Corpay Inc (CPAY) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the FleetCor Technologies, Incorporated Fourth 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 your questions. (Operator Instructions).

I'd now like to turn the conference over to Mr. Eric Dey, Chief Financial Officer. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us today. By now everyone should have access to our fourth quarter and full year 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 is the most directly comparable GAAP information appears in today's press release and on our website as described previously. Also, we are reviewing 2012 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 2012 guidance. They are not guarantees of future performance and therefore you should not put 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 filed 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?

Okay, Eric, thanks. Hello, everyone, and thanks for joining us today. I thought I'd cover three subjects in my opening remarks; first, our Q4 results; second, our 2011 full-year results; and then finally, our 2012 guidance and give you a bit of a bridge.

So first off our Q4 results; if you've had a chance to see our earnings release you'll see that Q4 was a very good quarter for us. We reported revenue of $140 million, an all time quarterly high since the founding of the Company. Now, we also reported adjusted net income of $47 million and adjusted EPS of $0.56 per share.

All of these results were beat against our own internal plan. And from a growth perspective Q4 revenue grew over 30% and adjusted net income more than 25%. So we finished comfortably ahead of our 10 and 20 targets.

Now let me shift into some of the drivers of this Q4 performance. One, we continued rapid growth of our Universal Card products, our CLC Hotel Card products and our Russia business. Together these three businesses grew revenue a combined 40% for the quarter, so they continue to grow really, really quickly.

Second, the environment continued to help us. Fuel prices were well above prior levels and US market spreads were way above normal for the quarter adding $3 million to $4 million of incremental revenue.

Third, the addition of our Mexico and AllStar acquisitions contributed meaningfully to our Q4 revenue but very little to our Q4 earnings.

And then finally, we booked a favorable tax rate for the quarter, 26% as we confirmed a couple of tax rulings that reduced our full-year tax liability.

Our fourth quarter also produced a particularly strong sales finish. Our US sales grew 40% for the quarter and 25% to the full year.

In the non-field channels things like web and mail grew almost 50% versus the prior year. We also got some sales traction from a new sales partnership with FleetMatics, a GPS tracking Company, who recently began selling their own branded version of our Universal Card. They're adding the fuel card to new sales of their GPS tracking services and we expect this new partnership to add approximately 5% to our 2012 overall US sales.

Now let me transition to our second subject, our full-year 2011 results, and let me begin by reminding you of what we set out to do in 2011. We targeted 10 and 20, that is 10% of revenue growth and 20% earnings growth for the year. That led to initial revenue guidance of $460 million to $480 million and we reported approximately $520 million so $50 million above our midpoint.

Our initial adjusted EPS guidance was $183 million to $195 million and we reported $217 million, so we finished 15% above our midpoint.

So our initial 10 and 20 has turned into 20 and 30 for 2011. These results were driven by executing what we call our three by three strategy, namely we build, we buy and we partner. On the build front we grow assets we own through both volume and rate-per-transaction. And for 2011 transactions grew 12% and revenue per tran grew 8%.

Next we strive to sign meaningful outsourcing partners. In 2011 we signed Shell, a portfolio measured in volume roughly the size of our entire Company. And lastly, we buy assets that we know and we can improve. We bought both a Mexican prepaid fuel card company and the AllStar fuel card business in the UK, which we announced in December.

Note both deals are outside of North America where we said we would focus and both diversify our revenue away from fuel price sensitivity, as they rely on fee-based models. So you'll see us continue to focus our acquisition efforts on emerging markets and on businesses we know.

Finally, in addition to accomplishing our business objectives last year, we also strengthened the Company's balance sheet. We closed a $900 million term loan with B, of A of which $600 million is in the form of a revolver, and our leverage ratio exited Q4 at 1.3 times EBITDA. So we believe this gives us the necessary capital and freedom to continue to pursue attractive acquisitions this year.

Okay, let me move on to my final subject, our 2012 outlook. For 2012 we're expecting revenue and adjusted EPS to grow approximately 19% at the midpoint of our guidance.

The growth drivers for '12 include one, expected healthy volume increases in a number of our fast growth businesses and that's consistent with our 2011 performance; two, continued rate enhancement as clients continue to convert to our extended network products. Three, the recently announced PHH leasing deal will obviously be additive. And four, we'll have a full year of our Mexico and AllStar acquisitions, which we previously said should add at least $0.25 combined to our 2012 adjusted EPS.

We do expect the macro environment to be less helpful to our 2012 growth rate, as both FX rates and fuel prices look to be level with 2011. So our '12 guidance does not rely on the favorable economic conditions that really helped our performance in 2011.

Finally, in addition to this base-line guidance, you should also look for us to continue to chase new partner outsourcing deals and new emerging market acquisitions. Our pipeline today is quite full all fronts and again that primarily outside of North America.

So, with that, let me now turn the call back over to Eric to cover our financial results in some more detail. Eric.

Thanks, Ron. For the fourth quarter of 2011 we reported revenue of $140.2 million, an increase of 32% from the fourth quarter of 2010.

For the fourth quarter GAAP net income increased 116% to $37.8 million from $17.5 million in the fourth quarter of 2011, or $0.45 per diluted share compared to $0.22 per diluted share in the fourth quarter of 2010.

For the full year of 2011 we reported revenue of $519.6 million, an increase of 20% from the full year of 2010.

GAAP net income for the full year of 2011 increased 37% to $147.3 million from $107.9 million for the full year of 2010, or $1.76 per diluted share compared to $1.34 per diluted share in 2010.

The other financial metrics that we routinely use to measure our business are adjusted revenues and adjusted net income, which we sometimes also refer to as cash net income. Adjusted revenues equal our GAAP revenues less merchant commission. We use adjusted revenues as a basis to evaluate the Company's revenue net of the commissions that are paid to merchants who participate in certain card programs.

Commissions paid to merchants can vary when market spreads fluctuate in much the same way some of our revenues can vary when market spreads fluctuate. For this reason we believe that the adjusted revenue financial metric is a more effective way to evaluate the Company's performance.

The reconciliation of adjusted revenues and adjusted net income to our GAAP numbers are provided in Exhibit One of our Press Release.

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 costs and intangible assets, amortization of the premium recognized and the purchase of receivables and the loss on early extinguishment of debt.

Adjusted revenues in the fourth quarter of 2011 increased 29% to $125.5 million compared to $97 million in the fourth quarter of 2010. Adjusted net income for the fourth quarter of 2011 increased 28% to $47.3 million, or $0.56 per diluted share compared to $37.1 million or $0.44 per diluted share in the fourth quarter of 2010 on a pro forma basis.

2010 adjusted net income on a pro forma basis provides comparability by including the public company expenses included in the fourth quarter of 2011, additional non-cash compensation expense related to our new option plan, increases in the effective tax rate to equal the effective tax rate in the fourth quarter of 2011 and fully diluted shares equal to those in the fourth quarter of 2011, all of which are described in Exhibit One of our Press Release.

Adjusted revenues for the full year of 2011 increased 22% to $468.4 million compared to $384.8 million for 2010.

Adjusted net income for the full year of 2011 increased 31% to $181.7 million, or $2.17 per diluted share compared to $139 million, or $1.66 per diluted share for 2010 on a pro forma basis. For the fourth quarter of 2011 transaction volume increased 33% to 63.5 million transactions compared to 47.7 million transactions in the fourth quarter of 2010.

Adjusted revenues per transaction for the fourth quarter of 2011 decreased 3% to $1.97 from $2.04 in the fourth quarter of 2010 due to the impact of acquisitions closed in 2011, which carry a lower revenue per transaction product.

For the full year of 2011 transaction volumes increased 12.8% to 214.8 million transactions compared to 190.4 million transactions in 2010.

Adjusted revenues per transaction for the full year of 2011 increased 8.1% to $2.18 from $2.02 in 2010. Adjusted revenue per transaction can vary based on geography, the relevant merchant relationship, the payment product utilized and the types of products or services purchased, the mix of which will be influenced by our acquisitions, organic growth in the business and fluctuation in environmental factors, such as foreign exchange rate, fuel prices and fuel price spreads.

Adjusted revenue per transaction for both the quarter and full year were positively impacted by organic growth in certain of our payment programs and the generally positive environmental factors in the quarter, such as higher fuel prices and favorable market spreads.

During the fourth quarter we completed the acquisition of AllStar Business Solutions Limited in the UK, which contributed to the increase in transaction volumes and adjusted revenues.

Also, during the third quarter the Company completed the acquisition of a Mexican prepaid fuel card and food voucher business, which also contributed to the increase in transaction volumes and adjusted revenues.

Excluding the impact of these acquisitions, our transaction volumes grew in line with prior quarters. However, both the AllStar business in the UK and our business in Mexico produce a lower revenue per transaction product and, when combined with our businesses' revenues, results in a lower revenue per transaction than would have resulted without the acquisitions.

I also want to note that the fourth quarter of 2010 and full year of 2010 transaction volumes and revenues have been adjusted for the wind down of a partner contract in Europe inherited from an acquisition, which we chose not to renew. This partner had a high number of transactions and very little revenue. A reconciliation of this contract wind down is contained in Exhibit Two to the Press Release.

Now let's shift over and discuss some of the drivers of our fourth quarter performance. First, our combined US Fuel Card business performed extremely well during the quarter growing nearly 40% compared to the fourth quarter of 2010. Helping drive this performance was revenue generated from our direct market and MasterCard product, which was up over 50% compared to the fourth quarter of 2010 resulting in higher transaction volumes for the quarter.

CLC Group, a provider of lodging management programs, hit another solid quarter with 30 plus percent revenue growth over the fourth quarter of last year. This increase was primarily driven by an increase in same store sales, higher sales volumes, higher margin product and higher revenues due to the restructuring of certain customer contracts.

In our international business our independent fuel card provider based in Russia, PPR, continued with its impressive growth trend with revenues up approximately 35% over last year. This increase was driven primarily by an increase in same store sales and strong new customer sales resulting in higher transaction volumes.

The macroeconomic environment in 2011 also helped increase revenues and profit during the fourth quarter and full year. When we talk about the macroeconomic environment we are referring to the impact of market spread margins, fuel prices, foreign exchange rates and the economy in general can have on our business. During the fourth quarter and full year of 2011 these macroeconomic factors were generally positive.

Now, moving down the income statement, total operating expenses for the fourth quarter were $76 million compared to $74.3 million in the fourth quarter of 2010, an increase of 2%. Included in operating expenses are merchant commissions, processing expenses, bad debts and selling and general administrative expenses. Included in operating expenses in the fourth quarter of 2011 were normal operating expenses related to the two acquisitions closed in 2011 and approximately $1.2 million of one-time deal related expenses related to our acquisition activities.

Credit losses were 20 basis points for the quarter compared to 23 basis points in the fourth quarter of 2010 and on a full year basis credit losses were 21 basis points compared to 29 basis points in 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 17% to $9.9 million in the fourth quarter of 2011 from $8.5 million in the fourth quarter of 2010. The increase was primarily due to the impact of amortization of intangible assets related to our acquisition in Mexico in the third quarter of 2011 and the AllStar acquisition in the fourth quarter of 2011.

Interest expense decreased 18% in the fourth quarter to $3.4 million from $4.2 million in the fourth quarter of 2010. This decrease was due primarily to the expiration of an interest rate hedge in November 2010 and the favorable impact of refinancing our term loan in June 2011 at a more attractive rate.

Our effective tax rate increased to 30.1% of pretax income for the full year of 2011 compared to 28.7% for the full year of 2010. However, in the fourth quarter of 2011 our effective tax rate was only 25.6% due primarily to a number of favorable items, including adjustments related to tax plans successfully implemented in foreign jurisdictions where we do business, the reduction in statutory rate in foreign jurisdictions where we do business and the mix of earnings between US and foreign jurisdictions.

Similarly in the fourth quarter of 2010 our effective tax rate was only 13.1%, also due to a number of favorable items including the mix of earnings between US and foreign jurisdictions, the reduction in the statutory rate in foreign jurisdictions where we do business and the impact of the reduction in the reserve for uncertain tax positions.

Now turning to the balance sheet, we ended the quarter with $341 million of total cash, $56 million of which is restricted and are primarily customer deposits. The Company also has a $500 million accounts receivable securitization facility. At the end of the quarter we had $280 million drawn on the facility and had the ability to draw an additional $26 million based on eligible receivables pledged against the facility.

On February 6th we amended and extended our facility termination date until February 2013. The renewal included a reduction in the facility's interest rate from CP plus 90 basis points to CP plus 75 basis points and also included a reduction in our unused line fee. The current purchase limit remains at $500 million.

We also have $293 million outstanding on our term loan and $125 million drawn on our $600 million revolver. As of December 31st our leverage ratio was 1.3 times EBITDA, a slight increase from 1.1 times at the end of the third quarter. The increase was due to borrowing on our revolving credit facility related to the purchase of the AllStar business in December. However, our leverage ratio remains well below our covenant level of 3.25 times EBITDA. The Company intends to continue to use its free cash flow to temporarily pay down the balance on the revolving credit facility and securitization facility and maintain liquidity for acquisitions and other corporate purposes.

Finally, we are not a capital intensive business as we spent approximately $5 million on CapEx during the fourth quarter of 2011 and approximately $13.5 million for the full year of 2011.

Now, on to our outlook for 2012, for 2012 we are expecting revenue to be between $615 million and $625 million, adjusted net income to be between $217 million and $222 million and adjusted net income per diluted share to be between $2.55 and $2.60.

Some of the assumptions that we made in preparing our 2012 guidance include the following. We are assuming that the macroeconomic environment will provide some challenges in 2012 when we compare it to our 2011 performance. As an example, foreign exchange rates are currently running lower than the 2012 average and we assumed that trend to continue in 2012. We assume market spreads to be consistent with the last three-year average, which is lower than 2011, and we assumed fuel prices to be flat to the 2011 average.

We are also assuming a 0.2% increase in our effective tax rate from 30.1% in 2011 to 30.3% in 2012, an increase of 1.5 million diluted shares outstanding from 83.7 million shares in 2011 to 85.2 million shares in 2012. And finally, this guidance does not reflect the impact of any future acquisitions or material new partnership agreements.

The full year guidance produces a 19% full year 2012 revenue and cash earnings growth rate, at the midpoint of our guidance range versus 2011. I would like to remind everyone that included in 2011 is the impact of a macroeconomic environment that was favorable in fuel price, market spread margins and foreign exchange rates and, as I mentioned earlier, we are assuming that the environment will be more challenging in 2012.

For those of you that are looking for guidance for the first quarter I want to remind everyone that our business has some seasonality and that typically the first and fourth quarters are lower than the second and third quarters in both revenue and profit. With that said, we are expecting our first quarter adjusted net income per diluted share to be between $0.56 and $0.59. We have no plans to provide quarterly guidance going forward but provide this guidance to help you understand our seasonality.

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

(Operator Instructions). Our first question comes from the line of Tien-Tsin Huang with JPMorgan.

I guess I'll ask about the conservatism in the guidance. I just wanted to take your temperature on that, Ron and Eric, because if we strip out I guess the AllStar and the Mexico deal it looks like it implies some high single-digit EPS organic growth. Is that accurate? I am just curious if the macro conservatism that you talked about was enough to bring it down to that level.

Hey, Tien-Tsin, this is Eric. You know, there are a number of reasons for that. Let me see if I can explain them to you. I guess first if you look at it from a GAAP perspective our GAAP net income was actually up about 25% over 2011 and the reason for that is our cash compensation or non-cash compensation expense between 2011 and 2012 is actually decreasing and, as a result of that decrease, it actually impacts the adjusted net income on a cash basis.

We also have an increase in our number of shares outstanding in 2012 versus 11, which is also impacting the calculation. Thirdly, the acquisitions that we completed in 2011 have a lower margin than does the rest of our businesses today and obviously as we get into 2011 we're going to be working on those business to bring those margins more in line with the Company's line average.

And then finally, we've taken a bit of a conservative view when we take a look at the macroeconomic environment looking into 2012 primarily as relates to FX rates. FX rates are currently running a little bit lower than the average was in 2011 and our average spreads in 2011 were higher than like the last three-year average, so we took a little bit more conservative view on those as well. I think those things combined resulted in where we were from a guidance perspective.

And, Tien-Tsin, it's Ron. We obviously want to give you a number we can make.

Sure. No understood but does the 10 and 20 still sort of apply here longer term?

Yes I think if you strip out all the words that Eric said you ought to think about the organic businesses comparable with '11 so when we peel back all the detail I'd tell you that our view is the businesses are growing basically the same if you kind of chuck out the environment.

Okay yes if you cleanse for everything. Okay understood. Last one and then I'll let someone else ask, just the implied sort of same store assumption in Europe? I mean, are you seeing things deteriorate there, ignoring FX of course? What's happening on the ground in Europe? Thanks.

Tien-Tsin, this is Eric again. Yes I would say that same store sales across Central Europe are running, meaning in the UK and our Czech Republic business are running probably flat to down somewhat in 2011 and we expect that trend to continue into 2012.

But I'd say here, Tien-Tsin, it's Ron, that we mentioned this the last -- I think in the last call -- the nose of the plane is up a bit in the US. It's not everywhere. The California market is still not great but I'd say we're on the plus side now in the US fuel card same store. Finally that thing is up.

And obviously too, just to add on to that, our same store sales in Russia are actually, you know, extremely well, doing extremely well right now.

Yes. No it sounds that way, very good. Appreciate it, guys.

Wayne Johnson, Raymond James.

Could you just comment on the -- your guys' appetite for future acquisitions in South America and could you also just give an indication on kind of the business climate there? And I have one follow-up. Thanks.

Wayne, it's Ron. High would be the headline and, again, we like markets with a model set up well, not only your payments early in the cycle but the model in terms of basically where the economics work, particularly in Brazil, are pretty attractive. So I'd say both Mexico, which we talked about the last time, and South America are interesting to us.

Right and so on that so Brazil being the most attractive market, can you give us any sense? Do you guys have anything in the pipeline or in your sights?

Yes I wouldn't comment on actually a country but I would say if you pulled up the public comps there are a couple of public comps there, Cielo and ReadyCARD. You can see kind of their growth rates in acquiring and in processing are very good but we're obviously, I think I've said this repeatedly, we've been in the business for 11 years so we know every company basically everywhere and, as I've said, we're in conversations. We're about trying to buy assets we like so you should assume if there are people anywhere we're talking to them.

And that would include the United States?

Yes I'd say again it's less interesting, Wayne, as we've said before, mostly again because of the market dynamics, right. The country here it's more penetrated and the model is obviously more competitive. There are more players doing what we do here but, again, if there was an interesting property here we would look at it but I'd say we like the looks of properties in other markets more.

Terrific, thank you.

(Operator Instructions). Phil Stiller, Citi.

Congrats on the good quarter. On the AllStar acquisition what was the revenue contribution in the quarter? And then, as we think about 2012, can you give us a sense in terms of how much you guys are investing in the platform consolidation there and what kind of long-term savings that should drive?

First, Phil, I'll just remind everybody we closed the AllStar acquisition on December 13th, so it had very little contribution, both from -- well, first from a revenue perspective and it had no contribution from a profitability standpoint, as we booked a bunch of deal cost in conjunction with closing the transaction so there was nothing from a profit standpoint. And it was single-digit millions in total revenue for the quarter, or for the month really.

Yes, Phil, it's Ron. On the second part of the question I'd say the two places that we're investing; one is in technology so the way to think about it is they have some kind of base line run rate of what they're spending, right to run the systems and enhance the systems they have and we're basically spending money to basically tailor and implement our technology. So that would be kind of an incremental spend this one year.

And then same on sales. They basically spend relative to their base significantly less than we do and so -- and they use a much narrower set of channels to acquire customers than we do so we're going to both spend more in total and we're going to introduce some new channels, new ways to acquire accounts that they don't currently use.

You guys have a rough time frame as to when you could get that business to kind of in line margins relative to the overall business?

You know, I'd say a fair amount of it hinges on the technology but I'd say that we're going to obviously go carefully but I'd say, as we exit this year we'll probably be a third to half of the way and probably you get to a years from there we'll be two-thirds of the way would be kind of a guestimate for you.

Okay great. On the North American business you had strong increases in revenue per transaction for the third consecutive quarter and it's been relatively consistent sequentially since that time. Is the -- are the comps that much more difficult after we get through the first quarter or are you expecting further increases on that metric going forward?

Yes again, it's the mix, Phil. It's environment, right, has given some lift to higher our fuel price or higher spreads but B it's the product mix that we go to so we're selling and if converted we have lot more of extended network cards that we earn more revenue so over the prior period we have a greater mix of higher profit products in our base now. So I think we told you we're probably 75% of the way through that set of conversions, so we expect that to keep rolling into 2012.

Yes and, Phil, I think to answer your question overall, I think we expect that obviously revenue per transaction to continue to grow in both of our businesses in the US in both internationally as well.

Okay great. Last question from me, any update on the Shell implementation and when we should expect revenue from that deal?

That's a good question. I'd say we're on track with the plan. At the end of the second quarter we're planning to basically go live in the first market. It's actually a market that Shell has picked in Asia and then basically, kind of as we get into the fall, the plan is to start to implement some of their bigger European markets so kind of starting Q3 and Q4 you should see transactions start to increase from Shell.

Okay great. Thanks, guys.

(Operator Instructions). And I show no further questions at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation and you may now disconnect.