Shares of Element Fleet Management Corp. plummeted for the second time in five weeks as the struggling Bay Street finance company said it will take a restructuring charge, cut staff and close offices as part of a recovery plan that will take the rest of 2018 to implement.
The Toronto-based company, founded by financier Steve Hudson, who is one of its largest individual shareholders, warned that earnings will fall short of investor expectations. The stock dropped by as much as 36 per cent on Thursday morning before closing down 24 per cent. Element has lost more than $3.5-billion in stock market value in the past year.
The extent of Element Fleet's troubles initially came to light earlier this year when the sudden retirement of its chief executive officer Brad Nullmeyer was announced, as well as the loss of a significant unnamed customer at the end of last year. Element is in the business of helping other corporations acquire, finance and manage billions of dollars in vehicles and equipment.
Now, five weeks after appointing Dan Jauernig acting CEO, the company is indicating 2018 will be a rebuilding year. Management reiterated that operating income for the core fleet business is expected to be down 3 per cent to 5 per cent this year compared with 2017.
Geoffrey Kwan, analyst at RBC Dominion Securities, wrote in a note to clients that the stock decline on Thursday was likely related to an update on a leasing business called 19th Capital. The unit, which specializes in financing publicly-traded and mid-sized trucking companies, has generated operating losses that were higher than Element's management expected.
Mr. Kwan wrote in a note to clients that the company's financial statements gave new information about the $750-million term loan that 19th Capital has with Element Fleet.
"Element Fleet believes it will still receive all principal and interest on the term loan," the analyst wrote, but those payments may not happen on schedule because 19th Capital does not have the cash flow to make them.
It has been less than two years since Element Fleet was created, when shareholders of Mr. Hudson's Element Financial Corp. voted to split the company into two public listings: Element Fleet for fleet-management services, and ECN Capital for specialty-equipment finance. Mr. Hudson took over running ECN, but remains vice-chairman of Element Fleet.
Investor confidence has been badly shaken by revelations that Element Fleet has struggled to please and keep its customers. The company said its once-rapid pace of growth and the integration of a new technology platform had posed challenges.
Element Fleet, which acquired General Electric's fleet business in a landmark $8.6-billion deal in 2015, had seemed poised for growth in customers and fees earned for a widening array of services, analysts said at the time.
Mr. Jauernig projects that Element Fleet will return to earnings growth in 2019. The restructuring efforts will lead to annual savings of about $20-million starting next year, he said. The company will take a restructuring charge of $40-million in the first quarter of this year.
One option no longer on the table is a potential sale of the business, which the company contemplated last year.
"The mandate from the board has been very clear to management that we're done with the strategic review. Our 100-per-cent focus is on customer retention, [and] focused on cutting costs where it makes sense," Mr. Jauernig said on a conference call with analysts, indicating that the significant stock price change had not altered the company's position.
The board of directors is still conducting its search for a permanent CEO and is considering external and internal candidates. To turn the business around, the new CEO will not only have to execute on promised financial objectives, but also persuade investors the worst of its customer attrition issues and other unwelcome surprises are in the rear-view mirror.
"We continue to view 2018 as largely a transition year for the company," John Aiken, analyst with Barclays, said in a note to clients.