FLEETCOR Technologies, Inc. (NYSE:FLT) Q4 2022 Earnings Call Transcript

FLEETCOR Technologies, Inc. (NYSE:FLT) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good afternoon and welcome to the FLEETCOR Technologies, Inc. Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Jim Eglseder, Senior Vice President of Investor Relations. Please go ahead.

Jim Eglseder: Good afternoon, everyone. And thank you for joining us today for our fourth quarter and full year 2022 earnings call. With me today are; Ron Clarke, our Chairman and CEO; and Alissa 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 fleetcor.com. Now throughout this call, we will be covering organic revenue growth. And as a reminder, this metric neutralizes the impact of the 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 diluted 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 do need to remind everyone that part of our discussion today 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. 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, both filed with the Securities 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 Clarke, our Chairman and CEO. Ron?

Ron Clarke: Okay, Jim, thanks. Good afternoon, everyone and appreciate you joining our Q4 2022 earnings call. At the top here, I’ll plan to cover four subjects. So first, I’ll provide my take on our Q4 results. Second, I’ll recap our full year 2022 performance. Third, I’ll share our initial 2023 guidance. And then lastly, I’ll update you on a few of the key priorities that we’re working. Okay, let me make the turn to our Q4 results, which exceeded the top end of our guidance range. So better than we expected. We reported revenue of $884 million, that’s up 10% and cash EPS of $4.04, that’s up 9%. Our cash EPS was helped in the quarter by our Brazil Tax-Happy, which did lower our Q4 overall tax rate. Organic revenue growth coming in at 7% overall, inside of that our Corporate Payments business super good, growing 20% in the quarter.

Against the prior year, our Q4 organic revenue growth was negatively impacted by about you know $20 million to $25 million of one-time revenues sitting in Q4 of €˜21. So that reduced organic revenue growth by about 2% to 3% in Q4. We do expect Q1 2023 organic growth to return to the 9% to 10% range. On cash EPS in the quarter pressured by both higher bad debts, and significantly higher interest expense. And as a result of the rising delinquencies we’re seeing in our US Fuel business, we did make the decision in Q4 to slow what we call our new micro digital sales. So our very smallest account. We also began tightening terms of our existing SMB account. Both of those things really a cautionary move to try to control bad debt expense here in 2023.

Fortunately, our credit risk is really narrowly concentrated and what we call these very small micro accounts and also in our newest vintages, you know think 12 months to 24 months. So really impacts a pretty small portion of our overall business. Turning to the trends fundamentals in the quarter are quite good. Same stores finished plus 2 for the quarter, our retention remaining steady at 92%. And sales grew 19% in the quarter, despite our decision to, again to slow the micro sales in fuel. So look, all in all, you know a bit better finish than we had expected and continuing strong trends helping us here as we roll into €˜23. Okay, let me turn to our full year 2022 performance, along with the progress that we made to better position the company for the mid-term.

So for the full year 2022, we reported revenue of $3.4 billion, that’s up 21% and up almost $600 million over 2021. Our cash EPS is $16.10, that’s up 22% versus prior year, and a full $0.85 ahead of our initial 2022 guidance. Our full year organic revenue growth of 13%. Full year sales or new bookings growth of 21%. And we closed five capability acquisitions if you include the GRG deal on January 1. So, really good, really outstanding performance against the primary objectives that we set. So in addition to the financial goals, we really did advance pretty meaningfully are beyond our strategy in €˜22, in which we extend either or both the product set of the business or the customer segment that we serve. This is helpful, obviously, because it grows the TAM, and obviously better positions the business for long-term growth.

So just a few of our beyond highlights for 2022. So in global fleet, significant progress on our EV capabilities, you know, we acquired, you know, our European public charging network. We’ve got mapping and payment applications, we’ve got at home charging software. And we’ve integrated all that to our ICE Fueling Solutions. So great progress there. In Corporate Payments, we added an AP Automation Software front end to our whole AP Payment Execution business, which is the company’s fastest growing business. So super delighted with that. In Lodging, we’ve gone beyond our workforce, core workforce business to two new verticals, the airline vertical and the insurance vertical, each of those reaching almost $100 million in revenue in €˜22. And then finally, in Brazil, we keep expanding our tag Fueling Solution.

We’ve gone to even more accepting sites now and more users. And I think exiting Q4 reached about $10 million annualized transactions. So of the combo in €˜22 have really good financial performance, and what I’d call significant strategic progress. So, we’re quite pleased. All right, let me shift gears and make the turn to our 2023 outlook. We’ve worked hard to build a plan to meet our most important objectives, and what is a challenging environment. So here is our 2023 guidance at the midpoint. So revenue of $3,825,000 billion that would be up 12% or approximately $400 million, EBITDA of $2,000,025 billion that reflects up 15% or up about $260 million. And then cash EPS of $17 at the midpoint that will reflect up 6%. We’re certainly outlooking a pretty unfavorable macro environment this year with a smidge lower fuel price and significantly higher interest rates.

So those two things are expected to reduce our 2023 cash EPS by about $1.75. Implying, we’ll be giving a $18.75 cash EPS guide in kind of an apples-to-apples environments. Our €˜23 plan does set out a number of pretty important objectives to deliver organic growth 10% plus, to grow new sales 15% plus in the diet or control our operating expenses with a plan to expand margins about 150 basis points for the full year, and 200 basis points, exiting 2023. Our major assumptions underlying our 2023 guidance, our first that are €˜22 acquisitions will add about 2% to 3% to our 2023 print revenue growth. This €˜23 guidance does include Russia, and will and so we have certainty of the divestiture. Guidance assumes that we can manage bad debt equal to the 2022 level, although we do think it’ll be more elevated in the first half and second half.

And then finally, we have not assumed a US or global recession, but rather builds our €˜23 plan and volumes, really just based on what we can see and project it from there. Our confidence in this €˜23 plan or outlook is bolstered by a few things. You know, first, we’ve now seen our €˜22 finish. Good, you know better than we thought. We closed the Global Reach, cross-border deal. So that’s in our numbers. We’ve made expense cuts already. So those are behind us. We’re seeing some recent improvement, slight but improvement in both fuel price and FX trends. We just recently implemented two interest rate swaps that will lower our 2023 interest expense and obviously fix rates. And then lastly, we qualified for Brazil Tax-Happy that will slightly lower our 2023 consolidated tax rates, a bit better than our earlier expectations.

Okay, let me transition to my last subject, which is an update on some of our important priorities. So Russia, let me start out with Russia. So making good progress. On the sale of our Russia business, we’ve had lots of interest, a number of parties that have bid for the asset. And we’ve recently moved a select group of buyers, potential buyers into the diligence phase. Timing is probably somewhere late Q2. And at this point, our plan would be to use the Russia sale proceeds to buyback FLT stock. If we did that with kind of a mid-year close, we’re looking at about $0.30 to $0.35 of any year cash EPS dilution. Okay, let me turn next to the FTC matter, appears to be finally in the homestretch. We’re at a point now where we do expect the court to issue an order, likely here sometime in Q1, detailing incremental processes and disclosures that we’ll need to implement.

So obviously, once clear we’ll move quickly to implement those things. Although we will require some time. I mean, just as a reminder, the disclosure, enhancements and process changes that we have voluntarily made over the last few years have not had a material impact on our financial performance. Nor do we believe that this Court order will have a material impact on our financial performance going forward. So last up, EV, again, you know, really good progress on that initiative. So in the UK, we’re now in market with what we call our three and one EV solution for commercial fleet clients. So in this case, it includes a UK public EV charging network, at home charging software, and, of course, traditional ICE Fueling, all of those integrated into one.

And I think we’ve got about 1,000 of our UK commercial fleet clients using the solution. So, doing well there. Additionally, we’re in the market in Continental Europe with an EV solution really for new customer segments. So beyond commercial fleet, so the new segments would include EV car manufacturers, charge-point operators, you know, even EV drivers. And fortunately, we are seeing adoption by all three of those customer segments, which for us is clearly all incremental to our Fleet Payment business. So, look, the goal again is to be a big €“ a major player in this EV transition and I do want to report you know we are officially out of the blocks. Okay, so in closing, again, we finished 2022 pretty well, again, positive sales and retention trends, that obviously helps the setup for this year.

€˜22 full year financial performance, you know, super good, 21% and 22% top and bottom line, you know, way ahead of the initial guide. Again, we’ve advanced last year a number of important beyond ideas that supports the future growth of the company. Our outlook for €˜23 we think positive. Outlooking double-digit revenue expectations, you know, improving operating margins and EBITDA, although our absolute profits for sure will be weighed down by the interest rate spike. We do expect to clear our Russia and FTC overhang here in the first half. The same time we’re going to continue to stake out our position in the new EV world. Again, big opportunity for us. And lastly, our mid-term objectives remain intact. We want to grow cash EPS in the 15% to 20% range once we lap the 2023 interest expense headwinds.

So with that, let me turn the call back over to Alissa to provide a bit more detail on the quarter. Alissa?

Alissa Vickery: Thanks, Ron. First, the financial details. As mentioned, we posted 10% growth in revenue in the quarter, driven by 7% organic growth or $57 million, which I’ll delve into in a moment. The remaining percentages came from $20 million of macro tailwinds and $4 million from acquisitions made over the past year. Organic revenue growth was negatively affected by the impact of one-off items not expected to repeat from the fourth quarter of 2021, including breakage, backlog to card orders, accounting true ups in the normal course and acquisition accruals. We expect 2023 organic revenue growth to meet our double-digit targets. Corporate Payments’ average revenue growth was 20%, driven by continued strong new sales across both direct and cross border.

Specifically, our Direct Corporate Payments business grew 27% and continues to demonstrate very robust growth. Cross-Border was up 24% another very good quarter, as new sales remained strong. Activity levels were robust across nearly all geographies, and we completed the full tech integration of AFEX into our Cross-Border platforms. Lodging continued to perform well, up 14%. While we’ve largely lapped the airline COVID recovery benefit, the airline business was still up 38% in the quarter. The suite of services we’ve bought into this business substantially enlarged as the TAM and durability of our Lodging growth profile over the medium-term. Fuel was up organically 2% with growth in International Fuel largely offset by softness in our US Micro SMB Customer segment.

And by Micro, we mean companies with less than five vehicles. So the smallest of the small. The economic cost of higher fuel prices, inflation, and in the case of micro SMB trucking, lower spot rates have negatively affected their ability to manage expenses, including their fuel bills, which has resulted in higher bad debt. We’ve also seen some negative mix shift among that micro trucking segment. As higher margin independent trucking volume is moving to lower margin volume as those drivers move to the larger contract carriers. This micro segment generated more than 75% of our US fuel bad debt losses in both the fourth quarter and full year 2022, fully filling the brunt of these economic headwinds. Given the higher loss rates of the micro client segment that we are experiencing, we have significantly tightened credit approval standards in a purposefully targeted and narrow way.

In order to get ahead of any further stress and this micro segment, the result was a drag on organic fuel growth in the quarter. We are taking a balanced approach to new customer demand gen activities, prioritizing customer segments and industries that are healthier to drive fuel growth in 2023. All while limiting our bad debt exposure. We will continue to feel the residual effect of tighter credit and higher losses in that micro segment in the first half of 2023. But would expect to clear this overhang and return to normalized fuel growth rates in the back half of the year. This will likely cause 2023 fuel organic growth to be at the low end of our normal range. Tolls was up 6% compared with last year, as the impact of strong new sales was masked by almost $5 million of non-recurring revenue in the fourth quarter of last year.

Toll sales were strong in the current quarter, recovering from software sales mid-year and helping offset some of the prior year one-time benefit impact. We expect tolls to return to its low-to-mid-teens growth rate in 2023. We’ve made great progress building out the Beyond Toll network and now have over 5,400 Beyond Toll locations, including 2,200 fueling stations, 2,300 parking lots, 750 drive thrus and 150 car washes that accept our tag. As an additional service to our customers, we are a reseller of insurance from other companies to our more than 6 million tag holders in Brazil, for whom we have negotiated preferential pricing. This insurance offering is growing quite fast. We sold more than 38,000 insurance policies in the quarter. We also signed up Santander as a total distribution partner, which is the fifth largest bank in the country.

All in all, we’re very bullish on the outlook for our Brazil business. Gift organic growth in Q4 was down 11% over prior year Q4, as the current orders that pulled forward in the last few quarters, and in Q4 prior year did not repeat. Due to the lumpy nature of card orders between quarters, it is best to look at full year gift organic growth, which was 11% as the newer online card sales programs and the B2B program have improved the growth of that business. Looking further down the income statement, operating expenses of $514 million represented an increase over prior Q4, primarily due to recent acquisitions, higher bad debt and volume-related increases. We did recognize $5 million in expense associated with reductions to staffing levels, and the termination of office space leases.

As we adjusted our expense base for the current challenging environment. We will continue to manage our expenses with a very close eye on our outlook. Bad debt expense was $41 million or 9 basis points, consistent with the third quarter 2022 level. I’ve already talked about what we’re doing to manage this, but suffice it to say, we’re very focused on it. Moving below the line, interest expense was $74 million for the quarter, up 168% over the prior Q4 and $165 million for the full year up 45%. These increases were driven by higher reference rates on our floating rate debt, as well as incremental borrowings for share repurchases and acquisitions. Our effective tax rate for the quarter was 24.2% versus 25.6% last year, and lower than our guidance.

The primary driver was the impact of a pandemic-related tax benefit election in Brazil realized for 2022 in the quarter. Now turning to the balance sheet. We ended the quarter with over $1.4 billion an unrestricted cash and approximately $600 million available on our revolver. There was $5.7 billion outstanding on our credit facilities, and we had $1.3 billion borrowed on our securitization facility. As a reminder, earlier in the year, we upsized and extended our credit facility by approximately $500 million and extended the maturity through June 2027 at quite attractive rates. As of December 30th, our leverage ratio was 2.8 times trailing 12-month adjusted EBITDA as calculated in accordance with our credit agreement. Our capital allocation was once again balanced in 2022.

In the quarter, we repurchased roughly 600,000 shares at an average price of $188 per share. In total, we’ve repurchased about 6.2 million shares during 2022 for $1.4 billion. Our guidance for share count for 2023 is 5 million shares lower than what we guided to a year ago. In total, we’ve bought back 11.7 million shares over the last two years. We still have over $1.2 billion authorized for future repurchases. In 2022, we spent $217 million on acquisitions and minority investments, excluding global reach on January 1st, 2023, solidifying our positions in EV, Corporate Payments and Lodging. Now, let me share some thoughts on our Q1 outlook and our full year assumptions. Looking ahead, we’re expecting Q1 2023 revenue to be between $875 million and $890 million.

And adjusted net income per share to be between $3.55 and $3.75. This is largely due to revenue seasonality for certain businesses, such as Fuel, Lodging and Tolls tend to have lighter first quarters due to weather and holidays. As such, the first quarter tends to be the lowest in terms of both revenue and profit for our company. We have a bit of a preview for the first few weeks of the year and we are tracking to the guidance we are providing. Of note for the full year 2023, we anticipate managing bad debt flat to the 2022 levels, expecting it will be higher in the first half of the year and then improve into the second half. We expect 2023 net interest expense to be between $312 million and $332 million based on the forward curve as of February 1st, 2023, which implies reference rates will peak sometime during the third quarter of 2023.

As we disclosed in the earnings release, and you can see on Slides 21 and 22 of our supplement, we entered into a series of interest rate swap agreements to fix rates on approximately $1.5 billion of our floating rate debt. These spots will provide some relief on our 2023 rate, and helps limit the downside risk from further rising interest rates. The inverted forward rate curve enabled us to reduce 2023 interest expense by locking in lower future rates over a three-year period. With these new swaps along with our previous outstanding swaps, we now have fixed interest rates on a total of $2 billion of our variable rate debt for most of 2023. Last week, we also entered into a euro cross-currency swap to benefit from the lower euro interest rates, with an implied interest savings of 1.96% on $500 million of notional debt.

With these various swaps, we have now managed interest rate and FX risk on $2.5 billion or 47% of our debt, excluding the securitization. We believe these actions will help mitigate the risks associated with continued increasing interest rates in 2023. We estimate these swaps to reduce interest expense by approximately $35 million in 2023. And finally, our tax rate in 2023 is expected to be slightly higher between 26% and 27%. As the continued benefit from the Brazil tax holiday is more than offset by higher tax rates in the UK. As the UK statutory tax rate increases from 19% to 25% in April of 2023. The rest of our assumptions can be found in our press release and supplement. As I complete my prepared remarks, I would like to extend our gratitude to our more than 10,000 employees around the world who helped us deliver such a strong finish to a great year, and who will be the driving force to even greater heights throughout €˜23.

Thank you for your interest in our company. And now operator, we’d like to open the line for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. And our first question today will come from Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani: Thank you. Ron, you talked a little bit about this rising delinquencies among the micro SMEs. I’m just curious was that fairly contained inside of fuel or the fleet business? Or were there any other weakness €“ was there any other weakness among the SMEs? And I’m just curious if you think that this might be a leading indicator of more things to come. If you go up market, I know you guys haven’t assumed any additional macro pressures and such.

Ron Clarke: Yeah, it’s a good question, Sanjay. And yes is the short answer. The fuel business and really the US fuel business, because the terms and the way we collect money and bill internationally is fundamentally different. The terms we pull all the money, et cetera. So yeah, the only place that we’ve seen the micro and again, we’re talking super-duper small, mostly one and two card accounts and super-duper new on the books, again, a year or two, that portion of the overall sells about 75% of the credit losses. So although the credit losses from that group are sizable, the amount of business from that group is not super sizable. So yeah, that’s the only place we’re seeing it. In fact, when we study the cohorts, you know, they’re a bit larger or more mature longer on the books. It’s super ratable with the trailing you know 12 months to 24 months. So it’s super-duper pocketed for some reason.

Sanjay Sakhrani: And you don’t think it’s a leading indicator or anything looking at historically.

Ron Clarke: Yeah, I mean, look you guys get this as good as mine. We’ve been talking about you know macro recession for six months now. And we study and look everywhere and we just don’t see it. We don’t see it in volumes. We don’t see it in sales. This is the one place where it showed up and it started, I don’t know call it maybe six months ago, kind of September, October, we saw the delinquency start to step up. So, my personal view is that, you know, these are quasi consumer businesses. You know, and as the funds ran out, and as the savings got depleted, there’s just more pressure, you know, on these kinds of businesses than others. And so, which is what , right. When we saw that we said, okay, you know you guys always ask me, hey, Corporate Payments faster so we get it up and go and move sales dollars and implementation dollars away from our tiny fuel business over there until we see how that plays out.

Sanjay Sakhrani: Okay, great. Just one quick follow-up for Alissa on, you know some of these impacts that happened to the growth rate in the fourth quarter. As I look across the different segments, you know, there’s been a lot of variability in the growth rate. I’m just curious, did that affect multiple lines, those items as one-off items?

Alissa Vickery: It did. I mean so we thought a decent amount in our Tolls business as well as a little bit in our Fuel business.

Ron Clarke: Those two.

Alissa Vickery: Yeah.

Sanjay Sakhrani: Okay, great. Thanks.

Alissa Vickery: And I would just add, you know, this is all normal course of business stuff, it just seemed to be a collection.

Ron Clarke: Yeah you want to point out Sanjay, it’s Ron again, that you know, we view it kind of this more of a bump than a trend. I did try to call out you know in the opening basically they were outlooking, this quarter we’re sitting in the thing back at 9 or 10. So really in our minds, it’s a comps’ issue, not a run rate issue.

Sanjay Sakhrani: Got it. All right. Thank you so much.