Corpay, Inc. (CPAY) Earnings Call Transcript & Summary

Okay. I think we can get started. Good morning, everyone. I'm Sean Kennedy from Goldman Sachs' Global Investment Research Division. I'm pleased to welcome FLEETCOR CFO, Eric Dey; and Jim Eglseder, Head of Investor Relations. Welcome, Eric and Jim.

Thanks for having us. Glad to be here in San Francisco. Weather was actually nice. Bits of rain we're having down in Atlanta right now.

Yes. I wanted to start off on the macro outlook. With FLEETCOR having substantial exposure to industrial customers in the energy, transport and construction industries, can you talk about what you're seeing in terms of same-store sales, trends across these end markets? Separately, you have some broad exposure globally in a number of markets. Can you describe the trends you're seeing in the U.S., Brazil, the U.K. and Greater Europe?

Sure. Our same-store sales statistic has been very consistent for a long period of time. I mean we're very diversified business. We have different business categories. We're in different geographies around the world. And as you can imagine, I mean, each one of those businesses and geographies, all have different economies. So each of those businesses perform in a little different way. But generally speaking, when you add it all up together, our same-store sales metric usually is plus or minus 1 point. And then the fourth quarter this year is no real different than that. We actually showed some same-store sales softness in the quarter of about 0.5%. So it's right in the margin that we have historically seen. In terms of the second part of your question, where have we seen a little bit of weakness, the over-the-road segment, I guess, for that category, meaning Big 18 wheelers in places like the U.S., the U.K. and even Brazil, we've seen some softness in those categories. And the explanation that I get for that is in the U.S. apparently, a lot of companies are decreasing inventories, which as a result, has caused the over-the-road traffic to be impacted somewhat by that. Is that going to change? I mean you would think so. In the U.K., over-the-road traffic there has been impacted by Brexit a little bit.

Did you see a pickup in the fourth quarter?

You mean in the U.K.?

Yes.

We didn't see much change there. It's been pretty flat. So is that going to change as Brexit gets resolved? Probably, hopefully. And we actually saw little softness in Brazil for some reason around agricultural transport. But I don't have any more color other than that. So I don't know why that happened. I think people got to eat. So you think that, that's something that would be pretty normal. But that's what that is. So again, for us, I mean, it's been pretty consistent. We think it's going to continue to be consistent. We planned for it to be consistent. It is what it is. But you talk about Brazil as an example. Brazil was -- had same-store sales strength in the quarter. Our corporate payments business had same-store sales strength in the quarter. So the -- all the businesses varied some degree.

Great. And then, I guess, last week on the earnings call, you laid out expectations for your business segments. I would say, like what are the main drivers looking forward behind your expectations of 6% to 8% fuel growth? It's down a little bit. And mid-teens growth in corporate payments, lodging in total?

I mean one of the great things about our business is our business model. Our model is highly predictable. So when we go through the process, when I go through our budget process, as an example, what's driving my budget for next year. Well, listen, I mean, first and foremost, it's the run rate of the business. Our businesses have some seasonality. But typically, our businesses grow throughout the year. So we exited 2019 at some level. So clearly, obviously, I can predict what the -- where that's going to go to in the current year. And we also invest a certain amount of money in sales and marketing, and I know, generally speaking, what the productivity levels are from our sales and marketing investment. So I can predict the impact for new sales. And attrition is fairly consistent. So we can predict what our attrition rates are going to be and all our new asset initiatives, we've got some view on those as well. So the combination of those things is what kind of drives our revenue in each one of our business categories from year-to-year. We can always have an outlier from time to time. You sign up an elephant somewhere along the line, which obviously is helpful. But it's pretty consistent. It's -- and all the businesses are relatively the same.

And I guess, like building on your kind of sales effort and go-to-market effort, can you talk about that? And I guess, talk about how you, I guess, you're more SMB focused compared to some competitors and how you really like tap into that segment of the market, which is pretty difficult, in general, to tap into?

Yes. I mean some of our businesses have gone down market a little bit. But we obviously sign up customers of all shapes and sizes. Our corporate payments business, as an example, goes more after larger accounts. As an example, our lodging business has historically gone after larger accounts, but more recently has gone down market a little bit to more midsized accounts, I would say. The fuel category is a little different around the world, which is I think what you're referring to. And that's where we've gone down market some because the penetration levels are so much lower down market than they are upmarket. We've done that through telemarketing effort and then more recently through investments in digital sorts of technology, and we've seen a lot of success in that. So we've really stepped up our investment in digital in all our businesses around the world.

And digital, like what specifically like -- what are those efforts there specifically?

Well, it's enhancing web, buying certain names on keywords on Google and those sorts of things. So when people are searching for a product, our name comes up first. So it's investment in things like that. It's investment in the entire credit screening and application process so to help speed that process along. Shockingly today, people, they don't want to hear from a telemarketer anymore. When was the last time you actually answered your phone, which is shocking. People are doing more and more of their search work after business hours as well, right? So they'd like to be able to go in and do some research on your product. And if they're interested in your product, actually fill out an application and maybe even get approved without actually talking to a live body. And you can do that if you're a smaller account.

And I guess, maybe talk a little bit about the smaller accounts going off of a bit, I guess onboard, self-onboarding and things like that, and how that helps your customer acquisition costs?

The only time you don't have to touch another person is helpful. And obviously, you do that with smaller fleets, right, because they don't need -- they're not as complicated of an account. Jim's painting company and I got 15 painters, and I need -- I got 15 trucks and I need 15 [ cards ]. It's an easier sell than if you're a Coca-Cola, and I've got different bill groups and thousands of vehicles, and I got trucks and cars, and I need different sorts of pricing structures. I mean, obviously, that's a higher touch sort of a sale versus a small to midsize sort of an account, which is less complicated. And again, our investments in technology are such that people can actually get through that process without talking to a body.

And it's less competitive, too, in terms of pricing and things like that.

Yes, I mean, down market, and look at who we're competing with most of the time. And again, you're talking mostly kind of fuel here. But we don't compete with -- our competition is really more inefficient payment methods when you get down market, right? It's corporate credit cards. It's major oil cards. It's cash. It's things like that, that we're trying to displace. And what our product does, when you go down market, we have a control card. We're helping effectively to reduce unauthorized spend on the card by mostly blue-collar workers. And if you're a big enough account, you can actually get a discount off the retail price of fuel as well. So a lot of different advantages.

All right. And then I guess, switching topics. You talked about -- you mentioned a little bit in corporate payments, obviously, a significant area of focus for FLEETCOR. And for some here who are newer to the FLEETCOR story, can you discuss your current offerings and tell us the main industry verticals in the segment?

Yes. I mean, first of all -- I mean, the payment space is an enormous space. I know what people throw out these incredibly large TAM metrics, but it's $150 trillion TAM. I mean, I love that. But it is -- it's an untapped market. I mean, there's 2 kinds of payments going on, right? I mean, companies make payments to employees, employee-related payments, and you make payments to the vendors. And so what we're trying to do, if you think about what all of our products are trying to do is solve for those 2 things. We help companies make some payments on behalf of their employees, and we help companies make vendor payments as well. And we've got products that effectively help them do that, whether it's a fuel product, whether it's a corporate pay product, whether it's a lodging product, whether it's a toll product, whatever it happens to be, that's what our products are effectively geared for. You're talking about specifically corporate payments though, I would imagine.

Yes. I was specific to corporate payments.

And again, we have an array of products, and we're helping our customers solve a problem they may have. We offer T&E cards. We offer payroll-related cards. We can help pay their vendors with our virtual card product. We do cross-border payments. So we help them make international payments. And we can make all of their payments for them. We have got a full AP outsourcing solution for them as well. So again, we've got a product for everybody, and we're trying to solve a problem that our customers might have, whatever that might be.

And then, I guess, building upon that, it seems like a trend is partnerships with Bill.com or AvidXchange. Can you talk about the growth in that area? And then also, I guess, how are the economics different than some [indiscernible]?

Yes, those customers are more of a network effect sort of customer. And effectively, what I mean by that is -- listen, we're the grill in the virtual card space. We have, I don't know, 1 million or so vendors signed up to accept our virtual card. And so when you get a Bill.com or an AvidXchange, as you mentioned, and that's a product that they want to start offering to their particular customer base, usually like Bill.com's case, it's a much smaller account than we typically go after. Why do they come to us? Because of the network effect. I've got the network and they don't have the network. So I can provide them with the capability to actually offer that product on day 1, where it would be near impossible for them to do that in a sort of near term. So it's great for us. And we've got lots of those sorts of customers, and I'm sure we'll be adding many more of those kinds of customers.

And then you recently mentioned the possibility of entering the procurement-related software market. Can you discuss how that market kind of fits in with your business? And I guess, are there any other adjacent markets that you're kind of -- that are looking attractive to you?

We were talking about M&A on the earnings call. And obviously, we've got -- if I need to go back and look at it over the last 15 years, I mean, we've done over 80 acquisitions of varying shapes and sizes over that period of time. And as you can imagine, we got a pretty robust business development group. So we're always looking at various types of M&A opportunities, whether they be tuck-ins that are right down the middle of the fairway. They're complementary to the businesses that we got or there may be something that's large in the payment space, but in a new geography, or again, complementary to something that I have. Ron mentioned something on the earnings call that we may be interested something in the procurement space. Well, what that means for us is, hey, we operate in -- when we look at corporate payments, we help companies make payments. So we run in the middle of that value chain, right? And so we help companies make payments. When they've identified the payment they want to make, they come to me, and I help them make that payment. Whether it's through a virtual card, whether it's through international payment or outsourced or AP solution to me, we help them figure out a way to pay. But there's more to the payment process than just that. If you look at the beginning of the process, there's a -- in the procurement world, it's identifying a vendor that actually has to be paid. It's provisioning that vendor to be paid, identifying the software that we have to use in order to get the vendor paid before it gets to somebody like me to actually make the payment. We have some interest in that adjacent space, where we could take on more of the value chain. Conversely, at the end of the process, there's a process we don't do as well, and that would be more on the receivable side, helping companies accept the payment, helping them post the payment, helping them reconcile back to the payment, things like that. So there's other pieces to it. And we'd like to own the value chain at some point, the entire value chain. So that's -- so we do have some interest in that space.

Great. And then the corporate payment growth did slow a bit in the fourth quarter. Is that just a function of lapping high-growth rates? And I guess, what's your medium term, like 3- to 5-year outlook for the business?

Yes. As we called out on the fourth quarter, I think we grew somewhere around 14% organically in the quarter, which is a little bit lower than we had been running. There was a couple of things happened in the quarter that we called out. One is we were lapping a pretty big comp, particularly in our cross-border payment business in the fourth quarter. I think in the third quarter, the prior, I think it was -- that business grew over 30%. So it's a little tougher comp. And then two, we had a little glitch in our payroll card business in the fourth quarter, which actually impacted our growth in the quarter. Without the payroll card, I think our business would have grew at around 18% organically. So it's a third-party vendor system that we were having a little bit of a problem with, which will impact our business, probably a little bit in the first quarter as well and then we'll lap it and it will be gone. But the way we view the corporate payments business over the medium-term is we view that business as a mid- to high teens kind of grower. And again, the reason we say that and the reason we think about that is because that's -- I invest in it to grow at that rate. I invest a certain amount of money in sales and marketing. We can predict the level of productivity we get generally from that level of investment that we make, and that's why we're confident in writing it down. So I think over the medium term, think of that as a high teens kind of growing category.

And there's just -- there's a lot of talk about corporate payments recently and IPOs and things like that. It's a very large market like you discussed. But have you seen any more competition recently?

In the corporate payment space, our competition really has been more large banks, right? I mean, banks have treasury relationships with companies. And when a company initially thinks about, wow, I'd like to somehow outsource the -- my payment process, their first call is usually to their bank, if they've got a good treasury relationship. The problem with banks is they usually don't have the right software and capabilities really to be that helpful on a full end-to-end sort of basis for their clients. And that's why the clients, in many cases, will come to see somebody like us because I can help them do more than just that banking relationship kinds -- that can kind of do.

Makes sense.

Beyond that, I mean, it's -- obviously, there's a few other people out there, but basically, that's our largest competitor.

And then I want to talk about your Beyond initiatives, definitely new products, exciting areas for growth. Your beyond fuel initiative added 1 or 2 points to growth in the fourth quarter. Can you give an update on its progression and outlook? And is there anything that has surprised you as you've been rolling it out to more and more customers?