Greetings, and welcome to the FLEETCOR Technologies Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to our host, Jim Eglseder, Senior Vice President of Global Investor Relations. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining us today for our fourth quarter 2019 earnings call. With me today are Ron Clarke, our Chairman and CEO; and Eric Dey, our CFO. Following comments from Ron and Eric, the operator will announce your opportunity to get into the queue for the Q&A session. It is only then that the queue will open for questions. Please note, our earnings and the supplement can be found under the Investor Relations section on our website at fleetcor.com. Throughout this call, we will be presenting non-GAAP financial information, including adjusted revenues, adjusted net income and adjusted net income per diluted share. This information is not calculated in accordance with GAAP and may be calculated differently than non-GAAP information at other companies. Reconciliations of historical non-GAAP financial information to the most directly comparable GAAP information appears in today's press release and on our website, as previously described. We are also providing 2020 guidance on both a GAAP and non-GAAP basis with reconciliations. Now before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. This includes forward-looking statements about our guidance and outlook, new products and initiatives and expectations regarding business development and acquisitions. They are not guarantees of future performance, and therefore, you should not put undue reliance upon them. These results are subject to numerous risks and uncertainties which could cause actual results to differ materially from what we expect. Some of those risks are mentioned today in our press release and on Form 8-K, on our annual report on Form 10-K that is filed with the Securities and Exchange Commission. These documents are available on our website and at sec.gov. With that out of the way, I would like to turn the call over to Ron Clarke, our Chairman and CEO. Ron?

Okay, Jim, thanks. Good afternoon, everyone, and appreciate you joining our fourth quarter earnings call. Upfront here, I plan to cover 4 subjects: first, provide my view of our Q4 finish; second, take a bit of a look back at our full year 2019 highlights; third, I'll preview our 2020 guidance; and then, lastly, I'll outline our priorities over the coming years. Okay. So on to the quarter. We reported Q4 revenue of $699 million, that's up 9%; and $3.17 in cash EPS, up 14%. Revenue finished a bit better than we had forecasted 90 days ago, I'd say, with the exception of gift, which came in light. Profits also at the high end of our expectations, helped a bit by a lower tax rate. Organic growth, good, overall finished at 10% in Q4. Fuel card growth inside of that at 9% for the quarter. Our 3 nonfuel lines' organic growth, quite good: tolls, up 17%; lodging, up 14%; and corporate pay, also up 14%. Trends remained quite good, what we call new sales or new bookings grew 13% in the quarter. Client revenue retention staying steady at just over 91%, and our same-store sales finished at 0.5 point negative, impacted mainly by the weak trucking vertical. Our Beyond strategy or Beyond initiatives, continued forward progress. And toll, just a great Q4, the Beyond toll, or what we call urban tag, sales in the quarter, 125,000 new tags sold in Q4. As a reminder, that's up from 4,000 in Q1, about 20,000 in Q2, and I think it was 58,000 in Q3. So clearly, evidence that the 20 million urban user target opportunity is starting to like our city-based parking, fuel and fast food offer. In the fuel business, our Beyond fuel here in the U.S., again, continued good progress.…

Thank you, Ron. For the fourth quarter of 2019, we reported revenue of $698.9 million, up 9%, compared to $643.4 million in the fourth quarter of 2018. GAAP net income decreased 22% to $235.5 million or $2.60 per diluted share from $302 million or $3.33 per diluted share in the fourth quarter of 2018. Included in the fourth quarter of 2019 was a gain of $13 million related to a minority investment and in the fourth quarter of 2018 was a gain of $153 million from the sale of the Chevron portfolio. Adjusted net income for the fourth quarter of 2019 increased 14% to $286.4 million compared to $252 million and adjusted net income per diluted share increased 14% to $3.17 compared to $2.78 in the fourth quarter of 2018. We experienced several macroeconomic headwinds in the fourth quarter of 2019 compared with the fourth quarter of 2018. Movements in foreign exchange rates were primarily negative, with most of the impact from the Brazilian real as the currency was down roughly 7% from the fourth quarter of 2018. We believe foreign exchange rates negatively impacted revenue during the quarter by approximately $9 million. In addition, fuel prices were lower by approximately 5% compared with the fourth quarter last year. And although we cannot precisely calculate the impact of these price changes, we believe our revenue was negatively impacted by approximately $2 million. And finally, fuel spreads had about an $8 million negative impact on the quarter compared with a very good spread setup in the fourth quarter of last year. So in total, those changes had a negative impact of approximately $19 million on our fourth quarter revenue compared with the fourth quarter of 2018. Organic revenue growth in the quarter was 10% overall. All of our major product categories…

[Operator Instructions] Our first question comes from Ramsey El-Assal with Barclays.

I wanted to ask about the corporate payments segment. It's still healthy growth there. It came in -- the organic growth rate came in below our model. I just wanted to kind of dig in a little bit there to see if there is anything has changed in terms of how you're viewing this segment. And I guess, in particular, going into 2020, is there any adjustment to your long-term thinking about the way, for example, Cambridge and Virtual card, both contribute to the overall growth rate there?

Ramsey, it's Ron. So the 14% headwind is pretty weak payroll card kind of subcategory, which is kind of flat. So if you pull that out, our core corporate pay was actually up 18% in Q4. And then, second, in Q4 of '18, there was a bunch of political spend because it was the 2-year cycle. I don't have it in front of me, but I'm sure the growth rate in corporate pay in Q4 of '18 would have been super high. So that made the comp, if you will, of this quarter against the '18 quarter quite tough, because of the political spend in Q4 '19. And then the second part of it, okay, what's the forward view, I'd say, high teens. I'd say, I don't have it in front of me, but if you said, "Hey, what do we think that whole corporate pay business will do that's embedded in our guidance?" I'd say we're outlooking high teens. And again, it does bump around by quarter. I think it has even here in '19. But we were investing to have that business keep pacing out in the high teens.

Okay. I appreciate that. I also wanted to ask about the FTC lawsuit and see if you had any comment on that? Any thoughts on timing? And just also, maybe embedded in your response, you could address the kind of potential risk if there could be any actual changes to your business practices that come out of this lawsuit as it gets eventually concluded. Or is this more just effectively a negotiation about a penalty payment?

Ramsey, this is Eric. I guess, first and foremost, there's been really no change since the complaint was filed by the FTC about 30 days-or-so ago. So we really don't have an update on the lawsuit itself, given the short period of time. We have made a number of comments around what we think the materiality of it is going to be, and our thinking is the same, and we don't think it's going to have a material impact on our business going forward. Yes, we have some conversations around redress, but those are still TBD at this point in time.

Our next question comes from Peter Christiansen with Citibank.

Ron, I guess with any type of business, there's always a pricing trade-off attrition issue that managers need to consider. I guess if you're looking across, particularly the fuel card business, how do you think about that trade-off between pricing and attrition? And has that changed?

I think it's fair, sure there is. I'd say that we're probably steady as she goes. I don't think we're making any material changes in fuel card pricing, either here or rest of the world. I think a bit of the reason for the thing guiding down a little bit in '20, is, a, we had a pretty good year. I think the full year this year was 9% organically. So a little bit better comp. And then b, really, it's credit. I'd say with the EMV thing being late in fuel, we're continuing to get chased by the bad guys at gas stations. And so I'd say the credit dynamics were worse in '19 in the fuel card business than we thought. And so we've had to take some actions, basically, to tighten credit, credit lines, the amount that people can spend, et cetera. So I'd say that's for certain part of the reasons we guide.

Is there any -- do you have an estimate of what percentage of provisions are cost to fraud?

Say it again, Peter, one more time.

What percentage of your provision expense has been fraudulent charges? And where has that mix of bankruptcy versus fraud kind of expenses there? How has that trended in recent quarters?

Yes. I don't have it super handy, but I'd say it's circa under $10 million of what we call fraud. I'd say the 2 kinds of fraud are basically application fraud, right? Someone makes up there an actual business, and they never are. And then fundamentally, fraud at the gas station, where someone fundamentally fills up tanks, if you will. And so I don't have it in front of me. We can circle back on it. But for sure, those 2 numbers are up in '19 over prior years.

And don't forget, as we migrate to chip and PIN next year, our fraud losses are going to decrease over a period of time, and hopefully, to be very minimal after October next year when hopefully, everybody's converted to the new chip and PIN requirement.

Our next question comes from Andrew Jeffrey with SunTrust.

Ron, I'm intrigued by your comments with regard to perhaps evolving M&A priorities and opportunities. Could you talk a little bit more about sort of corporate procurement and what that might look like in terms of augmenting the payable software offering you already have? Should we think about that as looking a little bit like what Coupa is doing? Or just a little color would be helpful.

Yes. I mean I think the headline is we've gotten into these 2 bigger categories, Andrew, the payroll and benefits and into the payables. So beyond just employee related, the idea of software, right? The clients are using different kinds of software to help them, clearly, in the payroll or benefit administration area and using software in and around payables, whether it's procurement or workflow and stuff. And so I think the idea is that there are some targets that nest around that, that are kind of in front of the payment. The payment is kind of the thing at the end. And so I think the thinking we've been doing over the last 6 months is, hey, hey, hey, if we bolted on some of that software that's in front of, basically, the payment, could we create a better bundled experience with the client? And obviously, it's obvious that those companies might have clients. So it might be an entrée for us into the payment thing that we do. So I wouldn't say we're ready to pull the trigger, but I'd say it's a concept in causing us to explore a set of targets that we didn't really look at 6 months ago.

Okay. All right. It would be interesting to see how you proceed. And just a point of clarification, if I may, around fuel. I understand OTR is soft and manufacturing have been in a recession for a couple of years now, or at least a year anyway. The 6% to 8% guidance versus the sort of the 9% in '19, does that suggest that beyond fuel it's facing tougher comps or deselling? Or I wonder if you could just parse out how much of that might be economic, same-store sales related, how much of it is sort of grow over in beyond fuel. I thought beyond fuel might offset some of the same-store sales weakness.

Yes. A combo of all those things you said. So one, it's obviously a good comp, a good growth rate in '19. Two is trucking not only in the U.S., but in Brazil, and the U.K. is weak. And I think we called it out in our same-store sales. It was, I think, minimized 4% to 5% negative range in the base in terms of softness. So it's quite weak. And then I think I mentioned the last one is, it's credit. So for example, we get a very large number of our new fuel card accounts digitally now in the U.S. I think it's approaching 75% of all the new accounts we acquire. And so we've had to moderate what we can offer both credit at all and certainly, credit for beyond fuel via that channel based on the credit experience that we've got. So we've decided to just going cautiously. I don't want to blow the thing up, so we're going in kind of slow, careful. Let the stuff we signed up in '19 bed in. Study the credit dynamics of it and then kind of expand it. So it might do better, Andrew, as we pace our way through the year, but I -- we really want to win pretty cautiously on the credit side.

Our next question comes from Tien-Tsin Huang with JPMorgan.

Just following up on Andrew's question, just on the Beyond side. I'm curious, is there a way you guys to quantify the impact in the fourth quarter or the lift in the fourth quarter and what the assumption would be in 2020 just for the Beyond initiative?

It's kind of in the 1% to 2% range, Tien-Tsin, is what I'd say. And again, we now have something in the base, but I don't have it in front of me. But we have obviously real revenue, and all the Beyond initiatives now finally in '19 and certainly in Q4. So they're all planning to be up. But again, they're coming off a relatively small basis. So it's something we could probably dig out and come back. But I'd say, across the board, it's kind of 1% to 2%.

Okay. And then when you mentioned broadening your client offerings, I know you gave payables as an example. But I'm curious the tangential stuff that you're willing to look at, how far are you willing to go from the core to meet this broadened client offering initiative? I mean I'm just -- can you give us a little bit more there? How far from the core are you interested in going?

Yes. Not super far would be the headline. And so the first one is we were fanatics around models. So we got to like the business model a lot first separate from what the business is. And then, second, it's got to be connected in some way. I referenced that procurement software example, because I think it's relatively easy to understand that. If you're AP heading a company and get ready to manage 1,000 invoices, you've got to have some set of software, either in your ERP or others to keep track of the vendors and whether you should have them all and when you should pay them. There's a lot of work to do before you click pay. And so things like that seem obvious to us as ways to maybe get clients more interested in a broader bundle. But we're not going to go crazy. We're just really trying to highlight that there's some adjacent things that are close to what we do that we like.

Okay. Last one, if you don't mind, just on the M&A side. Do you -- should we think of '20 looking like '19 in terms of doing a few similar-sized deals, like an Nvoicepay, Travelliance, SOLE? Or could we see some bigger deals in 2020 if you have your way? Anything that's holding you back there?

I certainly hope so, would be my answer. I've got my cheat sheet, a big elephant sitting here in front of me, and actually had a review yesterday on it. So our sights are set. I'm trying to do something big. As Eric referenced, our balance sheet is probably in as good a better place than it's ever been. So we are eager, probably like others on the phone, to do something. But I told you before, Tien-Tsin, we're not going to rush just because it's a good thing to do, but we're certainly interested in doing it.

Our next question comes from Sanjay Sakhrani with KBW.

I guess my first question is on the investments that are being made. Can you guys walk us through where those investments are being made? And what's driving some of these investments? Is it that you're being offensive? Or are those areas where you think, competitively, you could do better?

Yes, Sanjay, it's Ron. So I'd say, if you think about the sequential step in, in investments, it's one, some pro forma roll forward of the acquisitions. So some of the expense growth as you roll into '20 is really just 12 months of deals that carry lower margins, right, in our core business, that'd be number 1. Number 2 would be just traditional kind of line of business processing, servicing kinds of expenses that go hand-in-hand with the volume growth that we have planned. But the 2 bigger discretionary ones would be IT and sales. And what we saw, we've been modeling the last 2 or 3 months, the fact that our tax rate will probably step down about a point. I think we finished around 22% and change for '19. When Eric and I saw the number trending, I think we guided 20% to 22%. So we used 21% at the midpoint. We said, "Hey, there's an opportunity maybe to make a few investments in sales and IT." So we added a bit more really around transformation. I'd say instead of just projects, we're trying to have better data warehouses, move more processing to the cloud, improve our API layers as we connect, double down on the UIs for customers in terms of how they interact with us. So it's just -- it's a series of, I call it, different kinds of IT. Obviously, we're spending significantly more in and around cybersecurity. So it's investments in what we call non-line of business project investments that we're looking at.

Okay. And then just a follow-up on all Fleet M&A questions. I guess when we think about broadening the scope of these acquisitions, is it because there's not a lot of attractive stuff at the core and the valuations just aren't attractive enough? Or is it more that these are viable opportunities to get the same types of returns as you have elsewhere and it really adds another dimension to your offering?

Yes. I think it's really outside in. It's trying to look at the world that our clients and prospects fit in and how they go about doing their work and us identifying very adjacent kinds of software and services that look a lot like what we do. So I'd say that the first driver of it is to try to package things that help clients basically do their work. And then the second one is what you said. It creates obviously a bigger sandbox to go work in, and obviously, again, may create some cross-selling opportunities of getting client bases that are in similar areas. So it's all of the above. And again, we're going to be quite cautious and have a lot of conviction before we pull the trigger. But I want to give everyone a heads up that, that software and services adjacency is something that we are looking at so that people could be prepared if we tell you that.

But just a clarification. In terms of the accretion potential of any of these types of deals, is it similar to the stuff that you've done before? Or is it different?

They vary. We've looked at some fair number of these in the last 6 months. I mean as you know, the box of buying things that have both revenue growth and accretion opportunities all in one are not always super easy. And I think that's been a bit of a guide for us the last couple of years. It's not buying assets that are only accretive that don't have midterm growth prospects. So I'd say we're trying to make sure we look at deals that have both of those characteristics.

Our next question comes from Ashish Sabadra with Deutsche Bank.

A question on the toll, pretty good momentum there. You talked about pretty good traction on the 20 million urban user opportunity. You also mentioned potential slowdown in tolls to low teens. It's just still pretty healthy. And I guess it's mostly because of inflation. But I was just wondering if you can talk about how we should think about the urban user contribution going forward and the tailwind from the urban user going forward.

Ashish, it's Ron. Yes, that's a good question. So I guess you hit one of them. So if you said, "Hey, hey, why might Brazil organic growth step back a little bit from 2019?" One is what you said that inflation has gone backward a bit in Brazil. So a bit less of that is baked in. And then number two, I think that we are open to acquiring new accounts with longer free trial periods, which takes, in a sense, some of the pricing of the new business down. And the reason for that is that some of the competitors, the banks in Brazil, have been offering 6- or 12-month starts on the toll programs. And so although we believe we're the premium brand and network, we want to make sure we're still getting that business. So that would be the second one. In terms of the urban thing, I mean, let me put into context how big we think this could be. So in my opening remarks, I commented that we sold 125,000 new urban tags in the quarter, so call it circa 200,000 new users that signed up in 2019. I don't have the plan in front of me, but my guess is it's somewhere between 200,000 and 300,000 new urban users planned for 2020. We only sign up about 1 million new users, standard toll users per year. And so the impact, as you roll that snowball forward, if we can sign up 200,000, 250,000 and keep signing up 1 million, that number starts to get quite meaningful. So I'd say the one thing we've got evidence of now is that this offer to use an RFID convenient payment thing in and around the city at a bunch of places is something people like, and to tell you that we're able to actually communicate it and sell it. And so now we've got to try to scale it. We've got to build out the network further, which we've got money in for, and we've got to keep adding those number of users. So we're bullish on it, but I think it could be a pretty meaningful number here over the midterm.

That's very helpful. And then just maybe a follow-up question on the investments in digital and sales, that's pretty positive. How should -- how are you going to track the ROI on those investments? How should we think about the retention as well as sales booking going forward as you make these investments?

Yes. So the sales one, I'd say that one is shorter term. We, as you guys know, build models to increase sales investment year-over-year and increase sales production year-over-year. So that example, I'd say, we're planning, I think, I commented, 13% to 15% incremental sales production this year. And my guess is we're probably spending low teens incremental sales investment to accomplish that. I'd say the IT one is different. I'd say the incremental money we decided to invest this year is a bit nontraditional for us. It's more architecture, infrastructure and structural, if you will, allowing us to do things easier, better to make changes in applications, to write stuff on co-basis that fill all platforms to get stuff running on old, multi, single-client hardware into a cloud environment with better economics. So I'd say that they're probably a year or 2 out, the returns on this new set of IT things. But for us, I think the key is we have to simplify the technology footprint and application footprint that we have. And so we're making some investment in 2020 to get positioned to do that.

Our next question comes from George Mihalos with Cowen and Company.

Good to be on the call, guys. Maybe just to kind of circle back on the corporate payment side. Ron, I appreciate your commentary on growth kind of being in the high teens, looking out in the 2020. Should we expect any change, though, in the rates of growth for the cross-border business versus sort of traditional virtual card kind of putting full file outsourcing to decide and just focusing on those 2 segments or subsegments?

Yes, again, the high teens number still includes that payroll card subset, which, again, is not planned to grow super. So again, if we kind of move that out, the core corporate pay might do even a bit better. I'd say, yes, we probably are thinking about Cambridge, the FX business a bit slower. So we've grown that thing obviously in a couple of years, 20% plus on the top and more on the bottom. I'd say that the combo of our old line virtual card idea and our new line full AP outsourcing, that, that thing, again, is planned in the high teens. So really, both major businesses, both the payables business and the FX business are kind of hand-in-hand in terms of the growth rate.

Okay, very helpful. And just one point of clarification. With your sights set on potentially larger scale M&A, will that sort of put a pause or a hold on buyback activity over the beginning of the year?

George, it's Eric. Probably not. I mean the reality is we do have a lot of liquidity. As we've stated earlier, our balance sheet is in as best placed as really it's ever been. Our leverage is low. And listen, we've got plenty of liquidity, basically, to pursue both avenues, and that's what we want to do. So I wouldn't say we're not going to do it.

Our next question comes from David Togut with Evercore ISI.

Just to expand upon the beyond toll initiative in Brazil, recognizing this is a very different initiative than what you have in the U.S. with beyond fuel, do you have any credit concerns about Brazil as you do about the U.S.? In other words, is there any break on the growth of this kind of beyond toll initiative? And then related to that, I think, historically, you've given out some transaction growth numbers on the expansion of your McDonald's relationship in Brazil.

Yes, David. It's Ron. So yes, on the credit side, it's a good question. I'd say 2 things. One, that some large amount of our new business, we're booking on to credit card. So literally, we're not taking credit risk for, I'm going to say, call it, 2/3 of that new business that we're booking. And then obviously, the other 1/3, we're screening and determining that it's pretty creditworthy. So the credit dynamics in that market actually improved, believe it or not, in 2019 over the prior year. And we've got it modeled to kind of flattish going in 2020. So I'd say that sitting here today, the credit dynamics or risks aren't slowing us down on that. What's slowing us down there is trying to build out the nonfuel network. That's really the governor on speed there.

I see. And then McDonald's transaction growth? Any metrics there for the fourth quarter?

I don't have it in front of me. I know it's up, and it's planned to be up again in 2020. I think we've got, I can't remember, 75 additional locations that we're putting on. So it will be 2.5 million to 3 million would be my guesstimate without having a piece of paper in front of me.

Understood. Just a quick final question. Is the Mastercard fuel card in the U.S. still giving you differentiated growth versus the more traditional fuel card business? And if you have the growth rate for that business in the fourth quarter, that would be appreciated.

Ask it -- you just broke up for a second. Ask it, David, again, if you would?

Yes. Historically, you've given out quarterly transaction growth for the Mastercard fuel card, the interchange product. And I'm just curious if that -- and that product historically has grown faster than the core fuel card business. Was that still the case in the fourth quarter?

Eric, do you have that in front of you?

Yes, I don't have it exactly in front of me. We really don't talk about the individual lines of business. But it's -- if I recall, I think it grew kind of line average in the quarter with the growth of the whole fuel sector. Something in that ballpark.

Yes. I'd say, David, back again, I don't know the number, but the concept of this 2 for idea, particularly with our field people or phone people, to be able to offer a business, fuel cards that control fuel spend and then also on "1 account", help that company with payables or help open up the card for some employees for supplies or construction supplies. It's clearly a winning pitch. And then I saw some exhibit, I don't know, in the fourth quarter, where in Q2 and Q3, about 25% of all of our new sales were these 2 for sales, where this concept of adding payables to the account or some supplies, sometimes with different users in the account, is a very interesting offer. So I think the concept and the offer of this expanded product is good.

Our next question is from Ryan Cary with Bank of America.

It sounds like your underlying trucking environment remains tough, particularly in the U.S. and the U.K. But if we were to compare that to what you're seeing in the 3Q, it sounds like it weakened a little bit further. First, is that fair? And then second, while these headwinds are likely to persist into 2020, are you expecting we're past the trough? Or could things get worse before they get better?

Yes, Ryan, it's Ron. Yes, I'm looking at it, at a piece of paper. I'd say the trucking base softness got a little bit worse than Q3. It actually got worse kind of all throughout '19. We kind of planned it on the line that it's on, which, again, is soft. I don't know. I don't think we know that the U.K. is down not as much. Brazil is also, trucking, for some reason, is down some. So it has gotten a bit worse during '19, and we are planning it to be at the negative kind of 3% to 5% range in our 2020 guidance.

Got it. Okay. And then just a quick clarification on Beyond initiatives. Was the 1% to 2% incremental revenue growth contribution from the Beyond initiatives inclusive of both fuel and toll? And if it is, is there any way to break that up into the individual contribution from the fuel side and then from the toll side?

Yes. I think what we should do because Tien-Tsin asked that earlier, I think that we should try to put together a more embedded exhibit, where we go kind of line of business by line of business and give you guys some color on what the contributions are in the 2020 numbers rather than just throw it out, because they do vary in each of our 4 major categories, right? The Beyond efforts are different. The maturity, if you will, of them are different and stuff. And so, Jim, just remind us.

Yes, we'll take that, Ryan, as a takeaway and come back to you guys with something that hopefully is useful.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn it back to management for closing remarks. Thank you.

Thanks for joining us today, guys. As always, this is Jim, let me know if you have any further questions or if you need anything else.

Thank you. This concludes today's call. All parties may disconnect. Have a great evening.