Nov 14, 2016
Executives
Bradley Nullmeyer - CEO Dan Jauernig - President, COO Michel Beland - CFO John Sadler - SVP, Corporate Affairs, IR
Analysts
John Aiken - Barclays Vincent Caintic - Stephens Geoff Kwan - RBC Capital Markets Peter Rutledge - National Bank Financial Paul Holden - CIBC Tom MacKinnon - BMO Capital Markets Nick Stogdill - Credit Suisse Mario Mendonca - TD Securities
Operator
All participants, thank you for staying by, the conference is ready to begin. 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, operator. Good afternoon everyone.
Thank you for participating in our conference call to discuss Element Fleet Management's third quarter results for the three-month and nine-month period ending June 30th, 2016. Joining us today to discuss these results are Bradley Nullmeyer, CEO; Dan Jauernig, President and Chief Operating Officer; and Michel Beland, Chief Financial Officer.
A news release summarizing the third quarter results was issued earlier this afternoon, and the financial statements and MD&A for the three-month and nine-month periods ended September 30th, 2016 have been filed with SEDAR. This information is also available on our Web site at www.elementfleet.com.
As well, a presentation that accompanies management’s comments has been posted to our Web site in PDF format. This is located in the presentation section of our Web site 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 the 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 remarks complete, I’ll now turn the call over to Michel Beland, CFO.
Michel Beland
Thank you, John. I'll just go over the on Slide 5, on the basis of presentation which is unique, I guess, this quarter.
As there have been a separation where transaction which close on October the 3rd, Element Financial Corporation which is a taker EFM, now excludes the ECN capital operation and assets and as will remain Element Fleet Corp. for Element or Element Fleet that throughout this presentation.
The convertible debenture and per shares as we discuss the remain as obligation of Element Fleet. The conversion price adjustments for the convertible debentures was announced on October 19th.
And there is going to be a stand-alone financial reporting of ECN Capital which commences on the closing of the separation. Element Fleet reported ECN Capital as distributed operation as of September 30th 2016 and will continue to report that method for the period prior to the separation throughout the end of the year.
ECN Capital will also commence regular quarterly reporting with filing of the Q4 2016 financial results. And a separate call will be hosted by ECN Capital, later today.
The financial information and results of operation presented here and in the financial statement and in the MD&A have been presented on a cargo basis as if the separation had occurred at the beginning of the reporting and comparative periods, gives effect to all of the assets and capital structure to Element Fleet. As a result, certain financial results and financial statistics maybe different than previously disclosed in the previous financial reported financial information.
The remainder of this call and discussion will focus on Element Fleet continuing operation only. I'll pass on the call to Bradley Nullmeyer.
Bradley Nullmeyer
Thank you, Michel. And good afternoon everyone and thank you for joining us today.
This is our first earnings call that a peer fleet management business services company and my first as CEO. So, welcome.
So, opportunity to reiterate why this is a very exciting times for Element Fleet and to remind everyone of our strategy and progress that we have made to-date. On this call, I want to focus on Element Fleet, specifically our performance into Q3 of 2015, our strategy and execution of that strategy and how this translates into our future financial objectives.
I want to take a moment and remind our investors that the key reasons why Element Fleet is such a compelling investment. I will go into extensive detail but I want to highlight a couple of points on Slide 7.
Our industry is in the early stages of technology innovation and Element Fleet is at the center of these opportunities in the connected car share transportation and invest analytics space. We are specifically and strategically positioned ourselves there with the size and scale, most importantly we are there with our customers and our partners.
We create value for our customers by making their fleets and their driver safer, smarter and more productive. We also have a company that has extensive sufficient amounts of free cash flow to fund our future growth and return capital to our shareholders.
Our execution in this space and the opportunity of how we execute in that space when increased the recognition development fleet as a technology driven business services company and we view this truly as a evaluation catalyst. On Slide 8, I just wanted to review our strategy and progress that we have made to-date.
As we know the split is completed and we are focused entirely on our fleet management services company for our current and future companies. We're using our size and scale of our expertise to lead this transformation of the industry through the integration and the management of data for our customers.
We've achieved the size and scale to do this. We've delivered our integration benefits and synergies ahead of plan.
We continued to invest in our technology and mobile offerings. We're ahead of plan in this focus and also just announced and launched our Xcelerate platform which Dan will talk about later, a very exciting mobile application for our customers.
We continue to add suite of value-added services for our customers and we see future growth prospects from deeper penetration from our existing customer base and also as we penetrate in sourced an managed fleets. We will act our accretive M&A opportunities which increases our service in fee revenue provides more value added customers, value added products to our customers.
On Slide 9, it shows our significant progress that we made in this last year; truly a year of transformation. As I said before we completed the split into a separate fleet management company.
We've doubled our net earning assets, more than doubled our net earning assets. We increased our service and fee income by over a 163%, we've improved our returns, we've instituted and signed new bank lines and improved our ABS product offering.
We've increased our credit ratings, BBB high and a low. We've retained our employee base, our customers have been energized with our new products.
And we've added service step to new service in mobile offerings. With that, I want to turn the call over to Dan Jauernig, our President and COO.
Dan Jauernig
Thank you, Brad. On page 11, I wanted to touch on some of the highlights for the quarter before I get into more of the financial and operating results.
First of all, our total earning assets grew to $13.8 billion from $13.5 billion at the end of the previous quarter on a year-over-year basis. Total earning assets grew by 2.5% on a currency neutral basis and mostly because both Element and GE Fleet had very strong third quarters last year.
Originations were 1.6 billion, slightly less than 1.7 billion we did in the second quarter because of the seasonal buying patterns of our customers and the availability of new modeled year products in Q4. Originations were significantly higher than the 1.1 billion reported a year ago because Q3 last year only included GE fleet for part of the quarter.
We're very pleased to note that service and fee revenue was a $127.8 million in the quarter or 55.5% of total revenues. With respect to the integration as Brad mentioned, we launched Xcelerate Element's new and enhanced customer reporting portal.
This was a critical step in our integration plan which was to enhance and update Element Fleet Management system prior to moving GE Fleet customers onto our platform. This is now been completed with the launch of Xcelerate.
The final stage of the integration is to launch the GE Fleet customers on to Element's new and enhanced platform. This process has been substantially advanced and the goal live day will either be late in the fourth quarter of this year or really in Q1 of next year.
Overall, we're still on track to achieve over US $100 million of integration savings on an annualized basis by the end of the year. Finally, I wanted to take this opportunity to highlight new customer signings in 2016.
We assigned over 100 new clients in the first nine months of 2016, which represents more than 200,000 vehicles and which will build into more than 29 million in annualized revenues over the next three years. We are very pleased with the progress we're seeing in finding new customers in the US and in particular, in Australia, New Zealand and Mexico which have had very strong growth this year.
We are experiencing some software in Canada, particularly in the oil and gas sector, but once that is put behind us, we expect to see growth going forward in 2017. So, turning to Page 12.
With respect to our financial highlights, Element's after tax adjusted return on tangible equity was 23.9%, its highest level ever. This is the key indicator of our ability to generate surplus cash in excess of what is needed to fund our portfolio growth.
After tax adjusted operating income was $0.25 consistent with the second quarter a $0.08 higher than last year. Before tax adjusted operating income per share, improved to $0.30 in the quarter from $0.21 last year.
However, it was lower than the $0.32 reported in the second quarter mainly due to higher interest expense, OpEx and the credit provision reversal in the second quarter which was partly offset by higher interest in rental income and slightly higher service and fee income. Post-split tangible leverage came in at 7.7:1 compared to 7.5:1 last quarter and 7.1:1 last year.
Return on average assets was 3.6% in the quarter compared to 3.9% in the previous quarter and 3.6% last year. I'll cover return on assets in greater detail on the next page.
So, turning to Slide 13, I wanted to cover some of the key operating highlights for the quarter. In particular revenue yield of 9% was lower than last quarter mainly due to the recovery of credit provisions in order previously and somewhat seasonally lower service revenue as a percentage of total earning assets.
Having said that, revenue yield is up compared to last year and we expect it to improve over time as we price in our higher cost of funds on new transactions going forward. Interest expense as discussed is up year-over-year due to the widening spreads on recent ABS financing which was partly offset by the improved pricing we have in Element's senior debt facility.
Both Carol and DBRS upgraded Element Fleet on the separation which will further improve the pricing on our senior debt facilities going forward. Overall, return in assets of 3.6% is down from the 3.9% in Q2 due to the lower revenue yields discussed previously but consistent with last year as higher revenue yield completely offset our higher cost of funds.
And turning to Slide 14, revenue mix. As I mentioned previously, service and fee revenue continues to grow as a percentage of total revenue mix.
Service and fee revenue is now 55.5% of total revenue and with Element's new and enhanced fleet management system we will add capacity and scope to our service offerings which will further drive a service and fee revenue growth both in absolute dollars and as a percentage of total revenue going forward. Then finally, on Slide 15, Element Fleet's portfolio quality as expected with our customer base, the overall portfolio continues to perform very well with high quality assets and a high level of fortune 500 publicly traded customers, or publicly rated customers.
Non-current accounts were at 9 basis points and defaulted accounts declined to 2 basis points in the quarter, allowance for credit losses at 6 basis points of finance receivables is consistent with last quarter and reflects the strong asset quality of our portfolio. I should also note that over 90% of our portfolio are finance leases where Element doesn't have any residual exposure whatsoever.
That is a 100% of the residual exposure is retained by our customers. And in the 10% of our portfolio where we do have operating leases, we set our residual level at a very conservative level and incentivize our customers to do so by sharing any end of lease schemes with them when the car is remarketed.
And with that, I'll turn it back to Brad. Thanks.
Bradley Nullmeyer
Great, Thank you, Dan. Before we open the line for questions, I just want to reinforce a couple of item.
On slide 17, I want to review our outlook for the remainder of 2016. For the first few quarters of the year, we are in $0.76 per share for $0.25 of that coming in the third quarter.
With this and based upon the actual balance sheet and capital structure post-split and several other factors, we are guiding to a $1 to a $1 EPS for the full-year. Some of these factors such as wider ABS spreads, which have already narrowed and our extra ABS capacity that we are carrying which we're reducing 2017 as we consolidated our two ABS offerings, are temporary in nature and expected to improve in 2017.
We've reviewed many M&A opportunities over the last couple of quarters but have not execute any in this space yet. We're remaining very price disciplined but we do expect new tuck-ins in 2017 that will meet our requirements and has several that are under review.
Q3 was a solid quarter and has not changed, that has not changes our medium growth drivers and targets. These are on Slide 18 and are consistent with those we previously talked about.
Our medium term growth financial, our medium term financial objects that we target our organic EPS growth of 8% to 10% and ROAA exceeding 4%, tangible leverage of approximately 7.5% and a return on tangible equity of exceeding 22%. Additionally tuck-in opportunities related to service offerings will add an incremental 2% to 3% EPS growth.
Finally, on Slide 18, we consider ourselves a very prudent manager of capital. With our increased credit ratings, our excess capital capacity to execute our plan, our leverage, we generate significant surplus cash in excess of capital that we need to fund our growth.
Many of our shareholders and those in the phone want to hear about the return of capital and we understand that. For now, we'll be reaffirming our 10% per common share annual dividend, to review a capital options as the year-end decision by our board of directors and the return of capital options including dividend increase will be an important part of those discussions at the board level as we go through our 2017 planning process.
In closing, we're very excited about our position that where we are in the marketplace. We have a particular focus on integration and management of data for our customers.
We have vast amounts of data and in-house data scientists and use advanced Element's capabilities for our clients, those that are current with us and prospective clients including those that manage them in-house. We're right in the center of the connected car opportunity but with our clients and for our clients.
And finally we offer both financing and service offerings which is an enviable position to be in to capture opportunities from all angles and provide value to our customers. Now, with that I'll open the line for questions.
Operator
Thank you. [Operator Instructions] The first question is from John Aiken from Barclays.
Please go ahead.
John Aiken
Good evening, Dan. On the commentary about the incremental 100 clients that you pulled on year-to-date.
Can you give us a sense of how much of that $29 million is actually already come into 2016 so far? And in terms of the guidance which you're giving us, what is the mix of fee-based revenue versus spread revenue in that $29 million on a go-forward basis, please?
Dan Jauernig
Yes. Good question, John.
Very little the revenue has actually come in 2016. There is a long sales cycle due to signing up customers and even once the customer has signed up to actually onboarding the customers, it takes about three years to build that revenue base as the customers turn their vehicles and we put the new vehicles on to our fleet management system.
So, that $29 million will build over the course of the next three years and get on a full $29 million run rate by the end of 2 ½, 3 years up from today. The revenue mix of that would be up very similar to what you're seeing now, I would say close to 57% of that revenue mix would be service and fee revenue and the rest would be financing and we expect that to go forward.
We expect an opportunity to increase our service and fee income going forward with these customers as many of these customers don’t sign up for all of our service and fee products day one. So, that's an opportunity for us to build service and fee revenue over time with these customers as we prove up the value proposition of those additional products.
John Aiken
That's great, Dan. And you've talked about the adding the 100 clients with the integration with GE.
Have you honestly lost any clients because of either aggressive tactive competitors or just in friction in terms of the turnover?
Dan Jauernig
We have lost some customers since the acquisition of GE Fleet but no greater than our normal churn. We are seeing that some of our competitors are being more aggressive than normal as well as some of our account reps would say prior to the acquisition of GE Fleet.
And I think that could be because they've seen the level of investment we're making in technology. And maybe the only way they can compete in the short to mid-term is by pricing very aggressively.
Gain where we take a longer term view on this business and we're pretty comfortable with where we are in the category overall and with the investment we're making in technology.
Bradley Nullmeyer
And John, I just -- just to further add. We've a 95% plus retention rate and that has achieved itself through this whole, continued to this whole cycle.
You'd expect that our competitors were these that we approach, I'm trying to approach some of our clients by using aggressive pricing tactics. This is not a business that's run just on pricing because that's a short-term solution.
These are integrated, fully integrated solutions in our customers and they've been with for a long time. I said it before that it's a good part of our business and also the bad as we look at gaining market share.
But we together as an industry and traditional fleet managements, we've always had around a 95% retention rate. So, that hasn’t changed through this process.
The real win here is taking those clients once this is consolidated and adding the new products and services to those clients because we're already integrate into their system. And then of course the self-managed fleets which aren’t using anybody right now except our own internal resources are an ad-hoc group of products.
It's those clients that want in our system and consolidate and into one product offering.
John Aiken
Great. Thanks for the color.
I'll re-queue.
Operator
Thank you. The next question is from Vincent Caintic from Stephens.
Please go ahead.
Vincent Caintic
Hi, thanks guys. Good afternoon.
First on the capital return, I know this might be more of a topic for next quarter. But you talked about your high free cash flow and your ROEs about 20%, so now it's healthy number.
And I was just wondering if you could discuss what you're sort of broadly thinking about capital return about dividends and so forth. And then when you think about M&A opportunities, if you can remind us what sort of size and what areas of technology you might be thinking of pursuing?
Thanks.
Bradley Nullmeyer
Great. Thanks, this is Brad.
I will take the second one first. Those M&A opportunities, there are two different types of those M&A opportunities.
There is the larger consolidation ones which we talked about, we are actionable one but they are not our priority right now. The other ones are in the side of anywhere from $20 million to a $100 million.
These are accounts that would have a very nice product offering. Our customers are at very nice product offering and would have a smaller install base.
So, I think that some of them might have $5 million of revenue and they might have 10,000 or 20,000 vehicles or applications out there. We take those applications and we consolidate them onto our product offering and then we'll offer them a million six cars.
So, that's the size range we would see there. We have looked at a lot of them, we remain quite price disciplined.
It's very clear to us that in that new product offering we will do it by developing our self which we do and also through some acquisitions of those tuck-ins. So, expect more to hear from that through Q4 and into '17 we'll be more active in that space.
As far as return on capital, I'll just comment quickly. It's clearly a year-end decision sort of be next quarter.
We do generate substantial amounts of excess cash flow and capital that we use to refinance first. We talked about this before, about a third of that goes into our building our NEA’s.
As we grow that, the other 2/3rds is available for some form return to shareholders and as various options and then also tuck-in acquisitions that we acquire. So, that's a year-end decision to the board as we go through our planning process.
We will make sure we have enough capital to both grow NEA's first, be able to be action below on our tuck-ins, to build the future platform for the business. And then the board will look at what portion of the remainder is either to used to pay down debt, although we're post of our about 77, now we're close to our kind of approximately 75 anyway.
Leverage ratio and what would be returned to shareholders and what form that would take.
Vincent Caintic
Great. Thanks very much, Brad.
Operator
Thank you. The next question is from Geoff Kwan from RBC Capital Markets.
Please go ahead.
Geoff Kwan
Hi there. I just wanted to understand.
So, the guidance I think that you're essentially playing for Q4 is kind of a flat EPS quarter-to-quarter. Is that really more driven by the NIM outlook as suppose some of the other stuff that you pointed out?
And then I think from what you're saying is you expect that to improve heading into 2017, is that correct?
Bradley Nullmeyer
Yes. So, on Page 17, again there's a wide variety of factors that are there which is the balance sheet and the leverage and the capital structure that we have post-split.
Some of those I mention for example ABS spreads have increased, they've widened out. We have passed those on to new clients but you can't pass those on to previous clients until you'd into a cycle.
And the people earlier comment about being some price disciplined and we aren’t able to pass that on quite as fast as we thought. But we have seen those spreads come in quite substantially and they continue.
So, we think that's a temporary effect, in fact the last maybe as we did was quite a bit tighter than the one before that and the ones we're looking at now are tighter again. So, that where we reverse itself.
In addition, we carry some excess capacity in our ABS structures if you're familiar, remember we have a structure called Chesapeake one that was for the PHH assets. We had to do a separate structure for the GE assets.
So, right now are running two parallel structures. Those will be consolidated in '17.
So, that will reverse itself. Then there were a lot of opportunities for us to maximize and optimize our balance sheet with respect to public securitizations and mid-term loans, some other things that we'll do through '17.
And then lastly, there certainly was the M&A opportunities we've talked about that have not been executed year-to-date. We expect as I mentioned earlier, we expect to be actionable in those in late '16 and also '17.
So, is the combination of all those items together.
Geoff Kwan
No, I just I'm trying to reconcile. Because back in August you were giving the guidance range for this here about five to buck 15, but the buck five in would have been without acquisition.
So, that seems consistent with what you talk about now. I'm just wondering what that delta what change over the past few months, will it get us from say buck five down to this $1 $1 range.
So, that's so is it really kind of equal all those different things you were talking about that's really change in the past few months or than others?
Bradley Nullmeyer
Yes, it's all those. No, it's all those things together on Page 17.
It's all those together that have occurred over that timeframe.
Geoff Kwan
Okay. And that's my other question was 2017, I thought originally or you've talked about in the past a kind of 10% to 12% earnings growth.
Can you just remind me if that was all organic and I'm assuming that's not the kind of the apples-to-apples on the guidance that you got over in the medium term of that 8% to 10%?
Bradley Nullmeyer
So, it was always 8% to 10% organic which what I have in Slide 18. So, that has not changed incrementally above that when we talked about that was the what I have in italics on Page 18, which is a 2% or 3% growth or for tuck-in acquisitions.
So, I split it on Page 18 again. It's a 10 organic and then plus two or three with the tuck-ins.
Geoff Kwan
Okay. And maybe if I can take in one last question.
Just with the US selection prospects for lower corporate tax rate. Do you have any sort of sensitivity on let's say every 100 basis point decline in US tax rates might do on a per-share basis or however you'd want to quantify it?
Michel Beland
Yes. Geoff, its Michel.
We're not -- I don’t think this, these are discussions are taking place in whatever the Congress adapt, those are not this here to be seen but I think you'll see that our tax rate is already quite efficient and any adjustment of this will have no impact on our corporate tax structures.
Geoff Kwan
Okay. Great, thank you.
Operator
Thank you. The next question is from Peter Rutledge from National Bank Financial.
Please go ahead.
Peter Rutledge
Thanks. Just a quick follow-up on your last answer.
You said any change in the corporate tax rates won't have any impact on your corporate tax structures. That did I understand that correctly?
Bradley Nullmeyer
Yes.
Peter Rutledge
I mean, and your like one way to get tax cuts in the United States is to simply the tax structure which might remove the benefits of certain tax efficient structures. Is there any risk of that?
Michel Beland
I mean, I think the point I was making is that the tax rate here was 15% I guess the inflation tax structured we have in place are May in some part go away and they'll be back with essential structure.
Peter Rutledge
Back to 15, fair enough. Thank you.
A company last week issues with residual evaluation risk. And you guys have been forthcoming about this before, I just want to ask some clarifying questions because I'm getting questions from clients.
You've no residual evaluation risk in your financial lease book, is that correct?
Dan Jauernig
That's correct Peter, its Dan. Yes.
Peter Rutledge
Yes, okay. Okay.
And then in your for your vehicles under operating leases, you have most of those I think is I thought 98% of those are under repurchase agreements or guarantee depreciation programs. Is that correct too?
Dan Jauernig
Yes. Everything in our finance lease is what we call open end leases where the customer takes a 100% of the residual risk.
In fact, I'm not exactly what caused the problem at that company that you're referring to because we're not really seeing any weakness in the used car market, especially for vehicles that are three to four years old. Maybe some more weakness in vehicles that are only a year old and but when you look at our lease portfolio, again 90% of which is finance leases with no residual risk to two element.
Bradley Nullmeyer
And Peter, it's Brad. I mean, it's the complete separate in this same business.
You're talking about the entity that takes investment in cars and then spins them out within a year. Ours are all pre-planned cycles with our clients, whether they're looking at a four five year replacement cycle and the depreciation rate that goes in there whether it has been a residual risk or not, all goes down to total cost of ownership.
So, these are big corporations that just want to know what their total cost of ownership is. And that's much different than a daily rental car that's specking on one year old vehicle.
Because ours run four five and six years depending on the usage of them. But that's all planned with our clients upfront.
So, it's just it couldn’t be more of a different business that's complete to end to this spectrum.
Peter Rutledge
Okay. Thanks, that's very clear.
And one last one just related to again the US selection. Shift in the yield curve pretty dramatic.
Can you give us a sense might there be some funding cost pressure or a NIM pressure in the short-term and then how does it look to on medium term?
Michel Beland
Hi. We're not hearing anything directly related to it.
If anything I think there is some discussion that the economy might pick up because the presidents more pro-business than expected. But in the short to mid-term, we're not expecting anything negative or overly positive as a result to the election.
Peter Rutledge
What I mean is your funding cost that the yield curve widened out considerably in the last week. Is there any near term impact on your funding costs?
Michel Beland
We haven’t seen that in the ABS market. And in fact as Brad said the ABS market has tightened a bit from our last time that we went to market.
So, I'd have to take a closer look and no we're not seeing it currently.
Peter Rutledge
Thanks, that's clearly. Cheers, I appreciate it.
Michel Beland
Thank you.
Operator
Thank you. The next question is from Paul Holden from CIBC.
Please go ahead.
Paul Holden
Thank you. I want to ask another question or two related to NIM and risks around NIM.
So, my understanding is for the most part your cost of funding gets passed on to customers, but clearly there is some kind of time lag involved there. So, maybe if you can explain it to us in terms of how that time lag works.
Dan Jauernig
And so Paul, we have a consolidated pricing model with our clients that go through all the financing cost that they take it and all the service revenue part of it. And that's based upon the spread over our market benchmark depending where it is.
And we're always hedged on all those contracts once they're in place. But to give you an example of, we have a contract with someone and we've just signed a five year deal with them and they're going to order 2000 cars every year.
We've probably we've agreed with the spread over in applicable benchmark for them for the financing. If that benchmark moves up or down to the earlier comments about the election doesn't matter to us, that's automatically passed on, if the spread widens from what we thought when we priced it.
If it goes up 20 basis points. Sometimes we can pass that one definitely for new customers but for a current customer if I just signed them yesterday, it will be a little difficult to pass that on.
Now, what happens is there's a little bit of a lag because all of our competitors in that marketplace are all on the same are competing in banks, remember. All of our competitors use the same maybe so just takes a little bit of time to flush the result.
If the spreads that have on the ABS that have widened on us, they weren’t able to pass through in their entirety and but we have seen those come back in to be much tighter. If the election the earlier comment moves the curve, slide the curve around or changes the slope of it, those just get passed under our clients.
And then from that point, once we fund those, we lock in that, we hedge those, so we have no currency or interest rate risk going forward.
Paul Holden
So, basically it's the issued the benchmark you're using for your pricings different than you actual TDS benchmark?
Dan Jauernig
No.
Paul Holden
No.
Dan Jauernig
No, it's the spread. So, I would go and I would quote let's just pick them right, for 200 basis points over our benchmark, and I think at that day I could borrow a 100 basis points over that benchmark.
When we go into market six weeks later or a month or two later, I might be borrowing a 120 over that. So, I get squeezed on that 20.
So, I'm still pricing it 200 over, I can get squeezed and I did get a little bit on the ABS. not on the benchmark, just on the spreads that we're borrowing at.
Because these are long-term contracts and you're going in and you say okay what am I going to from my 2500 cars that I'm going to purchase this year, what's my cost on that going to be. And we will say okay you spread this 200 basis points over our benchmark.
And at that point we, yes.
Paul Holden
Yes, so you fix the spread, okay. And then how long approximate does that take to roll off by how long will take you to pass them pass along a higher spread to existing customers?
Dan Jauernig
So, for all new customers we get a passed on rate, for current customers because you're doing under a massed lease and sched. It can take 90 days to six months until we can push that through.
And a lot of that depends on how our competitors racked. On the last cycle, we all thought that it was a temporary phenomenon which is would have to be true, so we didn’t see those prices go on, go up with everybody.
If you go back to 2007 and 2008, when we were all on the marketplace and spreads went up 275 basis points, that got passed on to everybody because everybody was in the same ballpark. So, what we saw here was a strange phenomenon where spreads went up enough to cause what you saw here but not enough for everybody to pass them on.
And also think our competitors took a little bit of an opportunity hoping we would have to pass those on and then to say here's another reason why you should come with us. So, we chose not to pass those on, they're passed on a new ones, they're coming back in and they can take a quarter or two to just go through.
If they stay up for an extended period of time, we're going to see suite all the time. So, you can talk with the sophisticated CFO about what's happening in the marketplace and pass those on but it just takes a quarter or two.
Paul Holden
Okay. And then a question related to your implied Q4 guidance and that's particular to the fleet service fee.
So, from your looking for sort of flattish earning, does that suggest flattish fees or should we be expecting some sequential growth there?
Dan Jauernig
No. I think you'll, well, we're expecting some sequential growth.
Paul Holden
Okay. And more since sequential growth than what we saw this quarter?
Dan Jauernig
Yes, yes. I would expect that because of the seasonality that we had in Q3 which we won't have in Q4.
And again I think when Brad's referring to the EPS at after-tax versus pre-tax, so you may see some growth in definitely in the pre-tax number.
Bradley Nullmeyer
Q3, also just to reiterate that comment, Q3 has always has been our lowest quarter because you get people on vacation, you get great weather, so you get less action and less people using gas, and also the buying season kicks on in September. So it has always been a little lower.
So with the Q4 normal seasonality you will see an increase as Dan said.
Paul Holden
Okay, got it. And then final question if I refer to Slide 13, and sort of look at those key ratios, year-over-year how should I think about the cost synergies you are realizing from the GE transaction, given the NIM yield hasn't changed year-over-year and the OPEX ratio is the same year-over-year?
Michel Beland
So that is what we were talking about when you look at the NIM, which you do see is a substantial increase year-over-year in the revenue yield. Unfortunately that has been offset by the higher pricing on the ABS in the short term.
Again as Brad talked about and as I talked about with all of those new 100 customers we signed up in 2016, we have fully priced in those increased spreads and you will see the higher ROA going forward. The OpEx savings that was always dependent upon us combining our two fleet management systems.
That was the third leg in the tool that is going to be completed late in the fourth quarter of this year or early first quarter of next year. So then you will start to see some improvements in the OpEx.
The other synergies that we were getting was on our senior bank facility, which we already achieved with our higher credit ratings both as a result of the GE acquisition, and also because of the higher ratings that we have upon separation. And then the procurement savings that we got that mostly flows through revenue yield because it is higher rebates.
So the OpEx synergies are still to come and you just got to remember that offsetting some of the synergies will be normal growth in OpEx to support our growth in business year-over-year as well.
Paul Holden
Okay, thank you.
Operator
Thank you. The next question is from Tom MacKinnon from BMO Capital Markets.
Please go ahead.
Tom MacKinnon
Thanks very much. I wonder if you might be able to quantify just in terms of basis points what the impact was of the wider spread towards the unutilized capacity in ABS structures and how you see that coming back in over 2017?
Bradley Nullmeyer
Tom, it is Brad. I guess the answer is no, we do not really want to quantify that.
We have seen spreads go up and come back and sort of half of the increase has already come back in, but I don’t specifically want to quantify those by basis points. It is something I don't really want competitively people to know as well.
Tom MacKinnon
So just we are at 3.6 here on ROA and you want to get 4 next year. So you've got 40 basis points here to make up.
Maybe we can just work them into some buckets here. Is it just the funding costs would be more than half of this and a little bit – the rest from OpEx and fee revenue, how should I think about that?
Michel Beland
I mean I think we do expect revenue yield, so if I were to break it down it would be somewhere around 10 basis points on revenue yield, maybe a bit more, 10 to 15 basis points or 20 basis points savings on the cost of funds, and 10 basis point to 15 basis points on OpEx as the portfolio grows and we get synergies on combining onto one fleet management system going into 2017. It is just a question of timing in terms of when we actually achieve those and pass on the higher cost of funds or whether or not funding costs in the future issuance actually come in before we have to pass on the higher cost.
So all of those are timing factors that will impact it but there clearly is a path to over 4% ROA and what gives me confidence in that is the fact that again all of these new 100 customers that we signed on in 2016, all of them were priced with our highest cost of funds we have ever seen in the ABS markets in early 2016, and they all showed an ROA in excess of 4%.
Tom MacKinnon
Okay. Now one other question on Slide 18 when you talk about the medium-term financial objectives, I think other objectives the you had talked about was asset growth in the 5% to 7% range and fee and service income growth in the 8% to 10% range, I don’t recall if those things were organic or not, but you still stand by those kind of metrics?
Bradley Nullmeyer
It is Brad. So those were the inputs into this – if I can use that for a term, so underlying this are those components and we still feel comfortable with those.
I just think it is up from where we sit and try to understand the company was easier to consolidate into those and there will be a little bit of movement between those but we still stand by those and we still feel good on those – each of those individual targets as they build into this consolidated medium-term objectives here.
Michel Beland
Sorry, I was just going to add that they are all the business drivers that drive the EPS growth of 8% to 10%.
Dan Jauernig
Organic.
Michel Beland
Exactly.
Bradley Nullmeyer
And we have not changed – if you go through that we have not changed the components of those. You look at the net earning asset growth the components of those with replacement fleets and new contracts and then depreciated accounts coming in, so we haven’t changed any of that so we stand by that.
Tom MacKinnon
Okay. Thank you very much.
Bradley Nullmeyer
Thank you, Tom.
Operator
The next question is from Nick Stogdill from Credit Suisse. Please go ahead.
Nick Stogdill
Hi, good evening. For Brad or Dan, just on the 200,000 of new clients or new cars to be onboarded, could you give us a sense of what was taken from clients that were mentioned, [Indiscernible] versus taking market share and then just on the geographic mix of those new clients?
Dan Jauernig
So with respect to geographic mix it was primarily US, which is again 77% of our total portfolio, and we expect that to go forward. Notwithstanding the fact that again as I mentioned we had very strong quarters in Australia, New Zealand and Mexico as well.
We do not give a breakdown between fleets that we take from other third-party fleet management companies or that were self managed. Again that is not a metric that we want to report on going award for competitive purposes, but again we're very proud of the 100 customers that we signed up in 2016, and that we will build to our future revenue growth over the next three years.
Bradley Nullmeyer
Nick it is Brad. So Dan is right, we do not report on that for various reasons but there is a good cross-section of all of those areas inside those numbers including new clients and other products.
So across all the areas we talk about you will see them in the new client signings.
Nick Stogdill
Okay, great. Thank you.
Just another question on the transaction and integration costs this quarter there was a step up and I'm assuming that had to do with the rollout of the new platform. So should we expect that to decline in Q4 or will that continue as the platform rolls out or what sort of decline in Q1 ’17?
Bradley Nullmeyer
So it will definitely step up again in Q4 because we are heavy into the integration at this point in time. Then it will decline in Q1 and it will be completely done by the end of Q1 of next year.
Nick Stogdill
Thank you, and then just one last one, I think you mentioned the organic earning asset growth at the beginning to call but I missed it, so what was the number ex-currency, so it looked like it was 2.2% quarter-over-quarter on a reported basis, but…?
Michel Beland
So, year-over-year it was 2.5% this quarter primarily because both Element and GE Fleet had particularly strong quarters in Q3 of last year. We were seeing a very good pipeline for the fourth quarter so we expect that to pick up in Q4.
Nick Stogdill
Sorry, so it was 2.5% year-over-year?
Michel Beland
Yes, 2.5% year-over-year on our currency-neutral basis.
Nick Stogdill
Okay. Thank you.
Operator
[Operator Instructions] The next question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca
Good afternoon. Just a few questions, mostly to clean things up, the CHC, any update there on where things stand?
Michel Beland
Yes. It is Michel.
The CHC is the separate book of ECN Capital. We will cover this in the call at 5:30.
Mario Mendonca
You are right. Sorry.
I got it confused with the other call. Let me go back, then the tax gain, was there a tax gain this quarter because the tax rate this quarter versus last is very different?
Michel Beland
Yes, Mario it is Michel. Yes, the tax rate is a bit slower in the third quarter as a result of the separation.
We had to reset the company and some of the transfer prices that we usually do in an annual basis were done unusually at this third quarter to accommodate the separation. So you will see Q4 going back to the more usual tax rate in the low 20s.
Mario Mendonca
So the tax that we saw this quarter it would have added perhaps a penny to the result?
Michel Beland
I think it is 0.4 of a penny or something.
Mario Mendonca
Okay. So, I came up with something slightly different then.
And then, just going to the ROA, Brad, you had mentioned in the past and this is just to clarify, you had mentioned in the past that you expected to exit 2016 with an ROA of 4%, I just want to comment that has changed, that is just now something you still expect to achieve in 2017 but it is no longer reasonable expectation to exit the year that way?
Bradley Nullmeyer
So, we talked about exiting 2016 with that rate and that sort of means the first day of 2017. That has been pushed back a quarter or two into ’17.
So as Dan said, there is a clear path to get there. It is just the timing of some of the issues that we talked about like the widening of the ABS have slowed that down.
The increased leverage ratio and interest cost that we got out of the split. So those were reversed.
So, instead of January 1 it will just be a little bit later in ’17.
Mario Mendonca
And then just to be more precise on the capital generation of the company, you talk about a third of that is needed to grow the business, if you have got $13.8 billion or so of assets, and you grow up by 5%, you are adding about $700 million of assets annually using your leverage ratio of something like 7% or 7.5%, it seems to me that you're just using up maybe a quarter, even less than a quarter of your earnings annually, is there some other use that I am not accounting for when I do the back of the envelope?
Michel Beland
Yes. So I am using rough percentages when I talk about a third, I mean, first of all our tangible return on equity was very high this quarter at 23.9% because our leverage was very high this quarter.
So our tangible leverage might be closer to 22%. When I talk about a third, if our portfolio is growing at 7%, we will need to grow our tangible equity by 7% or a third of that 21%.
Mario Mendonca
So, a quarter would be low and a third might be a little bit on the high side.
Michel Beland
Yes, it is right. Maybe a little bit on the high side that might give us the ability to pay down debt a little bit, and…
Mario Mendonca
That is fair. It is a good explanation.
Thank you.
Operator
Thank you. The next question is from John Aiken from Barclays.
Please go ahead.
John Aiken
Hi, thanks for the follow-up. Hopefully we put the issue with the residual values to bed, but what would you need to see from the US economy to actually have a material increase on your credit losses on a going forward basis?
Bradley Nullmeyer
So, if you look at our – I mean, you have to have massive bankruptcies, I mean in 17, 18 years of running these products through PHH and GE they have had 3 basis points of credit loss at PHH and 2.5 through GE, one bankruptcy that went to liquidation, bankruptcies happened through liquidation in this business and that was Circuit City. Others like our car companies that are partners now went through bankruptcies that get reaffirmed.
We always have equity in our products. I mean, we are buying cars fairly inexpensively as you would imagine, and we have a seasoned portfolio.
If you think about a car in the first year, even at the prices we paid it might be – there might be a little bit less collateral, but by year two and even by year three or four, you have got a lot of equity built into it. So it would just have to be a catastrophic event in the US because, and even to the ’07, ’08 funding crisis, we saw losses in those years go to 10 basis points only because of liquidation.
So it is like no other quotation of our credit business I have ever seen in all my years because we don't have to stretch for credit. That is not the number one criteria.
We don't get someone phoning us today, and say, I have 10,000 vehicles’ I would like to lease them from you all in one shot. These are all tools of trade.
It is a number one and number two spend for them. They are readily available.
They are very generic vehicles that are all licensed and easy to get out. So, again we feel very, very comfortable with the credit profiles, and you see that is where ABS is through all of the funding again through ’07 and ’08, our funding structure is funded well.
Others like GE Capital didn't fund into the business.
John Aiken
Great. Thanks Brad.
John Sadler
Operator, we have time for one more question.
Operator
There are no further questions at this time.
John Sadler
Great. Thank you very much.
Thank you operator, and thank you all for joining us on this conference call this afternoon. I will look forward to –- sorry, I will turn it over to Brad.
Bradley Nullmeyer
Okay. Thank you.
So I just wanted to say, the same thing John had said, thank you for joining us for our first call as a dedicated fleet company, and we look forward to talking to everybody in late February, early March, when we do our results, and we appreciate everyone's time today. Thank you.
Operator
Thank you. The conference has now ended.
Please disconnect your lines at this time and thank you for your participation.