FleetCor Technologies' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 5.14 | About: FleetCor Technologies, (FLT)

FleetCor Technologies, Inc. (NYSE:FLT)

Q4 2013 Earnings Conference Call

February 5, 2014 17:00 ET

Executives

Eric Dey - Chief Financial Officer

Ron Clarke - Chairman and Chief Executive Officer

Analysts

David Togut - Evercore

Phil Stiller - Citi

Glenn Fodor - Autonomous Research

Adam Carron - Barclays

Tien-Tsin Huang - JPMorgan

Smitti Srethapramote - Morgan Stanley and Company

Tim Willi - Wells Fargo

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the FleetCor Technologies, Inc. Fourth Quarter Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today Wednesday, February 5, 2014.

I would now like to turn the conference over to Mr. Eric Dey, Chief Financial Officer. Please go ahead sir.

Eric Dey - Chief Financial Officer

Good afternoon, everyone, and thank you for joining us today. By now, everyone should have access to our fourth quarter press release. It can also be found at www.fleetcor.com under the Investor Relations section.

Throughout this conference call, we will be presenting non-GAAP financial information, including adjusted revenues, adjusted net income and EBITDA. This information is not calculated in accordance with GAAP, and may be calculated differently than other companies’ similarly titled non-GAAP information. Quantitative reconciliations of historical non-GAAP financial information to the most directly comparable GAAP information appears in today’s press release and on our website as previously described.

Also, we are providing 2014 guidance on a non-GAAP basis. Finally, before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. This includes forward-looking statements about our 2014 guidance, new products and fee initiatives and potential business development and acquisitions.

They are not guarantees of future performance and therefore you should not put undue reliance on them. These results are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of those risks are mentioned in today’s press release and Form 8-K filed with the Securities and Exchange Commission. Others are discussed in our annual report on Form 10-K. These documents are available on our website as previously described and at www.sec.gov.

With that out of the way, I would like to turn the call over to Ron Clarke, our Chairman and CEO.

Ron Clarke - Chairman and Chief Executive Officer

Okay, Eric, thanks, good afternoon and let me add my welcome to everyone. So upfront here I’ll plan to cover four subjects. First, comment on Q4, second, discuss some of our highlights from 2013, third, comment on our 2014 outlook and then lastly I’ll discuss a bit our go-forward strategy.

Okay. So first off Q4. Results for the fourth quarter were very, very good. We reported revenue of $256 million up 26% and cash EPS of $1.08 up 32%, so 26% top-line, 32% bottom line. There are a few puts and takes baked into those numbers. So on the plus side again we had the same businesses continuing to perform well. Our U.S. business was up 18% for the quarter and our UK fuel card business up 28% for the quarter. Second, we did get a lot of help from our recent acquisitions particularly VB in Brazil and Epyx in the UK, our two biggest acquisitions.

On the not so good side the Q4 environment was not particularly helpful. U.S. fuel prices and U.S. fuel spreads were both unfavorable to the prior period. And we had a Q4 tax rate that was 2.5% higher than our full year 2013 average, so obviously depressed cash EPS in the quarter. But look overall we’re happy with our results, happy with this growth rate and pleased with the extra rate we’ve got heading into 2014.

Right. So let me transition over to 2013 full year and which we reported revenue of $895 million up 27% and cash EPS of $4.05 up 35%, so 27% top-line, 35% bottom line for the full year. And since our IPO in December of 2010 so our first three years as a public company, we’ve grown cash EPS 31%, 38% and this year, 35%. So pretty good three years. In terms of highlights for 2013 let me mention just a few things. So first very good organic growth for the full year approximately 11%. We’re also pleased that we exited the fourth quarter with about $1 billion of run rate revenue for the first time.

Second, 2013 was a fantastic business development year. The biggest in the company’s history. We closed seven acquisitions including a couple of big ones and we signed six distinct partnership deals all over the globe. Third, we got deeper and better positioned in Brazil, an important market for us with these couple of additional acquisitions and we entered Canada for the first time on the back of a couple of private label wins. So deeper in one market and entry in a new market.

Fourth, we’ve gotten position in the telematics space which is an interesting cross-sell area for us. So we’re going to evaluate whether this could be an important new like for FleetCor. And then finally 2013 was a great capital market year for FleetCor. Our FleetCor stock doubled in 2013. So pretty pleased with that. So look all-in-all a really terrific 2013.

So let me now transition over to our outlook for 2014. We’re providing guidance today of $1.80 billion and revenue at the midpoint and $4.95 in cash EPS at the midpoint. The $4.95 cash EPS reflects about a 22% growth rate over last year’s $4.05 and on the revenue front the $1.80 billion target 50% of that is planned to be from international operations. So we expect to cross the 50% boundary for the first time. And we expect over a quarter of our total revenue in 2014 to be from beyond fuel card. So areas like food cards, hotel cards, transportation cards, (fuel) cards, telematics product etcetera.

So as you can see we’re getting some decent geographic and product diversification. In terms of the environment we’re expecting in 2014 I guess we say we expect it will not be very helpful. Specifically we’re assuming effective tax rate, it will be up 1% versus 2013 and that creates about a $0.05 EPS headwind which backs our midpoint guidance down from $5 a share back to $4.95. Eric will speak a bit more about that in his section.

Interest rates and overall interest expense will be up in 2014 so unfavorable. We’re also entering this quarter now with U.S. fuel prices below the prior year. So we can’t overall – we’re not expecting a lot of macro help in this guidance. So let me talk a little bit about the bridge, the profit bridge that takes us from cash EPS of $4.05 in 2013 to $4.95 cash EPS at the midpoint for 2014. So that $0.90 delta, the makeup is one about a third from the run rate with the extra rate coming out of 2013 that should get us about a third of the way to the target.

Two, we’re expecting continued strong organic growth from a number of our lines of business. So we’re planning our U.S. Direct Business to be up 13%, our CLC business had another double-digit year, our UK business up another 20%, our Russia business up another 20%. So we’re expecting a number of very strong growth rate in some of our largest businesses.

Third, we’re obviously expecting some upside in our new assets, the seven we just acquired. So we’re planning more profit performance out of the Brazil deals, the Epyx deal, the Australia, New Zealand deal, even our NexTraq telematics business. And lastly although not in our guidance we do have additional earnings upside in the form of our business development pipeline which as you know is always active for us. So in summary for 2014 expecting profits grow again over 20%, source of that is our current run rate, continued organic growth particularly in our largest businesses, more profit from the seven assets that we just bought and potentially some upside of the guidance as we progress through the year vis-à-vis our business development efforts.

Let me close out by talking just a bit about our go-forward strategy. So fundamentally we’re sticking to our game plan of build, buy and partner. So we’ll keep building the assets we own mostly through more sales investments. We’ll look to keep buying highly related businesses where we can shape the right thesis to improve profits. And obviously we’re going to continue to chase partners that have portfolios or partners that can bring new products to the company. So although our overall game plan is unchanged I do want you to hear a new emphasis on two things, two things in particular.

One, we’re going to be laser-focused on entering new markets more of these top 20 markets, obviously pleased with Canada, one of those this year, but we’re going to keep trying and get into markets we’re not in today. And two we’re going to continue to expand our product line so again about a quarter of our businesses beyond fuel cards and we’re going to keep on expanding in workforce payments again ones that are highly related where we understand the business. And we’re going to continue to look at things like telematics that are obvious cross-sell opportunity, so more big markets and more highly related products will keep part of our strategy.

And lastly we feel FleetCor is really well positioned going into 2014. We’ve got good organic growth, began about 11% last year. We’re fine in our way into new markets expect more of that. We’ve had the success beyond fuel cards about 25% of our business now of course that gives us more addressable markets. Great (NYSEARCA:VB) last year, seven new assets, more profit potential there and again we’ve got ongoing sourcing and work for new deals that we’re working on 2014. So the message is lots of ways to keep the growth going.

So anyway with that let me turn the call back over to Eric, so he can provide more information on the quarter, the year and the outlook. Eric?

Eric Dey - Chief Financial Officer

Thank you, Ron. For the fourth quarter of 2013 we reported revenue of $255.5 million, an increase of 26% from the fourth quarter of 2012. Revenue from our North American segment increased 15.5% to $125.4 million from $108.6 million in the fourth quarter of 2012. Revenue from our International segment increased 38.4% to $130.1 million from $94 million in the fourth quarter of 2012.

For the fourth quarter of 2013 GAAP net income increased 13% to $68.1 million or $0.80 per diluted share from $60.1 million or $0.70 per diluted share in the fourth quarter of 2012. Included in GAAP net income for the fourth quarter of 2013 was $10.6 million in expense related to new stock awards granted and invested during the quarter. And an unfavorable tax adjustment due to a tax law change in Mexico which adversely impacted the quarter results by approximately $0.02 per diluted share. The other financial metrics that we routinely use to measure our business are adjusted revenues and adjusted net income, which we sometimes also refer to as cash net income or cash EPS.

Adjusted revenues equal our GAAP revenues, less merchant commissions. We use adjusted revenues as a basis to evaluate the company’s revenues, net of the commissions that are paid to merchants who participate in certain card programs. The reconciliations of adjusted revenues and adjusted net income to our GAAP numbers are provided in Exhibit 1 of our press release. Adjusted revenues in the fourth quarter of 2013 increased 28% to $237.7 million compared to $185 million in the fourth quarter of 2012. Adjusted net income for the fourth quarter of 2013 increased 30% to $92.1 million or $1.08 per diluted share compared to $70.7 million or $0.82 per diluted share in the fourth quarter of 2012.

For the fourth quarter of 2013, transaction volumes increased 14.9% to 90 million transactions compared to 78 million transactions in the fourth quarter of 2012. North American segment transactions grew 6.6%, driven primarily by organic growth in our U.S. businesses and the telematics transactions we completed in April and October of 2013.

Transactions volumes in our International segment grew 23.5% and were positively impacted by acquisitions closed in 2013. Revenue per transaction for the fourth quarter of 2013 increased 9.7% to $2.84 from $2.58 in the fourth quarter of 2012. Revenue per transaction can vary based on geography, the relevant merchant and customer relationship, the payment product utilized and the types of products or services purchased, a mix of which will be influenced by our acquisitions, organic growth in the business and fluctuations in the macroeconomic environment.

When we talk about the macroeconomic environment, we are referring to the impact of market spread margins, fuel prices, foreign exchange rates and the economy in general can have on our business. During the fourth quarter, lower fuel spread margins and the low fuel prices primarily in the U.S. resulted in an unfavorable impact to revenues both in the North American and International segments. And although we cannot calculate precisely the impact of these changes, we believe that negatively impacted our revenues by approximately $3 million to $4 million for the quarter.

Changes in foreign exchange rates were mixed in the geographies most impacted. And overall, we believe, negatively impacted our revenues by approximately $2 million during the quarter. Revenue per transaction for the fourth quarter was up in both North America and the International segments. Revenue per transaction was up 8.4% in North America, due primarily to the positive mix impact of signing up customers who use higher revenue per transaction products than the average, organic growth in many other lines of business, acquisitions completed in 2013 we kept higher revenue per transaction products than the average partially offset by the impact of lower prices and fuel spread margins during the quarter.

In the International segment, revenue per transaction increased 12.1%, which was due primarily to organic revenue growth in many of our lines of business, particularly in the U.K. Acquisitions closed in 2013, some of which had products at a higher overall revenue per transaction versus our line average partially offset by unfavorable foreign exchange rates in the quarter and lower fuel prices in some market.

Now let’s shift over and discuss some of the other drivers of our fourth quarter performance. First, in our North American segment. Most of our lines of business performed well, resulting in an approximate 15% revenue growth rate in the quarter versus prior year. Some of the positive drivers in North American revenue during the quarter were similar to last quarter, including the continued exceptional performance of our MasterCard product, which had revenue growth of approximately 30% year-over-year for the quarter driven primarily by increases in volume. The CLC Group, provider of our lodging card programs, had another solid quarter with 20% revenue growth over the fourth quarter of 2012. This revenue growth was driven primarily by increases in our CheckINN Direct product which targets smaller account.

Results in our international business were again positively impacted by strong organic growth in our AllStar business in the U.K., which posted very strong double-digit revenue growth over last year measured in local currency. Results for our international business were also positively impacted by acquisitions closed in 2013, which included acquisitions closed in Australia, New Zealand, Brazil, U.K. and Russia. And finally, the macroeconomic environment in our International segment was unfavorable during the fourth quarter. And although we cannot precisely calculate the impact, we believe that negatively impacted our revenues by approximately $2 million to $3 million.

Now, moving down the income statement. Total operating expenses for the fourth quarter were $149.5 million compared to $109.4 million in the fourth quarter of 2012, an increase of 36.6%. As a percentage of total revenues, operating expenses increased to 58.5% of revenue compared to 54% in the fourth quarter of 2012. Included in operating expenses are merchant commissions, processing expenses, bad debt, selling and general and administrative expenses, and depreciation and amortization. The increase in operating expenses was primarily due to the additional expenses related to the acquisitions closed throughout 2013. And a $10.6 million non-cash expense related to new stock awards granted and vested in the fourth quarter.

The decrease in operating expense as a percentage of revenue was due primarily to adding acquisitions but lower overall operating margins than the company average and the additional $10.6 million in stock compensation. Credit losses were $4.8 million for the quarter or 10 basis points compared to $5.1 million or 13 basis points in the fourth quarter of 2012. The improvement in credit losses was primarily due to the continued improved performance in many business lines and the impact of acquisitions closed in 2013, which had products with historically lower bad debt as a percentage of billed revenue.

Depreciation and amortization increased 60% to $24.2 million in the fourth quarter of 2013 from $15.1 million in the fourth quarter of 2012. The increase was primarily due to amortization of intangible assets related to acquisitions closed in 2013. Total interest expense increased 62% to $5.5 million in the fourth quarter of 2013 from $3.4 million in the fourth quarter of 2012. The increase was primarily due to additional borrowings for acquisitions closed in 2013 and a slight increase in the interest rate and our term loan due to an increase in our leverage ratio in the fourth quarter.

Our effective tax rate increased to 31.9% compared to 32.6% for the fourth quarter of 2012. However, both years have unusual items. The fourth quarter of 2013 includes an unfavorable income tax adjustment related to changes in the tax law in Mexico in December which required the company to record approximately $1.5 million or $0.02 per diluted share and income tax expense retroactive to the beginning of the year. In the fourth quarter of 2012, there was an increase in taxes of $1.9 million due to the controlled foreign corporation look-through exclusion expiring for FleetCor on December 1, 2012 and which was not extended until January, 2013. If you exclude the impact of these one-time tax adjustments, our tax rates would have been 30.5% in the fourth quarter of both years.

Now, turning to the balance sheet. We have ended the quarter with approximately $386 million in total cash, approximately $48 million of which is restricted and are primarily customer deposits. The company also has a $500 million accounts receivable securitization facility. At December 31, we had approximately $349 million borrowed against the facility. We also had $497 million outstanding on our term loan and $635 million drawn on our revolver leaving $215 million undrawn.

As of December 31, our leverage ratio was 2.2 times EBITDA, well below our covenant level of 3.25 times EBITDA. We intend to use our future free cash flow to temporarily pay down the balance in our revolving credit facility and securitization facility and maintain liquidity for acquisitions and other corporate purposes. Finally, we are not a capital-intensive business as we spent $5.4 million on CapEx during the fourth quarter of 2013 and approximately $21 million for the full year.

Now, on to our outlook for 2014. We expect total revenues to be between $1.70 billion and $1.90 billion. Adjusted net income to be between $418 million and $428 million. And adjusted net income per diluted share to be between $4.90 and $5. As a result, our guidance at the adjusted net income per share midpoint of the range of $4.95 represents a 22% growth rate over the $4.05 per diluted share reported in 2013. However, in 2013 our results include approximately $5.7 million or $0.07 per diluted share of non-recurring income tax favorability.

Without this favorability, our 2014’s guidance represents a 24% growth rate over 2013. Some of the assumptions that we have made in preparing this guidance include the following. Fuel prices equal to 2013 average, despite the fact we are starting the year with fuel prices below the 2013 average. Market spreads equal to the 2013 average and foreign exchange rates equal to the current run rate. We are also assuming fully diluted shares outstanding of 85.6 million shares, a 1 million share increase from 2013. Interest expense of $24.2 million a 1% increase in our effective tax rate from 29.5% in 2013 to 30.6% in 2014.

And just to remind everyone, in 2013 we had two non-recurring income tax adjustments that resulted in a net favorable impact to our 2013 income tax expense of approximately $5.7 million. Without these adjustments, our 2013 tax rate would have been 30.9%. And just to remind everyone again, in the first quarter we reversed $1.9 million of tax booked in the fourth quarter of 2012 related to the controlled foreign corporation look-through exclusion expiring for FleetCor on December 1, 2012 and which was not extended until January 2013. And in the third quarter, legislation was passed in the U.K. that reduce the statutory income tax rates which resulted in a $3.8 million reduction in tax expense booked in the third quarter of 2013

And finally, as always no impact related to future acquisitions or material new partnership agreements. For those of you that are looking for guidance for the first quarter, I want to remind everyone that our business had some seasonality. And that typically the first quarter is the lowest in terms of both revenue and profit. First quarter seasonality is impacted by weather, holidays in the U.S., Christmas being celebrated in Russia in January and lower business levels in Brazil where most business is around summer break in the first quarter and the Carnivale celebration is also in the first quarter.

Additionally, our volumes build throughout the year and our new asset initiatives gain momentum throughout the year resulting in much higher earnings per share in the third and fourth quarters. With that said, we are expecting our first quarter adjusted net income per diluted share to between $1.03 and $1.07. Our first quarter guidance at the midpoint represents a 19% increase versus prior year when adjusted for the non-recurring favorable tax item in the first quarter of 2013 discussed earlier. We have no plans to provide quarterly guidance going forward but we have to update our annual guidance each quarter.

And with that said, operator, we’ll open it for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Dey. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of – pardon me, David Togut with Evercore. Please go ahead.

David Togut - Evercore

Good evening, Ron and Eric.

Eric Dey

Hey David.

Ron Clarke

Hi, Eric.

David Togut - Evercore

Could you break out the organic revenue growth rate for North America and international and also the organic revenue per transaction growth rate for each?

Eric Dey

Yes. David, for the full year if you look at our full year organic growth – full year revenue growth rate is 27%, about half of that for the year is from organic growth and kind of the other half is obviously the full year effective acquisitions that we acquired in the year. And the organic growth in the United States for the year ran around 11% and was slightly higher in the international business for the year.

David Togut - Evercore

Okay, that’s very helpful. Thank you. And then as a follow-up, the $10.6 million of stock comp expense you mentioned for Q4, did that all fall into USS G&A?

Eric Dey

The majority of that was in the U.S. That’s correct.

David Togut - Evercore

Okay. And then the growth rate that you gave for direct MasterCard 30%, that was a nice acceleration from what we saw in Q3 which I believe was the high teens. But I think that you guided to 13% growth for direct MasterCard for this year. Do I have that correct?

Ron Clarke

Yes, that’s – Dave it’s Ron. That’s for the overall direct business which has another set of products in it other than the MasterCard product.

David Togut - Evercore

Got it. So was it possible to understand what direct MasterCard growth would be for 2014?

Ron Clarke

Yes, it’s in that same kind of 30% range and like I told you we took a bit of a breather on rate for a quarter and kind of back on our standard rate plan.

David Togut - Evercore

Got it. Okay.

Ron Clarke

It’s kind of 30% for the full year.

David Togut - Evercore

Okay. Did you quantify the acquisition pipeline for 2014?

Ron Clarke

No, but active. We got handful of deals we’re working and a handful of partners. So, busy, we took a little break in the fourth quarter, we’re busy again. But we kind of raise the target internally to $500 million per year from $300 million. So, we’re given the size of the company now we’re trying to step it up, we did almost $1 billion in 2013.

David Togut - Evercore

Is most of that $500 million outside of fuel cards?

Ron Clarke

No, but still a number of interesting fuel card both partner and deals that we’re looking at but we are on the sole workforce payments base as well. So, look for a mix.

Eric Dey

Yes. And Dave just to add to that, that $500 million is just a guideline. Again, people ask us that question all the time and obviously we’re very opportunistic around acquisitions and partnered deals. So, we’ll close deals when they make sense but we are targeting about $500 million a year, could be more, could be less just like it was last year was significantly higher.

David Togut - Evercore

That makes sense. Final question for me. Timing for possible launch of direct universal card in Europe.

Ron Clarke

No, comment David yet, still not closed in.

David Togut - Evercore

Got it. Okay. Thank you very much.

Ron Clarke

Thanks.

Operator

Our next question comes from the line of Phil Stiller with Citi. Please go ahead.

Phil Stiller - Citi

Hi, guys. Thanks for taking my questions. The Outlook for 2014 I think you said 22% revenue growth at the midpoint. Is there a way to think about how much of that is organic versus from the businesses acquired in 2013?

Eric Dey

Yes, yes. Hey, Phil this is Eric. It’s kind of similar to this year, I would say probably a little less than half is our target for organic growth and as you know historically we’ve kind of guided people to think of our businesses kind of high single-digit to kind of low double-digit organic growth kind of company and that’s the guidance we provided for next year is kind of in that range. And then the reminder of that is obviously the full year impact of acquisitions that we closed in 2013. And then includes no new deals for 2014, no new partner deals that we’ve now already disclosed.

Phil Stiller - Citi

Okay. With the acquisitions that were closed during 2013, it sounds like you’re expecting some improvement in terms of the profit performance of those companies which is normal for you guys. But can you give us some milestones to look out for which of the acquisitions might be the biggest contributors and when we what do we see from that upside?

Ron Clarke

Yes, Phil it’s Ron. I’d say probably half of the improvement will be in the second half of this year and then the balance basically roll into the 2015. And the two biggest deals that we did with this VB deal in Brazil and this Epyx deal in the UK. They are the largest and will provide the most lift.

Phil Stiller - Citi

Are there specific initiatives that you guys are working towards with those acquisitions that we could keep track of?

Ron Clarke

Yes as you know every deal before we sign and wire we have a thesis, a profit curve. And so they’re based on specific plans that we have and so although what we did the majority of the deals I guess in the second half of the year. So I would say some of that’s getting underway now still kind of in the first quarter, but again I’d say it’s back-loaded based on when we close those deals. But every single deal has its checklist of things we’re trying to do.

Phil Stiller - Citi

Okay. Last question the Chip and PIN rollout in the UK, is there enough – any timeline on that?

Ron Clarke

Yes, great question, finally closed. So Q2 we should be allied in the market in Q2 with that product.

Phil Stiller - Citi

Okay, great. Thanks guys.

Ron Clarke

And by the way it would be the first one in the UK we believe if we get out in the quarter. So..

Operator

Our next question comes from the line of Glenn Fodor with Autonomous Research. Please go ahead.

Glenn Fodor - Autonomous Research

Hi, good evening. Thanks for taking my questions. Eric just real quick, apologize if you mentioned it, but restructuring and deal expenses in the fourth quarter, if there were and if you want to call an amount (indiscernible)?

Eric Dey

Yes, there was approximately $2 million in the fourth quarter, Glenn.

Glenn Fodor - Autonomous Research

How does that compare to say the third quarter?

Eric Dey

For the full year we spent about $5 million, so most of those deal costs were in the second half so I would say most of those were in the third quarter, that’s when we closed the other Brazilian deal, the larger deal. And they were some obviously associated with New Zealand and Australia deals kind of at the end of the first quarter into the second quarter, but I’d say the majority were in the second half of the year.

Glenn Fodor - Autonomous Research

Okay. And then Ron at times you’ve been a little more direct in your comments on the deals and kind of reading between lines if they’re closed or not. Didn’t really hear that (texture) today and you talked about paying down the revolver with near term cash flow I mean can we read into the fact that – can we read anything into this that there is not likely to be anything sort of notable in the say the first quarter that you eventually get there, but say first quarter not likely or is that a little bit of a reach?

Ron Clarke

Yes, that’s a reach. I’d say as always we have things that are closed in and furthered away and no different today.

Glenn Fodor - Autonomous Research

Okay, great. And then just final last one, good to hear all the guideline on $5 million of acquisitions noting it’s a guideline. But any reason to expect you won’t be able to get the same rates of ROI in accretion in future acquisitions and that you’ve gotten on past ones. And then also what’s the likelihood and potential so you get even more accretion since you have a greater scale and you load these things on to it, a bigger network probably rip more costs out? Thank you.

Ron Clarke

Yes, that’s another I think good question. So the first part of that I’d say is deal specific. So every deal we look at that we elect to do we’ve got some thesis of how we can make a lot more money. So I’d say ones that we do that’s basically – the only reason we go forward, Glenn. We believe we can get a much bigger number.

Glenn Fodor - Autonomous Research

Got it. Thank you.

Operator

Our next question comes from the line of Darrin Peller with Barclays. Please go ahead.

Adam Carron - Barclays

Hey guys, how are you? This is actually Adam here on for Darrin. Just a quick one on the revenue guidance, you just kind of talked about your expectations for FX. Is there anyway to sensitize what the revenue growth guidance would have been if you used the fourth quarter average exchange rate or even a constant current growth rate?

Eric Dey

Adam, are you talking about for the full year budget for next year?

Adam Carron - Barclays

Full year guidance, yes, revenue guidance.

Eric Dey

We really didn’t look at it that way, obviously there is – we’re in a number of different geographies around the world so exchange rates are moving in different directions. Our two big currencies that have the most impact were obviously the pound which is then moving more favorably towards the end of the year versus the Brazilian Reais which is actually been moving more unfavorable kind of throughout the year. In terms of average I don’t have that calculation in front of me.

Adam Carron - Barclays

Okay. And then secondly we talked a little bit about some of the synergies that you guys are going to look to recognize on some of these more recent deals in the back half of the year into 2015. Just wanted to see where you guys are at from earlier deals particularly the AllStar acquisition and CTF in Brazil. What the existing runway is there for synergies and what we should be expecting in 2014?

Ron Clarke

Yes, Adam, it’s Ron. I’d say we made good progress, both of those businesses have significantly higher profit than when we acquired them. I’d say particularly in the AllStar case it would be significantly more profit planned again here in 2014 and probably we’re getting a little later inning, I’d say in the CTF plan what we’re kind of go in a different direction there with a new product. So I’d say that one we’re really chasing kind of revenue growth more than profit growth this year.

Adam Carron - Barclays

Great. That’s very helpful. Thanks a lot guys.

Operator

And our next question comes from the line of Tien-Tsin Huang with JPMorgan. Please go ahead.

Tien-Tsin Huang - JPMorgan

Great. Good afternoon gentlemen. Just a few quick ones I hope if you don’t mind. Just on the – you get a lot of questions about emerging markets as you talked about FX already. Can you give us a sense of what’s going on the ground in places like Brazil, Russia, any surprises there and roughly how big now is the emerging market or maybe if you can just give Brazil as a percentage of revenue?

Eric Dey

Hey Tien-Tsin this is Eric. On the ground perspective I would say really we don’t see a lot going on from an economic perspective, I think our volumes were kind of where we expected them to be, I don’t think that the GDP in both of those markets I think is still up. So I think still kind of good from our perspective. From an FX perspective unfortunately the pound going in one direction and you got the British – the Brazilian Reais heading into other direction. So those two currencies has effectively mostly offset each other.

Tien-Tsin Huang - JPMorgan

Yes.

Eric Dey

So, not a lot of headwind in FX if that stays the course.

Tien-Tsin Huang - JPMorgan

Alright, understood. Let me just I guess I’ll ask about the Europe market obviously with WEX talking about the SO deal. Just curious what the implications are of that, any implications to the Shell UK portfolio and maybe just organic, inorganic growth there competitively, any thoughts there?

Ron Clarke

Can you ask Tien-Tsin that question again, what’s the question exactly.

Tien-Tsin Huang - JPMorgan

Yes, I’m sorry, Ron. Just the WEX gave a lot of airtime to the SO deal seems pretty interesting on their side from a platforming standpoint. So my question is does it change the competitive landscape at all implications to say your Shell UK deal that you have launched in the past. Just trying to get a sense of the bad debt changes of the endmarket?

Ron Clarke

Yes, I mean I think a, it’s – a number of those things are still ways away.

Tien-Tsin Huang - JPMorgan

Sure.

Ron Clarke

B, I would say it’s a very big phase, it’s historically been all oil companies. So I think again there is just plenty of runway over there if we have the right product set. So I’d say stay-tuned again for our plans there.

Tien-Tsin Huang - JPMorgan

Okay, okay. Two more just workforce payments I mean when you talk about workforce payments, does that look like some of the stuff that (indiscernible) does vouchers etcetera. Just trying to get a better definition of that?

Ron Clarke

Yes, when we use that word Tien-Tsin we’re really talking about payments that go between the employer and the employee.

Tien-Tsin Huang - JPMorgan

Right.

Ron Clarke

Fundamentally reimbursing. So we’re not really in “corporate payments” like a bank, do in (NYSE:AP) or doing what WEX does. So our game is basically to call on people that deal with get money to employees and so that whole line of products kind of fixed in there whether its tolls or food or obviously fuel or hotel. It’s all basically money moving from the employer to the employee. So we like that space. That administrative ease is really well liked.

Tien-Tsin Huang - JPMorgan

Got it, okay. Last one just kind of clarify some of the numbers that you gave a lot of good data here. Just acquired revenues in the fourth quarter and if I heard correctly fiscal 2014 if call it half of that’s going to be inorganic versus organic. That would imply a $100 million in acquired revenues for 2014 is sort of the base case. Am I doing that math correct guys?

Ron Clarke

Yes, that the ballpark is kind of a couple of $100 million in total which his low 20 so it’s kind of 9 to 10 is our organic view and kind of 10 to 11 is the (DOP).

Tien-Tsin Huang - JPMorgan

And then the fourth quarter Ron I apologize?

Ron Clarke

The fourth quarter I’d say because of some of those headwinds it would be I guess the year was about 50:50 kind of low teens organic to the full year and about 27 in total. So I’d say it was probably 55 to the full year and maybe a little higher Tien-Tsin in the fourth quarter because we had some of the headwinds that Eric pointed out in the quarter.

Tien-Tsin Huang - JPMorgan

Got it.

Ron Clarke

So I think the acquisition piece would have been a little stronger than that in Q4, but again we expect in our plan so that re-settle out basically its 50:50 which is that we’ve been on I think consistently try to grow the base business around 10 and then see what we can get done on top of that.

Tien-Tsin Huang - JPMorgan

Yes, understood. Thanks for the update.

Ron Clarke

Good to talk to you.

Operator

Our next question comes from the line of Smitti Srethapramote with Morgan Stanley and Company. Please go ahead.

Smitti Srethapramote - Morgan Stanley and Company

Yes, thank you. Just wondering if you could give us a little bit more detail on the CST outsourcing deal that was announced today, I am assuming the numbers from the (DLs) are included in your 2014 guidance. Just wondering when the revenues will start hitting the bottom line for this deal?

Ron Clarke

Yes, Smitti, it’s Ron. So I’d say our plan there is probably late second quarter in terms of that program. So we’re taking over a portfolio and selling the product. And I characterize is kind of a single digit million deal for us.

Smitti Srethapramote - Morgan Stanley and Company

Got it. So single digit sort of millions sort of run rate once it sort of fully ramps up by Q3?

Ron Clarke

Correct.

Smitti Srethapramote - Morgan Stanley and Company

Got it.

Ron Clarke

And again I think that the interesting part and one of the reasons we included this is really the focus on new markets in Canada, we won this Husky thing when we announced that four or five months ago.

Eric Dey

Correct.

Ron Clarke

So we’ve got two of these and now we have a product Smitti that works there and so we’re going to sell it directly and we’ve got these two accounts, Husky also plan to kind of go live in Q2. So come the second half of 2014 FleetCor will have some decent business in a market that we had effectively zero revenue in last year. So that – this I think part of the call out on this is to make the point that we try to find ways we get into important markets I think Canada is just inside the top 20 in terms of biggest. So we’re pleased with that.

Smitti Srethapramote - Morgan Stanley and Company

Got it. And then maybe just a follow-up question on telematics. Just wondering if you guys have received inbound inquiries from your current customers on a global basis since you completed the deal back in Q4 last year?

Ron Clarke

Yes, we’re – yes it’s another good question. We’re early in that but I’d say the early returns we’ve restructured and integrated to sales groups, this NexTraq company we bought is actually here in Atlanta. And so we’ve got now a group of those telematics sales specialist calling into the FleetCor client base with the goal to prove out whether there is an interesting cross-sell and I’d say it’s very early but I’d say very encouraging so far.

Smitti Srethapramote - Morgan Stanley and Company

Great. Thank you.

Operator

Our next question comes from the line of Tim Willi with Wells Fargo. Please go ahead.

Tim Willi - Wells Fargo

Thanks, and good afternoon. Just a couple of questions here. A lot of other stuff has been covered. Eric in terms of interest expense is what we saw in the fourth quarter a pretty solid run rate for 2014 on a quarterly basis?

Eric Dey

I kind of called out the interest expense in my guidance, Tim. We’re expecting about $24 million of interest expense next year and that will be spread pretty ratably throughout the year next year.

Tim Willi - Wells Fargo

Okay, thanks, sorry. I must have missed that, I apologize. And then – and second is regarding operating leverage and margins, obviously a lot is going on here with new deals coming on at different margin profiles versus sort of the organic base business. Is there any way you could just sort of give some color on margin trajectory of sort of the core base business relative to the drag and improvement of the acquired entities? Are we still seeing appreciable margin improvement from some sort of those legacy businesses or are they a little bit more stable and the margin with on a go forward basis is really driven by the assets you acquired?

Eric Dey

It’s a little of both, obviously we have a lot of organic growth in the existing businesses. We called out in 2013; we grew our business organically kind of 13%, about 4% or 5% of that came from transactions and the remainder of that came from revenue per transaction. So, that would create a lift in margins in the legacy businesses. And then certainly from an acquisition perspective, we generally buy businesses that have a lower margin profile than the company’s average. So, typically we’ll spend the next year or two to improve the performance of those businesses which would obviously then improve margins as well over that period of time.

Tim Willi - Wells Fargo

So, just inferring from that, it would see them like is it a reach to think about, there is probably margin expansion sitting here for the next 24 plus months if you don’t do any other acquisitions from this point?

Eric Dey

I don’t know 24 months is the right answer to high or low, but I would say the answer to your question is yes. I mean clearly we’re going to improve the performance of the businesses that we own and we’re going to continue to grow the existing businesses organically.

Tim Willi - Wells Fargo

Okay.

Eric Dey

Given– again given the fixed cost nature of our business, approximately two-thirds of our costs are fixed; some of the majority of the improvement in revenue goes to the bottom-line.

Ron Clarke

Again remember Tim its Ron. That we’re constantly trying to sell higher revenue per trend, products which you see in our numbers and so obviously that contributes the higher margins. Right, those are products that are sold our step up products – they carry higher revenue per trend generally carry higher margins. So, it’s a density and scale thing and it’s the product mix thing.

Tim Willi - Wells Fargo

Yes.

Ron Clarke

But you’re right. There is a lot of moving parts right, it’s not only the other businesses but it’s things like stock comp and deal cost and severance cost so, lot of things I think make it a difficult thing.

Tim Willi - Wells Fargo

Yes. I appreciate that. Thanks very much for the color. Thanks.

Operator

(Operator instructions) Our next question is a follow-up from David Togut with Evercore. Please go ahead.

David Togut - Evercore

Thanks. Just a quick modeling related question, Eric. What’s the right quarterly run rate for SG&A for 2014? I’m thinking about the stock comp number in Q4 and just wondering should we think about stock comp being more ratable through the year or does most of it kick in Q4?

Eric Dey

No, it was kind of a – the $10.6 million in Q4 was more of a one-time kind of hit it with a catch-up entry. So, we booked an entire year with a stock comp in the fourth quarter for that one particular item. We spent about $27 million in stock comp in 2013. From a modeling perspective, we’re currently assuming that it’s going to be flat next year. But our Compensation Committee meet toward the end of the first quarter and usually we have new stock grants that are issued at that point in time. So, that stock comp number will probably increase after that comp committee meeting. So, we can give you a better number kind of after that point in time.

Ron Clarke

It’s Ron. If your question is kind of point-to-point the answer is it would step down significantly, right. So, our Q1, Q2 operating expense is planned to be dramatically lower than what we reported in Q4 dramatically lower.

Eric Dey

But from a stock comp perspective I mean it’s generally ratable throughout the year, there is not a higher number generally in Q4 than there is in any other quarter, there is just happen to be that in 2013, but 2014 I just spread it throughout the year.

David Togut - Evercore

So I guess just the final piece of this is, should we expect SG&A to grow in line with revenue in 2014?

Eric Dey

It is – it’s obviously going to be of less I mean we get economies of scale from our business. Our margins what we’re planning at 22% increase in revenue and there is a 22% also increase in kind of cash net income per share. There is a number of reasons for that, one is we get the full year effective acquisitions that are kind of hitting into the year. So, again that trajectory of those acquisitions is such where you see most of the improvements coming in the third and the fourth quarters and exiting into 2014, 2015.

We also have a number of below the line items that are impacting our cash EPS next year, interest expense is going to be up pretty significantly due to the financing of the deal. So, we’re calling out $24 million of cash interest expense versus kind of $16 million this year. We also have a higher income tax rate next year, we’re going up kind of 1% which is where it’s kind of about $0.05 a share. And then the share count, it’s actually going up about a 1 million shares as well.

Ron Clarke

But I think David in terms of the model think about it is the revenue is on a curve each quarter going up and I think about the operating expenses being much more flat and that goes with that we’re restructuring the expense side of these businesses and putting in these programs. And so that’s what contributes really to the earnings growth getting better each quarter is there really won’t be growth in expenses any significant growth in expenses as we roll through the quarters here.

Eric Dey

Yes.

David Togut - Evercore

That’s extremely helpful clarification. Thank you very much.

Eric Dey

Good to talk to you.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes the FleetCor Technologies, Inc’s fourth quarter earnings conference call. Thank you for your participation. You may now disconnect.

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