Corpay Inc (CPAY) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the FleetCor Technologies Inc. Second Quarter 2011 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for question.

(Operator Instructions)

This conference is being recorded today, Thursday, August 4th of 2011. And I would now like to turn the conference over to Eric Dey, Chief Financial Officer. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us today. My name is Eric Dey and I'm the chief financial officer of FleetCor Technologies. By now, everyone should have accessed our second quarter 2011 press release. It can also be found at www.fleetcor.com under the Investor Relations section.

Throughout this conference call, we will be presenting non-GAAP financial information, including adjusted revenues and adjusted net income. This information is not calculated in accordance with GAAP, and may be calculated differently than other companies similarly titled, non-GAAP information.

Quantitative reconciliations of historical non-GAAP financial information to the most directly comparable GAAP information appears in today's press release and on our website, as described above. Also, we are reviewing 2011 guidance on a non-GAAP basis.

Finally, before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. This includes forward-looking statements about our 2011 guidance. They are not guarantees of future performance, and therefore you should not put any undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

Some of those risks are mentioned in today's 8-K with the Securities and Exchange Commission, others are discussed in our Form 10-K which is available at www.sec.gov.

With that out of the way, I would like to turn the call over to Ron Clarke, our Chairman and CEO. Ron?

Hi, everyone, and thanks for joining the call today. I plan to cover three subjects here in my opening remarks. So, first off, our Q2 results. You know, in a nutshell our Q2 results were very good. In fact we set all-time record highs in both revenue and net income. So for the quarter we reported revenue of $134 million, adjusted net income of $48 million, and adjusted EPS of $0.57. All of these results were [bid] against our internal plan.

From a growth perspective we've set organic growth targets of 10% and 20%. That is 10% revenue growth and 20% adjusted net income growth. And for the quarter revenue grew 21% and adjusted net income grew 37%. So, on both fronts we were well ahead of our targets.

Well, let me cover some of the reasons to the strong Q2 performance. First off, the environment continued to help us. We enjoyed unusually high market spreads which contribute probably over 3 million to 4 million above normalized levels. High fuel prices and favorable FX rates also helped our performance.

The one exception on the environment side would be the UK and Czech economies. Both are still very weak and together they put downward pressure on our transaction growth.

Second, we enjoy higher revenue per tran in the quarter. We continue to upgrade our clients to our extended network cards. And our mix continue to b positive as well with clients such as Shell contributing revenue with no transaction volume.

Lastly, although our performance was relatively balanced across the company, two of our businesses performed exceptionally well. Our Russia business grew over 80% in the quarter and our US Universal MasterCard business grew 70%. So, needless to say we're pretty pleased with the quarter overall.

Let me now move on to the implication of our 2011 full-year guidance. Based on this very good first half and our current run rates we are increasing our 2011 guidance. We now expect full year 2011 to finish with revenue of $480 million to $490 million, adjusted net income of $168 million to $173 million, and adjusted EPS of $2 to $2.05.

Although we recorded 104 of adjusted EPS in the first half, I'd say $0.04 or so was the result of unusually favorable environmental conditions. And particularly, the higher than normal market spreads I mentioned. As always this guidance does not include the impact of any future acquisitions or material partnership agreements that we may enter into.

Lastly, let me provide just a bit of a strategic update. First, we continue to chase new partner signings and a creed of acquisitions primarily outside of North America and Europe. We're making very good progress and expect to announce something concrete probably in our next earnings call. And we really are working on some very exciting new developments.

Second, we recently closed a new five-year $900 million term loan. This new facility along with our existing cash gives us over $800 million of liquidity to pursue acquisitions. And even with that I believe our Q2 leverage ratio is approximately 1.2 times which is at its lowest level in years.

Finally, I want to update you on our partnership with MasterCard. MasterCard created a program for business card holders called the MasterCard Easy Savings Plan. This plan allows business card holders to enroll and enjoy automatic discounts with 30 or more merchants. Both our Fuelman Fuel Network of approximately 19,000 sites, and our CLC Hotel Network of roughly 10,000 sites are part of the MasterCard program.

So this new partnership provides incremental savings to MasterCard's business card holders, incremental volume to our participating merchants and incremental revenue to FleetCor. So, we're very excited about the long-term prospects of this relationship.

So, in closing, I got to say we're really pleased with the quarter and we're pleased with the strategic progress we're making and we look forward to updating again in the fall.

So with that, let me turn the call back over to Eric to provide some additional color on our earnings release. Eric?

Thanks, Ron. For the second quarter of 2011 we reported revenue of $134.2 million, an increase of 20.4% from the second quarter of 2010. For the second quarter, net income increased 24%, to $36.7 million from $29.6 million in the second quarter of 2010 or $0.44 per diluted share, compared to $0.37 per diluted share in the second quarter of 2010.

The other financial metric that we routinely use to measure our business are adjusted revenues and adjusted net income. Adjusted revenues equal our GAAP revenues plus merchant commissions. We use adjusted revenues as a basis to evaluate the Company's revenues net of the commission that are paid to merchants who participate in certain card programs.

The commissions paid to merchants can vary when market spreads fluctuate in much of the same way some of our revenues can vary when market spreads fluctuate. We believe this financial metric is a more effective way to evaluate the Company's revenue performance.

Adjusted net income is GAAP net income adjusted to eliminate non-cash stock-based compensation expense related to share-based compensation awards. Amortization of deferred financing cost and tangible assets, amortization of the premium recognized on the purchase or receivables and losses on the early extinguishment of debt.

Adjusted revenues in the second quarter of 2011 increased 22.8% to $119.3 million compared to $97.2 million in the second quarter of 2010. Adjusted net income for the second quarter of 2011 increased 37%, to $47.8 million or $0.57 per diluted share compared to $34.9 million or $0.42 per diluted share in the second quarter of 2010 on a pro-forma basis.

2010 adjusted net income on a pro-forma basis includes the public company expenses incurred in the second quarter of 2011. Additional non-cash compensation expense related to our new option plan, loss and early extinguishment of debt, decrease in the effective tax rate to equal the effects of tax rate in the second quarter of 2011 and fully diluted shares equal to those in the second quarter up through 2011, each of which are described in exhibit one to this press release.

For the second quarter of 2011 transaction volumes increased 2.8%, to 50.3 million transactions from 49 million transactions in the second quarter of 2010. Adjusted revenues per transaction for the second quarter of 2011 increased 19.7%, to $2.37 from $1.97 in the second quarter of 2010. Adjusted revenues are defined as reported revenues less the commissions paid to merchants who participate in certain of our card programs.

I also want to note that the second quarter of 2010 transaction volumes in revenues have been adjusted for the wind down of our partner contract in Europe inherited from an acquisition which w echoes not to renew. This partner had a high number of transactions and very little revenue. A reconciliation for this contract wind down is contained in exhibit two to the press release.

In light of the Company's exceptional performance in the second quarter, I would like to give some examples of how we're able to achieve this performance. First, there are three business lines that are performing exceedingly well this year. They are our Universal MasterCard Program; our Russian business, PPR; and, our hotel card business, CLC.

In 2006, we started issuing corporate cards that utilize the MasterCard payment network, which includes approximately 165,000 fuel sites and 400,000 maintenance locations across the country. We market these cards to customers who require card acceptance beyond our proprietary merchant locations.

The MasterCard network delivers the ability to capture value-added transaction data at the point of sale and allows us to provide customers with fleet controls and reporting comparable to those of our proprietary fleet card networks.

The revenue generated from our direct market MasterCard products for the second quarter of 2011 go approximately 70% compared to the second quarter of 2010. This increase was primarily driven by strong new customer sales and existing customer same-store growth resulting in higher transaction volumes as well as the effect of higher fuel prices over the prior year.

In July 2008, we completed the acquisition of Petrol Plus Region, which we refer to internally as PPR, an independent fuel card provider based in Russia. As a result of this acquisition, we have become a leading independent fuel card company in Russia with additional operations in Poland, Lithuania, Latvia and Estonia.

We have negotiated card acceptance and settlement terms with over 700 individual merchants providing the PPR network with approximately 7,000 fueling sites across the region. For the quarter their product line revenues also grew approximately 70% over last year in local currency. This increase were driven primarily by an increase in same-store sales and strong new customer sales resulting in higher transaction volumes, as well as the impact of higher fuel prices.

And finally, in April 2009, we completed the acquisition of CLC Group, a provider of lodging management programs based in Wichita, Kansas. CLC is the company's proprietary lodging network in the United States and Canada. The CLC network covers more than 17,000 hotels across the United States and Canada.

For the quarter, CLC's revenues grew approximately 20% over last year. This increase was primarily driven by an increase in same-store sales, higher sales volumes in our higher margin products and higher revenues due to the restructuring of certain customer contracts.

Secondly, in certain of our businesses, a portion of our revenue involves transactions where we derive revenue from fuel price spread which is the difference between the price charged to our customer for a transaction and the price paid to merchant for the same transaction. In these transactions the price paid to the merchant is typically based on the wholesale cost of fuel. We experienced fuel price spread contraction typically when the wholesale cost of fuel increases at a faster rate than the fuel price we charge our customers.

In our first quarter earnings call we noted that this exact scenario happened which caused our fuel price spread-based revenue be negatively impacted by approximately 3.5 million in the first quarter of 2011 compared to the first quarter of 2010, which was primarily offset by the impact of higher fuel prices in the first quarter in certain of our businesses.

However, during the second quarter of 2011, the wholesale price of fuel dropped at a faster rate and the price charged to our customers which caused a favorable fuel price spread of approximately 3.8 million. The combination of favorable fuel spreads and higher fuel prices positively impacted our revenues in the second quarter.

Now, moving down the income statement. Total operating expenses for the second quarter were $65.7 million, compared to $52.6 million in the second quarter of 2010, an increase of 24.9%.

Included in operating expenses are merchant commissions, processing expenses including bad debt, selling expenses, and general and administrative expenses. The increase in operating expense in the second quarter of 2011 is due primarily to additional non-cash compensation expense related to our new stock option plan. Incremental public company related cost and additional cost support the growth of our business.

Credit losses were 25 basis points for the quarter, compared to 32 basis points in the second quarter of 2010. The improvement in credit losses was primarily due to the improvement in the economy and a shift in our marketing and sales strategy towards slightly larger fleet prospects.

Depreciation and amortization increased 4% to $8.6 million in the second quarter of 2011 from $8.3 million in the second quarter of 2010. The increase was primarily due to the impact of amortization of intangible asset related to two small acquisitions completed during 2010.

Interest expense decreased 37.6% in the second quarter to $3.5 million from $5.5 million in the second quarter of 2010, due primarily to the expiration of an interest rate hedge in November of 2010 resulting in a much lower interest rate and lower principle balances during the quarter.

In June, the Company refinanced its existing term loan facilities in the US and the Czech Republic with a new $900 million credit facility in the United States. As a result, the Company recognized a $2.7 million loss at early extinguishment of debt. I will discuss the new credit facility later in my remarks.

Our effective tax rate decreased to 31.8% of pretax income in the second quarter of 2011 from 34.3% of pretax income in the second quarter of 2010. The decrease in the effective tax rate was primarily due to the unfavorable impact on the prior year rate from the controlled foreign corporation look-through exclusion which expired in December of 2009, and was not extended until December of 2010 and was retroactive back to the beginning of 2010.

Now, turning to the balance sheet. We ended the quarter with $164 million of total cash, $63 million of which is customer deposit in our Czech Republic business and is restricted.

In June, we announced that we entered into a new five-year $900 million credit facility. This new multi-currency credit facility consists of a $300 million term loan and a $600 million undrawn revolver. And its terms provide weak or greater flexibility while reducing administrative burden which we will -- which will allow us to focus on growth.

Proceeds were used to retire outstanding amounts under FleetCor's existing credit facilities in the aggregate amount of approximately $329.3 million. We also amended our securitization facility, which removed a compliant certification reporting requirement and certain financial covenant requirements.

The Company intends to continue to use its free cash flow to temporarily pay down the securitization facility balance and maintain liquidity for acquisitions and other corporate purposes.

Now, turning to financial guides. Given our strong first half of 2011 results and improving economic environment and our progress on our organic growth initiative, we are increasing our financial guidance for 2011.

Our revised guidance for 2011 is now as follows. Revenue between $480 million and $490 million, up from our previous guidance range of $460 million to $480 million; adjusted net income between $168 million and $173 million, up from our previous guidance range of $155 million to $165 million; and, adjusted net income per diluted share between $2 and $2.05, up from our previous guidance range of between $1.83 to $1.95.

As a reminder, the Company's full year 2011 guidance includes approximately $2 million of incremental cash operating cost in 2011 for public company cost that did not exist in 2010. Also, a 2.1% increase in our effective tax rate from 28.7% of pretax profit in 2010 to 30.8% of pretax profit in 2011.

It also includes an increase of 3.3 million diluted shares outstanding from, 80.8 million shares in 2010 to 84.1 million shares in 2011. The increase in diluted shares was primarily due to stock vesting in conjunction with the IPO. If these incremental costs and shares had been incurred in 2010 the Company's full year 2010 adjusted net income would have been $138 million or $1.64 per diluted share.

And, finally, for those who are looking at GAAP numbers in 2011, please keep in mind that we will have an additional $17.9 million of non-cash compensation expense associated with our new option plan.

The Company's full year 2011 guidance assumes similar macroeconomic and business conditions exist in 2011 and has did in 2010, and assumes current foreign exchange rates. The guidance does not reflect the impact of any future acquisitions or material new partnership agreements.

And with that said, Operator, we'll open it up to questions.

Thank you. We will now begin the question and answer session.

(Operator Instructions)

Our first question comes from the line of Roman Leal with Goldman Sachs. Please go ahead.

Thank you. First, I want to ask a question on your commentary on larger fleets being one of the drivers here on the -- on the credit performance.

You know, just yesterday, one of your competitors said that they were interested in moving into the kind of smaller fleet segment, and now you're saying that you're kind of interested in that larger fleet segment. What drives you to move more towards larger fleets? Is that just more of a diversification strategy or do you see that segment performing would be better?

Yes. Hi, Roman, this is Eric. What we're really referring to there is moving away from the very smallest of fleets. Meaning that the fleets probably have one to three sort of vehicles which contribute to the majority of our bad debt to fleets that are larger than that. So, concentrating on fleets that have fleet size of a minimum of, five, six, seven vehicles and greater than that to help to reduce bad debt.

We're not referring going from small to mid0sized fleets to, you know, large national accounts. That's not what I was referring to.

Got it.

Roman, it's Ron. Let me just add to that. There's an [r-squared] between client size -- say one or two-person vehicles to let's say 100. You could run, you know, 100 or 150 basis point loss with one and two, 55 -- 30 to 15, 20 to 50. So the mix, your size mix drives your credit average.

Yes. I understood. Thanks.

So obviously, the larger average you have the better credit performance you'll have.

Got it. Now, on the MasterCard Easy Savings Plan, when was that rolled out and was there any impact this quarter from that program?

Yes, there's two products I mentioned. One is the fuel part which is called our Fuelman Network. That's been rolled out probably about a year-and-a-half ago.

Yes.

And we just rolled out the hotel products. I'd say there's kind of single digit millions, you know, from the fuel card and we'd expect probably some single digit millions more as the hotel card, you know, takes flight over the next quarter or so. So it's been a good program for us.

Great. And just -- I'm just curious, how big is the Russian business, and what's kind of driving the out-size growth there?

Yes, this is Ron. We don't disclose, Roman, the size of the business, but the growth is what we call relative investments. So in other words if you had a business that was let's say $50 million in revenue and we spent $20 million in sales the relative sales investment to the base of the business is what causes that business to grow.

So we're spending a lot and selling kind of 30% to 40% of the base. So obviously, if you're, you know, losing let's say 10% you're going to have fantastic volume growth. So, because the opportunity is so big we're investing a lot on the sale side.

All right. Thank you.

Thank you.

Our next question comes from the line of Glenn Fodor with Morgan Stanley. Please go ahead.

Hi, good afternoon. Thanks for taking my question, and congratulations on the good quarter. It's very good o see the increase in revenue yield. Is it correct to assume that a lot of these is sustainable as we look over the next couple of quarters because driven by things like new product sales and MasterCard sales, that those customers are going to be with you (inaudible) near term? So, should we expect, I mean, sort of pullback in that or can -- you can forecast that to be up over the next couple of quarters?

Hi, Glenn, it's Ron. So, I would say what we always say which is we're going to keep continuing to increase revenue per tran. So, our mix with this extended network cards are going to keep continuing to grow our mix like we told you repeatedly that we're spending money in the businesses that already have a higher revenue per tran versus the businesses that don't so that mix effect basically will continue.

And then, I think, we did mention we'll start in the market some additional add-on kinds of things. So, when you put those three things together our expectation is it's going to continue to rise.

Okay. Give us an update where you're up in ramping up Shell, and how is it going in your term 0hurdles or sort of data point to watch out for in the near term?

Yes, I think it's going good. I mean, obviously it is a gigantic account and we've got a massive team in place working on the accounts. So I'd say, the relations are good, we're hitting the early milestones that we set out for both GAAP closure in terms of the system and the early testing, basically, of the system. So I'd say, so far so good.

And, obviously, as I think we mentioned in the last call that win, Glenn, you know, has helped a lot in terms of interest from other oils in Europe, right, as they saw that announcement and have referenced into that account. So, I think it's been good on both fronts for us.

And last question. Given the turmoil going on in Europe to the point you just brought up on other conversation with other big oils, but has the economic situation over there -- has anything sort of changed with the texture of your conversations with sentiments from these other guys who are going out (inaudible)?

Yes, I don't think so. I mean, generally that industry, as you know is incredibly healthy so I would say the -- that the clients that we're in conversations with and the individuals are still pretty focused on what they are trying to accomplish. So, I would say no. I would say that the people we're talking to are still quite interested in our offer.

Okay. Great. Thank you, very much. I appreciate it.

Thank you. Our next question comes from the line of Tien-Tsin Huang with JPMorgan. Please go ahead.

Great. Thanks. I hope you guys can hear me. I'm actually outside at the airport. Good quarter here. I also want to ask like Glenn asked about the revenue per transaction. I actually want to ask about it sequentially. You know, assuming market spreads are stable and FX is stable, is there any reason why revenue per tran wouldn't be stable on a sequential basis just from modeling perspective?

Yes, Tien-Tsin, it's Ron again. I would say we expect that to continue to creep up, right -- from both, again, the product upgrades and these mix changes that we're making. So, I think even on a sequential basis you should assume that's still going north.

Yes, Tien-Tsin, this is Eric. The only thing I would add on to that is in Q2 we did have a bit of a favorability in market spreads so that clearly would have added to the revenue per tran that we earned in the second quarter. And we expect the -- our spread revenue to kind of be back at the line average for the rest of the year.

Right. So, basically, assume that's constant. But did you give the FX revenue in the quarter as a housekeeping question?

You mean, how much of the debt FX rates impact our revenue in the second quarter?

Correct.

You know, probably it was approximately $4 million on the revenue side. But if you take a look at cost, obviously higher FX rates impact cost negatively so probably about $2 million of incremental cost resulted. So, net, about 2 million.

Okay. That makes sense. And then, just on the same-store side I heard the commentary on the UK and Czech being weak. I'm curious about the US, and what you're seeing on the same-store basis given all the fund we're seeing in the markets.

Yes, it's actually good engine for us. You know, the -- I've seen all the commentary from other companies. Our US direct business -- I don't think we reported that, but it was up high single digit volume, 9%, Eric, I think?

Yes.

Kind of our [N-fleet] business. So, our kind of US clients, id say, are generally healthy. Again, it's not recovery from the glory days if you will, but it's not sliding backward for us now. It is sliding backwards, I mentioned, in that UK. You know, that market is just in the complete ditch, the UK market, but the US I'd say is still on the plus side.

Got it.

OK. I guess as we look into the back half of the year then, Ron, just looking at the present and take -- ignore -- assuming sort of a stable macro -- is we're having a pretty high level of confidence, that we'll see some large deals whether it'd be organic or inorganic sources still come true based on what you're seeing over the last three months?

Yes. I try to -- say a little bit. I'd say we're as always, Tien-Tsin, comfortable with the second half because we've got -- did visibility right into our run rates. So, as long as the environment kind of hangs, we think we'll earn the same or a little bit more. What I would say was a nickel, Eric, in the first half?

Yes --

So we'll earn $1 or a $1.05, I think, in the second half. And I was trying to say that although a number of these accounts are big, they're cautious and kind of slow moving, we've really made a lot of progress since the last call. And I'd say we're expecting to be able to actually say some concrete things to you instead of the we are making good progress. So, we are making good progress.

Excellent. Glad to hear it. Nice job, guys. Thanks.

Thank you. Our next question comes from the line of Tim Willi with Wells Fargo. Please go ahead.

Hi, thanks. I had a housekeeping question and a couple of questions on CLC. First, on housekeeping. Eric, could you just walk us back through the discussion of the impact on the hedge? I wasn't able to write everything down. That you sort of talked about any interest and fine relative to that.

Yes, we have an interest rate hedge in place last year that expired in November of last year. And effectively we have our interest rate hedged at around 4.25% approximately. Obviously, we were very, very happy to see that go away given where today's interest rates were. So, obviously it had favorable impact on the quarter from an interest rate standpoint.

Got you.

Was it about 700,000?

500,000 or 500,000 a month.

Yes, about 500,000 or 600,000 a month, Tim.

Wow. Okay. Great. And then on CLC, I guess I've never really asked a lot of questions about that business relative to fleet, but in terms of the growth there and the investment and what sounds like a nice quarter, I'm curious to what degree signing up more properties and, you know, geographic penetration.

Is that all part of the story here or is that much more about just signing out more card carrying customers to stay at sort of the existing footprint of properties?

Tim, it's Ron. I mean, the first comment I'd make is, you know, we're really delighted with that business. We closed early '09 in the worst conditions and that business this year will double in profitability from the year we bought it so we'll double earnings in the business in three years which is good.

And the reason for that is a bunch of things. There's very healthy customers. We've railroads that have come back, a bunch in that business. Outside kind of service and merchandising groups that are healthy. We made a bunch of product changes. We targeted the small market where we get three times as much per tran. So, kind of across the board -- the core, the sales, the new products -- basically it's kind of all working right now in that business.

Okay.

And then, within your customer base, I think, there's been -- part of the story there has been around changing contractual terms and sort of the spread, I guess, you get per room per night. You know, to what degree have you moved through that process do you think when you look at your customer base to the property base?

Yes, we're on the other side of that now.

Okay. Okay.

That's all I have. Thanks so much.

Thanks.

Thank you.

(Operator Instructions)

Our next question comes from the line of Darrin Peller with Barclays Capital. Please go ahead.

Hi guys, how are you? This is actually [Adam Karen] here for Darrin.

Hey, Adam.

I just have a quick question for you guys. In terms of -- when you think about the kind of -- some kind of strategic move here in the second half of the year -- and you guys mentioned that you have about $800 million or so in liquidity, but you also mentioned that your leverage ratio is only at about 1.2 times.

Is there a specific size that you guys are looking at for a deal, and could this leverage ratio possibly increase if necessary?

Yes. Hi, this is Eric. We're looking at all different sized deals. We look at deals that may range to as small as $4 million to $5 million in purchase price to as large as perhaps a couple of hundred million or so. Obviously, if we buy one of these companies we're going to tap in to our revolver to help pay for the purchase price so it would impact our leverage to some degree.

Okay. That's helpful. And then I just had one quick housekeeping question. Eric, you mentioned that $17.9 million in stock-based comp. Was that for the year, or for the remainder of the year?

That's for the entire year.

Okay. Got it. Thanks, guys.

Thank you. Ladies and gentlemen, that concludes the FleetCor Technologies Inc second quarter 2011 earnings conference call. We thank you for your participation, and you may now disconnect.