All right, welcome to the 2023 Raymond James TMT and Consumer Conference. My name is John Davis. I'm the lead payments and fintech analyst here at Raymond James. We're excited to have FleetCor CFO, Tom Panther, with us this morning. So first, welcome, Tom. Thanks for coming.
Yep. Great to be here. Thanks, JD.
So we're going to treat this as a fireside chat. If there's questions in the room, feel free to raise your hand, and we'll try and keep this as interactive as possible. So Tom, you've been on the job about nine months or so now.
Mm-hmm.
Maybe first impressions, why FleetCor? You hopped into a strategic review, sale of Russia. Yeah, what surprised you? Just kind of early thoughts.
Sure. Yeah, no, it's been a busy eight to nine months, that's for sure. We've been doing a lot over the last period of time. You know, as JD as you said, we sold the Russia business. We looked at selling the prepaid business. We've been doing a variety of integration efforts related to some of the recent acquisitions. We acquired PayByPhone in September, and then obviously, we've been doing a lot related to strategy, and strategy is not something that is new to FleetCor. They've been involved in strategy and M&A type activity. It's part of their DNA. But when you have a strategic review occur that's provoked by some activist activity, then that takes it up to another decibel level.
And so we've been doing a lot related to the strategic review, which for me, in terms of onboarding, has been a great opportunity to just learn, access to all types of opportunities to gain more information about the company. What I would say in terms of what's surprised me, or from an impression standpoint, when you think about our businesses, you think of FleetCor as having, you know, a lot of complicated businesses, and that's true, but I've been surprised by the relatedness of those businesses, how the products that are associated with the fleet business versus the lodging business versus the corporate payments business are so related. And then a little bit of how we...
I'm sure we'll get into this a little bit of how the strategy in Brazil and how we've been able to take a single product and build an ecosystem of products around it is also a related strategy that we're now deploying as well. All of that kind of fits together, as opposed to something that just looks like three standalone silos.
Okay. And I know, you know, the strategic review, we're kind of in the late innings here. Maybe just a quick update, you know, a little history lesson of kind of what you guys looked at. You know, clearly now it's more of a, you know, some sort of, like, spin merge, not, you know, an outright sale of
Right
any asset, but maybe just kind of give a quick update there and
Yeah, yeah. Well, just to kind of quickly conclude and close the loop on what we've decided versus, you know, what is still pending, and from a decision standpoint, at least as of now, you know, we all live in businesses that are living and breathing organisms, so things can always change. But looked at whether or not the sale of a segment made any sense. No. Looked at whether or not a pure tax-free spin made any sense. No. I can explain a little bit why, if people are interested. What remains is a bit of a hanging chad that we're still looking at: whether or not a merger-type transaction with a strategic partner makes sense. When you say, "Well, you know, why would you look at that?" Well, I would say tax and dilution avoidance.
We could obviously look at, we look at transactions all the time. We're a strategically minded company. We've done almost 100 acquisitions over our 20+ career. If we were to do this, it would be a structure that would allow us to minimize any type of tax or dilution impact. And that would be what we would look at. Think of kind of a JV-type structure underneath the holding company, with potentially some type of liquidity event in the future as you bring that company in, work on synergies, top and bottom line. That would be the type of thing that we would, that we continue to explore. And Ron has used the dance partner metaphor. The dance card has gotten narrower, much fewer names.
We looked at a variety of things over the course of the review. One of the things that the board said when this got kicked off is, "We want to be extremely thorough. We don't want to come back and have to revisit this. We want to be able to demonstrate to our shareholders that we looked at everything." And so we've been extremely thorough in terms of all the different permutations. But I think where we stand now is just a handful of dance partners, and our expectation is that we'd be able to conclude this in time. Conclude this in terms of, what's the next step? Are we pursuing something, yes or no?
Certainly not close anything by our February earnings release, but certainly, we would be able to be at a point where we'd say, "Okay, we've completed all of our analysis, and this is what we've decided." Now, strategy and M&A is always going to be part of what we do, and so that's not to say, you know, no matter what the outcome is, that we're not going to pursue something at a later date. But you know, I think it's important to be able to bring this to a head. I guess the last point I'd make is that it's not some fait accompli that we're definitely doing something. It's a very high bar, a disciplined approach, very analytical in terms of how we think about this.
And so if we did do something, it would be something that, you know, we thought had, not just a lot of strategic value, but it also had, financial merit as well. We commented that if we're looking at a particular segment, it was related to corporate payments. I think the thing I would leave you with is, we think about corporate payments across multiple types of subsegments. This isn't an all-or-nothing kind of thing. In fact, I don't think you could find another corporate payments business that has the products and geographies that, that we do, from multi-card to virtual card to full AP and cross-border.
So if we were to do something, it would be related to something that would potentially augment a segment, a subsegment of that, that larger segment, versus something that you'd sit there and say is a complete cousin to what we have today. Because like I said, I don't think there is a cousin to what we have today.
No, that's very helpful. And then maybe switching gears, you know, you mentioned on the Q3 call that you were gonna reshuffle the reporting segments from five into three. So maybe just talk a little bit about the thought process behind that.
Sure. Yeah, it really is in keeping with simplification. A lot of the feedback that we hear, both internally, but more importantly, especially for this audience, externally, is around simplification. And so, essentially, leaving lodging and corporate payments as they are, but bringing Brazil and fleet together into vehicle payments, is a little bit in terms of what I was talking about earlier, JD, in terms of the relatedness. The strategies, the products, what we're trying to do with those businesses, is quite similar. The geographies are different, and maybe some of the anchor products are a little bit different. Think toll tag versus parking versus fuel. But we see them coming together as a business that has that secret sauce of large customer base and large proprietary networks.
Bringing those together gives us an opportunity to strategically talk about that business holistically. Now, for you investors, I know information is something that you hold very dear. And so while we will report a consolidated segment, you'll still continue to get the geo breakdown. That's one of the things that we'll have to do from an SEC reporting standpoint. And we were just meeting internally just last week in terms of what do KPIs look like, so that people can understand some of the KPIs within the vehicle payments business. So that you can maybe distinguish what's going on in a, in a parking environment, where the transactions are completely different in terms of, of, of frequency, versus a tag, a tolling environment, versus a fleet environment.
But the reality is, is this is all starting to get a bit cross-pollinated, because we have so many multi-product customers now. In Brazil, we've referenced 60% of our consumer customers are multi-product. They started as a simple user of a toll tag, and now they're using three, four, five, six products that we're able to sell to them, predominantly through, you know, digital means of an app. And even in the UK, one of the things that we were, you know, have made advancements on, is almost 30% of our sales now in the UK are non-fuel related sales.
So that's an example of customers and networks being a real success measure, where we can go to those customers, a million-some-odd drivers in the U.K., and be able to introduce them to EV, to where we have, you know, a network that expands to 20+ charging stations, 60%+ coverage. Expose them to repairs and service and maintenance and tires, where we have a network of 40,000 garages. So we can take a million drivers made up of 60-some-odd customers, 60-some-odd thousand customers, and be able to show them these other networks, and be able to help them with their overall fleet management.
So all of that is about the strategy of starting to cross-pollinate and bring all of this together, because we see a real proof point starting in Brazil, but emerging also in the U.K., and we think also will be a game changer in the U.S., where we can bring together these customers and these networks, and bring multiple products in front of them, generally delivered through a phone. Which, what better way to deliver all of this, is through a mechanism that you and I are all used to using every day of our lives, fortunately or unfortunately, depending on your point of view.
But at least from an economic standpoint, it's a very easy, frictionless, relatively low-cost way for us to develop tech, some UI, that allows us to schlep products over the face of that phone, that somebody's already used to using.
Okay. No, that's, that's helpful. Maybe turning to quarter-to-date trends in the Q4, I think the guide implies about 10% organic growth.
Yeah.
Similar to the Q3. But just, you know, curious, you called out some lodging softness. Ron said macro was a little bit weaker than he expected in the Q3. So just curious on the update, quarter to date.
Yeah, sure. I mean, I think in a business like ours, the trend tends to be what it is. The thing about this business is it's quite recurring. It's a base. It moves like a barge, not a speedboat, is sometimes the analogy I use. And so I think that trend is what we see here as we sit here in December. We did see a little bit of those signs at some level of macro softness. I mean, it's not surprising. I mean, companies, regardless of whether they're in Brazil or the U.S. or the U.K., they've withstood a fair amount of inflation, they've withstood a fair amount of wage increase, interest rates up in most of those markets. Brazil, not so much. They had already started to cut some rates.
They're on a different cycle. So sure, a little bit of some level of softening, but more within pockets of our business. And you know, one of the things that's great about the size and scale and geography of FleetCor is we're diversified and resilient enough to be able to withstand those. But in some of those pockets of the business, you know, we'll feel those. We think they're cyclical, not structural. We've talked to customers to validate our thesis. But you know, that comes with the ebbs and flows, particularly when you're in this economic potential inflection point.
I think all of us would agree, at least as we think about the U.S. and, and the U.K., which we probably know better than how you think about, you know, Brazil, is, is the fact that the U.S. economy, U.K. economy, European economy as a whole, has been stronger in 2023 than I think all of us were necessarily being told would happen, a year ago. And, and so I think that's, that's continued. That's broad macro. One of the things to sometimes clarify a little bit is our nomenclature maybe gets in our way a little bit, 'cause we also think internally macro. We use the term macro inside our company all the time, and we're not necessarily talking about big picture macro, about economies and GDPs and spend levels.
We're thinking about fuel cost and FX, kind of those more narrower, more technical levels of macro spreads as it relates to fuel, a very complex way in which we earn money in a portion of our fleet business. That element of macro, in particular, was a little softer in the Q3 than we had anticipated. We saw a rapid run-up in fuel price, oil, et cetera, and then it dropped. And so we've seen some price-spread normalization as we exited the Q3. But those elements of macro, the more technical level, are things that were a little bit of a headwind in the Q3.
Okay, great. That's a great transition to kind of the 2024 framework that you laid out
Mm-hmm.
t he 9% to 11%. You kind of touched on it a little bit there, but explaining kind of what you mean when you're saying neutral to slightly positive from a macro perspective
Sure. Yeah.
I think that's important.
Well, that there, in those words about neutral to positive, it was more of our internal language, the more technical side, where we saw fuel and FX as positive. We saw interest rates as positive. We saw bad debt. So the point of that, of that commentary on the earnings call, we really weren't making news about the top line. Given a range of 9 to 11, that's our midterm guide. When you think about the, the nature and durability of our business, I think that's, you know, where people would expect, us to be. That's where we expect to be. We're going through the planning process. We'll tighten that up, clearly, in our February call, as we finalize things.
But the real point of that conversation was the massive headwinds, overhangs that the company was staring into or even experiencing a year ago, Q3 and Q4. Interest rates were up significantly. We were a heavily weighted variable rate debt balance sheet that we've tightened up some. We're now 60% fixed rate. We put on some pretty attractive swaps, where we have some positive carry on those. Bad debt has gotten significantly better. I would say that the exit rate of bad debt today is about where we expect bad debt to be. Maybe dollars go up because spend goes up, but on a basis point level, we would expect bad debt to be where it is. Taxes feel about where we would expect them to be.
You can imagine with the number of legal entities that we have and the number of jurisdictions, there's all kinds of tax planning things that we're constantly working on. Some of them are, you know, tax jurisdictions trying to earn more revenue and taking benefits away from us, so we got to plan or and find another planning opportunity in another jurisdiction. So taxes feel about, you know, in that 27% kind of effective tax rate range. FX, you know, if anything, it feels like with the Fed taking a pause that the dollar will continue to weaken and that FX will be a benefit to that, call it, 40% of our business that's international.
So, what we were referring to as more those technical elements of macro felt like they were neutral, and the broader economy felt stable to us, is kind of how we think about that. We're not betting on a big macro tailwind at either the broad level or the technical level to be at our back to be able to do that 9 to 11 number.
Okay, and then I know you haven't, you know, disclosed or kind of given thoughts on segment level yet, given you're still in the planning process.
Mm-hmm.
But as we think about, you know, the fleet segment or corporate payments, any call-outs of why it wouldn't kind of be in that normal range?
No, I
growth outcomes?
It's a momentum-based business. I, you know, made this comment before in some of our breakouts. You know, if you think about us, just to use round numbers, a $4 billion business, we're not solving for $4 billion every year. We're solving for the increment. If you want to use 10% as, as a number to keep the math simple, we're solving for that $400 million incremental revenue that we're making every year. And, and so as we think about just the, the various businesses that we have, the portfolio of businesses, what we think their growth rates are, those big, large, momentum-based businesses that have recurring, customer bases, recurring users, what's nice about it, it's a nice ratable business.
It just kind of runs, and we're managing it to try to get the incremental growth off of that. I think you can expect growth trends to be pretty consistent. I don't see a massive pivot in terms of the growth rates, plus or minus a couple of percentage points on either side.
Okay. And then, you know, as we shift kind of to the fleet segment, the new vehicle segment would, you know
Mm-hmm
kind of be a high single digit, normalized grower. You have aspirations to get to potentially low double digits in the Brazil plus the current fleet business. So maybe just talk about some of the initiatives that could potentially get you over that hump into double digits going forward?
Yeah, but, you know, just in terms of sheer math, and again, we're more about strategy and not math, but just to kind of level set us on the math, when you bring Brazil in with the fleet business and combine the vehicle payment segment, you have kind of an 8% grower, just to use a number, obviously ±, based on where we are. That's, call it, 50% of the company, ±. We see the opportunity of that business, one, the core businesses just to continue to grow at their trend line, whether it's the U.S. fleet business, the international fleet business, or Brazil.
But what we're bringing into the strategy that's particularly exciting, that we think adds 2% to 4% kind of growth rates on top of that 8% number, I think we referenced a 10 to 12 range by the time we get to 2027, is what I was talking about before, bringing together customers and networks, where we already have large customer bases and, on the B2B side, and proprietary networks that we don't think can be replicated in terms of vehicle usage services that our customers would use. So just by adding that onto the B2B side, we think can add, back to the increment comment, another $200 million to $300 million to the revenue base.
Then on the consumer side, a market that we really haven't been in at all, except for in Brazil, but by buying PayByPhone in September, we essentially acquired both. That was kind of a twofer, where not only did we get a network of over 1,300 parking operators, but we also got a customer base of 6 million active users. Those 6 million active users are distributed across the U.K. at about 2.5 million, the U.S. at about 2 million, and Europe at about 1.5 million. So that's 6 million active users that every day, or give or take, at least once a month, are on their phone, paying for parking.
Now, we're interested in parking in and of itself, yes, but really what we're interested in, again, back to the strategy, is a customer base and a network. Because why? Because we've got 6 million active users who are using that phone, and we can then, relatively easily, from a tech investment standpoint, introduce those customers to multiple products and turn them into what we have in Brazil, where I said earlier, 60% of our customers are using multiple products. We can take somebody who's used to using PayByPhone only and start showing them insurance, EV, fuel, repairs and maintenance. I knew I had another one. I was missing it. Repairs and maintenance, all of those things where we can just make them a multiproduct user.
That then brings an opportunity for, call it, another $200 million to $300 million of incremental revenue. So when you take the existing businesses that have demonstrated durable growth rates at their trend line, coupled with the entry into these cross-sell opportunities, that defines what the vehicle payment ecosystem looks like, that's how you get to a 10% to 12% grower. So at that point, you've got a business that's growing 10% to 12%, 50% of the business, just on relative size, assuming they were growing at the same rate. Corporate payments, which is, call it, 25% of the business, by then it would be larger, growing at high teens, and then lodging growing in the low-to-mid teens.
We think that's a pretty impressive business, and one with margins that are, you know, 50+% margins. We're exiting this year at a margin around 54%. So we think that's a business that certainly relative to our current EBITDA multiple, should garner a fair amount of capital interest.
No, that's great. Then just touching on the margins, given you have such high EBITDA margins, how should we think about the operating leverage in the business? You know, obviously, I think fuel or fleet, rather, is your highest margin-
Mm-hmm.
segment, growing the slowest, so just you have a little bit of a mix-shift headwind.
Mm-hmm.
How should we think about margins?
Yeah
you know, over a medium term?
Yeah. I mean, the beauty of this business is it's not capital intensive, and it's fairly fixed cost. And so once you get to scale, when you think about fleet, you think about lodging, they've been around for a long time, those businesses have gotten to scale, you just get the structural benefit of revenue growing faster than expenses. It just is the beauty of the way the businesses are structured. And then on the corporate payment side, which you saw is a pretty interesting step up in margins there, it's getting to that level of scale where buying GRG earlier in the year on the Global Reach on the cross-border side added a significant amount of business opportunity to it.
Against a fixed cost platform, we're actually able to extract efficiencies from the prior company that we acquired, just because we're all on one platform. So even though there's a little bit of a mix shift of those businesses, maybe with a little bit higher margin, growing faster, we still see margins, you know, next year and beyond in that, you know, mid-50% range. I mean, at some level, the margins can't go to 100%, nor do we necessarily want them to. We want to continue to invest in the business for the long haul. We're very methodical and disciplined around the variable costs, namely the sales and marketing that we spend.
We think we've seen multiple years of kind of a test and learn of what works, what doesn't work, what type of marketing has returns to it, namely salespeople. Yes, some branding and advertising, but when you're predominantly a B2B shop, our advertising is more to kind of get name recognition out there. We're not big into advertising. That tends to work more in a retail-based organization. So I think, you know, the marketing dollars, marketing that we spend is more around client acquisition and business at origination, that's real kind of tangible, where you can actually see the spend and the return, which as a finance guy, I particularly like.
Yeah. No, that makes sense. And then obviously, given kind of the uncertain macro backdrop, there has been focus on your bad debt expense.
Mm-hmm.
I think it was only 6 or 7 basis points last quarter. You know, how should we think about? Did you tighten credit? You know, what kind of top-line impact has there been?
Sure.
Just as we think about, obviously, bad debt, you know, what's the right level? Is it six or seven, or should it be 10 to 15? Like, how do you guys think about bad debt and kind of growth in that space?
Yeah. We think about bad debt in more of a, in a way, we want to take some risk, but relative to, say, a financial institution, completely pales in comparison. So bad debt generally is around: How do we minimize it? Because we want to be fairly restrictive with respect to, you know, how we think about about credit. The credit that we offer is a revolving-type credit. We generally know whether or not somebody's gonna pay us within two weeks to 30 days, just in terms of how our payment terms roll. So we would say, as I mentioned earlier, where we see bad debt now is a bit, kind of in our sweet spot, of where we like it to be.
We have seen, because we lost the revenue, namely some late fees and some card fees, and some level of fuel-related revenue, we did see some revenue impact, some revenue and erosion associated with significantly reducing our exposure to those micro SMB segment. EBITDA positive, but revenue erosion. But we're more focused on making sure that we go after customers that are gonna stay with us, that are gonna repay us back, and that we have a nice, steady, recurring revenue flow. And the micro segment, kind of a digital-only go-to-market strategy, was a bit of an experiment that we decided to test and learn, and learn to move away from. We're not getting away from digital.
We still spend marketing dollars on digital forms of interaction, but we supplement that now with field, much like the way we go to market in the U.K. and in Australia, where you've got a combo of warming them up with digital, introducing them to content with digital, but then having field representatives, who are experienced in our products, being able to kind of further cultivate the relationship and close the sale.
Okay. No, that's, that's helpful. Maybe switching over to corporate payments, which has clearly been a bright spot this year, you know, 20% growth. Maybe just talk about the different, y ou know, how we think about it. Corporate payments means a lot of things to different people.
Sure.
You have an FX business, accounts payable business, virtual card, channel partners.
Yep.
Maybe talk about how you get that 20%, you know, maybe by channel or segment. How you guys think about it internally?
Yeah. Well, the reality is, when you think about our business, there's two big pieces, a payables business and a cross-border business. They're both growing at similar clips. And the diversification of that business has been a particular strength of ours, whether it's the product diversification, JD, that you mentioned, in terms of the full suite of products that we can offer, from a basic T&E card, all the way up to full AP, to cross-border, to multiple geographies. Our cross-border business basically never sleeps. It has a trading desk in Sydney, and in London, and in Toronto, so it's constantly on the move, both the traders as well as the salespeople. So that's kind of an interesting concept, where you literally have a business that's up and running 24/7. Well, maybe not the seven, but at least the 24.
Although some of those guys do continue to cultivate relationships and call on CFOs and treasurers, even on the weekends, to try to close an FX trade. But we see the business as really just having extremely strong sales capabilities. All of those things that the products that we've been able to create have been able to give us the ability to sell at extremely high levels. I think both of them were right in the high twenties this past quarter. Cross-border had been outperforming that a little bit, a couple of quarters in a row, because we were mining that Global Reach portfolio that we had recently acquired.
So that gave us an opportunity to really kind of go to a whole new customer base and introduce new products and services to them. But the real secret sauce of that business is the base continues to naturally grow, 'cause more and more spend comes across our rails as they gain a greater degree of awareness of what we can offer. The attrition is next to nothing. These are very sticky customers. They are large customers, so the bankruptcy and out-of-business rate is quite low. 70% of our business is over $20 million in revenue. Almost 30% of the business is over $1 billion in revenue, so these are large, chunky customers. Are they immune to economic ebbs and flows? No. No company is.
But the diversification of the business allows us to work in a way that allows us to kind of continue to put up those kinds of numbers. Every quarter is a new quarter, so we'll, y ou know, we obviously, you know, are always paying attention to what's going on within our customer base. But we feel really good with what we've put together from a geographic and from a product standpoint, that the business has really got a lot going for it and has a lot of moats to protect itself.
Okay, great. We have about a minute or so left. Is there any questions in the audience? All right, well, I'll wrap with one more. Just on M&A, balance sheet's in good shape, I think leverage about 2.7 x.
Yep.
You know, can we expect more stuff on the consumer side? Is that kind of a, is that, was PayByPhone, you know, you wanted the network, and the consumer just kind of came with it? Or just curious kind of where M&A priorities are with that.
Yeah. I don't think you'd see a lot of capital deployment on the consumer side. Again, if there was another interesting asset out there, particularly like the template of PayByPhone, where you got both network in the, in the way of the parking operators, as well as consumers, all within the vehicle ecosystem, great. We're always looking at things that would maybe be attractive on the corporate payments side. We see that as a business that, if it's 25% today, we want it to continue to get bigger, not just because it's growing the fastest, but because we're doing some things inorganically. So I think the M&A environment. I think 2024 is set up for a nice M&A environment. Obviously, it takes two to do any of those things, but I think valuations are generally coming down.
Private companies, I think, are a little bit hungrier in terms of a liquidation event. Our balance sheet is in extremely good position. You know, this year we'll generate almost $1.003 billion in free cash flow. That just creates cash flow in and of itself. And then, we have, you know, strong access to capital, whether it's stuff right off of our revolver or the ability to do additional things. I don't see us doing anything in terms of issuing equity. If anything, we'll be buying equity back. We still think, you know, at a $250 stock price, buyback is still part of our deployment strategy, but it's gonna be a mix.
You know, we believe that using our capital for recurring earnings on the M&A front is important and probably would be the first place we would go. But we also think buying FleetCor in a buyback arrangement is also a really attractive investment, too. And we got the high-cost problem of generating well over $1 billion of free cash flow every year, so we have the opportunity to say, "Well, what do we want to do with that?
Sure.
You know, it's make more money.
All right. Well, thanks, Tommy. We'll have to wrap it there.
Good. Thanks, JD. Thanks, everyone.