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Executives

Ron Clarke – Chairman and Chief Executive Officer

Eric Dey – Chief Financial Officer

Analysts

Tien-Tsin Huang – JPMorgan

Tim Willi – Wells Fargo

Adam Carron – Barclays Capital

Phil Stiller – Citigroup

Roman Leal – Goldman Sachs

FleetCor Technologies, Inc. (FLT) Acquisition of Fuel Card Company in Russia Conference Call July 11, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the FleetCor Technologies 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)

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

Eric Dey

Good afternoon, everyone and thank you for joining us today. By now, everyone should have access to our press releases announcing that we have successfully completed the previously announced acquisition of CTF Technologies, the leading fuel payment platform provider in Brazil and that we have acquired a leading Russian fuel card company. These press releases can also be found at www.fleetcor.com under the Investor Relations section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statement regarding the transaction between FleetCor and CTF Technologies and the Russian fuel card company. Our remarks may include discussion on future financial and operating results, benefits of the transaction, and other statements about management’s future expectations, beliefs, plans or prospects. They are not guarantees of future performance and therefore you should not put any undue reliance on them. These statements 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 our press release and our 8-K filed with the Securities and Exchange Commission.

In addition, during the course of this conference call, we may make reference to non-GAAP financial information, including adjusted revenues and adjusted net income. This information is not calculated in accordance with GAAP and maybe calculated differently than other companies’ similarly titled non-GAAP information. Quantitative reconciliation of our historical non-GAAP financial information to the most directly comparable GAAP financial information are included in our filings with the SEC, which are also available through our website. We also ask that you limit your questions to only be about the acquisition. We will be hosting an earnings call in early August to discuss the second quarter.

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

Ron Clarke

Thanks, Eric. And as always, thanks to everyone for joining the call today. The purpose of this call is to update you on the status of a couple of recent FleetCor acquisitions. So, first off, we want to confirm today that we have officially closed our CTF acquisition in Brazil effective July 3. And just as a reminder, CTF is a pretty meaningful fuel payments company in Brazil. It serves long-haul fleets more than local predominantly fee-based. Its great relationships with Brazil two largest fuel retailers, Petrobras and Ipiranga and its settlements are handled by Brazil Bank leaving CTF out of the receivable financing and credit extension business, which we like.

Again, our primary motivation for acquiring CTF was to get positioned in Brazil, a large under-penetrated and obviously attractive fuel card market. So, today we’d like to reconfirm our expected second half accretion from CTF, which we estimate at $0.04 to $0.05 at cash EPS. This is the same range we communicated back in May when we signed the definitive doc.

So, let me move on now to our next transaction, which is our second major fuel card acquisition in Russia, which we closed on June 15. This Russian fuel card company is a technology leader in fuel card system and it serves both major oil clients like Rosneft and Gazprom along with hundreds of independent card issuer. It’s basically a partner’s business and that it supplies card technology to card issuers meaning it does not issue cards directly to end customers.

This company’s technology is the de facto standard in Russian fuel card systems. It uses an old-fashioned software license model that we hope to transform into an online SaaS model over time and it’s pretty sizable. Approximately, 30% of all commercial fuel purchased in Russia run through this company’s technology and about 80% of all fuel purchased on a fuel card runs through this company’s technology. So, 30% of all commercial fuel and 80% of all fuel card purchase fuel run through this company’s systems.

So, our motivation here is once again is the market and strengthening our position in attractive economies. Russia has annual commercial fuel purchases of approximately 30 billion liters, about 15% of the US with only one-third on fuel cards today, meaning the other two-thirds are still on cash and voucher. So, obviously, lots of runway for further penetration. We expect this new Russia deal will deliver approximately $0.02 of incremental cash EPS in the second half of this year. So, along with CTF, we are estimating a total of $0.06 to $0.07 of combined incremental cash EPS in the second half.

So, in conclusion, we are delighted to announce the closing of CTF and the closing of our second Russian fuel card company. As we have said repeatedly, we are interested in gaining positions in attractive fuel card markets, specifically those that are large, under-penetrated, growing, and are balance sheet light. So, both Brazil and Russia fit this profile and we have acquired attractive assets in both places on which to bill. So, obviously, we are pleased with that.

So, with that, let me turn the call back over to Eric to provide a few more financial comments. Eric?

Eric Dey

Thanks Ron. Just to recap, this morning we announced that we have completed the acquisition of CTF Technologies for $180 million and for that we have acquired all the outstanding stock in the business. FleetCor financed the transaction with existing cash in the business and through its existing debt facility. The acquisition was carried out pursuant to a plan of arrangement under the Business Corporations Act in Canada and was approved by final order of the Supreme Court of British Columbia. The transaction closed on July 3.

In addition, today, we also announced that on June 15, we completed the acquisition of a leading fuel card company in Russia. The acquired company is the Russian leader in fuel card systems and serves major oil clients and hundreds of independent fuel card issuers. We have not disclosed the terms of this transaction. We expect this transaction to be accretive to both revenue and profit in 2012 and expect the acquisitions to add at least $0.06 to $0.07 in adjusted net income per diluted share including deal and restructuring costs for the remainder of 2012.

After the completion of this acquisition, we have approximately $300 million of unused capacity in our revolving credit facility. As a result of the additional borrowing, we expect our leverage ratio to increase slightly to approximately 1.7 times pro forma EBITDA, well below our covenant level of 3.25 times. As a reminder, adjusted net income is GAAP net income adjusted to eliminate non-cash stock-based compensation expense related to share-based compensation award, amortization of deferred financing cost and intangible assets, and the amortization of the premium recognized on the purchase of receivable. We will be providing additional guidance related to 2012 on the second quarter earnings call in early August.

With that said operator, we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Glenn Fodor with Morgan Stanley. Please go ahead.

Unidentified Analyst

Hi, this is (indiscernible) for Glenn. Thanks for taking our question. Just can you talk about how this business that you are acquiring is different or similar from your existing operations in Russia? And then how much more do you need to do in Russia to get your capabilities to where you want them to be?

Ron Clarke

Yeah, this is Ron. The primary difference is this, the first business that we acquired we are actually the card issuer. So, we actually serve end clients. And this business is again a card technology business and it serves card issuers actually people like us in our first business.

Unidentified Analyst

Okay.

Ron Clarke

So, be a little bit like an analogy, be like a bank, right, which use Visa or a MasterCard versus First Data, who is providing the processing capability for the bank.

Unidentified Analyst

Understood. And then how much more do you need to go in Russia to get your capabilities where you want them to be, do you think you are – do you have all the infrastructure you need in place? All the technologies remain in place in Russia or do you think you might be more acquisitive in Russia still?

Ron Clarke

Yeah, look we’re never satisfied, but I’d say, we’ve got two attractive assets that are different and we’ve got those certainly the largest independent position in that market. So, I’d say we’re comfortable with the set of capabilities that we have and we are pretty confident we can run pretty fast with it. So, I’d say we’re happy.

Unidentified Analyst

Great, thank you.

Operator

Thank you. The next question is from the line of Tien-Tsin Huang with JPMorgan. Please go ahead.

Tien-Tsin Huang – JPMorgan

Hi, thanks. Hey Ron and Eric.

Ron Clarke

Hey, Tien-Tsin.

Tien-Tsin Huang – JPMorgan

Hey, thanks for hosting the call as always. So, I guess it sounds like it’s an issuer processor I’m just curious what the pricing model here is? Is it sort of paid per active card kind of situation or is there a – you got to cut out the spend, I’m just curious how to look the model that works?

Ron Clarke

Yeah, I mean at the top-line Tien-Tsin, their current model is not the model that we want. So, their current model is the quote old-fashioned software license. So, if you are a card issuer, they provide their system to you, call it on a CD-ROM, you run it heavy on the client site. And then they provide networking software that allows you to talk to other people to join up your network and then they charge for related things like maintenance and service and cards, things that make the entire system run. And obviously, our idea is to take that system and run it in a SaaS model, get out of the heavy client delivery model, and have these issuers basically access throughout the web, and then change obviously the pricing model to a per-click model.

Tien-Tsin Huang – JPMorgan

Got you. So, obviously, you tell which is that, I mean, how long or challenging would that conversion be and I’ll call it through, it would be obviously I know you gave us some accretion numbers there, but I am just curious what the process would be?

Ron Clarke

Yeah. I would say that the timeline is more a function of market reaction than capability. We are in this game obviously of running most of fuel card systems all over the world. So, it’s not really a technical complexity, it’s really kind of whether the market is happy with hey, I can take you off of maintaining your own stuff. I can put you on real-time off, so you don’t use blacklist. I’ll take you out of the infrastructure business of having to maintain your stuff. I’ll take you out of being a clearinghouse doing network accounting. So, there is a whole bunch of benefit that we can deliver and the question is when we tell you one of our customers, will you be happy or sad is the question?

Tien-Tsin Huang – JPMorgan

Okay, that makes sense. And I’m curious that – I guess, were they a client was they call a client of this company and I am curious what your share is on the issuing side and what kind of customer concentration they might have?

Ron Clarke

Yes, and low.

Tien-Tsin Huang – JPMorgan

Low share?

Ron Clarke

Yeah, you ask the client and…

Tien-Tsin Huang – JPMorgan

Well, how is your share?

Ron Clarke

Yeah, low.

Tien-Tsin Huang – JPMorgan

Okay.

Ron Clarke

Good question.

Tien-Tsin Huang – JPMorgan

It seems like you’ve got sort of some interesting network potential if you were to make these conversions, etcetera, so okay. So, last question for me, just have this deal come about, I think I ask you about every time, so forgive me, but I am just curious how this deal came about, how you did the diligence etcetera? It sounds like there was already a contractual relationship there, so as you are comfortable to bring it in?

Ron Clarke

Yeah. This was not a shop deal. This again is this line about having our feet on the street in these places, so we obviously met the owners of this business. I met them three or four years ago. We’ve been talking about this deal literally since we bought the first business and (the class) we then found it was the right time. So, yeah, local relationships that we had for a while.

Tien-Tsin Huang – JPMorgan

Okay. I know I said that was my last question. You’re not going to hedge any, because you are on both this deal and the Brazilian deal is that correct?

Eric Dey

Yeah. Tien-Tsin, this is Eric. Yeah, we have no intention to hedging anything. I mean, again, it’s our – our philosophy is to not repatriate any money back to United States. And as a result of that, we really don’t have a need to hedge any money. We want to use money that we accumulate overseas basically to acquire other attractive assets.

Tien-Tsin Huang – JPMorgan

Got it. Thanks a lot guys.

Ron Clarke

Thanks.

Operator

Thank you. The next question is from the line of Tim Willi with Wells Fargo. Please go ahead.

Tim Willi – Wells Fargo

Thanks and good afternoon. Just some questions. One is (indiscernible) if I missed it, but could you maybe give us a feel for what the organic top line look like, I mean low double-digit, high double-digit, 20% or just anyway we can sort of think about this how this operation was growing?

Eric Dey

Tim, which business are you referring to the Brazilian business or the Russian business?

Tim Willi – Wells Fargo

I am sorry, the Russian business.

Eric Dey

From an organic perspective, we think it’s probably in the single-digit range for now. And again, our objective is to basically change the model of the business and obviously to take that to a different place.

Tim Willi – Wells Fargo

Okay. And is the single-digit more a function of the revenue model versus the underlying growth of the customers in those businesses?

Ron Clarke

Yeah, Tim its Ron. I think, simplistically, this is a game of value chain. So, what the company does for customers today is somewhat limited and so how they charge them is also somewhat limited. And so the game here is yes, always adding some more card issuers, but the game is to start doing more things for these card issuers like online ops and running their infrastructure and so on and that’s the juice. So, if the answer is, do we think this acquisition is a high growth engine, the answer is absolutely and many double-digits, a very high growth engine.

Tim Willi – Wells Fargo

Okay. The second question I had is, does this at all is your solution that penetrate you beyond Russia with this kind of service or you had that capability, call that’s a stupid question, but just (indiscernible) you expand into other countries where you are not currently at, but not necessarily have to acquire and sort of make that first move into a geography you’d like to be in and maybe try with all the issuers?

Ron Clarke

Yeah, I would say generally no. There is nothing unique about their system per say other than they established it and it kind of became the de facto standard. I would say the attractive side benefit here is you heard us repeatedly say we are interested in major oil relationships like we have here with BP and Chevron and obviously with Shell in Europe. And so by definition, we picked up two or three very large major oil relationships. These people in Russia become our client. And I think the answer that those Russian oil companies are aggressive and they have a lot of business outside of Russia. So, I would say the extension benefit of this transaction is related to the extension of those relationships.

Tim Willi – Wells Fargo

Okay great. Thanks very much.

Operator

Thank you. The next question is from the line of Darrin Peller with Barclays Capital. Please go ahead.

Adam Carron – Barclays Capital

Hey guys, how are you? This is Adam Carron here for Darrin. I was wondering – how is it going? I was just wondering if you guys could provide a little bit more color in terms of what we should be expecting in terms of a revenue contribution from both of these acquisitions over the back half or if not maybe at least throw a little bit more color around the margins?

Eric Dey

Yeah, hi Darrin, this is Eric. We haven’t disclosed any of the specifics around each of the deals at this point in time. So, you really can’t comment for now.

Adam Carron – Barclays Capital

Okay, but I guess historically or I guess more recently we have seen acquisitions with a lower margin profile than FleetCor is going to average and is it fair to assume that this would be kind of in line with that as well?

Eric Dey

That is correct.

Ron Clarke

Yes, I think that’s true generally, Adam, right is that the way other people run businesses versus the way we run businesses and the scale that we bring. So, these would both be below the FleetCor line average, but heading to the FleetCor line average that’s the direction I’ll have.

Adam Carron – Barclays Capital

It sounds good. Alright, thanks guys. I appreciate it.

Ron Clarke

Thanks, Adam.

Operator

Thank you. The next question is from the line of Phil Stiller with Citigroup. Please go ahead.

Phil Stiller – Citigroup

Hi guys. Congratulations on this deal.

Ron Clarke

Hey Phil. Thanks.

Phil Stiller – Citigroup

I guess I had a question related to revenue mix, I mean, for the overall business given that the acquisitions you guys have made over the past year. If you think about the revenue that’s tied to fuel prices and spreads, how does that change kind of on a pro forma basis as a result of these acquisitions?

Ron Clarke

Well, these businesses are more fee-based businesses, and obviously as a result of that, the amount of revenue that we have that is sensitive is the movement in the retail price of fuel or is spread based. As a percentage of our overall revenue is clearly would go down.

Phil Stiller – Citigroup

So…

Ron Clarke

Once you factor in the mix of some of these new businesses that we’ve acquired. Yeah, those are effectively deals, so if you take the deals we have done in the last year, we did a Mexico deal, we did the AllStar deal, we did the CTF Brazil deal, and now we’ve done a Russian deal. All four of those approach zero in terms of the fuel price sensitivity to those four businesses, approach zero.

Phil Stiller – Citigroup

Okay. So, I guess once we get the revenue metrics from these two deals, we’ll be able to get, I guess, more precise on what those end exposures are. Can you talk about the competitive landscape of this Russian business, who you guys are competing with there and how ownership of PPR potentially impacts their relationships with other card issuers?

Ron Clarke

Yeah. Again, if you heard the stats, Phil, basically it’s a rough number of 30 billion liter per year commercial business and keep it simple a third if you run through fuel cards, and then 80% of what runs through fuel cards runs through this company’s system. So, effectively, I hope 80% of all fuel cards run on their system, so they are part away the market leader in it. So, the competition again is really non-fuel cards right, two-thirds of the commercial fuel bought Russia today is still with paper vouchers and cash. So, if you listen to our sales people over there or the oil company sales people, that’s fundamentally who they are competing with. They’re competing to take people off the cash and vouchers.

Phil Stiller – Citigroup

Okay. And I guess just last question, is it fair to assume that this deal was one of the two that you guys had (indiscernible) on?

Ron Clarke

That is correct. We try to do what we say.

Phil Stiller – Citigroup

Okay, great. Thanks guys.

Operator

Thank you, ladies and gentlemen. (Operator Instructions) The next question is from the line of Julio Quinteros with Goldman Sachs. Please go ahead.

Roman Leal – Goldman Sachs

Hi guys. It’s Roman Leal. Thanks for taking my questions.

Ron Clarke

Hi, Roman.

Roman Leal – Goldman Sachs

Hey, excellent. So, just given your incline of this Russian business and given sort of the fact you bring it in-house, there is presumably some cost savings there. How much of the $0.02 of incrementally be as which you could attribute to that cost savings versus the revenue contribution?

Eric Dey

Zero from the cost savings.

Roman Leal – Goldman Sachs

To very minimal?

Eric Dey

Zero.

Roman Leal – Goldman Sachs

Okay. And as far as the pipeline, I know you said this is one of the two LOIs, but presumably there could be more, what does the pipeline looks like as far as acquisitions?

Ron Clarke

Still busy. We’re working on my hand up multiple opportunities as we’re sitting here today.

Roman Leal – Goldman Sachs

And these are mostly international or is there some domestic as well?

Ron Clarke

No comment on that other than we are always interested the most, if we’ve said it once it’s we are interested in attractive market. So, I’d say again our preference and priority is to find deals in other markets.

Roman Leal – Goldman Sachs

Got it. Okay, thank you.

Operator

Thank you. That is all the questions that we have today. This does conclude the FleetCor Technologies conference call. You may now disconnect and thank you for your participation. Have a nice day.

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