Element Fleet Management Corp. recently announced a customer-centric plan to meaningfully improve financial performance, strengthen and de-risk the company’s balance sheet, and position the business for growth.

“We have embarked on a transformational reset of Element’s business, with a renewed focus on our customers and on improving productivity,” said Jay Forbes, Chief Executive Officer. “Element has crafted a clearly defined plan to deliver superior customer service, generate meaningfully improved profitability and solidify our financial position. This plan is the product of the thorough strategic assessment process we have undertaken over the past four months. It will enable Element to reach the full potential inherent in its leading fleet-management platform, creating significant value for all our stakeholders.”

The plan includes:

• A series of concrete actions to improve the customer experience and generate an estimated $150 million in run-rate pre-tax operating income improvements in the fleet management business by the end of 2020;
• A $150 million investment in the business to achieve those improvements, which will be funded in part by capital retained after a reduction in the company’s quarterly common share dividend and the introduction of a dividend reinvestment plan;
• An agreement, subject to the satisfaction of certain conditions, to purchase the interests in the 19th Capital joint venture that Element does not already own for nominal consideration. 19th Capital provides equipment financing to owner-operator drivers and private fleets. Element plans to undertake an orderly run off of 19thCapital’s assets over the next 36 months. In conjunction with this initiative, Element will recognize an after-tax charge of approximately $360 million in the third quarter reflecting a write down of the carrying value of its remaining investment in 19th Capital;
• Strengthening the company’s investment-grade balance sheet through a $300 million offering of common shares via a bought deal transaction; and
• A clear accountability plan, including a Transformation Management Office run by a leading global consulting firm that will bring focus, support and accountability for the duration of the program, as well as regular reporting to track our performance.

These initiatives have been undertaken to position Element to offer better service to its customers, the company said. The plan builds on Element’s foundational strengths – scale and leadership in key markets, a top-tier customer base, strong cash flow, ready access to capital and an investment-grade balance sheet – by putting the focus where it should be, on customers, and putting legacy issues behind the company. The result will be a stronger, more efficient Element that better serves its clients and is well-positioned for future growth and value creation, officials said.

Transforming the Fleet Business

The plan to transform Element’s fleet business is based on a comprehensive assessment of its operations undertaken in recent months. This included customer and stakeholder interviews, extensive industry benchmarking, and in-depth reviews of Element’s operations, structure and balance sheet. Element’s management and Board of Directors have examined key topics such as customer retention, rebate management, people and culture, IT systems, allocation of capital expenditures and more.

The result is a new path forward, founded on renewing Element’s focus on its customers, and ensuring that customer needs are at the center of all key decision-making. Key aspects of the plan include:

• Simplifying how it works, and the organizational structure it works in, by reducing the nine existing layers of the organization to five, bringing leadership closer to the customer
• Simplifying operations and customer touchpoints to provide a better, more consistent customer experience, through initiatives such as automating manual processes to reduce errors and improve cycle times

In total, approximately 80 percent – or $120 million – of the expected total run rate pre-tax operating income improvement is from productivity enhancements to the customer experience, with the other 20 percent – or $30 million – largely flowing from revenue assurance and improved retention.

As a result of these transformational changes to how Element does business, management expects to achieve the $150 million in annual pre-tax operating income improvements by executing on opportunities in three waves:

1. Quick Wins – It expects to action $40 million in run-rate profitability improvements by the end of 2018, and has identified and advanced more than $30 million of these to date. This phase includes the implementation of over 50 initiatives including organizational redesign, supplier management, revenue assurance and cost productivity.
2. Back to Basics – Throughout 2019, Element will execute on the second wave of over 25 projects that are collectively anticipated to take us to $100 million of pre-tax run-rate profitability improvement by the end of that year. These projects will focus on improving customer service delivery, optimizing our go-to-market strategy and pricing model, improving customer acquisition and retention, better managing rebates and procurement, and increased automation and organizational simplification.
3. Building for the Future – The final wave will consist of a smaller number of 5-10 projects that are anticipated to bring the pre-tax run-rate profitability improvement to the full $150 million estimate by the end of 2020. Completing the fortification of our operating foundation, we will then pivot to growth, with focus on the mid-market fleet segments, salesforce optimization and other strategic growth levers.

To de-risk the execution of this transformation and to ensure that the customer experiences only positive outcomes from this undertaking, the company has taken steps to create crisp execution:

• Element has created a Transformation Management Office, which will bring focus, support and accountability to the program.
• It has developed a change management approach to train and support our team, and it will align incentive compensation to the attainment of results.
• It is building capability and confidence with Quick Wins, and has populated its executive ranks with seasoned leaders who have successfully steered organizations through extensive change.

Executive Moves
In recent weeks, it has two more experienced executives with a demonstrated ability to manage change and deliver value – Jacqui McGillivray as Chief Human Resources Officer and Scott Davidson as Executive Vice President, Corporate Development. This is in addition to the previously announced appointments of Forbes as CEO, effective June 1, and new Chief Financial Officer Vito Culmone, effective July 16.

The company also has realigned its executive team to put the right people in the right roles to drive the best possible customer experience, bring the executive close to the customers and front-line employees, enable faster decision making, and to represent our strategic priorities. This includes the naming of Jim Halliday as Chief Operating Officer.

Repositioning 19th Capital

Over its short history, 19th Capital has meaningfully underperformed expectations, Element said. Element’s strategic assessment has led management and the board to conclude that attempting to undertake any further turnaround of the 19th Capital business would divert management’s focus from its core fleet business and the aforementioned transformation plan. Accordingly, the company has determined that the best path forward is to acquire full control of the venture and run off the business in an orderly fashion over the next 36 months.

Element has reached an agreement to purchase the remaining equity interests in 19th Capital from its current joint venture partners for nominal consideration subject to the satisfaction of certain conditions. Under the plan, Element will continue to serve 19th Capital’s client base, while working to dispose of idle truck inventory, changing the origination process to improve the creditworthiness of 19th Capital clients and reduce churn, and running off existing leases. Element will cease further investment in new inventory to support the 19th Capital business.

The company’s plan to address 19th Capital is expected to result in an after-tax charge in our third-quarter results of approximately $360 million. Following the acquisition and consolidation of 19th Capital onto Element’s balance sheet, 19thCapital is expected to represent a residual investment of approximately $260 million in book value, net of related third-party debt.

Both management and the board firmly believe that the run off of 19th Capital will free up management time and resources to focus on the greater value the company can create from its market-leading fleet business, the company said. Addressing 19th Capital in this manner will also reduce uncertainty, de-risking Element’s operations and balance sheet.