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

All right. I think we're going to go ahead, sit down and get started here. My name is John Davis, I'm the payments and fintech analyst here at Ray J. We're excited to have Evercore -- FLEETCOR's CFO.

Evercore? Come on.

FLEETCOR's CFO, Eric Dey, with us this morning to tell us a little bit about the story. So with that, Eric?

Thank you, John. Thank you, everybody, for being here today. We're going to talk about 3 things today. I don't know if a lot of you know the FLEETCOR story or not, but I'm going to give a very high-level overview of what we do today and what our products are, talk a little bit about our growth strategies and how the company has performed, particularly since the IPO in 2010. And then lastly, give you a little bit of the financial model of the company and how the business has performed in our go-forward kind of objectives. First and foremost, FLEETCOR. Who is FLEETCOR? We're a leading global payments company. We have operations all over the world, as you can see, as this chart indicates, it's not a coronavirus chart. That is where we have operations. We do business in about 100 countries globally today. But we're primarily really in 3 countries. We're in the U.S., we're in Brazil, and we're in the U.K. Those 3 countries represent about 90% of our revenue today. But we do have fairly other significant operations in other parts of Europe, Mexico, Canada and Australia and New Zealand, just to pick a few other places where we've got a little bit larger presence. In 2019, we had about $2.6 billion in revenue. About 40% of that business is international. All of our businesses process about 2 billion transactions a year, so obviously a pretty significant IT environment around that. We have business relationships with about 800,000 different accounts and 800,000-or-so merchants. And globally, we have about 8,500 employees. So that's kind of a high-level overview of FLEETCOR. So simplistically, what do our products do? Our products help to simplify, automate, secure, digitize and control payments on behalf of companies. And these are companies that are making payments to their employees or payments that are being made to their suppliers. The business payment space, obviously, is an enormous space around the world. Other people -- I'm using a metric that other people have kind of come up with here, but they've said that, "Oh, my god, this is $170 trillion space globally." Well, we operate in that $170 trillion total addressable market. And our products are helping companies, basically, make that process easier for them. And again, we've got products that help simplify payments that are made to employees and payments that are made to suppliers and help to simplify that process as well. Today, we go to market with 4 primary products. We have a corporate payments product, a fuel product, a lodging product and a toll product. I'll talk about each of these products a little bit more individually over the next few pages, but very simplistically, our corporate payments product effectively helps companies make payments to vendors, and they're doing that through a virtual card product in the United States. It's our domestic product. We're the largest virtual card provider in the United States. We also do international payments as well. We bought a company a few years back called Cambridge. So we make international payments all over the world. And then more recently, we acquired another company, called Nvoicepay, which makes domestic payments in the United States. Our corporate payments business also helps solve problems that companies have by -- we offer a payroll card solution and we also offer a T&E card solution as well. So whatever payment problems one of our customers might have, we have a product to help to solve that problem. We're also one of the largest fuel card providers in the world. Our objective there is we're helping companies manage their fuel spend, and that's either through reducing unauthorized spend on a card or to help to get significant discounts off the retail price of fuel, depending on the size fleet that you may have. We also have a lodging product. We command the largest hotel network in the United States, effectively, that we market to what's mostly blue-collar workers, meaning, people that travel around the U.S. and need to spend typically in what's a lower-end hotel. Think railroads, think over-the-road fleets as an example. Our discount -- our network is significantly discounted and generally commands rates that nobody can find anywhere else, including the Internet, anywhere. We also did an acquisition recently, which got us into the airline vertical as well. So we help airlines book rooms for their -- obviously, their airline employees and for displaced passengers as well. And then we own the second largest toll company in the world in Brazil. We have over 5.4 million toll users in the country. We've expanded the usage of the technology in the country, so not only can our customers buy or use that product to buy toll tags, but they can also use it to buy things like parking, buy things like fuel, buy things like fast food, just to name a few. And we'll get -- again, get more into that as we get down the road. So why are we into these products? What is it to us that makes these products unique? From our perspective, it really is the business model. The business model for all these products are basically similar. They all have recurring revenue. All of these businesses have high EBITDA margins. They all have specialized networks. So there's high barriers to entry. We have similar selling systems in all of these businesses, so we can export our expertise from one product to the next. And all of these businesses have scale, we're either the leading company or the second leading company in all of the products that we have. First, going to a little deeper, more in-depth with our fuel card category. It represents about 44% of our revenue in 2019. And again, this product exists to help our businesses monitor and control fuel spend. Again, our customers are either after discounts off the retail price of fuel. So think large fleets can command big discounts. Or if you're a smaller fleet, effectively, your objective is to control unauthorized spend on the card. And our product, it really is a control card. It can only be used to buy one thing, unless you come to us and you ask for that card to be opened up and create even a more specialized card. We've been talking about another product called Beyond Fuel more recently in the United States. And effectively, what that is, is we're allowing some of our more creditworthy customers to buy other things beyond fuel. Think fuel and maintenance, fuel and construction supplies. Maybe I'm a construction company and, from time to time, one of my guys at the site needs to go to the Home Depot and buy some nails. Well, we have a product that allows them to effectively do that. But we're not trying to provide a universal purchasing card because we are trying to still create some element of control over the usage of the card. So effectively, it provides businesses, simplistically, with just a better way to pay. And we obviously have specialized IT systems and merchant networks and -- to make -- to facilitate all this from happening. You can see down the right, there's a number of different advantages for this product as well. Our second big product category is called corporate payments. Again, simplistically represents about 19% of our business last year. It's made up of 3 big categories of products, the way I define it. One, we make domestic payments, and we do that mostly with our virtual card product in the United States. We're the largest virtual card issuer in the United States today. So we help companies streamline the way they make payments in a more cost-effective manner. We also own one of the largest cross-border payment companies. So we help companies make payments, basically, around the world as well. And then more recently, we acquired a business called Nvoicepay, which is a full AP outsourced provider. So now we can take the entire book from a company and make payments on their behalf in the most cost-effective manner. And then based on the needs of companies, as I said earlier, we can also provide them with other products, think like payroll, think like a T&E card, to help solve, again, a problem they may have. So we -- obviously -- this is obviously a very large and growing space. Today, you can see it's a -- I mean again, using some of these big numbers on the page, it's a huge opportunity, effectively, around the world, and it's basically underpenetrated and we're trying to grab more of the pie. And for those of you who don't know, through these products we're MasterCard's #1 large market commercial card issuer in the United States as well. So we got a very, very good relationship with MasterCard, as you can imagine. Our toll business in Brazil. Again, it's the second largest toll company in the world. We have about 5.4 million active tag users in Brazil today, about 90% market share in the country. Obviously, accepted at, basically, every toll plaza in Brazil today. But what's really kind of interesting when we got into this business a number of years ago, it's -- we're starting to adapt the technology so it can be used to buy things that are beyond just toll. If you've ever been to Brazil, it's probably not the safest environment in the world. So there's other -- I mean we've adapted other usages for the product, think parking as an example. So we now have a network of over 1,400 parking garages, where you could use that little toll technology, drive to a parking garage, reads a tag, opens a gate, you go in. Obviously, when you leave, you leave, then you just get billed for whatever the parking is. Obviously, streamlines the process, but the customer doesn't have to pull up their wallet, put a credit card in some sort of machine, it's just -- it helps streamline the entire process. We've also been asked by a couple of large major oil companies, think Petrobras, think Shell, in Brazil to test the technology to allow customers to actually buy fuel. So we did a test over the last few years, and the results have been fantastic. Again, all the gas stations in Brazil are manned. So we got this technology where a person drives up to the -- in the lane, there's an attendant there. The scanner reads the tag, reads the license plate, authorizes the transaction. The guy goes fill it up, fills the tank, you drive away. Again, streamlines the process for the gas station, streamlines the process for the customer as well. They don't have to get out of their car, they don't have to pull their credit card out, they don't have to pull cash out, they don't have to go into the station, they don't have to do those kind of things. So the receptivity of this is great. And more recently, we were approached a year or so ago by McDonald's. They've heard about this technology and they wanted us to test it in some of their drive-through locations in Brazil. So we did a test of, literally, 2 or 3 gas stations. And the test went -- or gas stations -- McDonald's locations. The test went so well that McDonald's came back to us and go, "We want you to implement this technology in all of the drive-throughs throughout Brazil at all the locations." And again, it's just -- I mean think about it from McDonald's perspective, guy drives to the drive-thru lane, "Hey, I want to order 2 Big Macs and a Coke and pay with Sem Parar," is all they have to say. Reads the tag, just bills the customer directly, they go in, they just take their food and they go away. So McDonald's loves it from a throughput perspective. The customer loves it because, again, they don't have to pull out their wallet, they don't have to do anything that might be more risky. So the receptivity of that has just been fantastic. And as you can imagine, we now have other fast food chains in Brazil that are approaching us now about that -- using that same technology for that. We also have other usages and other relationships. I mentioned a few things here, car rental companies and there's leasing companies and even new car manufacturers are taking our product and installing it in all of their cars as well. So lots of different usages for this product. So as you can imagine, we're really excited about what's going on in Brazil. I talked a little bit about lodging. Again, we're the leader in providing B2B lodging payment and toll solutions to workforce and airline companies. We've got relationships with about 30,000 or over 30,000 hotels today. Our hotel spend that we help facilitate is about $2.2 billion, and we managed about 27 million hotel rooms on behalf of our customers last year. And again, all this is through a network of significantly discounted hotel rooms, and again, discounts that companies really can't get anywhere else. Because again, what we're bringing to these hotel owners, I bring volume, volume they don't have. So we provide an advantage to them. And then lastly, we own one of the largest gift card companies in the United States as well, represents about 7% of our revenue today. It's a relatively big company. We processed about 1.4 billion transactions. We're in about 50 different countries. We've got a very blue-chip customer base. Obviously, we've -- we facilitate transactions through digital payments as well as traditional plastic sorts of payments as well. But again, all these businesses, if you go back to why are we into these all-similar, recurring revenue, high-margin sorts of business, specialized networks and so on and so forth. There's a lot of similarities in the way we think about these businesses. Now from a growth perspective. This is my favorite chart I love to go over every year. Effectively, this tracks the company's performance since our IPO in 2010. So for the last, call it, just about 10 years, we've grown our revenue at a compounded annual growth rate of 22%. And we've grown our adjusted net income per share at about 24% over that same period of time. So you can see pretty significant performance over that period of time. As a matter of fact, our investor relations -- outside investor relations firm said that I think we were the 14th best-performing IPO of the decade, so I think pretty impressive performance over that time. How do we do this? We employed a strategy that we call build, buy and partner. Build means, hey, we're trying to grow the business organically. What I've guided people to is to think about our business growing kind of in the 9% to 11% organic growth range. We're going to do that the old-fashioned way. I'm going to invest more money in sales and marketing. I'm going to sign up new customers. I'm going to cross-sell other products. I want to get more spend from the customers I have. And I want to get into more geographies. Ideally, for us, we want to get into as many of the top 25 GDP markets around the world as is practical. We're going to buy businesses. We've done, I have lost count now, but I think we've done over 80 acquisitions over the last 15-or-so years. And there are large acquisitions, tuck-in acquisitions. They've helped us to get in new geographies, new products and the like. But again, the same objective, more customers, more spend, more geographies. We're trying to build a bigger business. And we've created significant partnerships over that period of time, which, again, helps us to get more customers, enter new geographies and get more spend, things that we want to do. In the corporate payment business, we partner with Bill.com and AvidXchange. They use our products. We cross-sell different products to our customers, again, to get more share of wallet. We provide big outsourcing opportunities, think of the major oil companies around the world. So we do things like that. So that's kind of been the company's strategy going back. It's going to be our strategy more going forward as well. Again, just to add a little more color. We build our businesses to acquire more customers and capture more of the existing customer spend. Last year, we spent over $200 million in sales and marketing, and again, with the objective being to grow our businesses organically kind of in that 9% to 11% range. Again, we invest money in IT. We try to develop the best products available. We try to have the best technology, provide the best services to our customers. So we're constantly investing in sales, constantly investing in IT to have the best products available. And again, we also want to offer those products to not our existing customer base through cross-sell opportunities, but think of new customers, think of new geographies and everything we kind of just went over. We buy companies for the same reason, to penetrate existing markets further and enter new geographies. We generate over $1 billion a year in free cash flow. My first use of free cash flow is going to be M&A. We want us -- our target is to spend about $1 billion a year in M&A. We have lots of liquidity. We're low -- we're very low-levered today. We were very opportunistic from a share buyback standpoint as well. So we're trying to provide total returns back to our shareholders more in the 15% to 20% range, and again, through some combination of again, growing the business organically, doing some M&A and doing some share buyback. Again, we talked a little bit about partnering with companies, we also partner with companies as well. So we, again, bring in more volume in larger swaths -- swatches back to the company. Virtual cards, again, we partner with Bill.com and AvidXchange. They use our virtual card. We are their virtual card provider. So we get a lot of volume through those kind of partnerships. We have big private label partnerships on the major oil side. Think, BP, Speedway, euroShell as an example. And we have other large international relationships around the world. Again, think Shell, think Petrobras in Brazil, think McDonald's, just to name a few other of those. So we're going to continue to grow our business by developing and enhancing the partnership relationships that we have. So our midterm objective, again, as I indicated earlier, hey, we want to grow the top line 9% to 11% organically. That kind -- and grow my cash EPS in the 15% to 20% range per year through some combination of accretive acquisitions and share repurchases. So that's our objective kind of going forward. Finally, let me give you a high-level overview of some of the financial statistics of the company. I'm running out of time. So first, from a financial perspective. Listen, we talked a little bit about what's the top thing here before, we're a high-growth company. Our objective is to continue to be a high-growth company historically. Again, we've grown our revenue at a compounded annual growth rate in the 22% range over that period of time, 24% from a cash net income perspective. We talked about our business model a little bit. We have a predictable recurring revenue stream. And again, it is very forecastable because of the way we run it. We have minimal credit risks around the world by the nature of our products, our control cards. We don't provide a lot of credit to our customers, and that's kind of the products that we have. Our bad debt runs 7, 8 basis points, certainly, over the last year or so. We have a highly leverageable cost structure. 2/3 or so of our costs are fixed today. So we have a lot of flow-through of organic growth, basically, to the bottom line. So we have high EBITDA margins as a result. Our EBITDA margins run in the high 50s as a percentage perspective. And we generate a lot of cash. In 2019, we generated over $1 billion in free cash flow. So that translates into, as I got a terrific balance sheet, significant liquidity, got lots of cash and I got lots of borrowing capacity to do the kind of things we want to do. We have low leverage. We were 2.3x -- 2.43x levered at the end of 2019. And our CapEx requirement is relatively low. We spend about 2.6% of revenue. We're not a bricks-and-mortar company, so most of my IT spending goes back into investing into the business, enhancing products, enhancing our systems, protect the business that we have. That's effectively what we're spending money on. To give you a sense of some of the other statistics. Hey, our objective is to grow our business 9% to 11%. Well, hey, I go to the bottom line here, in the bottom line box. What have I done over the last 2 years by quarter? 10%, 9%, 11%, 11%, 11%, 13%, 11%, 10%, our business model is very, very predictable. So we grow by design. Again, we talked about we have terrific EBITDA margins. We have low CapEx requirements. 2019, our EBITDA percentage was about 56.9% for the year. So again, we have terrific margins. All of our products have terrific margins, which is why we like those business models. And again, if you look at our businesses just from an organic growth perspective, we have a lot of flow-through directly to the bottom line. So a terrific financial model, kind of, as well. Again, going back to -- we generate a significant amount of free cash flow in the business, again, as I indicated, which can be used for acquisitions and share buybacks. You can see here to the right, we generated just over $1 billion, 2019, in free cash flow. Last year, we spent about, I don't know, $450-or-so million in M&A. And we also did a pretty significant amount of share buybacks. We spent about $700 million in share buybacks last year as well so again, with the objective of growing the bottom line in the 15-or-so percent range. Our leverage is low, it's consistent. I think ideally, what I tell people is, we'd like to be around 3x levered, I mean the debt rates are really low. We certainly don't want to use our free cash flow. The first use of our free cash flow is not to pay down what is pretty cheap debt for us. So we want to invest back into the business. I want to invest more in M&A and then buy shares back on an opportunistic basis is effectively what we're trying to do. But our balance sheet, really, has not been in a better place than it is right now to execute on some of the strategic things that I talked about earlier. So in summary, we have about a $25 billion market cap, although moved around over the last week, as most companies did. We're a global business payments companies, a bunch of different kind of growth categories with substantial TAMs. We got a demonstrated history of growing our business organically. We got a great track record. You look at our financial performance since the IPO, grown 22% and 24% compounded, respectively. We're good allocators of capital and always have been. We've done about 80 acquisitions to date. And our plan is to do more acquisitions going forward. And again, we want to do that to get -- to penetrate existing markets further or to enter new geographies that we're not in today that we actually want to be in. We already mentioned that. And then again, our objective ultimately is to grow the bottom line, cash EPS, in that 15% to 20% range.

All right. I think we have a few minutes for questions. Maybe I'll start. Eric, you talked a lot about M&A. What segments you're focused on? Obviously, valuations are pretty high in the corporate payments arena, so how do you guys think about returns versus multiple paid and just a little bit accretion and the balancing the growth and accretion?

Listen, I mean we're very opportunistic. We obviously have identified. We have a list of a lot of companies we're interested in. We've got a very robust M&A department. So we have -- we're in contact with lots of different companies today. And we're actually in conversations with companies in almost every space that we're in today. So there are different sorts of opportunities around the world. Some of those categories, think corporate payments as an example, the multiples are a little bit higher in that category. So clearly, we don't love that. We don't love to do dilutive deals, and that would not be our ultimate objective, to do a dilutive deal. Although we might do a dilutive deal if we thought the midterm return for that acquisition was, obviously, highly, highly accretive. So we might do something like that as well.

All right. I guess I'll ask the obligatory coronavirus question for people that are newer to the story.

The virus. We don't have any business in Asia. So we're not really impacted, certainly, directly by shutdowns in those countries or we're not that impacted by being -- we're not a manufacturing concern, so we don't have inventory coming in that we're dependent upon. But we are transportation-related, some of our businesses are transportation-related, and we have seen some softness, particularly in the over-the-road sector as the manufacturing category has slowed down a bit in the United States. But -- although we may see a little bit of softness there, we certainly expect to see that come back at a later date when this is resolved. So we don't see a meaningful impact from coronas to us.

Anyone out there? All right. Well, last one for me. Just talk a little bit about the fuel business and the ability to kind of grow that mid- to high-single digits despite what is a relatively soft industrial environment in the U.S. and just talk about the levers and how you're able to sustain that growth and what the outlook for this year kind of implies from a U.S. trucking perspective.

We have lots of different fuel businesses around the world. I mean it's not all in the United States. Think we've got businesses in the U.S., I got businesses all across Europe. We're in Russia, we're in Mexico, I mean Australia, New Zealand. And some of the growth dynamics and the penetration rates of those businesses are much different than it is in the United States. So some of our businesses are growing well over double digit, particularly in some of those geographies. And some of them, as you would imagine, are growing a little bit slower. So when you add it all up, it kind of it gets into the range that we've guided people to. I think we indicated on the last call, we have seen some softness, particularly in the over-the-road sector. We've seen some slowness in the manufacturing sector in the United States, which has impacted some volumes there. But again, we're very, very diversified, both from a product and from a geography perspective. So although you see some slowness or softness in some of those businesses, you also see a lot of strength in some other ones as well, which is, again, why we're confident in what we guide to.

All right. I think we're out of time. Thanks, Eric.

Thanks.