Jul 28, 2021
Operator
Thank you for standing by. This is the conference operator.
Welcome to the Element Fleet Management Second Quarter 2021 Financial and Operating Results Conference Call. As a reminder, all participants are in listen-only mode.
And the conference is being recorded. After the prepared remarks, there will be an opportunity for analysts to ask questions.
Element wishes to remind listeners that some of the information in today's call includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties, and the company refers you to the cautionary statements and risk factors in its year-end and most recent MD&A as well as its most recent AIF for a description of these risks, uncertainties and assumptions.
Jay Forbes
Thank you, operator. And thanks to all of you for joining us this evening.
Frank and I will be sharing tonight's call with Jim Halliday, our Chief Operating Officer who is a OEM partners and will provide an update tonight on new vehicle production delays and how we are managing the situation. We would like to use our time with you to discuss Element's results for the second quarter and the first half of the year.
The progress that we've made advancing our strategic growth objectives, and the headwinds we're experiencing as a consequence of those OEM production delays, which are driven by the shortage of microchip supply the many OEMs including the big three domestic manufacturers. We will start by looking backwards for a moment at the pandemic impacted period that made up the majority of 2020.
With COVID-19 taking hold in our operating geographies early last year, we faced two significant tests. It was our business model as resilient as we believe that to me, it was our ongoing work transforming Element's business and balance sheet ready to withstand the challenge.
And we passed those tests with flying colors. Our revenue and cash flow screens remain strong and steady.
Our booking business was solid with delinquent and impaired receivable positions, dramatically improving over the course of 2020 to maintain ready access to ample cost efficient capital for our clients including unimpeded access to the syndication market. Our liquidity actually improved under the circumstances and we accelerate the transformation and in doing so, overachieved our year-end goal.
Unanimous Element able to successfully navigate the challenges of the pandemic last year, we've benefited from the experience. We learned much about the cash flow with another business allowing us to right size our funding facilities and contributed substantial interest savings and make a very positive impact on our net finance revenue.
Jim Halliday
Thank you, Jay. And Good evening, everyone.
Originations are a crucial component of Element's business. Every origination is a new vehicle for one of our clients, and new vehicles for our clients, our core drivers of net revenue per Element.
I want to clarify that we don't just lease new vehicles to our clients. In some cases, we order and acquire vehicles on behalf of our clients and then turn around and resell the vehicles directly to the clients.
We call those A&R or Acquisition and Resale transactions. And they're valuable to us too even though they don't show up in origination volumes.
I think A&R is an important dimension of our business to acknowledge. So I wanted to mention it upfront, and I'll come back to it in a bit.
Originations are the precursor to leases, as well as a number of pre-lease and related services, all of which are revenue events for Element. For example, before a client takes delivery of their vehicle, we typically have titled licensed and registered that vehicle for them.
Those are highly administrative tasks that vary in nature by jurisdiction, as well as by type of vehicle.
Jay Forbes
Actually additional insights on this topic. If those on the call only take two things away from our discussion of the OEM production delays this evening.
I hope they are the following. Firstly, it's a supply problem.
Demand from our clients has returned to pre-pandemic levels. And secondly, it's a temporary problem and that's going to be shortly.
Based on our understanding of the latest OEM production plans, we expect to return to normal production volumes later in this half. This will clear our order backlogs and generate increased levels of originations and their associated impacts on revenue and cash flow in early 2022.
This will be higher than historical run rate originations. Although my use of the term run rate here continues to exclude our motto originations in 2019/ 2020.
I do hope that we've provided you with a deeper understanding of the primary challenge our business faced in the first half of this year. I'm now going to turn the call over to Frank to discuss our financial and operating results for the period.
Frank Ruperto
Thank you, Jay. Good evening, everyone.
I'm happy to be here with you tonight to talk to our solid second quarter and first half results and how they demonstrate our progress on Element's strategic growth priorities. With a few exceptions, I'm going to focus my comments on first half results, and their comparison to the first half of last year on a constant currency basis.
Because second quarter of last year was heavily impacted by COVID in the first quarter of last year was one of Element's strongest and not materially impacted by COVID. By using the first half results, we get a better picture of last year's Q1 and Q2 balance each other out a bit for comparison purposes.
In addition, our stated target growth rates are annual. So comparing year-to-date this year to year-to-date last year is more indicative of our progress against these goals.
I will also focus many of my comments on constant currency, which is a truer measure of our progress given the translation noise and restating our U.S. revenues, earnings and cash flows our largest geographic contributor into Canadian dollars.
To put the magnitude of this translation noise into perspective, the Canadian dollar appreciated by nearly 10% from $0.73 last year to $0.80 this year, creating a non-economic drag on our financial performance. Starting briefly with Q2 results.
Our adjusted operating income for the quarter was $126.5 million or $0.20 per common share on an after tax basis, which is in line with consensus. The provision for taxes applicable to elements adjusted operating income is based on 25.8% effective rate for the second quarter, up from 23.4% last quarter.
As I mentioned on our last call, we recommend modeling elements adjusted EPS based on a 23% to 25% effective tax rate for 2021. I would suggest earning towards the higher end of that range.
Remember that the real cash tax amounts that LM pays are a lot less than the reported tax line item on our income statement. For that reason, we continue to believe free cash flows as better metric than after tax AOI on a per share basis when it comes to evaluating the underlying performance of our business.
In the first half of 2021 Element generated 484 million of net revenue, which is 38 million or 8.4% growth from first half of 2020, net revenue of 46 million on a constant currency basis. This growth was primarily driven by net financing revenue improvements of 32.9 million or 17.6% helped along by 2.3 million and 2.4 million improvements of first half over first half servicing income and syndication revenue growth respectively.
Again, all on a constant currency basis. Adjusted operating expenses in constant currency were flat in the first half of this year compared to last year was salaries and wages up modestly offset by lower G and A expenses.
Growing net revenue while keeping OpEx flat is the hallmark of a scalable operating platform. First half operating margin expanded by 390 basis points in year-over-year, and still 360 basis points after the impact of changes in foreign exchange.
As we indicated in our disclosures today, we expect operating margins to moderate slightly in the second half because first half adjusted operating expense benefited somewhat from a collection of discrete non-recurring items and net revenue also benefited from approximately $5 million of provision for credit loss releases in the first half which are likely to be the largest releases from our allowance for credit losses this year. Nevertheless, we will continue to enjoy strong operating leverage throughout 2021.
That 8.4% first half net revenue growth was magnified by our scalable platform almost two fold into 16.7% adjusted operating income growth year-over-year before the impact of FX. Adjusted EPS for the half year-over-half year grew 10.9% in constant currency despite a 730 basis point increase in the applicable effective tax rate.
Changing gears now to our strategic priority of advancing a capital lighter business model. I want to offer my perspective on the role of syndication in Element's growth strategy.
Syndication advances all three of our current strategic priorities. We're not relying on syndication to grow net revenue 4% to 6% annually.
However, with low related operating expenses, syndication revenue contributes materially to our operating margins by landing heavily on the adjusted operating income line. Syndication leads our charts to a capital lighter business model by reducing liabilities on our balance sheet, freeing up equity while maintaining our target tangible leverage ratio.
Additionally, syndication provides the means to generate capital that can be returned to shareholders via repurchase of common shares for cancellation under our NCIB or also driving return on equity and accelerating growth on a per share basis. Through strong performance and reducing the equity capital invested in the business we grew our pre-tax return on common equity 100 basis points alone in Q2 on a quarter-over-quarter basis.
It's important to remember that each lease is entered into undertows we are willing to keep on our balance sheet. We only syndicate leases when the totality of the transaction is economically superior to holding the lease on our balance sheet.
So syndication is always a net win for Element. In the first half of this year, we syndicated 1.6 billion in assets for 36 million of net revenue largely on par with roughly 1.5 billion syndicated in the first half last year that generated 33.3 million of revenue on a constant currency basis.
The other driver of our capital lighter business model that enhances return on equity is servicing income which grew 1.3% in the first half over last year, and 1.4% as measured quarter-over-quarter in both cases before foreign exchange. Service revenue requires only working capital to support its growth and therefore represents high quality, high return revenue.
Service revenue is being led by maintenance, volume uptick in the U.S. and Canada as well as excess services revenue.
We're also seeing the organic growth of service revenue streams from Australia, New Zealand and Mexico, where we continue to increase our share of wallet with existing clients in addition to new client wins. As you heard Jay say, and we have communicated in our written disclosures this quarter, we believe that servicing income has now turned a corner and we anticipate continued growth in the second half of this year on a constant currency basis with clients vehicle usage returning towards pre-pandemic levels this month.
Each Q3 and Q4 servicing income should be successively better than Q2 this year even without adjusting for potential FX headwinds. Our third strategic priority alongside profitable revenue growth and advancing a capital lighter business model is annual free cash flow growth before FX in 2021 and the return of excess equity to common shareholders.
Free cash flow per share for the first half was essentially flat year-over-year with Q1 of last year being the free cash flow high point for the last three years and thus making for a tough comparison. The year-over-year for the second quarter, free cash flow was up 13.8% and 16.3% on a per share basis each before FX.
Quarter-over-quarter Q2 free cash flow grew 16.3% and 18.2% on a per share basis again before foreign exchange. The per share metrics were aided by our NCIB activity.
Element repurchase over 13.5 million common shares in the second quarter and is repurchased over 22 million common shares or 5% of our float for cancellation since the inception of our program last November. Combined with common dividends, we returned 189.4 million in cash to shareholders in Q2 and have returned 360 million since the NCIB began.
Before I hand things back to Jay, I'd like to walk you through the impacts of OEM production delays and deferred originations on our net revenue and cash flow. The key message here regarding the OEM production delays is that the financial benefits of effective originations are not lost, but simply deferred.
Our clients need these vehicles to operate their businesses and fulfill the needs of their customers. As Jay explain in order place with an OEM creates a binding obligation on our client to lease when the ordered vehicle is produced by the OEM, thereby turning it into an origination.
When that origination occurs, we begin to obtain both the P&L and cash flow benefits associated with that new vehicle. At the end Q2 we had just under 1.5 billion of would be originations in the form of backlog orders.
To put that into perspective, it's a record backlog when you exclude backlog or model order volumes from prior periods. It's over $170 million larger than the order backlog at the end of last quarter, meaning the end of Q1, 2021.
It's over 425 million larger than the order backlog at the end of Q2 of last year. And it's over 500 million larger than the order backlog at the end of Q2 2019.
Again, excluding our model these deltas are all based on global volumes and constant currency. But the Q2, 2021 Global record backlog is comprised of record backlogs in each of our geographies.
So how did we end production delays impact net revenue? OEM production delays negatively impact net finance revenue in the near term because the deferred originations keep the financial benefits from hitting the books in the current period.
However, the orders are firm and the financial benefits do come on the books when the OEM is ultimately able to deliver the vehicle and trigger in origination. The net financing revenue from originating and leasing that vehicle is not lost but simply deferred to subsequent quarters and it will be incremental net financing revenue on top of the net financing revenue linked to normal originations which incur in that subsequent quarter.
Additionally, the OEM production delays impact the number of vehicles to which Element provides services shortly after origination, such as titling, registration and the other services that Jim talked us through, including the remarketing of the vehicle being replaced. Again, the related service revenues would be absent from the period affected by the deferral, but be additive to a future period in which the origination occurs.
The deferral of originations also leaves us with a lower number of new leases we can syndicate. Depending on the proportion of originations we plan to syndicate in any period.
Lowering originations could lead to lower syndication revenue. Like net financing, revenue and service fee income these syndication revenues are not last but rather only deferred until origination occurs.
And we have the asset on book to syndicate. We will realize the related deferred syndication revenues four to six months, generally four to six months after the origination.
This revenue would be incremental, the normal syndication revenues being generated in the period. Remember, our business has proven solid, and that includes its financial performance.
We believe we will offset much but not all of the revenue and cash flow headwinds from OEM production delays through countervailing revenue streams inherent in our business model, such as gain on sale, as well as other opportunities we have identified, some of which Jim spoke to earlier. We remain on target to achieve between 4% and 6% net revenue growth for full year 2021 over last year on a constant currency basis.
Right now the OEM production delays have us trending towards the lower end of that 4% to 6% range, but the situation is very fluid as you've heard. To give you directional sense of the size of the positive impact that the deferral originations can have the following hypothetical.
If Element has effectively accumulated 1 billion of deferred originations by the time OEM production capacity normalizes we would expect the ensuing 12 to 18 months to benefit from those originations occurring. We would expect the net revenue growth rate during that 12 to 18 month periods increased by 100 to 300 basis points meaning that if we were otherwise going to grow 5% annually over that period, we would expect the growth rate to increase to between 6% and 8%.
And we would expect free cash flow from the same 12 to 18 months to benefit incrementally by approximately $40 million to $50 million in total. Finally, I would add that the incremental growth will ultimately be driven by the timing of how quickly OEMs can meet our backlog and new orders which are likely to be spread out as they ramp up to meet not only our pent up demand, but the markets in general.
With that, I'll hand it back to Jay.
Jay Forbes
Thanks, Frank. Just a few more thoughts for me before we open the floor to your questions.
First, when I think about the challenge our business is facing in the form of the OEM production delays our Q2 and first half results are all the more impressive. We remain on track to grow net revenue 4% to 6% year-over-year before FX, as we said we would in spite of a linchpin product supply shortage.
We're materially enhancing our return on equity despite a tepid service revenue recovery and on plan syndication activity. And we're growing free cash flow year-over-year and returning excess equity to shareholders exactly as we said we would.
This is once again showcasing the resilience of Element's business model, which we proved last year through the depths of the pandemic. Yet again, we're growing Element business in spite of unforeseen and unprecedented circumstances.
Our second line of thinking is inspired by being back on the East coast of Canada right now, a place where I grew up. Element's market leading growing resilient fleet management business is like a stunning coastal vista, which is often been shrouded a cog thereby obscuring the view.
Back in 2018, we had the heavy fog cover of 19th capital and over leveraged balance sheet and a struggling core fleet business. Transformation started cutting through that fog with early 2020, offering the first visibility of what this company could really look like.
When the fog of the pandemic rolled in and no sooner did that fog start to dissipate then we became shrouded in yet another back of fog caused by these OEM production delays. Over like coastal to weather systems, the current cloud won't last long.
We can tell that from the weather report showing the strength of our order book the recovery of our service revenue, and our healthy financing and syndication positions. You can imagine Element's looking like in the clear light of day as highly scalable operating platform, one then ensures net revenue growth falls almost straight through to operating income; a view where are transformed processes systems and procedures which we continue to automate and improve means that we can handle high transaction and interaction volumes without a commensurate increase in operating costs.
And more importantly we can do that without risk of degradation in a consistent superior experience that our people deliver to our clients. And our world class and uninterrupted funding and syndication capabilities to continue to show their value advancing our capital lighter business model that has already materially enhanced and provides the opportunity to return capital to shareholders.
Imagine what our results will look like when the new clients should share wallet wins and accompanying revenue units secured by our commercial teams in the first half had been on boarded, implemented, generating net revenue, operating income and cash flow. And imagine the service revenue potential in a post COVID V-shaped economic recovery with our clients fleets now back at pre-pandemic levels of activity.
Jim, Frank and I have the privilege of seeing Element up close every day and obscured by any fog and we can tell you, it looks even better from here than it does from far. Best is still yet to reveal itself.
With that, let's open the floor to your questions. Operator?
Operator
We will now begin the analyst question and answer session. The first question comes from Geoff Kwan with RBC Capital Markets.
Please go ahead.
Geoff Kwan
Hi, good evening. My first question was just on sort of the new client wins and the existing clients doing more business with you.
I mean, the Q2 results, you had issued yet another good quarter of new client wins and again existing clients in more business. You talked about shortening the sales cycle and improving the pipeline quality.
I know it's hard to generalize but are there additional insights that you can share just about what you're doing and then why clients are switching that's causing your hit rate to increase. And then any additional insights on trying to get self managed as well as U.S.
mega fleet targets.
Jay Forbes
Good evening Geoff, Jay here. We continue to ramp up the win rates across all three regions.
And I think it's a combination of a number of factors, firstly, sales force effectiveness. So, we have invested heavily in a much more disciplined approach to our commercial efforts and what has been the case in the past, leveraging some of the IP that we have developed in the Mexican market, refined in the A&Z market and brought into the U.S.
Canadian market and in final form if you will. And then, with that team embracing it, putting it into use and productive use here in Canada and the U.S.
they have expanded on that IP and in turn have shared their learnings with our colleagues in both Mexico and A&Z to the betterment of their salesforce effectiveness. So, a concerted effort in developing a go-to market process complete with marketing capabilities, complete with better sales funnel management, we're in the quality of the prospects in that funnel, the speed by which we're able to move from prospect to proposal to contract to signed agreement.
That has all helped accelerate the pace of growth that you're seeing. So, I think that's one key factor.
Second factor is indeed that best practice sharing across three regions where there is active sharing of learnings in terms of what's working, what isn't. And I would also point to the reputation and the return but the reputation that we enjoyed prior to the amalgamation of these organizations into the entity that became known as Element.
They operated as market leaders, had a great reputation in the marketplace for the consistent client experience that they offered. And the return to that stature wherein we are seen to be the market leader not only in size but indeed the consistency and superiority of that client experience has opened up more doors for us both with our existing client base as we look to increase the share of wallet and the services that we provide our existing clients who have a deeper level of trust and respect for us but that has also opened the door to prospects.
And in particular and this was a surprise to us, in particular, the client some of our competitors who aren’t just satisfied with their offerings and the experience that they're having with our competitors and they have come forward knocking on our door asking us to entertain doing business with them and you can see that in the numbers. We eschewed heavily toward share wallet and market share in terms of ads in the first half, largely as a result of again going within our existing client base and selling into the white space of opportunities there.
But secondly being more responsive to the RFPs that have come forward as prospective clients have locked into the market. They are seeing a viable alternative to the incumbent and approached us to consider doing business with them.
Geoff Kwan
And so, just on self-managed in U.S. mega fleet targets?
Jay Forbes
Yes, in self-manage, I would say to you the -- for any available of highly qualified targets in the stealing market share and share wallet space has elbowed out some of our effort that we would have put into self-managed to be honest with you. It does not in any way shape or form reflect any diminished perspective or diminished interests.
Quite the contrary, what we're seeing in our early forays into the self-managed have been encouraging. They constitute a goodly amount of the pipeline in terms of prospects.
And we have been modifying our go-to market approach for self-managed fleets based on those early forays into the U.S. and Canadian market in particular, and to some extent the A&Z again leveraging a lot of the knowledge that we cultivated as we built a very successful self-managed strategy for Mexico.
And then in mega, nothing and probably of substance to report there. Again loan long sale cycles and complex client needs very bespoke offerings and so we continue to have a number of opportunities that we're pursuing with interest.
And again, I would say that the credentials that come with supplying our model with like service solutions has served us very well in terms of providing us an entree for discussions with these larger potential mega fleet opportunities.
Geoff Kwan
Okay. And just my second question was on Armada.
And the Q1 and Q2 were a very subdued amount there. I think last quarter you still suggested that a "normal year" that I think we may see that still in 2021.
But given we haven't had much so far in Q1 and Q2, do you still and think that's achievable, are we going to see something less than typical for them in terms of originations this year?
Jay Forbes
I probably would have to fall back to our blanket statement around OEM production volumes and the resumption of same later in the second half. It really is quite dependent on how quickly the OEMs are going to be able to rebuild the production capability as the microchip shortage starts to wane and that becomes less of a constraint.
So yes, let's fall back on that just as the catch all, unfortunately. And so it will totally depend on the rate of ascent, the OEMC in terms of return to normal production models.
Geoff Kwan
Okay. Thank you.
Jay Forbes
Thank you.
Operator
The next question comes from Paul Holden with CIBC. Please go ahead.
Paul Holden
Thank you. Good evening.
First question is with respect to servicing income. So, you've provided some helpful context around where you're at in utilization end of July like back to pre-pandemic.
I think to better understand that'd be helpful to understand where you were in Q2 relative to sort of pre-pandemic run rates.
Jay Forbes
Yes, nearly normal. It has been a just a very constant ascent back to normal in terms of transaction levels and where transaction levels could be anywhere from the incurrence of a routine preventive or the maintenance, the consumption of fuel, the rate of incidents around accidents and collisions.
We never really saw anything but kind of a straight line a sense in terms of return to normal, it just planned out a little lower than what we've anticipated, took a little longer that we than what we had planned for. And again I think as much a function of the general environment and the issues that we have seen around vaccination and of a return to normal in terms of societal interaction.
So, delighted too as we sadly continued I think through the second quarter delighted to subsequent to Q2 to see us actually hit normal pre-pandemic levels of consumption, especially around fuel consumption and managed maintenance. So, feels like we're there.
And obviously based on the growth that you're seeing in terms of the new client wins, the share wallet, and new prospects that we've converted to, to clients. And then, we're encouraged by the profile for service revenue growth going forward.
Paul Holden
Thank you. Okay.
Second question is, really help me better understand the risks, either upside or downside to sort of your origination outlook for the next few quarters right stretching in the 2022. And I guess the question is, what changed between the Q1 update with respect to the expected delay of roughly $200 million from Q2 to Q3 and what actually occurred?
And does that again, does that mean anything in terms of potential risks either negative or positive in terms of your forward outlook today?
Jay Forbes
Yes. And maybe given Jim's at call faced here.
I'll ask him to speak to that, Paul.
Jim Halliday
Yes Paul, thanks for the question. I think the main driver of that obviously is the OEM production cycles continued to rise in Q2.
As Jay sort of alluded at beginning of the call, they are normally 60 days in the U.S. and 90 in Canada and they're now up to 130 and they're still moving north.
So, that's really the driver of kind of the fluidity and the OEMs forecast as much as much as ours is changing us as that dynamic happens.
Paul Holden
So sorry, I don't I guess I don't fully understand the answer just in terms of again I think the original expectation is roughly $200 million of worth of origination is being delayed.
Jim Halliday
Yes. So, the reason.
The reason the originations grouped out in quarter two was because the OEMs ability to deliver those vehicles to us move down.
Paul Holden
Understand, okay.
Jay Forbes
So, in the U.S. Paul, we actually ended up at twice the normal time to convert an order to an originated unit.
And that increased in two months on average and just pushed those originations into future periods. And again as Jim has indicated right now, the cycle time continues to increase.
And so, we as we look to the second half, they're difficult to have any type of line of sight with any degree of exactitude as to when that cycle time will start to compress and we'll get back to the normal 60 days cycle time from order to origination. So, it's that was the big factor is just the elongation of the cycle time from order to origination far beyond what anyone would have anticipated.
Paul Holden
And if I read through the answer correctly and based on my understanding of like vehicle sales in the U.S., then that's kind of suggesting that the OEMs are prioritizing the restocking of dealer inventories or for fleet sales. Is that a correct interpretation?
Jay Forbes
No.
Jim Halliday
No. I -- no.
I mean, I could take that one Jay if you want.
Jay Forbes
Yes.
Jim Halliday
Yes. So, Paul in the U.S., the way that the OEMs work and Canada is the same is there is an allocation that's for the fleet customers.
And so, they're not de-prioritizing our business, it's just and the retail is facing the same challenges. If you drive by a dealer a lot today, you'll see it's an incredible lack of vehicle inventory particularly from our core three OEMs and that's both on retail and fleet, it's not different.
But we're, we get updates from every day and certainly their perspective is that they're making progress towards securing more chips and that they expect to return to normal production volumes late in the kind of the second half of the year.
Paul Holden
Okay. I will --.
Jay Forbes
And Paul, I think it's important. I think it's important just to step back again.
As you think about this, recognize that as we think about the business globally we're absolutely in the U.S. and Canada, missing out on net financing revenue and syndication revenue and service revenue.
And more importantly to us, we're missing out on significant amounts of cash flow by virtue of having these originations deferred. And they will take place but they are being deferred right now.
But globally, the same factor that has given rise to these OEM production shortages has given rise to a ridiculous used vehicle markets in A&Z and to a lesser extent in Mexico which in turn has given rise to significant increments and gain on sale. And so when we look at the business globally, there is almost a hedging here that has taken place at the NFR level.
So, what we're actually seeing deferred in the U.S. and Canada and will be realized as revenue in the subsequent period, we're actually in receipt of one time revenue that significantly offsets that NFR.
And so, the real exposure for us is more along the service revenue and as Jim has pointed out, remarketing. So, if we're not replacing a vehicle, we can't sell the end of the life vehicle off and earn the associated fees associated with doing so which again is a very lucrative part of our business nor are we able to through the origination generate the upfront cash flows that usually come as part of origination transaction.
Those are the two parts of the business that are still exposed by virtue of this OEM production delay and that exposure again is temporary in nature, short term in nature, and the mere deferral of the revenue that will be earned in the subsequent period. That subsequent period being totally conditioned upon the ability of the OEMs to quickly ramp up and given the influx of chips that are becoming available to them now.
Paul Holden
Understand. Thank you.
Operator
The next question comes from Mario Mendonca with TD Securities. Please go ahead.
Mario Mendonca
Good evening, Jay. Sort of along the same line you've offered that the cycle time in the U.S.
is up by two months and one month in Canada. That would imply then that with the orders being as strong as they are that we should see a real spike in originations next quarter, I mean, if we're really just talking about a month or two delay.
What's causing you to think 2022, is it simply that the cycle time is not a constant, it continues to expand or is there something else going on?
Jay Forbes
A couple of factors to think about. So one, yes, absolutely we're at a 125, 130 day cycle time right now and it's rising.
And so when do we crest and when do we actually start to see a reduction in that cycle time and an expansion of capacity and the ability to drive down the order book. And so, what we're seeing is the pipeline for all intents and purposes has been constrained.
And yes, we will have originations in Q3 and Q4 absolutely. But they are going to be longer in arriving to us than they would normally be, which means that the orders that we might have placed in Q1, Q2, get produced in Q3.
And so it wouldn't be unrealistic to see the order book continue to build. The order backlog continue to build depending on how quickly the OEMs were ready to ramp back up production to normal levels and reduce that cycle time.
So, it is just constrictive supply that is preventing us from originating these vehicles. And if you're a player but it will be cleared at a pace that resembles the OEMs ability to produce that volume.
Mario Mendonca
A related question, then. I think you told us correct me if I am wrong but I think you told us that the backlog is at about $1.5 billion, is that right?
Jay Forbes
Yes.
Mario Mendonca
That I just understand. So, maybe you've also been good enough to explain that Armada hasn't made a meaningful contribution to originations in Q1 and Q2.
Has Armada made a meaningful contribution to that order backlog in 2021?
Jim Halliday
The comparisons that we have offered that have tried to bring Armada out of this just so we could have like-for-like in and if you will ever run by the Armada or the core business. And the reason why Armada had so few originations in Q1, Q2, was a function of better matching of supply to their needs.
Vehicles arriving in Q1 are not as valuable to them as vehicles that are arriving in Q3.
Mario Mendonca
So, did -- have they given orders to EFM, has Armada have given orders to EFM in 2021?
Jay Forbes
Yes, they have.
Mario Mendonca
Thank you.
Jay Forbes
Yes, absolutely.
Operator
The next question comes from Tom MacKinnon with BMO Capital. Please go ahead.
Tom MacKinnon
Yes. Thanks very much and good evening.
We certainly then, we've certainly made it clear that demand is robust and it seems to be just an issue here in terms of OEMs being able to fulfill what has been a very strong order book. But I was curious by the comments you put in the press release where you said Element leads, there is additional near term client demand for vehicles in the U.S.
and Canada that is not reflected in the first half of '21 order volumes, as some clients have remained cautious in the first half of the year to the lingering uncertainty regarding the pandemic and economic recovery. So, maybe you can tell us what made you, you've talked about demand being robust but at the same time you're saying that clients have remained cautious.
And maybe you can talk about what you were seeing there and why they were saying that now that cautiousness with respect to clients has trended through the first half of the year. Thanks.
Jay Forbes
Yes. And maybe I'll start and ask Jim to add a little bit more color.
So, if you will, Tom, segment the population of clients and to the bulls and the bears. So, those who lose the business model has been less impacted less affected by the pandemic and have a very bullish outlook for the future prospects of your organization, have their orders and there are aggressively moving towards a continued revitalization of work and work with the past practices.
The same time, we would have some other clients that would have been taking a more cautious view of how the pandemic might unfold and the impacts it may have on the organizations and the organizational needs. And then you stir in to that and gosh even if I put an order in, given the chip shortages and the resulting OEM production delays and might even going to be able to get a vehicle, why bother?
So, if you stratify the client base into those two groups, what you see in terms of record, order backlogs, and each of the three regions reflects that conviction of those clients with a bullish attitude. What it doesn't reflect is those that are sitting on the sideline by virtue of is there a cautious view as to how the economy might unfold and with it how their business may be impacted.
And or a bit of a reluctance to place an order knowing that it's just going to be queued up for a considerable period of time, awaiting OEM production. And Jim's conversations to these conversations plus there's others leaders conversations with those clients would suggest that what we've been cautious for a while.
And we can no longer either we have become more bullish in terms of the economic sentiments or just more pragmatic in terms of our approach. Our fleet is aging.
It's becoming more expensive to run. We're incurring greater down time than what we should be.
And it's just time to place those orders. And so, that would represent that second group and what we're hearing in terms of additional pent-up demand.
So, that's in our mindsets how the two segments can coexist. So, they then place the orders and contributed to record order backlogs coupled with those that to this point had been in a bit more cautious, a bit more latency and attitude.
But the clock is running against some in terms of managing an efficient fleet and they need to make some decisions.
Tom MacKinnon
Okay, thanks for that. And the second question is with respect to the buyback, the 5.6 leverage, you bought back a lot and a quarter of 5.6 leverage kind of stayed the same quarter-over-quarter.
You're like halfway through and it's a 10% NCIB and there is maybe a little over four months left on it. So, related to that like is your intention to just sort of continue on this pace and utilize the entire NCIB especially given that you're at an attractive 5.6 leverage and does this increase in OEM cycle time have any impact on that?
Thanks.
Jay Forbes
Yes. With regards to the latter point now, the OEM cycle time wouldn't have any material weighting in terms of our consideration around the NCIB or capital allocation process.
So, that wouldn't be a factor per se. And we're pleased with the pace of the program.
We've set up to buy as much as 10% of the shares outstanding shares of the organization. And as we've stated before, one of the governing factors for us, one of the more important governing factors for us is tangible leverage and trying to keep our tangible leverage in that sweet spot of plus or minus six times tangible leverage recognizing that's where we're now want to be on the efficient frontier.
So, that will continue to be a bit of a beacon, a bit of a guiding light for us in terms of the pace and sizing of the share buyback program as to go forward.
Tom MacKinnon
Okay, thanks.
Jay Forbes
Thank you.
Operator
There are currently no more questions within the phone lines and this concludes the question and answer session. I would like to turn the call back over to Mr.
Forbes for any closing remark.
Jay Forbes
Thank you, operator. And more importantly, thanks to all of you for joining us this evening for a discussion of our Q2 results.
Much appreciate your time and your continued support. Thanks all and stay well.
Operator
This concludes today's conference call, you may disconnect your lines. Thank you for participating and have a pleasant evening.