May 11, 2016
Executives
John Sadler - SVP, Corporate Affairs and IR Steven Hudson - CEO Bradley Nullmeyer - CEO, Element Fleet David McKerroll - President, Rail and Aviation Michel Beland - CFO Dan Jauernig - COO
Analysts
Vincent Caintic - Macquarie Geoff Kwan - RBC Capital Markets Paul Holden - CIBC Mario Mendonca - TD Securities Tom MacKinnon - BMO Capital Markets Nick Stogdill - Credit Suisse Lemar Persaud - TD Securities Phil Hardie - Scotiabank
Operator
Good afternoon, ladies and gentlemen. Welcome to the First Quarter Results Analyst Call.
I would now like to turn the meeting over to Mr. John Sadler, Senior Vice President, Corporate Affairs and Investor Relations.
Please go ahead, Mr. Sadler.
John Sadler
Thank you, Patrick. Good afternoon everyone.
Thank you for participating in our conference call to discuss Element’s first quarter results for the three months period ending March 31, 2016. Joining us today to discuss these results are Steven Hudson, CEO of Element Financial Corporation; Bradley Nullmeyer, CEO of Element Fleet; David McKerroll, President of Element’s Rail and Aviation vertical; Michel Beland, Chief Financial Officer of Element Financial Corporation; and Dan Jauernig, Element’s Chief Operating Officer.
A news release summarizing first quarter financial results was issued earlier this afternoon, and the financial statements and MD&A for the three months period ending March 31, 2016 have been filed with SEDAR. This information is also available on our website at www.elementcorp.com.
As well, a presentation that accompanies management’s comments has been posted to our website in PDF format. This is located in the presentation section of our website and we invite you to open it now.
Before we begin, I want to remind our listeners that some of the information we are 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 section of our 2015 MD&A 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 the Company’s 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 measures to IFRS measures can be found in our MD&A.
With these introductory comments complete, I’ll now turn the call over to Steven Hudson, CEO.
Steven Hudson
Thank you, John, and thank you for joining us this afternoon for Element’s first quarter earnings release. I would like to start by turning to slide five of the investor deck.
We are pleased to report $0.35 per share of after-tax adjusted operating income in line with consensus. Pre-tax adjusted operating income of $0.45 is an increase of 10% over the previous quarter.
Total earning assets of $19.4 billion versus $20.5 billion have to be taken in the context of the impact by appreciation of Canadian dollar over other operating currencies, representing a 5% change in closing balances. Consolidated fleet earning assets grew by an impressive 7.8%, almost 8% on a currency neutral basis from the end of Q1 2015.
This clearly demonstrates the strong organic growth power of the fleet business. Originations exceeded $2.1 billion, 75% of that being for our fleet business, as well those originations were in line with consensus.
Our minimal and modest oil and gas industry exposure, most of which is investment grade was unchanged from the previous quarter. Turning to slide six, our book value of $12.61 compares to $13.43 as at December 31, 2015.
However, on a currency neutral basis, book value per share would have increased by $0.23 over December 31, 2015. Our portfolio owned asset quality remained extremely strong, 99.7% of our portfolio remains current and 99% rail utilization in our rail business.
Brad and Dan will speak to in a moment with respect to the successful -- ongoing success with the GE Fleet integration but suffice it to say that it’s sufficiently advanced now to allow the fleet team to reengage in M&A activities for the second half of 2016. On the funding side, we had success with oversubscribed ABS offerings, raising more than $1.1 billion to fund our fleet and rail business in the first quarter.
One of the key takeaways, summary points of the first quarter, we’d a strong first quarter for all our businesses. The Element Fleet had an exceptional quarter with a strong growth in fleet -- service and fee revenue, which now exceeds 50% of our revenue, delivering on Brad’s commitment to you a several quarters ago and with ROAA at 3.9% targeting an exit of 4% ROAA at the end of 2016.
Clearly, Element Fleet has emerged as a leading service company, not a lending platform. On page seven, more data with respect to the currency neutral growth of the fleet business.
I’d comment that commercial and vendor had good growth year-over-year as well as rail; Dave will speak to rail in a moment’s time. On the aviation side, I would note that that number is for a business that’s in runoff.
You’d say if it’s a runoff, why did it increase? Fair question, because we had some commitments to fund.
We’ve now completed that. You’ll see in Dave’s comments that this book will be substantially reduced by the end of this year.
And our ECAF I, our successful first aviation fund of our family of funds, $1.9 billion under management. Turning you to page eight, I think I’ve commented on the top three, I just want to comment quickly on before tax returns and on earning assets and as well as equity.
That 3.62% is impressive that’s a 10% in ROAA quarter-over-quarter, driven by our fleet business and the pre-tax, return on equity is also up 10%, 11% quarter-over-quarter, very impressive results. Turning to page nine, you’ll see that the service and fee revenue was at 56%.
On the bottom right hand side of your page nine, you’ll see the progression of the service and fee revenue. Brad once said that we would hit 60%; it looks that that may happen in ‘16 or ‘17 but it’s impressive nonetheless.
It’s driven by the service revenue, syndication fees and some asset management income. Turning to page 10, you see the improved geographic diversification of Element.
The Canadian market exposure over the past 12 months has gone from 32% of our portfolio to 16% and our U.S. business has gone from 67% to 74% over the same period.
And with those comments, Brad, I’ll pass to you.
Bradley Nullmeyer
Great. Thank you, Steve.
I’ll direct your attention to slide 12 to start. Once again we’re very pleased with the performance of Element Fleet and the results achieved by our team of over 2,600 employees in five countries.
Several quarters ago, we stated a goal that was to grow our service and fee revenue to be more than 50% of our total revenue. I’m pleased to say this objective has been achieved.
And this is up substantially when we were Canadian only fleet company in late 2012. We’re a customer-focused service company that provides an array of fleet management services to our many customers.
Our size and scale drives down cost for both us and our customers and increases our opportunity landscape for growth. Our combined offerings are the best in class and the compelling value proposition for our clients.
We’re now a leading provider of global fleet management services, a leading service company. On slide 13, we delivered solid year-over-year growth in our total earning assets.
On a reported basis, our total earning assets remained stable. However, our total earning assets grew by almost 7.8% on a currency neutral basis including the GE acquisition.
This asset base is what drives our increased service revenue opportunities. On slide 14, you’ll see that our key financial metrics improved.
Our ROAA improved to 3.9%, driven by an increase in our financial yields which were positively impacted by some asset management income, which came earlier than expected and a reduction in OpEx. We continue to be on track to exit 2016 at over 4% ROAA.
In the quarter, we also made significant progress on the separation of the companies. Steve will comment more on this in a later section.
However, during the quarter, we announced the fleet management team, a group of experienced and dedicated individuals that will lead fleet management. We also closed our first post GE acquisition ABS offering, an $875 million product offering that was oversubscribed.
I’d like to ask Dan Jauernig to comment on slide 15, and give us an update on our integration progress.
Dan Jauernig
Thank you, Brad. Please refer to page 15 for the integration update.
We continue to make good progress in all of our integration efforts since our last update. As you may recall, our original targeted annualized integration savings was between US$90 million to US$95 million within 18 months of the acquisition.
We are pleased to report that $100 million of annualized integration savings will be achieved by the end of this year. We provided a regular quarterly update to our Board of Directors yesterday.
In that report, we have identified additional integration savings above the $100 million target, which we are currently holding for reinvestment into accelerating our fleet product development in 2017. As a service driven organization, continuous product improvement and ongoing product development is required.
As a result, we plan on accelerating our product and service innovation in 2017, after the integration is completed. Increased product and service innovation will accelerate fleet service revenue growth, help to increase customer loyalty, and ensure that we maintain our industry-leading data analytics.
All of the integration teams in procurement, business operations, and IT have made significant progress in the quarter with respect to our integration efforts. As a result, the integration process is well-advanced and Element Fleet is now positioned to reengage in M&A opportunities in the second half of 2016.
And with that update, I’ll turn it back to Brad.
Bradley Nullmeyer
Thank you, Dan, for that update. Element Fleet is now a leading service company in the fleet management space.
We have the largest and most comprehensive set of benchmarking data for analytics, as Dan mentioned. We have significant purchasing power and extensive network of partners that provide a complete suite of services.
We have stable funding sources and partners, pristine credit quality and annuity like revenue streams. We have a global product offering over 45 countries around the world through our Element Arval partnership with BNPP.
Our size and scale allows us to reinvest in product development for our customers, so that we can continue to provide superior product offerings and leading edge technology solutions. We’ve experienced leaders in transforming companies to the deployment of technology.
And finally, as Dan stated, our integration process has allowed us progress -- has allowed us to reengage in M&A opportunities in the latter half of 2016. I’d now like to pass the call back to Steven Hudson to talk about commercial finance.
Steven Hudson
Thanks Brad. Slide 18, quick over view of the commercial finance business, which is a business comprised of rail, our vendor finance and aviation business, we are in the midst of the transition into an integrated structuring advisory and asset management business, Dave will speak to this in a second.
On the rail origination side, I don’t think it’s a surprise to anyone on the call that we expect to our Trinity program that we will be deferring some of the originations, i.e. temporary reducing them.
However, we are positioned to take care of -- to access portfolio and secondary market opportunities which occur in the marketplace. So, I think we’re on track for a good year in rail but it will be a little more lumpy than we thought.
With respect to our aviation, our on balance sheet business will continue to run off during the year. Dave will speak to that in a second.
And our family of funds in the aviation side is well underway. I’m quite pleased with the progress.
Dave?
David McKerroll
Thanks Steve. I will begin on slide 19.
In aviation, we are continuing our transition from the on-balance sheet business to an integrated advisory and asset management business. The wind down of general aviation portfolio will accelerate through year and we are targeting to be down to $700 million to $750 million by the end of the year.
The wind down will be completed through a combination of asset sales and syndication, managing down assets to maturity, and transferring assets to Element’s managed funds. Since the announcement of the separation of Element, we’ve had a lot of positive feedback from investors who are keen to co-invest with us in aviation assets and in multi-asset funds that would include aviation, rail, and other transportation assets.
Investor objectives and preferences are being reflected as we develop our fund. The transition to asset management is underway and will progress over time as we bring additional funds to market.
The business will provide Element with the more effective use of its capital, and increases profitability. The targeted returns and fee structure will vary for each fund or co-investment vehicle but the range of returns and fees, we provided at the bottom page 19.
On the next slide, we show the progression of the Element family of funds. We closed ECAF I last year; we are launching ECAF II, a $1.1 billion commercial aircraft fund in the second quarter; and we will be launching a transportation fund, which will include aviation, rail and other transportation assets, late in 2016.
On slide 21, we provide a summary of the financial results for our aviation vertical for the quarter ended March 31, 2016. These are in line with our expectations.
Aviation originations for the first quarter were $119 million compared to $265 million in the previous same quarter of 2015. As Steve said, the originations were from either retained program or from deals -- retained vendor program or for deals that we had committed with customers prior to our decision to exit the general aviation business.
Please note that we do own some helicopters which are leased to CHC Helicopters, who e recently announced a Chapter 11 filing. However, our exposure to CHC represents less than one-half of 1% of Element’s assets.
I’ll turn to the rail vertical, beginning on slide 22. There are some market headwinds facing the North American rail market.
The combination of reduced car loadings, increased railcar velocity and access production capacity of new cars has put pressure on these rates and utilization levels. However, Element’s railcar portfolio was built to withstand the current environment.
We have a young fleet, virtually no exposure to coal markets, very strong lessees, evenly spread lease renewal dates over many years, and we only have 6% of our leases expiring in 2016. Our utilization, as Steve said, remains strong at 99%.
Although there is pressure on lease rates and new car prices, the secondary market continues to support the value of lease railcars, demonstrating the institutional demand for these long life assets that produce solid cash flow over time. We have reduced or deferred our originations from the Trinity program and our direct business, so we are well positioned to take advantage of opportunities as they appear in the secondary market, later in the year.
Financial results for the rail vertical are summarized on slide 23. As we have been talking about, originations have been reduced, so they are only $51 million for this quarter, compared to $198 million in the previous quarter.
We expect the originations to be in the range of $200 million to $350 million for the rest of year but will be weighed heavily towards the end of the year. And originations will be coming from our Trinity program and our direct business, but we will opportunistically pursue transactions that we see in the secondary market.
Revenue and return on assets declined in the fourth quarter, principally due to in Q4, we had a gain that was a result of our portfolio balancing -- rebalancing efforts. Maintenance expense was higher than normal this quarter due to timing of some repairs, and we had slightly higher leverage that led to a slightly reduced ROAA.
With that, I’ll turn it back to you Steve.
Steven Hudson
Thanks Dave. Turning to slide 24, on the vendor finance business, I’d maybe like to start with the Canadian originations.
You’ll note that Canadian originations were $76 million during the quarter. That’s a continuation of our cautious and we believe, prudent approach to the Canadian credit marketplace.
Our portfolio has performed very well in the circumstances but we have -- we are measuring twice and cutting once with respect to Canadian business, but we are very pleased with the team and very happy with our customers in the marketplace. Our U.S.
business continues to be extremely strong. Although originations increased 2.9% over last year, I would note that the non-transportation originations have almost doubled or little over doubled from the same period.
And that’s been a focus I mentioned last quarter that we have been tightening up in some of the transportation limits. So, I think it’s impressive to see that kind of growth that 100% in non-transportation assets.
We are extremely happy with our U.S. business performing very well and the yields are consistent and expenses with our expectations.
Michel?
Michel Beland
Thank you, Steve. I’ll take you to slide 26, which presents the key balance sheet account as of March 31, 2016; December 31, 2015; and March 31, 2015.
As we have stated previously, the amounts reported at March 31, 2016 were negatively impacted and virtually by the impact of the changes in the operating foreign currencies over the company’s reporting currency or Canadian dollar. On an average, all currencies retracted against the Canadian dollar at March 31, 2016 compared to December 31, 2015 and accounting for approximately 5% of the reduction in assets and liabilities.
Total assets were $23.9 billion at March 31, 2016 compared to $25.2 billion at December 2015 and $12.5 billion at March 31, 2015. Total earning assets were $19.4 billion as of the end of Q1 2016 compared to $20.5 billion at December 2015 and $10.1 billion as of March 31, 2015.
Book equity declined to $5.4 billion as of March 31, 2016 compared to $5.7 billion at December 2015, when increased from the $3 billion reported at the March 31, 2015. The decrease over the amount reported at December 31, 2015 reflects the impact of the change in the foreign currency while the increase over the amount reported as of March 31, 2015 is a result of the equity raised to finance the GE Fleet acquisition.
Both financial leverage and tangible financial leverage ratio, the latter computed on the basis that the company’s most restrictive covenant remained constant over the amount reported at December 31, 2015 at 3.31 and 4.58 to 1 respectively. Slide 27 provides a summary of the consolidated statement of adjusted operating income for the quarter.
All metrics were positively impacted by the GE Fleet acquisition, which closed in Q3 2015. Interest income was $297 million for the current quarter compared to $288 million for the preceding quarter and a $137.2 million in Q1 2015.
Net interest margin at a $173 million grew by 2% from the $168 million reported in the preceding quarter and by 107% from the $84 million reported during Q1 2015. Fleet management and other revenues were at $140 million for the quarter compared to $129 million in the preceding quarter and $53 million in Q1 2016 and represent 45% of total revenues on a consolidated basis from increased fleet penetration.
A provision for credit losses was $3 million in Q1 2016 compared to $7 million that was booked in Q4 2015. The increase -- the decrease over the amount reported in the Q4 2015 resulted from year-end activity of the company was overly conservative and reflects the improvement over the 90-day plus arrear which has declined by 55% over the amount reported on December 31, 2015.
Net financial income was $310 million compared to $290 million in the preceding quarter and a $134 million in Q1 2015. Adjusted operating expenses were a $127 million, an improvement of 1% over the amount reported during Q4 2015, reflecting the positive impact from the integration initiatives, but increased from the $55 million reported in Q1 2015 before the impact of the GE Fleet acquisition.
Adjusted operating income before taxes were $183 million during the current quarter compared to $161 million in Q4 2015 and $78 million in Q1 2015. I’ll take you down to page 28, which presents the summary of the financial consolidated yields, presented as a percent of average earning assets for the three months ended March 31, 2016 and for the comparative periods.
Average earning asset grew to $20.2 billion during the current quarter from the $19.6 billion in Q4 2015 and a $9.5 billion reported in Q1 2015. Net interest margin was 3.42 during the current quarter and remained constant from the 3.43% reported during Q4 2015 but slightly lower than the 3.52 reported in Q1 2015 from the impact of the larger fleet operations.
Fleet management and other revenues were 2.77% compared to 2.63% during the preceding quarter from the 2.26% reported in Q1 2015, again from increased fleet operation and related activities. Net financial income was 6.13% compared to 5.91% in Q4 2015 and 5.64% in Q1 2015, again from increased fleet activities.
Adjusted operating expenses were 2.51% during Q1 2016, a slight improvement over the 2.61% reported in Q4 2015, but up from the 2.34% reported in Q1 2015. The increase over Q1 2015 reflects the impact of the GE acquisition and the improvement in the current quarter reflects a realization of synergies from the integration initiatives.
Adjusted operating income before income tax was 3.62% during the current quarter, a positive increase over the 3.3% reported during, both Q4 2015 and Q1 2015. And the improvement is a combination of improved fleet management and other revenues activity, and improving operating expense from integration initiative.
Adjusted operating income after income tax was 2.84% during the current quarter compared to 2.92% during Q4 2015. The decrease over the preceding quarter reflects the tax rate of 21.6% for the current quarter compared to a one-time low of 11.2% in Q4 2015, which was impacted by one-time year-end adjustment.
Slide 29 presents the annualized average return on shareholders’ equity for the current quarter and the preceding quarter ended December 31, 2015, and a comparable quarter of March 2015. Before tax adjusted operating income on average shareholders’ equity increased to 13.9% during the quarter from the 12.58% reported during the preceding quarter and the 11% reported during the quarter ended March 31, 2015.
After tax adjusted operating income on average shareholders’ equity was 10.74% during the quarter, a slight reduction from the 11.08% reported during the quarter ended December 31, 2015, again from the lower tax rate reported in December of 2015. On slide 30, we presented per share amount.
As we indicated previously, pretax operating income per share was $0.45 during the current quarter, an increase of $0.05 from the $0.40 reported during the preceding quarter and an increase of $0.18 from the $0.27 reported in Q1 2015. After tax adjusted operating income per share was $0.35 for the quarter compared to same $0.35 during the preceding quarter and $0.21 in the comparable quarter of 2015.
As mentioned, again previously, the Q4 2015 benefited from one-time year-end tax adjustment. Book value per share was $12.61 as of March 31, 2016 compared to $13.43 at December 31, 2015, and $10.20 as of March 31, 2015.
Again, the reduction in book value per share reflects the impact of the appreciated Canadian dollar over the other operating currencies between the period. On page 32, our asset quality continues to reflect continued quality of the assets and the high level of rated customers.
Slide 32 presents non-current assets covering loans which are greater than 31 day past due increased marginally from those reported at December 31, 2015 but are trending lower than the average quarterly amount of 2015. The Company’s consolidated allowance for credit losses has maintained constant as a percent of finance assets compared to Q4 2015 and the average quarterly amount reported in the 2015.
On slide 33, I present the historical and current funding capacity where the Company has approximately $24 billion in funding capacity and over $6.5 billion in availability to fund future origination in addition to being able to access the ABS market, specifically for both the rail and fleet operation. And immediate funding availability was reset during Q1 with the successful issuance of $1.1 billion to full both fleet and rail asset.
The Company continues to match fund for its portfolio for maturity, currency and interest rate. I’ll turn the meeting back over to Steve.
Steven Hudson
Thank you, Michel. Let me just quickly address the separation update; Michel will be following me with details on supplementary disclosure on the two businesses on page 35.
As everyone knows, on February of this year, we announced the separation of Element into two publically traded market leaders, the first being the fleet management business, which when traded publically will be the world’s largest publicly-traded fleet management company. Commercial finance company will be a leader in the commercial finance industry, transitioning from an asset owner into an asset management model.
The independent businesses are now focused and driven by proven executives by Brad, Dave and myself. As a side noted, it’s interesting that inbound enquiries that we have had from customers have increased with respect to future business opportunities and I think in large part by the two separate and independent businesses.
The improved cost of capital and attractive funding models, Element Fleet will enjoy an improved credit rating in the future and increased leverage, which will drive better returns for our shareholders. And commercial finance will meet its funding needs, not from banks but from institutional investors in its various funds.
Turning to page 36, we have continued to see the access to optimal capital, as we’ve been unable to access the ABS market even when it was choppy, which is comforting that we have got a robust and strong funding model. And the commercial financial company is beginning its successful transition, particularly evidenced by the family of ECAF funds.
The compelling investment thesis and valuation in commercial financial, you will clearly have a growth company, driven by myself. In Element Fleet, you’ll have stable growth, pristine credit quality, high service revenue as reported earlier in the meeting, robust funding and superior valuation.
Brad’s business will look phenomenal. The reoccurring revenue at 50% the ROAA exiting at 4% later this year, the leading North American share, the deep reliance that is enjoyed by Brad and by Dan and by Kristi with BNP Paribas gives them worldwide coverage in the high barriers to entry.
And then commercial finance will have significant growth. I would draw your attention to page 37, which shows what we believe to be the appropriate multiples -- comparable multiples for the fleet business.
There are some saying with comparison to FleetCor and WEX is maybe 6% appropriate, I would suggest you post this quarter with significant service and fee revenue that -- including in our comparables is completely appropriate. On page 38, some feedback that we have had and analysis since we have last had an opportunity to talk.
Myself, and Brad and others and Michel, and I think the entire team was on the road talking to our shareholders, the input from the shareholders has been that they would, if they could like a pure fleet play, not mix with other businesses would provide for higher service revenue, higher ROAA and a de minimis credit risk. We have gone through our entire business, we’ve identified a few large fleet assets that we will be transferring into the fleet business; you will see that in the supplemental information, Michel will walk you through.
The other important piece, and you will see later that there are over 1,000 action items to complete the separation, but tax analysis is now completed is that we now have fleet on a standalone basis to do its tax deductable goodwill and its asset step up will enjoy eight to 10 years of tax shelter without availing itself of any rail assets. So, with the input back from our shareholders, we expect to not mixing different types of businesses with the ability to move some large fleet assets into fleet, we think a standalone fleet business is far preferable, and it won’t be able to use the tax deferral.
I think I know the commercial finance company will be. So, rail will now be positioned in whole within the commercial finance business.
The benefit of all that is it provides for singular focus of management between fleet and commercial finance. We think the fleet company is clearly on a path to being a dominant service provider and removes the barriers to premium valuation that might be impaired to fleet or in another businesses.
With respect to the process, on page 39, an oversight, special committee of the Board has been struck, that struck several months ago shared by Bill Lovatt, who is the Chairman of our company, Richard Venn and Pierre Lortie. As you know, Bill serves as the Chairman of element currently; he will be Chair of commercial finance business.
And Richard Venn who is currently Vice Chair will chair the fleet business. We have execution of senior management with PwC as program lead with respect to a separation project under Michel’s capable leadership.
There are 15 different work streams and 1,000 action items, more than 30 employees internally and 15 external, so a 45-person team involved in this. In addition, we have key advisors, Canadian, U.S.
legal tax evaluation advisors to assist the necessary steps. Suffice it to say that I believe and on behalf of the board that the separation is on track to a successful separation in Q3.
With respect to page 40, there will be a butterfly transaction, splitting out fleet and commercial finance, which will allow for a tax free settlement with our shareholders. It will be pursuant to court approved plan arrangement under the OBCA.
After implementation, our shareholders will receive one share in Element Fleet and one share in the commercial finance company, name to follow. Proxy circular detailed separation we mailed to our shareholders in August.
The transaction is subject to the approval of Element’s shareholders special meeting to be held in September of this year. Target to close this transaction is late September.
Outstanding preferred shares and convertible debentures will remain with the existing company i.e. Element Fleet.
Michel has a formula -- illustrative formula to walk you through in a moment with respect to the conversion rate on the debentures. Element Fleet will provide short dated TSA to the commercial finance company, as we continue building out the final back shop, and a formal dividend policy will be in place prior to year end for both companies.
On page 41 and 42, we previously announced, just to reinforce the board, the chair and the management team at fleet at as well as the board, chair and the senior management team at to commercial finance company. Page 43 provides us a -- not proposed, it is the timeline.
So, you can scratch your proposed. This is the timetable that the company will meet in separating the companies.
Michel, I’ll pass back to you for a supplemental disclosure.
Michel Beland
Thank you, Steve. We’ve got a section here that -- the following section presents the actual financial position and financial results of the two separate segments and namely fleet management and commercial finance for the period ended and as at March 31, 2016.
And the related pro forma results, as if the separation taking place at the beginning of the reporting period with the full allocation assets, pref shares and convertible debentures allocated to the appropriate entities. If you go to slide 46, and the fleet management balance sheet, pro forma assets have increased by $1.2 billion relating to certain fleet assets, consisting of over the road trucks and trailers to be consolidated into and managed by fleet management as part of the separation, and previously originated in the reported in rail, commercial and vendor vertical.
Liabilities have increased by $900 million from the increase in finance assets, and we’ve presented a convertible debenture separately as these will be retained by the fleet operation, as part of the separation. Equity, shareholders’ equity has increased by $300 million from the increase in assets and we’ve presented separately again the pref shares which was also to be retained by the fleet management.
A pro forma leverage ratio of 7.3:1 calculated as debt over tangible equity would have been expected on pro forma basis as of March 31, 2016 from this operation. On page 47, the fleet management pro forma statement of adjusted operating income reflects the allocation of the income and expense reported during the current quarter, adjusted for the additional income derived from the pro forma balance sheet, fleet management as discussed on page 46.
As a result, net income on the pro forma basis would have been a $110.3 million for the quarter compared to the $102.9 million reporting a net income to shareholders after deduction of dividends from pref shares, a $101 million or $0.26 a share. Pro forma, if you go to page 48, we do the same pro forma consolidated commercial finance balance sheet, which reflects a same adjustment as we just mentioned for fleet management, resulting in an expected pro forma tangible leverage of 3.3:1 as of March 31, 2016.
And the commercial finance pro forma statement of adjusted operating income as presented on page 49, reflects the same adjustment as mentioned for fleet management, resulting in a pro forma net income to shareholders of $33.1 million for the quarter compared to the $40.5 million reported in the company’s financial statement which are presented on a consistent basis over the comparative periods. Pro forma earnings per share is therefore reduced to $0.09 per share from the $0.11 per share pre the separation actions.
Steve mentioned the convertible debenture earlier. So, if you go to page 50 and 51, we have disclosed the expected treatment of the convertible debenture as part of the separation initiatives.
And on page 51, just to provide people what a roadmap of the actual calculation, we’ve provided a pro forma example of what a conversion would be based on the assumptions that were laid on that page. So essentially, the conversion price will be adjusted downward for the value that has been spun out of Element.
So, if 30% of the value has been spun out, then the conversion price will be adjusted downward by that same 30%. Steve?
Steven Hudson
Thanks, Michel. Just to wrap up before we open the call to questions.
We believe that the independence of the two standalone businesses and the proven executives is beginning to show. We have an integration of GE that’s now ahead of plan, results on the savings are slightly ahead of plan with more to come.
We’ve now green lighted to reengage in previous M&A discussions which we think is a second half deliverable. Don’t read into that that we need more capital because we don’t because we have sufficient capital between the businesses.
We’re still finalizing the allocation of capital between the two businesses, but we are able to conclude a transaction on our balance sheet without having to raise equity. The improved cost of capital is inside with the positive position of the rating agencies, more to come.
But funding profile and the access to ABS has been proven. And then the investment and the valuation we think is much clear as we get closer to the separation.
On page 54, just to review Element’s standalone, it’s reiterating EPS of $1.12 for 2016, if we’re standalone business for that year, I mean that number is good, it could be bit higher but 1.12 is good. It excludes $0.13 to $0.14 of rail but now we’ll be in the commercial finance company, because fleet does not need the tax deferral and more importantly, I think a lot of people, the majority of our investors would like to see a pure play in fleet and it’s high service revenue, low de minimis credit risk.
It includes some modest EPS accretion for tuck-in deals. As I mentioned earlier that’s now been green lighted by the Company.
Core EPS growth in ‘17 of 8% to 10%. The EPS guidance for commercial finance standalone, as you appreciate we’re completing the work on the transition to funds, will be provided in Q2 as we move from an asset manager -- an asset owner into an asset manager.
I would say the aviation run off is moving quicker than we thought and the transition to fund is moving little quicker. So that’s good news.
And rail is -- we are prudently reducing originations from our Trinity relationship in the short term, but we are positioning ourselves to take advantage of secondary market opportunities in 2016. If the Company were combined for the full year we would reiterate the guidance unchanged.
But you will see some lumpiness due to the rail portfolio opportunities with some deferred originations. And operator with that we would be happy to open the call to questions.
Operator
Thank you. We’ll now take questions from the telephone lines.
[Operator Instructions] The first question is from Vincent Caintic from Macquarie. Please go ahead.
Vincent Caintic
Good afternoon. Thanks very much guys and thanks for all the detail with the pro forma financials, I think that’s going to be very helpful.
First, for Brad on the fleet, on the organic side. So, the servicing as a percentage of revenue at 56%, it’s impressive.
I was wondering how high it can go. In the past you had talked about 60, but it seems like you’re going to get there quickly.
What’s the limit there, and how do you achieve that?
Bradley Nullmeyer
Thanks Vincent. So, that was the fact that as I -- noted by some asset management fees that were moved earlier in the quarter.
We expect that to continue its march above 50%. Last quarter we talked about it under 50 and moving up.
That number could go as high as 60. Again, what we’re really looking at there is making sure we provide value added services.
That percentage can move around a little bit as clients use some of our asset lending power or they decide to do their own self funding. And what we look at there is the growth rate in that number as much as the percentage.
So, I think anywhere between 50 and 60 is a really nice balance, and again that can move around. For example, we can have a relatively big fleet, very big fleet with many cars, 10,000 units that might not take our funding, might do their own self funding, which we do often; in that case, you would have higher growth percentage.
We can have other clients come on that would bring their fleet over on a sell leaseback and their service revenue grows over a period of time. So, above 50 is a great number and great result, and between that 50 and 60 is where it should settle.
And again, primarily we are looking at the growth of that number it drives EPS growth.
Vincent Caintic
And then on your comments for the potential tuck-in M&A, could you describe what the size of that and what return hurdles you have for that? And I am thinking in particular that now that you have GE and PHH under your belt that the synergies would be much higher with another transaction, if you could just give us a concert of what you are looking at?
Thanks.
Bradley Nullmeyer
So, those tuck-in acquisitions are two things, they are transformational in the size that we have had before. They’re two categories; one is product type offerings where we have development in the connected vehicle space.
For example, we want to add new products to our current offerings; there will be smaller tuck-in acquisitions. The traditional fleet management company that you’d think of that can be we’ve always talked about being the size of $1 billion and $1.5 billion, which we can do without our raising equity.
And we talked about previously, not doing that until the -- integration was substantially advanced, which is as you now heard Dan talk about that. So those synergies would come on quicker once the integration is completely done.
What it would allow us to do is just continue our march at more scale in our business. And also the companies that are available that we are looking at are in a slightly different space and product offerings than we are, and that’s what makes exciting as well.
So, it’s a way to add new products, new development products. We are getting very large into the connected vehicle space in its entirety.
And these acquisitions, both small and the larger tuck-in ones will help us develop our products in that space.
Vincent Caintic
And just one for Steve, if you could describe how discussions are going for -- with the third-party fund investors, what’s the appetite, trying to get a sense of how much things can grow from here? Thanks.
Steven Hudson
I think as you reported on some other companies you follow, there is a strong appetite for rail assets, particularly out of Asia and those funds. So that’s -- I think there’s more to come from us and other companies in the space.
So, I think I’ll leave it there. We are comfortable that there will be opportunity to launch a significant rail funding.
And on the aviation side, Dave has clearly shown the ECAF II is in the marketplace and coming. So, I think we are -- I don’t think we are driving forward to those fund investors discussions with other investors about participation in the common equity commercial finance company or are continuing in are advancing.
And I think I have to kind of leave it there, Vincent, because it’s not -- that’s about what’s in the marketplace.
Operator
Thank you. The next question is from Geoff Kwan from RBC Capital Markets.
Please go ahead.
Geoff Kwan
Just my first question was for Brad on the fleet side, now that you have gotten a little bit of more time under your belt with respect to the GE transaction, just wondering if you can kind of give maybe some more underlying color around the cross-sell and the up-sell on the services side. For example, has the progress happened as well as you’d like or are there certain things that are kind of getting more traction than others?
Bradley Nullmeyer
Great, question. So, I mean the original thesis for putting the companies together was taking the best of both of those opportunities, best of both product offerings.
PHH and Element before and then GE together came about to the same product, slightly different ways; each of us had a different way to get there. We definitely use the acquisition to be a catalyst for innovation.
What I mean by that is that I don’t think either of us alone had the ability to invest in the type of technology we are doing now. And what that means is we are just continuing offering more and more clients into our customers, and the value proposition just keeps getting more and more compelling as we go there.
So, we’ve taken the best of those two, we’ve put together customer focus groups listening to where we listen to a customers from both side, Element Fleet customers previously and GE Fleet customers together, and we are picking the best of those together. So original thesis was there, still proves itself out.
And I would say, if anything, it’s being picked up faster, the cadence is faster than we even thought because of the need for our clients to drive their cost down. And again as we talked about this many times, this is a top five spend [ph] for our customers and their ability to drive those cost downs to something that is our core competency of managing the vehicles in the connection of those, ultimately driving their total cost of ownership down, so much faster and more exciting than we even envisioned a year ago.
Geoff Kwan
And just the other question I had was for Michel and a little bit more on the bookkeeping. I noticed from the MD&A, you talked about there was some reclassification of items within the income statement, just wondering if you kind of give me some more color and maybe I just may have missed it kind of going through it.
Michel Beland
Sorry, Geoff. I can’t remember the reclass you’re referring to.
Maybe, I can give you a call after -- directly a call, after this meeting.
Geoff Kwan
Okay, sure, thanks. That’s fine.
Michel Beland
Yes, I don’t believe that we have actually reclassed anything.
Operator
Thank you. The next question is from Paul Holden from CIBC.
Please go ahead.
Paul Holden
So, clearly, the integration with GE is enabling you to realize cost synergies greater than originally expected. Is it also enabling you to realize those operational synergies sooner than expected?
Michel Beland
So, from a timing perspective, no, we’re still on track to combine the two portfolios at the end of the third quarter, which is driving factor for our business operation synergies. But, based upon the work that we’ve done today, we expect that we’ll be able to have integration savings above a $100 million, which we want to hold back for additional product development in 2017.
So, it’s not sooner, it’s just incremental to synergies that we’ve identified.
Steven Hudson
Hi, Paul, it’s the Deputy Chairman of Fleet speaking, Steve. But I would say as approving [indiscernible] Deputy Chair is what the impressive part, lot of impressive parts, the impressive part is the confidence in the procurement side now that what Brad and Dan are looking at these tuck-ins or larger tuck ins if you will that there’s a degree of confidence that we can deliver on the procurement.
In fact Kristi Webb is sitting here this afternoon with us in Toronto, listening to this, but I think everyone has got a great degree of confidence that we can deliver on -- we can be more precise and larger on procurement.
Paul Holden
And in terms of the procurement savings, is that opening up new doors for you in terms of adding new customers?
Bradley Nullmeyer
Yes, absolutely. As we utilize our size and our scale and we get better pricing for our customers, absolutely that’s the case.
Paul Holden
And then maybe just an update on the investment and technology you’re making on the fleet side, in fact $75 million investment you’d previously announced; how is that progressing and when will we start seeing the benefits of that?
Dan Jauernig
Yes. Again that’s all part of our integration efforts and that’s progressing well.
We’re 50% completed in our integration process. And you’ll see the full benefits of that when we combine the portfolio at the end of the third quarter this year.
Bradley Nullmeyer
So, just to echo that what we’re seeing is already early indications of the wins from the increased service revenue being more efficient and also being up for offered products that are more connected into the cars, we have examples of -- for example drivers who can now we can help them plot their logistics plan for the day, which sounds pretty simple for those of us that sit in the chair all day, but if you’re on the road all day, those are key opportunities. So, we’ve run those programs out into beta test sites and that has really helped our revenue growth and that’s where you’re seeing the effect of in this quarter and beyond.
Paul Holden
And then just to be clear, Brad, in terms of the fleet tuck-in opportunities, even with your pro forma tangible leverage at 7.3 you think you can do deals of the size of 1 billion to 1.5 billion of assets without having to raise any new capital or is there any new common equity?
Steven Hudson
It’s Steve. But there’s still -- we’re still finalizing the balance sheets and in conversations with the banks which are going -- it’s going very well.
But, there might be a 0.3 or 0.4 capital that might come back from the commercial side of the fleet side. So, take that 7.3 as approximate that’s probably closer to 6.7, 6.8, but we have to settle that stuff down or finalize it with the bank group.
But, if you go back to PHH’s history when it was a fleet only company and you look at their leverage, it was in the high 7s to low 8s.
Paul Holden
And then final…
Steven Hudson
Sorry Paul, it was A rated…
Paul Holden
Final, just quick question on commercial finance in terms of the estimated tax shield with the rail assets in there now. Do you know roughly how many years that business would go to having without having to pay cash taxes?
Steven Hudson
Yes. Between -- Michel, do you want to?
Michel Beland
Yes, you will also have about 10 years’ deferral coming out of the rail business.
Operator
Thank you. The next question is from Mario Mendonca from TD Securities.
Please go ahead.
Mario Mendonca
Could we just look at fleet and the improvement in fleet earnings from Q4 to Q1? That’s obviously a pretty big move from say 96 million pretax to 131 million.
So, first, could we start with fleet fees? 92 million or so to about 103 million or so, 11% increase in a single quarter while the currency was working against you.
Can you help me think about why sequentially that would be up 11% in just one quarter?
Bradley Nullmeyer
Mario, it’s Brad. So, I talked earlier about included in there and it’s affected by some asset management fees that we earned out of the acquisition of GE fleet where we had the systems and the people.
So, we’re managing some assets for them. And they came earlier than expected.
If that wasn’t earlier, you would see a more stable march up to the plus 50% and you’d see a more stable march up to the 4% exiting on the ROAA business that we talked about. So, that’s really just a timing issue, so fees continue [technical difficulty]…
Operator
[Operator Instructions] Please go ahead.
John Sadler
It’s John Sadler here, I just wanted to reconnect. We’ll start the -- restart the conference call.
We have the team back on the line here.
Operator
Bradley Nullmeyer
Mario? Operator?
Operator
Yes, you are now online with the participants.
Bradley Nullmeyer
Mario, can you hear us?
Operator
[Operator Instructions] His line disconnected. The next question is from Tom MacKinnon from BMO Capital Markets.
Please go ahead.
Tom MacKinnon
Just a couple of quick numbers questions here. One is, I think the common shareholder equity at the end of the first quarter is $4.9 billion.
When you split into two companies, you got $3.4 billion on the one side and $1.3 billion on the other side, so that totals $4.7 billion. Am I missing anything that -- is there $200 million or is it just rounding or what’s going on with that?
Michel Beland
You’re looking at pro forma?
Tom MacKinnon
That’s right, yes.
Michel Beland
The combination should be the same.
Tom MacKinnon
Okay. So, maybe there might be just be some running on that.
Then secondly, with respect to the fleet, when would we think about a dividend, a more significant dividend and how would that start to play out?
Steven Hudson
The dividend will be -- policy will be established on separation [technical difficulty] increase dividend. But the new Board will set that, but there will be a formal policy announced on the separation…
Tom MacKinnon
Okay and then, the last one is if I kind of look at the slide 49 on the commercial finance business, you talk about earnings of $0.46 to $0.49 for the full year, prior to transitioning to an asset manager, so that just kind of means that you just stayed the status quo for the whole year? The same we’d get somewhere in the area of $0.46 to $0.49 in 2016, is that correct then?
Steven Hudson
What I was trying to say Tom was that [technical difficulty]
Tom MacKinnon
Hello? Sorry, could you repeat that?
I may have just lost you.
Steven Hudson
We are having to deal with [technical difficulty] What I am trying to say to you is that business is on track, as we move from a manager -- from an owner to manager, as you know we give up NIM and we get fee income back. So we will be presenting that in Q2.
But, if we were an asset manager -- asset owner, Tom, I’ll tell you, we are on track for the year. But as we transition from owner into manager, you are converting NIM into fee income.
You won’t have as much fee income, but presumably hopefully will have a higher multiple for fee manager.
Operator
Thank you. The next question is from Mario Mendonca.
Thank you very much for calling back.
Mario Mendonca
I have been disconnected. Hello, can you guys hear me now?
Steven Hudson
Can you hear us, Mario, okay?
Mario Mendonca
I have been disconnected twice now. So, I want to start taking this personally.
Bradley Nullmeyer
I have to give my answer three times now Mario. So, I want to take it personally.
Mario Mendonca
So, Brad, could we go back to the…
Bradley Nullmeyer
Yes could we go back to the fees part of it. Again, it is affected by some timing on some assets that we manage for the fleet business coming out of GE.
We have talked about that number being 50% to 60%; it should sail in the 54%, 55%, as we move through 2016. So, it’s really just a timing issue for us.
Mario Mendonca
So, Brad, there is $103 million in fee income, what would that number be x that amount?
Steven Hudson
I think in your service and your fee revenue line, it will be about 54%. So, I’ll go to reconciliation for you.
Mario Mendonca
So, just clearly the fleet fees weren’t up 11% in the quarter, I am just trying to get a sense for what that…
Steven Hudson
Not sequentially; they’d be up, you’re up significantly on the fee management [technical difficulty] but we’ll break it too out for you, Mario.
Mario Mendonca
And then syndication fees, $30 million in the quarter from $17 million, again, it seems that’s up 79% sequentially. So, I am just trying to understand where these numbers are coming from?
Steven Hudson
Syndication will be a larger part of this model going forward, because you are managing albeit investment grade. We touched 40% of Fortune 500 company but as we go forward, we will manage within our credit limit.
Mario Mendonca
But is there something in that that would cause the 30 million this quarter because they’re almost 31 million.
Bradley Nullmeyer
Steve, that begin is the asset management, the timing of those syndication. So, you can’t sequentially put that ratio on there, to your question.
We can break out the difference in there, but what happens is just the timing issue and it’s being replaced by their income that they will be at the 50%, 55% as we move through ‘16 and then also reiterating our ROAA at 4% to exit.
Mario Mendonca
I think where I am going with this is you disclose your $131 million in pre-tax earnings in fleet, that’s a 37% from where it was last quarter. What I am really -- what will be helpful to understand is what that number would be x of what these management fees, because that seems to be what the real crux of the matter is; ultimately if you trying to think about what this business is capable of, that 131 million isn’t helpful.
Steven Hudson
If you go to page 21 of the MD&A and look at the fleet management fees went from 92 million to 131 million.
Mario Mendonca
And Brad said that a portion of that was these fees that these…
Bradley Nullmeyer
I was talking about the consolidated 207 to the 238, so that’s, those are our core management fees.
Mario Mendonca
So, let’s go back to it then, the 92 to a 103, so it’s an 11% in fleet income, fleet fees sequentially?
Bradley Nullmeyer
Those are core fleet earnings; you’re not going to get 11% every quarter. But, if we add certain products on in different times, clients come on at different times, so that is core fleet management fee income not affected by anything other than our timing of being able to offer services earlier.
Mario Mendonca
So, then, it’s in the 30 million that you would highlight something?
Bradley Nullmeyer
That’s correct. The 30 million is affected by timing and the syndications of that, the difference -- so there’s still a growth off of the ‘17 but not as much you need to see on the 80% or whatever that number.
So, it’s same. So, what we’ve got here is very, very strong core fleet management earnings that will allow us to exit ‘16 at more than 4%, moving up into the mid-50s and possibly the 60 at some point, we talked about that.
And then opportunistically, we have from time-to-time syndication fees, fleet management service fees, the asset fees that will come from time-to-time.
Mario Mendonca
So, Brad, can you -- are you able to give me a sense of what that 131 would be x this timing?
Bradley Nullmeyer
17 could be $5 million or $6 million less, Mario.
Mario Mendonca
17? 17 was in Q4 2015.
Bradley Nullmeyer
Yes, I’m saying the 17, if you put that up that’s sort of a mid $25 million number, so off 30.
Mario Mendonca
So, I’ll do some back of the envelop to try to get me to a number. Now the next thing…
Bradley Nullmeyer
But again, Mario, just to release the real metrics there, we need to be driving towards the 4% exiting ROAA in ‘16 and then that 55% plus management fees really get us to the higher margin service income, the metrics you need to look at.
Mario Mendonca
The reason I’m going at this so is because you haven’t really generated any real synergies yet, so if you started to add a bunch of synergies to the 131, you get way over 4%. And I’m just trying to…
Bradley Nullmeyer
No, sure we have.
Mario Mendonca
I’m trying to get it to a number that makes a little more sense to me?
Bradley Nullmeyer
Yes. So, if you take the 3.90, back it down to 3.7ish, if you took out that -- that timing issue and that again is our march into a -- it’s just a sharper rise to 4%.
So, it’ll be 3.7 moving towards 4, those synergies, Dan’s already talked about those, many of those have already come in; the procurement savings are coming in, they’re just coming over time, they ramp over time. So, example of that is we go and save cost for somebody for a supply chain, we take time to move all those vehicles from supplier A to supplier B and that different pricing is coming in, in Q1, an you’re seeing benefit of that.
So, there is…
Mario Mendonca
So, part of that…
Bradley Nullmeyer
There is substantial synergies there; the one that’s not there, final synergy is not there, it’s coming in Q4, it is the one that talks to the operation savings that Dan talks about and that’s the one that will finally take us over the 4%.
Mario Mendonca
So, the procurement, it would appear then the part of the reason why fleet fees were -- that spike in the quarter really is the part of the procurement savings actually appears on 103 million, is that right?
Bradley Nullmeyer
Well, some of it. I mean those fees are costlier, so we earn fees different ways, right?
Some are monthly subscription fees, some are percentage of the repair, some are the cost savings, and so, some of it’s in there and some of it’s going through other areas. But, what you’re seeing there is the increased usage of our products as we add those new products and as we drive the cost down.
So, for the most part you’d most of it there.
Mario Mendonca
Most of it procurement goes through there?
Bradley Nullmeyer
Yes, as that ramps up and then the rest that of it you’ll see coming in Q4 through the OpEx number.
Mario Mendonca
And that’s all I’m trying to understand like how this moves so much in the quarter, and like I’m just trying to piece it together and I guess a portion of it is the procurement. So, this makes just more sense to me.
The other thing I wanted to pursue then was fleet, is the 26% tax rate that you assume in fleet, I think you said 26 point or is it 22, I forget. Whatever number is, it’s a low number for a business that’s predominantly in the U.S.
So, what sort of tax management do you have in place that would get to such a low tax rate?
Michel Beland
We have the same tax structure, as we’ve had in the past, Mario, and I think we’ve -- I mean obviously we have an operation outside of the country and we have a structure that takes advantage of some of the funding coming back from Canada, and it’s no different than we’ve had in the past.
Mario Mendonca
Michel, you’re confident in that number, that’s not a number that would move around too much, you’re confident in that number?
Michel Beland
No, no, our projections for the year will be a tax rate around 22% to 23%.
Mario Mendonca
And then real quickly here; the other thing I wanted to touch on was cost in the ABS market. Costs are going higher; this is ABS, fleet ABS, should we’ve seen that, you can call up right up on Bloomberg that the costs that have gone up a little bit.
Now you do seem confident though that you can keep your margins pretty stable, or even improve them. What gives you that confidence?
Is it the capacity to pass these additional costs on to your customers?
Bradley Nullmeyer
It’s Brad. So pricing has gone up a little bit and what happens with that is that for a new product coming down the pipeline, we are able to pass on most of that, right?
I mean we have some resistance from our clients. But if it happens today and new cars that are being because all those are factory ordered, they’re coming in the next months, they’ll be at the new pricing metrics.
Mario Mendonca
I mean that’s part of the answer, you feel like you can get a lot of this through. And then finally, pulling this altogether, I kind of feel Steve that you’re backing down on the $1.61 for 2016.
And the reason I say this is you’ve got $1.12 in fleet now, $0.09 quarterly in the other business, that’s about $0.36, put them together, it’s a little under the $1.61. Am I reading too much into the numbers, like are you reiterating the $1.61 guidance for the year?
Steven Hudson
Yes, I am. The part, maybe the part and the delta is that ECAF II will have a nice impact in Q2.
We’ve got to factor in the launch of that second fund and the third fund. So, those would help.
There certainly is -- if you’re doing less rail, that will bring EPS down, but the ECAF family will bring it up. So, you’re right in individual items but in the mix, if we kept them together, it’d about $1.60.
Mario Mendonca
But for the year, like is 1.61$ still your outlook?
Steven Hudson
Yes.
Operator
Thank you. The next question is from Nick Stogdill from Credit Suisse.
Please go ahead.
Nick Stogdill
Two quick follow-ons on the $1.61 objective. Did you guys hedged the currency in 2016 at all, or have put any hedges in place yet?
Michel Beland
It’s Michel. We don’t have any currency exposure -- we don’t have any currency hedges.
So when obviously our balance sheet and our assets and liability are matched for foreign currency, but the income is not hedged.
Nick Stogdill
And then is there any M&A embedded in the 1.61, the tuck-ins and fleet?
Steven Hudson
In that $1.12 we talked about there was a modest amount in $1.12 for tuck-in M&As.
Nick Stogdill
And then just a quick one for Brad. Of the 7.8% organic currency neutral growth, is that a combination of growth in the existing customer base as well as new customers?
And if it is a mix, can you may be split out how much is one or the other, could you give a sense of it?
Bradley Nullmeyer
So, it’s a combination of both, but more in new clients, so you get some natural growth by taking vehicles that have depreciated off, so you get cost delivering number there as normal replacement and the majority of that is new clients coming on with the fleets.
Nick Stogdill
So over half is new clients? Okay, great.
Thank you.
Operator
Thank you. The next question is from Lemar Persaud from TD Securities.
Please go ahead.
Lemar Persaud
I don’t actually have a question. I just queued up in case Mario couldn’t get back on.
Operator
Thank you. [Operator Instructions] The next question is from Phil Hardie from Scotiabank.
Please go ahead.
Phil Hardie
Just a quick follow-on question, just with respect to the numbers, just sticking from the $1.12 for fleet that’s basic EPS?
Bradley Nullmeyer
Yes.
Phil Hardie
And you’ve done some work on the treatment of the converts, and I think if I flip back through Q4 results, it’s probably about $0.02 per share difference between basic and diluted. And I think probably 80% of the overall impact [indiscernible] in that portion comes from the convertible debentures.
Could you give us some guidance in terms of what the dilution impact would be on the fleet side on that?
Michel Beland
We haven’t really computed that number. But to the extent we have a value of -- an estimated value of 30%, that we moved out, I guess you can take that two-penny and apply the math to it, so you’d have a 70% of the $0.02 coming down on the fleet side as a result of that.
But again there are a lot of factors in here at this point in time.
Operator
Thank you. The next question is from Mario Mendonca from TD Securities.
Please go ahead.
Mario Mendonca
Sorry, just one final, let me clarify. Michel, probably for you; when you look at the balance sheets of the two businesses and show a pro forma, it looks like the common equity in both cases goes down.
And there is probably some calculation in there; I just don’t understand but why would the common equity in both of this go down?
Michel Beland
I think that’s the question that Tom asked before.
Mario Mendonca
I am sorry, I was disconnected.
Bradley Nullmeyer
No problem. On page 46, Mario, that’s probably where the confusion comes.
We are showing common equity at 3.6 and in natural fact, we should have show common equity at 3.1 and the pref share of 0.5. So you you’ll see that -- so there is no reduction.
Mario Mendonca
Okay, I get it. Okay.
That’s clarifies it. Thanks.
Operator
Thank you. This concludes today’s question-and-answer session.
I would now like to turn meeting back over to Mr. Sadler.
John Sadler
Great, thank you operator and thank you everyone for joining us this afternoon. We’ll look forward to giving everyone another update when we report our Q2 results in early August.
Thanks again.
Operator
Thank you. The conference has now ended.
Please disconnect your lines at this time. And we thank you for your participation.