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Executives

Eric Dey - Chief Financial Officer

Analysts

Roman Leal - Goldman Sachs

FleetCor Technologies, Inc. (FLT) Goldman Sachs Financial Technology Conference September 13, 2012 9:10 AM ET

Roman Leal - Goldman Sachs

Hi, everyone. I am Roman Leal. I am part of the IT Services Team, [Kantaros], primarily focused on campaign and processors, so hello for everyone I haven't been met personally. It's a delight to be here with Eric Dey, CFO of FleetCor, a specialized processing model, focused in a very vertical in payments of the fuel segment, and actually one we used as a segue kick off with the in short to the FleetCor business model, but what is your end market like? What's the value proposition of FleetCor, and perhaps your competitive positioning?

Eric Dey

Okay. For those of you who don't know, let me start out with giving you just a very brief overview of kind of what FleetCor is and how we go-to-market. Today, we are a leading global provider of fuel cards and workforce payment product of the businesses.

Our products are primarily designed to help businesses better control employee spending and provide merchants with the loyal customer base. Today, approximately 90% of our revenue is derived from our fuel card related products and 10% of our revenue or so is derived from our other complementary products, such as we have a hotel card product in the United States for the business called CLC. We also have a telematics product that we are offer in Europe, and we have a food card and voucher business that we offer today effectively in Mexico.

We market our products to effectively businesses of all shapes and sizes around the world and governmental entities. We have operations in 23 countries around the world today, but primarily really we are in about six countries, where the majority of our revenue is. We are in places like the United States. We are in the U.K. We're in the Czech Republic. We are in Russia, and more recently, we are in Mexico and Brazil.

Over the last seven or eight years, our company has experienced a tremendous amount of growth. Since 2003, our revenues have grown at a compounded annual growth rate of approximately 28%, and our adjusted net income or cash flow has grown around 41% compounded annual growth rate over that same period of time, and half the growth or so has come from organic means, and the other half of our growth really has come through acquisitions that we've completed over that period of time. Since 2002, I think, we've completed what has now been about 50 different acquisitions around the world, so we are very acquisitive company.

We've been able to grow our company, primarily by using a three-pronged growth strategy. We always like to this kind of internally. We build, we buy and we partner. We build the businesses that we own by investing in sales and marketing and growing the businesses the old fashion way organically. We also buy businesses that have very attractive business models similar to our other businesses, and more recently we like to buy businesses that are in more attractive geographies like the emerging markets. Again, as evidenced by some of the recent acquisitions that we've done in Russia, Mexico and Brazil of late. Then finally, we like to partner with major oil companies. I mean today, we have significant strategic relationships in the United States as an example with merchants like BP and Chevron, where they've outsourced the management of their commercial card portfolios to companies like ours, and more recently with Euroshell.

We've got a very diversified business model. 60% or so of our revenue is derived from our businesses in the United States and 40% or so of our revenue is derived from our businesses that we own internationally. We also get about 55% of our revenue from our merchant relationships and 45% or so of our revenue comes from our relationships with all of our customers. We also have very, very low customer and merchant concentration, so if anyone of our customers or merchant left us today, it would have very little impact on our business.

Our financial model today, we also believe is tremendous. We have a transaction-based model. Our revenues are recurring in nature. We have to sell very little amounts of our revenue from year-to-year in order to continue on with our revenue stream kind of from year-to-year, and we have very attractive margin profile. We have over 50% EBITDA margins today.

Roman Leal - Goldman Sachs

I guess, I would start from a bird's eye view. You are in a lot of markets. What are the key differences perhaps in those geographies, maybe variations in your business model, how you go to market in these geographies and the competitive position.

Eric Dey

You know what's interesting is? We market our products using every mean possible. I mean, we have feet on the street. We use telemarketing, we use direct mail, we use the web. We go to third-party partners to help market our products.

Today, we don't use all of those means in every country, because we are relatively new into some of these countries, but it's our objective basically to introduce those other marketing techniques as we get in and start to implement some of the businesses that we are into.

Roman Leal - Goldman Sachs

If we stick to North America, and dig a little bit deeper, is this still a growth market or are the certain verticals are still growing faster than others, or are you at market share gain point?

Eric Dey

The North America segment is still a growth market for us. I mean, if you look at our first couple quarters of the year, we've grown our North American business about 15% or so organically. We do that by doing a couple of things. We obviously were investing in sales and marketing. We grow the amount of transactions that we have, and we also increase the amount of revenue that we have by growing revenue per transaction. Again, simplistically, we do that in a couple of ways.

Again, by investing in sales and marketing, we are actually bringing in customers that we are marketing products to that have higher revenue per transaction-type product, so when we add those kind of more value-added customer inherently it increases revenue per transaction. We also up-sell products and services to our existing customer base.

One of the products that we've been very successful at over the last couple of years is marketing our extended network cards and we've done that, again, primarily to our processing related customers, and our processing related customers are effectively customers where we do very little work on behalf of those customers. Meaning, of this third-party petroleum marker that will come to us and ask us to process cards branded in their name, so effectively we earn very low amounts of revenue per transaction, but we offer other products and services to those customers, and when we do that, we earn more revenue per transaction, so it's just a couple of example of some of the things that we do.

Roman Leal - Goldman Sachs

We've definitely seen that in the model over the last several quarters, where revenue (Inaudible) have kind of offset the modest growth in transaction, but how much more pricing leverage do you think you have in North America, before you kind of need that transaction growth to kick in?

Eric Dey

Well, we always have transaction growth. We have three different pieces of the North American basis, the way I look at it, right? We've got a big direct business, which includes our MasterCard product. We've got a partner business which encompasses many, many different kinds of businesses including big processing related businesses and then we've got our hotel card business in the United States.

If you recall from the last couple of earnings calls, we called out a couple of those businesses as performing exceedingly well. Our direct business, particular our MasterCard products has been growing at just under 50% over the last year or two.

Our CLC business, which is our hotel card product in the United States, is also there growing at a very, very aggressive rate kind of in the mid-teens or so, and our partner business also growing kind of the single-digit level is made up of a number of different businesses. A number of those businesses, we actually don't control the customers. The customers are actually controlled by the third party petroleum marketers, so those businesses actually don't grow so to the extent we can continue to be successful in signing up new partners and signing up new CLC customers and new direct customers. We are going to continue to, A, fill the bucked with new customers that we can up-sell products and services to and we are also going to, again, reap the benefits of positive mix, because again our focus is on up-selling and selling products at a higher than the average revenue per transaction, so we think that we got a lot of runway left in the business. I think is the simple answer to your question.

Roman Leal - Goldman Sachs

Okay. You have relation with many merchants' gas stations that I think could be considered like a traditional merchant acquiring processing relationship. Where do you make up all the new entrants that are coming into the traditional payment space? Do you see any near-term or long-term threats, whether it'd come from a traditional player, or merchant acquirer bankable interest space or one of the new entrants that come into space?

Eric Dey

You know, there really hasn't been a new entrant in the fleet card space in 20 years that I can think of, so we're really not that concerned about it. If you look at new competitor, there's lots of barriers to entry. The first thing in new competitor would have to do in our space is they have to go and hire bunch of IT people and actually develop a system that actually works.

Great. Now I have got a system networks. Now what am I going to do? Now, I got to go out and I got to sign up a bunch of merchants that are willing to accept my product, and after I sign up the merchants, now I got to go out and hire sales people and go sign up actual customers that will accept my card after merchants and I was able to sign up. The short story is, they come talk to me about 20 years and you may have some business with any scale. We're really not concerned about any new person entering the market. In the United States, those people would be a little bit late to the game today.

Roman Leal - Goldman Sachs

Okay. Shifting to international. You recently did some acquisitions into some emerging markets. You have a leading share in Russia, into Brazil, into Mexico. What are perhaps the opportunities? Can you size the opportunity there? maybe the addressable market. How far are we in the penetration curve and what's the strategy there?

Eric Dey

Again, one of the reasons that we like those markets is because the penetration level is extremely low. If you look at the United States as an example, I don't know, something like 80% of our fuel transactions in the United States are made on some sort of a card product, but if you go to places like Brazil and Russia, which are huge market, something like 10% or 15% of our fuel transactions are made on some sort of a card.

The reason we like those markets is because, there are tons of opportunities there and we believe we are kind of early to the game there, so we've got of runway not only to market fleet and fuel card related products, but perhaps to also get into other complementary products as well in those geographies.

Roman Leal - Goldman Sachs

What are the competitive dynamics there? I mean are you basically don't (Inaudible).

Eric Dey

It varies. There's always some competitors around, but generally speaking they are very, very small. We're always competing to some degree with the major oil partners there, but they don't offer a control card. One of the benefits of our card is, our card can be limited to what it can be used for.

Our card can be locked down, where a fleet operator can designate exactly what they want their driver to actually purchase. It can be locked down to specific gas stations, specific grades of fuels, specific times a day. We capture a lot of information around the transaction and so forth. Those products don't exist in some of those other countries, particularly by the major oil companies.

Roman Leal - Goldman Sachs

Sticking to acquisitions. They contributed nicely to results in the last few quarters obviously, where would you say the other line organic growth of the business is now? I know historically you said over 10% and that's initially your long-term target, but where has it been recently. And now that you have entered a high-growth markets working out, where do they go?

Eric Dey

I think what we said in the past, Roman, is that we are comfortable guiding people to our stated goal of around 10% organically, and I think we are comfortable with that strategy. Obviously, we have lot of different products in a lot of different places around the world. Some of those markets and some of those products are going to at higher rates than other products and other geographies.

Again, look at the United States, it's grown 15% organically over the last couple of quarters, so performing exceedingly well. Clearly, if you look at some of the emerging markets, some of those businesses are actually performing exceedingly well as well.

I would say that in general, the emerging markets are going to contribute more than the line average kind of going forward and the more penetrated markets are probably going to contribute a little bit less. Again, in total, I think we are still very comfortable that we are going to grow this business organically kind of in that 10% range.

Now, what can affect our business to some degree is environmental factors, which is a little bit out of our control. Fuel prices going up and down can impact some of our businesses around the world. Fuel price spreads going up and down can impact some of our businesses around the world. FX rates as an example, 40% of our revenue is international, so that can have a positive or negative impact on some of our businesses, and the economy in general. All that taking put aside, we think again about 10% is the number that we are kind of comfortable with.

Roman Leal - Goldman Sachs

Okay. You mentioned the economy. You also have large exposure to European businesses, particularly your U.K. business. How has the macro backdrop affected that business and what are you doing to offset that backdrop?

Eric Dey

Our U.K. business is actually performing better than expected this year, so we are actually pleased with that. I mean, obviously, the U.K. economy is a little bit different than the rest of the Central European economy, because it is segregated to some degree. I think that from a transaction perspective that economy is relatively flat, but again we think that we just acquired a big business there at the end of last year, company called AllStar, and we've got a master plan for that business, so we are very, very bullish on our U.K. operation today.

Roman Leal - Goldman Sachs

What are some of the verticals or geographies that you are not currently in that you would like to expand in?

Eric Dey

I think what we've stated before is, we are very interested in the emerging markets. We kind of define those as, obviously Russia is a big emerging market. Latin America is a big emerging market, and obviously as evidenced by the fact that we just did a couple of deals down there. Asia, obviously a big emerging market as well. I think there are some opportunities there down and places like India as well are the emerging markets.

I don't want to suggest that we are going to be in all of those markets in the near-term, but those are markets that we would love to get into with a fleet card product or some other complementary sort of a product down the road.

Roman Leal - Goldman Sachs

When you think about the margin profile of the business, how much more leverage do you have? You already above those 2% EBITDA margins and where is that leverage really coming from working out the needle?

Eric Dey

We have to look at it in two different ways. One, if you look at some of the businesses that we've acquired, one of the reasons why we like some of these businesses is because they are undermanaged. We buy entrepreneurially owned businesses in places like Mexico and Brazil and in Russia as an example. Those businesses have lower margin profiles than the rest of our businesses do.

We go in and we go through the diligence process. We are looking at the customer contract. We're looking at merchant contracts, we are looking at IT systems, we are looking at the overall structure of the business and what we see is where we think we can take that business to and we can increase the margin profile of those businesses, so all those places we think we can take those businesses kind of put a line average.

Our other businesses, I mean to the extent that we continue to grow those businesses organically. All the new customers that we are adding in. I mean, generally are brought on at higher than a line margin, and because of the fixed cost nature of our business, most of that incremental revenue that we bring on go straight to the bottom line thereby increasing our margins. Again, we are very, very bullish on where we this business can go both, from a margin perspective and from a profitability perspective.

Roman Leal - Goldman Sachs

Once you tally up all the acquisitions and it's all fully integrated, how much exposure we have to fuel prices and fuel spreads?

Eric Dey

You know those numbers are actually going down. My sense in the latest quarter, we had under, I think that the exact number was 18%, 19% of our revenue which is directly impacted by the movement in the retail price of fuel, and our fuel spread revenue was kind of in that same ranges around 20%.

Most of the businesses we are acquiring of late are more fixed fee kind of businesses, so they either have no or very limited sensitivity to the movement in the retail price of fuel or fuel price spreads, so as a result of that, obviously those other two metrics were actually going down as a percentage of our total revenue.

I just mentioned fuel prices and fuel price spreads for those of you who don't know, those businesses are those two revenue dynamics actually in contrast to one and other, so if fuel prices go down, which is obviously unfavorable for certain of our business that generally has a favorable impact on market spread, so generally those things are kind of a natural hedge towards one and other. We think we have very limited exposure to fuel or the spreads moving around.

Roman Leal - Goldman Sachs

That's very important especially relative to your competitor. What makes your exposure much smaller relative to the competition? Perhaps give us some examples of some of the fees or business models that you deploy that kind of gets you away, diversify away from the...

Eric Dey

First of all, again, we've got businesses all over the world. Again, we are in 23 different countries around the world, although I did mention it's primarily six. Each one of those models in each one of the country is a little different. We have some interchange based models in the United States. We've got a MasterCard product, obviously, because it's more of an interchanged type of a model. That revenue is more sensitive to the movement in the retail price of fuel. We've got other models in the United States that are spread based, such as our fuel product.

We've got other models that are more fixed fee in nature like our partner-type business like our hotel card business. We have most of our European businesses are more 60s, where we get a few from the merchant for participating in our card programs and where we get maybe a fee from the customer to participate in our card programs. As a result of that, obviously there is lower sensitivity to fuel and fuel price spreads. Those are the kind of models that were really kind moving toward versus the latter.

Roman Leal - Goldman Sachs

First Just one more and we'll open it up, so there's been a lot of activity in the over-the-road segment here domestically. It's hard to imagine that a very sexy segment, but what's so exciting about it? The recent acquisitions, how much more competitors are going to get in? What's your edge there?

Eric Dey

I mean, over-the-road sector is first of all not overly exciting. It s very penetrated segment in the United States, dominated kind of by three big merchant chains. The truck stop chains and from a perspective it's dominated by a lot of very large kind of over-the-road customers in the United States.

When you got a dynamic where those customers are going to those large three merchants, it's not a very attractive model, because there is margin compression there. What a little more attractive about that segment is when you get small to mid size customers that are going to truck stops that are outside of that have big network. Though the margin profile of that transaction is a lot higher than the first thing that I mentioned, so it's a bit of a mix bag.

I say that yes, we are after some of the over-the-road customers, particularly the smaller customers, because we believe there is a better margin profile of those customers, but it's certainly not a segment of the business that we are targeting in any big way.

Roman Leal - Goldman Sachs

Okay. Let me pause there and see if there are any questions from anyone in the room.

Question-and-Answer Session

Unidentified Analyst

[NST] and mobile payments becoming more of a reality for the retail businesses, how do you see your business in the FleetCor side being impacted by that, and when in your five to ten year timeline would you need to start adjusting your business to give your customers a mobile option or a NST option etcetera?

Eric Dey

We don't. We are kind of indifferent to the payment method. I mean, if somebody came in and they had a cell phone in their hand, and obviously you see a lot of people doing this now in the retail stores. If a commercial customer had the same thing, well all they doing is swipe in their phone for the transaction. We don't care what the means of making the transaction. We want to grab the transaction itself, and we would still grab the transaction irrespective of whether it's a card or phone or some other means. I mean the technology is obviously getting better regarding the usage of kind of mobile technology, but we are indifferent to it I would say.

Unidentified Analyst

One of the benefits I think that you have is that you are able to give the expense back to the corporate for expense control. How is it that you are able to do that better than banks, and what is the capability of banks to be able to do that?

Eric Dey

Our software is custom designed. We have developed software capabilities or software programs that specifically meet the needs of the fleet operator, and banks just don't have same sort of software. They haven't gone after that market specifically. Banks are interested in grabbing the largest amount of transactions, which are typically more retail related transactions where all you are really doing is billing and collecting from a customer.

A sophisticated fleet manager needs not only does he need control over the usage of the card, where the card usage can be limited, but he is also interested in getting very detailed reports around those transactions and how his fleet drivers are actually operating. That's the kind of functionality we are actually providing to the business and you can't get that from the bank.

Unidentified Analyst

When you sign up a new customer, if you sign up a new corporate who say we are going to give expense management for all your fuel needs. How long is that process, how integrated are you into their systems to be able to do that?

Eric Dey

When you say into their systems, are you referring to the customer?

Unidentified Analyst

Yes. You mentioned that your software is better than banks to be able to deliver that expense systems, but do you have line items that you are able to give that the banks are unable to?

Eric Dey

Some of the information that the fleet operator is interested and it's first from the transaction perspective. He is interested in limiting what their card can be used for. If you look at the general purpose credit card, which is something the bank would offer. What can you buy with that card? I could go into a store and I could buy anything with that card. Not only could I buy fuel, but I could buy cigarettes and food and big screen TVs if that's what I wanted to buy, but using a control card, I can limit the usage of that card where you can only go to specific gas stations, specific times a day you can only buy specific grades of fuel and you can't buy anything else, so it's going to capture a lot of information around that transaction.

Then I am going to give that fleet operator a detailed report. It's going to have a odometer readings on it. What graded gas was purchased and so on, so how many gallons did the fleet operator buy. It's all very, very useful information to a fleet operator to manage the driver. The banks again, they just haven't developed a system as customized as ours is to meet needs of that fleet operator.

Unidentified Analyst

Is there a role or a concern or an opportunity for you to be a part of the early adoption drive moving from, say, oil to natural gas utilization?

Eric Dey

Again, from our perspective, we want to capture a transaction. Whether it's a oil transaction or natural gas transaction or whether it's some other type transaction, we just want to capture the transaction, so I would say yes. I mean, we are certainly interested in that, because we want to get as much revenue as we can from every transaction that is out there, so that is something that we are looking at as well.

Unidentified Analyst

As you expense other verticals, how easy is it to cross-sell into the same corporate and go from fuel into hotels or food coupons.

Eric Dey

You know what we found is that the customer base in a lot of those verticals are essentially identical like our hotel card product in the United States. We have a low end hotel network that is marketed primarily to blue collar-type workers, so it's a workforce that tends to drive overnight and stay in lower end hotel, so typically these are people that are driving over-the-road vehicles, driving more ugly vehicles so to speak versus white collar drivers like ourselves, so our customer bases are very complementary and we tend to market to each other as best we can.

Unidentified Analyst

Maybe a couple of points I wanted to come back to. One was the processing opportunity. Can you remind us where you are in the process of the Shell contract, since you got pretty meaningful contract and remind us how we should expect that to ramp up in respect to financials.

Eric Dey

The Shell contract, again, I think we stated before is a processing agreement, so we are going to earn a very low amount of revenue per transaction, but it's an account that has a huge amount of transaction. I think we stated before that what we are going to get from that is about 200 million or so incremental transactions when that account is fully implemented.

The game there is to up-sell other products and services and significantly increase the amount of revenue per transaction much like our other major oil relationships that we have in the United States.

In the United States, when the major oil companies started outsourcing the management of their card portfolio, we started it much the same way. They wanted to, hey our system isn't very good. We need a new system, so let's go to somebody who actually does this for living versus us trying to recreate the wheel, so we are going to basically outsource to their systems, so it starts out as a processing agreement. Then over time, up-sell other products and services until you end up with the full service kind of a turnkey solution, and so we are hoping that's where the rest of the world kind of goes as well, but the opportunities there are just enormous if we are able to crack that code.

Unidentified Analyst

What's the difference between the major oils view other private label portfolio in Europe for example which is the U.S. and everyone here has basically outsourced that at this point.

Eric Dey

Again, the major oils in the United States started out the same way. They just view what is proprietary information. They don't want anybody else touching their customer. It started out the same way in the United States until they realized that's not our core competency. We are not in the business of managing card products. We are in the business of selling oil, so eventually it migrated the word did in the United States, and again it's our hope that we will get to a same place with the international major oil companies as well.

Unidentified Analyst

You also talked about the difference in profitability between the small and the large fleet in relationship with over-the-road segment, but I am sure that applies to the local fleet segment as well. Where are you in terms of mix between small and large, and are you happy with that or would you want it to go?

Eric Dey

I mean first of all, we have businesses all around the world, and again if you look at our United States business, it was developed as primarily a small to mid size fleet offering. For the most part, that is where this business started in the United States, but we got a product for everybody, so I want to make that clear. We go after large business, we go after over-the-road business, we go after all businesses, but we've been primarily focused on the small to mid-size business and that's because that's where the sweet spot is. That's where all the profit is in the business.

The bigger the customer is, the more leverage the customer has. The bigger the merchant, the more leverage that that merchant kind of has as well, but we love that small to mid-size sector. That's where the sweet spot is, but some of our international businesses, again, we have the full spectrum of products that we offer to every business out there and we have got pretty decent market shares in all segments of business in a lot of different places.

Roman Leal - Goldman Sachs

Great. I think, we are at the time minimum allot, so maybe possibly there are any questions before I wrap it up? Okay. Great. Thank you.

Eric Dey

Thanks.

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