Corpay, Inc.

First quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Jim Edelstetter. Thank you. You may begin.

Good afternoon, everyone. and thank you for joining us today for our first quarter 2021 earnings call. With me today are Ron Clark, our chairman and CEO, and Charles Freund, our CFO. Following their prepared comments, the operator will announce that the queue will open for the Q&A session. It is only then that you can get in the line for questions. Please note that our earnings release and supplement can be found under the investor relations section of our website at FleetCorps.com. Now, throughout this call, we will be presenting non-GAAP financial information, including adjusted revenues, adjusted net income, and adjusted net income per diluted 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. I do need to remind everybody that part of our discussion today may include forward-looking statements. These statements reflect the best information we have of today. All statements about our recovery, outlook, new products and acquisitions, and expectations regarding business development and future acquisitions are based on that information. They are not guarantees of future performance and you should not put undue reliance upon them. We do not undertake any obligation to update any of these statements. These expected results are subject to numerous uncertainties and risks, 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 8-K 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. Before we begin, I would like to make you aware that over the last few weeks, we posted two short videos to the Investor Relations website. The first is around our approach and strategy for electric vehicles, as discussed by Alan King, who is the head of the UK, Europe, and ANZ, for fuel, and heading up that effort for us. The second is a video providing some insight into our downmarket full AP product, so you can get a feel for what it is and how it works. We had mentioned that we would likely spend some more time on these topics in the future, And this is an entrant step while we continue to work on those efforts. So now with that out of the way, I will turn the call over to Ron Clark, our chairman and CEO. Ron?

Okay, Jim, thanks. Hi, everyone, and thanks for joining our first quarter 2021 earnings call. So up front here, three subjects. First, my view of Q1 results. Second, I'll share our rest of year outlook. And then third, talk a bit about how we're positioned for growth over the midterm. Okay, let me turn to Q1 results. So we reported a Q1 revenue of $609 million, really kind of spot on our expectations. Reported cash EPS of $282 million. That's a bit better than our guide, mostly helped by lower credit losses and fewer outstanding shares. The macro, not much of a factor. We really call the macro pretty well versus our guidance. We did have higher fuel prices, but a bit lower spreads, and so really no impact there. Against the prior year, we reported a revenue decline of 8% and an organic revenue decline of 6%. Unfavorable Brazil FX hurting our print and continued weak same-store client volume softness impacting our organic growth. All right, let me make a turn to the trends in the quarter and share with you what we're seeing. So volume, sequential volume in Q1 versus Q4, pretty stable as we expected. But we are now beginning to see a bit of an uptick here in April. So early signs of volume recovery. Same-store sales, or what we call client softness, really stuck at approximately minus 6%. This continues to reflect a small segment of our client base that is struggling to recover, but fortunately still trying. Retention, really terrific in Q1. We reported 93%. Overall retention, that's our best result in years. Credit losses, very low for the quarter, $2 million. That was helped by a $6 million recovery and, again, lower sales rolling into this year. But the real story of Q1 is sales. So Q1 sales results, really nothing short of fantastic. Consolidated sales finished 7% ahead of last year. Yes, 7% ahead of last year, so finally growing again. If you rewind sales over the last four quarters, so sales versus prior year, 55%, 81%, 92%, and now 107%. Inside of that are fuel card businesses, both here and international, coming in ahead of the prior year, driven mostly by record digital sales. So for Q1, we signed 35,000 new business clients worldwide, 35,000. So, again, a terrific result. So the summary for Q1, I'd call it an in-line summary. for volume, revenue, and cash EPS. And I'd call it an outstanding result for credit performance, retention performance, and most importantly, sales performance. Okay, let me transition to our rest of year 2021 outlook along with the assumptions behind that included in our Q1 earnings supplement. On page 12, you'll see our updated guidance for the year. So full year, 21 revenue expectations at the midpoint, $2,650,000,000. That's unchanged from last time. Reasons that we're saying put our one Q1 revenue, again, coming in kind of on plan. Two, we've built in significant sequential revenue step-up in the forward quarters, probably in the range of $100 million up from Q1 to Q4. So our Q2, Q3, Q4 revenue guidance now assumes revenue growth in the high teens. In terms of the COVID recovery in our outlook, I'd say it's a bit mixed. U.S. and U.K. look maybe better than our plan outlined, but in our case, the Brazil COVID situation worse, and so a pushback there in terms of recovery. On the cash EPS front, we will flow through our 12-cent Q1 beat. We'll raise full-year 21 cash EPS guidance at the midpoint to 1242. So 1242 for the base business. In terms of the Apex acquisition, hopeful now to close that deal on June 1st. Initially, we thought May 1st. So as a result of the one-month delay, we're going to take the expected in-year Apex accretion at the midpoint to 18 cents versus 20 cents previously. If you combine... The base business and AFEX, our consolidated EPS outlook at the midpoint would be 1260, 1260 for the full year. I do want to add we feel very good about the AFEX cross-border deal. They had a great Q1 performance, and their management is really holding steady their rest-of-year forecast. All right, let me make a turn over to our last subject today, which is how is Fleet Corps positioned for growth in 22 and beyond. So I do want to highlight just a few factors that give us confidence in sustainable growth. So one is the exit rate. So if we hit this rest of year guidance, you know, our Q4 step-off will be quite strong heading into 2022. And if we hit our rest-of-year sales plan, again, that'll pour in-year revenues into 2022. Digital, I can't say enough about digital and the investments we're making in digital selling, digital UIs and customer experience. new ways of underwriting credit. And so the digital transformation making a big impact on the company. Third is EV. You know, we're actually embracing EV, particularly in Europe. Early feedback, really, really positive there that we may actually be advantaged in selling because of our integrated, you know, mixed fleet experience. as well as this at-home recharging opportunity. It looks real. It looks like clients will pay subscriptions to basically measure and reimburse, you know, employee recharging at home. So potentially a new meaningful revenue opportunity that is nonexistent today. Fourth factor, our beyond strategy or our entry into new segments. So as we've discussed before, we're extending into new customer segments really in each of our major lines of business. So in corporate pay, you know, the Roger deal helped us enter the SMB space. In lodging, a couple deals last year helped us enter the airline accommodation space. And in Brazil, we've entered what we call the urban driver space. So in each of these cases, basically we're extending our businesses, extending our TAM, and obviously extending our longer term sales opportunity. A fifth factor is brand. We just introduced our new Corpay brand aimed at unifying all of our various corporate payment assets. So this single brand will help our corporate payment business go to market you know, with a single identity and hopefully give us an advantage with this broader bundle that we've got. And then last factor is capital. You know, our balance sheet's in terrific shape. Leverage ratio at two and a half times. Liquidity approaching, you know, two billion. Again, our plan is to generate a billion plus of annual free cash flow. We have the ability to lever up to three times you know, target, which would produce circa, you know, $8 billion in capital to invest in either M&A or buybacks over the forecast period. So obviously upside for us via capital allocation. So look, the takeaways from today, so one, Q1, I'd say again, an inline Q1 financial performance, but an outstanding Q1 sales performance. Rest of year, again, we're raising rest of year cash EPS at the midpoint to 1242. That's excluding acquisitions. And to 1260 at the midpoint, that's including Apex. So tracking to deliver that, although, again, fully aware of the uncertainties. And then lastly, in terms of positioning, we really do feel well-positioned, well-positioned to grow the company next year and beyond. Again, we expect a strong exit, which will pour into 22. We're extending each of our businesses into bigger TAMs, and we've got the available capital to drive incremental returns if we manage it well. So with that, let me turn the call back over to Chuck. to provide some additional details on the quarter.

Thanks, Ron. For Q1 of 2021, we reported revenue of $609 million, down 8 percent, GAAP net income up 25 percent to $184 million, and GAAP net income per diluted share up 29 percent to $2.15. Included in our Q1 2020 results was the impact of the $90 million one-time loss related to a customer receivable in our cross-border payments business, which equated to $0.74 per diluted share as reported last year. Adjusted net income for the quarter decreased 8% to $242 million, and adjusted net income per diluted share decreased 6%, to $2.82 as we continue to feel the effects of COVID on our businesses. Organic revenue growth improved two points sequentially to down 6% on a year-over-year basis. We saw improvement in every category except tolls as Brazil continues to grapple with incremental COVID-related shutdowns. As a reminder, organic revenue neutralizes the impact of year-over-year changes in foreign exchange rates, fuel prices, and fuel spreads, and includes pro forma results for acquisitions closed during the two years being compared. Our fuel category was down organically about 6% year-over-year, which was a four-point improvement from Q4. The international fuel business growth was a bit better than North American growth, as those international markets shut down earlier in the quarter last year, so had easier comps. The corporate payments category was down 5% in the first quarter, one point better than Q4, as improvements in virtual card and full AP were offset by FX, which was lapping a very strong Q1 last year. Full AP growth accelerated 14 points sequentially to 21% growth year over year, powered by continued strong new sales. Tolls was up 3% compared with last year, but down 4 points from Q4 of 2020 due to the aforementioned shutdowns in Brazil. Looking longer term, compared with Q1 of 2019, revenue was up 13% organically. The lodging category was down 14%, which was an improvement from down 25% last quarter, with domestic airline activity recovering faster than we expected. GIFT showed organic growth of 2% year over year, as that business felt the effects of COVID earlier in Q1 of 2020 than most of our other businesses. That said, we've seen real traction in digital card sales and in our B2B sales efforts, where we are selling gift cards to businesses for use as incentives. Recognizing that the comps to 2020 may not be very helpful, we did add some comparisons to 2019 for organic revenue growth and sales, so you can see how we are trending compared with