Jim Eglseder, Investor Relations, welcomed everyone to the FLEETCOR Technologies Incorporated Second Quarter 2023 Earnings Conference Call. He was joined by Ron Clarke, the Chairman and CEO, and Tom Panther, the CFO. The operator announced the queue will open for the Q&A session after their prepared comments. The earnings release and supplement can be found on their website. They will be covering organic growth and non-GAAP financial metrics. Forward-looking statements may be included in the discussion and should not be relied upon as guarantees.

In Q2, the company reported record revenue of $948 million and cash EPS of $4.19, both of which increased sequentially. Organic revenue growth was 10%, driven by a 6% increase in fleet revenue, a 45% increase in EV revenue, a 15% increase in Brazil revenue, and a 7% increase in tag volume. CEO Ron Clarke then discussed updated 2023 guidance, key priorities, and the status of the strategic review.

In Q2, lodging led the growth with 14%, followed by corporate payments with 22%. Sales grew 20% in the quarter, with corporate payment sales up 80% versus last year. Retention remained steady at 91%, and same-store sales finished flat. The outlook for the rest of 2023 includes revenue of $3,848 million at the midpoint and cash EPS of $17.22 at the midpoint.

The company is running ahead of internal expectations in the first half, with a forecast of 12% revenue growth and 10% organic growth in the second half. This includes an expected 14% growth in Q4 and reaching $1 billion in quarterly revenue for the first time. Additionally, the company is making progress in its EV efforts, with EV revenue up 45% year-over-year and the number of U.K. EV commercial accounts nearly tripled. The company also refreshed its board and pivoted North American fleet sales to bigger company prospects.

The company has stopped onboarding small companies and expects a 30-35% decrease in fleet credit losses in the second half of the year. Additionally, they are increasing the number of new fuel apps with more than five cards. They are also in the midst of a strategic review, which includes closing the FTC injunctive relief chapter, closing the Russia sale, exploring the sale of their prepaid businesses, and looking into potential small divestitures within the vehicle line of business.

The company is working to reposition their global fleet business and create an exciting future with sustainable growth. They are expanding their vehicle-related payment solutions and social solutions beyond fuel. They are exploring the idea of separating one or more of their businesses to unlock value, either by spinning off a major business into a separate company or combining one of their businesses with a dance partner. They expect to complete their work on these four initiatives before the end of the year and they are pleased with their Q2 and first half performance.

In the second quarter, organic revenue growth was 10%, with Corporate Payments revenue up 22%, driven by strength in their direct business, including AP software solutions. Fuel prices were lower than expected at $3.65 per gallon, but foreign exchange rates negatively impacted them by $9 million. Despite $23 million of macro headwinds, they were able to power through with organic and acquisition-related growth.

Cross-border revenue increased by almost 30% and customer transaction activity was strong. The company is committed to cost synergies and rationalizing IT and facilities overlap, which will help expand margins. Organic revenue increased 6%, with the U.S. seeing success from digital sales and Europe seeing 20% sequential quarter growth in EV solutions. In Brazil, revenue grew 15% due to 7% tag growth and 16% sales growth from digital, field, and partner distribution channels.

Lodging revenue increased 14% in the quarter, up against a tough year-over-year comp. This was driven by sales success across industry verticals and an increase in revenue per room night of 19%. The Other segment declined 14% due to a shift in the timing of card orders by retailers, but net revenue expectations remain in line. Operating expenses increased 9%, primarily due to acquisitions, while bad debt expense was stable with last year. EBITDA margin improved 140 basis points from the first quarter and 30 basis points over last year, and is expected to improve throughout the year, exiting around 200 to 250 basis points better than the prior year.

Interest expense increased in the second quarter due to higher rates, resulting in a $0.57 drag on adjusted EPS. To manage this risk, the company executed $2 billion of fixed rate swaps with an average maturity of 3.5 years and an average fixed rate of 4.3%. This offered an immediate positive carry of 100 basis points and reduced the fixed rate portion of debt to 60%. The effective tax rate for the quarter was 26.6% and the company had $1.25 billion in unrestricted cash and $768 million available on its revolver. For the full year, GAAP revenues are expected to be between $3.836 billion and $3.86 billion.

FLEETCOR provided estimates for adjusted net income, adjusted net income per diluted share, and EBITDA growth for Q3. They are also assuming an August close of their Russian business, which will result in a $0.25 to $0.35 decline in adjusted EPS for the rest of the year. They are using a fuel price assumption of $3.66 and an average SOFR rate of 5.31% for the rest of the year. They are currently in the process of a strategic review and have learned a lot through the process, though they are not yet revealing which way they are leaning.

Ron Clarke states that getting people to believe in the fleet business and its transformation into the vehicle business is priority, as well as the potential for a structural separation that could potentially include a combination with another entity. He also mentions that EV has grown 47%, and that they have a good line of sight on the EV piece in the short to mid-term and how it would supplement growth within the fleet.

Ron Clarke explains that the company is making money from the existing vehicles, EVs, and commercial fleets, and will also be entering the consumer market. Tom Panther adds that the company saw some good transaction activity in their international markets, such as Mexico and Australia, which has contributed to the organic revenue growth.

Tom Panther answered a question from Ramsey Assal about the impact of the yellow bankruptcy on the company, saying there was no exposure to yellow. Nick Cremo then asked for more information on the North American Fleet segment, to which Tom said they don't break it down beyond the segment level, but that the international business outperformed the U.S. Ron Clarke added that the mid-single digit revenue per transaction growth should continue in the second half.

Ron Clarke reported that the Corpay segment was very strong, with the direct business being "well north of 22%". He also mentioned that the cross-border business had an 80% increase in new business quarter-over-quarter. He noted that the partner business, where the segment started seven years ago, is still negative and trending down.

Ron Clarke discusses the success of the company's sales and cross-border business, which is trending higher than expected. He also explains the company's strategy of focusing on larger customers by offering them all three of the company's products, and he confirms that there will be more of this in the future. Finally, he confirms that the strategy for capital allocation has not changed and that M&A is still the priority.

Ron Clarke explains that there are two sources of margin expansion for the full year: operating leverage from increased revenue, and the lapping of capability acquisitions which have cost around 100-200 basis points. He predicts that the consolidated margin will be up 340 basis points in the fourth quarter, stronger than it was last year.

Tom Panther and Ron Clarke discuss the acquisition of GRT and the effects it will have on stock comp, bad debt, and EBITDA margin. Peter Christiansen then inquires about the virtual card and direct side of the business, to which Ron Clarke responds that sales are at record levels for both the payables side and the cross-border side, and that the mix has shifted more to full AP, but stand-alone virtual cards are still being sold.

Tom Panther discusses the strong growth seen in the Corpay segment, which is driven by sales and deepening existing customer relationships. He notes that both the payables and cross-border subsegments are attractive and have strong sales results and pipelines. He also states that there is no material difference in terms of margin between the two subsegments.

Ron Clarke explains that the cross-border business is attractive because it has a low cost of sales and a fast implementation rate. He also adds that digital marketing initiatives have been gaining traction, but it is difficult to move a big machine like this and it takes longer to get more of the bigger accounts.

Ron Clarke reported that the credit numbers were already down and they were forecasting a roll rate to be down, which was Job one. Job two was to get more of the larger clients in the door, which they are working on. Tom Panther reported that field sales remain strong, and they have been doing well, buffering the impact from the pivot to digital. Nate Svensson asked about monthly trends in the organic fleet business and any updates on July and August. Tom Panther reported that they were expecting continued sequential acceleration as they move into the third quarter.

Ron Clarke discussed the business momentum from the previous month and expected similar trends for July. He noted that the benefit of an uptick in crude should result in higher retail numbers, as well as seasonal growth. However, he mentioned that revenue nights were down sequentially and year-over-year, as well as some softness in managed accounts. He maintained mid-teens growth for the full year, but did not specify any details on the cadence of growth for the back half.

Nate discussed a soft pocket of growth in managed accounts in Q2, which was offset by diversification in airline and insurance. Ron mentioned the custom business in railroads and trucking firms, as well as the small SMB business, and called out the consulting travel group which has performed above mid-teens. Trevor asked for help on what the organic growth in fleet in the quarter would have looked like ex Russia.

Ron Clarke explains the level of visibility for the company's fourth quarter guidance. He says that July is tracking to their guide and that they have the sales in the bag. He also mentions that the business is a recurring revenue business and that they are ahead of sales year-to-date. He notes that Q3 is always a strong quarter and Q4 is better than Q1, giving them an extra boost.

Tom Panther and Ron Clarke discussed the take rate in corporate payments and fleet, noting that the slight increase was due to a combination of factors such as mix of business and pricing, as well as fuel. They also noted that the mix shift in corporate payments is expected to continue, leading to a significant difference between the direct corporate payments business and the channel business.

Ron Clarke reported that corporate payments are seeing an 80% increase in cross-border new business quarter-over-quarter. He also mentioned that they are consolidating their brand and generating more leads by offering more solutions to prospective companies. Clarke noted that this could be an input to the strategic review of potentially divesting some businesses, and that they could potentially have a commercial agreement with the company afterwards if the separation still makes sense.

Ron Clarke states that the corporate payments book was up 80% year-over-year, and that the company is still expecting to grow 20% plus in the Corporate Payments business. He also states that they are in the middle of a strategic review to create more value and to separate sales and spending, with the potential to create more value in certain segments. Additionally, they are full-speed ahead on the separation process, including the sale of noncore assets and businesses.

The company is looking into separating their fleet, lodging, and corporate payments businesses. They are considering both a pure separation and a combination of the businesses. There are potential costs associated with the separation, such as taxes and IT and management costs, and the company is trying to make sure that any benefits from the separation would outweigh the costs. Additionally, the Brazil tag business saw strong growth of around 15% in sales and 7% in tag growth.

Ron Clarke explains that the success of the products is due to the widening of distribution channels and the addition of fuel and insurance add-ons to the Sem Parar tags. These add-ons are in high demand and have allowed the company to increase their revenue without adding more tags. The first quarter saw almost 40% of the spend in Brazil being for beyond toll products.

Tom Panther reported that B2C customer base was at 40%, and that revenues from products other than the tag subscription were showing success. Ron Clarke added that their sales year-to-date were at a record level, and that they had been increasing each year with no slowdown. The conference then concluded with no further questions.

This summary was generated with AI and may contain some inaccuracies.