Corpay Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 11 speakers on the call.

Operator

Please note this call is being recorded.

Operator

I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Jim Eglestetter, Investor Relations. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us today for our Q2 2024 earnings call. With me today are Ron Clarke, our Chairman and CEO and Tom Panther, our CFO. Following their prepared comments, the operator will announce the queue will open for the Q and A session. Today's documents, including our earnings release and supplement, can be found under the Investor Relations section on our website atcorpay.com. Throughout this call, we will be covering several non GAAP financial metrics, including revenues, net income and net income per diluted share, all on an adjusted basis.

Speaker 1

Will also be covering organic revenue growth. This metric neutralizes the impact of year over year changes in FX rates, fuel prices and fuel spreads. It also includes pro form a results for acquisitions and divestitures or scope changes closed during the 2 years being compared. None of these measures are calculated in accordance with GAAP and may be calculated differently than at other companies. Reconciliations of the historical non GAAP to the most directly comparable GAAP information can be found in today's press release and

Speaker 2

on our

Speaker 1

website. It's important to understand that part of our discussion today 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 and future acquisitions are based on that information. They are not guarantees of future performance and you should not put undue reliance upon them.

Speaker 1

We undertake no obligation 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 ks and in our Annual Report on Form 10 ks. These documents are available on our website and atsec.gov. So now I'll turn the call over to Ron Clark, our Chairman and CEO.

Speaker 1

Ron?

Speaker 2

Okay, Jim. Thanks. Good afternoon, everyone, and welcome to our Q2 2024 Earnings Call. Upfront here, I'll plan to cover 3 subjects. 1st, provide my take on Q2 results, along with an update on our problem children.

Speaker 2

2nd, I'll share updated 2024 full year guidance, including an up close look at our expected Q4 exit. And then lastly, I'll speak to our portfolio and our commitment to deeper versus wider. Okay. Let me begin with our Q2 results. We reported Q2 revenue of 976,000,000 dollars up 7% excluding Russia and cash EPS of $4.55 up 14% excluding Russia.

Speaker 2

Results really right in line with our expectations, both revenue and earnings finishing on the high side of our guidance range. Most importantly here, the trends in Q2 improving. Overall retention improved to nearly 92%. That's up 100 basis points from last year. Same store sales improved to flat in the quarter, that's up 2% sequentially and sales or new bookings strong up 21%, particular strength in our corporate payments business, sales there up 28%.

Speaker 2

So clearly a noticeable improvement in all three of our key business trends. Organic revenue growth for the quarter 6%, but clearly a tale of 2 cities, Our corporate payments business, Brazil business and international fleet business performed exceptionally well, while our lodging and North America fleet businesses not as good presented a drag on growth. So taken together, averaging out to 6% overall. So let me update you on the 2 problem children. So first, North America fleet performed really in line in Q2 against expectations, but still a drag on growth.

Speaker 2

We've now mostly lapped the infamous micro pivot and the implications there around late fee revenue and bad debt. Real progress though happening in the business on a few fronts. Retention is better, 150 basis points better in fact than Q2 last year. Softness improving 100 basis points better sequentially and sales growing. In the quarter, 80% of all of our digital sales, now 5 card and plus size accounts.

Speaker 2

So a significant pivot new business there. A third of our field sales now being booked to our new Corpay 1 fuel card, business card and virtual card in 1 and 25% of our SMB trucking sales now on our new Comdata Connect card that has no credit exposure. Additionally, we signed some important new accounts GasBuddy and AT and T, which are now coming online. So look, the evidence is building that there's demand for our new products and that this larger prospect segment sales can be grown. So that's happening.

Speaker 2

So on the back of these trends, we're outlooking North America fleet to grow revenue organically in Q4 and get back in the plus column. Okay. Over to lodging, our second problem child. Lodging finished a bit weaker in Q2 than we expected, mostly the result of lower flight cancellations and fewer homeowner insurance claims. Progress though happening on the lodging front.

Speaker 2

First IT there much better, uptime and search response time now exceeding our SLAs, big improvement in client softness and client retention in the business. Our new differentiated pricing now in place, increasing our yields where we've lowered room rates, if you will, to bigger accounts and increased pricing to walk in travelers. And then lastly, sales and lodging growing, up 36% in Q2, again, evidence to us that there's demand for the solutions. So again, the progress that we're seeing, we do expect the lodging business to turn positive, organic growth in Q4. So hopefully, as we exit Q4 this year, problem, children, no more.

Speaker 2

So the wrap on the quarter, again, no real surprises, in Q2, results kind of right on expectation. Trends, same store sales, new sales and retention trends significantly improved across the board. And our 2 problem children progressing on a path to growing again. Okay. Let me make the turn to our 2024 full year guidance.

Speaker 2

So today we're reiterating the full year 2024 guidance at the midpoint that we provided in May. So as a reminder, $4,000,000,000 in revenue and cash EPS of $19 For sure, some changes, some puts and takes in this guide. We're out looking weaker FX here in the second half than we were 90 days ago and a bit weaker second half launching revenue. That's offset by, Tamarang revenue and some expected synergies, that we'll capture there. Along with some expense management actions that we're putting in place to maintain profitability.

Speaker 2

I do want to put a special emphasis on our Q4 guide, which you can see in our earnings supplement. We're all looking accelerated double digit print and organic revenue growth and $21 of run rate cash EPS heading into 2025. Additionally, we are expecting to capture some meaningful synergies from our Paymorang and GPS corporate payments acquisitions next year, likely in the $0.50 accretion ballpark. So look, the main message to take away here is that core pay is headed to a better place. We're leaving behind some challenges, the Russia divestiture, Fed hikes, the fleet pivot, lodging softness, even the strategic review and heading to a place with accelerating performance, driven by problem children improvement, lower interest rates, higher sales and fewer shares.

Speaker 2

Our expected arrival to the better place is Q4. Okay. Last up, let me transition to an update on our portfolio, which again calls for a deeper, not wider company, squarely focused on 3 segments. We're well underway with our integration and synergy planning for our Pay Marang and GPS acquisitions. Initial thinking there calls for conversion and shuttering of the acquired IT systems, a significant streamlining of back office operations and G and A and really a leveraging of our broader product line to increase revenues in both businesses.

Speaker 2

We expect these two deals to add about 15% to our corporate payments business revenue next year, and with corporate payments overall representing about 40% of the overall company. We're also progressing a couple of small vehicle related divestitures, totaling approximately $400,000,000 of after tax proceeds. We anticipate using any proceeds from these divestitures to buy back C Pay stock to minimize dilution heading into next year. Lastly, we are working a couple of interesting deals in the pipeline, where we'd maintain our target leverage, and frankly have the liquidity to pull the trigger, if in fact the deals survive diligence. So in conclusion then today, Q2 again finishing in line, but don't miss improving trends, the base, new sales and retention, maintaining our full year 2020 4 guide at $4,000,000,000 in revenue and $19,000,000 in cash EPS, tracking to a better place with accelerating revenue and an EPS run rate of $21 exiting Q4, and ongoing simplification of the company, doubling down on corporate payments and aggressively working the synergies of our 2 newest deals.

Speaker 2

So with that, let me turn the call back over to Tom to provide some additional detail on the quarter. Tom?

Speaker 3

Thanks, Ron, and good afternoon, everyone. Here are some additional details related to the quarter. Print revenue was $976,000,000 which I was pleased to see at the high end of our guide despite a $3,000,000 macro headwind from both fuel and FX. Organic revenue grew 6% led by 18% growth in corporate payments. Reported revenue growth was 3%.

Speaker 3

However, excluding the impact from the sale of our Russia business, revenue grew 7%. Strong expense discipline and another quarter of lower bad debt resulted in EBITDA margin expanding to 53.1%. We generated $325,000,000 of free cash flow, which translates into $4.55 per share in cash EPS, $0.05 above the midpoint of our guide, up 8% versus last year and up 14% excluding the impact of the sale of our Russia business. Overall, solid results for the quarter. Now turning to our segment performance and the underlying drivers of our organic revenue growth.

Speaker 3

Across all of our segments, sales increased 21%, retention improved to nearly 92% and same store sales were flat compared to down 2% in the first quarter. Corporate payments revenue increased 18 percent during the quarter driven by impressive 19% growth in spend volume. Our direct businesses revenue grew 22% with sales up 34% and solid growth across spend volume, transactions and customers. Revenue per total spend, sometimes referred to as the take rate, increased during the quarter and our card penetration, which measures the percentage of total spend processed via virtual card, increased approximately 6% and is now above 11%. Both of these measures reflect the strength of our business relative to recent sector trends.

Speaker 3

Also, on July 1, we closed the PayMarine transaction and we are squarely focused on integrating the business. Inclusive of our initial synergies, we expect PayMarine to contribute approximately $25,000,000 to $35,000,000 to second half revenue. Cross border revenue increased 19% and sales grew 25% during the quarter. Client spend volume was robust against all geographies, which reflects our ability to further penetrate our large addressable markets. It's clear from our consistent strong performance that our go to market strategies are working.

Speaker 3

Consequently, we continue to make significant investments in this business through increased sales and marketing resources. In addition, we announced in June the acquisition of GPS, which will add over $125,000,000 of revenue in 2025 and increase our scale, particularly in the U. S. Currently, Corporate Payments as a segment contributes 30% of core pay revenue. But on a pro form a basis, at the end of next year, corporate payments will be approaching 40% of our company.

Speaker 3

Now turning to vehicle payments. Organic revenue increased 5% during the quarter with growth driven by Brazil and international fleet. Our international fleet business continues to perform very well led by low double digit revenue growth in both Australia and our U. K. Maintenance business.

Speaker 3

In the U. K, we've expanded the pay by phone parking app into a multi point solution consumer vehicle payments app by adding the ability to purchase insurance and search for nearby fuel stations and EV chargers. And we expect to integrate our vehicle maintenance and repair network into the app in the Q3. It's early days in terms of customers transacting on the app, but we've made good progress and we are excited about the opportunity. In Brazil, business performance was extremely strong with revenue growing 20% and sales increasing 27%.

Speaker 3

The business is clicking on all cylinders. The anchor toll product grew tags 9% and toll related revenue grew 20%. Our product offering now includes nearly 7,000 acceptance locations, including 2,800 gas stations, resulting in fueling transactions being up 24% year over year. We have sold nearly $2,500,000 insurance policies, up 3x from last year. Additionally, ZAP Pay users and revenue are both up approximately 40% compared to last year, which is all organic as we are in the early stages of cross selling the product.

Speaker 3

In the U. S, our local fleet business continues to be a drag on revenue growth. Excluding this business, North American fleet grew 3%. While the shift away from micro accounts has impacted our sales and revenue, we are beginning to see increased sales from our upmarket digital and field efforts. Sales of our proprietary Fuelman products grew 29% in the quarter and we're seeing signs this trend has momentum.

Speaker 3

Sales to companies operating 5 plus vehicles were the highest they've been in the last 3 years, which puts us on track to surpass our 2022 revenue from that customer segment. So our plans are working, just taking longer than we would like. Lodging revenue declined 10%, was a bit worse than we expected due to slightly lower room nights and rate. Sales of our overall lodging product were quite good, up 36% over last year, which gives us confidence that our customers like our Advantage product. Digging deeper into the segment's performance, we are encouraged to see same store sales, which had been the primary source of the business' recent softness, improved 300 basis points compared to Q1.

Speaker 3

Specifically, workforce showed improvement as we lapped some of the weakness from last year. Insurance was the primary cause of this quarter's weakness in revenue. Insurance results were impacted by the decline in claims activity and some one time benefits recognized last year that did not recur. Excluding last year's one time insurance commissions, revenue would have declined 3%. Now looking further down the income statement.

Speaker 3

Q2 operating expenses of $542,000,000 were up 1% versus Q2 of last year. Expense growth from acquisitions and sales investments were essentially offset by lower bad debt expense, a 4% decline in G and A expenses and the sale of our Russia business. Bad debt expense declined $7,000,000 or 20% from last year to $28,000,000 or 5 basis points of total spend. Substantially, all of the decline was in U. S.

Speaker 3

Vehicle payments as we realized the benefit from our higher quality customer portfolio. EBITDA margin in the quarter was 53.1%, approximately 60 basis points of improvement from last year. The positive operating leverage was driven by solid revenue growth, lower bad debt expense and a disciplined expense management. Excluding our Russia business sold in August of 2023, EBITDA margin increased approximately 100 and 65 basis points. Interest expense this quarter increased $6,000,000 year over year due to a decline in interest income from the sale of our Russia business and the impact of higher interest rates and debt balances.

Speaker 3

Our effective tax rate for the quarter was 24.7% versus 20 6.6% last year, driven primarily by tax benefits from specific tax planning strategies. Now turning to the balance sheet. We ended the quarter with nearly $1,400,000,000 in unrestricted cash, and we had approximately $850,000,000 available on our revolver. We have $5,900,000,000 outstanding on our credit facilities, and we had $1,400,000,000 borrowed under our securitization facility. As of the end of the quarter, our leverage ratio was 2.6x trailing 12 month EBITDA, which remains within our target range.

Speaker 3

As previously mentioned, we acquired PayMarang on July 1, which increased our leverage to 2.8x. Our ability to generate over $300,000,000 in quarterly free cash flows will increase our capacity on the revolver and cause leverage to decline during the rest of the year. In the quarter, we repurchased 2,200,000 shares and year to date, we've repurchased 3,300,000 shares for $949,000,000 We have $610,000,000 remaining under the current Board authorization and we will continue to evaluate additional buybacks over the course of the year based primarily around the timing of some potential non core vehicle related divestitures and the acquisition of GPS, which we expect to close in early 2025. Now let me provide some details related to our outlook. As Ron indicated, we are maintaining our guide at the midpoint of $4,000,000,000 of revenue $19 per share.

Speaker 3

We are tightening the range, reflecting increased visibility into our second half performance. However, the unsettled macro environment, particularly of late, increases the possibility of coming in towards the lower end of the range. For the overall economy, last week's economic data in the U. S. Reflected a slowing economy, which triggered significant moves in the equity and fixed income markets.

Speaker 3

However, a broader view of economic data continues to point to low single digit growth in our major markets, giving us confidence that business spending will grow at similar levels. We have analyzed recent historical and forward looking to inform our fuel and FX projections. Overall, we're estimating a modest macro headwind based on lower fuel prices and weaker FX, namely the Brazilian real forecast. Nonetheless, we remain focused on what we can control, which is running the business and optimizing its performance. Related to our core business, we are maintaining our full year guide in each of our businesses except for lodging as we continue to work through the softness.

Speaker 3

While we see indications of the business improving, we're electing to further derisk the forecast by assuming room nights to be relatively flat in Q3 and seasonally decline in Q4 compared to Q2. The impact from the macro headwind and lodging is offset by $25,000,000 to $35,000,000 of revenue from Pomerang. From a cash EPS perspective, we expect Paymerang to be EPS neutral and we've taken actions to offset the revenue headwinds through a range of expense initiatives, the flow through effect from the lower FX rates and fewer shares. I would also note that there was about $5,000,000 of gift revenue that was pulled forward in Q2 from Q3 based on customer shipment demands, which is simply timing and why we don't flow through this quarter's beat to the full year guide. So in total, some minor changes to our full year outlook, but no changes to print.

Speaker 3

For Q3, we're expecting revenue to grow 5% to 7% and cash EPS to grow 9% to 11%, which is supported by our preliminary July results. This translates into $1,015,000,000 to $1,035,000,000 of revenue and $4.90 to $5 per share of cash EPS. A little over half of the sequential increase in revenue is driven by Paymerang and the seasonal lift from our gift business. The remaining sequential increase is driven by the implementation of new sales, same store sales remaining flat, improved retention, especially in the U. S.

Speaker 3

Vehicle payments business and specific business initiatives, which are underway. We're projecting to exit the year with organic revenue growing in the low to mid teens, led by corporate payments growing in excess of 20%. However, equally important, North America fleet and lodging are projected to have turned to the corner and returned to growth. These estimates exclude the impact from our pending acquisition of GPS that is scheduled to close in early 2025 pending regulatory approval. We expect at least $0.50 of accretion next year from the combination of PayMarang and GPS.

Speaker 3

However, more importantly, we expect earnings accretion of approximately 2x that amount once we've completed our integration plans in the back half of twenty twenty five. The rest of our assumptions related to our guide can be found in our press release and supplement. With that, thank you for your interest in Corpay. And now operator, please open the lines for questions. Thank you.

Operator

Thank And we will take our first question from Darrin Peller with Wolfe Research.

Speaker 4

Hey, guys. Thank you. Look, it's great to hear about the confidence in reacceleration on both the lodging side and North American fleet. I guess just one quick one on the lodging and then a little more color on fleet also. But on lodging, just the conviction around that is coming from, I think you were saying just the signings you're already seeing evidence of.

Speaker 4

And I just want to make sure that the tech side of it is all good now and ready to go in terms of new volume coming on. And then really on fleet, if you could just reiterate a little more of what you're saying around conviction on that, just why you see the confidence there, but it's great to hear given the trends.

Speaker 2

Yes. Darren, it's Ron. I mean the short answer, let me start with the logic thing, is really the base, right, the client base flexed down, call it, about a year ago starting in Q2 last year, both from the IT issue and kind of just softness macro in those areas. And so it's really less about the lodging business accelerating and more basically that the base went down and it stabilized. So effectively if you look sequentially, if I said to you, which I guess we have, hey, our print for lodging in Q2 is X, Think of it being mostly stable or flat sequentially.

Speaker 4

Okay.

Speaker 2

And so what that does is it takes the decline out, right, which was whatever 9 or 10 in the 1st couple of quarters that lists obviously the whole company. And it's really the same story for NAF, right, that the business was in decline when we made the pivot. We kicked out all of that micro business revenue and bad debt. So effectively we took the revenue down and fortunately we've refilled the bucket with more stable revenue. So the same thing, the better Q4 performance is not a function of lodging or NAF really growing.

Speaker 2

Think of them as honestly just flat and mostly just not declining anymore. And again, the main thing is really just we've lapped the bases going down and both businesses have stabilized since then.

Speaker 4

Okay. That's really helpful, Ron. Guys, just one more follow-up is on the corporate payment side. The growth has continued to be strong. I just want to make sure and we've had good feedback on the deals, especially Paimaraeng and the accretion coming.

Speaker 4

But Ron, how do you feel about your positioning now? I mean, given the number of deals you've done, where the assets are all placed? Do you think strategically we're where you want to be or do you anticipate more?

Speaker 2

Yes, Darrin, good question. We've talked about it before. I would say I feel like the Humpty Dumpty work is mostly over. We have a pretty broad product line now. We've got card products.

Speaker 2

Think the new tech guys like Divvy and Ramp and Brex and stuff. So we have those products. We've obviously got the full AP automation products. So I think from percent So when we say to you guys, hey, Tim, I think up 28% is that something like for the quarter. So that's the game out there.

Speaker 2

The game is shifted from assembling a competitive and a good business to now really just selling a lot of it. And I think the numbers show that we're not only selling it, but the business is compounding too. So we're in a good spot.

Speaker 4

That's great.

Speaker 3

And Darren, we expect it to continue to become a Darren, what I'm saying is we'd expect it to continue to become a bigger piece of the overall core pay portfolio. We'll launch just its growth rate, will cause it to continue to be a bigger portion of it. We said 30% now and 40% by the end of next year. And certainly from a capital allocation perspective, we would still view it as attractive way to deploy capital. That's great.

Speaker 4

Makes sense guys. Thank you.

Speaker 2

Good to talk to you.

Operator

Thank you. And our next question comes from Tien Tsin Huang with JPMorgan.

Speaker 5

Hey Ron and Tom, good to talk to you guys. Just a follow-up on Darren's last question there. Just on the corporate payment side, the acceleration to the 20%, what's fueling that? I know there's a little slightly easier comps. I want to make sure if there's anything else in there.

Speaker 5

And I think, Tom, you talked about take rates and trends there being positive. Maybe just to hone in on that with the direct business and I know there's some concerns out there on virtual card monetization and adverse payment selection that kind of thing. What's your view on that?

Speaker 2

Hey Tien Tsin, it's Ron. So on the first part, the acceleration is mostly sales, right, that I think you know this well, but in that business, the revenue is driven by sales literally from a year before. And so when we step up sales like we did in that business at 2023, we get the benefit here really throughout 2024. And the business basically had record sales last year. And then the second one is we're really out of the blocks in terms of synergies with the Panerang.

Speaker 2

We're back to the old fleet Corpay wheelhouse deals, right, where we buy stuff right in the space that we're in. And we know where profit pools are and revenue pools, so we're able to basically get at improving businesses like that like super quickly. So I'd say those obviously retention has stayed super good in those business. So it's just the model of the sales relative to the base, in this case a little bit extra from the synergies. But let me let Tom pick up because I know there was some question in part of our business with 1 of the other guys.

Speaker 2

You want to go to the take? Yes, sure.

Speaker 3

So, Tien tsin, what I'd say is the health related to the health of the network. We feel like our network related to the merchant portfolio really stands out. It's differentiated relative to what we see others having. 1, just its sheer size. It crosses multiple industries and verticals.

Speaker 3

We're not wet at any particular one. Obviously, we have a fair amount of focus on construction and field services and transportation, but it's wider than that as we've built it over the years. Our customer segment is much larger than what we would say is some of our peers in the marketplace where we're dealing with customers that are $100,000,000 to $200,000,000 to $500,000,000 in revenue. So that gives them the ability to really influence the merchants on the other end. We also offer merchants a much more customized acceptance program where we can do things for them in terms of the levels of acceptance that they're willing to have and what expenses they'll accept versus what they won't accept.

Speaker 3

So it's not a one size fits all model with us. So we just think we've got a healthy merchant portfolio and then numbers that we referenced in terms of seeing take rates on the move up and card penetration gradually moving up. That's not something you would expect to see rates up, that's going to move gradually. All kind of points to a healthy merchant portfolio. The acquisition we did with Pay Marang will only make that larger.

Speaker 3

So we feel good about what we're seeing from an overall network perspective.

Speaker 5

Great. Thanks for going through that. Just my quick follow-up on the M and A front. I know got some divestitures, you're going to buy back stock with those proceeds. You're going to close UPS later, I mean early 2025.

Speaker 5

Can you how quickly can you replenish the acquisition pipeline with similar type deals?

Speaker 2

It is replenished, Tien Tsin, in my opener we got a couple of deals active that we're sitting looking to pull the trigger on now. So I think you know we're kind of mostly never out of that business. It's really just a question of whether the prices that sellers are looking for is something we could meet. So yes, we're in the game. We're going to buy stuff as we said in the spaces that we're in.

Speaker 2

And I think digging into these 2 most recent ones, when we signed and when we closed, it helps your confidence playing the game again and going after the synergies. So I'd say we're full speed ahead on that. And I'd say the confidence in the divestitures is much higher than when I spoke to you last time. I'd say 100% will exit 1 and probably 75% will exit 2 by Christmas.

Speaker 5

Good. We like those deals. Thank you, Ron. Thank you, Tom.

Speaker 2

Good to talk to you.

Operator

Thank you. And our next question comes from Sanjay Sakhrani with KBW.

Speaker 6

Thank you. I wanted to dig in to the commentary on North America fleet. I think Tom talked about the growth being 3% ex the micro pivot. I'm just curious on what should we expect is embedded in the guide for the second half growth? And then maybe you can just elaborate on what's driving the weakness there?

Speaker 6

Is there any macro headwinds? I'm just trying to think through what we should think about the normalized growth rate on a go forward basis.

Speaker 2

Yes. Hey, Sanjay, it's Ron. So I'd say the best way to think about it is flat. Forget plus or minus a percent or 2. If you look at the things sequentially, the goal in this year, exiting this year is to have our North America fleet business revenue flat, be 100% past the pivot, with higher quality revenue sitting in there that's obviously got better retention rates which I called out has better same store sales rates and stuff like that.

Speaker 2

So the real question is next year, okay, hey, you made the pivot, you're done with that speech, you got better revenue, better trends and stuff, So what's going on? It's just sales. The $1,000,000 question is these couple of new products in this new channel investment, will we sell enough business relative to the base that that business can be a single or high mid digit grower again. So that's the question. It will be acceptance of the 2 new products that I called out.

Speaker 2

We call 1 of them Corpaid 1, which is kind of a 301 product and the other one called Comdata Connect, which is for trucking. So will those 2 products as the build in the field and the pivot and digital which I called out, will those things create enough absolute amount of sales that that base grows decently next year. That's the call. And obviously 90 days we'll give you our answer of what we're planning and what we think we can do. But look, the early returns, which is why I called it out, are good.

Speaker 2

When you launch new products, the question is always does the market like them? What's the acceptance? As you can see in the quarter, we're just leaving a

Speaker 3

third to a quarter

Speaker 2

of the sales of the channels are these new products, which is quite good. So we're optimistic that we've got the right things and we'll give you a better outlook in 90 days.

Speaker 3

And Sanjay, related to your second question, nothing material from a macro perspective in the second half. There's a call it $0,000,000 to $5,000,000 been on where fuel price lands of where that could be, but nothing that would be really significant to the overall give or take $1,000,000,000 business.

Speaker 6

Okay. And just to follow-up on Ting,

Speaker 7

you sort of alluded to,

Speaker 6

in terms of the virtual card businesses out there. I mean, it just seems like there's been a little bit of disappointing growth there. I guess, like, is that creating some of the data around that and how it affects you.

Speaker 2

I think the good news, Sanjay, is it hasn't. I mean I think it's always something to look at what other people are doing, but I think Tom said it earlier, all of our setups are different, right. Some guys have super low and inability to influence the merchants, other people are more highly monetized. We have a different business than other people, right, in terms of the amount of card, pure card business with Control AP. So the first thing that I'd say is you got to be a little careful drawing conclusions across the businesses.

Speaker 2

But look, it's working for us. We're calling out that our monetization is growing. And to Tom's point, we have a couple of things going on with both the partner and with the Pomerang deal that will increase our monetization as we go through the second half. So we're right now kind of outside of the problem, if you will, of people experiencing less car penetration.

Speaker 3

Thank you.

Operator

Thank you. And our next question comes from Nate Svensson with Deutsche Bank.

Speaker 6

Hey guys, thanks for the question. I guess on margins, really nice to see another quarter of solid margin expansion. You've got margins up 60 basis points, even more ex Russia. Kind of just wondering your thoughts on the ability to continue expanding margins in the back half of the year, particularly given you'll be lapping some really strong margin expansion in the back half of twenty twenty three and then you start to layer pammering in there. So anything we should keep in mind for our models with regard to cadence or magnitude of margin expansion and what that extra rate might look like heading into next year?

Speaker 2

High is the headline, Nate, high, right? I think we've said repeatedly that we've got significant operating leverage in this business. So I think our print was what's on low 53%, 53% and change, let's say, for Q2. We're looking sequentially, for revenue to go up 50 here in Q3, 975 call it the 1025 and then up I think another $40,000,000 as we head into Q4. So the flow through, the margin flow through of that incremental revenue is 80% or 90% in our business.

Speaker 2

So margins will expand another 2 to 2 50 basis points between Q2 and Q4. So this is the model. The model is if you get sequential incremental revenue on the books that you'll have significantly good flow through.

Speaker 6

That's great to hear. I guess for the follow-up, I kind of want to talk about retention. So obviously really nice to see the step up in retention, both sequentially and year over year. So I was hoping you could unpack a little more what's driving that? How much of this is kind of the external environment getting a little better?

Speaker 6

How much of it is explicit actions taken by you at core pay? And then I know for the growth algorithm the back half of the year, you talked about a number of different factors, retention, same store sales, new products, etcetera. So I guess just any way to like help size each of those metrics and their contribution to growth for the remainder of the year with a focus on retention there?

Speaker 2

Yes. Let me take the first part, Nate, it's Ron, and then Tom can pick up. Just on the hay retention, we called out the retention trend was good, nearly at a 92%, which is the best in a while. It's really mostly mix. And what I mean by that is, simplistically, the retention of a company like ours is really most fundamentally based on the size and the health of the clients.

Speaker 2

Remember, we provide credit and we probably kick out half the people. So for 92% retention, so 8% loss, it's probably closing in on half of that is us not liking the client enough anymore right to extend credit. So the mix like we talked about in the infamous North America fleet pivot, we're pivoting to higher quality, better creditworthy accounts, more stable accounts. So that structurally will create retention improvement. And then corporate payments as a business is bigger accounts.

Speaker 2

Tom said it earlier, call the average account a $200,000,000 or $300,000,000 company in its own right. And so when you have clients like that, they're way stable and generally decent creditworthy. So as corporate payments grows from whatever it was 20s to call it 30% now on the way to 40 percent that's another part of the mix that will improve our attention. So I would say that we'd be out looking proving retention certainly as we run through the next 4 to 8 quarters.

Speaker 3

And Nate, let me kind of walk you through the sequential quarter from Q2 through Q4 because I think it's important for you to kind of understand the pieces. So if we printed $975,000,000 in Q2 and are guiding toward a midpoint of $10.25 that $50,000,000 increase, half of that or a little over half of that is related to PayMarin coming on board, which obviously have a lot of visibility into and the seasonal uplift that we have seen from Gift. That's over half of the $50,000,000 increase. The other increase is really the snowballing of what we would call really our outperforming companies, the Brazil, the cross border, the payables that makes up the lion's share of remaining sequential increase. We'll be getting some lift from some of the other businesses, but not meaningful.

Speaker 3

That's more back to your question about a pretty similar retention based sales kind of model. But the snowballing of cross order payables in Brazil is what coupled with the Pomerang and the gift gets you to the 10.25. And then Q4 is more of the same. It's both the growth of Pomerang because we'll then start harvesting some of the synergies. So that gets you of the $40,000,000 growth between Q3 and Q4, half again is Pay Meringue and Gift.

Speaker 3

A Gift typically has a high seasonal second half. I mentioned the 3rd quarter already. It also typically has a strong Q4 for the obvious reasons of the holiday season and vendors wanting to refill their virtual shelves, if you will, gift cards. And then the rest of that increase, call it another $20,000,000 is the snowballing again of our growing businesses and the sales that we've been talking cross border and payables growing almost 30%, Brazil growing 27%. Those just pour into the second half that then drives the revenue.

Speaker 3

Now it's certainly not without some risks. I mean clearly we got to execute and we got to deliver. You don't look at those numbers and say, oh, well that's a lay down forecast for the second half of the year, but it's something that we do have discrete plans up against and the plans are up against things that we've got a fair amount of visibility in and things that are performing today is how I would describe the way we get from here to there.

Speaker 6

Ron, Tom, appreciate the color. Thank you.

Operator

Thank you. And our next question comes from Peter Christiansen with Citibank.

Speaker 8

Good evening. Thank you, gentlemen, for the question. I wanted to dig into the transaction momentum we're still seeing in the Brazil business, it looks fantastic. As we think about like parking, fueling stations, that kind of growth that you're seeing there, I was wondering if you can attribute that more on the footprint expansion versus kind of like same store growth or more user engagement. And on the footprint expansion kind of story, can you just remind us where we are?

Speaker 8

And do you see more opportunities to expand those two networks?

Speaker 2

Hey, Pete, Ron. Good question. Yes, the headline is the Brazil business is doing great. So if you divide it between kind of the core toll business or tags, which I think we said the tag volume, tag count grew 9% in the quarter. The reason again for that is we're Coke.

Speaker 2

We have every distribution channel known to man to buy a tag. We're at toll booths. We're in malls. We're in retail stores. We're in digital.

Speaker 2

We're in all the new cars they make on the windshield coming out. So if you've got a vehicle, you can buy our tag. And so there's just nobody, 2,000 people in those various places helping sell these tags. And then second, we told you and it's come true that the cross sell when you have 6000000000 or 7000000 active users including more than half of them come into your half every month, you can sell other vehicle related stuff and we are. We're selling a pile of it.

Speaker 2

Fueling is compounding I think at 25% or 30%. The funniest one we bought this we call it car debt speed. It's like tickets and registration for your car. And so that thing is compounding. I think it's 40% in the quarter, but literally we're up like 5x selling that to our own user base because when users now come on their phone to the homepage, we know who you are, you're Pete Christiansen, you're account 102.

Speaker 2

We know your registration. We literally put up on the homepage, hey, you've got 2 tickets Pete, They're outstanding partner and they're due on Friday. And so the power of I hope people aren't missing this, the mass, the size of the base and the number of new users we add and the broadening line of vehicle things that we're selling now, we've got the model working. I don't know if people can see it, but we're growing the platform of the flagship product because of our distribution and we're broadening the add on things. And your related question is, yes, the footprints of those related things are growing.

Speaker 2

So we've added another I think 400, 500 fueling stations this year and more next year. We've added thousands and thousands of incremental parking locations through a deal. We've added this car debt thing from 1 of the largest companies in the country doing it. So we are doing that, widening where the users can use these add on services which helps us reach more of the base. So the model is working.

Speaker 2

It's incrementally profitable obviously because we're cross selling right versus just getting new accounts. So I'm hoping that the model that we articulated a few years ago, people can see that it's working.

Speaker 8

That's really encouraging. And I hate to beat the dead horse on virtual cards and it sounds that's really encouraging about the mix being really healthy there as part of overall payment files. But just curious if you could give any color on rebate levels and how you're seeing those trend at least in your business?

Speaker 3

Yes, Pete, I'd say they're stable. I mean, we're not going to get into those details and they can vary dramatically based on customer base, size of transaction. But there's nothing from a rebate standpoint that's noising up the numbers. I'd say the trends there are how they've been over the last several quarters.

Speaker 8

That's helpful. I appreciate that, Tom. Thank you very much.

Operator

Thank you. And our next question comes from Ramsey El Assal with Barclays.

Speaker 9

Hi, thanks for taking my questions this evening. Rana, I wanted to ask about lodging's contribution to your longer term growth algorithm. I mean, the segment is undoubtedly recovering. What's your confidence level that lodging will eventually get back to its kind of historical growth watermark? Hi,

Speaker 2

Ramsey. Hi, and the reason again, I think if you go back to the very beginning of the thing is if you think about travel and U. S. Travel and the different pockets of white collar, blue collar, big companies, little companies. This area that we go after is just completely uncertain.

Speaker 2

The word they use is kind of unmanaged. So us people that are on the call have been spoon fed and managed for travel for forever and ever. But a group of guys going to fix wires in Tampa after a storm do not have very good travel, health and stuff. And so I think that the niche and the product line and the network that we've got serves this incredibly underserved market segment of which we've got a decent share. I don't have that in front of me, maybe call it 20%, something like that.

Speaker 2

So there's plenty of TAM and there's really not many good alternatives to help those companies. And so this isn't as bad as the IT thing we did whatever 6 or 7 years ago, but obviously we created some of the problem and the fact that the base is stabilizing tells me that we've contained it, that the people that didn't like what we did to them a year ago that we were not doing that to kind of 3rd and we can keep selling like we said when we grew up 36%, then the answer is we'll be back on the other side. I mean the value, Ramsey, to a customer, I think the spreads, which is our cost versus retail, hit $50 a room night, in June or July, dollars 50 I think we turned over $25 of that back to the company. So your ability to have a simple way to book, save and then pay for all that stuff in an organized way and control it so that people are going where you want, not spending other stuff. The combination of those things is just such a great value prop.

Speaker 2

It's probably the best value prop we have at the company. And so we just have to execute well, not like we did a year ago. So confidence is high to do better again.

Speaker 9

Super helpful, Juan. And one more from me. Can you unpack the same store sales improvement, which was really meaningful in the quarter? Where was that localized in terms of industry verticals, products kind of across the business? I think throughout your remarks, you've addressed that a little bit, but maybe just kind of roll it up for us.

Speaker 9

Where are you seeing the best improvement there on same store sales?

Speaker 2

Yes. The 2 big ones would be North America fleet. And again, that's structural, right? We, whatever, a year and a half ago, stopped the micro thing. And so your base gets way more stable when you have better clients in it, right, more sturdy kind of clients in it and you don't kick them out again for credit.

Speaker 2

And then the other one is logic because again that base started to erode in Q2 of last year and so the customers that we didn't do good for, again we kind of contain that. So those would be sequentially the two businesses that had to carry the most improvement into Q2.

Speaker 3

And that was the inflection point that we were that was the inflection point that we were looking for and anticipating to make sure that it didn't widen. And this was the quarter where we were able to see that in fact it didn't widen and it's coming back. So that gives us that element of optimism in terms of how they're going to perform.

Speaker 2

And you guys, Randy, it's Ron again, a good model and some good math guy. So when I say to you, hey, I've got 2 problem children,

Speaker 3

I have some at

Speaker 2

home too, but 2 problem children here, hey, they're going to go from declining to stable, hey, trust me, pal. What I'm trying to say to you is don't miss the trends. What are the 2 businesses whose same store sales improved the most sequentially? The 2 problem children. Whose retention was better, the problem children.

Speaker 2

And so we're seeing already in the trends those businesses getting better. So when we run the models forward that's a big part of what creates the improvement of leaseback to stable in those businesses.

Speaker 9

Got it. Thanks so much.

Operator

Thank you. And our next question comes from John Davis with Raymond James.

Speaker 7

Hey, guys. Well, I think if we go back to 4Q of 2022, there was a lot of travel disruption and the lodging business benefited. So just curious, did you see any benefit from the Crown Strike outage and the associated travel disruption there?

Speaker 2

Hey, John, I hate to admit, yes, we did, which we saw kind of in our July flash. So I don't necessarily like to wish problems on people. But yes, remember that if you took our entire lodging business and you looked at the pieces out of it, right, we sell to like 3 or 4 different verticals there. We sell to what we call kind of workforce or blue collar. We sell to airlines and we sell to insurers and stuff.

Speaker 2

In the in a couple of those businesses we have either what we call emergency like a hurricane or distressed, which is like the airlines not being able to get the flights across. That stuff probably is, I don't know, 10% or 15% of the entire business. So even if it's 50% better for a whole year like the world was upside down. So I wouldn't say that it's super duper meaningful to the overall thing, but it's certainly helpful. Certainly our numbers in that segment will be better in this quarter.

Speaker 7

Okay. That's helpful. And then Ron, just to dig in a little bit, you saw a nice acceleration in sales growth. I think you called out corporate payments up 21% versus overall up 21%. And I think Tom called out North America fleet 5 card plus new sales being really strong.

Speaker 7

But maybe overall, like what is North America fleet new sales look like in the other segment to call other than corporate payments driving that 21% as a nice sequential improvement?

Speaker 2

You have that Tom?

Speaker 3

Yes. North America fleet, John, is kind of mid single digits, but it's really kind of a tale of 2 cities in there because there's some segments within there that we're just kind of deemphasizing. If you look at our proprietary fuel product, it's actually up 30%. So that just gives you the range of variability that's going on in the North American fleet business. So I think you really have to kind of decompose it to get to what's going on there.

Speaker 3

Then as you said, you've worked down the page in terms of lodging, we referenced that payments almost 30%. So it's where we're focusing our sales efforts, we're seeing the results, I think is the message we leave you with.

Speaker 7

Okay. Appreciate all the color. Thanks, guys.

Operator

Thank you. And our next question comes from Andrew with William Blair.

Speaker 10

Thank you very much. Good afternoon. Appreciate you taking the question. I know that the call has gotten a little long. So I'm going to ask you one, Ron,

Speaker 3

just big picture

Speaker 10

and when I think about corporate payments and the 2 big deals you've announced recently, the profile of the business has really pretty meaningfully shifted and will continue to do so next year. And I know you did an exhaustive corporate review last year, but does there come a point where you kind of look at the merits of being a pure play, call it 20% scale public B2B company and what that might mean for some of the parts for FLEETCOR. This is just it's such a distinctive unique business where I think there could be scarcity value. I wonder if you revisit some of that potential shift in corporate structure?

Speaker 2

Yes, not now, right. We spent the last year studying that, I think referenced our conclusion that the greatest value creation in the company is 2 things. 1, keeping corporate payments going, which we're doing compounding organically 20% and buying accretive deals and 2, accelerating the vehicle business. And so that's what we're on. With that said, there's always a different day.

Speaker 2

Wake us up a different day and we'll see where we are in 6, 12 months. But I think we said that we like the company we have. We like the fact that we're in 3 payment lines and we've obviously got some fix it work to do in a couple of businesses. So I'd say we're not on a revisiting the 3 segments today, period. Again, our eyes are always open in our ears, but it's not today.

Speaker 10

Okay. That's helpful. Glad it's not off the table completely in the future though.

Operator

Thank you. Thank you. And we will take our next question from Dave Koning with Baird.

Speaker 8

Yes. Hey, guys. Thanks. And just one question for me. So Q4, you've guided the 14% growth.

Speaker 8

Just the math around that, I mean, it's pretty outstanding. Like, is that corporate 20% and everything else kind of over 10%? And then is that sustainable? Is there anything in Q4 that's really good that falls off in 25?

Speaker 2

Well, I'm glad that you said that. Yes, we've my word is that's arriving at a better place, at a nice place. And so, yes, 14% organic revenue growth and 14% print growth is attractive. So on the first part of your question, yes, obviously virtually every business is performing. Tom mentioned before, obviously the other categories with gifts would go way into the positive column and corporate payments would go well into the 20s because we're picking up some planned synergies on the Pay Meringue side and again just the snowball of the sales there.

Speaker 2

And then continued great performance in Brazil and then the 2 problem children as we said kind of stabilizing. So that's what the thing looks like. So as soon as you get the problem children from declining to stable, the high performing businesses pull up obviously the average growth rate quite a bit. In terms of hey does that mean if we're at 14%, hey we're at 14% forever, no. What I'd say is so much of it turns on the earlier question of what can we sell next year particularly in North America fleet in lodging if those bases have stabilized, can we sell enough to grow those businesses attractively again.

Speaker 2

But I would say it certainly bodes for double digit growth, right, which will certainly back you guys at 90 days with a view of 25. But yes, it will be a great outcome to get there and I think it sets us up well to be north of 10% in 2025.

Speaker 8

Great. Thank

Operator

you. Thank you. We have reached our allotted time for questions. This does conclude today's Corpay Second Quarter 2024 Earnings Conference Call. Thank you for your participation.

Operator

You may disconnect at any time.

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Corpay Q2 2024
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