Nov 11, 2015
Executives
John Sadler - SVP, Corporate Affairs and IR Steven Hudson - CEO Bradley Nullmeyer - President Daniel Jauernig - COO David McKerroll - Head, Element's Rail and Aviation Vertical Michel Beland - CFO
Analysts
Vincent Caintic - Macquarie Geoff Kwan - RBC Capital Markets Paul Holden - CIBC Tom MacKinnon - BMO Capital Markets
Operator
Good afternoon ladies and gentlemen, welcome to the Third 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, Greta, and good evening ladies and gentlemen. Thank you for participating in our conference call to discuss Element’s third quarter results for the three months ended September 30, 2015.
Joining us today to discuss these results are Steven Hudson, Element’s CEO; Bradley Nullmeyer, Element’s President; Daniel Jauernig, Chief Operating Officer; David McKerroll, head of Element's Rail and Aviation verticals and Michel Beland, Chief Financial Officer. A news release summarizing our third quarter financial results was issued earlier today and the financial statements and MD&A for the three and nine months ending September 30, 2015 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 on 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 third quarter 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 useful to investors.
A reconciliation of these non-IFRS measures to IFRS measures can be found in our MD&A. The appendix to the presentation provides a definition of pro forma for the purposes of today’s conference call.
We value this concept today to call as two timing factors impacted our financial results and certain reported metrics during this quarter. First of all we obtained reduce funding costs on our senior line from closing of GE US Fleet acquisition on August 31 and from receiving an investment grade written from [DB Direct] on September 24.
The benefits of these interest cost reductions are only reflected in our reported results as on those dates. Our pro forma numbers used during today’s call reflect these cost reductions as if they had occurred on the first day of the third quarter.
Second, we raised equities before the quarter on May 29, to finance the acquisition of GE Fleet, which closed in two trenches; the US portion of the GE Fleet business was acquired on August 31 and the businesses in Australia, New Zealand and Mexico closed on September 30. As subscription received issued on May 29, were converted in to Element’s common shares on August 31 and are reflected in our reported common shares as standing on that date.
The pro forma metrics used today also assume that the acquisitions of the GE Fleet businesses in Mexico, Australia and New Zealand occurred on August 31, the same date as the subscription received towards converted and common shares rather than the actual acquisition date of September 30. With these introductory comments complete, I’ll now turn the call over to Steven Hudson, CEO.
Steven Hudson
Thanks John and thanks for taking the time to review and discuss. We believe to be an outstanding quarter strong on all fronts.
Let me turn to page 5 of the slide deck that you have in front of you up on your screen. Let me start with two key developments in the quarter as John mentioned were happy to have closed the previously announced GE Fleet transaction and two stock components; first being the US business on August 31 and the second being the Mexico, Australia, New Zealand business at the end of September; significant steps forward for this company, as well commensurate with that we are happy to have announced our second investment grade rating which has driven significant cost of fund reductions.
On the other page 5, let’s just talk about some of the highlights associated with those developments; 77% of our Elements’ total earnings assets are attributable to our fleet and rail business, and that makes us the dominant - that is our dominant business and we’re happy to be in that position. Our Q3 adjusted operating earnings per share of $0.26 as John mentioned you are kind enough to give us the bunch of equity in advance of needing it.
We closed on all the equity to acquire the Australia New Zealand deal even though we didn’t receive the income till Q4. If we’d got the equity timed up with the closing of Australia, we would have been $0.28, that’s the pro forma number that John referred to earlier.
We are reaffirming our guidance of two areas of $90 million to $95 million integration savings. We have some encouraging news on that.
Dan Jauernig, our Chief Operating Officer will speak to that shortly, and we’re reaffirming our $1.61 after tax EPS, and we’ve formerly announced our dividends driven by our strong quarter and a very solid incoming cash flow. If I turn you to page 6 of your deck, some key metrics are on track; earnings, free adjusted operating cash flow pre-taxed with $0.32 would have been $0.34 if not for the timing on the equity issuance versus $0.31 in Q2.
As I mentioned, adjusted operating income per share of $0.26, $0.28 pro forma basis versus $0.23 in Q2, consensus of $0.25. Originations are very strong across the board, aviation as you know a lumpy business that we’ve had in the past and we are also transitioning that to a fee base business as Dave McKerroll will speak to you shortly.
We do have some disclosure on page 7, I’d like to review if you a few with respect to organic growth. If you turn to the right hand side of page 7, let’s take a second and look at the company’s strong organic growth.
It’s true we made a few strategic acquisitions, but the proof of the pudding is, can we grow it organically. I think that’s adequately addressed on page 7 that shows the growth complete.
We’ve used year-over-year numbers, we’re moving acquisitions that show over $1 billion growth of fleet which is 21% adjusting for currency difference that’s over (inaudible) and assets on a pure organic basis, and very strong growth commercial vendor driven by our US business, rail and aviation. So 4 billion of organic growth in that period I think speaks to the quality of strength of our franchise.
Page 8, as I mentioned earlier, we are now a fleet and rail business with 77%. We love our other business, but fleet and rail are really what drives the go-forward business.
We added 7 million of GES that’s in the quarter, rail we had almost 360 million of new efforts in Q3 pursuant to our strategic partnership with (inaudible) industries which Dave will speak to shortly, and year-over-year our assets are 8.3 billion September 30 to 19.3 billion as of September 30, 2015. Turning the table on page 9, if you look to the second column on the right, those are our reported numbers.
The right most columns would be the pro forma which are just this for the timing of the equity and a little bit on cost of funds. I think the important message in pro forma is it will drive very strong Q4 results.
We’re very happy with our business; Michel will speak to the leverage ratio, which is growing and still room for growth on our leverage ratio. We’re reconfirming our 12 years of tax deferral and estimated value of $4.50, and Brad and Dan will walk you through the fleet section, what I call the ROA walk on how we walk the fleet business in to its 4% ROA target which we’ve forecasted and we’re committed to.
On page 10, continued evolution on our fleet business. Fleet business is 39% year-to-date, we are obviously forecasting higher fleet business as we’ve taken control now of the fleet business with opportunities to grow its service components as well as David’s initiative transition our aviation business in to one of our fleet business, so more good news to come on the mix on fee and spread income.
On the bottom of page 11 is showing that the transfer in to our already at September 30, ’14 of significant US player with 63% of our assets in the US, an economy today that numbers 73% and growing. This is important; not only are we fleet and rail, but we’re fleet and rail with a dominant franchise in North America.
With those introductory comments, Brad I’ll pass the presentation to you.
Bradley Nullmeyer
Thank you Steve. We continue to be pleased with the performance of our commercial and vendor financing unit and our fleet management business during the third quarter.
In our fleet division as mentioned by Steve and John we closed the acquisition of GE fleet services business in US, Mexico, Australia and New Zealand. This has resulted in Element having just over 66% of our total assets in the fleet business at the quarter end.
As you can see from slide 13, our financials stayed relatively constant in the quarter, while our OpEx continues to improve. We are pleased that on a comparable quarter-over-quarter basis i.e.
Q3 of 2015 compared to Q3 2014, our net earning assets and fleet increased and grew organically at just over 21% and on a currency neutral basis they grew organically at over 7%. The fleet ROA has dipped slightly to just over 3.1%, primarily due to the use of our senior bank line during the quarter and the timing of the acquisition closings.
As we exit 2016, we will deliver an ROA in the fleet business in excess of 4%, and on slide 14 and 15 I’ve provided an update on the GE Fleet acquisition and a bridge announcements of our past to the ROA as we move through 2016. At this time I’d like to have Dan Jauernig, our Chief Operating Officer provide an update on the GE Fleet integration and on our path to the fleet ROA.
Dan?
Daniel Jauernig
Thanks Brad. We are well underway on our integration process in all areas, with various work still in progress.
We have developed a completely separate office for integration that is not burdened with our daily fleet business and workflow. Having said that, we keep all of our fleet teams appraised of our integration efforts together with our customers through our Customer Integration Advisory Board that we established.
The Advisory Board is a group of 23 customers from diverse areas and industries across North America. This group will have direct input in to our integration efforts, and provide us with valuable guidance on our systems development and customers facing reporting tools throughout the integration process.
Our IT projects are well under way, and they will position Element fleet to drive future business growth and efficiencies. We are well advanced on our targeted annualized integration savings of 90 million to 95 million and tracking towards the high end of the range.
Of the three buckets of savings, we are substantially complete on our cost of fund savings, which will wholly realized starting in to the first quarter of 2016. Our procurement savings are also substantially advanced, all of our supplier contracts are in the process of being renegotiated as we speak to take advantage of our combined scale.
We expect negotiations to be finalized in Q4 with all new contracts in place starting on January 1 2016. As a result we will realize the fully year benefits of procurement savings in 2016.
Our business operations and IT consolidations are ongoing as we speak, with consolidation savings beginning in Q3 2016 and fully implemented within Q4 2016. All of our integration planning is complete, the integration savings have been quantified, and we have a clear pathway to executing on our integration targets.
Finally, just a quick update on our global alliance with BNP, Arval. BNP Arval has recently announced that it has closed its acquisition of GE’s Fleet business in Europe.
Together we are continuing to enhance our global fleet offerings and deepening our alliance with them through the Element-Arval Global Alliance agreement to better service our North American fleet customers in Europe and generate more business from their European fleet customers here in North America and Australia and New Zealand. And with that I’ll now turn it back to Brad.
Bradley Nullmeyer
Thanks Dan. As you can see we are executing on our strong growth opportunities within our fleet business in both deeper product penetration in to our current customer base as well as new customers opportunities and products that we continue to rollout.
Our size and scale coupled with our global reach is second to none, and while scale is not a strategy in and by itself, it’s an important component for us and our customers. Our size and scale allows us to invest in new technologies, like our recently announced IT initiative, that will allow us to service customers like no one else in the industry can.
We are well under way in our integration as Dan spoke about of our businesses, and we’re on a path to deliver value to our fleet customers and value to our shareholders. On slide 16 and 17, you can see that our commercial and vendor business originated $580 million during the quarter, with both Canada and the US showing strong organic growth.
This is a 7% increase over the second quarter originations and 55% increase over the same quarter last year on a comparable basis. Our US only originations more than doubled from Q3 2014, while in Canada we saw the effect of right-sizing the origination platform that we spoke about in quarter one.
During the quarter, we announced some strategic review of the Canadian commercial and vendor business and have engaged parties to assist us in that process. The result of these review are not yet finalized, but we have a high level of interest in this business.
Commercial and Vendor did these record originations while maintaining its ROA at just under 4% despite slightly lower syndication income burp during the quarter. In addition our commercial and vendor group continued to reduce its OpEx ratio which is in line with our expectations and under the 2% we previously committed to.
As a closing comments, we are pleased with the results of both our commercial and vendor business and our fleet management businesses that they have returned to us during the quarter. We are also excited about how our fleet businesses are coming together on the people side, our customer side, and on the financial side, and we are now fully poised for growth and innovation within this business.
With that I’d now turn the call over to David McKerroll. Thanks Brad.
On slide 19 we can see the results for our real vertical, they are in line with our expectations. Originations for the period were 358 million that’s up 275 million from the previous quarter.
Our yield and expenses were comparable to previous quarters bringing in the ROA at 3.3%. We announced last month that we’ve signed a new four year agreement with Trinity Industries to purchase these rail cars.
Our strategic alliance with Trinity which we started in December 2013 has given us the opportunity to quickly become a significant railcar lessor. Trinity has been a great partner and will continue to be important partner going forward.
The first phase of our original program with Trinity will conclude this year, and we are expecting volume from Trinity in the range of $150 million to a $175 million in railcars for the fourth quarter. The extension starting January 1, 2016 will provide us with $1 billion of these railcars over the next four years.
This will give us a reliable flow of leased railcars to support our business and when we combine that with our direct origination capabilities, we will be able to grow our rail book by approximately 25% next year. The attributes of our rail portfolio continued to be very attractive.
We have a very young fleet but it is well diversified by car type lessee industry in turn and provides significant tax yield for Element’s income. Turning to slide 20, Aviation finance, our aviation vertical had 83 million of originations during the quarter, ROA improved by 110 basis points over the same quarter last year, but is lower in the second quarter because of the fee income that was included in the second quarter for closing ECAF 1, our 1.6 billion commercial aviation fund.
Originations tend to be lump in this vertical, so shouldn’t be surprise with originations going up and down. But we are continuing to have more emphasis on generating fee income through restructuring and advisory mandate including additional fund vehicle similar to ECAF 1.
These mandates use significantly less capital than director cap financing and generate superior returns from restructuring, arranging and administration fees every year. With that I’ll turn it over to Michel Beland.
Michel Beland
Thank you Dave. Slide 22 looks at some of the key financial results from the income statement.
Financial for the three month period ended June 30, 2016 increased to 259 million from the 208 million in the previous quarter, generating net financial income of 185 million for the quarter versus 150 million in the preceding quarter. Adjusted operating expenses were 78 million for the quarter, versus 61 million in the immediate previous quarter.
Adjusted operating income and full income tax increased by 21% to 107 million during the third quarter versus 89 million for the previous quarter. After tax adjusted operating income or adjusted operating income after income tax was 87 million and 90 million on a pro forma basis versus 68 million in the preceding quarter.
Slide 23 provides a number of operational yields expressed as a percent average earning assets. Financial revenue expressed as percent of average earning asset was 8.0% in Q3 versus 8.3% in the previous quarter.
As we’ve discussed previously and (inaudible) over the previous period was mainly attributable to the lower level of sanitation activities during the quarter as a percent of average earning asset, and as Dave mentioned the prior quarter included (inaudible) advisory fee related to the establishment of the commercial aircraft ECAF 1. Interest expenses expressed as a percent average earning assets was 2.26% in Q3 versus 2.33% in the previous quarter in line with the current mix of business and related financing and it reflect a reduction in debt plus 2.53% during the current quarter compared to 2.56% in Q2 and a slightly lower tangible leverage of 3.61 during the current quarter versus 3.71 during the previous quarter.
We’ve had a reduced growth year of 36 basis points offset by the 6 basis points improvement in [planning] cost, average net financial margins decreased from 6% in Q2 to 5.7% in Q3. Offsetting those lower margins, adjusted operating expense declined slightly to 2.39% of average earning assets for the quarter versus 2.44% in the immediate quarter, reflecting the expected improvement resulting from a completed integration of [CH&H].
Adjusted operating income before income tax was 3.30 of average earning assets for the quarter versus 3.55% in the immediate quarter. As mentioned, pro forma the positive impact of the reduced funding cost risen from the achievement of the investment grade rating and the timing of the equity raised and the closing the Australia, New Zealand and Mexico acquisition in September 30, we estimate a pro forma adjusted operating income before taxes as a percent of average earning assets that had been 3.4% versus the 3.3% (inaudible).
Reported throughout there’s a (inaudible) of a strong balance sheet and approximately 1.5 billion in deferred income and free cash flow of 5.5 billion that will be monetized over the remaining term of the company’s assets. On slide 24 lies a balance sheet snapshot.
The total assets were 23.6 billion at the end of the quarter, an increase of 54% from the 16.3 billion at the end of the preceding quarter. This reflects the acquisitions of GE Fleet in the US, Mexico, Australia and New Zealand, as well as organic growth during the quarter.
Leverage increasing keeping with our guidance to include efficiencies of our capital structure, Element tangible leverage ratio was 4.52 to 1 as of September 30, 2016 compared to 3.1 to 1 as of June 30, 2015 reflecting the impact of the GE Fleet acquisition and related financing. The company expects leveraged ratio to continue to increase through 2015 and 2016, as the company continues to expand and forecast tangible leverage of 5 to 1 as of December 31, 2016 assuming the current mix of assets and verticals.
Tangible leverage test we mentioned here applicable to the bank [ordinance] has been reaffirmed by DBRS as part of their recent rating input as their internal guidance. On slide 25, after tax adjusted operating income as the return on average common share equity declined by 19 basis points to 8.94% from the 9.13% with equity raise of May 29 to finance the GE acquisition and the start of closing of the transaction between August 31, and September 30.
This had a similar impact on the before tax adjusted operating income, return on average shareholders’ equity where they declined (inaudible) to 104 basis points down to 11.22%. Again on a pro forma basis, this quarter decline would have been eliminated and return on equity similar to Q2 at 12.3%.
Slide 26 provides a number of per share amounts, book value per share increased to $12.58 on a pro forma basis versus the $10.29 reported at the end of the preceding quarter. Free operating cash flow per share or adjusted operating income before income tax improved to $0.32 per share in Q3 and $0.34 per share on a pro forma basis versus $0.31 a share in the previous quarter.
After tax adjusted operating income per share was $0.26 with $0.28 on a pro forma basis, approximately $0.01 ahead of consensus versus $0.23 for the preceding quarter. In addition to these headlines, basic EPS numbers (inaudible) to fully diluted after tax operating income per share on a pro forma basis at $0.25 a share.
Slide 27 summarize a reformative trend of non-current and impaired asset as a percent of finance receivable as well as an allowance for credit losses. All these measures are on plan and reflect the high quality nature of elements finance receivables.
Returning to balance sheet capacity, as the graph on slide 28 shows that we are committed funding facilities demanding to more than 21 billion of which 4.3 billion was unutilized and available as of September 30, 2015. What this graph does not illustrate is the incremental funding capacity that is available to the companies through the rated asset backed securities market which we utilized on a regular basis to benefit from accumulated portfolio in the rail and fleet vertical.
I’ll turn the call back over to Steven.
Steven Hudson
Thanks Michel. Before we open the call to questions, let me just summarize certain things.
I am quite pleased with what is a strong robust quarter, particularly given the size of the acquisition that we just completed. The first I might draw your attention to is our reaffirmation of our EPS guidance of $2.25 per tax, as you know we do not pay tax and $1.61 post the deferred tax charge.
To reaffirm our 90 million to 95 million of cost savings I think the you’ve heard us indicate that the phase 1 is going to be better than expected. I had spoken to Brad and Dan of the procurement savings being in the 40 million to 42 million range, we think that number will be 45 million plus and growing, but Dan is deep in to negotiations and contracts, all of which will be completed by January 1.
Item number three; strategic review continues to the Canadian C&V business. We’ve had very strong and deep interest on that particular business with more to follow on that with the transaction for announcement in Q1 of ’16.
As we mentioned on our October call and Karen Martin our Treasurer presented, we maintained our matched funding discipline and Michel spoke in to significant available capacity and our completely managed book. Item number five, we’ve been able to increase leverage as Michel mentioned to increase the capital efficiency of our model, with our rating agencies now focused on our bank covenant for leverage.
We have at least to 1 point to 1.5 turn to grow in to that. We’re also happy to see DBS can join us as a rating company and we’re also happy to see some recent running reports on the fleet industry indicating it’s a single A business.
Point number six, a strong organic growth, if you ex out all the [excessive] growth which has been very focused and very strategic, you see $4 billion organic growth year-over-year. So I think about can we grow it, has been proven.
And we discussed we missed (inaudible) in the second year, Brad is intending to take to the third, fourth gear volume number five with his partner Dave McKerroll. And then finally on the acquisitions front, we are obviously watchful but a disciplined will be followed.
We are first and foremost committed to delivering on the integrate savings to our shareholders and driving our earnings per share and our ROA, and make sure those acquisitions are priced at the appropriate level. I think operator with that introduction, we are happy to open the call to questions.
Operator
[Operator Instructions] the first question is from Vincent Caintic of Macquarie. Please proceed.
Vincent Caintic - Macquarie
Just want to focus more on the organic earnings power in the fleet business and I’ll break up my question to the servicing fee growth and then the organic growth of the size of the business. First on the servicing fees, I am just wondering how much further can ROA grow seeing in the 2016 that you have 10% contribution to ROA from servicing fees and currently the servicing fee mix is 39%, I am just wondering how much more this penetration can increase?
What is in the 10 basis points contribution to RWA and if you could also give an example for how you can drive incremental demand from customers.
Bradley Nullmeyer
Thanks Vince this is Brad. If you look at the bridge walk we’ve done you’ll see how we get in to our 4% plus ROE, and included in there is our integration cost savings which we talked about and those are well underway.
In addition to that, we see the shift from straight spread money over money business in to the revenue part of it, and as you know those two go hand in hand. With the scale and the systems work we are doing, we are poised to have the best analytics and consulting practice and new products of anybody in the industry.
And that’s where we see the increased penetration coming. So the model’s in there, there is some space for that growth with the lifecycle of that, the sales cycle of that takes a period of time, but we will see that coming on strong in the first quarter as we both go deeper in to our things like telematics where we’re at a fairly low 30% penetration rate.
We expect that to be - it should be upwards of 100% as we move in through ’16 and out of ’17 and then other products such as our Red-Light cameras and some of our other new products that will get a complete better and better penetration in there. So we’ve modeled in that, but that 10 basis points there is space there because as you know it’s a high margin business, its capital light business, and so we expect to see exceptional growth on that.
We’ve talked quite a bit about moving that from the approximate 45% for the fee only basis to exceed 50% of our total income as we move through ’16.
Vincent Caintic - Macquarie
And then in terms of the asset size and originations, if you can give us a sense how much more that can grow and in particular how much of the market share you can take out of the 80% and so over a 100 billion of fleet that’s managed in-house? And then when you approach a customer what’s the typical size of their fleet in terms of either dollar size or the count of the vehicles.
Thanks.
Bradley Nullmeyer
It’s Brad again. So we specialize in fleets over a thousand.
We have a 175 right now on our list and have over 5000, so it’s a fairly big market place. We talked about that 80% and that includes customers that doeth themselves and we have customers that I visited last week that have come a 150 people managing a very small fleet of 5000 cars.
Those are the ones that we can do on our systems and our processes with only a few people inside their operations. So those are great opportunities for us.
When we go in to that market place we have a traditional outsourcing program with them, and that’s where we look at taking all their fleets and doing all their service part of it. And the second part of your question Vince was on the side.
Yeah. So I said we take currency out of our business quarter-over-quarter.
We grew 7% and we expect that part of the business can grow on a currency neutral basis between 8% to 10% per year and then we expect our revenue to grow in conjunction with that as well. And we do not see that having a limited shelf life to it, meaning that we think that it can go well through ’16 and ’17, because there is a very, very large market there that we continue to tap.
So we fully expect that to continue to through ’16,’17 and beyond.
Steven Hudson
Vince this is Steve, just a little color on Brad’s comment. One of the question was could we return the [HH] asset growth given (inaudible) for capital.
I think that questions now very clearly addressed at the 7% growth early period as established, we can turn it on and Brad’s and Dan have just got their hands on the GES, so I think we’re confident with that 8% plus number and the asset growth and double digit on the service side. And you’re probably right, we probably sand bag to bid on the service revenue on that ROA walk for you.
Operator
Your next question is from Geoff Kwan of RBC Capital Markets. Please proceed sir.
Geoff Kwan - RBC Capital Markets
I just wanted to clarify your last comment around the organic growth on the fleet side in terms of 8% to 10%. Have you guys talked previously, and thought Dave might have been a little bit lower, more on the 4%ish range.
I don’t know if that was apples-to-oranges or it was something else that you’ve talked about previously.
Steven Hudson
Geoff its Steve, that’s comments from the industry, never from us. People said fleet grows with GDP and small price increases, we never bought in to that.
So people work 4 to 5, I think tonight where this afternoon on a wet windy afternoon in Toronto we’ve demonstrated $0.07 growth. We’ve always said that we would outperform the industry.
Geoff Kwan - RBC Capital Markets
Okay, thanks for clarifying that. And then secondly was on the aviation side, because you talked about how you’re repositioning that business in terms of on the growth side.
Just wanted to understand how to think about it from a modeling perspective because when we take a look at say last year in 2014 you had 800 million of originations, but is this going to be the case where you’re just going to report just the equity portions of the deals that you’re funding and like I said, how it implies on originations in the balance sheet.
Steven Hudson
I think Geoff we’ll continue to show originations for our Aerospace business as it is traditional and we’ll start to show as well the reference to ECAF 2 and other funds and bonds for you. So we’re not going to turn off that reporting until we’ve completed the transition in to a fee business.
Geoff Kwan - RBC Capital Markets
A last question I had was just on the share price obviously I had a bit of account as a last for the bit. Just wondering if you guys have talked internally about whether or not to do any sort of share buybacks or those sorts of things.
Steven Hudson
While we here are pretty focused on establishing the dividend using capital first there Geoff, as an investor I think we expect to see that I will be buying stock here once we clear the blackout. It’s hard to believe that we trade a little over seven time’s pre-tax cash flow in 2016.
So what you should expect me to say is it’s a screaming buy and we’ll be putting our money where our mouth is.
Operator
The next question is from Paul Holden of CIBC. Please proceed.
Paul Holden - CIBC
So first question I wanted to ask was on that embedded free cash flow number 5.5 billion, I think that’s the first time you’ve disclosed that number in that way. So wanted to add a little more in terms of what that implies in terms of funding capacity going forward and associated leverage on that 5.5 billion of available future equity.
Michel Beland
Paul it’s Michel. The 5.5 billion is really the difference between the cash flow arising out of the assets and the repayment of the debt.
So there’s 5.5 billion greater than a free cash and (inaudible) is a combination, a repatriation of equity in to the deals and the spread income that comes from the transactions. So a portion of it was always on our balance sheet, its’ better than our financial assets.
If you look we have 1.6 billion of confirmed income, finance receivable being at the end of September. It is also very - a similar portion of amount embedded in the equipment on their operating leases.
So the 1.5 billion is really those two numbers which is the interest income and that the customers are committed to pay us less the interest expense we pay on the debt and the 5.5 is really the return on the equity that’s invested in these assets. That will be used to reinvest in to new assets as these mature.
Steven Hudson
Paul I think (inaudible) divestiture is if you look to a contractual lease commitments to the company less those contractual debt payments that is 5.5 billion of excess cash flow i.e. the company’s book equity is equal to that of its committed cash flow with all respect to growth or value its businesses (inaudible).
I don’t know another company can make that statement.
Paul Holden - CIBC
I guess my question is trying to get to the point in terms of the future available cash flow plus associated leverage on how much you could grow the book organically without having to tap the markets for any new additional equity.
Steven Hudson
I think the reference would be we find a couple of rating agencies with us confirm fleet companies of A rating from 7 to 1 leverage. We’ve gone through that historical walk of [PHA] back in 80s with you, we are getting more confidence about leverage, obviously work to do on our side including the integration of GE.
We can grow a lot without having to tap the equity market. We can get the precise math back to you later.
(inaudible) new equity, Paul.
Paul Holden - CIBC
Got it. And then in terms of the seeing the OpEx ratio obviously has come down nicely probably exceeding expectations.
Are there any implications for that ratio as you sell the Canadian portion of the business or you would go higher necessarily?
Steven Hudson
No that would actually probably give us a little bit (inaudible) even though the states just because it has more scale, has a little more efficiency on a percentage basis, but it would be a nominal effect on it. We’ve been very successful in the US in driving that cost down.
We talk about being under 2% and we continue to drive it, lowering that as we drive efficiencies. But there was no effect on the sales of the Canadian sale or anything else with respect to Canadian business.
Paul Holden - CIBC
And then a question that’s popping up frequently and I know you guys have gone through it in the past, wondered if you could go through one more time. In the US it looks like the Fed is going to start raising rates soon, so that should impact the cost of funding through ABS facilities and through your bank facilities as well.
Can you walk through how you can pass that on to customers particularly on the fleet side?
Steven Hudson
Actually Paul as you know our book of existing assets is matched for the rate and for debts, there’s no impact existing to the future book, the lease contract provides to pass along the increased cost of funds.
Paul Holden - CIBC
Okay, and that’s true on the fleet side.
Steven Hudson
Right.
Operator
The next question is from Mario Mendonca of TD Securities.
Mario Mendonca - TD Securities
Michel perhaps for you, the 55 basis points reduction in cost of funds, could you help make that a little more precise in terms of how we would affect the 2.5% to 3% you disclosed in your cost of borrowing this quarter. Like what kind of a delta should we see there?
Michel Beland
The 35 basis points reduction which came about once the company received its rating from the DBR was only effective on September 24. So it had no impact on the financial results of (inaudible) year, and that’s why we bring the close-up of the pro forma basis number to try to bring that in.
But that number will actually come in to play in the fourth quarter only.
Mario Mendonca - TD Securities
So the 2.53, where would you guide us to there? The 2.53 is the cost of funds this quarter reported.
Michel Beland
Yeah, I think the cost of fund and next year has a pure cost of debt maybe a little bit higher only because we will be reporting the Mexican, Australia and New Zealand business which has a tax rate obviously the structure of their interest rate is different than ours. So I think that will be a little higher than that.
The LIBOR in the US is 50 basis points and we price off LIBOR and LIBOR in Australia and New Zealand is over 225-230 basis points. So that is certainly increase the cost, but that will be adjusted in hopefully at the beginning of 2016 as we transfer our funding from our senior line to ABS facility that is just a (inaudible) structure.
Steven Hudson
The answer of course Mario was that Q1 we would guide you to 235 to 240 in cost of funds.
Mario Mendonca - TD Securities
And presuming you get the ABS structure like Chesapeake too essentially.
Steven Hudson
Let me guide you through the three components Michel had spoke to, we have an 8.5 billion senior line. The cost of funds on that are down 55 basis points which is the 20 basis points we announced on closing the transaction at 35 basis points probably see to the second investor grade rating from DBRS.
However the GES its fitting our senior line as oppose to going to Chesapeake. So senior line down temporary or bridge funding for the GES, it’s a higher than what Chesapeake would have done.
When they roll in to Chesapeake you get the pickup from that reduced cost of funds. That could be as early as early December.
So we guide you to that lower number in Q1.
Mario Mendonca - TD Securities
So you feel confident that Chesapeake too will get done in 2015.
Michel Beland
Yes, we’ve done. We have a rating agency engaged and then we have in the commitment and soft commitment and verbal commitment for oversubscribed from the 4.5 money in the (inaudible).
So we are confident not to close this by the end of November.
Mario Mendonca - TD Securities
Given these sort of frictional changes that can sometimes be inevitable when a deal gets done early on, would you go on to revise the $0.33 you talked about for Q4 2015. I am a friend of the $0.33 you offered earlier this year.
Michel Beland
No Mario.
Mario Mendonca - TD Securities
Still comfortable with $0.33. Sorry I didn’t hear you.
Steven Hudson
Yes.
Operator
[Operator Instructions] The next question is from Tom MacKinnon of BMO Capital Markets. Please proceed sir.
Tom MacKinnon - BMO Capital Markets
Just a couple of questions, first maybe for Michel on the 21 of the MD&A you got the number of shares outstanding at the end of the quarters been 386. Just wondering what that is on a fully diluted basis, not a pro forma of fully dilute basis but what is tried on a fully diluted basis, just help in modeling going forward.
Michel Beland
Still have the MRP to send you a detail after the call in the morning, make sure I don’t remember that procedure
Tom MacKinnon - BMO Capital Markets
The other one is on that same page there is 9 million in the other effects of dilution, and I assume that 9 million number includes this lower funding cost as well, is that correct?
Michel Beland
That’s on page 22 at the time of the MD&A, there’s sort of table that kind of reconcile the number through a pre-dilution and post-dilution, so you will be able to see the number there on another CD, where you’re talking about share count and the 256 which is diluted share count, half of the share count there comes in to the $0.25 calculations, so the 9 million is the radius back on the convertible shares.
Tom MacKinnon - BMO Capital Markets
Roughly what’s the dilution we should be using for just going forward on the 386, is that something that we should be addressing offline then?
Michel Beland
Yeah, I think if you look again on page 22, there’s about 44 million short view and a conversion - that converts. So I think that is probably going kind of mirror from quarter-to-quarter or get close to that.
Tom MacKinnon - BMO Capital Markets
So traditionally we only had like a 7 million or 8 million shares between the basic and the diluted, and now you’re saying there’s going to be something like 40 million shares between the basis for dilution.
Michel Beland
Yeah it depends if you have a dilution or not in the number, but (inaudible) 75 million have converted this quarter with some pretty number of substantial.
Tom MacKinnon - BMO Capital Markets
The $1.61 that you talk about then for next year Steve, given that backdrop, how should we be looking at that number on a fully diluted basis.
Steven Hudson
Since there are the diluted, aspect shares, I guess there’s a lot of assumption to be made about that price share and the profitability of the company. So it’s hard for me to say, but I can put something through tomorrow and give you some kind of guideline if you want.
Tom its suffice to say that $0.28 if we had got the equity when we wanted it, it would have been lower quarter, but it’s still a good quarter so I don’t think we are in a bad (inaudible) $1.61, but let us come back to it.
Tom MacKinnon - BMO Capital Markets
And then one for Dave McKerroll. I think you talked about something about outlook for fourth quarter being 5.6 to 5.80 was that in the aviation?
Did you say something about an outlook for the fourth quarter in the five, six (inaudible) AD range or --.
David McKerroll
When I was referring to origination I was talking in Rio that we have an estimate of what our past quarter volume from Trinity is going to be and I said its estimated between a 150 and 175 million US for the fourth quarter. And I think that’s now at the end of our first phase of Trinity and now as of January 1st there’ll be an expansion that we announced last month.
Steven Hudson
As you know Tom we’ve right sized our rail book requirements of late.
Tom MacKinnon - BMO Capital Markets
And then with respect to leverage at 5, I think its 5.1 that you’re guiding to at the end of 2015 and 4.5 currently is that correct.
Steven Hudson
Yes.
Tom MacKinnon - BMO Capital Markets
And 1 to 1.5 potential points of turn here, and Steve that you mentioned is that over the 4.5 or the 5.1. Just trying to get a feel for how high you think you can take the leverage here.
We talked again as a 6 to 6.5 range or you did mention some delays have been 7 to 1.
Steven Hudson
As I mentioned Tom we are confident that we’ll get to the 7 to 1 leverage ratio not yet done, but our conversation is underway subject to the integration of GE successfully. As a reaffirm that 7 to 1 is nothing to rate against they are comfortable with for fleet companies which we are not there yet.
So that 4.5 going to 6 you got one half turn and maybe more to come. But not maybe more to come once integration is successfully completed.
Tom MacKinnon - BMO Capital Markets
And what do you think you have as an additional sort of balance sheet capacity here to absorb tuck-ins to be able to take the 4.5 to 6. What would be the like the available excess leverage you would have her.
How would you be able to --.
Steven Hudson
1.5 Tom on $5 [billion]. You got leverage at 4 or 5 they can go to 6.
Efforts stay on C&D business once you will decrease leverage. So you got lots capacity.
Tom MacKinnon - BMO Capital Markets
What are we talking and the ability to be able to bring in assets I’m assuming reasonable premium in to the asset of $3 billion to $4 billion.
Steven Hudson
Yeah 3 billion is a good number.
Operator
There are no further questions registered at this time. I will now like to turn the meeting over to Mr.
Sadler. Please proceed sir.
John Sadler
Thank you Greta and thank you ladies and gentlemen for joining us on this call this evening and we will look forward to speaking to you again when we report our Q4 2015 results. Thank you.
Operator
Thank you. The conference has now ended, please disconnect your lines at this time.
We thank you for your participation.