Q2 2022 Fleetcor Technologies Inc Earnings Call
[music].
Good afternoon, and welcome to the fleet core technologies incorporated second quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the stocky followed by Sierra.
After todays presentation, there will be an opportunity to ask questions.
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To withdraw your question. Please press Star then two.
Please note. This call is being recorded I would now like to turn the conference over to Jim Eggo setup head of Investor Relations. Please go ahead.
Good afternoon, everyone and thank you for joining us today for our second quarter 2022 earnings call with me today are Ron Clarke, our chairman and CEO , Charles probably their CFO .
Following their prepared comments, the operator will announce the queue will open for the Q&A session. It is only then they can get in line for questions.
Note our earnings release and supplement can be found under the Investor Relations section of our website at <unk> Dot com.
Now throughout this call we will be covering organic revenue growth as a reminder, this metric news what neutralizes the impact of year over year changes in foreign exchange rates fuel prices and fuel spreads.
It also includes pro forma results for acquisitions closed during the two years being compared.
We will also be covering non-GAAP financial metrics, including revenues net income and net income per diluted share all on an adjusted basis.
These measures are not calculated in accordance with GAAP and may be calculated differently than at other companies' rec.
Reconciliations of the historical non-GAAP to the most directly comparable GAAP information can be found in today's press release and on our website.
I do need to remind everyone that part of our discussion today may include forward looking statements.
These statements reflect the best information we have today.
All statements about our outlook, new products and expectations regarding business development and future acquisitions are based on that information.
They are not guarantees of future performance and you should not put undue reliance upon them. We undertake no obligations to update any of these statements.
These expected results are subject to numerous uncertainties and risks, which could cause actual results to differ materially from what we expect.
Some of those risks are mentioned in today's press release on form 8-K and in our annual report on Form 10-K filed with the Securities and Exchange Commission. These documents are available on our website and that S. A C dot gov.
Now with that out of the way I'll turn the call over to Ron Clarke, our chairman and CEO Ron.
Okay. Jim Thanks, Good afternoon, everyone and thanks for joining our Q2 2022 earnings call.
Upfront here I'll plan to cover just a three subjects first I'll give you my take on Q2 results.
Second I'll share our updated our rest of year guidance and the assumptions underlying it.
And then lastly, I'll share just a few reasons to to like our prospects over the midterm.
Okay. Let me, let me turn to our Q2 results, which were frankly outstanding across the board.
We reported revenue of 861 million, that's up 29% versus last year.
194 million an increase of.
Of that about 28 million was a macro benefit.
About 45 million from acquisitions.
And the remainder are 121 million.
From organic growth.
So that puts organic growth for the quarter are up 17% and that's on the back of 15% growth in Q1.
You know revenue finished you know well above our expectations for the quarter about 35 million above the top of our guidance range.
Profitability, we reported cash EPS of $4 17 for the quarter.
That represents an all time quarterly.
Quarterly profit record for the company, so I'm delighted with that.
That's up 32% versus last year.
And about 27 cents above the top of our Q2 guidance range.
Trends in the quarter quite good.
Same store sales came in at plus 4%.
We're seeing continued recovery in both our corporate payments and lodging a client base.
And basically flat same store volume in our fleet client base as they manage through these record high fuel prices.
Sales Q2 sales excellent up 36% for the quarter versus last year.
Digital sales way way up.
And we continue to increase the number of new accounts.
That join US end to end digitally with no human intervention in total are globally over 50000, new accounts on the books in Q2.
And lastly, our retention remained basically steady as she goes at 92%.
I do want to call out just a few pretty exciting wins in renewals since we spoke last so first is Delta Delta Airlines.
They selected our new distressed passenger mobile app and that automates passenger.
Passenger hotel booking in the event of a canceled flight sooner.
So no more queuing up.
At the gate.
Hmm.
You know or waiting to get accommodations, you get an alert and you are in you get booked.
We did win one of the largest global food chains are they did select us to manage their gift card program. So big win there.
And then D P, where we're delighted that D P North America makes.
Extended its relationship.
With us so we will continue to manage their commercial.
Card program through the midterm.
So look in conclusion for the quarter you know our business fundamentals are in up in a really good place, we continue to satisfy and retain clients.
Obviously, adding lots of new accounts. So you put those together and it result in faster organic growth.
Okay, Let me shift gears and turn to our updated our second half guidance.
So first off we're expecting.
The second half revenue macro impacts to be roughly net neutral.
To the company versus our view 90 days ago fuel price clearly better now, we think spreads better but FX significantly worse. So taken together, we think it's a it's about a push on.
On the below the line factors similar view, we have of a net.
Neutral impact rest of year, we're out looking higher interest expense, but mostly offset by a lower share count.
So despite kind of these puts and takes the second half macro is looking to be an overall wash I do want to point out that in terms of the quarters, where we're expecting macro help here in Q3, and then macro hurt in.
In Q4.
So we are we will reflect that in our quarterly guidance. So look with these assumptions, we're revising our full year 2022 guidance up today to revenue to 3.4 billion at the midpoint.
Cash E P. S to 15 95 at the midpoint.
Our preliminary July results support this rest of the year guide.
And our results show show no macro weakness at this time.
Assumed in this revised full year 2022 guidance is a 100% flow through of our Q2 over performance and basically our second half our revenue and profit guide, where we're staying put again is we assume that the the macro was basically a wash with last time.
Yeah.
Assuming we achieve this new higher full year 'twenty two guidance. It implies a full year 22 revenue growth of 20% and full year twenty-two Kashi P S growth up 21%.
So 20% top 21% bottom I do want to point out that that this would reflect a 70 cents.
Increase in cash E. P. S from our initial guide in February .
Okay. So last up today as a look forward.
To the Companys prospects over the mid term.
I do want to.
Provide a reminder to those that might be new to the company today are that fleet cores purposes is it's pretty straightforward, which is to help businesses small medium and large.
Whether here or around the world to spend less on their non payroll expenses.
So we do that by providing solutions expense management payment solutions that help clients really just better control employee purchases and also better control and schedule a P payments.
You all know that global non payroll business expenses represent of a very big number and that's a very big Tam for us to target.
So let me just tick through a few reasons to maybe like our prospects over the midterm.
So first up is really recovery.
So our company has recovered.
Quite significantly since the onset of Covid twenty-two earnings now are expected to be up 44% versus 2020, and again our clients much healthier to as momentum you know fundamentals are very good in the company trends good Retentions still.
Will you know above 90%, we're selling a lot of business, so clearly business growing organically.
Three is the moat.
We think the moats to our business are high, particularly their proprietary gas station hotel a toll in virtual card networks.
That we operate we get more data and deeper discounts than our general purpose competitors. So both big advantages our volumes are super significant that run through these networks. So it makes them extremely difficult to.
To replicate.
Next up E V. We do believe our fleet business can make the E V transition with our clients, we're really in a pretty unique spot to help them. We spent the last year or two assembling E V assets like public charge point acceptance networks at home.
Home shower charging software applications.
And are pleased to report that we've got about 4000 E V clients now in Europe , who are we also hope to share.
Our plans over the coming weeks for how we're going to go on E V offense, so more to come there.
Next up corporate payments you know our plan is to make our corporate payments business a much much bigger business and today will acquire more scale in our cross border business. A reminder, that we have an acquisition teed up to close here in Q4.
Our announcement today that we've added invoice automation capability to our corporate payments business with today's accrual of Phi acquisition are delighted with that we've also appointed our corporate payments business at the SMB segment.
To increase the Tam and that's in addition to our middle market a core focus.
A recession.
Our company may not be recession proof.
But we are recession resilient.
We view our products is more necessity than discretionary I take fuel.
Fuel price literally almost doubled.
And really our same store you know fuel volumes.
Basically pretty flat pretty pretty steady so points to a pretty necessary product and last up is acquisitions, we do expect to make acquisitions over the forecast period and were hopeful to have about six to 8 billion of incremental capital at our disposal at the <unk> today.
<unk> leverage ratio.
We are good at deals were even better at improving acquired company performance. So our we think some some upside here so look taken together.
We think these factors give us a good chance to sustain our growth over the midterm.
So in conclusion today again, we reported exceptional our record results in Q2, we're raising full year 'twenty two guidance quite significantly.
And we believe we're positioned pretty well to compete and expand our business over the midterm. So with that let me turn the call back over to Chuck to provide some additional details on the quarter Chuck.
Thanks, Ron.
So let's look at some more detail on the quarter.
As Ron mentioned, we posted impressive 29% growth in revenue, including 17% organic growth, which I'll delve into in a moment.
7% or $45 million of the growth was from acquisitions made over the past year, and 4% or $28 million came from macro tailwind.
Affecting our results fuel prices were $4.89 per gallon for the quarter much higher than our $4.25 guidance assumption from Mei and contributed around $33 million of additional revenues versus prior year.
We exited the quarter with fuel prices at around $5 per gallon, which we expect to moderate some over the balance of the year.
Fuel spreads were also a positive by about $3 million compared to the prior year.
We had an 8 million dollar negative impact of lower foreign exchange rates as the strength of the Brazilian real was more than offset by unfavorable movements in most other global currencies.
Now moving to organic growth corporate payments was up 18% led by full AP outsourcing, which was up 47% and driven by continuing strong new sales.
Cross border was up 22%, which is normalized for the apex acquisition.
The cross border team had a very good quarter again as new sales remained strong and activity levels were again robust across nearly all geographies.
Moving onto our expense management solutions.
<unk> was up organically, 7% and has largely returned to its pre pandemic growth rate new sales growth of 10% and flat same store sales contributed to the performance.
Overall volumes remained stable, although we did see some slight moderation in new sales activity as application volumes were up year over year, but approval rates dipped a little bit.
Tolls was up 19% compared with last year as the business continues to perform new sales were solid driven by our expanded product utility and differentiated value proposition and we're well positioned as we head into the seasonally strong summer travel season in the southern hemisphere.
Lodging continued to perform exceptionally well up 42%.
Our workforce lodging business has improved with higher new sales and better volumes as our programs are viewed as more valuable as hotel costs are rising.
Airlines again outperformed with organic growth of 88%.
The travel recovery continues with domestic travel leading the way.
International travel, which tends to garner higher revenue per transaction still has more room to recover particularly in Asia.
Gift had an outstanding quarter up 63% as customer card orders were pulled forward earlier in the year than normal.
Retailers want to ensure they have adequate card stock in advance of the year end holiday season, and avoid any potential delays due to supply chain issues.
We estimate that approximately $10 million to $12 million in second quarter revenues were brought forward from the second half, which may negatively affect organic growth in the third and fourth quarters.
So looking further down the income statement.
Operating expenses of $491 million represented a 33% increase over $370 million in Q2 of the prior year.
Primarily due to the addition of the apex and a L. A operations.
We also had increases tied to higher volumes across our businesses incremental bad debt stock compensation, and new sales generation activities and investments to drive future growth.
Bad debt expense was $27 million or six basis points.
It was consistent with last quarter and in line with our expectations.
In the second quarter of 2021, bad debt was $6 million or two basis points.
Bad debt levels have returned to more normal and historical levels. As a result of strong sales to new customers, who tend to have a higher loss rate than the back book of existing customers.
And from higher fuel prices, which correlate to higher write offs.
The EBITDA margin in the quarter was 52, 1%, which is a 200 basis point improvement from Q1, but still down from 55% in the second quarter of 2021 largely due to higher stock compensation expense and bad debt.
We still expect our full year EBITDA margin to be in line with our original expectations or 52% as margins expand in the back half of the year from revenue growth and the increased benefit of synergy realization from acquisitions.
Interest expense decreased 33% year over year, driven by the continued effect of $1 billion of fixed rate swaps that matured in January and the benefit of higher interest income earned on customer deposits and cash balances and certain foreign jurisdictions.
Our effective tax rate for the quarter was 23, 7% versus 25, 2% last year with the decrease driven by a $9 million discrete benefit in the quarter, partially offset by less excess tax benefit on stock option exercises and higher interest income on foreign deposit.
That's which are taxed at a higher rate.
Now turning to the balance sheet, we ended the quarter with over $1 $4 billion in unrestricted cash and $1 $1 billion available on our revolver.
There was $5.3 billion outstanding on our credit facilities, and we had $1 $6 billion borrowed in our securitization facility.
As of June 30th our leverage ratio was 2.76 times trailing 12 month adjusted EBITDA as calculated in accordance with our credit agreement.
In the quarter, we upsized and extended our credit facilities by $488 million to $4 $5 billion and extended the maturity to a new five year term of June 2027.
The term loan a was increased from $2.73 billion to $3 billion and a revolving credit facility was increased from one point to 85 billion to $1 5 billion.
Pro rata credit facility was converted from a LIBOR to sulfur base rate with margins on borrowings approximately 12 five basis points lower than the pro rata facility pre amendment the.
The improved terms reflect the consistency earnings power and strong cash flow generation of our business.
We repurchased roughly 1.6 million shares at an average price of $230 during the second quarter.
We also had a <unk> five plan in place in July under which we repurchased another 900000 shares at a $215 average price.
In total this year, we've repurchased four 3 million shares for $995 million.
$656 million remains authorized by our board for further repurchases.
Buying back shares at these levels is a no brainer along with a small deals we've recently announced.
We always had been and continue to be very efficient capital allocators, and our profits and cash flow put us in a position to take advantage of this unique opportunity to buyback a lot of shares at very low valuations.
Finally in order to align with recent changes in the organizational structure and management reporting.
The company has recast its segments from a geographic split to more of a product level split as seen in exhibit four of our earnings press release.
Further details will be provided in the upcoming 10-Q filing.
As Ron has covered our full year guidance updates, let me now share some thoughts on our Q3 outlook and our assumptions.
For Q3, we're expecting revenue to be between $870 million and $890 million and adjusted net income per share to be between $4 15 and $4.25.
On our guidance assumptions, we are assuming fuel prices of $4.64 in Q3 and $4.29 in Q4 again based off the forward curve for our forecast period.
Given an anticipated decline in fuel prices, we are assuming higher fuel spreads, particularly in Q3, having already experienced spread expansion during July .
Our interest expense guidance of $145 million to $155 million assumes average LIBOR raise of.
2.2% and three 2% in Q3 and Q4, respectively.
The rest of our assumptions can be found in our press release and supplement.
And moving away from the results and the outlook I would like to thank all of our employees around the world who helped US received two distinctions recently.
First <unk> has become certified as a most loved workplace.
Which honors the companys dedication to creating a culture in which employees are valued and given resources and opportunities to succeed.
And secondly, our U K team has also earned recognition for its employee mental health support winning a gold award in the workplace well-being index by mental health charity mind.
We are incredibly proud of these recognitions as we believe they reflect our company's commitment to our core values and the culture. We worked so hard to create and maintain.
Thank you for your interest and now operator, we'd like to open the line for questions.
Okay.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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To withdraw your question. Please press Star then two.
At this time, we will now pause momentarily to assemble our roster.
Sure.
Thank you. Your first question comes from Pete Christiansen with Citi. Please go ahead.
Everyone. Thanks for the question.
Well Ron I was just wondering if you can update us on the cross sell initiatives.
With the core pay one solution would be to be in.
Yes I'd.
I'd say it's.
Still pretty early days I think I said last time, they were trying to make sure. We've got people on this new payment platform first before we try to cross sell them.
So.
Okay.
Moving from spend over but I'd say, it's still pretty early I'd say, we had a little bit of.
Oh.
And which we determined that about 5000 of our call. It 100.
50000.
U S fleet card clients.
It's about half the payables that so that was one of those times are like okay. We can we can spend a lot of energy targets.
50000 companies.
Certain amount of spend that we will earn revenue on where we can refocus on the 5000 that are have always been so.
Uh huh.
A bit redirected so I'd say, some progress, but always kind of the new things we're still learning.
Thanks, and last one for me just wondering if you had an update on tag fueling in Brazil.
I know you've deployed some capital there to get those systems in place just wondering if you had an update on on the efforts there to to get more a tech Julie.
Yes.
Good question that things go and Super good its its way up I think it's 50% versus the.
Prior period I think we're on.
We're going to add.
<unk> thousand 1200, new locations.
This calendar year. So we are on track for that but most importantly to me is the thesis.
Hey, if we have more locations will we get more transactions. That's right. We've got the five or 6 million access people that have a tag and so if you stick them in front of locations that can accept it.
Trans World and so the good news is they do.
So when we say new accepting locations and geographies, where we didn't have acceptance we see transactions appear. So we're going to have we're going to keep pushing the thing obviously, we're going to add another few thousand locations and I think I said at the beginning our hope is to have 10 million transactions here.
Here in 2022, so I'd say, it's still got it all right.
Great. Thanks, so much nice results.
Thanks Bill.
<unk>.
Thank you.
Our next question comes from Darrin Peller with Wolfe Research. Please go ahead.
Hey, guys.
When we look at the trend line, even at two year stack basis on the fuel the organic growth rates.
I mean, they're they're sounding like they're in the low teens for fuel for example.
When we look at again, just looking at two year stacked.
And similar to our corporate payments in terms of two year stack acceleration. So the trends are good organically I'm curious.
We look at the outlook first of all is that something you see as a normalized growth for fuel.
10% plus type grocery medium term.
Organically.
Cross selling helping that or will it and then secondly, just when we look at the outlook for the rest of the year, obviously, the gas price assumptions, you're assuming are lower.
Which I assume is impacting guidance, but what's the organic growth of the fuel business embedded in that.
Hey, Darrin, it's Ron why don't I take.
The first part and then give it over to Chuck So in terms of the.
The fleet business and the corporate payments business I'd say, we're in the same place where we.
We're planning, we modeled to be high single digits, and fuel and obviously high teams and corporate payments I know it sounded like a broken record, but we actually deploy.
Marketing and sales investment to hit those targets because again, we have all the stats right on loss rates and same store. So we basically if we hit the sales production targets. It basically comes out of the model, we're going to sell X lose Y. So we're going to grow 9%. So.
Yeah, we had some call it a recovery the booster dose.
And I think I mentioned, the higher fuel prices.
Nick help right sales are way up in that business digital demand is way up in the business.
The need to control is higher so I'd say nothing fundamentally.
Different in those two business lines in terms of the revenue targets other than we're off.
We said that and that's kind of where we're coming out.
Do you want to pick up truck.
A year question.
Yes, I would say that.
As Ron said the business is kind of a high single digit. It you can see organic growth for this quarter around 7%.
I would say that that's probably going to be consistent for the rest of the year.
Macro coming down over the periods.
Panic basis again, selling more than we lose good news, but we expect that organic growth to be kind of mid to high single digits.
Hey, Darrin, it's Ron just you said something interesting I want to just how the group is we haven't really landed where it's <expletive>.
The incremental product revenue to your point, so let's say we sold back some corporate payments lets just say virtual card and bill pay services to the fuel card clients. When it's been small I think we've mostly put it in the fuel card, but to the extent that that thing gets to be a larger number that that is.
Question, whether we kind of categorize them by the client is using it.
What the product is.
Okay. Thanks, Ron just a quick follow ups on the corporate payment side in terms of the strategy now I mean, you're doing more tuck ins on accounts payable, obviously and you know with invoice pay it seems like an area a set of assets that are differentiated where are you on the build out of where you want it to be in terms of really good integrated solutions that is one good sales.
Or is that can sell the AP side, rather than what used to be really selling my virtual card specifically.
Yeah, that's Super Duper good question Darren.
We're virtually complete like we're Super Happy Let me, let me try this on yourself historically in this thing.
We term corporate payments I think theres been three kind of buckets of providers, so kind of in the SaaS software front process or workflow companies that help basically.
And kind of AP process approval scheduling.
Scheduling that kind of stuff.
Quote payment or bill pay execution paying 100 invoices for the company, whether it's paper or card or ACTH and then third is really hard whether it's.
A business card or J D card or really a P cards. If you think about it the suppliers generally are different of those three buckets. If I said his name the top few people that have workflow software versus payment execution versus car. So we've got all three right. So we've got a.
<unk>, obviously now in the software front I think we're if not the largest non bank certainly close to in terms of bill pay spend volume and then we've obviously got a pretty big card business and relationship with Mastercard and so we love the fact that as a single provider.
We have capabilities like a process to make software to credit provision.
Hey, no matter, how it's paid to have a big virtual card networks. So we like.
That package as we go into the market right. The thought is we may attract people that are looking for more than one thing at a tie back to kind of the platform idea. So we're pretty we're pretty happy with it.
Great.
Great Alright, thanks, guys.
Yeah.
Thank you.
Your next question comes from Sanjay sack, Ronnie with K B W. Please go ahead.
Thanks.
Maybe just to follow up on that last question Ron So when we think about the revenue distribution of corporate payments how much of it comes from those three different buckets and then.
As we look ahead are there other pieces that you want to add to that business or do you feel like with all the with all the acquisitions that you've made.
You have everything you need to know sort of focus on that strategy that you mentioned.
Yeah again.
Say that I think we mostly have all we need I say it's ballpark.
If you take the.
The channel business, so the partner business out right, when we help either syntax or something.
With virtual card processing, which we do so if you take that out.
Just go to what we call the direct business, where we go to an AD business ourselves.
A third a third a third.
Sitting there between.
Traditional cards, what we call virtual cars or full AP and then this fourth pocket of what we'd call SaaS software workflow is basically close to zero right. We're just starting we spent the last year turning through whether we wanted to do a bigger deal there are capabilities deal there and ended up at <unk>. So.
That's kind of the run down the partner business is kind of similar in size call. It you know a quarter quarter quarter quarter, not not to hurt your head on that piece and the direct business as I mentioned in the last call is growing dramatically faster right I think year to date. The first half it's in the high Twenty's the direct business.
Thank God, we reported for the quarter I think the full AP is approaching 50% growth.
So we've got we've got Super good growth in what we call the core.
Corporate payments set and as Darren said, we're Super focused now really on the marketing and sales execution of it like this new product, which you didn't ask about but.
Let me just add first of all there seems to be when we analyze the Google search there's demand for this SaaS software stuff, that's incremental to what we'll call invoice payment. So we think we may generate some incremental leads by having a straight software product.
And then hopefully we'll get some sales productivity because the sales within the same salesman can sell both back and the payment execution. So we can get.
Get more revenue dollars out of the sales of the hope is that the production basically per quota carrier will go up as we bring in for him.
Okay, Great and then just a follow up question for Charles.
Could you just talk about like higher interest rates and how that sort of flows through the model I assume you've factored most everything in but maybe you could just speak to that and then just two part question second part is one of your competitors saw higher instances of fraud, I mean, I assume that's something you're monitoring but is there anything to call out there. Thanks.
Sure. So yes, we have factored in escalating interest rates, our assumption for Q3's, 2.2% for LIBOR going up to three 2% in Q4.
Following that curve.
So we have factored that through all of our variable debt, we do still have about 1 billion hedge.
Half of which comes off in January next year. The other half in December of next year.
So all of that has been contemplated.
I'd say on the fraud side, we have seen an uptick in attempts something thats kind of always been.
A factor attempted fraud, whether it be application for all the people coming in.
It will not really see they are or transaction fraud, skimming and things that's always in our credit loss numbers, but when fuel prices get as high as they have been all that activity does ramp up so we have tools in place to monitor it as such we have been watching it very very closely and I'd say, we'd probably in this last quarter, maybe over rotated a little bit to protect ours.
Sales as we saw an uptick in duplicate transactions our applications I should say some of those people get applications, though are people coming through multiple channels right.
Great because we have Google.
Sites are own or partner sites portal sites, whatever it may be and so we would probably dial that up a little bit too harshly and.
Revisiting that but nonetheless, we're monitoring it closely and while it's always in our numbers, we haven't seen a dramatic uptick in terms of.
Are pretty.
Great. Thank you.
Yeah.
Thank you. Your next question comes from Andrew Jeffrey with Trust Securities. Please go ahead.
Hi, Good afternoon. Appreciate you taking the question.
Ron I guess start with kind of a big picture question.
There's lots of.
<unk> is here that are sort of a different points in the cycle.
All doing well is there a point at which.
No.
It makes sense to us.
To take advantage of the strength in whether it's lodging or I know gift has been a long conversation.
To kind of streamline the business it would seem like this would be kind of an optimum a moment, perhaps consider that.
What do you mean, Andrew just in terms of when you use the word street I mean, I mean potentially.
Selling or divesting businesses that.
That maybe are a little bit ancillary to the to the overall offering I think about.
Fuel and core pay and Brazil, as being kind of the core businesses for the company.
As I said gift has been a conversation of over the years and I just wonder if there's any update sort of on the on the business model from that standpoint.
Yeah, I would say that.
Let's start where you started which is we like businesses that perform so well we're in a business, where we have performance, where there's market theres demand and and we compete well and we perform when we grow we tend to like that I don't have in front of me, but I think the non essential lodging business you called that grew 40%.
And 80% rent so that'd be the first thing the second thing I say it all the time that you guys. I guess this would be like Mastercard or visa, saying about their business and running through the categories that we're saying Hey, this is what we spend on fuel and hotels and whatever that that's how we think about it. These are just different kinds of you.
Now spend categories that said the company that employee spend and so to watch the model again, it's just identical we got out of the business. The same business and we give them a product to control one kind of span and then and then another guy and then the last one you know if people listening as we're trying to head towards what we call. This platform.
Well, we could get a single client.
Use multiple right.
All of these solutions are here, so I'm kind of mid size company that has you know walk around people. So we gave you our fleet card, but some of the people are salesman travel with G. M O T. A travel product and then how you're big enough that you pay a fair number of vendors.
We gave you built anything and so the hope is it will start to bring actually more of these things together over time more people will stop asking me. Okay are they unrelated let me start just go back to the first point, we like businesses they perform.
Okay. That's helpful.
But.
We are.
Got it okay.
I appreciate that thought I would check in and then just from a I guess another kind of high level question it sounds like.
You could be setting up for some investment cycle around cross selling as you get more focus and understand sort of the composition of your customers and so forth.
Any areas. Maybe this is more a question for Charles any areas, where you could ramp spend to accelerate revenue growth in a meaningful way that we should be thinking about especially as you look out to 'twenty three.
Yeah, I think we've stated repeatedly that the the fastest and most logical.
Way for us to Goose revenue is advertising, mostly digital advertising spend and the reason is one that that channel both advertisers and cells and I think I've mentioned have the sales literally complete without any people. So it's a it's not only on advertising and marketing channel.
The sales are closing channel and then second you know even in.
Enormous amount of field.
Resource out there, so giving them more qualified leads pointing them.
More crisp way to the right targets that may be interested in our solutions is another way to drive sales and revenue. So that's the one if you said, hey, I'm going to stop at a profit target.
In hopes of ramping up revenue that's the first place we would go we could go in a big way, we could go relatively quickly and we know a fair amount about what kind of returns we get from it.
Yeah.
Okay I appreciate all that thank you.
Thank you.
Your next question comes from <unk> <unk> with Evercore. Please go ahead.
Hey, Hi, this is Sharon <unk> from Evercore.
Quick question on the pricing front like deep rising for the lodging business moved up pretty significantly and even for the tools is when were there any specific items in this quarter that kind of drove it and how should we think about for what does the 40.
Second half of the year.
Yes. So this is charles in the lodging business, we have seen.
Pretty sizable recovery in terms of volume you saw some better.
Obviously expansion in pricing.
Pricing just hotel rates right hotel rates are higher that has created some additional margin in that business, which is helpful. And we are capturing more of that also as international air starts to recover that does have higher take rates than our domestic air and so we'll be able to ride so without it.
As well in the lodging business.
The toll side I'd say that we've done a good job differentiating our product do you see the rest of the markets and are able to withhold good pricing.
Pricing in terms of our subscription we're also as Ron mentioned earlier seeing success in terms of fuel parking and even our fast food business and as that brings more merchant discount revenue per tag that should also help.
Revenue per tag metric continue to improve.
Got it understood I know one quick follow up on the share count for the full year are there any buybacks baked in for the second half or is it just assuming no buybacks after the ban in July .
Our go forward guidance only assumes what we completed under the <unk> five in July .
Everything else that is assumed that we would use to pay down debt, which is really our R. R.
Favorite choice.
Got it thank you so much.
Yeah.
Thank you.
Your next question comes from Ken Zebrowski with automotive automotive research. Please go ahead.
Hi, good evening, everyone. Thanks for taking the question I just wanted to ask about the accrual aside acquisition just since I'm not familiar with the asset does that get you more into the procurement side of things and I guess, if not I mean, how much appetite is there to move up the transaction lifecycle. There and then anything you can comment on it.
<unk> the size of the deal revenue growth of the business that'd be really helpful. Thank you.
Yeah.
Yeah, Hey, Ken its Ron so yeah, we the.
The size is small it's basically a capability.
Assets that we bought.
You know a cloud based software package at a group of people that have built it I think ballpark they have kind of a 100 ish middle market clients at single digit millions in revenue.
On the on the Hey, the procurement I say not super interested the platforms a little wider right to your point in terms of procurement help our focus is really in the invoice automation.
Space again of helping EAP departments that by our payables products get.
At health and stuff and so that's the area that will build out and as you can imagine we did all kinds of studying with internal and external people and how this package compete and compares against other people that do the SaaS software, which convinced that's really to pull the trigger on it so its capability.
Well connected to our payment execution engine get into our sales force and hopefully they'll get more business and more rate right as a result of the incremental value.
Really excited about it I mean, its little but it's one of those.
As I previewed probably for a year now and we're going to do this we need to do this we will do this and it was really just with what we really like the guys. The team basically that we pull the trigger on.
Okay, Great and then just for my follow up and ask you about the guidance just because we're getting a few questions on it it looks like three Q guidance coming in strong versus some of the expectations that are out there, but the <unk> guide, maybe a little bit lighter than than what some.
As expected it was there anything in particular, that's causing that or anything.
That's that's leading to maybe some some.
Some weaker exit rates as you can exit the year and.
Move into 'twenty three.
Hey that that's a super good question so.
The short short answer to it is really that the trend of macro I can't remember I think I said this in my opening remarks that the macro things fuel price spreads FX et cetera, and then the below the line things you know interest expense chairs and stuff kind of when you put it all together is kind of a wash of what we thought from 90 days.
Well, it's a little bit of a stair step. So we got the best macro kind of here in Q2 right high fuel prices interest rates are still not high as you run into Q3, and then Q4 those things keep kind of rolling down a hill, so youll price again, we forecasted to be going down each quarter.
Our interest expense, we forecast that it would be going up each quarter and so it's mostly the macro overlay on our core business. So we run our business.
Kind of what we call macro neutral inorganically. So we can make sure we're running the business right and then we drop.
ROE help or hurt on the Brent, which would you guys like to see so that that's that's that's the short answer of it cooked into our assumptions.
Is it declining macro overlay Q2, Q3, Q4, but even with that if you look you know you do the math even at the print level, it's sequentially up right. The revenue still will grow sequentially in Q3 and in Q4 versus what we just produced.
I'd also add Canada just.
Just to reiterate we did see them, bringing forward of revenue in the gift card business is circa $10 million to $12 million.
Coming out of the second half and so that calendar <unk> has always had also having an impact.
Right.
Alright, Thank you very much I appreciate it.
Got it.
Thank you. Your next question comes from Mihir Bhatia with Bank of America. Please go ahead.
Good afternoon, and thank you for taking my questions.
Wanted to maybe just start with the Delta lodging win can you just help us understand maybe just the size of the impact of the Dealogic business any historical detail you can share in terms of room nights already.
Just any additional detail there and when does it go lives.
I'm not sure did you get Pixar.
Delta.
Yes.
Lodging business.
It's backed up.
Yep Yep Yep, so like I'm, sorry, I missed the first part of it so again, the lodging business and it's you know.
Tired he is a you know four.
400, and something million for $450 million annualized.
Annualized revenue business at.
All of the airlines segment versus the workforce and insurance segments call. It 100 data or you had rough number. So I would say that we would expect as one idea to probably grow that business.
10%, depending on the breadth and the pace of the rollout that they do but most of that wanted to call. It out to just show that we actually have some interesting tack here in the company and our people build stuff that clients and honestly their clients.
I'm sure everyone on this phone has been either.
Either that or seen that queue up line when they scrap of flight on your so the idea of being connected into their.
Passenger manifest system and being able to provision the service kind of inch semantically. It's just such a massive leap forward. So I think the prospects for this thing certainly go well beyond Delta. We've got I don't know 40, or 50 global airline clients and a handful.
I don't know four or five that are using this new product and so the hope is that it it goes wider with the clients, we have and that a bunch more of a pick up and it kind of becomes the way you know just distressed passengers are handled versus the old fashioned way.
Right no that does.
Thank you.
And if I could just ask a question I just want to ask was about two.
Momentum, you've obviously seen some really good momentum now for quite a few quarters and you mentioned digital sales were way way up so I did want to dig in a little bit on the drivers there I think last quarter you talked about.
Inbound such as being high.
So is there something about the process.
Or like productivity improvements that you've done that's driving the sales momentum.
I understand where this normalizes back as gas prices come back down where does the sales productivity normalize back down.
That's actually Super Good question. So yes, the the sales are compounding quite well, which we're obviously delighted in the digital part.
Compound is even even faster and so the two the two basic reasons for that are one spend so we're obviously spending more right. We're trying to reach more people.
Et cetera. So you spend more you produce more and then second I think the digital team has done a great job.
With process improvement. So for example, spending money to targets better right.
The right prospects instead of the wrong prospects are redesigning websites. So less people drop off that visit the website to begin with on hand off at the end of the 58% of the people that don't sign up all digitally but want to talk to somebody how do we get them over and how fast.
There's been a whole bunch of kind of workflow improvements that we've made are dialing the thing and to basically get more out of each dollar that we spend and so we've got a whole bunch of new ideas. We've got geography cash running we've got new websites launching so the team is just you know I don't.
If anyone listening, but it's in all world.
The people that have plans to keep taking the thing Paul So we don't see it resetting back.
When fuel prices moderate I think some of the free searches the job and the board will probably moderate some but my guess is we'll continue to over the past more and produce more.
That channel.
Great. Thank you.
Okay.
Youre welcome.
Thank you. Your next question comes from Bob Napoli with William Blair. Please go ahead.
Thank you good afternoon.
Solid results.
Question, just on the M&A wrong, and you guys have consistently been active ever since I've known you.
Valuations have come down.
Quite a bit.
What are you most interested in obviously I am sure you have and how active is your pipeline.
It just any thoughts on where you are most interested in adding you've been adding a lot of corporate payments is that where we would expect to see additional M&A or is there a.
And they have a broader broader view there.
That's a good question first of all I'm glad you're doing well just FYI.
So the short answer on M&A.
M&A is the because of the runoff.
And our capital is cheap.
You basically saw for last week.
Call internally a lot of capability acquisitions, probably in the last.
Year on year, and a half we've done five or six months.
Throw little deals right in terms of the purchase price, albeit maybe more important in terms of the capabilities that we got so I think what you'll see is we have a few more of those in fact.
Bye.
My opening about easy Werent.
The one yard line on a pretty important.
The transaction, which we think is a superb capability thing that we hope to announce a euro.
Weak so you'll see a few more of those we've got one where we're getting our business international that's not international so call. It two or three more but now we've got in our gun sights the old fashion fleet core accretive deals that are larger now cover a bigger client base bigger revenue and obviously got bigger.
Profit synergies so as the as the valuations you know.
Normalized we've.
Re engaged in some of those conversations. So my guess is the next 30 60 days Youll see us announce a few more capability type deals and then as the year rolls on.
Shouldn't be surprised to see us back doing some some larger more accretive deals.
Great. Thank you.
Right.
Right.
Just a quick follow up on Brazil, and the toll business and just your thoughts like long term.
That business in the kind of the ability to grow that that business and well would you look to add on to that business.
That market.
That's another really good question I mean the thing.
Every time when when we do reviews and we're there we talk about the businesses.
Enormity of the scale.
It is just such a gigantic.
The thing you drive around in that country and it's you know the brand name is literally you know because it's got a retail feel to it it's just everywhere.
Millions right back at you.
So the part of the.
The size of the franchise over whatever it is a 20 plus year old company is crazy and so what I'd say and then be the people the guy that runs the thing and the team there I'd, probably say repeatedly to our board I think it's one of the best So we have a great group of folks there, but what I would say as I see it Bob and tube.
Part one is.
Monetizing this thing we told you guys about we're going to take all these clients.
Clients, we had and we're gonna add on fuel to toll and why are we doing that because per user. It has 10 times. The stat. So a user says X per year at all and tax and fuel. So every one of those people that we can move over to fuel. Its helpful. Plus we get M. D are two or 3% on the honest.
So I think you'll see US you know bring that to a realization work contributes in a big way, but the new idea, which I think is also a big one is.
Add on the team is testing out two or three add ons basically too.
Do you have the proposition for example vehicle insurance as an example, going back to the 6 million drivers in the B to B drivers and basically offering up.
Insurance for those vehicles, because obviously they know they know a fair amount about them. So I think it's the core business. We've got we're gonna name another big win there. So we've got banks that are just getting launched to sell our products are.
Our sales Guy there is all world phase two with the fuel thing getting that to monetize and then phase III is really just add an idea.
A lot of new things, that's close to the business. So I don't know if you can hear it but we're super bullish still about the prospects there.
Thank you I appreciate it.
Okay.
Thank you. Your next question comes from Trevor Williams with Jefferies. Please go ahead.
Great. Thanks, Good afternoon, I wanted to ask on credit because your provision you've been running call it plus or minus $25 million or so per quarter in Q1, and Q2 first just any help on what you're building in for the second half of the year on bad debt and then just how should we think of that number and the sensitivity. It has in a recession.
And both with how high losses can go I know you guys tend to cite as percentage of billed business, but.
Whether on that metric or in dollars and then kind of counterbalancing that how quickly you can shut off the credit spigot.
If and when things start to turn.
Yeah sure ever it's Charles So looking forward, we do expect to kind of maintain current levels towards again until through the end of the year. So as fuel prices have remained pretty high.
A while for that to flow through the receivables. So that's going to take a quarter or two to kind of flush it out and then normalized hopefully as we go into next year.
We have as we said we've seen more attacks, we're being prudent in that regard.
But we would.
As we exit the year with a lower fuel price, but you know hopefully if such a better for next year.
That said on the recession side, we've been through.
Downturns before Covid was a bit unique we've seen similar kind of.
Recession call it in the global financial crisis, and that was around at that time here, but I'd say that yes, while we could see things go up our payment cycles are a little different than what you've seen at standard bank right, we don't offer revolving.
And we generally we have some clients that are on monthly net call. It 15, a lot of our clients are more frequent cycles weekly cycles or biweekly type cycles, and so our exposure if someone doesn't pay as we can shut it down pretty quickly and they don't have a big revolving loan that's sitting out there so yes, one basis points.
Could go up it would tend to spike like you might see in other credit card type portfolios.
In the event that we do and we haven't yet we haven't seen any sign of any kind of recession, but if we do just like we did in Kobe will certainly go back and re look through the portfolio and see where we can pull back excess lines and such we did open up some lines as fuel prices went higher so.
So we of course, if you smell something will go back and pull them down as fuel prices dropped.
Hey, Trevor its Ron we've got a lot of practice that we ran a fire drill just two years ago on this game. So I think we could we could you know desktop that playbook and if you go look at our credit losses, which are pure we published we did a pretty good job. It does tie all of the business back some but we know what to do particularly the.
Next point on the new business, we're probably half of our losses come from that's the place that you can instamatic linked to your point.
Get the thing thick, so we get the drill we monitor it carefully look at roll rates and everything and I'm knocking on wood here.
We call them and we know how to manage.
Okay, No fair enough and then just as my follow up on interest expense and any help with how we should be flowing that out to 2023, I think with the updated guide or backing into something like $60 million for Q4, taking that with the hedges that roll off next year. So just any initial free.
Mark you can give us for kind of quarterly baseline for 2023 interest expense.
Yeah sure I think your step up is probably in and around the ballpark.
Well it depends on the forward curve. So what I've seen is that a lot of people are anticipating an actual reduction in LIBOR sofa.
Through next year and so it just depends on what you believe there. So we're not we're not ready to give kind of that forward guidance, but I would say that you step off sounds about right and we will have $500 million it rolls off.
Currently hedged around 2.4.
That will roll off in January .
Got it okay perfect. Thank you.
Yeah.
Thank you.
Your next question comes from Ramsey Ellis's splits Barclays. Please go ahead.
Hi, gentlemen, thanks for taking my questions. This evening.
I had a follow up question probably for Charles on how to think about interest expense as well.
Can you talk about some of the offsets in the model that you have I'm thinking about like high cash balances cash balances and high rate jurisdictions, and you'd mentioned float income I'm just trying to think of what other tools you might have at your disposal to offset some of those higher interest interest expense as it flows through from higher rent.
Rate hikes, and I know you can soak up some of the Bottomline impact with buybacks as you mentioned I'm just curious what else what other machinery do you have to kind of help there.
Yeah. So if if interest rates in some of those foreign jurisdictions do continue to tick higher we do get interest income benefit.
Note that passive income under Subpart F is double tax we pick tax locally there and we pay tax year on the same income which is why our tax rate is a bit higher this year.
So I would call that out.
All of that is factored in so any forward rates that we see in Brazil, the CLEC or others.
The factor that in into our forward view.
Fuel prices coming down will help source securitization, we've kind of maxed out at $1 6 billion.
And so as fuel prices dropped that'll come down a little bit so that that'll be helpful.
But yes, there are offsets if things continue to go up in foreign jurisdictions for sure.
Got it Okay, and then and then lastly, and forgive me. If you already commented on this I missed it a little bit in the prepared remarks. It was it just an update on the Russia business and I guess the question here is are you sort of.
Planning on staying there unless the sanctions regime sort of forces you out or are you kind of looking for the right structure to potentially exit. The business is just a question of time or is it just more that you might hang onto it indefinitely depend how things break from a policy from a regulatory perspective.
Yeah, Hey, Ramsey, it's Ron I'd say, it's less about the regulatory we've got good people and we have you know an idea there I think we.
I said it repeatedly as a function of how the conflict plays out and what our options are so we've got people.
Helping us explore exiting that thing fully so probably like lots of people were kind of day to day looking at our options and looking at how the things go in and look at what's going on with the conflict. So it.
It doesn't seem to make sense for us to pull the plug on it today, but we're going to keep looking at.
Alright Super helpful. Thanks, so much.
Thank you.
Reached the end of our allocated time for a question and answer session. So that does conclude our conference for today. Thank you for attending you may now disconnect.
Okay.
Yeah.
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