Dan will mention a couple of these in a few moments.

We closed 2 fundings in Chesapeake II, one during the quarter and one recently, both with record low funding costs and with many new investor names. And we are now a programmatic issuer and the largest in our space.

During the quarter, we purchased approximately 1.3 million shares under our NCIB and are intending to apply to the TSX to add both our preferred shares and our convertible debentures to our NCIB program. This should be accepted by TSX and actionable within the next 2 weeks.

With respect to our noncore assets, we're presently implementing strategies to optimize the value of these assets for our shareholders. Our expectation is that the capital received from these initiatives will be returned to security holders, including retiring debt and/or share buybacks.

Since we last spoke, we focused intently on the operations of the 19th Capital Joint Venture. In the second quarter, we recorded a $30 million provisional reserve against the carrying value of our equity to provide us with the flexibility to execute on expedited sales or trade-ins of unutilized assets to increase the efficiencies of this portfolio.

This provision follows a comprehensive review of the 19th Capital portfolio and operations and is expected to increase immediate cash flow to us and/or bring our operations into the operations' newer vehicles to increase utilizations and the efficiencies of that fleet. Dan will talk more about that in a few minutes, but I do want to tell you that we have drilled down extensively on this with our own analysts, our own employees and, of course, our auditors. Our sole focus going forward is to maximize the value of our investment and return the capital associated with all of our noncore assets to our security holders.

With that, I'll turn the call over to Dan Jauernig, our Chief -- President and Chief Operating Officer. Dan?

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Daniel A. Jauernig, Element Fleet Management Corp. - President and COO [4]

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Thank you, Brad. Turning to Page 9. I'll start by providing an update on 19th Capital. As Brad noted, our investment in the joint venture is now classified as noncore. These fleet [light] assets were retained by Element as part of the separation from Element Financial last year. The strategy, at that time, was to increase the penetration of our fleet service product offerings to this retained portfolio over time. Irrespective of that strategy, we have now determined that it would be more informative to separate these assets from our core Fleet Management services and operations.

In the second quarter, we incurred a noncash $10.9 million loss from our share of the joint venture. Our share of the joint venture's operating losses in the quarter improved to $8.2 million from $10 million in the first quarter. The remainder of the losses in each quarter, $2.7 million in Q2 and about $200,000 in Q1, were due to losses incurred in repositioning the fleet and marketing -- marking down the value of some trucks held for sale.

As Brad noted, we also recorded a $30 million reserve against certain assets of the joint venture, which also serves to reduce the carrying value of our investment in 19th Capital. This will allow the joint venture extra flexibility to execute on its refreshed strategic plan. This includes increasing the focus on the movement of units from corporate-sponsored owner operator to small corporate fleets, expediting the sale or trade-in of units and optimizing the size and composition of the fleet overall to improve efficiency.

We anticipate that these actions will improve -- will rightsize the operating fleet, increase utilization rates and improve Element's cash flows through the operation of newer and more efficient vehicles. Our goal, as Brad mentioned, is to optimize the value of our investment in the joint venture and to use the capital received from these initiatives to enhance our capital structure and return capital to our stakeholders.

Turning to Page 10. I wanted to give you an update on our North American post-integration efforts in Q2. As you may recall, in January of this year, we successfully migrated all of GE Fleet's U.S. and Canadian customers and their portfolio information onto Element's new and enhanced Fleet Management system. At that time, all former GE Fleet customers became live on Xcelerate and Driver Xcelerate, our industry-leading front-end customer and driver reporting tools.

In Q1, immediately after the customer migration, we experienced some challenges in the day-to-day operations of the business related mainly to the GE fleet portfolio and its customers. It took some time for the former GE Fleet customers, suppliers and employees to become familiar with Element's Fleet Management system, and this resulted in some backlogs in the business.

For example, in Q1, there was a material increase in interim funding in the quarter due to a backlog in getting orders fully processed. Since that -- since then, additional training and support has been provided to all the new users of our Fleet Management system and backlogs are returning to historical performance levels.

It should be noted that interim funding also increased in Q2 compared to Q1, but for very different reasons. In Q2, it was due to much higher funding volumes late in the quarter compared to Q1, even as the backlog in interim funding was reduced quarter-over-quarter. But as a result of the increased funding, the aging of the interim funding has improved substantially even though the absolute dollar amount has increased quarter-over-quarter.

Finally, we carried added resources in Q2 to ensure customer satisfaction levels were maintained. But now that the post-migration or post-integration activities are winding down, we're shifting our focus in Q3 on optimizing processes, improving operational performance and getting incremental productivity gains throughout the business.

Moving on to Page 11, I wanted to provide a quick update on our overall business performance in the quarter. We continued to experience solid portfolio growth in the first half of the year with total earning assets, including interim funding, growing by 4.3% on a year-to-date basis over the end of last year.

Originations in the second quarter were $1.9 billion, up significantly from the $1.4 billion in Q1 and up 15.2% compared to Q2 of 2016. In the second quarter, we continued to build a solid pipeline of existing and new customer vehicle orders for delivery in the second half of 2017.

Examples of new customer wins in Q2 include: Shell Global, where we expanded our relationship with them in Canada to include their entire U.S. fleet of over 3,300 vehicles. We are providing a full outsourced solution to Shell that includes almost all of our Fleet Management product offerings. As part of that relationship, Element can now offer Shell's Navigator fuel cards to all of its customers in North America.

Another example is Johnson Controls, a multinational company headquartered in Cork, Ireland, which signed a multiyear contract with the Element-Arval Global Alliance and includes over 34,000 vehicles globally, including 20,000 in North America, an increase of 8,000 vehicles over the 12,000 that we manage today for Tyco, which was acquired by JCI in 2016.

Future growth opportunities for us include their fleet of approximately 2,000 vehicles in Mexico, Australia and New Zealand.

We also announced on July 20 that our customers now have the option to integrate data provided by General Motors OnStar directly into Element's Xcelerate platform and other analytic offerings to gather fleet location, usage and vehicle diagnostic information. With over 1 million vehicles managed in North America, Element becomes the largest fleet management company to incorporate data provided by OnStar to help its customers improve productivity, safety and cost.

At the same time, we're very pleased with the status of our new prospect list. There are some very large opportunities on that list that are significant in size and just executing on a few of the larger prospects will generate a significant amount of incremental volume and service revenue in 2018. We're seeing increased demand for our core fleet service products, which is a key overall leading indicator for growing our service and fee revenue.

On Page 12, we're seeing increased interest from our customers to leverage the data from the vehicles in their fleet. Today's fleets are in a unique position to harness the power of connected vehicles, one that integrates data from drivers, suppliers and the vehicle itself. To lead our customers in this trend, Element will be introducing Connected Data, a new service offering that harnesses the power of the connected vehicle to deliver actionable fleet insights to our customers. Connected Data will integrate vehicle data provided by General Motors OnStar devices, or from other aftermarket devices for non-GM vehicles. The vehicle data will be integrated directly into Element's Xcelerate platform and analytic offerings.

Using Connected Data, customers will be able to receive vehicle and driver data that they need to effectively manage their fleets. This will make it easier for our customers to gain insights and take action in many key areas within their fleets to lower their cost and improve driver safety. Our customers will be able to use Connected Data to determine optimal times to replace their vehicles, mitigate fuel consumption, use integrated location and diagnostics to reduce maintenance costs and maximize overall fleet utilization.

We're leveraging our integrated service offerings and investment in technology to sign more customers onto our platform, increase product usage and drive regular reoccurring service and fee revenue. Element will be issuing a press release and providing more details on its new product offering, Connected Data, early next week.

I'll now turn it over to Samir to go through our financial results for the quarter. Thank you.

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Samir Zabaneh, Element Fleet Management Corp. - CFO [5]

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Great. Thank you, Dan. Good morning, everyone. Thank you for joining us today. I would also like to formally welcome Zev to the team. I am looking forward to working with you, Zev.

Let us begin on Slide 14. Element achieved $0.11 per basic share on an IFRS basis and $0.23 per share on an adjusted basis. The adjusted results declined by $0.01 sequentially and $0.02 compared to the same period in the prior year due to factors that will be highlighted shortly. Adjusted results excluded the impact of business acquisitions and separation costs; amortization of the synthetic discount on the convertible debentures; the impact from the operating losses related to 19th Capital; and share-based compensation, the aggregate of which was $0.17 per share.

Moving on to Page 15. As mentioned previously, on a go-forward basis, we will report our financial results under 2 segments: Fleet Management and Noncore assets. This allows for greater visibility into the performance of the core fleet business as we continue to execute on our strategy of being the world leading technology-enabled fleet management services company, while at the same time delivering on the strategy for each of the noncore assets to maximize the value to Element and return capital to our security holders.

As you can see from the slide, Fleet Management is the majority of our business and covers pure fleet operations in Canada, the U.S., Mexico, Australia and New Zealand and comprises 90% or more of our funded assets through revenue, average debt outstanding and expenses. Given the relatively higher expense allocation to Fleet Management and the fact that all of our preferred shares are allocated to the core business, adjusted basic EPS for the core business is 78% of the total EPS.

Page 16 sets out the various assets that we classify as noncore. These assets have other -- remained with Element post the separation with ECN for various reasons or acquired on an opportunistic basis post the separation. As shown on the slide, the combination of the term and working capital loans together with the equity ownership in 19th Capital comprises nearly 66% of the total assets outstanding. All of these assets are either in a planned run-down scenario or under management review with the expectation of maximizing value to Element and capital returned to our shareholders.

Over the next 2 pages, I plan to walk you through the methodology that we followed in creating the 2 segments we discuss herein. Page 17 sets out the steps we followed in allocating the balance sheet between the 2 segments. At the start, we set out a target tangible leverage ratio of 7.5x for Fleet Management. This target ratio had been communicated by us before and is in line with what we believed to be prudent level of leverage for the company of our size and in our core business. We then completed the following steps: Allocated dedicated secured borrowing based on available volume base to the noncore segments with the remainder of the secured borrowing going to Fleet Management. We then allocated convertible debentures to core fleet in order to achieve the 7.5x tangible leverage that we set as a target. The remaining convertible debt outstanding was then allocated to the noncore assets. Finally, shareholders equity imputed to fleet included 100% of the preferred shares.

The next slide highlights the income statement allocation, where the key take away points are as follows: Services and other revenue as well as interest income were allocated based on each segment's respective actual results for the period; interest expense was allocated on the same basis as the balance sheet allocation of debt; and operating expenses were allocated based on actual direct costs, plus an allocation of -- to noncore assets of approximately 50 basis points of earning assets. This allocation covered actual out-of-pocket expenses being incurred on managing such noncore assets.

With that in mind, let me now provide you with key highlights regarding the financial results of each of the 2 segments. Beginning with Fleet Management on Page 19. Services and other revenue was $143 million, which was a 12% increase compared to the immediately prior quarter and a 6% increase compared to Q2 of 2016. On a constant-currency basis, services and other revenue increased by 11% and 2% sequentially and compared to the same period and the prior year, respectively.

It is important to note that included in the services revenue during the quarter was higher than normal marketing and syndication fees, both of such service categories do fluctuate over time. That said, Element achieved increases across most service lines during the quarter. This was an indication of continuing momentum and revenue increases across the service lines and also a testament to the cross-selling opportunities that exist within our customer base.

Net interest and rental revenue was $81 million for the quarter, a decline of 3% compared to Q1 of 2017 and 7% compared to the same period in the prior year. On a constant-currency basis, the declines from the comparable periods were 4% and 10%, respectively. Such decreases were mainly due to increased interim funding, resulting from post-integration backlog management as well as stronger origination momentum, as Dan indicated earlier. This interim funding resulted in higher advanced rates against earning assets, which was 104.5% during the quarter. Normalizing for the interim funding would result in a net interest margin percentage of 2.85% for the quarter compared to 2.82% in the preceding quarter and 2.9% in the prior year.

Average earning assets increased by 0.2% sequentially and a decline of 0.5 percentage point compared to Q2 of 2016. On a constant-currency basis, the decline compared to the same period in the prior year was 3.7%. That said, including interim funding, average funded assets grew by 4.3% sequentially and 4.5% compared to Q2 of 2016. Originations have increased over both comparative periods, reflecting our continued strong momentum in pipeline conversion.

On Page 20, as you could see, Fleet Management services and other revenue has consistently grown as a percentage of total revenue over the past 5 quarters and continues to be in excess of 60% of the total revenue.

Shifting our attention to noncore assets segment. As shown on Page 21, noncore services and other revenue was $10.2 million compared to $19.1 million in Q1 of 2017 and $6.6 million in Q2 of 2016. Generally, noncore services and other revenues are transaction-based and will fluctuate over time. Included in the service revenue were fees that were earned on nonfleet customers in connection with various syndication and transaction services.

Net interest and rental revenue was $13 million compared to $7 million and $20 million for Q1 2017 and Q2 2016, respectively. The increase over Q1 2017 was due to the acquisition of an opportunistic portfolio that we have indicated earlier, while the decrease over the same period in the prior year was due to the run-off nature of the equipment finance portfolio in New Zealand and the structure of the 19th Capital Joint Venture.

Moving on to Page 22. Adjusted operating expenses were $123.1 million for the quarter, an increase of approximately 7% compared to Q1 2017 and Q2 2016. On a constant-currency basis, operating expenses increased by 6% sequentially and 4% compared to Q2 2016. Salaries, wages and benefits increased during the quarter, mainly due to an increase in incentive compensation, the catch-up accrual related to Q1 of this year as well as part of the overall service revenue growth.

General and administrative expenses also increased on a sequential basis due to certain one-time credits that we had the benefit for in Q1 of this year and which was related to property and miscellaneous items. The remainder of the increase in the G&A was related to various professional fees and other administrative matters, which we do not expect to sustain for the remainder of this year.

Moving on to Page 23. From a treasury perspective, cash flow provided by adjusted operating activities was $245 million on a year-to-date basis, a continued reflection of the strong cash flow capabilities of our business. During the quarter, our treasury team delivered on the following accomplishments: issued 150 million in preferred shares on May 5, 2017; completed the Chesapeake combination on April 7, 2017, creating one of the largest fleet ABS platforms; and completed the largest deal in fleet ABS term markets, which was upside by nearly 2x, given the strong demand for our paper and came in at a net spread that was substantially below what was issued last year.

As of June 30, Element had $3.4 billion in available financing to fund ongoing originations. We believe our strong cash flow and liquidity available on our balance sheet will be sufficient to fund future growth and deliver capital to our shareholders in line with our capital allocation policy.

In conclusion, overall, I consider this quarter a restart with clear visibility into the core business for our company. While we will prudently manage each of the noncore assets as we indicated earlier, we will continue to focus on building the world's leading technology-enabled fleet management services company. We are enthused with the continuous strong momentum in origination, the solid increases in services revenue and our management of the balance sheet to provide us with a solid base for future growth. Our operating expenses will decline towards the end of this year as we definitively complete the post-integration phase and begin to benefit from the operating leverage inherent in our business model.

With that, I will turn the call back to Brad.

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [6]

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Great. Thank you, Samir. In summary, this quarter has been a very important and busy one for the company. In fact, it has been a busy time since our split, which we completed less than a year ago. I just want to highlight briefly 3 initiatives that have been spoken about today and thank the employees that completed those projects.

Firstly, completing the integration and the massive data conversion into a single platform with exciting new mobile applications has been a monumental task for our teams, but one that sets the platform for the future of Fleet Management. I want to thank our employees for all their hard work and dedication on this project.

Secondly, we've separated the noncore assets from our core fleet operations to provide additional transparency and focus on our core fleet operations. I want to thank those teams for their work done to separate these businesses and allow us to report on the core and noncore fleet operations. It was a significant amount of work that was undertaken and completed, so thank you. We hope that you all agree that the time was well spent as it provides a more transparent view of our business, and it really allows the investment community to focus on our very solid core fleet operations.

Third, I want to comment quickly on the combination of our ABS funding into 1 platform, Chesapeake II. It's the largest program in the fleet industry, and we've issued 2 very successful oversubscribed tranches. And I want to thank our treasury team, led by Karen Martin, for those initiatives.

In the quarter coming up, next quarter, we will double down on our focus on maximizing the efficiencies in our core businesses, while ensuring that our customer service is at its highest possible level. At the same time, we'll be implementing strategies to maximize the value of our noncore assets with a view to returning the excess capital to our security holders.

In our last press release, we indicated that we're initiating a process of Board renewal. This process is led by our Chairman of the Board, Richard Venn, with the input of several other independent directors and is well advanced. We expect to have some very exciting announcements in that front in the very near future.

Lastly and later this year, in the fall of this year, we'll be holding a Shareholder Day that will allow you to meet some of our talented team of our employees to see our operations first hand, to work with live demonstrations on some of our products and participate in some workshops to provide you with a deeper understanding of our fleet management business and how we're executing in this exciting space.

At that time, we will have more visibility into the amount and timing of the return of capital from our noncore assets and would be well advanced on our multiyear plan and be able to provide guidance into 2018 and beyond. And we look forward to you attending that day. The announcement of that date will be coming in the next few weeks.

With that, operator, I will pass the call back to you to open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from John Aiken with Barclays.

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John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [2]

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With the new core earnings and the guidance of $0.71 to $0.73, the implications are that after 2 quarters of $0.18, the earnings are going to be flat through the remainder of the year. This is a bit of a change from my standpoint in terms of the previous commentary, where the earnings were going to be second half-loaded, on the back-end. Are the implications that most of the growth that was anticipated is actually coming out of the noncore side of the assets? And what is the expectation for dampening the earnings if we're looking at improvements on the margins and improvement on the costs in the second half of the year?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [3]

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Sure. So why don't I -- maybe I'll start with that with answer. So yes, we have indicated in Q1 that the second half of this year was going to be stronger. And that's still -- when we talked about that, that was related to the core business and, of course, at the time, we hadn't separated the business into the 2 segments. I guess the, mainly, the post-integration period has taken us a bit longer. While we continue to see very strong originations as we indicated, the interim funding part of it and the backlog and becoming -- and making the customers active is going to make just a little bit of an impact on the second half of this year. So we had expected the second half to be stronger. We still believe we will continue to grow our services revenue as we convert more from originations into pipeline, we should exit the year with a stronger momentum towards revenue increases. So we're just, maybe in summary, just a little bit delayed on the core side.

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John Aiken, Barclays PLC, Research Division - Director and Senior Analyst [4]

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And then when we take a look at the noncore assets, obviously, the implications are that you're looking to divest of these. If and when that happens, are you actually able to pay down your higher cost funding sources? Or is this actually going to be allocated against the revolver until the prefs and the debt come due?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [5]

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So once we get the final approval from the TSX, with respect to the more expensive pieces of securities, we will begin to buy those back as much as we can. We will also continue to buy back our common stock. So we do have approval from the board to continue buying back any of these securities. And certainly, as we sell the noncore assets, we will have a bigger capacity to be more aggressive on buying back of these securities.

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [6]

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And John, it's Brad. Each of those noncore assets have a -- has a different funding underlying it than you would expect with our core businesses. As you know, our core business is funded through the ABS. Each of these have a different lending amount. So the net amount of those proceeds, which varies widely depending what type of assets and how they fit into our borrowing base, the net amount of that which would include the equity we have invested in it and possible gains that come off sale or disposition of wind down, that's the amount of money that would be reinvested into the most optimal capital spot at that time, which could be any combination of what Samir said or high-rate debt.

So some of these assets have an amount of debt to repay, some are all equity returned to us. And again, the timing of that is uncertain and that will happen over the next period of time. But clearly, when we dispose, wind down, collect cash on those, first, we're going to pay whatever debt is on those, and then secondly, the net equity is what's getting returned to our stakeholders.

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Operator [7]

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The next question is from Nick Stogdill with Credit Suisse.

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Nick Stogdill, Credit Suisse AG, Research Division - Research Analyst [8]

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If I could start with the integration charges this quarter of $31 million, still relatively elevated versus the $36 million last quarter and I guess we were expecting that to come down. Can you give us some context of what's in the number? Is it the backlog issues that Dan discussed that are carrying on here? Is there anything for CEI? And will we see these actually decline towards 0 in the back part of the year or should they be -- or they continue to carry on I guess in the back part?

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Daniel A. Jauernig, Element Fleet Management Corp. - President and COO [9]

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Yes, so it's Dan. Most of the -- well, the integration related to the GE Fleet acquisition has been completed. So there won't be any more charges coming through for the GE Fleet acquisition. There will be some smaller amounts, and I think Samir can give you color on the amounts that are coming through for CEI. But those will be a lot less than what we saw from the GE Fleet acquisition.

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Samir Zabaneh, Element Fleet Management Corp. - CFO [10]

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Just to give you some more. So what you will see coming, we have indicated before that related to GE, we will be -- we will have completed the integration by the end of the second quarter and that is going to happen. CEI is going to begin anytime soon. So you might see still parts of the integration. Obviously, much, much-reduced number related to CEI. We expect the total amount of the integration costs for CEI to be between $5 million and $6 million and that will be over then, assuming 2 or 3 quarters. So in Q3, you will see a significant reduction on -- in this line item.

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Nick Stogdill, Credit Suisse AG, Research Division - Research Analyst [11]

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So the only amount coming through in Q3 will be related to CEI, is that accurate? There's nothing else that could be...

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Samir Zabaneh, Element Fleet Management Corp. - CFO [12]

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That is accurate. That is accurate.

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Nick Stogdill, Credit Suisse AG, Research Division - Research Analyst [13]

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On the CEI, the purchase price was about $40 million. So I guess $5 million to $6 million seems kind of high, 15% of the total purchase price. I guess, what's going through in the $5 million to $6 million. What do you have to do here to integrate that?

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Daniel A. Jauernig, Element Fleet Management Corp. - President and COO [14]

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Yes, so it's Dan. It's -- again, that acquisition was a service product-related acquisition, heavily focused on technology, and to fully integrate it into our systems, so that our clients can get the full benefit of the offering that they're providing, just requires some technology work. And as you dig into these things, they're always a bit more challenging than you anticipate but when we look at the added benefits that we get by leveraging their customer base along with our customer base, it's well worth the return.

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Nick Stogdill, Credit Suisse AG, Research Division - Research Analyst [15]

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Okay. And then just my second question on the 19th Capital. So on that call, and I think it was around June 1, you'd indicated that there shouldn't be really any more material charges coming. So what's maybe changed between now and then on the $30 million reserve? And then the $2.8 million loss, what's the total asset sale that's booked against, just to get a context of the percentage?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [16]

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Yes. So we already talked about 19th Capital operating losses, which will continue, so those have continued, although they've been substantially reduced down to $8.4 million. Included in that number is $2.7 million for the quarter that is increased depreciation and some sales. And we don't -- we won't disclose the actual book value of those, but we're in the process of writing down those book value to trade-in and marketable values. The provision is quite simply to give us flexibility to execute on what this business needs to go forward. It's a noncash charge, what it allows me to do is take vehicles that are underutilized or are horribly fuel-efficient, take those vehicles and either trade them in or pay down -- sorry, or sell them.

When they're sold, Element Fleet gets all the cash for that because we have a cash sweep. If they get traded in, sometimes there's some net cash that we get back. More importantly, we get an asset that utilization is much greater than what it was before and we get increased cash flows off that. So the flexibility to allow us to rightsize that portfolio with respect to the size and the composition. That number has been scrubbed and bored and drilled and looked at and reviewed by everyone, including our auditors, but it's really a number that is against the noncash provision number and it gives us the flexibility with 19th Capital to execute, to rightsize that portfolio.

Our joint venture partner there, Celadon trucking, has -- the management team that has dealt with us before has entirely left the company. There's a new CEO there. That new CEO has a new plan, and he's working with us very extensively. It's 1 of his top priorities, not #2 of his 3 priorities, he told me yesterday, to work with us on a plan to rightsize this portfolio and to get this business on the right track to make sure we have the right units and the right number of units.

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Operator [17]

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The next question is from Mario Mendonca with TD Securities.

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Mario Mendonca, TD Securities Equity Research - MD and Research Analyst [18]

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Could we go directly to the -- to 19th Capital again and that $30 million provision? The explanation that it's to provide the flexibility throws me off a little bit because -- and forgive me if this makes me sound like an accounting geek, but there's no provision in IFRS for taking a provision to give you flexibility. It's because the assets are somehow impaired. So when you say it provides flexibility, what is the sort of accounting explanation for the charge? Like what assets were impaired? Could you help me think through that?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [19]

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Sure. Mario, from a -- you're absolutely correct from an IFRS basis. But we do have the ability to, we call it a provision, but it's really bringing down the value of the equity and that is a top level adjustment that we have made as we expect that continuous sale of the fleet would result in losses. So when Brad mentioned that it gives us flexibility, we have -- and especially, when you see what's happened in Q2, we sold some units and there was a loss on it. So clearly, if we want to move fast -- and we have said in the past, depending on how fast you want to move the underutilized vehicles, we can go through an auction or a wholesale or retail. If you want to move faster, there could potentially be losses. And so we have decided to take that, call it, the value of the equity down. But that was clearly derived from expectations that we will have these losses from -- potential losses from the fleet sales.

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Mario Mendonca, TD Securities Equity Research - MD and Research Analyst [20]

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Okay. So maybe though if I could then, the loss, the $30 million provision relates to treating a certain proportion of the portfolio as essentially, it's available for sale. It's going to be sold maybe sooner than you might have expected.

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Samir Zabaneh, Element Fleet Management Corp. - CFO [21]

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Yes.

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Mario Mendonca, TD Securities Equity Research - MD and Research Analyst [22]

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And that's what precipitates taking the charges, is that a fair characterization?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [23]

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That is.

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Mario Mendonca, TD Securities Equity Research - MD and Research Analyst [24]

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Now maybe the question then is, what proportion of the total assets in the JV are now being treated in that manner that essentially gave rise to the $30 million? Because what I'm getting at here is, is there any reason why next quarter you could determine that proportion instead of being 5% of the assets, it should be 10% of the assets? You see where I'm going with that, Samir?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [25]

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Yes, yes. I totally see what you are going with that. In coming up with this new number, Mario, we actually looked at the total assets, and we have people in-house that are Class 8 vehicle experts. And those are assets that are underutilized. And we had mentioned the brand of the assets called Max Force vehicles. Those have not been popular with the markets that we're going after and especially as the trucks become more aging, anything above 60 months in age become even less desirable. So we have scrubbed the entire portfolio and we looked at balancing and as I've said that before, that we're going to continue to balance between what we could generate from the cash flow of the leased vehicles and what we could generate from the sale today, even though we might book a loss at the JV level. And we took this quarter a provision just to account for that. And so we looked at the assets in entirety and we believe this number, as of today, to be the sufficient number that we need to actually move the assets that are held for sale. And by the way, this is not -- so as we incur future operating losses from the JV, those will continue to bring the value of the equity down. So this is not a provision against operating losses in the future. This is just an expectation that we might be taking losses related to their fleet sales.

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Mario Mendonca, TD Securities Equity Research - MD and Research Analyst [26]

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So am I correct in saying then when I ask what proportion of the assets are now treated as, say, available for sale? That's not the right way to ask the question because you really feel like you've looked at the entire book.

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Samir Zabaneh, Element Fleet Management Corp. - CFO [27]

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Yes.

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [28]

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Yes. It's Brad, Mario. That's exactly right. We've looked at the entire book, scrubbed it up and down and sideways, every piece right down to serial numbers and the type of truck. What this -- setting aside the accounting and IFRS and everything Samir just explained, which is correct, what this allows me to do as a manager is move a little faster. So it allows me to take a vehicle that I could, I'd be better to take an x dollar amount of noncash loss to move it today rather than wait 90 days, because 1, I either get the cash back that we get 100% of to pay down our debt or I get a unit that's going to have a 95% or 100% utilization rate because it has all the new GPS on it, the ELD logs that's fuel-efficient and whatnot.

So this is really a management decision, off of a JV, to move things forward a little faster. But it's not a portion to your first question, it's what you landed on the last part, it's scrubbing the entire book and we do not expect to revisit this prior to year-end when audits happen and things. But this will allow me to re-rightsize the book for composition type of vehicles and number of vehicles.

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Mario Mendonca, TD Securities Equity Research - MD and Research Analyst [29]

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Thank you for the explanation.

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Operator [30]

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The next question is from Geoff Kwan with RBC Capital Markets.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Just following up on Mario's question. I guess, on the JV, you mentioned you scrubbed it, but I'm just curious to understand like what metrics or what would cause you to have to take another write-down? Is it the decision to maybe sell or essentially deal with a bigger number of vehicles that you've done currently? Is it having utilization rate drop to X? Is it the lease rate will need to drop by Y? Is there anything that you can provide?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [32]

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It's a combination. It's Brad. It's a combination of all those things. It's looking at every single asset specific. There's 10,000 vehicles here. Some of these vehicles that have Max Force engines. Some of them don't have ELDs on them. Some of them don't have GPS. Some of them have GPS that's not working. Some of them have -- less fuel-efficient. When you have the ability for some of these bigger -- mid-sized corporate clients that are moving these fleets to -- to pick the type of assets, they want bigger vehicles, they want safe vehicles and they want the right composition for the right usage they're carrying for. So it allows me to rightsize that portfolio. So it's gone right down -- and we specifically have by VIN number now, which vehicles we think we want to sell and where we'll sell that will give us the maximum return either as a trade-in, which gives me a new fuel-efficient vehicle or as an outright sale that will give me the cash back that we get to sweep on that comes back to repay the debt.

So it's right down to VIN number, completely scrubbed across the whole board and that whole process and review and everything has been scrubbed by our auditors as well. But this is very much a management of the JV and us deciding to move sooner on these asset sales because in the midterm and even the short term, that's a better answer for us because we get all that cash back either in increased rental rates for new vehicles or cash back from a sale.

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Mario Mendonca, TD Securities Equity Research - MD and Research Analyst [33]

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Maybe if I can ask it another way, if we assume that the number of vehicles you want to dispose or effectively deal with is unchanged, what sort of buffer, like how much in, say, basis points with utilization rates or the lease rates have to drop to incur a change in assumption to drive another write-down?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [34]

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I don't think there is any such thing because we've already scrubbed it right to where -- so even things with utilization. So for example, if a vehicle came back that was in our utilization pool now, we know we can get more than the outstanding book value on that particular vehicle that's being utilized. So utilization rates are -- they've improved slightly, but really this is about taking the top side of that book. The assets that either aren't fuel-efficient or these types of things that I've been talking about and spinning those either into cash by sale or more fuel-efficient vehicles.

We do not expect, and I'll say it again, we do not expect to revisit this before year-end where there's an audit. This gives us -- and I know Mario doesn't like the word but it's flexibility to be able to manage this within our operating platform to maximize the cash flow for us. So we do not expect any changes with this. We do not expect another charge in the third quarter for this other than the normal operating losses that will come through, period, full stop, been scrubbed, looked at, reviewed, bored, drilled and everything else.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Okay, I'll move on to my next question. You obviously mentioned the guidance for 2017 on the core and in the past, you've talked on a consolidated basis of kind of guidance on EPS of kind of higher single digits. As we kind of think about 2018 and maybe a little bit longer, is that still the right rate that you're comfortable with? Or now that you've got a core/noncore, does that change how you think about EPS growth going forward?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [36]

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Sure, so why don't I take that. So as you could see, we're giving guidance only on the core side. And as Brad mentioned, we are not providing guidance on the noncore side because the earnings do fluctuate and there may be some plans with certain of the assets to change between now and the end of the year. When we have our Shareholder's Day, by the time we get there, we will provide you with far more visibility on the 5-year plan as well as overall guidance for 2018. We do expect revenue to continue to grow in 2018. While we're still committed to the mid -- to the medium-term objectives that we have, which will begin by 2019 and above. But when we get to 2018, we'll talk about that at the end of the year. Geoff?

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [37]

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And if I can maybe sneak in one last question, the ABS issue that you guys did this week. Can you talk about what the general kind of frequency that you expect to hit the markets? And with that issue specifically, how much, if any, do you -- should we kind of be thinking about in terms of NIM yield expansion?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [38]

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So we expect to be in the market 3x to 4x every year. And the NIM, the benefit is going to be dependent on what is the actual spread that we do the term deals at. As we mentioned, the recent spreads that we have were absolutely attractive and far better than what we had last year. And these spreads are going to go up and down. If you were to take the most recent issue, they could be between 20 and 30 basis points improvement on that actual issue.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [39]

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And sorry, that's 20 to 30 basis points on the issue, but on the -- when you apply it over on the overall NIM yield, what would that bring it up by?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [40]

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Depending on the size of the issue itself. On the most recent one, that could generate, on an annual basis, improvement in dollar amount between $3 million and $5 million.

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Operator [41]

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The next question is from Paul Holden with CIBC.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [42]

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I just want to ask you, first off, on the growth in the core service revenue. I believe you said it was 2% year-over-year on a constant-currency basis. That's clearly lower than what you would like to see and what we would like to see, which is more something in the high single digits. So what do you think explains the below run rate growth? And what's it going to take to get it up to the 8% to 10% level? And how long do you think it will take to get there?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [43]

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Okay, so why don't I start with that? And Brad and Dan, feel free to actually jump in. So when we look at the integration that we had, we had mentioned previously that our customers were in a period of wait -- wait and see as the conversion ended and they got to experience our new product platform, which we clearly, they do have the full visibility of. And as Dan mentioned, we are seeing increased momentum of our customers using that platform. Now we do believe as they begin to use it and benefit from the data that could become available all the time online, that whole appreciation of the full services offering that become integrated under 1 single report will make it much more appealing for them to sign up with us and know more -- for more services.

So yes, compared to last year, that has been slower, but on a sequential basis, actually, we've begun to see a very strong momentum. And we do expect over some time in the future -- I'm not giving guidance to that, that we will get to the mid- to high single digit in services revenue. Several things have to come into play. Our customers will have to begin to use Xcelerate much, much more. We do believe the end source market today of our business will begin to open up, especially as we begin to see the technology-enabled services that we actually provide. When all of these things happen and hopefully, sooner than later, you will begin to see that kind of services revenue.

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Daniel A. Jauernig, Element Fleet Management Corp. - President and COO [44]

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Yes, so I'll just add to that. Samir is absolutely right. I think one of the challenges that we had with the integration is that customers, existing customers, where we hoped to get increased product penetration sales, played a wait-and-see game. They wanted to see the integration kind of go through. They wanted to experience the new platform before they kind of signed on board for additional products and services.

I do believe, especially with our new Connected Data product that we're going to roll out early next week, we are really seeing a lot of interest coming in the door now who can experience Xcelerate, they can see the tool. They can use the tool. Their drivers can use the tool. They can see how we're doing Connected Data for 1 or 2 customers in particular. And as we roll that out, I really think we have a good solid pipeline for Q2, and we're going to execute on that pipeline. But if we do that, we should start to see good revenue growth coming through in 2018.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [45]

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Okay. Good. And then I thought with the explanation you provided on the interim funding issue and the average NEA coming in below the ending NEA kind of understood what happened last quarter. But now it seems to have happened 2 quarters in a row. So I'm not fully sure I understand what's happening. So maybe the simple question is when should we expect average NEA to be more reflective of ending NEA?

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Daniel A. Jauernig, Element Fleet Management Corp. - President and COO [46]

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Yes, so obviously, I didn't do a very good job in explaining the difference. But you're absolutely right, there is a difference between what happened at the end of Q2 versus Q1. So in Q1, it was related to some of the challenges we had with post-integration work and backlogs backed up. We've actually cleared those backlogs so the aging of the interim funding has improved substantially. The only reason it hasn't come down is because of the material increase in origination volumes in Q2, in particular, late in Q2, compared to Q1. Q2 volumes were $500 million higher than Q1. And that's just normal aging of our interim funding.

So as volumes normalize, you will see that interim funding number come down throughout the course of the year. Now again, hopefully, if our volumes continue to be high, it might stay high. That's not necessarily a bad thing.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [47]

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Okay, so what you're saying is possibly in Q3, but at least by the end of this year, you should see an average EA that looks more like the ending EA sort of averaged over the 2 quarters?

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Daniel A. Jauernig, Element Fleet Management Corp. - President and COO [48]

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Yes, it might be a bit higher than previous years because we're -- some of the orders that are coming through are tending to be more medium-sized trucks that require up fitting. And that just takes a longer process to get through the interim funding cycle. But you're right, it will trend down.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [49]

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And then I'm going to try to ask some very specific questions related to the 19th Capital JV and maybe these are for Brad. You said that the utilization rate improved marginally Q over Q. Do you have a specific number you can give us there?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [50]

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I have a specific number, but we don't disclose it.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [51]

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Okay. So something higher than 85, which I think is the round number you gave last quarter. And then what about in terms of the number of vehicles, given the actions you're taking to rightsize the portfolio? Can you give us a numerical sense of how the number of vehicles has changed Q over Q?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [52]

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Yes. So we have in the quarter and the couple of quarters, we've moved a couple of hundred units, 200 and a bit more into small corporate fleets. So that's good news. We sold 200 or 300, Samir?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [53]

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Yes.

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [54]

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200 or 300 kind of numbers. That's kind of the cadence of what's happening. We're in a period now where we're testing the market. So we're taking them out and we have minimum bids on these vehicles and we won't move them if they don't meet those minimum bids. That's the kind of cadence that we're moving around. In total, there's 10,000 trucks here. We've talked about 20-ish percent of this portfolio is assets that we would rather not have on the books today because they don't generate the right amount of revenue for us. So they're not the right units or they're not the right models or they're not -- or they're the Max Force that we've talked about.

So we're looking to move -- rightsize this in the range of 1,500 to 2,000 units over the next little while. That's rightsizing and that's a combination of moving those into small fleets, trade-ins and ultimate spin and sales.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [55]

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Okay, so if your objective is to reduce the fleet by roughly 2,000 vehicles, let's call it, and you're doing 500 a quarter, it's roughly a 12-month process?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [56]

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Yes, that's probably not far off. Again, one of the reasons for doing this "provision" was so that we could move a little faster on that to give us that flexibility. But you don't want to flood the market because that's [silly] and you want to make sure you have the right users for the right -- so we think in the next 6 to 12 months, we will absolutely get it into the right sized range. We always have some under-utilization of the vehicles and depending what time they are, what kind of year they are, what the usage is, to sell them so. But your time frame is about right.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [57]

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Understand. Okay. And then when you -- when we're in that sort of 12-month time frame, what do you envision the utilization should look like, right, given again there will always be some vehicles that won't be utilized. So should we be expecting -- is 95 a good target?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [58]

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So ultimately, at the end of this, this is a portfolio that should run in the mid to high 90s of utilization if you have the right mix of vehicles and get them out to small corporate clients. So that's kind of the target we're running to, and we think that's doable with respect to, again, scrubbing the vehicles, looking at the VIN numbers and looking at what the usage of these vehicles are. So if you're writing this from scratch, you'd want to be in the mid-90s and then you have a very nice profitable business that well services its debt and provides a return to its equity holders.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [59]

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Got it. And then in terms of the breakeven rate, you're still on target by end of this year?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [60]

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Yes. Again, the losses came down from 10-plus to just high 8s. So we think in the next couple of quarters, we'll continue to have -- some improvement will continue but we're looking towards the end of the year for that. Again, we have a new CEO, a new management team at Celadon that's working with us in -- for that plan, so we still think we're on course for that.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [61]

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Okay. And then 1 final question is with respect to the adjusted operating expenses. So you reported $123 million versus $115 million a year ago and, Samir, we walked through a number of the factors that led to the growth in the expenses so I understand that. What I don't fully understand is why those increases in operating expenses weren't offset by the GE-related cost synergies? So wondering if you can kind of walk through that for us.

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Samir Zabaneh, Element Fleet Management Corp. - CFO [62]

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Sure. So as you could see in these expenses, we mentioned salaries and benefits have actually increased. During the quarter, there was a catch-up accrual related to Q1, so it's somewhat inflated during this quarter, but you would see a bit more of a normalization in Q3 and Q4. We also had expected that by now, given the post-integration, that there will be certain headcounts that would no longer be with us for the remainder of this year.

As we continue to focus on the customer service and ensure that all of our customers are fully trained and fully knowledgeable of their invoices, we feel from a customer service side, we need to ensure that we have as much as we need possible to complete this post-integration period. And hopefully, exit that between now and the end of this year. So that's really what is driving it with this.

With respect to the G&A, it's just certain one-time accruals that we actually had. But again, as I've mentioned, that I expect to decline in Q3 and in Q4.

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Paul David Holden, CIBC World Markets Inc., Research Division - Executive Director of Institutional Equity Research [63]

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Understand. And can you give us any quantitative measures on how much it should decline, say, by Q1 next year?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [64]

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In total, it should decline by -- for the total operating expenses, between $3 million and $5 million. That would be a very comfortable number, hopefully more.

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Operator [65]

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The next question is from Stephen Boland with GMP Securities.

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Stephen Boland, GMP Securities L.P., Research Division - MD & Equity Research Analyst [66]

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I'll ask my 19th Capital question as well. I just want to just confirm that the cash flow from the operation is still servicing the debt adequately in there?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [67]

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Yes. Yes, it is, Steve.

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Stephen Boland, GMP Securities L.P., Research Division - MD & Equity Research Analyst [68]

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Okay. And you expect that to continue even though you're rightsizing the portfolio, obviously...

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [69]

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Yes, because as we rightsize the portfolio, if it's a trade-in, we get a more fuel efficient and much higher utilization asset. We would never trade an asset in into this book unless we had a user for the new asset. So you automatically get 100% utilization in the new asset and that produces, obviously, much better cash flows because it's got ELDs and everything, and GPS and everything on it. Secondly, if it's sold, 100% of those proceeds come back to us and it comes right in to repay the debt. We have a cash sweep on this business. So both are good for us from a cash point of view.

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Stephen Boland, GMP Securities L.P., Research Division - MD & Equity Research Analyst [70]

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Okay. And just maybe on the separation of -- we talked about income statement, maybe just on the balance sheet. You kind of inherited this balance sheet from the larger entity. Brad, when you look back like when -- if you were building this fleet company from scratch, do you use prefs, converts? What would be the ideal structure? And would that actually increase your, I guess, operating EPS, looking back or looking forward?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [71]

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So great question, Stephen. A little bit hypothetical, but I appreciate the question. If you're doing this from scratch, you would not have the capital structure that we have in place right now. So as we move our noncore assets, obviously what we do with that and as we take those, if we could pay down the higher rate converts and some prefs and get our leverage back into the -- we talked about we could run at 7.5x, but I think you could run easily at 8x if you are 100% owned business then you'd have an optimal capital structure. And if you run the numbers, that would give us some substantial improvement to the normalization, if you want to call it that, of our EPS, substantial improvement over the $0.71 to $0.73, but it's hypothetical. So that's the journey we're on. As we get that capital back, we will be optimizing our capital structure opportunistically as we go through that journey.

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Stephen Boland, GMP Securities L.P., Research Division - MD & Equity Research Analyst [72]

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And Samir, I presume you've run a lot of scenarios on the separation, what would that hypothetical look like? Like that $0.71 to $0.73? Can you give us a ballpark? Is it...

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Samir Zabaneh, Element Fleet Management Corp. - CFO [73]

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Sure. So that would certainly get us to the high 70s. Again, as Brad mentioned, that is hypothetical. But when we ran that scenario, if we did not have that type of balance sheet that we have today, we would be in the high 70s now.

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Operator [74]

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The next question is from Tom MacKinnon with BMO Capital.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD [75]

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Just a couple of numbers questions and then maybe 1 follow-up. What was the FX assumption you had in the $0.71 to $0.73 guide for the core business?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [76]

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We assumed in Q3 and Q4 based on the consensus that we see will be at 1.3. Though I think so far in Q2, we are below that, but the consensus still points to the 1.3%.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD [77]

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And you talked about in the second quarter a catch-up in some bonus accruals. What was the dollar amount of that?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [78]

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Around $4 million.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD [79]

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And then finally, with respect to these noncore assets, $18.4 million in earnings on $192 million in equity. Even if I take out the $10 million loss on the 19th, that's still 8 on $192 million. It's like a 17% ROE. So am I correct here? These assets, you're calling them noncore but they're actually pretty good assets, especially, I guess, the ones outside the 19th Capital. Any idea as to what would be monetizable? And the prices they could be monetized at? And how quickly they could be disposed if you had to put them in terms of which one of those assets, which of those assets that you listed as noncore?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [80]

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Yes. So Tom, you're right when you did the numbers on that. The reason for noncore is that these earnings are choppy. The timing is susceptible. They use different amounts of equity. They're not predictable. They're not everything, perfectly in a box that you see from the fleet business. So that's why they're there. You're right, 19th Capital is a journey that will take a year or 2, 12 to 24 months to get that back. The other ones are monetizable, and we're looking at those independently, quickly, but we want to do that with what's the best interest. So those assets that are there are not a performance issue, so they are generating a return for us and we need to look at that present value of that return versus getting the sale, a gain, the assets back and then utilizing that into -- opportunistically into either the debt reduction or the share buybacks. So each one of those has a strategic plan, some of them will be sooner rather than later. And you're right, we have some nice assets there, they are performing, they just don't fit in the category of [pure fully] annuity-based predictable ongoing long-term customer relationships. They're more left over, I'll say, from the DNA of Element Financial Corporation, which is more opportunistic.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD [81]

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There are some other revenues associated with the noncore, is that -- what would that be related to? Is there any kind of syndication gains? Or what would that be related to on the noncore? Of about $10 million?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [82]

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So yes, so these are -- there are certain fees that we have been able to generate because of syndication or transaction fees. These are not fleet-related and some of them may not be related to any actual asset that we have in the noncore. These are just fees that we had been able to benefit from over time. And we will put those on the noncore, and we don't expect those to actually continue or happen.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD [83]

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Okay. So the $10 million that we got noncore fees in the quarter is, I mean it was down from pretty good addition...

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Samir Zabaneh, Element Fleet Management Corp. - CFO [84]

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That is unlikely to be repeated.

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [85]

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Yes. So Tom, again, those are opportunistic in nature, but we're not in the process, we're not in the DNA now of doing those types of one-offs. So there are various fees and structuring fees and some other things in there. But that's why I put them in noncore because they're not readily repeatable. So Dan talks about adding Shell today. We have pretty good visibility on what revenue we're going to get from Shell over the next 5 years for each vehicle and it's repeatable in an annuity-type base. This stuff is choppy, and we talked about it being lumpy before. So that's why we're calling it noncore. And as we go forward, if we do get fees that are in that bucket that aren't in the traditional core fleet, like the Shell example I just gave, we will put them in noncore because they're not a repeatable type annuity base.

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Operator [86]

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The next question is from Brenna Phelan with Raymond James.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [87]

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I just wanted to stick with the noncore. The heavy-duty truck portfolio of Class 8 tractors and trailers, has that been scrubbed similarly to the assets in the JV or like what are those asset values trending like?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [88]

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Yes. So Brenna, that's right. It's absolutely have been scrubbed because that's not on our operating business, that's an opportunistic portfolio that we used our capital on and then our servicing basically and our repair facilities. So that's absolutely been scrubbed. That portfolio has a different performance characteristics to our fleets. As you know, our fleet business has almost non-existent real arrears and no losses. These types of portfolios do have losses in them. They're fully provided for, including if you think of the New Zealand portfolio, that we wound down over the last couple of years. So that's been scrubbed. That book is one that is salable, it's performing in accordance with expectations. We're just working through whether it makes sense. It's a numbers exercise for me now to see if it makes sense to sell it for a gain of X or continue to earn a spread income of Y for a period of time. But absolutely been scrubbed, no issues with that, everything fully provided for. Now if you look at the New Zealand portfolio, that portfolio is one we bought at a substantial discount. Dan and I bought it as part of the GE acquisition. We made some nice returns on that, so that has losses on it, but you buy it at a discount and they're fully, fully provided for.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [89]

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Okay, great. That's helpful. And then just -- you talked about you had some assumptions baked in for maybe a reduction in headcount by now. Is that still -- are you still looking to reduce, sell it like we should expect those expenses to come down over the rest of the year?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [90]

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Yes. So Brenna, this is Samir. As I've mentioned, there is a rightsizing of the business, but the most prudent way to do it is when we feel comfortable that this -- and post-integration period has definitively ended and that on the customers' side, everything is totally looked after. And that should happen by the end of this year. It's not next quarter, but will happen by the end of this year. There is a very strong operating leverage that should happen in this business, but to get there, we need to rightsize the size of the business for the kind of revenue that we have and that benefit will begin to occur beginning in 2018.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [91]

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Okay. And then just last one. In the terms of the NCIDs you have in place right now, what do you expect to be active sort of immediately after coming out of the blackout and what, in your view, is the best buy right now?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [92]

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We will be active as soon as the blackout ends. And yes, so in terms of guidance, we have the Board approval that we have and we're going to continue to execute on it.

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Operator [93]

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The next question is from Jaeme Gloyn with National Bank.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [94]

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First question on service revenues in the core fleet business, increase driven by remarketing. Can you quantify how much was remarketing? What percentage of -- or the revenues or service revenues is that typically in? Was it in this quarter? Maybe just a little bit more details around those efforts.

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Samir Zabaneh, Element Fleet Management Corp. - CFO [95]

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Sure, so maybe I will -- let me start with that. So both remarketing and syndication were relatively higher than normal. And within that remarketing, we have 2 categories. One is the remarketing services for our existing customers that we have the -- they lease their vehicles from us, but we also have separately marketing services for third parties. And the pipeline for them -- and actually we have an increased level of third parties that come to us for the remarketing. And that's just because given the experience that we have and our demonstrated ability to generate value for our customers, that's starting to bring third parties to come to us for their remarketing. So in total, between the syndication and the remarketing side, there is around $5 million of the increase, I would say, just related to these 2 items.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [96]

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Okay, and so remarketing is -- this is acting as a broker essentially and you're receiving a commission on sales, is that the way to think about it?

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Samir Zabaneh, Element Fleet Management Corp. - CFO [97]

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Yes, but...

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [98]

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That's about -- if you think about what we do again, we don't have residuals in this business. We sell those units for and on behalf of our clients and we charge them a fee and the way through. Any gain or loss goes to our clients. So this is what we've done since 1946. We take the vehicle, we clean it up, we decide where it's best sold. We sell the unit through our on auction lanes or on the Internet, whatever happen to make sense. And then we charge a fee for that.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [99]

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Okay. And just one more on this, the -- I'll shift gears just given the time. Just the conversation around Xcelerate and bringing the clients on board to that platform was discussed as being a driver of increasing the service revenues in the back half and into 2018. Can you give us what is the penetration rate of your existing clients using Xcelerate? And where do you expect that to be at the end of the year?

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [100]

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Dan, maybe you can comment on that in a minute. But that's a new product offering. The penetration rate is quite low. We do not and won't for a period of time disclose exactly what that is, but the amount of downloads and usage on that is doubling all the time. So it's got a very wide acceptance. This was a massive, massive change in the industry with data consolidation and changing from report generators and requesting reports into mobile application. So there's been a lot of education through our clients. And we started with our customer advisory board, which was a select number of customers who want to be involved in it. So we don't exactly talk about penetration rates. My personal view is everybody should be on it. There's no reason not to be on it. But that's a journey as people go through their own internal cycle, how they manage their own internal business, how they wake up and drive their vehicles every day and account for them. But that penetration rate is coming on very quickly and the users of that are quite thrilled with that. What that really does is give us another -- there's great efficiencies behind that that will drive out later in the year as we make sure our customer service is there. But it really gives us another sticky point with the vehicle and really with the driver because now it's on his device and that device he or she lives with all day long, 24/7/365. So that's the reason for that. And Dan, if you have any comments on that?

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Daniel A. Jauernig, Element Fleet Management Corp. - President and COO [101]

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All right. I was just going to add, Brad, Xcelerate, what that really is, is a platform where you can see all of our products and service offerings. So it's really a powerful tool because if you only bought 1 or 2 of our product offerings, you can see the other product offerings but you don't see any data coming through from those other product offerings. So it really gives you -- it really gives us an opportunity to upsell a customer, who has only bought 2 or 3 product offerings. But I think what's really making the difference is the customers or more and more of our consumers are coming to us, in particular, customers that went out and bought telematic devices directly from third parties, but they weren't getting that data connected with the other products and services that we're offering. Through Connected Data, we can now take that feed. We can take that feed directly from GM OnStar, from any other device that they may have acquired or we've actually gotten to a few customers and worked with some of our partners so they would have a much better experience by buying devices through us and our partnerships, so they can get that data directly into our platform and cross pollinate that data with all the other products and services they have with us to really see the impact of that data and to get actual insights into their fleet. I think that's where our opportunity is going forward.

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Bradley D. Nullmeyer, Element Fleet Management Corp. - CEO and Executive Director [102]

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Great. Thank you very much. Well with that, with the time, we appreciate -- we're going to close the call now. We thank everybody for joining us. We look forward to talking to you at the next earnings announcement and also at our Shareholder Information Day, which we'll have later in the year, and stay tuned for that announcement. But we thank everybody for their time. With that, we'll close the call.

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Operator [103]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.