Q3 2023 Fleetcor Technologies Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the core Technologies, Inc. Third quarter 2020 earnings Conference call. At this time all lines are in a listen only mode. Following the presentation.
We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero for the operator. This call is being recorded on Wednesday November eight 2023, and I would now like to turn the conference over to Jim Eglseder Investor Relations. Please go ahead.
Good afternoon, everyone and thank you for joining us today for our third quarter 2000, 2300 earnings call.
With me today are Ron Clarke, our chairman and CEO and Tom Panther, our CFO.
Following the prepared comments, the operator will announce that the queue will open for the Q&A session.
Please note our earnings release and supplement can be found under the Investor Relations section on our web site absolutely core dotcom.
Throughout this call, we will be covering organic revenue growth as.
As a reminder, this metric 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 and divestitures or scope changes 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 other companies.
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 need to remind everyone that part of today's discussion may include forward looking statements.
These statements reflect the best information, we have as of today, all statements about our outlook, new products and expectations regarding business development of future acquisitions or based on that information.
They are not guarantees of future performance and you should not put undue reliance upon them. We undertake no obligation to update any of these statements.
The 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 at SEC Gov.
So now with that out of the way I will turn the call over to Ron Clarke, our chairman and CEO Rod.
Okay. Jim Thanks, Good afternoon, everyone. Appreciate you joining us today.
Upfront here I'll plan to cover three subjects first our financials, our Q3 results our Q4 guidance.
And a brief 'twenty 'twenty four preview.
Second I'll provide an update on our strategic review and where we're coming out.
And then lastly, I'll introduce our fleet transformation plan.
Which is aimed at accelerating the revenue growth of that business.
Okay. Let me, let me begin with our Q3 results, which were generally in line with our expectations, we reported revenue of $971 million up 9%.
And cash EPS of $4 49 up 6%.
Versus last year.
Private would've been up.
16%.
Instant interest rates Q3 macro weaker than our August outlook or.
Fuel spreads contracted about 25% in.
In the quarter.
And that was the result of a 50 cent fuel price point to point increase.
From the Q2 exit to the Q3 exit.
Which compresses fuel spreads looked at despite this weaker macro our Q3 earnings power through we actually finished a few cents ahead of our August guide if you exclude just the Russia and pay by phone transactions.
Overall organic revenue growth for Q3 up 10%.
Inside of that our corporate payments business maintained its 20% growth rate.
So super pleased there.
Our pivot, which we started last year in North America fuel away from new Super small micro accounts clear.
Clearly paid dividends this quarter.
Our North America fuel credit losses when in half.
From about $24 million last year to $12 million this year.
Trends in the quarter generally quite good continued strong demand for our products our new sales.
Up 17%.
Versus prior year, so very good rich.
Retention remaining stable across the enterprise at 91%.
Our same store sales did soften a bit from flat last quarter or two kind of minus one this quarter, we did noticed pretty noticeable softening in our managed services.
Hub segment in lodging, which we're digging into it.
Q3 EBITDA.
<unk> $529 million $529 million, an all time.
Record high for the company.
Hell by EBITDA margins, which expanded to 54, 5%.
That's up about 200.
<unk> points versus last year.
So all in all I would say a pretty pretty good Q3 performance.
Okay. Let me, let me make the turn to our updated Q4 guidance.
Which reflects.
A couple of changes in scope.
So the rusher divestiture, which we mentioned last time.
And the recent pay by phone acquisition, we've also refreshed the Q4 macro.
Which is out looking a bit weaker FX than we saw in August. So look despite these adjustments in these pressures the fundamentals are quite good.
Such that our underlying Q4 profit guide is actually a bit stronger than our view 90 days ago.
You can see on page 14.
In our earnings supplement that refreshed bridge.
So we are updating our Q4 guidance today to $968 million in revenue at the midpoint and $4 49 in cash EPS at the midpoint, so really right on top of our Q3 print.
We're again historically Q3 and Q4 results have been have been very similar.
This updated Q4 guide implies a 10%.
Organic revenue growth in the quarter and a 14% EBITDA growth.
So again, the forecast really spot on to our 10 13 19 compounding model.
Okay, Let me transition to our preliminary view of 2024.
Which I characterize the setup is quite encouraging.
So we're all looking the 'twenty 'twenty four macro environment to be neutral to maybe slightly positive and that's simply looking at the various macro factors as they exit this this year and the next year.
Revenue were more outlook ing again, although early organic revenue growth in the same 9% to 11% range.
That's consistent with prior years, and then lastly, kind of the key profit drivers of the business generally setting up favorably so we're expecting lower bad debts.
Flat to lower interest expense.
And a stable tax rate and share count.
So generally a good setup. So look although it's early days in our in our 24 planning I would say, we generally like what we see.
Alright, let me, let me shift gears and provide an update on our strategic review.
As a reminder, the goal of our strategic review.
Or portfolio review is really two fold so first to make a simpler company.
And then second to evaluate separation options to increase shareholder value.
On the simplification front, we've done a few things we've sold Russia.
We decided to keep our prepaid business.
Although we are working a couple of other non core asset sales.
We're moving to three.
Primary reporting segments all of these things too to make a simpler company.
On the separation front, we've concluded not to pursue appear spin.
And that's mainly.
Looking at remain co D D rating risk.
We've also decided not to pursue a strategic sale, primarily there due to tax leakage.
And our estimate of dis synergies, but we are continuing to evaluate a couple separation alternatives with dance partners that.
And that we think are potentially a pretty attractive.
So we do expect to conclude those discussions with the Counterparties over the next 90 days.
And we will certainly report back then.
Okay. My last subject up is to introduce our fleet.
<unk> plan.
Which we believe is the single most important thing effort to unlock shareholder value and re radar stock. So the objective of the fleet transformation plan is.
He is to accelerate our global fleet business.
Growth in the double digits. So that we have three big primary businesses that can all target double digit revenue growth.
We have prepared a few slides.
And our lengthy earning supplement beginning on page 22 to help walk you through how we intend to accelerate fleet growth.
The plan really centers around three big ideas.
So first D E U.
On the <unk> front.
We plan to get at.
Performance improvement through new fleet products.
Which we're leasing into the market now.
These products join up with our core corporate payment products to really create a differentiated offering in the marketplace. As you may recall, we're also pivoting.
That business from kind of small micro prospects to a bit larger.
<unk> prospects, both for Murray pointing our digital.
Marketing machine.
And adding additional field and zoom reps.
Targeted this slightly larger market segment.
The emphasis will be on two primary verticals those are field services and construction.
Both of which are big significant opportunities.
<unk>.
Underpinning for the plan as EV.
We believe we can capitalize on the EV transition.
We're getting much more confident that our three in one commercial fleet.
EV Ice's solution is really is a winner.
We can maintain or maybe even increase our fleet revenues throughout the throughout the transition.
Though early experience in the U K over the last 11 quarters bears this out.
Revenue per EV vehicle running higher than revenue per IC E vehicle, so again pretty positive.
Then lastly is this idea of a consumer.
Vehicle payments business versus just the b to B.
Vehicle payments business and so the idea is to further expand on that front and really just leverage the networks the payment networks the merchant relationships we have.
That we built on the <unk> side over the last 20 years.
So the idea would be we start with anchor apps so think.
Toll tags in Brazil, or digital parking in the U K.
They have millions of active mobile users and then offer additional vehicle payment related solutions.
That utilize our payment networks. So for example, utilize our EV network or utilize our <unk>.
Service repair network.
We demonstrated success in this approach in Brazil over 60% of our active consumer toll users now use a second or even third.
Payment solution like like parking or insurance.
So we think pretty exciting.
Additionally, this this consumer.
Vehicle payments push does open up additional.
Additional interesting acquisition targets.
For example bay by phone.
And literally other ones as well so look we believe that we have the potential to incrementally drive.
The overall fleet slash vehicle business into double digit territory.
Via these three ideas, so again kind of new fleet products combined.
Combined with corporate payment products targeted to a couple of big verticals success in the EV transition and the build out of our big billion dollar consumer vehicle payments business.
Clearly well underway in Brazil, and we hope to accelerate with this pay by phone acquisition, you can actually see our forecast math the bill to 1 billion on page 29 of the supplement.
This anticipates that this expanded.
Consumer vehicle lag growing fast can pull a low single digit core fleet card business in the in the double digit growth territory, so literally maybe 12%.
So look in conclusion today.
We're forecasting 2023 pretty much where are we started out in February of this year and in around $17 or cash EPS.
That's despite selling Russia, and having a bit unfavorable macro.
24 outlook early but I'd say encouraging.
Still busy on some active separation discussions with some counterparties we.
We expect to conclude that in 90 days and then lastly, this fleet transformation plan, we think quite exciting.
We believe it has the potential to reaccelerate.
The fleet business and really potentially lift the entire.
Enterprise to faster growth, so with that let me turn the call back over to Tom to provide some additional detail on the quarter Tom.
Thanks, Ron and good afternoon, everyone.
Here are some additional details related to the quarter.
Let me start by acknowledging that it was an active quarter with the sale of the Russia business the acquisition of pay by phone and significant movements in fuel prices and FX rates.
I'll address the impact from each of these factors to better compare our actual results to our previous guidance.
First our prior guidance included a full year revenue and earnings from the rest of our fuel business.
Based on the August 15th clothing date and final cash proceeds.
His position of Russia resulted in $12 million of lower revenue and <unk> <unk> of lower cash EPS.
Like the acquisition of pay by phone on September 15th added $2 million of revenue and is <unk> dilutive to adjusted earnings.
Turning to the macro headwinds in the quarter compared to the assumptions used for our guidance in August the.
Total negative impact was $17 million average fuel prices of $3 88.
Were 7% higher during the quarter, resulting in a $4 million benefit. However, it's important to note the point to point increase in fuel price from July one to September 30, it was around 50.
The majority of this 15% increase occurred in August and plateaued for the remainder of the quarter.
Underlying that rapid increase in the retail fuel price with an even greater increase in wholesale fuel costs, which compressed fuel spreads approximately 25% compared to our forecast adversely affecting revenue by $13 million.
So the net impact from changes in fuel prices on revenue with a $9 million headwind.
It's typical when fuel prices rapidly increase for spreads to compress due to wholesale fuel prices, increasing faster than retail prices, which can overwhelm the fuel price increase benefit.
We get asked regularly if theres a way to track the pricing spread impact we found that opus or the oil price information service, which is a subscription based provider does a good job depicting retail and wholesale fuel prices and the resulting spread.
Now turning to FX rates the significant strengthening of the dollar beginning in August when the Feds tone became more hawkish caused the dollar to strengthen relative to our foreign currencies, resulting in an $8 million drag on revenue.
In summary, if we knew in early August what we know now about these factors I just discussed our guide would have been revenue of $963 million and cash EPS of $4 33.
Per share compared to our reported results of $971 million and $4 49 per share.
The majority of the $8 million revenue beat came from our international businesses. Our earnings outperformance is particularly impressive because the flow through of our revenue results combined with our strong expense management and lower bad debt expense enabled us to power through the macro headwind and still exceed our pro forma August <unk>.
Cash EPS guidance, when adjusting only for the impact from Russia and pay by phone.
We've included slide seven in our earnings supplement that walks you through these moving parts.
Now onto more details regarding our results for the quarter focusing on year over year revenue growth.
Organic revenue growth was 10%, reflecting the diversification of our business and the realization of the strong sales that we've produced throughout the year.
Year over year lower fuel prices resulted in a $12 million reduction in revenue.
And lower fuel price spreads reduced revenue by $23 million.
<unk> rates were favorable relative to last year translating into a $15 million benefit so net net a $20 million macro headwind versus last year.
Putting aside the macro noise and comparisons to our prior guidance GAAP revenue increased 9%, which reflects the businesses ability to consistently deliver solid revenue growth.
Corporate payments revenue was up 20% driven by 20% growth in spend strength in our direct business, which grew over 30% was again led by outstanding growth in full AP or AR.
Comprehensive menu of high quality payment solutions continues to sell extremely well up 28% as we sign up new customers, who are looking to modernize their AP operations.
We also continue to expand our proprietary merchant network and increase the amount of carnival spend.
Cross border revenue was up 19% as sales also grew 28% and recurring client transaction activity was robust we are the largest non bank FX provider in the world and the name recognition. We now have is a real advantage when we compete for our clients' business more importantly, our best in class capability.
These service and products allow us to have market, leading retention and client acquisition, which you can see in our results.
Turning to our fleet business organic revenue increased 4% we experienced.
Strength in our international markets and in the U K. We are pleased with the continued strong sales performance of our three in one product offering which customers find very attractive as they add evs to their fleet.
In the U S. Some softness in small fleet. In addition to the impact from our shift away from micro clients are affecting our sales and overall results.
Our shift to higher credit quality clients also impacted late fees, which were down 21% from Q3 2022.
While the decline in late fees results in a drag on our revenue growth has been more than offset by a decline in bad debt expense, which I'll comment on later, but it's important to point out that our decision to pivot market.
<unk> has been EBITDA positive.
Lastly, as Ron mentioned.
We continue to refine our go to market strategy to acquire larger customers and we're excited about the rollout of additional products that we expect will drive a significant uplift in sales heading into next year and going forward.
Before I move on Ron address the pay by phone acquisition and how it fits into our fleet transformation strategy.
To give you some deal specifics pay by phone as the world's second largest global parking payments platform with over 6 million monthly active users on its mobile app.
Their network covers approximately $4 million parking spaces, primarily in North America, the UK and Europe, and they process over $200 million transactions annually totaling $900 million in spend.
Paid approximately $300 million for the company and expect to realize about $50 million in revenue next year.
Now to Brazil, where revenue grew 16% compared to last year, driven by 7% tag growth our tag growth enables us to further increase the proportion of revenue from our expanded network of products, where we earn incremental revenue.
In the quarter, approximately 35% of customer spend was from our expanded network.
Fuel is a great example of how we're expanding our product network with a number of tag enabled gas stations growing 25% and transactions up over 40%.
Our extensive network enabled us to generate 20% sales growth in the quarter over the prior year with almost 30% of our sales coming from non tag products. Our success in Brazil, as a tangible proof point of our broader vehicle payment strategy, where we leverage an anchor product used by a large customer base.
To deliver additional products and services driving incremental revenue growth.
Lastly, we've received some questions over the last several quarters about the potential impact of the Brazilian government deploying free flow tolling, where the toll station reads the license plate and the individual pays the toll after the fact by going to our website.
Now that these free flow stations have been in place for a few years. Our experience is that we actually sell more tags. When these toll stations are installed because the tag user received a small discount and is able to pay the toll automatically via their tag.
This frictionless customer experience drive incremental demand for our product.
Lodging revenue increased 10% against a tough prior year Q3 comp where the business had grown 28%.
It's not unusual for the business to have quarterly revenue growth fluctuations driven by weather and natural disaster variability.
Year to date, the business is up 16%.
This quarters performance was highlighted by sales success across our industry verticals. In addition to revenue per night.
<unk> increased 20% driven primarily from channel and product mix, namely from our distressed passenger product and higher Hotel Commission revenue.
Offsetting that to some degree with softness in our construction and transportation verticals as the weaker macroeconomic environment is impacting these sectors. We expect this softness to rebound as the economic outlook becomes clearer.
Before leaving this segment I want to briefly comment on our expectation to move to three primary business segments. We're making this change in how we operate the company in the fourth quarter and will reflect the new segments in our 10-K.
Now.
Looking further down the income statement.
Operating expenses of $526 million represent a 4% increase versus Q3 of last year driven by acquisitions increase is tied to higher transaction and sales activities and investments to drive future growth, partially offset by lower FX rates and the sale of our Russia business.
Bad debt expense declined 22% from last year to $29 million or six basis points of spend.
Within that fleet bad debt expense was down $15 million year over year as we realize the benefit from lower exposure to micro clients as previously discussed.
EBITDA margin in the quarter was 54, 5%, a 225 basis point improvement from the third quarter of last year.
After normalizing for the Russia sale, we still expect our full year EBITDA margin to exit this year 200 to 250 basis points better than the prior year.
This positive operating leverage is driven by solid revenue growth lower bad debt expense disciplined expense management and synergies realized from recent acquisitions.
Interest expense increased $43 million year over year, driven by the increase in sofa on our debt stack and higher debt balances driven by acquisitions the impact of higher interest rates resulted in an approximate 44 drag on Q3 adjusted EPS.
Our effective tax rate for the quarter was 26, 6% versus 26, 8% last year.
Now turning to the balance sheet, we ended the quarter with $1 $1 billion in unrestricted cash and we had $660 million available on our revolver.
We have $5 $6 billion outstanding on our credit facilities, and we had $1 4 billion borrowed under our securitization facility.
As of September 30th our leverage ratio was 266 times trailing 12 month EBITDA as calculated in accordance with our credit agreement.
We repurchased 2 million shares in the quarter for $530 million, including the ASR, we announced in conjunction with the Russia sale and we have over $700 million authorized for share repurchases.
We have ample liquidity to pursue near term M&A opportunities and we'll continue to buy back shares when it makes sense.
Now turning to our guidance let.
Let me start by bridging the implied Q4 guidance, we provided in August to reflect the acquisition and divestiture activity during the quarter and current macro environment.
The sale of the Russia business would reduce revenue by $30 million and the acquisition of pay by phone with increased revenue by $10 million.
We're now expecting a $20 million macro headwind versus what we thought back in August driven primarily by worse FX rates, partially offset by higher fuel prices of $3 96.
Making these pro forma adjustments to our prior Q4 guide lowers revenue to $968 million and adjusted earnings per share to $4 34 per share at the midpoint. We've included slide 14 in the earnings presentation that lays out these factors.
With that pro forma reference point established let me comment on our Q4 outlook that includes the factors I. Just mentioned, we are expecting revenue to be between $953 million and $983 million, representing 10% growth versus last year at the midpoint.
And we expect adjusted net income per share to be between $4 34.
And $4.64 per share, which at the midpoint is up 11% over what we reported in Q4 2022.
So similar to the third quarter, we expect to generate solid year over year revenue and earnings growth. Despite some softening economic conditions in our markets.
Based on this Q4 guidance for the full year, we now expect GAAP revenues between $3 77, 4 billion and 380 $4 billion.
Adjusted net income between one to five 2 billion and $1 $2 $76 billion.
Adjusted net income per diluted share between $16 82.
And $17 12 per share and.
And EBITDA growth of 14% and EBITDA margin of 53%.
Thank you for your interest in <unk> and now operator, we'd like to open the line for questions.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed with the one on your telephone keypad J Donald Trump acknowledging request questions will be taken in the order received we advise participants to please limit your questions to one question and one.
One follow up.
And should you wish to cancel your request. Please press the star followed later too.
Are you seeing your speakerphone. Please keep your handset before pressing any keys one moment. Please for your first question.
Your first question comes from the line of Sanjay <unk> from <unk> W. Please go ahead.
Hey, guys.
Also in a tough backdrop here, Ron could you give us a little bit on the.
Strategic axes Youre considering.
Area with these dance partners.
Maybe you can just speak to what certain permutations might be.
Yeah.
Yeah sure Sanjay so, it's really mostly in and around our corporate payments business.
And so we have a couple of interesting out of priorities.
Well, we might separate something.
And actually have a pure play that has more scale and synergies and stuff and so we're kind of in the final mile of working through those conversations and seeing whether there's something there.
Okay.
Understood and then.
I appreciate the preliminary organic revenue outlook for next year I guess, when you think about the different variables from a macro standpoint, whether it be the economy and then obviously FX can.
Could you just give us a sense of sort of where we're at with that like what are you guys baking into that organic growth in terms of the backdrop the macro backdrop.
Yes, I think generally.
The comment I gave us.
So if you look at the various macro factors and the way we are exiting.
The fuel price spreads FX et cetera, I'd say that sitting here today, it feels like kind of a neutral ish to maybe a smidge positive.
And so.
Obviously, our organic stuff puts that to the side right.
Print organic but I did want to just provide a bit of a preview that.
This year Sanjay with.
Interest rates up whatever 400 basis points.
The grow over basically across some of our key.
So it looks quite good.
Looks way more normalized than it has in the last couple of years.
Yeah.
Okay, great. Thank you guys.
Thank you and your next question comes from the line of Tien Tsin Huang from Jpmorgan. Please go ahead.
Yeah.
Hey, good afternoon, I know you guys covered a lot here I wanted to ask on the.
Maybe for you Ron just on the consumer vehicle payments, a $1 billion that youre talking about 'twenty seven do you have.
The assets you need today to get to that $1 billion and do you expect the margin profile at that time to be difference. Since this is a consumer.
Or CDB business.
You called out.
Yes, it's a great question Josh.
Vince you Tonight, so yes.
Yes, we've got a couple I'd say of additional.
Transactions that we're looking at to fill out a couple of product lines, but this is <unk>.
Sir I wasn't saying, but mostly <unk>.
Organic play, where we get we use basically these big consumer active.
Box right.
And just match it up with what we already have right, which is the payment network and the merchants and so yes.
The 1 million dollar question there Tien tsin is just that velocity. So when we show 2 million people some additional related things, what's the take rate.
So I would say that most of the thinking goes studying what we've done in Brazil, and obviously studying this deal.
The view is that it's organic.
The key is you heard me talk a million times as cost of sale, that's the key to growth and profitability and so the good news is our view is we're not going to do tons of.
Marketing, Hey, let's go out and spend.
Ben Gazillions of dollars, but rather trying to line up big basis, So I'd say, we like the.
Yes.
EBITDA profile basically again the thing to go so a couple of more deals and most of the organic.
That's the game plan.
And Tien Tsin, we wouldn't expect it to be margin dilutive again look at.
Brazil is our bellwether it has attractive margins across the rest of our portfolio. So we think that's a good indicator of what the overall business can be.
Yeah add ons.
Oh, we're always lower cost right the new new accounts.
Sure.
I like it I mean, it's exciting I think getting into the consumer side and getting the synergies that would make a lot of sense. Just just curious on the cost side as you called out, but I'm sure you're thoughtful about that and I'm glad to hear that it's in your margin zone. Just on my follow up then just the three business lines.
The cleaning up the reporting segments I know, we're going to get more but is the general.
It's going to be copay vehicle payments and I suppose lodging.
Can you give us an idea on the margin differences.
Between the three because I think as we're thinking about.
Our own some of the parts.
I know there are a lot of different views on the profitability across those three but is there any high level thoughts that you can share on that.
Yeah, well, let me start just on the segments, yes. So second one will be vehicle, which will be our global fleet business are up.
Brazil business, and then obviously really theirs.
<unk>, which is a big part of the Brazil thing today.
The pay by phone and the other things would be in that second business, obviously corporate payments and then sort of a business logic.
Those will be the three laws.
Yes, so for your modeling, we're really just combining fleet in Brazil today.
And so based on how we report operating income and how you might model business and a more detailed level. It would just be a simple summation of those two.
We wouldn't anticipate any type of shift.
Profile, it's just bringing those two together into the vehicle payment segment.
Okay very good thank you.
Glad you like it.
Thank you and your next question comes from the line of Darrin Peller from Wolfe Research. Please go ahead.
Hi, Thanks, I mean sticking to just the card.
The segment themselves from this past quarter they were strong in the core piece side.
And then.
Kevin.
To hear Thats, an important part of the strategic thinking going forward, but Ron I'd love to just hear what you see going well there.
Obviously, a lot of competitive chatter going on around me.
Macro headwinds some debating structural changes so just.
Just talk to us a little more about your strategic plans on that segment before any any real mergers or anything else just standalone, what's going well what do you anticipate it to look like over the next year.
So good question, Darren mostly everything is going well to suppose that on how many quarters that 20%, but quite a few.
Going forward I think the sales.
Sales.
Inside of the 17% or in the mid to high <unk> for that line of business. So.
That tells us that we are selling a lot there's a lot of demand.
In terms of what's working well or not well lets say everything's working well with the exception of that channel business, which we've spoken up right. So again.
<unk> continues to decline but.
As you know much smaller part of the total.
What's your slides at the end of the direct business is growing closer to 25, 30%. So.
Look as I said before what we spent what over the last couple of years assembling stuff right software getting scale getting more scale in cross border.
Now the game is really marketing and sales and we put the brand out a while ago. We've added head count you see the sales growth rate. So that's the game now it's really just to drive.
New sales faster and get those implemented.
Unlike some other people have reported to your point, because we're middle market.
<unk> is pretty stale right. Our same store sales look stable look stable exiting the quarter. So we're not seeing.
Any of that.
So it looks like.
And one other comment there.
We havent seen erosion on the supplier level, we continue to see good network expansion Carnival spend continues to gradually move up so.
The interest level from the merchant side the supplier side.
Favorable.
That's really that's really helpful color, Ron just a quick follow up to the pre.
Business decision, just maybe just take a step back on why you decided to keep that now and are there any other noncore assets that do make sense curve to sell potential here.
Yeah, Paul I think ultimately Darrin, we just liked the business more than some other people have looked at it. So when you look at the tax leakage.
And dilution from that I'd say that we spent a lot of time, making that a better business and when we show up to three years ago and so the premium that we were looking for.
What is worth today right to pay the tax I think people didn't get close enough to where we are I wanted to see.
So we feel good enough to hold it with that said, okay. Now as part of this we went through all the all the other kind of small non core things. So we do have to kind of non core things that we're kind of actively talking to buyers about so there's a couple of hanging chads left there but.
And the broader.
Got a party thing we will have mopped up when we come back in 90 days.
Okay makes sense guys. Thanks very much.
Got it.
Thank you and your next question comes from the line of from CL.
CLS also.
Mark from Barclays. Please go ahead.
Hi, Thanks for taking my question I have a quick follow up on the consumer.
New consumer business, how should we think about that from kind of a geographic perspective is it a plan that you are kind of are going to execute.
All over the place depending on weather helpful assets become available in key geographies are you focus just on the U S or Europe or how are you looking at that.
Yes, great Great question Ramsey, So maybe step back.
Our current business is really in three markets three countries call. It 90% of the company right here, Brazil, and the UK so that would be the answer so were.
The $1 billion target, where I don't get to your 400 <unk>.
Silver payment business in Brazil, today, and close to zero right.
UK and the U S and so part of this pay by phone idea was to get a big customer base.
And in the U S, where we already have these networks again was the idea. So there's no plan for James's earlier question for Us to go far Youngman Faraway places and to try to build a business, where we don't have networks and management and staff. So Brazil UK you.
And that is how we're thinking about.
Alright, it makes a ton of sense.
And one follow up on the lodging segment, you called out the tough year over year comparison. This quarter also mentioned some softening in our sub vertical I think it was managed services I'm just trying to think through how to model that out next quarter, the comp gets easier, but due to the headwinds youre seeing in that managed services sort of sub vertical stick around where should we expect more of a.
A bounce back on the easier comp next quarter.
Yes, good question.
Unclear I would say, we thought I think I call. This out because we started to see it in Q2.
So again, let me go to the top and maybe this will be helpful. So inside of our lodging business, we serve call it four or five different customer sub segments. So we do things like airlines insurance railroads construction things like that so one of those segments is kind of this project.
Based segments, so think like.
Housing first.
<unk> merchandise people environmental companies, it's only I don't know Randy three or 400 clients in it but they feel pretty big teams of people that go.
Oh, the places and stay for a while.
When people go with city of staying there for two or three weeks. So thats the nature of the business. So literally starting in Q2 and more in Q3 say 50 out of those 300 clients just starting to go like Super Star. So when we call them, they would say things like Oh, Hey, Wal Mart.
It was a big client for merchandising move that in house use.
Use our third party company to go there into merchandising in their stores or a couple of our construction clients flipped over to using local contractors instead of their own people. So.
I'd say were just not really sure. The good news is the other segments, we don't see it.
Mostly rather than kind of in this one place.
So I think with trend what top 10% organic so thats actually went backwards that vantage thing a bit while obviously the rest of the businesses went forward. So we're kind of out looking Ramsey the thing to kind of stay soft ish here in Q4, and then obviously.
A better idea when we make the turn into next year.
That's great Ryan clears it up thank you.
Thank you and your next question comes from the line of Peter Christiansen.
Christianson from Citi. Please go ahead.
Thank you good evening, thanks for the question.
I'm just curious now that youre through a good portion of the strategic review.
It seems like.
You certainly have a scheme setup for the next couple of quarters.
Just curious on your thoughts on the use of <unk>.
Share repurchase leverage levels, and then second secondary to that general.
Thinking about the trade off between margin and growth here do you see an opportunity to invest perhaps accelerate growth a bit more get more behind sales just curious on your on your thoughts on those relationships. Thank you.
Yeah. Good good question Pete so.
It's been a pretty.
Pretty busy and active whatever it's been six or nine months strategic strategic review. So look the good news in it when you put out an AD like that it does generate incremental activity. So we do have as I said not only some separation.
The discussion is still going but we've surfaced some additional M&A targets or the kind of interesting.
Around the same space as people look to default.
I think our priorities around capital leverage or kind of the same our targets three I think we're running two five or two six.
We're buyers of our stock obviously at this price.
If we grow.
1% next year grow the bottom faster, that's 10 times EBITDA multiple for company compounds.
And so we're buyers of our stock. So that's a three times leverage will go higher for a deal. We do have again, a few interesting things in this consumer space that have surfaced and a couple in our core corporate payments space that we're chasing so like always I'd say those will be the two main users I think will.
Generate out of the low billions of $1 billion three ish I think is that our early look at next year, plus we've got leverage still.
Right.
Today, and EBITDA will grow next year or so.
A handful of deals and buy our stock back would be would be the order.
And then longer term growth growth versus margin are you coming out any differently.
Close to review or.
So onto the progress.
So if you look if you look at our.
For three quarters and even into our guide I think we stepped up sequentially as we said right EBITDA margins I think I quoted between 50, 455% this quarter and I think Tom and I are looking at kind of the same number for Q4.
Kind of look at our plan for.
For next year, Similarly, which gives us a little more money because we kind of gone past some of these capability acquisition.
They will ramp up the sales and marketing investments a bit.
Initially at least try to keep the.
Exit of our margin kind of between $54 55 is kind of a target for next year.
Great. Thank you Ron that's helpful.
Got it.
Thank you and your next question comes from the line of Mihir Bhatia from Bank of America. Please go ahead.
Hi, good afternoon, and thank you for taking my questions. The first question I had I just wanted to go back to the fleet product transformation. So fleet segment Brunswick mission strategy.
One way you talk about the fuel plus business Scott.
To ask a little bit more if you could talk a little bit more about that how how is that different than the beyond fuel strategy that I think you all had a couple of years ago, and just trying to understand what kind of growth et cetera, do you expect that strategy to drive.
Yes.
A good question so.
Let me start by saying that most of the competition.
So the prospects that we're trying to get her on business cards. So in the old days. It was cash in house accounts and other things and now we look at the customers that we want to add that we don't have many around business cards and some of those are on our competitors' fuel cards.
As well and so the idea is really to go to new accounts with a combined effectively a business card and if you are in one so.
Target that against verticals that use.
<unk> that have people in the field think of like field services like HVAC or construction things like that.
So that's the basic idea that we've now wrapped.
Then we bought a company about two years ago.
Roger that we rebrand as core pay one so we've wrapped all of that technology now around the business card.
It's mobile centric kind of automated expense capture and staff around the business card and then connected that to our proprietary fuel card capabilities.
In networks and so what you've got is a business card, it's a little more high tech those under the bank cards combined fuel car that has controls and advantaged economics, and it's bundled into kind of one package in one account and so the testing on it has been.
Super Duper good.
We're literally in the market selling the products now so the biggest difference I would say is the focus its new accounts versus batch of the base. It's been a couple of verticals and the product has been revamped to re wrapped with modern technology.
Technology.
Got it. Thank you and then just I wanted maybe just switching back to the corporate update.
<unk> segment for a second.
And it's a little bit of a repeat of the earlier question about just what is driving that strength that you are seeing like I appreciate that.
You are a little bit more mid market, but some of the factors like just macro slowdown a lot supply is choosing to push back or not accept virtual card payments seem like that shouldn't.
Be as big of an issue where they are small medium.
All customers are small to medium and I was just wondering are there particular areas of strength in that corporate payments segment that you would call out and just trying to understand a little bit about what's really driving so much strength for you guys or has it just been a lot of new sales.
What's driving that.
Yes, I mean, I think you can see the bid and the Kpis. It is.
Volume I mean, it's really not right so and the two big businesses here the payables business.
FX business, it's volume and it's what you said I think I just quoted it in Q3 again I think the sales of those businesses were up 28% year over year over the prior.
Blockbuster first half so you've got this huge implementation backlog effectively a new new volume new business.
Comment on the books, which helps give us the predictability a lot of the <unk>.
Sales will make it in this quarter or next quarter, we'll obviously be implemented.
The software next year. So it's not really complicated. We finally are off Humpty dumpty work of putting.
Competitive set of offerings together and has made the turn really into marketing and selling them and theyre doing a great job at it. So I think it is.
Pretty straightforward and then B, we're getting leverage in that business on the profit side.
Tom It's all looking about $1 billion ballpark call. It a $1 billion at year end revenue and so the scale of the business now and qualifying a 20% incremental revenue.
Flow through margins are 75% to 80% on that stuff. So it's obviously increase the EBITDA margin so.
It's just it's in a good spot as a giant Tam and so the game is to just keep Jason Chase it hard after it because we finally have what we need there.
Okay. Thank you.
Thank you and your next question comes from the line of sneak Brahmo from UBS. Please go ahead.
<unk>.
Hey, congrats on the strong quarter guys and thanks for taking my question I just wanted to ask about how the sales pipeline had been trending in the fleet business with the pivot to larger customers and how that.
So 2020 core outlook for the fleet business when paired with the new products that you plan to rollout.
Yeah, Hey, Nick it's Ron so.
I say, a little slower than we'd like but happening. So again, it's I guess, we're about a year.
I ended the pivot.
I can't remember, how clear I said, it but it's worked right in Q3.
The credit losses in that business, what half of 2012 and our outlook for.
This quarter Q4 is 25 going to 10, so <unk>, we have traded a bit of late fee revenue right. Because we don't have those small accounts that are going later, obviously go on that so I would say that it's in process, it's been pretty complicated to turn that digital engine too.
Bigger accounts to make sure that their credit worthy.
Although one of them is working but we're seeing I think as I mentioned sequentially, but an increase in what we call five card market. There and then second we started building the.
Field and zoom staff.
A little contact it'll be outbound if you will on that a bit larger scene than the micro so I'd say that we're moving some investment dollars along with pivoting. The digital engine. So the plan is for it to pick up a lot I don't have it in front of me, but I think our sales plan for that line of business here.
In the U S is up 25%.
Next year on the back of that.
One the digital pivot to the incremental field sellers.
And I went off to lose sight of the international business continues to sell quite well.
Year to date 10 plus percent.
Levels of sales growth. So that also helps us generate the overall fleet performance that you're seeing.
Thanks, that's very helpful color and great to see the credit losses down substantially for Michael.
Follow up question I, just wanted to touch on pay by phone I'm sorry. If this was already addressed but what's the margin profile and revenue growth profile of that business on a standalone basis, and how much opportunity do you see on the expense side to optimize there.
Yeah, there is no margin profile.
And that business right, that's been a gogo growth business compounding at about 20% to 25%.
Last three years of their preliminary plans stand alone into into next year and a 24 is another 25%.
Call It $50 million next year call. It 40, this year pro forma going to go to 50 kind of earning versus virtually nothing.
So again the big idea is what we can do with it right, which are two things one we've got a ton of businesses that are already the employees who are using their app here in the United States and in the U K. So we're obviously going to go to our business clients and hopefully dramatically increase the amount of.
The parking.
That the company has instead of glow consumer pocket, where FYI the rate is substantially better.
Oregon for our business and then the second one I think we said is we have networks. They don't have right beyond parking we at EV. We have service, we have registrations in fines and compliance kinds of things and so.
The idea is obviously to try to light up their customers who are in the app, making payments, where remember we got the information.
It's Ron Clark He's on his iPhone as license plate is X Y Z Nissan is Mastercard the data that we need to add an EV recharge is kind of in the account when we show up. So so we expect the synergy if you will to take that thing.
In the positive territory right as we as we head into 2020.
Great. Thanks for all the color.
Thank you and your next question comes from the line of Bob Napoli from William Blair. Please go ahead. Thank you good afternoon.
A lot there are a lot there tonight to go through.
The separation alternatives merging with someone else is that essentially would that.
Given the size of your businesses that are essentially going to be.
Three core corporate payments acquiring somebody and then merging into a public company or I mean.
Just any thoughts around how that.
Could work, what youre thinking about there.
Yeah, Hey, Bob good to hear your voice. So obviously, there's a few different flavors that were working on depending on who the counterparty is.
This is actually a pretty fascinating structure that we're looking at where we could spin it out.
Asset of ours effectively into a private entity. It has someone else combine their assets into the same private entity, we would obviously control and some fair amount of that company. So we consolidate it.
Work on the synergies and then basically IPO that a different day.
We're looking at there's not a scenario, where we would literally put.
Our asset.
Andrew we're not a company so there's a few different combinations and it really just a function of.
How accretive what kind of premium.
Think we could get by separating something a goodbye, which again makes it a lot more sense to us.
Pure spread has been where we're kind of guessing at it pro forma multiple so we've been in conversations with a few people for quite a while and we're trying to figure out whether.
The thing makes sense or not.
Thank you interesting just a follow up on corporate payments the 20% organic growth is really impressive given the size is that something that is sustainable into next year and is it.
The AP side or the cross border FX, you've made a number of acquisitions there what is outperforming more.
Maybe relative size of the key pieces of corporate payments.
And another question there.
60, 40 in terms of revenue, but they are both kind of confounded Bob around the same level and I would say.
Early days without Ron pushing too hard I'd say next year as you know high teens to 20 again more to do to give you that final number but I think yes, I think we believe given the sales again that we got in the queue in the backlog that come online next year and then we've got a couple of monetization.
Ears.
Get more card if you will with some of the accounts. So I think it's even though it's big I think we feel good about the thing just getting up and going again next year.
Thank you I appreciate it.
Thank you and your next question comes from the line of meats Vinson from Deutsche Bank. Please go ahead.
Hi, guys. Thanks for taking the question I just wanted to double click on organic growth within the fleet period, a little bit. So if you take Russia out from all periods. It looks like organic growth was relatively flat at 3%. This quarter. So can you give a little geographic detail on what drove that 3% growth I know last quarter, you called out Mexico, and Australia. So just want.
What happened this quarter, what yields grew well, which may have grown a little softer within that how did the monthly trends progressed as we move through the third quarter and then moving into the fourth quarter should we expect that organic growth ex Russia to stay roughly flat at around 3%.
Hey, Nate I'll take that again, I'd say the international markets continue to perform quite well.
Both Mexico, and Australia, Europe, UK all of them performed very well.
Our U S business, we saw our enterprise.
Segment do quite well, even some of the over the road trucking was able to do some level of positive growth relative to the overall blended growth rate. So.
While the international markets carried most of the weight of the positive growth. We did see some pockets within the U S business. There was there was also accretive to the overall as we said some of the small fleet business is just struggling a little bit in terms of filling the bucket back up with with the sales activities.
Right.
Got it I appreciate that and so I know there's been a few questions on the shifting to consumer vehicle payments, but I find that pretty intriguing. So I'll ask another one here, obviously, you've seen great success kind of building out the strategy in Brazil, but it seems to me like there's a lot of idiosyncrasies about that market that make it fairly unique compared to the U K or the U S that you.
Called out earlier, so maybe could you talk about some of the hurdles that you might see on your path to implementing that consumer vehicle ecosystem in the U S and the U K and how you're planning to get over those hurdles as you roll it out and what learnings you can take from the Brazil experience. Thanks again.
Yes. It is.
Another good question.
I think the whole thing turns on the existing.
A customer file so the big learning I think in Brazil is just.
Walked back in time is that Youll recall, there to the original consumer business was mostly tags initially.
Hey, you go to the Tollbooth you go to a store you go online and have one of automatic told bag and I get why don't I stick. It on my windshield on there it is and so the big idea or a couple of years ago. There was to get people on to the phone.
Get those same people are the tag to be on the phone and so what we learned there is once they are on the phone and checking things like their accounts or hey, we put content on like what the value of their car is because we know the cars that we found that there were $3 million.
5 billion people every month.
On the App on the phone doing stuff and so that's what enabled the sales of additional things for example insurance providing insurance and so.
That's the million dollar question is can you take a couple of million active users that are on a phone every month.
In the U K and point them at three or four other things related to their vehicle like E. For example, like servicing their car will will that take like it has in Brazil, because we have the rest of it.
We have the networks with obviously attack.
It connects to these networks in a med host computers and alike, and all kinds of G&A to sell to the top of all of this stuff. So that's the focus the game is.
That conversation that marketing that app with the consumer and their willingness to basically take things and the secret.
<unk> Challenge is there is no more data inputs.
So rather than having three or four separate apps right type and I'm, Ron Clark I have a range Rover, here's the license plate here as pancreatic or here's my phone number and so on it's kind of one and done the vehicle and you and your card stuff is already in place.
The parking app, though and so it's kind of in place for the add on apps. So I would I would point you to there and like the Big question, how fast we can grow this thing in Brazil, that's over 60% of the customer base.
Multiple products so it's.
A number where we feel like we can get some really good penetration over time.
A significant number of people will do just as Ron described it use cases or wanted to use one app to serve as the multiple types of activities and ultimately payment transactions.
Their vehicle.
Well, let me just give you a date, which I found fast enough.
<unk> not but.
To me, it's a bit of peanut butter and jelly, Hey, you've got a.
Our phone and your AD and Youre doing parking.
Mark here.
Here for an hour or whatever then you get carried away and you go on the App and you extend your time another hour. So I know exactly when you park, when youre, leaving and stuff Hey, what about <unk>.
Contests sure for that two hours.
While you're parked at the stadium you don't watch a game or stop then with no deductible, we covered around that two hour period, you know SaaS from your vehicle. So I give that one as an example, we can nest, we think some things like Super Duper close we have you're right.
Illustration and stuff, we could provide notifications and reminders of when that thing is that we're scan for fines that you have so.
Power of it is really and it being super close to what the existing application.
Thanks, guys I appreciate all the color.
Thank you and your next question comes from the line of Trevor Williams from Jefferies. Please go ahead.
Great. Thanks, a lot I wanted to go back to the thinking on organic growth in 2024, and I know it's early days, so it's a rough sketch but the.
The 911, that's in line with kind of what historically, you've shared for organic targets, but Ron how are you think about what the right growth rate is for fleet, specifically now, especially with Russia out so at least in the near term how youre thinking about fleet within nine to 11, I think historically it had been assumed to grow at 7%.
<unk>. If you think you can get there in 2024 ex Russia.
Yes, Trevor good question, I'd say, probably too early a set of days to give you a super good answer I'd say that.
We've done more work because we started sooner on the corporate payments.
And because that stuff sells in that installs later.
Way visibility into the full year right I kind of know what the backlog is as we had over Christmas.
The big question of where we come out is.
How much juice from the new new staff. So obviously the baseline global fleet business has been kind of low single digits. The last few quarters.
Obviously, you have two kind of big upsides.
Around the steel product line, a new channel and then obviously this consumer piece for example, like selling businesses parking. So I'd say it turns on that to me. The question is.
How far out and how much are we gonna want SaaS basically you're trying to close some of these incremental things to try to move that number up faster and remember with the with the vehicle combo with Brazil, you're probably already at.
Between the international Brazil, or the U S. You're probably seven to eight so call. It high single digits before you take a breath and so the real push is going to be how much new news, we layer on top of that but as you can tell from my conversation that that's what we're on and that's what we're going to really try to push its the number one.
One two and three assignments of this company is to take that big business and we choose it and get it back.
The fun and exciting installing somewhere so that we have three businesses that people like instead of do.
So I wanted to hear loud and clear that Thats what were on.
Understood. Thanks, and then Tom just a quick one for you the corporate payment margins it looks like we're up.
Little more than 400 basis points year over year, I think you alluded to potentially some synergies coming through in your prepared remarks anything specific to call out there I don't know if there was some global reach expense synergies that came through but that'd be helpful. Thank you.
Trevor.
Certainly a contributing factor in terms of the energy that we're able to realize with global reach.
Did a lot of heavy lifting over the spring and early summer to move onto one platform, we're able to eliminate some of the back office costs technology costs that was a significant contributor.
And then just the positive operating leverage within the business and just look at the structural dynamics of that business and how 20% revenue growth against a relatively stable fixed cost base, we're just going to generate positive operating leverage and drive margins higher so combination synergies and structural components would be.
Things that contributed to that.
Okay. Thank you.
Thank you and your last question comes from the line of Kenneth Sasaki from Autonomous Research. Please go ahead.
Hey, good evening, thanks for taking the question here.
Ron maybe one for you I wanted to ask you about the spin merge opportunity with our strategic partner <unk> been CEO at fleet core for two plus decades and built the business over time. So how do you think about your day to day responsibilities in the scenario, where there is a spin slash merger and I guess, where would you go to response.
All of these fall under that new structure, which would be two separate entities and then separately are there specific assets within <unk> that you would look to combine with either by product segment of the market or geography or is the play really defined overlap with another business and take out the cost.
Yes.
Okay, So I'd say.
First off we're not sure.
We've been we've been working at this and we have a couple of attractive combinations, but I don't want to leave this call where people think hey, it's a fait accompli as branch resting or something so so that would be 0.1, I'd say they are possible but.
Don't want to handicap it beyond that that's number one number two is it depends on the structures again, so one of the structures. It's kind of interesting is this idea of a spinning assets into a into a private entity. If someone else is in that case. It would almost look to me like a bleak or company, where we have a mine.
Alrighty, Investor, which we had that were all before so as busy thinking about that thing as I am today. If it went the other way if we were to basically RMT it enter into something else that was published.
Sure.
Planned in advance of doing that that we were clear kind of where the thing was going to.
To your point.
To take something that's super valuable.
He and I have to be Super convinced that it's going to go on a path that makes sense and it's going to get resolved that will warrant a premium so we are.
Spending a lot of time on those social issues and talk about how that would go but my commentary is I think I and others would be super involved certainly early on.
And whatever combination that we went forward with.
Alright.
<unk>.
Yes that makes a lot of sense and then I guess just as my follow up.
Some of the.
Some of your payment peers have called out headwinds in their cross border businesses, specifically, they're seeing more cross border transactions being done in U S dollars, rather than those payments being converted to local currencies. I guess are you guys seeing any of those trends and I guess, how much of a risk is that for the cross border payments business.
And then corporate payments.
Yeah, that's a good Paul I'd say not much I mean, there's a little bit of that win.
FX volatility kind of right softens and kind of where the dollar was whatever a few weeks ago, but I'd say, it's really on the margin. If you look at again, what we're pricing there. It's just the sheer volume growth which is adding.
Just more clients and more spend and I'd say, we're generally pretty stable.
Be a smidge softness youre point here and there and then remember for US just the diversity of that business right. So we originate I guess about 80% of all the business all the revenue outside of the United States and Canada, The UK Europe, Australia, and so that.
Geographic diversity and kind of the originating currencies also have a big impact. So there it's a little bit of a hedge right. One one places a little bit weaker, but then the counterparty is a little bit stronger so I.
I don't think we're immune but I'd say, we're not seeing much in the way of slowdown.
Okay excellent thanks, Ron.
Okay.
Thank you there are no further questions at this time.
Ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may all disconnect.