Corpay, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Fleet Core Technologies Inc. Third Quarter 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, November 8, 2023, and I would now like to turn the conference over To Jim Egglesetter, Investor Relations, please go ahead.

Good afternoon, everyone, and thank you for joining us today for our third quarter 2023 earnings call. With me today are Ron Clark, our Chairman and CEO, and Tom Panther, our CFO. Following the prepared comments, the operator will announce that the queue will open for the Q&A session. Please note, our earnings release and supplement can be found under the Investor Relations section on our website at fleecore.com. Throughout this call, we will be covering organic revenue growth. Now, 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 and divestitures or scope changes closed during the two years being compared. We will also be covering non-GAAP financial metrics, including revenues, net income, and net income per diluted share, all on an adjusted basis. These measures are not calculated in accordance with GAAP and may be calculated differently than 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 need to remind everyone that part of today's discussion may include forward-looking statements. These statements reflect the best information we have as 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. The 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. 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. Good afternoon, everyone. Appreciate you joining us today. Up front here, I'll plan to cover three subjects. First, our financials, our Q3 results, our Q4 guidance, and a brief 2024 preview. Second, I'll provide an update on our strategic review and where we're coming out. And then lastly, I'll introduce our fleet transformation plan, which is aimed at accelerating the revenue growth of that business. Okay, let me begin with our Q3 results, which were generally in line with our expectations. We reported revenue of $971 million, up 9%, and cash EPS of $449, up 6% versus last year. Profit would have been up 16% at constant interest rates. Q3 macro weaker than our August outlook. Our fuel spreads contracted about 25% in the quarter, and that was the result of a 50-cent fuel price point-to-point increase from the Q2 exit to the Q3 exit, which compresses fuel spreads. Look, despite this weaker macro, our Q3 earnings powered through. We actually finished a few cents ahead of our August guide if you exclude just the Russia and pay-by-phone transactions. Overall organic revenue growth for Q3 up 10%. Inside of that, our corporate payments business maintained its 20% growth rate, so super pleased there. Our pivot, which we started last year in North America fuel, away from new super small micro accounts, clearly paid dividends this quarter. Our North America fuel credit losses went in half from about $24 million last year to $12 million this year. Trends in the quarter generally quite good. Continued strong demand for our products. Our new sales up 17% versus prior years, so very good. Retention remaining stable across the enterprise at 91%. Our same-store sales did soften a bit from flat last quarter to kind of minus one this quarter. We did notice pretty noticeable softening in our managed services subsegment and lodging, which we're digging into. Q3 EBITDA reached $529 million. $529 million, an all-time low. record high for the company, held by EBITDA margins, which expanded to 54.5%. That's up about 200 basis points versus last year. So all in all, I'd say a pretty good Q3 performance. Okay, let me make the turn to our updated Q4 guidance, which reflects A couple changes in scope. So the rusher divestiture, which we mentioned last time, and the recent pay-by-phone acquisition. We've also refreshed the Q4 macro, which is outlooking a bit weaker FX than we saw in August. So look, despite these adjustments and these pressures, the fundamentals are quite good. such that our underlying Q4 profit guide is actually a bit stronger than our view 90 days ago. You can see on page 14 in our earnings supplement that refreshed bridge. So we're updating Q4 guidance today to $968 million in revenue at the midpoint and $449 in cash EPS at the midpoint. So really right on top of our Q3 print, where again, historically Q3 and Q4 results have been very similar. This updated Q4 guide implies a 10% organic revenue growth in the quarter and a 14% EBITDA growth. So again, the forecast really spot on to our 10, 13, 19 compounding models. Okay, let me transition to our preliminary view of 2024, which I characterize the setup as quite encouraging. So we're all looking at the 2024 macro environment to be neutral to maybe slightly positive, and that's simply looking at the various macro factors as they exit this year and the next year. Revenue, we're outlooking, again, although early, organic revenue growth in the same 9% to 11% range. That's consistent with prior years. And then lastly, kind of the key profit drivers of the business, generally setting up favorably. So we're expecting lower bad debt, flat to lower interest expense, and a stable tax rate and share count. So generally a good setup. So look, although it's early days in our 24 planning, I'd say we generally like what we see. All right, let me shift gears and provide an update on our strategic review. As a reminder, the goal of our strategic review or portfolio review is really twofold. So first, to make a simpler company, And then second, to evaluate separation options to increase shareholder value. On the simplification front, we've done a few things. We've sold Russia. We decided to keep our prepaid business, although we are working a couple of other non-core asset sales. And we're moving to three primary reporting segments. All of these things to make a simpler company. On the separation front, we've concluded not to pursue a pure spin, and that's mainly looking at RemainCo derating risk. We've also decided not to pursue a strategic sale, primarily there due to tax leakage and our estimate of disenergies. But we are continuing to evaluate a couple separation alternatives with dance partners that we think are potentially pretty attractive. So we do expect to conclude those discussions with the counterparties over the next 90 days, and we'll certainly report back then. Okay, my last subject up is to introduce our fleet transformation plan. which we believe is the single most important thing, effort, to unlock shareholder value and re-rate our stock. So the objective of the transformation plan is to accelerate our global fleet business growth into double digits so that we have three big primary businesses that can all target double-digit revenue growth. We have prepared a few slides in our lengthy earnings supplement beginning on page 22 to help walk you through how we intend to accelerate fleet growth. The plan really centers around three big ideas. So first, BAU. On the BAU front, we plan to get at performance improvement through new fleet products. which we're releasing into the market now. And these products join up with our corporate payment products to really create a differentiated offering in the marketplace. As you may recall, we're also pivoting that business from kind of small micro prospects to a bit larger seam prospects, both from repointing our digital marketing machine and adding additional field and Zoom reps targeted this slightly larger market segment. The emphasis will be on two primary verticals. Those are field services and construction, both of which are big, significant opportunities. Second underpinning for the plan is EV. We believe we can capitalize on the EV transition. We're getting much more confident that our three-in-one commercial fleet EV ICE solution really is a winner and that we can maintain or maybe even increase our fleet revenues throughout the transition. So early experience in the UK over the last 11 quarters bears this out. Revenue per EV vehicle running higher than revenue per ICE vehicle. So again, pretty positive. Then lastly is this idea of a consumer vehicle payments business versus just a B2B vehicle payments business. And so the idea is to further expand on that front. and really just leverage the networks, the payment networks, the merchant relationships we have that we built on the B2B side over the last 20 years. So the idea would be we start with anchor apps. So think toll tags in Brazil or digital parking in the UK that have millions of active mobile users and then offer additional vehicle payment related solutions that utilize our payment networks. So for example, utilize our EV network or utilize our service repair network. We demonstrated success in this approach in Brazil. Over 60% of our active consumer toll users now use a second or even third payment solution like parking or insurance. So we think pretty exciting. Additionally, this consumer vehicle payments push does open up additional interesting acquisition targets, for example, pay by phone and literally other ones as well. So look, we believe that we have the potential to incrementally drive um, the overall fleet slash vehicle business in the double digit territory, uh, via these three ideas. So again, kind of new fleet products, um, combined with corporate payment products targeted to a couple of big verticals success in the EV transition and the build out of a big, you know, billion dollar consumer vehicle payments business, um, Clearly well underway in Brazil and we hope to accelerate with this pay by phone acquisition, you can actually see our forecast math the bill to a billion on page 29 of the supplement. This anticipates that this expanded consumer vehicle leg, you know, growing fast. can pull a low single-digit core fleet card business into double-digit growth territory. So literally maybe 12%. So look, in conclusion today, we're forecasting 2023 pretty much where we started out in February of this year, in and around $17 of cash EPS. That's despite selling Russia and having a bit unfavorable macro. 24 outlook early, but I'd say encouraging. Still busy on some active separation discussions with some counterparties. We expect to conclude that in 90 days. And then lastly, this fleet transformation plan, we think quite exciting. We believe it has the potential to re-accelerate the fleet business and really potentially lift the entire enterprise to faster growth. So with that, let me turn the call back over to Tom to provide some additional detail on the quarter. Tom?