Element Fleet Management (TSX:EFN, Financial) (Canada), a global leader in fleet management, was a top contributor to the Fund’s performance for the quarter. In our view, Element Fleet Management delivered a strong first-quarter earnings report in May, despite continued headwinds from original equipment manufacturer production delays. First-quarter order volumes of 1.4 billion were in line with originations, resulting in the backlog remaining flat sequentially at 2.9 billion, compared to normalized levels around 1.2 billion. This backlog corresponds to CAD 45-55 million in deferred revenue and CAD 55-65 million in free cash flow. Management expects original equipment manufacturers to reach full production capacity by the middle of 2023, at which point originations will surpass orders, which will then enable the company to reduce its backlog and realize these deferred economics. Operating expenditures grew 6% year-over-year due to operating costs intended to generate future revenue as well as an unquantifiable amount from inflation. However, we believe inflation will be a net positive for the company as revenue gains should more than offset inflationary pressures on operating expenditures. Management’s capital-light model approach translated to further deleveraging despite additional capital returns to shareholders. The company returned CAD 106 million to shareholders in the first quarter, of which CAD 74.5 million was through buybacks.
From David Herro (Trades, Portfolio)'s Oakmark Intl Small Cap (Trades, Portfolio) Fund second-quarter 2022 commentary.
