Corpay, Inc.

Good day, everyone, and welcome to today's Corpe Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and 1 on your telephone keypad. You may withdraw yourself from the queue by pressing star and 2. Please note, this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Jim Ecclesetter, Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today for our second quarter 2024 earnings call. With me today are Ron Clark, our Chairman and CEO, and Tom Panther, our CFO. Following their prepared comments, the operator will announce that the queue will open for the Q&A session. Today's documents, including our earnings release and supplement, can be found under the Investor Relations section on our website at corpay.com. Throughout this call, we will be covering several non-GAAP financial metrics, including revenues, net income, and net income per diluted share, all on an adjusted basis. We will also be covering organic revenue growth. This metric neutralizes the impact of year-over-year changes in FX 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. None of these measures are calculated in accordance with GAAP and may be calculated differently than at other companies. Reconciliations of the historical non-gap to the most directly comparable gap information can be found in today's press release and on our website. It's important to understand 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. These documents are available on our website and at SEC.gov. So now I'll turn the call over to Ron Clark, our Chairman and CEO. Ron?

Okay, Jim. Thanks. Good afternoon, everyone, and welcome to our Q2 2024 earnings call. Up front here, I'll plan to cover three subjects. First, provide my take on Q2 results along with an update on our problem children. Second, I'll share updated 2024 full-year guidance, including an up-close look at our expected Q4 exit. And then lastly, I'll speak to our portfolio and our commitment to deeper versus wider. Okay, let me begin with our Q2 results. We reported Q2 revenue of $976 million, up 7%, excluding Russia, and cash EPS of $455, up 14%, excluding Russia. Results really right in line with our expectations, both revenue and earnings finishing on the high side of our guidance range. Most importantly here, the trends in Q2 improving. Overall retention improved to nearly 92%. That's up 100 basis points from last year. Same store sales improved to flat in the quarter. That's up 2% sequentially. And sales or new bookings strong, up 21%. Particular strength in our corporate payments business, sales there up 28%. So clearly a noticeable improvement in all three of our key business trends. Organic revenue growth for the quarter, 6%, but clearly a tale of two cities. Our corporate payments business, Brazil business, and international fleet business, performed exceptionally well, while our lodging in North America fleet businesses, not as good, presented a drag on growth. So taken together, averaging out to 6% overall. So let me update you on the two problem children. So first, North America fleet performed really in line in Q2 against expectations. but still a drag on growth. We've now mostly lapped the infamous micro pivot and the implications there around late fee revenue and bad debt. Real progress, though, happening in the business on a few fronts. Retention is better, 150 basis points better, in fact, than Q2 last year. Softness improving, 100 basis points better sequentially, and sales growing. In the quarter, 80% of all of our digital sales, now five card and plus size accounts. So a significant pivot in new business there. A third of our field sales now being booked to our new Corp A1 business. fuel card, business card, and virtual card in one, and 25% of our SMB trucking sales now on our new Comdata Connect card that has no credit exposure. Additionally, we signed some important new accounts, GasBuddy and AT&T, which are now coming online. So look, the evidence is building that there's demand for our new products and that this larger prospect segment sales can be grown. So that's happening. So on the back of these trends, we're outlooking North America fleet to grow revenue organically in Q4 and get back in the plus column. Okay, over to lodging, our second problem child. Lodging finished a bit weaker. in Q2 than we expected, mostly the result of lower flight cancellations and fewer homeowner insurance claims. Progress, though, happening on the lodging front. The first IT there, much better. Uptime and search response time now exceeding our SLAs. Big improvement in client softness and client retention in the business. Our new differentiated pricing now in place, increasing our yields where we've lowered room rates, if you will, to bigger accounts and increased pricing to walk-in travelers. And then lastly, sales and lodging growing up 36% in Q2. Again, evidence to us that there's demand for the solutions. So again, the progress that we're seeing, we do expect the lodging business to turn positive organic growth in Q4. So hopefully, as we execute for this year, problem children no more. So the wrap on the quarter, again, no real surprises in Q2. Results kind of right on expectation. Trens same store sales, new sales and retention trends significantly improved across the board and our two problem children progressing on a path to growing again. Okay, let me make the turn to our 2024 full year guidance. So today we're reiterating the full year 2024 guidance at the midpoint that we provided in May. So as a reminder, $4 billion in revenue and cash EPS of $19. For sure, some changes, some puts and takes in this guide. We're out looking weaker FX here in the second half than we were 90 days ago. and a bit weaker second half lodging revenue. That's offset by Paymerang revenue and some expected synergies that we'll capture there, along with some expense management actions that we're putting in place to maintain profitability. I do want to put a special emphasis on our Q4 guide, which you can see in our earnings supplement. We're out looking accelerated double digit print and organic revenue growth and $21 of run rate cash EPS heading into 2025. Additionally, we are expecting to capture some meaningful synergies from our Paymerang and GPS corporate payments acquisitions next year, likely in the 50 cents accretion ballpark. So look, the main message to take away here is that CorePay is headed to a better place. We're leaving behind some challenges, the rusher divestiture, Fed hikes, the fleet pivot, lodging softness, even the strategic review, and heading to a place with accelerating performance, driven by problem children improvement, lower interest rates, higher sales, and fewer shares. Our expected arrival to the better place is Q4. Okay, last up, let me transition to an update on our portfolio, which again calls for a deeper, not wider company, squarely focused on three segments. We're well underway with our integration and synergy planning, for our Paymerang and GPS acquisitions. Initial thinking there calls for conversion and shuttering of the acquired IT systems, a significant streamlining of back office operations and G&A, and really a leveraging of our broader product line to increase revenues in both businesses. We expect these two deals to add about 15%. to our corporate payments business revenue next year, and with corporate payments overall representing about 40% of the overall company. We're also progressing a couple small vehicle-related divestitures, totaling approximately 400 million of after-tax proceeds. We anticipate using any proceeds from these divestitures to buy back CPAY stock to minimize dilution heading into next year. Lastly, we are working a couple interesting deals in the pipeline where we'd maintain our target leverage and frankly have the liquidity to pull the trigger if in fact the deals survive diligence. So in conclusion then today, Q2, again, finishing in line, but don't miss improving the base, new sales, and retention, maintaining our full year 24 guide at $4 billion in revenue and $19 in cash EPS, tracking to a better place with accelerating revenue and an EPS run rate of $21 exiting Q4, and ongoing simplification of the company, doubling down on corporate payments, and aggressively working the synergies of our two newest deals. So with that, let me turn the call back over to Tom to provide some additional detail on the quarter.

Tom? Thanks, Ron, and good afternoon, everyone. Here are some additional details related to the quarter. Print revenue was $976 million, which I was pleased to see at the high end of our guide, despite a $3 million macro headwind from both Fuel and FX. Organic revenue grew 6%, led by 18% growth in corporate payments. Reported revenue growth was 3%. However, excluding the impact from the sale of our Russia business, revenue grew 7%. Strong expense discipline and another quarter of lower bad debt resulted in EBITDA margin expanding to 53.1%. We generated $325 million of free cash flow, which translates into $4.55 per share, and cash EPS, 5 cents above the midpoint of our guide, up 8% versus last year, and up 14%, excluding the impact of the sale of our Russia business. Overall, solid results for the quarter. Now, turning to our segment performance and the underlying drivers of our organic revenue growth. Across all of our segments, sales increased 21%, retention improved to nearly 92%, and same-store sales were flat, compared to down 2% in the first quarter. Corporate payments revenue increased 18% during the quarter, driven by impressive 19% growth in spend volume. Our direct businesses revenue grew 22%, with sales up 34%, and solid growth across spend volume, transactions, and customers. Revenue per total spend sometimes referred to as the take rate, increased during the quarter, and our card penetration, which measures the percentage of total spend processed via virtual card, increased approximately 6% and is now above 11%. Both of these measures reflect the strength of our business relative to recent sector trends. Also, on July 1st, we closed the Paymering transaction, and we are squarely focused on integrating the business. Inclusive of our initial synergies, we expect Paymorain to contribute approximately $25 to $35 million to second-half revenue. Cross-border revenue increased 19 percent and sales grew 25 percent during the quarter. Client spend volume was robust against all geographies, which reflects our ability to further penetrate our large addressable markets. It's clear from our consistent, strong performance that our go-to-market strategies are working. Consequently, We continue to make significant investments in this business through increased sales and marketing resources. In addition, we announced in June the acquisition of GPS, which will add over $125 million of revenue in 2025 and increase our scale, particularly in the U.S. Currently, corporate payments as a segment contributes 30% of core pay revenue. But on a pro forma basis, at the end of next year, Corporate payments will be approaching 40% of our company. Now, turning to vehicle payments, organic revenue increased 5% during the quarter, with growth driven by Brazil and international fleet. Our international fleet business continues to perform very well, led by low double-digit revenue growth in both Australia and our UK maintenance business. In the UK, we've expanded the pay-by-phone parking app into a multipoint solution consumer vehicle payments app by adding the ability to purchase insurance and search for nearby fuel stations and EV chargers. And we expect to integrate our vehicle maintenance and repair network into the app in the third quarter. It's early days in terms of customers transacting on the app, but we've made good progress and we're excited about the opportunity. In Brazil, business performance was extremely strong, with revenue growing 20% and sales increasing 27%. The business is clicking on all cylinders. The anchor toll product grew tags 9%, and toll-related revenue grew 20%. Our product offering now includes nearly 7,000 acceptance locations, including 2,800 gas stations, resulting in fueling transactions being up 24% year over year. We have sold nearly 2.5 million insurance policies, up 3x from last year. Additionally, ZAP pay users and revenue are both up approximately 40% compared to last year, which is all organic as we are in the early stages of cross-selling the product. In the U.S., our local fleet business continues to be a drag on revenue growth, excluding this business North American fleet grew 3 percent. While the shift away from microaccounts has impacted our sales and revenue, we are beginning to see increased sales from our upmarket digital and field efforts. Sales of our proprietary FuelMan products grew 29 percent in the quarter, and we're seeing signs this trend has momentum. Sales to companies operating five-plus vehicles were the highest they've been in the last three years, which puts us on track to surpass our 2022 revenue from that customer segment. So our plans are working, just taking longer than we would like. Lodging revenue declined 10%, which was a bit worse than we expected due to slightly lower room nights and rate. Sales of our overall lodging product were quite good, up 36% over last year, which gives us confidence that our customers like our Advantage product. Digging deeper into the segment's performance, we are encouraged to see same-store sales, which had been the primary source of the business's recent softness, improve 300 basis points compared to Q1. Specifically, workforce showed improvement as we lapped some of the weakness from last year. Insurance was the primary cause of this quarter's weakness in revenue. Insurance results were impacted by the decline in claims activity and some one-time benefits recognized last year that did not recur. Excluding last year's one-time insurance commissions, revenue would have declined 3%. Now, looking further down the income statement, Q2 operating expenses of $542 million were up 1% versus Q2 of last year. Expense growth from acquisitions and sales investments were essentially offset by lower bad debt expense, a 4% decline in G&A expenses, and the sale of our Russia business. Bad debt expense declined $7 million, or 20%, from last year to $28 million, or five basis points of total spend. Substantially, all of the decline was in U.S. vehicle payments as we realized the benefit from our higher-quality customer portfolio. EBITDA margin in the quarter was 53.1%, approximately 60 basis points of improvement from last year. The positive operating leverage was driven by solid revenue growth, lower bad debt expense, and a disciplined expense management. Excluding our Russia business, sold in August of 2023, EBITDA margin increased approximately 165 basis points. Interest expense this quarter increased $6 million year over year due to a decline in interest income from the sale of our Russia business and the impact of higher interest rates and debt balances. Our effective tax rate for the quarter was 24.7% versus 26.6% last year, driven primarily by tax benefits from specific tax planning strategies. Now, turning to the balance sheet, we ended the quarter with nearly $1.4 billion in unrestricted cash, and we had approximately $850 million available on our revolver. We have $5.9 billion outstanding on our credit facilities, and we had $1.4 billion borrowed under our securitization facility. As of the end of the quarter, our leverage ratio was 2.6 times trailing 12-month EBITDA, which remains within our target range. As previously mentioned, we acquired Pamerang on July 1st, which increased our leverage to 2.8 times. Our ability to generate over $300 million in quarterly free cash flows will increase our capacity on the revolver and cause leverage to decline during the rest of the year. In the quarter, we repurchased 2.2 million shares, and year-to-date, we've repurchased 3.3 million shares for $949 million. We have $610 million remaining under the current Board authorization, and we will continue to evaluate additional buybacks over the course of the year based primarily around the timing of some potential non-core vehicle-related divestitures and the acquisition of GPS, which we expect to close in early 2025. Now, let me provide some details related to our outlook. As Ron indicated, we are maintaining our guide at the midpoint of $4 billion of revenue and $19 per share. We are tightening the range, reflecting increased visibility into our second half performance. However, the unsettled macro environment, particularly of late, increases the possibility of coming in towards the lower end of the range. For the overall economy, last week's economic data in the U.S. reflected a slowing economy, which triggered significant moves in the equity and fixed income markets. However, a broader view of economic data continues to point to low single-digit growth in our major markets, giving us confidence that business spending will grow at similar levels. We've analyzed recent historical and forward-looking information to inform our fuel and FX projections. Overall, we're estimating a modest macro headwind based on lower fuel prices and weaker FX, namely the Brazilian AI. But financial markets are fluid, causing a degree of variability regarding our macro forecast. Nonetheless, we remain focused on what we can control, which is running the business and optimizing its performance. Related to our core business, we are maintaining our full year guide in each of our businesses, except for lodging, as we continue to work through the softness. While we see indications of the business improving, we're electing to further de-risk the forecast by assuming room nights to be relatively flat in Q3 and seasonally decline in Q4 compared to Q2. The impact from the macro headwind and lodging is offset by $25 to $35 million of revenue from Pamerang. From a cash EPS perspective, we expect Pamerang to be EPS neutral, and we've taken actions to offset the revenue headwinds through a range of expense initiatives, the flow-through effect from the lower FX rates, and fewer shares. I would also note that there was about $5 million of gift revenue that was pulled forward in Q2 from Q3 based on customer shipment demands, which is simply timing and why we don't flow through this quarter's beat to the full-year guide. So, in total, some minor changes to our full-year outlook, but no changes to print. For Q3, we're expecting revenue to grow 5 to 7 percent and cash EPS to grow 9 to 11 percent, which is supported by our preliminary July results. This translates into $1.015 billion to $1.035 billion of revenue and $4.90 to $5 per share of cash EPS. A little over half of the sequential increase in revenue is driven by Paymerang and the seasonal lift from our gift business. The remaining sequential increase is driven by the implementation of new sales, same-store sales remaining flat, improved retention, especially in the U.S. vehicle payments business, and specific business initiatives which are underway. we're projecting to exit the year with organic revenue growing in the low to mid-teens, led by corporate payments growing in excess of 20 percent. However, equally important, North America Fleet and lodging are projected to have turned to the corner and returned to growth. These estimates exclude the impact from our pending acquisition of GPS that is scheduled to close in early 2025, pending regulatory approval. We expect at least 50 cents of accretion next year from the combination of Paymerang and GPS. However, more importantly, we expect earnings accretion of approximately 2x that amount once we've completed our integration plans in the back half of 2025. The rest of our assumptions related to our guide can be found in our press release and supplement. With that, thank you for your interest in Corpay. And now, operator, please open the lines for questions. Thank you.

Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. We do ask that you limit your questions to one question and one follow-up. And we will pause for a moment to allow questions to queue. And we will take our first question from Darren Peller with Wolf Research.

Hey, guys. Thank you. Look, it's great to hear about the confidence and reacceleration on both the lodging side and North American fleet. I guess just one quick one on the lodging and then a little more color on fleet also. But on lodging, just the conviction around that is coming from, I think you were saying, just the signings you're already seeing evidence of. And I just want to make sure that the tech side of it is all good now and ready to go in terms of new volume coming on. And then really on fleet, if you could just reiterate a little more of what you were saying around conviction on that, just why you see the confidence there. But it's great to hear, given the trends.

Yeah, Darren, hey, it's Ron. I mean, the short answer, let me start with the logic thing, is really the base, right? The client base flexed down about a year ago, starting in Q2 last year, both from the IT side. and kind of just softest macro in those areas. And so it's really less about the lodging business accelerating and more basically that the base went down and it's stabilized. So effectively, if you look sequentially, if I said to you, which I guess we have, pay our print for lodging in Q2 is X, think of it being mostly stable or flat sequentially. And so what that does is it takes the decline out, right, which was whatever, 9 or 10 in the first couple quarters, that lifts, obviously, the whole company. And it's really the same story for NAF, right, that the business was in decline when we made the pivot. We kicked out all that micro-business revenue gap. and bad debt. So effectively, we took the revenue down. And fortunately, we've refilled the bucket with more stable revenue. So the same thing. The better Q4 performance is not a function of lodging or NAF really growing. Think of them as honestly just flat and mostly just not declining anymore. And again, the main, main thing is really just We've lapped the bases going down, and both businesses have stabilized since then. Okay.

That's really helpful, Ron. Guys, just one more follow-up is on the corporate payment side. The growth has continued to be strong. I just want to make sure, and we've had good feedback on the deals, especially PayMeringue and the accretion coming. But, Ron, how do you feel about your positioning now? I mean, given the number of deals you've done, where the assets are all placed, do you think strategically we're where you want to be, or do you anticipate more?

Yeah, Darren, good question. We've talked about it before. I would say I feel like the Humpty Dumpty work, you know, is mostly over. We have a pretty broad product line now. We've got card products. Think the new tech guys like Divi and Ramp and Brex and stuff. So we have those products. We've obviously got the full AP automation products. I think From the product perspective, we spent lots of time and money assembling a pretty broad set of products in this middle market. So the game now is really selling. So when we say to you guys, hey, Jim, I think up 28%, is that right, for the quarter? So that's the game down there. The game has shifted from assembling a competitive and a good business to now really just selling a lot of it. And I think the numbers show that we're not only selling it, but the business is compounding, too.

So we're in a good spot.

That's great. And, Darren, we expect it to continue to become a bigger piece of the overall core pay portfolio. One, just its growth rate will cause it to continue to be a bigger portion of it. We said 30% now and 40% by the end of next year. And certainly from a capital allocation perspective, we would still view it as attractive ways to deploy capital.

That's great. Makes sense, guys. Thank you. Good to talk to you.

Thank you. And our next question comes from Tinsen Huang with JP Morgan.

Hey, Ron and Tom. Good to talk to you guys. Just to follow up on Darren's last question there, just on the corporate payment side, the acceleration to the 20%, what's fueling that? I know there's a slightly easier comp. Just want to make sure if there's anything else in there. And I think, Tom, you talked about take rates and and trends there being positive. Maybe just to hunt in on that with the direct business, and I know there's some concerns out there around virtual card monetization and adverse payment selection, that kind of thing. What's your view on that?

Hey, Tingen, it's Ron. So on the first part, the acceleration is mostly sales, right? I think you know this well, but in that business, the revenue is driven by sales literally from a year before. And so when we step up sales like we did in that business in 23, we get the benefit here really throughout, you know, 2024. And the business basically had record sales last year. And then the second one is, you know, we're really out of the box in terms of synergies with the Paymerang. You know, we're back to the old fleet core pay wheelhouse deals, right? We buy stuff right in the space that we're in. And, you know, we know where profit pools are and revenue pools. So we're able to basically get at. improving businesses like that, like, super quickly. So I'd say those, obviously, retention has stayed super good in those businesses. So it's just the model of the sales relevant to the base, in this case, a little bit extra from the synergies. Well, let me let Tom pick up, because I know there was some question in part of our business with one of the other guys. Do you want to go to the table? Yeah, sure.

So, Tim, what I'd say is the health related to the health of the network. We feel like our network related to the merchant portfolio really stands out. It's differentiated relative to what we see others having. One, just its sheer size. It crosses multiple industries and verticals. We're not wedded to any particular one. Obviously, we have a fair amount of focus on construction and field services and transportation, but it's wider than that as we've built it over the years. Our customer segment is much larger than what we would say is some of our peers in the marketplace where we're dealing with customers that are $100 million to $200 million to $500 million in revenue. So that gives them the ability to really influence the merchants on the other end. We also offer merchants a much more customized acceptance program where we can do things for them in terms of the levels of – of acceptance that they're willing to have and what expenses they'll accept versus what they won't accept so it's not a one-size-fits-all model with with us so we just think we we've got a healthy merchant portfolio and then numbers that uh that we reference in terms of seeing take rates on the on the move up and card penetration gradually moving up that's not something you would expect to see race up that's going to move gradually all kind of points to a healthy merchant portfolio the acquisition we did with pay moraine will only make that larger. So we feel good about what we're seeing from an overall network perspective.

Great. Thanks for going through that. Just my quick follow-up on the M&A front. I know you've got some divestitures. You're going to buy back stock with those proceeds. You're going to close GPS later, I mean early 25. How quickly can you replenish the acquisition pipeline with similar type deals?

It is replenished engine in my opener. We've got a couple of deals active. that we're sitting, you know, looking to pull the trigger on now. So I think, you know, we're kind of mostly never out of that business. It's really just a question of whether, you know, the prices that sellers are looking for is, you know, something we can meet. So, yeah, we're in the game. We're going to buy stuff, as we said, in the spaces that we're in. And I think digging into these two most recent ones, one we signed and one we closed, it helps your confidence. you know, playing the game again and going after the synergy. So I'd say we're full speed ahead on that. And I'd say the confidence in the divestitures is much higher than when I spoke to you the last time. I'd say 100% will exit one and probably 75% will exit two by Christmas.

Good. We like those deals. Thank you, Ron. Thank you, Tom. Good to talk to you.

Thank you. And our next question comes from Sanjay Sakrani with KBW.

Thank you. I wanted to dig in to the commentary on North America. I think Tom talked about the growth being 3% X to micro pivot. I'm just curious, what should we expect is embedded in the guide for the second half growth? And then maybe you can just elaborate on What's driving the weakness there? Is there any macro headwinds? I'm just trying to think through what we should think about, you know, the normalized growth rate on a go-forward basis.

Yeah, hey, Sanjay, it's Ron. So I'd say the best way to think about it is flat. Forget, you know, plus or minus a percent or two. If you look at the thing sequentially, the goal in this year, exiting this year, is to have our North America fleet business revenue flat. Be 100% past the pivot. We'll have higher quality revenue sitting in there that's obviously got better retention rates, which I called out as better same-store sales rates and stuff like that. So the real question is next year. Okay, hey, you've made the pivot. You're done with that speech. You've got better revenue, better trends and stuff. So what's going on? It's just sales. The million-dollar question is these couple new products and this new channel investment, will we sell enough business relative to the base that that business can be a single or high, you know, mid-digit grower again? So that's the question. It'll be acceptance of the two new products that I call that, we call one of them Corp A1, which is kind of a three-in-one product, and the other one called Comdata Connect, which is for trucking. So will those two products in the build in the field, And the pivot in digital, which I called out, will those things create enough absolute amount of sales that that base grows decently next year? That's the call. And obviously, 90 days will give you our answer of what we're planning and what we think we could do. But look, the early returns, which is why I called it out, are good. When you launch new products, the question is always, does the market like them? You know, what's the acceptance? And as you can see in the quarter we're just leaving, you know, a third to a quarter of the sales of the channels are these new products, which is quite good. So we're optimistic that we've got the right things and we'll give you a better outlook in 90 days.

And Sanjay, related to your second question, nothing material from a macro perspective in the second half. There's a, you know, call it zero to five millionth on where fuel price lands of where that could be, but nothing material. Nothing that would be overly significant to the overall, give or take, billion-dollar business.

Okay. And just to follow up on what Tegan sort of alluded to, in terms of the virtual card businesses out there, I mean, it just seems like there's been a little bit of disappointing growth there. I guess, like, is that creating an opportunity for you guys to go in and buy companies that you know, that are in that field. I'm just trying to think about how you guys look at, you know, some of the data around that and how it affects you.

I think the good news, Sanjay, is it hasn't. I mean, I think, you know, it's always something to look at what other people are doing, but I think Tom said it earlier, all of our setups are different, right? Some guys have super low and an inability to influence the merchants. Other people are more highly monetized. You know, we have a different business than other people, right, in terms of the amount of card, pure card business versus full AP. So the first thing that I'd say is you've got to be a little careful drawing conclusions across the businesses. But, look, it's working for us. You know, we're calling out that our monetization is growing. And to Tom's point, we have a couple things going on with both a partner and with the Pamarang deal that will increase our monetization as we go through the second half. So right now we're kind of outside of the problem, if you will, of people experiencing less car penetration.

Thank you.

Thank you. And our next question comes from Nate Svensson with Deutsche Bank.

Hey, guys. Thanks for the question. I guess on margins, you know, really nice to see another quarter of solid margin expansion, even though margins up 60 basis points, even more ex-Russia. Kind of just wondering your thoughts on the ability to continue expanding margins in the back half of the year, particularly given you'll be lapping some really strong margin expansion in the back half of 23, and then you start to layer a pain meringue So, anything we should keep in mind for our models with regard to cadence or magnitude of margin expansion and what that exit rate might look like heading into next year?

Hi is the headline, Nate. Hi, right? I think we've said repeatedly that we've got significant operating leverage in this business. So, I think our print was what's on low 53, 53 and change, let's say, for Q2. We're looking sequentially, Nate, for revenue to go up 50 here in Q3, 975, call it the 1025, and then up, I think, another 40 as we head into Q4. So the flow through, the margin flow through of that incremental revenue is, you know, 80 or 90% in our business. So margins will expand another two to 250 basis points between Q2 and Q4. So this is the model. The model is if you get, you know, sequential incremental revenue on the books that you'll have significantly good flow through.

That's great to hear. I guess for the fall, I kind of want to talk about retention. So obviously really nice to see the step up in retention, both sequentially and year over year. So I was hoping you could unpack a little more what's driving that, how much of this Is kind of the external environment getting a little better? How much is explicit actions taken by you at core pay? And then I know for the growth algorithm in the back half of the year, you talked about a number of different factors, retention, same-store sales, new products, et cetera. So I guess just any way to like help size each of those metrics and their contribution to growth for the remainder of the year with a focus on retention there.

Yeah, let me take the first part, Nate, it's Ron, and then Tom can pick up just on the, hey, retention. We called out the retention trend was good, nearly hitting 92%, which is the best in a while. It's really mostly mix. And what I mean by that is, simplistically, the retention of a company like ours is really most fundamentally based on the size and the health of the clients. Remember, we provide credit, and we probably kick out half the people. So if we're at 92% retention, so 8% loss, you know, probably closing in on half of that is us not liking the client enough anymore, right, to extend credit. So the mix, like we talked about in the, quote, infamous North America fleet pivot, We're pivoting to higher quality, better credit-worthy accounts, more stable accounts. So that structurally will create retention improvement. And then corporate payments as a business is bigger accounts. Tom said it earlier, call the average account a $200 million or $300 million company in its own right. And so when you have clients like that, they're way stable and generally decent credit-worthy. So it's corporate payments grows from whatever it was, 20s to call it 30% now on the way to 40, that's another part of the mix that will improve our retention. So I would say that we'd be out looking improving retention, certainly as we run through the next four to eight quarters.

Yeah, and Nate, let me kind of walk you through the sequential quarter from Q2 through Q4, because I think it's important for you to kind of understand the pieces. So if we printed $9.75 in Q2 and are guiding toward a midpoint of $10.25. That $50 million increase, half of that, a little over half of that, is related to Pangoran coming on board, which drivers have a lot of visibility into, and the seasonal uplift that we have seen from GIFT. That's over half of the $50 million increase. The other increase is really the snowballing of what we would call really our outperforming companies, the Brazil, the cross-border, the payables. That makes up the lion's share of the remaining sequential increase. We'll be getting some lift from some of the other businesses, but not meaningful. That's more back to your question about a pretty similar retention-based sales kind of model. But the snowballing of cross-border businesses, payables in Brazil is what coupled with the Paymering and the gift gets you to the 1025. And then Q4 is more of the same. It's both The growth of Paymerang, because we'll then start harvesting some of the synergies, so that gets you the $40 million growth between Q3 and Q4. Half, again, is Paymerang and gift. A gift typically has a high seasonal second half. I mentioned the third quarter already. It also typically has a strong fourth quarter for the obvious reasons of the holiday season and vendors wanting to refill their virtual shelves, if you will, with gift cards. And then the rest of that increase, call it another $20 million, is the snowballing, again, of our growing businesses and the sales that we've been talking about, cross-border and payables growing almost 30%, Brazil growing 27%. Those just pour into the second half that then drives the revenue. Now, it's certainly not without some risks. I mean, clearly we've got to execute and we've got to deliver. You don't look at those numbers and say, oh, well, that's a lay-down forecast for the second half of the year, but it's something that we do have discrete plans up against, and the plans are up against things that we've got a fair amount of visibility in, and things that are performing today is how I would describe them, the way we get from here to there.

Ron, Tom, appreciate the color. Thank you.

Thank you. And our next question comes from Peter Christensen. with Citibank.

Good evening. Thank you, gentlemen, for the question. I wanted to dig into the transaction momentum we're still seeing in the Brazil business. It looks fantastic. As we think about, like, parking, fueling stations, that kind of growth that you're seeing there, I was wondering if you can attribute that more on, like, footprint expansion versus kind of, like, same-store growth or more user engagement and And on the footprint expansion kind of story, can you just remind us where we are and do you see more opportunities to expand those two networks?

Hey, Pete and Ron, good question. Yes, the headline is the Brazil businesses is doing great. So if you divide it between kind of the core total business or tags, which I think we said the tag volume tag count grew 9% in the quarter. The reason again for that is, you know, we're Coke. We have every distribution channel known to man to buy a tag. We're in toll booths. We're in malls. We're in retail stores. We're in digital. We're in all the new cars they make on the windshield coming out. So if you've got a vehicle, you can buy our tag. And so there's just nobody, 2,000 people in those various, you know, places helping sell these tags. And then second, we told you, and it's come true, that the cross-sell, when you have six or seven billion active users, including more than half of them, come into your app every month, you can sell other vehicle-related stuff. And we are. We're selling a pile of it. Fueling, compounding, I think at 25% or 30%. The funniest one, we bought this. We call it car debt speed. It's like tickets and registration for your car. And so that thing's compounding. I think it's 40% in the quarter. But literally we're up like 5X selling that to our own user base because when users now come on their phone to the homepage, you know, we know who you are. You're Pete Christensen. your, you know, account 1020, we know your registration. We literally put up on the homepage, hey, you've got two tickets beat. They're outstanding, partner. And they're due on Friday. And so the power of, I hope people aren't missing this, the mass, the size of the base and the number of, you know, new users we add and the broadening line of vehicle things that we're selling now We've got the model working. I don't know if people can see it, but we're growing the platform of the flagship product because of our distribution, and we're broadening the add-on things. And your relating question is, yes, the footprints of those related things are growing. So we've added another, I think, 400, 500 fueling stations this year or next year. We've added thousands and thousands of incremental fueling parking locations, you know, through a deal. We've added this car debt thing from one of the largest companies, you know, in the country doing it. So we are doing that, widening where the users can use these add-on services, which helps us reach more of the base. So the model's working. It's incrementally profitable, obviously, because we're cross-selling, right, versus just getting new accounts. So I'm hoping that the model that we articulated a few years ago, people can see that it's working.

That's really encouraging. And I hate to beat the dead horse on virtual cards, and it's really encouraging about the mix being really healthy there as part of overall payment files. But just curious if you could give any color on rebate levels and how you're seeing those trend, at least in your business.

Yeah, Pete, I'd say they're stable. I mean, we're not going to get into those details, and they can vary dramatically based on customer base, size of the transaction. But there's nothing from a rebate standpoint that's noising up the numbers. I'd say the trends there are, you know, how they've been over the last several quarters.

That's helpful. I appreciate that, Tom. Thank you very much.

Thank you. And our next question comes from Ransi Ellis-Holtz. with Barclays.

Hi, thanks for taking my question this evening. Ronna, I wanted to ask about lodging's contribution to your longer-term growth algorithm. I mean, the segment is undoubtedly recovering. What's your confidence level that lodging will eventually get back to its kind of historical growth watermark?

Hi, Ramsey. Hi, and the reason, again, I think... If you go back to the very beginning of the thing is, if you think about travel and U.S. travel and the different pockets of it, you know, white collar, blue collar, big companies, little companies, this area that we go after is just completely uncertain. The word they use is kind of unmanaged. So us people that are on the call have been, you know, spoon-fed and managed for travel forever and ever. But a group of guys going to fix wires, you know, in Tampa after a storm do not have very good, you know, travel help and stuff. And so I think that the niche and the product line and the network that we've got serves this incredibly underserved market segment of which we've got a decent share. I don't know if in front of me, maybe call it 20%, something like that. So there's plenty at TAM, and there's really not many good alternatives to help those companies. And so, you know, this isn't as bad as the IT thing we did, whatever, six or seven years ago, but obviously we created some of the problem, and the fact that the base is stabilizing tells me that we've contained it, that the people that didn't like what we did to them a year ago, that we're not doing that to kind of the rest of the client base. So as long as the clients sitting on our books, you know, in July are happy and we can keep selling, like we said, we grew, what, 36%, then the answer is we'll be back on the other side. I mean, the value, Ramsey, to a customer, I think the spreads, which is our cost versus retail, hit $50 a room night. in June or July, $50. I think we turned over $25 of that back to the company. So your ability to have a simple way to book, save, and then pay for all that stuff in an organized way and control it so that people are going where you want, not spending other stuff, the combination of those things is just It's just such a great value prop. It's probably the best value prop we have in the company. And so we just have to execute well, not like we did a year ago. So confidence is high to do better again.

Super helpful, Juan, and thanks. And one more from me. Can you unpack the same store sales improvement, which was really meaningful in the quarter? Where was that localized in terms of industry verticals, products kind of across the business? I think throughout your remarks, you've addressed that a little bit, but maybe just kind of roll it up for us. Where are you seeing the best improvement there on SAM store sales?

Yeah, the two big ones would be North America Fleet. And again, that's structural, right? We, whatever, a year and a half ago, stops the micro thing. And so your base gets way more stable when you have, you know, better clients in it, right? More sturdy kind of clients in it and you don't kick them out again for credit. And then the other one is logic. Because, again, that base started to erode in Q2, you know, of last year. And so the customers that we didn't do good for, again, we kind of contained that. So those would be sequentially the two businesses that had the most improvement in the Q2.

And that was the inflection point that we were looking for and anticipating to make sure that it didn't widen. And this was the quarter where we were able to see that, in fact, it didn't widen and it's coming back. So that gives us that element of optimism in terms of

how they're going to perform. And you guys ran into this, you know, models and good math guys. So when I say to you, hey, I've got two problem children, two problem children here, hey, they're going to go from declining to stable. Hey, trust me, pal. What I'm trying to say to you is don't miss the trends. What are the, you know, what are the two businesses whose same store sales improved the most sequentially? The two problem children. whose retention was better, the problem children. And so we're seeing already in the trends those businesses getting better. So when we run the models forward, that's a big part of what creates the improvement and leads back to stable in those businesses. Got it.

Thanks so much.

Thank you. And our next question comes from John Davis with Raymond James.

Hey, guys. Well, I think if we go back to 4Q of 22, there was a lot of travel disruption and the lodging business benefited. So just curious, did you see any benefit from the Crown Strike outage and the associated travel disruption there?

Hey, John, I hate to admit, yes, we did, which we saw kind of in our July report. flash, so I don't necessarily like to wish problems on people, but yes, remember that if you took our entire lodging business and you looked at the pieces of it, right? We sell to like three or four different verticals there. We sell to what we call kind of workforce or blue collar. We sell to airlines and we sell to insurers and stuff in the in a couple of those businesses we have either what we call emergency like a hurricane or Distressed which is like the airlines not being able to get the flights across that stuff probably is I don't know 10 or 15 percent of the entire business so even if it's you know 50% better for a whole year like the world was you know upside down and So I wouldn't say that it's super-duper meaningful to the overall thing, but it's certainly helpful. Certainly our numbers in that segment will be better in this quarter.

Okay, that's helpful. And then, Ron, just to dig in a little bit, you saw a nice acceleration in sales growth. I think you called out corporate payments up 21% versus overall up 21%. And I think Tom called out North America Fleet, you know, five-card plus, new sales being really strong. But maybe overall, like, what is North America Fleet new sales look like and the other segments to call out other than corporate payments driving that 21% and a nice sequential improvement.

Do you have that, Tom? Yeah, North America Fleet, John, is kind of mid-single digits, but it's really kind of a tale of two cities in there because there's some segments that's in there that we're just kind of de-emphasizing. If you look at our proprietary fuel product, it's actually up 30%. So that just gives you the range of variability that's going on. business so I think you really have to kind of decompose it to get to you know what's what's going on there then as you said you work down the page in terms of lodging we reference that payments almost 30% so it's a you know where we're focusing our sales efforts we're seeing the result I think is the message we leave you with okay appreciate all the color thanks guys thank you

And our next question comes from Andrew Jeffrey with William Blair.

Thank you very much. Good afternoon. Appreciate you taking the question. I know the call's gotten a little long, so I'm going to ask you one, Ron. Just big picture, and when I think about corporate payments and the two big deals you've announced recently, the profile of the business has really pretty meaningfully shifted and will continue to do so next year. And I know you did an exhaustive corporate review last year, but does there come a point where you kind of look at the merits of being a pure play, call it 20% scale public B2B company and what that might mean for some of the parts for Fleet Corps? This is just, it's such a distinctive, unique business where I think there could be scarcity value. I wonder if you revisit some of that potential shift in corporate structure.

Yeah, not now, right? We spent the last year studying that. I think referenced our conclusion that the greatest value creation in the company is two things. One, keeping corporate payments going, which we're doing, compounding organically 20% and buying accretive deals. And two, accelerating the vehicle business. And so that's what we're on. With that said, there's always a different day. You know, wake us up a different day, and we'll see where we are in, you know, six, 12 months. But, you know, I think we've said it. We like the company we have. We like the fact that we're in three payment lines, and we've obviously got some fix-it work to do with a couple of the businesses. So I'd say we're not on revisiting the three segments today, period. Again, our eyes are always open and our ears, but it's not today.

Okay. That's helpful. Glad it's not off the table completely in the future, though. Thank you.

Thank you. And we will take our next question from Dave Koning with Baird.

Yeah. Hey, guys. Thanks. And just one question for me. So Q4, you've guided the 14% growth. Just the math around that, I mean, it's pretty outstanding. Like, is that corporate 20% and everything else kind of over 10%? And then is that sustainable? Is there anything in Q4 that's really good that falls off in 25?

Well, I'm glad that you said that. Yes. My word is that's arriving at a better place, at a nice place. And so, yeah, 14%. percent organic revenue growth and 14 percent print growth is attractive. So, on the first part of your question, yes, obviously, virtually every business is performing. Tom mentioned before, obviously, the other categories with gifts would go way into the positive column. And corporate payments would go well into the 20s because we're picking up some planned synergies on the Paymerang side. And, again, just the snowball of the sales there. And then continued, you know, great performance in Brazil. And then the two problem children. we said kind of stabilizing. So that's what the thing looks like. So as soon as you get the problem children from declining to stable, the high-performing businesses pull up, obviously, the average growth rate, you know, quite a bit. In terms of, hey, does that mean if we're at 14%, hey, we're at 14% forever? No. What I'd say is so much of it turns on the earlier question of what can we sell next year, particularly in... North America fleet in lodging, if those bases have stabilized, can we sell enough to grow those businesses, you know, attractively again? But I would say it certainly bodes for double-digit growth, right, which we'll certainly back you guys in 90 days with a view of 25. But, yeah, it'll be a great outcome to get there, and I think it sets us up well to be north of 10% in 2025.

Great. Thank you.

Thank you. We have reached our allotted time for questions. This does conclude today's CorePay second quarter 2024 earnings conference call. Thank you for your participation. You may disconnect at any time.