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Element shares plunge as CEO departs, colouring Steve Hudson’s legacy

Steve Hudson, former CEO of Element Fleet Management Corp., in Toronto on April 8, 2011.

J.P. MOCZULSKI/The Globe and Mail

As global markets gyrate, shares of Element Fleet Management Corp., the brainchild of company founder and Bay Street financier Steve Hudson, plummeted 29 per cent in a single day after it announced the departure of its chief executive officer and the loss of a crucial customer.

It is a stunning fall for what was, until recently, a high-flying company. The newly revealed woes have also changed the narrative around Mr. Hudson's comeback, a long march to regain investors' trust after the downfall of his previous venture.

Element has not named a new chief to replace outgoing CEO Brad Nullmeyer, who is one of Mr. Hudson's closest associates, and the company is now conducting an external search. But the board did reveal that it expects earnings from its core fleet business to fall by three to five per cent in fiscal 2018 after losing the servicing business of a large client, which the company didn't name, in recent months.

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Combined, the two updates rattled investors. "The search for a new CEO adds incremental risk to an already unstable story," CIBC World Markets analyst Paul Holden wrote in a note to clients.

Near the start of the century, Mr. Hudson disappeared from financial circles after his leasing giant, Newcourt Credit Group, fell apart in the wake of a costly acquisition.

After his eight-year, self-described "walkabout," he started building something new. In 2011, he took the nascent venture, Element Financial Corp., public, vowing not to get trapped by the same hubris that failed him once before.

Element soared in its early days. The company largely focused on fleet management, which meant servicing the vehicles that a client might provide to its sales representatives.

The firm also served as a bank of sorts to these same customers by lending them money so that they could lease their fleets of vehicles.

By 2015, the stock had quadrupled. That June, Mr. Hudson bought General Electric's fleet business for $8.6-billion, making Element the biggest fleet company in the North American corporate car market.

The shares climbed for a month after the announcement, but they haven't been worth as much since. Element subsequently re-engineered itself, splitting into two separate companies, but shares in its core business, renamed Element Fleet Management, have tumbled 65 per cent. In many ways, Mr. Hudson fell victim to another large deal, despite his claim at the time of the GE acquisition that the blockbuster purchase was only the start of a new phase of aggressive growth.

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That Element Fleet has tumbled so far, and so fast, is also at odds with Mr. Hudson's own description of the business. When its predecessor firm was split in two, in 2016, he stressed that the fleet unit offers modest predictable growth "very much like a utility," projecting an image of stability.

Element declined to comment for this story.

Although the GE deal made Element a dominant force in its industry, what's transpired in its aftermath is a reminder that being bigger isn't necessarily better; the buyer struggled to integrate the two businesses behind the scenes. Element also had difficulty with the development of a new technology platform that would help clients manage their large fleets of cars. The system took too long to launch, and when it was finally ready, there were bugs in it, affecting client satisfaction.

"There's a ton of data when it comes to fleet management services," interim CEO Dan Jauernig said on a conference call, adding, "you're always going to have some problems, especially with the data migration as large as the one that we undertook. And unfortunately, through that process, we lost a handful of large customers."

The news that Element lost a prominent client in recent months shocked analysts, who asked management how this could be considering Element had recently stressed that its fleet management business was "sticky," meaning customer turnover should be low.

"The single biggest risk associated with this turnaround story is further customer attrition," Raymond James analyst Brenna Phelan wrote in a note to clients.

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As Element searches for a new CEO, it will also look to cut costs. "We are moving to streamline our operations, right-size the organization and properly align our expense base to our revenue growth," Mr. Jauernig, the interim leader, said on the conference call.

However, Element does not face any immediate cash crunch, despite the lost customers. "We note, as highlighted by the company, that Element generates approximately $400-million of free cash flow per year, more than sufficient to pay its dividends and address an inefficient capital structure," Ms. Phelan wrote to clients.

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