Corpay Inc (CPAY) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to FleetCor Technologies Incorporated Third Quarter Conference Call. At this time I'd like to turn the conference over Eric Dey, Chief Financial Officer. Please go ahead.

Good afternoon, everyone, and thank you for joining us today. By now everyone should have access to our third quarter 2012 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, adjusted net income and EBITDA. This information is not calculated in accordance with GAAP and may be calculated differently than other companies similarly titled non-GAAP information.

Quantitative reconciliation 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 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 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 press release and Form 8-K filed with the Securities and Exchange Commission. Others are discussed in our annual report on Form 10-K. These documents are available on our website, as previously described and 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.

Okay, Eric, thanks. Hi, everyone, and thanks for joining the call today. I'll plan to cover just a couple subjects here in my opening remarks. So first off I'll provide a bit more perspective on Q3 and second, I'll discuss the overall outlook for the Company.

Okay, so first off let me turn to our results for the quarter. The Q3 results we reported were really good and ahead of our internal plan. We set new record highs for both revenue and profit. We reported Q3 revenue of $187 million, up 39%, and cash EPS of $0.83, up 47%.

Our adjusted net income grew over 50% for the quarter and our EBITDA reached almost a $100 million for the quarter, so overall pretty good.

So in terms of drivers, let me start with the environment and I describe the environment really as mixed for the quarter. Our market spreads returned to normalized levels, so not much help there.

Fuel prices were flat in the US but up a bit in Europe so helped our international segment some.

We enjoyed a favorable one-time Q3 tax credit, which was worth roughly $0.03 in the quarter, so kind of operating EPS really $0.80 for the quarter. And on the negative side FX was a headwind reducing our revenue approximately $3 million versus constant currency, so really in a bit of a mixed bag.

Our North American business had another really terrific quarter. Adjusted revenues grew 11%, all organic, and our Universal Card programs drove most of that upside, beating our internal expectations really across the board.

Our CLC business continued to perform well. It was up 14% for the quarter.

And then lastly, our recent acquisitions Allstar, Efectivale, TGF and NKT were all additive in the quarter, so that gave us lots of additional lift.

So in summary, we're obviously very pleased with these Q3 numbers and, given our trends, we're raising our Q4 and full-year guidance to reflect this momentum and Eric will cover those details in just a bit.

So now let me transition over to the Company's outlook and begin talking about our current state of the union. So obviously we're pleased at how the Company is performing. Our performance is really across the board virtually every business doing well.

Most of our key metrics are in a very good place. Our client satisfaction and retention levels are improving. New sales are up, credit losses are stable, expenses are under control and our system reliability is sound.

So, given these trends, we believe we can keep moving our base business forward despite being in a neutral economy.

So overall I characterize our core businesses very healthy.

Second, in terms of outlook, we believe there's a big, big upside in our new assets so we've acquired four businesses or four new assets in the last year, all outside of North America and we're making some good progress improving profits in each one of them.

So, for example, we're converting right now our Allstar business in the UK to GFN, our global processing platform, and this conversion will deliver not only material expense savings but sets the business up to do new things like eFilling, offer chip and pin cards, give us even some new pricing alternatives.

In our Mexico business, Efectivale, we're well underway reshaping that business moving clients from paper to cards and emphasizing fuel, which carries much higher margins for us. We're also launching a universal fuel card there, which we believe the market will like.

So in summary, we expect these four new assets to yield higher profits for us as we moved into 2013 and '14.

Finally, we remain very active in our global business development efforts. We were accomplishing a number of the goals that we set out so we're getting into new markets, more attractive markets that give us access to more market potential and a longer runway. We're getting our GFN system accepted and recognized as the best fuel card system in the world.

We're up sizing our credit facility by $500 million bringing our available liquidity to a billion dollars and we're committed to focusing that billion in liquidity on businesses we know and businesses in which we can improve performance.

We remain very active in both new partner development and new acquisition situations and we've even stuffed up our investment in new add-on product capabilities, mostly centered around mobile tools.

So we believe the Company is well positioned to do even bigger things in the future.

So in conclusion, we're pleased with our Q3 results. We're pleased with our trends and momentum and we're very encouraged by some big, big opportunities in front of us.

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

Thanks, Ron. For the third quarter of 2012 we reported revenue of $186.9 million, an increase of 39% from the third quarter of 2011. Revenue from our North American segment increased 9.1% to $101.5 million in the third quarter of 2012 from $93 million in the third quarter of 2011.

And revenue from our international segment increased 107% to $85.4 million in the third quarter of 2012 from $41.2 million in the third quarter of 2011.

For the third quarter of 2012, GAAP net income increased 47% to $59.7 million, or $0.69 per diluted share, from $40.5 million, or $0.48 per diluted share, in the third quarter of 2011.

The other financial metric 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 revenue less merchant commissions. We use adjusted revenues as a basis to evaluate the Company's revenues 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 revenue can fluctuate when market spreads vary. For this reason, we believe the adjusted revenue financial metric is a more effective way to evaluate the Company's 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 intangible assets, amortization of the premium recognized on the purchase of receivables, a loss on early extinguishment of debt and adjusted for the income tax effect of such.

The reconciliation of adjusted revenues and adjusted net income to our GAAP numbers are provided in exhibit one of our press release.

Adjusted revenues in the third quarter of 2012 increased 44% to $174 million compared to $120.9 million in the third quarter of 2011.

Adjusted net income for the third quarter of 2012 increased 52% to $71.6 million, or $0.83 per diluted share, compared to $47.2 million, or $0.56 per diluted share, in the third quarter of 2011.

For the third quarter of 2012 transaction volume increased 46% to 79 million transactions compared to 54 million transactions in the third quarter of 2011. Our transaction volumes in our international segment were positively impacted by two acquisitions closed in the second half of 2011 and two acquisitions closed in the first three quarters of 2012.

To remind everyone in August of 2011, we acquired Efectivale, a Mexican pre-paid fuel and food card Company. And in December of 2011 we acquired Allstar Business Solutions, a leading UK fuel card company.

In mid June of this year we completed an acquisition in Russia and in July we expanded into the Brazilian market with our acquisition of TTF Technologies.

Adjusted revenue per transaction for the third quarter of 2012 decreased 1.6% to $2.20 from $2.23 in the third quarter of 2011. Adjusted revenue per transaction can vary based on geography, the relevant merchant and customer relationship, the payment product utilized and the types of products or services purchased, a mix of which will be influenced by our acquisition, organic growth in the business and fluctuations in environmental factors such as foreign exchange rate, fuel prices and fuel-price spread.

Adjusted revenue per transaction for the quarter was positively impacted by our organic growth and certain of our payment programs.

Also during the third quarter we believe that the environment both helped and hurt our businesses. Spreads in foreign exchange rates were generally unfavorable while fuel prices were flat in the US and up slightly in our international market.

Although we cannot precisely measure the impact of the environment, in total we believe the environment hurt our revenues by approximately $4 million to $5 million during the quarter, which I will describe later.

In addition, while the Allstar business in the UK and our business in Mexico, Efectivale, represent good profit margin businesses, they do have lower revenue per transaction products. The impact of the product offered by our businesses acquired in the UK and Mexico were partially offset by the impact of acquisitions completed in 2012.

In 2012 we acquired a Russian fuel-card business and CTF Technologies, Inc. in Brazil, which have higher revenue per transaction product in comparison to our other businesses. However, the overall impact of these acquisitions resulted in lower revenue per transaction for our international and consolidated revenues.

Now let's shift over and discuss some of the drivers of our third quarter performance. First, in our North American segment all of our lines of businesses performed well resulting in an 11% organic growth rate in the quarter versus prior year at the adjusted revenues line.

However, included in the North American segment revenue in the quarter was the impact of lower fuel price spread. During the quarter the wholesale cost of fuel rose at a higher rate than the retail price of fuel, which compressed fuel spread margins and which we believe adversely impacted our revenue by approximately $2 million to $3 million.

Fuel prices were generally flat versus last year in the US and had very little impact on the quarter.

Some of the positive drivers of revenue during the quarter included the continued exceptional performance of our direct market and Master Card product, which has revenue growth of 49% year-over-year.

The CLC Group, provider of lodging management programs, continued to perform well and had another solid quarter with 14% revenue growth over the third quarter of last year.

In our international business, our results were positively impacted by the two acquisitions closed in the second half of 2011, Efectivale, the Mexican pre-paid fuel and food card company and Allstar, a leading fuel card company in the UK, and the two acquisitions closed in 2012, CTF in Brazil and the acquisition in Russia.

In addition, our independent fuel card provider based in Russia, PPR, continued to grow with revenues of double digit over last year in local currency.

Also, the Mexican pre-paid fuel and food card portion of our business is off to a strong start with revenues of double digits in local currency. However, the results in our international business were negatively impacted by the sluggish economy in Europe and unfavorable foreign exchange rates during the quarter.

As I previously stated, the macroeconomic environment was generally unfavorable during the third quarter and although we cannot precisely calculate the impact we believe negatively impacted our revenues by approximately $4 million to $5 million.

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 third quarter the increase in the wholesale cost of fuel resulted in lower fuel spread margins, which we believe negatively impacted our revenues by approximately $2 million to $3 million. Changes in foreign exchange rates were generally unfavorable and impacted our revenues by approximately $3 million during the quarter.

And finally, fuel prices were generally flat in the US and up a bit in Europe and we believe added approximately $1 million in international revenue.

Now, moving down the income statement, total operating expenses for the third quarter were $101.1 million compared to $72.5 million in the third quarter of 2011, an increase of 39%. Included in operating expenses are merchant commissions, processing expenses, bad debt, selling and general administrative expenses and depreciation and amortization expense.

The increase in operating expenses was primarily due to additional expenses related to acquisitions closed in the second half of last year and the first three quarters of this year. Included in operating expenses for the quarter was $6.9 million of mostly non-cash stock compensation expense versus $3.7 million in the third quarter last year. Approximately $1 million of additional stock compensation expense was recorded in the third quarter based on expectations that certain employee's restricted stock vesting hurdles will be met by year-end.

As a percentage of total revenues, operating expenses remained flat at 54% compared to the third quarter of 2011. Credit losses were 13 basis points for the quarter compared to 20 basis points in the third quarter of 2011. The improvement in credit losses was primarily due to the impact of acquisitions closed in 2011 and 2012, which have product with lower bad debt as a percentage of billed revenue, improvement in the economy and a shift in our marketing and sales strategy towards a larger fleet prospect.

Depreciation and amortization increased 50.1% to $13.6 million in the third quarter of 2012 from $9.1 million in the third quarter of 2011. 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, the All Star acquisitions in the UK in the fourth quarter of 2011, the acquisition in Russia in June of 2012 and the acquisition in Brazil in July of 2012.

Interest expense increased 3.7% in the third quarter to $3.2 million from $3.1 million in the third quarter of 2011. The increase in interest expense is primarily due to additional borrowings related to acquisitions closed over the last year, partially offset by slightly lower interest rates.

Our effective tax rate decreased to 27.8% of pretax income compared to 31.5% for the third quarter of 2011. The decrease in our effective tax rate was primarily due to the recognition of a one-time income tax benefit during the quarter of $3.5 million that resulted from our net deferred tax liability in the UK being reduced due to the enactment of a lower statutory UK tax rate. The impact of this one-time income tax benefit on adjusted net income per share was approximately $0.04 per share in the quarter.

Now, turning to the balance sheet, we ended the quarter with $352.2 million of total cash, $52.2 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 $355 million borrowed against the facility and had the ability to draw an additional [$15 million] based on eligible receivables pledged against the facility. We also had $282 million outstanding on our term loan and $208 million drawn on our revolver.

On November the 7th we announced that we have increased the size of our credit facility by $500 million. The increased credit facility will total $1.4 billion and consists of a $550 million term loan facility and an $850 million revolving credit facility. The interest rates on the upside facility will remain unchanged. At the time of closing we drew an additional $250 million of term loan, which we used to immediately pay down the revolver and securitization facility.

After closing the Company has approximately $1 billion of liquidity, which will be used primarily to fund future acquisitions, other general corporate purposes including to potentially fund share repurchases from certain of our significant legacy investors. The terms and timing of any future repurchases would be subject to the discretion of our Board of Directors and we currently do not have any specific plan.

As of June 30th our leverage ratio was 1.34 times EBITDA, a slight increase from 1.2 times at the end of the second quarter. The increase was due to additional borrowing on the revolving credit facility to close the CTF acquisition in the third quarter.

At September 30th our leverage ratio remained well below our covenant level of 3.25 times EBITDA. The Company intends 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 $5.2 million on CapEx during the third quarter of 2012.

Now on to our outlook for 2012; given our very favorable results in the first nine months of the year and our outlook for the remainder of the year, we are again increasing our guidance for 2012. We now expect revenue for 2012 to be between $678 million and $682 million, up from our previous guidance range of $665 million to $675 million, adjusted net income to be between $248 million and $251 million, up from our previous guidance range of $235 million to $240 million. And we expect adjusted net income per diluted share to be between $2.89 and $2.91, up from our previous guidance range of $2.74 to $2.78.

The assumptions that we have made in preparing this guidance include fuel prices flat to current levels for the fourth quarter of 2012, market spreads to return to their historic normal levels in the fourth quarter, a slight decrease in our effective tax rate from 30.1% in 2011 to 29.8% for the full year of 2012, foreign exchange rates to remain at current levels for the fourth quarter, fully diluted shares outstanding of 86.2 million shares for the full year of 2012 and finally, no impact related to any future acquisitions or material new partnership agreements.

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

(Operator Instructions). Our first question if from the line of Julio Quinteros with Goldman Sachs.

Just real quickly on the organic commentary I just wanted to make sure the 11% growth, that was only concentrated in North America; is that correct?

Correct.

That's correct, Julio.

Okay so by definition everything else would have been acquired before the reported revenues.

No that's actually not correct. I mean we've got organic growth clearly in our European operations as well. If you remember when I commented on by the international businesses, I kind of talked about each one individually so we had kind of double-digit growth in our Russian business, double-digit growth kind of in the mid-teens in our Mexican business. Our Brazilian business is actually up certainly double-digit levels over prior year as well and then our European businesses are kind of flat to up to perhaps down a little bit because of the economy.

Okay great that's helpful and then, as you guys have had a chance now to kind of look at the integration and the plans around some of the recent acquisitions here, is there anything either from a cost of a revenue perspective that you guys are seeing that provides more opportunity as we really start thinking about 2013 and what the contributions could be here, again either from a revenue or a cost integration perspective?

Yes, Julio, it's Ron. I would say they're probably consistent with our thesis when we did the deal, which would be pretty significant next year. We've owned a couple of them almost a year or certainly will be a year by December in the case of All Star, so we're pretty well underway in making improvements.

Okay got it and then just lastly on the ramp of the new assets, when it's all said and done are there any targets in terms of we should be thinking about how much the fuel spread business could contribute to revenues over time? I know that's something that can cause some noise quarter-to-quarter but anyway to think about how the new contribution from the new businesses could impact the overall mix there as we start looking at the kind of longer-term view?

You know, generally, Julio, the businesses we're acquiring are non fuel-spread based businesses so, as a percentage of our total revenue that mix should decrease over time.

Okay great; thank you.

Yes, Julio, it's Ron. The last four are basically zero in terms of fuel spread dependency.

Yes I realize that. I was just wondering if there was a target or something that you guys had in mind in terms of where you would like to get the overall contribution from that type of business.

No it's just another revenue source. We have many different models around the world and that's just one of our models.

Okay got it; thank you.

Darrin Peller, Barclays.

This is actually Adam Carron for Darrin. Just in terms of what we're seeing in the international segment, is there any way you could help parse out your expectations for revenue per transaction on a go forward basis? Obviously we saw a little bit of a jump sequentially here from a second quarter to third quarter and it was down much more -- much less on a year-over-year basis. Is there any way to think about that going forward?

Well, you know, what happens, Adam, is when we buy some of these businesses generally speaking some of those businesses have lower revenue per transaction products like the Efectivale business in the All Star business as an example. Some of the businesses actually have higher revenue per tran businesses, like the CTF business and actually the Russian acquisition that we recently completed. Generally though after we buy these businesses we improve the performance of those businesses and the revenue per tran in each of those businesses will start to increase over time. But generally when we just buy them it has -- it can have a negative impact on the run rate, just because of the mix of the new business.

Okay and then that's very helpful and then just a quick follow-up in terms of could you guys provide us and update in terms of the rollout of Shell? I think you guys had spoken that your expectations were to see it in the fourth quarter in October of 2012 and just maybe you could quantify what we should expect in terms of an impact to transactions and revenue per tran there.

Yes it's Ron. We're kind of at the one-yard line in terms of being ready to launch into the first market T minus some set of days here and so there would be virtually kind of no impact here in 2012 and then I would assume that we would probably board about half the transactions next year and the other half the following year, kind of half in '13 and half in '14.

Great, thanks a lot, guys.

(Operator Instructions). Phil Stiller, Citigroup.

Congratulations on the good results. I wanted to ask about the margins. We were a bit surprised to see them up on a year-over-year basis. I think your commentary related to some of the recent acquisitions. Was that those were lower margin businesses? So I was wondering if you could provide some color on what drove the margin increase on a year-over-year basis and what you guys expect going forward.

Hey, Phil, this is Eric. If you look at our margins kind of in each of the -- each of our two segments, at the North American level our margins were up kind of -- I don't know -- 3% or 4% and what drives that effectively is the organic growth in the business so really nothing unusual going on from that segment perspective. When you look at the international business they're probably down a little bit and that's driven primarily by the mix impact obviously of adding the lower margin businesses into the portfolio.

But I would say that at a consolidated level our margins are exactly where we thought they were going to be.

Is there a point at some point in the near future where you reach an inflection point in the international margins, given the cost savings that you guys are pursuing in some of these deals?

You know, we're just starting that process, Phil, so there's a long runway between when we're going to start reaching any inflection point on the new deals. As Ron indicated, I mean we're just starting with Allstar and we're just scratching the surface with some of our other acquisitions, so there's a pretty good runway in front of us.

Yes, Phil, it's Ron. The leverage tends to be one-time on the cost side but it's kind of never ending on the revenue side, both pricing and then what we call product upgrades or mix and add ons, so again I think our message is consistent that we expect margins to continually increase.

Okay on the topic of deals can you provide an update on what your pipeline is looking like? I am assuming you guys still remain pretty optimistic, given the increase in the credit facility here.

Yes we like to have the money so yes, Phil, I would say, as always the same line, busy, what we're involved in both on the partner side, oil partner, and on the pure acquisition side we're in multiple situations on both of those fronts.

Can you provide some more color?

There's one of the reasons obviously we up size the line.

Yes can you provide some more color on the partnership opportunities? It seems like you're still progressing along with Shell though it's probably been a little slower than you originally anticipated. As we think about potential new deals, are those continued to get pushed out and if we think about you signing them, would they require capital to do so?

Yes so the answer is it's a mix so of the partner opportunities we're looking at we have both kind of processing only kinds of opportunities and we have more full service outsourcing opportunities as well. We have some that require zero capital. It's us taking over and provisioning a service. And we have others where we're "effectively acquiring" the card base and paying some premium basically to do that.

So it's a mix, Phil, across the things we're working on.

Okay that's helpful. Thanks, guys.

(Operator Instructions). And those are all the questions we have for today and that does conclude the conference call as well. Thank you for your participation. You may now disconnect.