Corpay, Inc.

Greetings and welcome to the Fleet Core Technologies second quarter 2020 earnings conference call. As a reminder, this conference call is being recorded. I would like to turn the conference over to our host, Mr. Jim Egglesetter, head of investor relations for Fleet Core Technologies. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining us today for our second quarter 2020 earnings conference call. With me today are Ron Clark, our Chairman and CEO, Eric Day, our longtime CFO, and Charles Freund, who, as you saw in your earlier press release, will be taking over for Eric as of September 1st. Following the prepared comments today, the operator will then announce your opportunity to get into the queue for the Q&A session. It is only then that the queue will open for questions. Please note, our earnings release and supplement can be found under the Investor Relations section on our website at FleetCorps.com. Throughout this call, we will be presenting non-GAAP financial information, including adjusted revenues, adjusted net income, and adjusted net income per dilute share. This information is not calculated in accordance with GAAP and may be calculated differently than non-GAAP information at other companies. 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 previously described. Now, 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 outlook, new products and fee initiatives, and expectations regarding business development, acquisitions, and future performance. They are not guarantees of said future performance, and therefore, you should not put undue reliance upon them. These results are subject to numerous risks and uncertainties, which could cause actual results to differ materially from what we expect. Some of those risks are mentioned in today's press release on Form 8K, and on our annual report on Form 10-K filed with the Securities and Exchange Commission. These documents are available on our website and at sec.gov. With that out of the way, I would like to turn the call over to Ron Clark, our Chairman and CEO. Ron?

Okay. Good afternoon, everyone, and thanks for joining our second quarter earnings call. Before I begin my opening remarks, I do want to say a big thank you to my pal, Eric Day, for making the Fleet Corps journey with me almost from the beginning. You know, I think we've had a pretty good time together and enjoyed some success along the way. So all of us will miss you, Eric. At the same time, I do want to welcome my other longtime partner, Chuck Freund, also with us from the very beginning as he transitions into the new role of CFO. So Chuck's been involved in literally every aspect of the company. He's run some of our businesses. He's bought businesses. He's helped us plot the future. So I can assure you he'll be a terrific CFO. Okay, so back to my prepared remarks in which I'll cover four subjects. So first, I'll report on the progress of against the initial COVID response plan that we undertook. Second, I'll provide my perspective on Q2 results. Third, I'll speak to the trends, the line of business trends that we're seeing here in July, along with thoughts on rest of the year. And then lastly, provide our perspective on fleet's long-term prospects, you know, in a post-COVID world. Okay, so let me begin by summarizing the progress against the COVID response plan that we put into motion in Q2. It was focused against six areas. So first was safety. So very pleased to report today we've had very few positive virus cases among our 8,000 global employees. And fortunately, no one seriously ill. So very, very happy with that. To business continuity, we've been able to deliver our services in this new remote environment. And we can report again in Q2 that our systems performance and uptime were very good. Three credit, we're delighted, honestly, with our Q2 credit results. Came in at, I think, $21 million, which was about our original loss plan. And receivables aging continues to look quite good. So a real bright spot so far. Fourth, liquidity. You know, we quickly tried to strengthen our liquidity back at the beginning of the quarter. We stepped up collections intensity. We repatriated cash. We even secured a bridge loan. So today, liquidity is quite good, $1.9 billion and a leverage ratio 2.6 times. Expenses, you know, we anticipated obviously weakness in Q2, so we trimmed expenses. We actually managed our expenses 50 million lower, which is 20% lower than the original plan that we built. So that cushioned our Q2 profits. And then last is selling. We knew in this new remote world we'd have to sell differently. Lots of progress around targeting different kinds of companies, new ways to get leads, providing new tools for our salespeople to work at home, new monitoring approaches. So really a revamped selling model that's starting to rebound. So I do want to give a shout out really to all the fleet core employees who jumped on these set of things. It was quite urgent to get at these things. So IT, HR, credit, sales management, really good performance. Okay, let me make the turn over to our Q2 results. So we reported Q2 revenue of $525 million, which is down 19%. and cash EPS of 228, which is down 20% versus prior year. So our expense reduction actions help narrow our profit decline. In terms of organic revenue for the quarter, finishing down 17% behind the prior year overall. Fuel coming in at minus 16, so about line average revenue. corporate pay at minus 17, uh, lodging in total at minus 37, uh, but the workforce, uh, portion, uh, somewhere in the high twenties, uh, and toll in the plus column, uh, plus three for the quarter, uh, driven by its, uh, subscription model in terms of trends, um, in Q2, obviously, uh, uh, affected by COVID, um, same store sales, the big one declined, 17 percent so about the same as our organic revenue growth as we saw client softness really across every business thankfully client retention remain stable at 91 percent and new sales weren't great about half of last year's level for the quarter but clearly rebounding as we move through the quarter so it's pretty hard to reflect, um, on a quarter like this, but, but we're kind of, here's my conclusion. It's for us, it's really a story Q2 of client softness and client softness being, you know, way down as a result of COVID because if you look at other aspects of our business, they were generally kind of okay, you know, retention stable at 91, um, feeling good about finding a new way to sell in this environment and confirm that we can keep selling our services in this environment. Credit didn't bite us. You know, loss was about on plan. We flexed expenses down to keep profits kind of in line with revenue, right size of the company. And we generated $200 million of free cash flow in the quarter. So, you know, a few bright spots. Okay, let me transition to the trends that we're seeing in July and how we're thinking about the rest of the year. So we've included in the earnings supplement a line of business volume chart that runs through the last few months, including July. And you'll see there that really every business we have has at least bottomed out. And many of the businesses are recovering and recovering a bit more quickly in July. They're affected really by the entire client distribution, so clients that are down a little bit, clients that are down a medium amount, clients that are down a super lot. When we look at those distributions, they're all moving up. So all clients are kind of moving back up, adding volume. So just a couple of call-outs. You can see international fuel recovering very nicely as Europe out ahead of us on the COVID thing. And our high-growth businesses, full AP tolls, Russia simply just powering through their client softness because of lots of new business. So clearly things getting better. In terms of rest of year, we do expect continued improvement, but we will still have challenges here short term. So volume we think will continue to recover, but unclear, you know, as to how quickly. Our second half revenues will recover more slowly than volume, and that's mostly because of mix. We're seeing larger enterprise clients with lower rates recover faster. than our small business portfolio. We expect the macro, particularly FX, to continue to weigh on our second half here versus prior year. We do expect sales to continue to recover, to get better. We're hopeful of getting back to 90% of prior year as we exit 2020. And then lastly, expenses, we plan to continue to manage expenses down here in the second half, targeting about 10% lower expense levels than prior year. So in conclusion, Q3 and 4 will be better than Q2, but again, still challenging. So lastly, let me transition here over to kind of a long-term view of Fleet Core and how all of this impacts the company. I mean, at the headline level, we think the new behaviors coming out of COVID will be a mixed bag. You know, there's puts and takes. But the main point is we think that those new behaviors will impact us kind of at the margins, if you will, of our business. And at the core, because it's essential workers that keep powering on, that the core of our business will hold up, you know, quite well. So negative impacts that we expect long-term is probably less white-collar commuting long-term, which again will impact our European fuel card businesses a bit at the edges because some have white-collar fuel cards. Likely less business travel, at least over the mid-term, so that'll dampen our T&E card business and our airline business. crew lodging business. And then the accelerated shift to digital and digital purchasing and away from face-to-face shopping will create pressure on our gift card business. On the positive front, the whole work-from-home, remote working model certainly will drive demand for outsourcing, outsourcing of everything generally. So that will lift You know, our payables business, we think our virtual card and our full AP prospects and the preference for touchless and avoidance of attendance, we think will lift demand for really almost all of our card businesses. So fuel cards pay at the pump versus in-store. Brazil nonstop electric tolls versus cash boosts. you know, payroll cards that are reloadable versus payroll checks, you know, virtual cards instead of, you know, printing AP checks. So look, again, the headline is that our view is that these impacts we think are at the margin and at the core of what we do is serve clients with essential workers and that there'll be continuing demand for good payment solutions for that group of clients. So what do we do while we wait for our clients in the world to recover here? We're going to stay focused on what we can control and what we can do, namely that's to advance the three main priorities, primary priorities of the company. So one is portfolio. We're continuing to look at things to reposition our portfolio, create fewer bigger businesses, add more non-fuel businesses, add more faster-growing businesses, and likely more adjacencies. Second, penetration of our big four businesses. We're working, again, to enhance our products, create more sales pressure, strengthen our cross-sell channels back to our clients. We're also pushing our beyond strategy, which transforms our businesses and their TAM both through broadening what each business offers, but more importantly, maybe the segments that each of our businesses can target. So, for example, urban city dwellers in Brazil versus highway toll users or airline crew lodging versus only workforce people. And then lastly, we're working on strengthening the base capabilities of the company, a particular emphasis on tech, on technology. So you'll see us invest more in IT, more in IT transformation. We'll move more applications to the cloud. We'll improve digital UIs and VIs for clients. We'll continue to advance our cybersecurity protection. So we'll continue to get better at IT. So from our perspective, if we keep progressing these three priorities, portfolio, business penetration, and our capabilities, it supports our ambition of a 15% to 20% profit growth company. So look, in closing, Q2, our Q2 performance, again, really a story of same-store sales, client softness as a result of COVID, Again, with other aspects of our business, particularly, you know, retention and credit holding up nicely. Second half, for sure, better than Q2, but again, still challenging, we think, over the short term. But I think most importantly, longer term, the message from us today is that the core, the main thing that we do around the world, which is to serve clients' essential needs, services, payments needs. We think that that remains quite good, quite robust, and that we see puts and takes again around the margins of our business, uh, as it relates to COVID. So with that, uh, let me turn the call, uh, one more time back over to Eric to, uh, provide some additional details on the quarter, Eric.