Corpay, Inc.

Good afternoon and welcome to the Fleet Corps Technologies, Inc. Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I'd like to turn the conference over to Jim Egglesader, head of investor relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us today for our third quarter 2022 earnings call. With me today are Ron Clark, our chairman and CEO, and Alyssa Vickery, our interim CFO. Following the 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 line for questions. Please note, 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 covering organic revenue growth. As a reminder, this metric neutralizes the impact of year-over-year changes in foreign exchange rates, fuel prices, and fuel spreads. It also includes pro forma results for acquisitions closed during the two years being compared. We will also be covering non-GAAP financial metrics, including revenues, net income, and net income per dilute share, all on an adjusted basis. These measures are not calculated in accordance with GAAP and may be calculated differently than that at other companies. Reconciliations of the historical non-GAAP to the most directly comparable GAAP information can be found in today's press release and on our website. I also 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 outlook, new products, 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 undertake no 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 8K and in our annual report on Form 10K filed with the Securities and Exchange Commission. These documents are available on our website and at sec.gov. Now with that out of the way, I will turn the call over to Ron Clark, our Chairman and CEO. Ron?

Jim, thanks. Good afternoon, everyone, and thanks for joining our Q3 2022 earnings call. Up front here, I'll plan to cover four subjects. First, I'll provide my take on Q3 results. Second, I'll provide updated full-year 2022 guidance Third, provide just a brief preview of 2023, along with some of the factors that will affect our performance. And then lastly, I'll catch you up on a few recent developments. Okay, let me turn to our Q3 results, which were quite good and ahead of our expectations. We reported revenue of $893 million. That's up 18%. and cash EPS of 424, that's up 21%. Our EBITDA for the quarter exceeded 450 million. Organic revenue growth, quite good, coming in at 13%. That was led by our corporate payments business at 21%, and our lodging business at 28%. Trends in the quarter, quite good also. Same-store sales finished plus 2%, retention remaining steady at 92%, and overall sales performance just terrific, up 24% for the quarter. We onboarded almost 60,000 new clients during Q3. So the fundamentals of the business remain very solid, obviously selling a lot and retaining a lot. Look, additionally, I want to point out that we're continuing to strengthen the setup, the positioning of the company, which obviously improves our growth prospects going forward. Added some important EV assets and further refined our plan to go on offense. We added some pretty important AP automation software to front end. our corporate payments solution set that really rounds out for us that AP solution set. And we continue to expand our fuel footprint in Brazil, driving transaction growth there. I think we're expecting an exit rate of about 10 million annual add-on fueling transactions. So good progress. Okay, let me shift gears and turn to our updated full year 2022 guidance along with the assumptions behind it. So we're revising full year 2022 revenue guidance up to $3,410,000,000 at the midpoint. This includes absorbing about $8 million of macro headwind in the second half. versus our August guide. We're maintaining full year 2022 cash EPS guidance of 1595 at the midpoint, same number we gave in August. This does include a bit of a flip-flop. We pulled some revenue forward through gift orders into Q3 that we had out looked in Q4. We're also absorbing about four to five cents of dilution from the new plug surfing and accrualify acquisitions. We're also incurring about 30 million of incremental bad debts and interest expense way above our August guide. You know, as the Fed has accelerated their interest rate increases. So if we achieve this 3 billion, 410, and 1595 updated 22 guidance, That would represent 20% revenue growth and 21% earnings growth for the full year versus 2021. Okay, importantly, next up, I'm going to share a brief preview of our early look into 2023. So like most companies, we're expecting the 23 setup to be quite challenging. We do run the business, plan the business on a macro-neutral basis, really so that we can operate through any kind of cycle, good or bad. Then we do overlay our spending and capital allocation decisions based on the environment we're seeing. So for 23, we're expecting organic revenue growth overall of about 10%. which is our target. That's based on our preliminary 23 budget submissions. Inside of that, probably no surprise, global fleet, outlooking mid to high single digits, our lodging and Brazil businesses, mid-teens, and our corporate payment business for next year, high-teens. And by the way, closing in on almost a billion dollars of overall revenue next year, so getting quite significant. We'll bake in clearly less OPEX expense growth next year with a goal of delivering 200 to 300 basis points of margin improvement. We're hopeful we can reach a 23 cash EPS with a 17 handle. But that's ultimately going to turn on, one, the level of sales investment we make and then the corresponding bad debt that comes with that. Two, interest rates, where they peak and if and when they start down. Three, FX rates, particular eye on the pound, does it recover? And then lastly, recession, do we get one? And if we do, what would the depth duration be? So look, on the recession front in particular, we wouldn't describe Fleet Corps as recession-proof, but pretty recession-resilient. Some of the reasons that we should be pretty recession-resilient are, first, our solutions are essential, generally not discretionary. Demand for our services runs higher in inflationary or cost-conscious times. You know, think fuel prices. This year and the demand that we see and lastly our businesses are a really diverse geographically by client size from SMB to enterprise Lots of verticals we serve obviously lots of product or spending categories. We're by no means Immune to some client segments certain client segments, you know being impacted by recession for example construction And for sure, we'll reel in restrict credit in the event of a downturn, and that for sure pressures revenue. So, look, we plan to have a much clearer picture of 2023 when we speak again in 90 days, and we'll offer up our formal 23 guidance then. Okay, let me transition to my last subject, which is to catch you up on a few recent developments, and let me begin with the FTC case. So the court held a two-day hearing on the FTC matter. That was on October 20th and 21st. Importantly, the judge concluded that she would not enter the proposed FTC order. and rather encouraged the parties to mediate, to negotiate, so that we've agreed to engage with the FTC and see what we can work out. We do think that the face-to-face court hearing was really quite helpful. It gave us the chance to summarize the various disclosure and process enhancements that we have voluntarily made really over the last four or five years, all of them aimed at enhancing our customer experience. So some of the enhancements we called out were eliminating certain digital ad claims and the language around that. We ceased selling add-on features via negative option and instead packaged up various features into three packages and sell those affirmatively up front. We designed and implemented much bigger, bolder T's and C's, including a Schumer-like fee box that's front and center. And lastly, we collected express or what we call affirmative consent from 96% of our fuel car client base to the specific terms of their car programs. we've also proposed some new incremental enhancements going forward that would include crediting client payments on the day we receive them versus the day they're posted along with some other items that comply with the CSPB consumer payment standards obviously we're b2b but are willing to do this We talked about combining our invoicing and reporting materials into a single consolidated package to make it easier for clients to review. And we said repeatedly, I think, throughout this FTC case that we're trying to cooperate, trying to be transparent. We simply emphasized to the court that we need to know exactly what the practices are that we're being asked to implement, and if we can understand them, we'll implement, we'll comply with them. We're also saying again today that we don't believe that the disclosure enhancements that we've already made, which we can see, nor the additional ones that we're contemplating, will have a material impact on the company's go-forward financial performance. Okay, let me turn to our situation in Russia. We've made the decision to explore selling the Russia business. We've retained a local investment bank. We have formally launched the sales process. It is underway. The business does generate meaningful free cash flow, so that can potentially support acquisition financing. along with annual dividends, and we think that that should provide a reasonable floor on the valuation. Additionally, we've completed all of the isolation or separation steps necessary to carve the business away from Fleet Corps. This provides assurance that we can maintain compliance with the sanctions, and we do plan to move into this isolation or passive ownership phase beginning in early December. And obviously, we will keep you updated on the sale process. So lastly, on the acquisition and capital allocation front, we did complete three capability acquisitions since we spoke last. So a corporate payments add-on called the Coolify on August 1st, an important EV deal in Europe, Plug Surfing on September 1st, We closed literally yesterday an international workforce lodging deal called RoomX. And finally, we expect to complete the cross-border deal called Global Reach, which is a bolt-on around the end of the year. So as you can see, we focused really on capability acquisitions in this environment, choosing to strengthen, you know, again, the positioning – and setup of the company over the midterm. We do hope that M&A valuations reset a bit next year. You know, higher interest rates will obviously take hold and just maybe we can get back to larger accretive transactions. Additionally, we did repurchase 500 million of FLT in Q3 at what we think are quite attractive prices. So look, in closing today, again, very good Q3 results. Earnings grew 21%. Maintaining our full year 22 cash EPS guidance at 1595, you know, despite a bit weakening macro that we're absorbing. This would represent a 70 cent higher number than the initial EPS guidance that we provided in February. We do expect 23 to be a challenging year, but see our overall organic growth rate in and around 10% our target. And again, our earnings turning mostly on the interest rate and FX environment. The FTC case finally winding down. Again, we do not expect a material impact going forward. We have decided to explore the sale of our Russia business, again, underway, and delighted with these handful of capability acquisitions this quarter. Lastly, many thanks to Alyssa here for stepping in to the CFO role on an interim basis. So now over to you, Alyssa.