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FleetCor Technologies, Inc. (NYSE:FLT)

Q3 2012 Earnings Call

November 8, 2012; 05:00 p.m. ET

Executives

Ronald Clarke - Chairman, President & Chief Executive Officer

Eric Dey - Chief Financial Officer

Analysts

Julio Quinteros - Goldman Sachs

Adam Carron - Barclays

Phil Stiller - Citi Group

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to FleetCor Technologies Incorporated third quarter conference call.

At this time I would 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 third quarter 2012 press release. It can also be found at www.fleetcor.com under the Investor Relation 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 described previously. Also, we are reviewing 2012 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 2012 guidance. 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 today’s press release and Form 8-K filed with the Security 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.

Ronald Clarke

Okay Eric, thanks. Hi everyone and thanks for joining the call today. I plan to cover just a couple of subjects here in my opening remarks. So first off, I’ll provide a bit more perspective on Q3 and second, I’ll discuss the overall outlook for the company. Okay, so first off let me turn to our results for the quarter.

The Q3 results we reported were really good and ahead of our internal plan. We set new record highs for both revenue and profit. We reported Q3 revenue of $187 million up 39% and cash EPS of $0.83 up 47%. Our adjusted net income grew over 50% for the quarter and our EBITDA reached almost $100 million for the quarter, so overall pretty good.

So in terms of drivers, let me start with the environment and I describe the environment really as mixed for the quarter. Our market spreads returned to normalized levels, so not much out there. Fuel prices were flat in the U.S. but up a bit in Europe, so it helped our international segment some.

We enjoyed a favorable one-time Q3 tax credit, which was roughly $0.03 in the quarter, so kind of operating EPS really $0.80 for the quarter and on the negative side FX was the headwind reducing our revenue approximately $3 million versus constant currency, so really again its a mixed bag.

Our North American business had another really terrific quarter. Adjusted revenues grew 11%, all organic and our universal card programs drove most of that upside, beating our internal expectation really across the board. Our CLC business continued to perform well. It was up 14% for the quarter. And then lastly our recent acquisitions, AllStar, Efectivale, CTF and NKT were all added into the quarter, so that gave us lots of additional lift.

So in summary, we are obviously very pleased with these Q3 numbers and given our trends, we are raising our Q4 and full year guidance to reflect this momentum and Eric will cover those details in just a bit.

So now let me transition over to the company’s outlook and begin talking about our current state of the union. So obviously we are pleased with how the company’s performing.

Our performance is really across the board, virtually every business doing well. Most of our key metrics are in a very good place, client satisfaction and retention levels are improving, new sales are up, credit losses are stable, expenses are under control and our system reliability is sound. So given these trends we believe we can keep moving our base forward despite being an individual economy. So overall I characterize our core business as very healthy.

Second, in terms of outlook, we believe there is a big, big upside in our new assets. So we’ve acquired four businesses or four new assets in the last year, all outside of North America and we are making some good progress, improving profits in each one of them.

So for example we are converting right now our AllStar business in the U.K. to GFN, our global processing platform and this conversion will deliver not only material expense saving, but sets the business up to do new things like e-billing, offered chip and pin cards, give us even some new pricing alternatives.

In our Mexico business Efectivale, we are well underway reshaping that business, moving clients from paper to card and emphasizing fuel, which carries much higher margins for us. We are also launching a universal fuel card there, which we believe the market will like.

So in summary we expect these four new assets to yield higher profits for us as we move into 2013 and ‘14.

Finally, we remain very active in our global business development efforts. We are accomplishing a number of the goals that we set out, so we are getting into new markets, more attractive markets that give us access to more market potential and a longer runway.

We are getting our GFN system accepted and recognized as the best fuel card system in the world. We are upsizing our credit facility by $500 million, bringing our available liquidity to $1 billion and we are committed to focusing that $1 billion of liquidity on businesses we know and businesses in which we can improve performance.

We remain very active in both new partner development and new acquisition situations and we’ve even stepped up our investment in new add-on product capabilities, mostly centered around mobile tools. So we believe the company is well positioned to do even bigger things in the future.

So in conclusion, we are pleased with our Q3 results, we are pleased with our trends and momentum and we are very encouraged by some big, big opportunities that drive us.

So with that, let me turn the call back over to Eric to cover our financial results and updated guidance in more detail. Eric.

Eric Dey

Thanks Ron. For the third quarter of 2012 we reported revenue of $186.9 million, an increase of 39% from the third quarter of 2011. Revenue from our North American segment increased 9.1% to $101.5 million in the third quarter of 2012 from $93 million in the third quarter of 2011 and revenue from our international segment increased 107% to $85.4 million in the third quarter of 2012 from $41.2 million in the third quarter of 2011.

For the third quarter of 2012 GAAP net income increased 47% to $59.7 million or $0.69 per diluted share from $40.5 million or $0.48 per diluted share in the third quarter of 2011.

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. Adjusted revenues equal our GAAP revenue less merchant commission. We use adjusted revenues as a basis to evaluate the company’s revenue, net of the commissions that are paid to merchants who participate in certain card programs.

Commissions paid to merchants can vary when market spreads fluctuate in much the same way some of our revenue can fluctuate when markets spreads vary. For this reason we believe the adjusted revenue financial metric is a more effective way to evaluate the company’s performance.

Adjusted net income is GAAP net income adjusted to eliminate non-cash stock-based compensation expense related to share-based compensation awards, amortization of deferred financing cost and intangible assets, amortization of the premium recognized on the purchase of receivables, a loss on early extinguishment of debt and adjusted for the income tax effect of such. The reconciliation of adjusted revenues and adjusted net income to our GAAP numbers are provided in Exhibit 1 of our press release.

Adjusted revenues in the third quarter of 2012 increased 44% to $174 million compared to $120.9 million in the third quarter of 2011. Adjusted net income for the third quarter of 2012 increased 52% to $71.6 million or $0.83 per diluted share compared to $47.2 million or $0.56 per diluted share in the third quarter of 2011.

For the third quarter of 2012, transaction volume increased 46% to 79 million transactions compared to 54 million transactions in the third quarter of 2011. Our transaction volumes in our international segment were positively impacted by two acquisitions closed in the second half of 2011 and two acquisitions closed in the first three quarters of 2012.

To remind everyone, in August of 2011 we acquired Efectivale, a Mexican pre-paid fuel and food card company and in December of 2011 we acquired AllStar Business Solutions, a leading U.K. fuel card company. In mid-June of this year we completed an acquisition in Russia and in July we expanded into the Brazilian market with our acquisition of CTF Technologies.

Adjusted revenue per transaction for the third quarter of 2012 decreased 1.6% to $2.20 from $2.23 in the third quarter of 2011. Adjusted revenue per transaction can vary based on geography to 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 and environmental factors, such as foreign exchange rates, fuel prices and fuel price spread.

Adjusted revenue per transaction for the quarter was positively impacted by organic growth in certain of our payment programs. Also during the third quarter we believed that the environment both helped and hurt our businesses.

Spreads and foreign exchange rates were generally unfavorable, while fuel prices were flat in the U.S. and up slightly in our international market. Although we cannot precisely measure the impact of the environment, in total we believe the environment hurt our revenues by approximately $4 million to $5 million during the quarter, which I will describe later.

In addition while the AllStar Business in the U.K. and our business in Mexico, Efectivale represent good profit margin businesses, they do not lower revenue per transaction products. The impact of the product offered by our businesses acquired in the U.K. and Mexico were partially offset by the impact of acquisitions completed in 2012.

In 2012 we acquired a Russian fuel card business and CTF Technology Inc. in Brazil, which have higher revenue per transaction products in comparison to our other businesses. However the overall impact of these acquisitions resulted in lower revenue per transaction for our international and consolidated revenue.

Now lets shift over and discuss some of the drivers of our third quarter performance. First, in our North American segment, all of our lines of businesses performed well, resulting in an 11% organic growth rate in the quarter versus prior year at the adjusted revenues line. However included in the North American segment revenue in the quarter was the impact of lower fuel price spread.

During the quarter the wholesale cost of fuel rose at a higher rate than the retail price of fuel, which compressed fuel spread margins and which we believe adversely impacted our revenue by approximately $2 million to $3 million. Fuel prices were generally flat versus last year in the U.S. and had very little impact on the quarter.

Some of the positive drivers of revenue during the quarter included the continued exceptional performance of our direct market MasterCard product, which had revenue growth of 49% year-over-year. The CLC Group provided of lodging management programs continued to perform well and had another solid quarter with 14% revenue growth over the third quarter of last year.

In our international business our results were positively impacted by the two acquisitions closed in the second half of 2011; Efectivale, the Mexican pre-paid food and fuel card company and AllStar, a leading fuel card company in the U.K. and the two acquisitions closed in 2012, CTF in Brazil and the acquisition in Russia.

In addition, our independent fuel card provider based in Russia, PPR, continued to grow with revenue up double digit over last year in local currency. Also the Mexican prepaid fuel and food card portion of our business is off to a strong start with revenues up double digit in local currency. However, the results in our international business were negatively impacted by the sluggish economy in Europe and unfavorable foreign exchange rates during the quarter.

As we previously stated, the macro-economic environment was generally unfavorable during the third quarter and although we cannot precisely calculate the impact, we believe it negatively impacted our revenues by approximately $4 million to $5 million. When we talk about the macro-economic 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 third quarter, the increase in the wholesale cost of fuel resulted in lower fuel spread margins, which we believe negatively impacted our revenues by approximately $2 million to $3 million. Changes in foreign exchange rates were generally unfavorable and impacted our revenues by approximately $3 million during the quarter. And finally fuel prices were generally flat in the U.S. and up a bit in Europe and we believe added approximately $1 million in international revenue.

Now moving down the income statement, total operating expenses for the third quarter were $101.1 million compared to $72.5 million in the third quarter of 2011, an increase of 39%. Included in operating expenses are merchant commissions, processing expenses, bad debt, selling and general administrative expenses and depreciation and amortization expense.

The increase in operating expenses was primarily due to additional expenses related to the acquisitions closed in the second half of last year and the first three quarters of this year. Included in operating expenses for the quarter was $6.9 million of mostly non-cash stock compensation expense versus $3.7 million in the third quarter last year. Approximately $1 million of additional stock compensation expense was recorded in the third quarter based on expectations that certain employees restricted stock investing hurdles will be met by year-end.

As a percentage of total revenues, operating expenses remain flat at 54% compared to the third quarter of 2011. Credit losses were 13 basis points for the quarter compared to 20 basis points in the third quarter of 2011. The improvement in credit losses was primarily due to the impact of acquisitions closed in 2011 and 2012, which have products with lower bad debt as a percentage of billed revenue, improvement in the economy and a shift in our marketing and sales strategy towards the larger fleet prospects.

Depreciation and amortization increased 50.1% to $13.6 million in the third quarter of 2012 from $9.1 million in the third quarter of 2011. The increase was primarily due to the impact of amortization of intangible assets related to our acquisition in Mexico in the third quarter of 2011, the AllStar acquisition in the U.K. in the fourth quarter of 2011, the acquisition in Russia in June of 2012 and the acquisition in Brazil in July of 2012.

Interest expense increased 3.7% in the third quarter to $3.2 million from $3.1 million in the third quarter of 2011. The increase in interest expense is primarily due to additional borrowings related to acquisitions closed over the last year, partially offset by slightly lower interest rate.

Our effective tax rate decreased to 27.8%, our pre-tax income compared to 31.5% for the third quarter of 2011. The decrease in our effective tax rate was primarily due to the recognition of a one-time income tax benefit during the quarter of $3.5 million that resulted from our net differed tax liability in the U.K. being reduced due to the enactment of a lower statutory U.K. tax rate. The impact of this one time income tax benefit on adjusted net income per share was approximately $0.04 per share in the quarter.

Now turning to the balance sheet. We ended the quarter with $352.2 million of total cash, $52.2 million of which is restricted in our primarily customer deposits. The company also has a $500 million accounts receivable securitization facility. At the end of the quarter we had $355 million borrowed against the facility and had the ability to draw an additional $50 million based on eligible receivables pledged against the facility. We also had $282 million outstanding on our term loan and $208 million drawn on our revolver.

On November 7 we announced that we have increased the size of our credit facility by $500 million. The increased credit facility will total $1.4 billion and consist of a $550 million term loan facility and an $850 million revolving credit facility. The interest rate on the upside facility will remain unchanged. At the time of closing we drew an additional $250 million of term loan, which we used to immediately pay down the revolver and securitization facility.

And for closing, the company has approximately $1 billion of liquidity, which will be used to primarily to fund future acquisitions, other general corporate purposes, including to potentially fund share repurchases from certain of our significant legacy investors. The terms and timing of any future repurchases would be subject to the discretion of our board of directors and we currently do not have any specific plan.

As of June 30 our leverage ratio was 1.34 times EBITDA, a slight increase from 1.2 times at the end of the second quarter. The increase was due to additional borrowing on the revolving credit facility to close the CTF acquisition in the third quarter. At September 30 our leverage ratio remains well below our covenant level of 3.25 times EBITDA.

The company intends to use its free cash flow to temporarily pay down the balance on the 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 approximately $5.2 million on CapEx during the third quarter of 2012.

Now, onto our outlook for 2012. Given our very favorable results in the first nine months of the year and our outlook for the remainder of the year, we are again increasing our guidance for 2012. We now expect revenue for 2012 to be between $678 million and $682 million, up from our previous guidance range of $665 million to $675 million.

Adjusted net income to be between $248 million and $251 million, up from our previous guidance range of $235 million to $240 million and we expect adjusted net income per diluted share to be between $2.89 and $2.91, up from our previous guidance range of $2.74 to $2.78.

The assumptions that we have made in preparing this guidance include fuel prices flat to current levels for the fourth quarter of 2012, market spreads to return to their historic normal levels in the fourth quarter, a slight decrease in our effective tax rate from 30.1% in 2011 to 29.8% for the full year of 2012, foreign exchange rates to remain at current levels for the fourth quarter, fully diluted shares outstanding of 86.2 million shares for the full year of 2012, and finally, no impact related to any future acquisitions or material new partnership agreement.

And with that said operator, we will open it up for questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) Our first question is from the line of Julio Quinteros with Goldman Sachs. Please go ahead.

Julio Quinteros - Goldman Sachs

Greetings guys. Just really quickly, on the organic commentary, I just want to make sure, the 11% growth, that was only concentrated in North America, is that correct?

Ronald Clarke

Correct.

Eric Dey

That’s correct Julio.

Julio Quinteros - Goldman Sachs

Okay, so by definition everything else would have been acquired for the reported revenues.

Eric Dey

No, that’s actually not correct. I mean we’ve got organic growth clearly in our European operations as well. If you remember when I commented on like the international businesses, I kind of talk about each one individually. So we had kind of had double-digit growth in our Russian business, double-digit growth kind of in the mid-teens in our Mexican business.

Our Brazilian business is actually up, certainly double-digit levels over prior year as well and then our European businesses are kind of flat to perhaps down a little bit because of the economy.

Julio Quinteros - Goldman Sachs

Okay, great, that’s helpful. And then as you guys have had a chance now to kind of look at the integration and the plans around some of the recent acquisitions here, is there anything either from a cost or revenue perspective that you guys are seeing, that provides move opportunity as we really start thinking about 2013 and what the contributions could be here, again, either from a revenue or a cost integration perspective.

Ronald Clarke

Julio, its Ron. I would say they are probably consistent with our theses when we did the deals, which would be pretty significant next year. But we’ve owned a couple of them almost a year and certainly we will here by December in the case of AllStar, so we are pretty well underway in making improvements.

Julio Quinteros - Goldman Sachs

Okay, got it. And then just lastly on the ramp of the new assets. When its all said and done, are there any targets in terms of we should be thinking about how much the fuel spread business could contribute to revenues or over time. That’s something can cause some noise quarter-to-quarter, but anyway think about how the new contribution from the new businesses could impact the overall mix there as you start looking at the kind of longer term view.

Eric Dey

Generally Julio, the businesses that we are acquiring are non-fuel spread based businesses. So as a percentage of our total revenue, that mix should decrease over time.

Julio Quinteros - Goldman Sachs

Okay, okay great. Thank you.

Ronald Clarke

Julio, its Ronald. The last four are basically zero in terms of fuel-spread dependency.

Julio Quinteros - Goldman Sachs

Yes, I realized that. I was just wondering if there was a target or something that you guys had in mind in terms of where you would like to get the overall contribution from that type of business.

Eric Dey

No, its just another revenue sources. We have many different models around the world and that’s just one of our models.

Julio Quinteros - Goldman Sachs

Okay, got it. Thank you.

Operator

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

Adam Carron - Barclays

Hey guys, how are you? This is actually Adam Carron for Darrin. Just in terms of what we are seeing in the international segment, is there any way you could help pass out your exceptions for revenue per transaction on a go forward basis. Obviously we saw a little bit of a jump sequentially here from second quarter to third quarter. I mean it was down much less on a year-over-year basis. Is there any way to think about that going forward?

Ronald Clarke

Well, you know what happens Adam is, when we buy some of these businesses, generally speaking some of those businesses have lower revenue per transaction products, like the Efectivale business and the AllStar business as an example. Some of the businesses actually have higher revenue per tran businesses, like the CTF business and actually the Russian acquisition that we recently completed.

Generally though, after we buy these businesses we improve the performance of those businesses and the revenue per tran in each of those business will start to increase over time. But generally when we just buy them, it can have a negative impact on the run rate, just because of the mix of the new business.

Adam Carron – Barclays

Okay, and then that’s very helpful. And then just a quick follow-up in terms of, could you guys provide us with an up-date in terms of the rollout of Shell. I think you guys were just looking at your exceptions would exceed in the fourth quarter, in October of 2012 and just maybe you could quantify what we should expect in terms of an impact to transactions and revenue per tran there.

Ronald Clarke

Yes Adam, it’s Ron. We are kind of at the one-yard line in terms of being ready to launch into the first market, T minus some sort of dates here and so there would be virtually kind of no impact here in 2012, and then I would assume that we would probably board about half the transactions next year and the other half the following year, kind of half in ‘13 and half in ‘14.

Adam Carron – Barclays

Great. Thanks a lot guys.

Operator

(Operators Instructions) Our next question is from the line of Phil Stiller with Citi Group. Please go ahead.

Phil Stiller - Citi Group

Hi guys, congratulations on the good results. I wanted to ask about the margins. We were a bit surprised to see them up on a year-over-year basis. I think your commentary related to some of the recent acquisitions was that those were lower margin businesses. So I was wondering if you can provide some color on much of the margin increase on a year-over-year basis from what you guys expect going forward.

Eric Dey

Hey Phil, this is Erick. Yes, if you look at our margins kind of in each of our two segments, at the North American level our margins where up kind of, I don’t know, 3% to 4% and we would drive that effectively as the organic growth in the business. So really nothing unusual going on from that segment perspective.

If you look at the international business they are probably down a little but and that’s driven primarily by the mix impact, obviously of adding the lower margin businesses into the portfolio. But I would say that on a consolidated level, our margins are expectedly where we thought they were going to be.

Phil Stiller - Citi Group

Is there a point or some point in the near future where you reach an inflection point in international margins, given the cost savings that you guy are pursuing on some of these deals.

Eric Dey

We are just starting that process Phil, so there’s a long runway between when we are going to start reaching any inflection point on the new deals. As Ron indicated, I mean we are just starting with AllStar and we are just scratching the surface with some of our other acquisitions. So there’s a pretty good runway in front of them.

Ronald Clarke

Yes Phil, it’s Ronald. The leverage tend to be one-time on the cost side, but its kind of never ending on the revenue side, both pricing and then what we call product upgraded or mix or the add-ons. So again, I think our message is consistent, that we expect margins to continually increase.

Phil Stiller - Citi Group

Okay. On the topic of deals, can you provide an update on what your pipeline is looking like. I’m assuming you guys still remain pretty optimistic given the increase in the credit facility here.

Ronald Clarke

Yes, we like to have some money, so yes Phil, I would say as always the same line, busy. What we are involved in both on the partner side, oil partner and on the pure acquisition side, we are in multiple situations on both of those fronts, one of the reasons obviously we up-size the line.

Phil Stiller - Citi Group

Yes, can you provide some more color on the partnership opportunities? It seems like your still progressing along with Shell, although it’s probably been a little slower than you original anticipated. As we think about potential new deals, are those continuing to get pushed out and if you think about you signing them, would they require capital to do so.

Ronald Clarke

Yes so the answer is it’s a mix. So of the partner opportunities we are looking at, we have both kind of processing only kinds of opportunities and we have more full service outsourcing opportunities as well. We have some that require zero capital that’s taking over and provisioning a service and we have others where we’re “effectively acquiring” the card base and getting some premium basically to do that. So it’s a mixed feel across the things we are working on.

Phil Stiller - Citi Group

Okay, that’s helpful. Thanks guys.

Ronald Clarke

Thanks.

Operator

(Operator Instructions) Those are all the questions we have for today and that does conclude the conference call as well. Thank you for you participation. You may now disconnect.

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