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

All right. Let me get unmuted. Sorry about that, everyone. This is Tien-Tsin Huang. I'm the payments processing and IT services analyst at JPMorgan. And really excited to have FLEETCOR back with us today and to give us an update on what they're seeing. FLEETCOR, we think of as doing some great things on the corporate payments side, across fuel and virtual card corporate payments, tolling, all over the world. And with us from FLEETCOR, we've got Eric Dey, the CFO; and Jim Eglseder is also there, I think, from Investor Relations. So great to see you virtually, Eric. Thanks for joining us.

Good to see you, Tien-Tsin. I hope everybody is -- I wish I was in Boston today enjoying ourselves there a little bit versus sitting here in this conference room, but we are where we are.

Fingers crossed we'll be doing that next year. How's traffic in Atlanta? You're open back up again, right?

Well, I would say that people are sporadically open. Traffic is still extremely light for Atlanta. So it's -- I think a few people have gone back to work, but you could definitely see a pickup in activity.

Yes. Yes. We're all watching.

It's going slowly.

Yes. No, we're all watching. Well, hope everybody is safe and healthy over there. So Eric, we're going to do fireside chat like we've done in the past. We will have a chance for the audience to ask questions through the Q&A button here. I'll be managing that. I can see it on my side. So feel free to ask. But I did poll the investor community and put these questions together, and let's try and get through hopefully as many as we can. So again, thanks for your time. So let's start. You just reported earnings last week. Maybe let's just dig right into the revenue side of it. You said you'd expect revenue to be down 20% in the month of April, not too surprising. Not too dissimilar from peers. You were growing 8% in the earlier part of the year, January through February. So walk us through which businesses are most impacted by the pandemic and which ones are a little bit more defensive as well?

Okay. First, I want to remind everybody, I'm assuming a lot of people know who FLEETCOR is and what we do, that our businesses are very resilient. But all that being said, all of our businesses have been impacted by COVID as has, I guess, most businesses around the world. Again, as a reminder, most of our businesses are recurring. Ron just joined.

Tien-Tsin, hey. This is a first.

Great to see you, Ron.

How are you, partner?

I'm well. Terrific to see you.

So just to kind of continue on with the question. Just to remind everybody, our businesses are primarily recurring revenue in nature. We have very broad customer base and diversified businesses across industries and geographies. To answer your question more specifically, we did put out an earnings supplement with our last press release. And on Page 10, we did give a detailed overview of how our major businesses have been performing. So those businesses that have been impacted less by COVID and those businesses have been impacted somewhat by COVID and those businesses have been impacted more. The businesses that have shown more resiliency, I would say, is kind of our full AP business, in our corporate payments space, has really just been doing phenomenally well. It's been growing kind of in the 50%, 60% range even through this pandemic in the month of April. And most of that is through just selling new business. It's a great product. It's been received very well by our customers, and we're just selling a lot of it. Our cross-border FX business has also done very well. As the foreign currencies have become more volatile around the world, that business activity picks up in that business. Our toll business is subscription-based, also has done extremely well so far through the month of April and is growing in the kind of 7% range. About 85% or so of our revenue comes from the actual subscription fee of the tag itself. And about 15% or so of the revenue comes from the Beyond Toll sorts of products, say, things like parking and fuel and fast food. Those Beyond Toll sorts of products have been impacted, obviously, more than the toll product has in general. Switching to the other side of the coin, what businesses have been impacted the most than anything else. It's a few of our business, think of our U.K. fuel business and Brazil has been impacted pretty significantly. Originally, I think it kind of peaked in mid-April, it was down about 50%; and then recovered somewhat, it's down about 30%. But a significant amount of that fuel business is white-collar-related. So there's more of an impact from people like us staying at home versus the majority of our customer base, which is blue collar in nature. Those blue-collar workers are still going to work every day. You look outside your window, the landscapers are still cutting a lawn. Painters are still painting. The construction guys are still doing their construction work. If they don't work, they don't get paid. So those guys are more still out there. Our gift card business has been impacted somewhat because, obviously, it's very retail-oriented and the retail space is significantly impacted. So that's kind of it, then we've got some businesses that are kind of in between that. So it's a hodgepodge of stuff. But overall, the month of April is down about 20%. We believe at this point...

A little better than we thought.

Actually, better than we originally thought. And the good news is, is, hopefully, we'll get better from here. May should be better than April, June should be better than May. And as the businesses, economies gradually recover around the world, our revenues and volumes should tick back up as well.

Just to add, Tien-Tsin, to what Eric says. So we coded in the April document, we set out kind of red, yellow, green. So hey, what's our portfolio look like? So the only add is, fortunately, we've got more green and yellow than red. We didn't provide the proportion, I don't think, Jim, in that document. But anyway, that's good news for us. More businesses that are kind of okay in COVID than not.

Yes. No, that makes sense. It's a good overview. So maybe I'll skip ahead and just ask this question since you're on it. If you're reexamining the portfolio in its entirety in terms of fit or what doesn't fit, what you might want more of, has that -- has this experience changed your thinking on the portfolio?

I think it has. I think, obviously, not only on the portfolio, but on functional things like credit policies, sales approaches, channel mix, things like that. So I'd say, functionally, there's lots of things we're already doing to basically be in a different place when we get to the other side. I'd say in terms of the portfolio, obviously having businesses that are payables and have more fixed expense than mobility-centric like obviously the card business, I'd say we liked that category before COVID. And I'd say we like it probably a smidge more now post-COVID or in-COVID than we are. But I think we've said before, Tien-Tsin, we are eyeing a bunch of things in and around as payables or what we call corporate payments space. We're doing well there at this point, we're growing it. We see how other people view the space, obviously. So we're -- that's a category you'll see us have more of, not less, for sure.

Terrific. Got it. So on your business, we always -- look, fintech is a great business. Your business is a great business, no disputing that. I think you have the third highest margin behind Visa and Mastercard in our coverage, which is a good company to be in. So the contribution margins are very high. Can you talk about your fixed versus variable expense mix, and what you can do to manage expenses to the extent that maybe the recession lasts a little bit longer than we think?

Yes, I'll start and then Eric can pick up. So I'd say kind of rough number, Tien-Tsin, we think about our overall expense structure kind of 50-50, 50% fixed, 50% variable, although nothing's fixed over some cycle. And I'd say some expenses in the range of, call it, 5% as we run through rest of the year will come out of our system from doing nothing. Effectively, they are variable. They are IT fees, card fees, out-of-pocket fees, service outsourcing. So everything, commissions and sales, anything that would move, obviously, as volume moves down. And then second, I think we decided to trim a bit some of the discretionary things that we do. Projects that would be difficult to get traction anyway, maybe they rely on third parties, right, and they're distracted and stuff. So I'd say somewhere in the 5% to 8% -- 5% to 10% range against our original plan is we will probably have expenses run for the balance of the year. We actually have a big meeting, Eric, and I do tomorrow to make the final calls on what I call the tougher expense costs versus we saw already -- Eric and I ran through April yesterday. We've already seen the free variable money come back in our April numbers being off our plan. So 5% to 10% would be the thing. Again, the good news in a business like ours, the incremental margins on the upside when you have leverage are phenomenal. Unfortunately, they're equally not super good on the downside.

Yes.

Yes. And just to add to that, again, as Ron indicated, we're trying to rightsize our cost structure to meet the size of our business today. But on the other hand, we don't want to cut our legs out from under us either. As the economies start to recover, we want to be well positioned to grab some of that volume when it comes back the other way.

Yes. No, I think that's absolutely the right call. I trust you on that. How about on the sales side, right? Sales are very, very important to FLEETCOR and you put a lot of energy into your sales, and I think it was a 2% sales performance in the first quarter. I'm sure things quieted down very quickly in March. So how are you adapting your sales force to get them ready for potentially some, I would assume, pent-up demand here once we get out of this COVID.

Yes. So a couple of things on that. So one is we're already doing some things like retargeting. So obviously, they have -- our salespeople have prospect lists and they historically would have called you versus Jim or someone else. Now they're focused on growth or surge industries. So I'd say the first thing is targeting. And then, second, we moved clearly all the marketing spend from things that would have been physical, think trade shows, for example, to digital, along with, obviously, all of our field organization. So I'd say, short term, we're already making some changes. And the good news is the contact rates seem high, which is, frankly, a bit surprising where an average sales force were kind of reaching people. The question that's open to us is, can we close? Will business close in this environment? Will people lift their pens over the next couple of months? And I'd say that one's too early to call. But let me give you an opportunity that's come up. So in Brazil, we built that business or the guys that founded that built that business by standing at toll booths. So Sem Parar had people all over the country with a clipboard. You came into the slow crawl line, Eric went down the fast line, and they would sit there with a clipboard and go, hey, don't you want to be in the flow lines? Well, literally a couple of months ago, as this thing happened, the São Paulo government said, go back to the toll booths. We don't want people in those lines. We don't want touching. We don't want cash. And so our sales literally are going up a little bit, I don't know for how long and how long we'll be there, but that would be an example of the channel mix is starting to shift a little bit in our business based on this thing. So that was actually a positive that the sales rate is higher than normal.

Got it. How about on the product side? Staying with fleet maybe, we've been hearing contactless cards on the consumer side getting more popular and just contactless in general as a term. Is there a product opportunity on the fleet side that you're examining that could open up some chances for you or shots on goal?

Yes. It's fascinating. We made an investment about a year or 1.5 years ago in a tech company called P97. I don't know if you've heard of it. But the basic idea was to create kind of a cloud way to drop mobile fuel transactions into gas stations without retrofitting all the point-of-sale. As you guys know, the EMV has been super late to the gas station industry because of the huge ball of systems that the gas stations have. So that would be something that might get accelerated. We've built some proprietary apps that work and test now. So if you drove into one of our test stations with your phone, you could literally turn the pump on and make the purchase at pump #7 without going up to the card reader and stuff. And so that would be an example of a product that's kind of there that frankly hadn't got a lot of traction. People just get out with their card and maybe they're going to the C-store to eat or something like that. But that would be an example of something that may have a different level of appeal now going forward, basically keeping the drivers away from the point-of-sale equipment.

Yes. No, I like it. One more on fleet.

Even in the toll one, I mean, think of the government deciding to do that. And we have -- I think I told you in one of our other ones, we have a mobile app now that uses Bluetooth because we have the gadgets at all the toll booths. If you drive in, we have this in test in a couple of places in Brazil, into the cash lane with your phone in your car and you've agreed to download some money into our app, the gate will stop and go open. No rolling the window down to chat with a toll agent, no exchanging cash. Literally, the gate in that lane will open. So as an example, the messaging and the interest in that product is going crazy now because people are, obviously, in Brazil, are concerned with that. And Eric mentioned earlier, the contact rate on our remote cloud-based AP thing has also gone crazy. Maybe one of the best sales months we've ever had. So all of the products that look to be touchless, we think we'll get some acceleration on the other side, even getting some now, I guess, I'd say even -- because here in May they get some acceleration. So maybe some good coming out of that.

Let's stay with the tolling topic then, right? You have a lot of, I'd call it, users in-force with toll tags. And that could be the weapon or the tool to drive a lot of what you're talking about with Beyond Toll with the drive-thru in McDonald's and parking and this push towards contactless as we're talking about here. I mean where else do you see this Beyond Toll opportunity going? What's the wake-up call here?

I mean, I think it's a great point. Our line here is it's always better to be lucky than good. And so the fact that we've started to build out those networks, the added convenience, to your point, of effectively touchless food payments, fuel payments, no chatting. As you know, in Brazil, 100% of the fueling is via an attendant, a bit like, I think, New Jersey still here in the U.S. And so I think that message of taking a sticker that you've already got an account that you've already got and being able to use it in parking lots. We tripled the number of parking lots in the last year. We've announced that we've added yet another food supply with another 400, 500 locations just in the last month. So the whole idea of this thing, once we clear the anxiety, I think, phase, it should resonate, I think, with people because, wow, I don't have to talk. I don't have to reach out. I can just take the bag from the McDonald's person or the [indiscernible] person. So again, we're pretty bullish that getting a head start on that was a good idea. At least in retrospect, a good idea.

And Eric, remind us, right, because you do have a basically, I call it, a closed-loop proprietary network there with the toll tags as the card equivalent. The revenue model, remind us, I mean, you make $4, $5, few bucks a month and then how much of this is transactional? What does the transactional element look like?

About 85% or so of our revenue today is subscription-based. So we charge a monthly toll fee and 85% or so of that revenue comes from that. The other 15% is more interchange-based. So you get some interchange from parking, from fuel and from fast food today. So that's been the model. Fortunately or unfortunately, the subscription model is very resilient. Obviously, you send bills to your customers every month, you get paid. Unfortunately, a lot of people are staying home right now. So the interchange-based volumes are impacted pretty significantly because people are just not on the street.

Got it. Got it. Let me squeeze you a little bit. I know a lot of investors wanted me to ask you about the credit risk, what you see there. I know there's a misfortune on the Cambridge side, let's start with that, assurance that, that is a one-off. It looks like a one-off, but I keep getting questions about what have you done to sort of relook at your book. So let's maybe start with Cambridge and then we can extend it to the rest of the portfolio, the businesses around credit.

Yes. I mean, unfortunately, as you've indicated, we called out on the earnings call, we actually put a pretty detailed description of what that onetime loss was in our earnings supplement. So if anybody has that handy, I think it's on 14 -- Page 14 and 15 of the earnings supplement we've given a pretty detailed explanation of what it was. Unfortunately, it was one of those things that's kind of a perfect storm. We did business with one of the largest rice exporters in the world. They move rice to various countries around the world, a lot of it's to third world countries. And unfortunately, as the COVID thing hit, economy started to shut down, ports started to shut down around the world, this company had nowhere to deliver their product for some period of time. So they didn't have a lot of revenue coming into the company literally overnight. At the same time, the FX rates, the dollar strengthened against a lot of currencies around the world. And unfortunately, their positions, the hedging positions that they had went under water. And then it was very shortly after that followed by the cratering of the oil prices around the world, which further caused additional volatility in FX rates around the world. So it's been a perfect storm, which effectively caused this thing to happen. And when it did, we and other providers of this hedging product had then decided to cap what their position was and crystallized a loss. And as a result of that, the company decided to file for insolvency, which enabled us to -- or made us basically crystallize the loss. Ron and I have gone through, we did a deep dive on the entire portfolio to see if there's any other circumstances like this. This particular account was the largest account we have in that hedging business by a wide, wide, wide margin. So the exposure we have in anybody else that could be like this would be dramatically smaller. And again, we went into those positions and we ensured that -- installed some new practices where, hopefully, we ensure that this sort of thing could never happen again.

Yes. The simple way, Tien-Tsin, we run credit, manage credit, control credit in the company is we set literally individual client credit limits. And so the concept of the company is, hey, I give you a $50,000 credit limit. You don't pay, we turn off, in every business, in fuel cards, in tolls, in corporate AP, whatever it is. And so to Eric's point, this got our attention, got my attention. So we've gone 8 million miles deep to ensure that whatever credit limits exist in any part of Cambridge that when that light hits red, it's off. It's closed. It can't run. There's no more chitchatting with you about, hey, it's going to be okay, don't worry about COVID or whatever. And so I'd say that we have way, way smaller credit limits in that place, and that we put in that policy basically that the most we could ever lose in one of those things would be the credit limit. And again, the reason that things are better than we thought is not only the government stimulus package, but remember, our terms are incredibly short in the company. Like in our payables business, the majority of that book is daily, daily or same day. So I take your money and make the payment to Jim. Tons of our fuel card business is on weekly terms, so you can't get too far ahead of us, right, in terms of what you can buy. All of our businesses around the world collect electronically, mostly pulled. So if you have any money in your bank, we got it. We get it like Eric's Brazil example. And so structurally, the credit risk in our company is dramatically smaller than what people may see from the outside because the turn rate on the receivables is so, so short, and then the methods that we have of getting the money from clients. And so I think we reported that we don't see a lot in the delinquency buckets. We obviously study every business, right, what we call trip rates, when you go late, you don't pay on time; and then what we call roll rates of what's the aging of receivables. And so we have a benchmark on those couple of things company-wide for years and years. And frankly, Eric and I have done -- I don't know how many reviews I've done, 10 or 15 in the last 4 weeks. In every review, I come into them like I can't believe it. I can't believe that we're not seeing significantly changed kinds of trip rates or roll rates. They're up, honestly, but not up at all to the extent that we thought. In fact, Eric and I took an incremental $10 million reserve in our Q1 numbers just because we saw a couple of those early warning things kind of tick up. So I'd say at this moment in time, sans the Cambridge thing, we feel quite good.

Okay. No. That's terrific. I'm glad you went through that. So another topic I want to hit. Just on the corporate payments side, we've heard from some of your peers as well as on the banking, private side, et cetera, that, that market does seem like it's opening up, meaning a lot more demand to outsource, a lot of more demand to automate payrolls, which makes sense, right? Can't get to the lockbox, can't get to the PO box, can't pick up your checks and all that good stuff. So how are you placing your bets there, Ron and Eric, to win with this eventual pull forward, let's call it, of secular growth in corporate payments?

I think we've told you before that we were lucky. We've got a pretty big head start over the last 4 or 5 years building the pieces to be in this payables business. And we -- obviously, we're a big -- one of the biggest virtual card processors. Obviously, a year ago, we got into the full AP kind of software business. We built various sales channels over periods of time. We've got most of the other issuing partners that really do any volume are clients of ours. So when we look at our setup, Tien-Tsin, for being someone who could do well in the space, we like it. We have a broad set of offerings. We go across a lot of verticals and a lot of size segments. And again, we see all kinds of things through the lenses of our partners as well. So we see all that transaction data, all the things that are going with our partners. And so I'd say to you that, a, we're well positioned in the thing; and then, b, per my earlier point, I think the interest and the remoteness of that service will cause us to just step harder, bigger on that space and fork more money. Eric and I are actually going through last night in this expense review, tomorrow talking about sparing that business much in the way of cuts vis-à-vis some of the other things. First of all, because it's not down as much, right? It's more yellow or green. But b, because of what you said that the prospects were always big in terms of the TAM. It was always -- payables are half of the world's business expense structure. But I'd say that we're set up well, and we're going to plow more money into the sales side assuming again that we can close. I mean that would be my caveat to you that we need confirmation over the next 1, 2, 3 months that people are in a mindset to be able to "make the change. Hey, I don't want to go back into the office. I do want to make this change to outsourcing now." If we see that, we'll continue to spend more money in the space.

So organic deal activity, it sounds likely to pick up. How about inorganically? It sounds like could we see some consolidation here in that corporate payments space?

Look, I mean, this thing, whatever this thing is that we're in is creating all kinds of problems for companies: liquidity problems, operating problems and stuff. And so a, we think that there's assets that may be available that we coveted, I think I said in our call last week, for a long time. So there's a handful of assets that sit in either kind of damaged companies or troubled companies a bit that we like. And then to your point, I think it raises the risk profile for everybody. Owners of all businesses sit there and go, oh my gosh, like who would've thunk it? We were doing just fine, and slam, we got hit and the concern about, hey, could this happen again, is there a rebound here, I think the question about when will valuations come back, all those new credit markets, there's just a lot of stuff in our minds that we think advantage us a bit because a couple of things: one, because we know the space and we know everybody. So every asset that's interesting, we know. We know the principals, and better, they know us. And number two, we actually have money. We were able to kind of build up our liquidity and stuff. And so we have some money. And so I'd say, that along with the changing world, I think, makes for more opportunity than we had 2 months ago.

Yes. And to your point on sales closing and can you ink those deals, I guess that poses the same question for you here on how selective can you be to the extent that there's some opportunistic things to do here? And yes, you guys have the capital liquidity, as you called out. I'm just curious, like how much does the macro here influence your thinking on pulling some triggers here on the deal side?

Well, again, if you use that same framework that we use to describe our company, this kind of green, yellow, red businesses. I mean I hate to admit this publicly, but we had a couple of red businesses that are closed. Then the travel-related space pretty close to pulling the trigger on, which we've obviously slowed now. But the good news is we have some businesses in the other couple of categories. And so I think -- and we're close as we were with -- 90 days ago when we spoke about this. So I think it's really going to turn on the seller expectations, right? We had conversations and indicated valuation levels to people, 60, 90 days ago and we're in a bit different place. And so I think one of the questions of will we close on some of these things is really as much a function about them, the owners, the sellers of these assets. But there are a couple of things that I think we would pull the trigger on assuming that the valuation gets into the range that we think makes sense.

Got it.

Because we have the money, we know the space, we know the companies. We, like you guys, have some view of the current world. I mean for me, the most, most valuable thing of this entire thing is we're in it. And we can -- the great thing is we can read out if the world just stays on brand -- or the world just stays like this, but even if the world stayed like this, we have an idea now of how to model that. The reason we haven't -- Eric and I haven't remodeled things is we're expecting some curve, whatever shape you have in your mind, and so we've been reticent to say, okay, okay, this is what we think can do for 2020. But we're obviously doing that with all the assets that we're looking at and running the scenarios that, okay, we know where they're running now because we own those businesses. And so our bottom case is the world stays like this for a year or 2. And our moderate case is, it has some kind of curve and our happy-go-lucky case is it steps up relatively quickly in the next year. So we have all those models and that's what causes us to think about a little bit different valuation for those businesses. But again, at the right valuation, we'd pull the trigger even if the world stayed where it is.

Got it. Now look, you've created a lot of value in doing deals and doing this why we're paying close attention to what you're doing, whether it be with the buybacks and what you're going to acquire next and everything else, that's the spirit of the question. I know we're almost out of time, and it's great to chat with you. Wish we had more time. Just a longer-term question, I usually ask you this when I see you, Ron, in person. Just 3, 5 years out from now coming from this lower baseline, from a macro standpoint, that is, I mean, does FLEETCOR look a lot different in 3, 5 years from now than maybe what you thought on January 1 this year?

It's a good question, Tien-Tsin. I think, again, at the portfolio level, we were already on some trajectory, right, of getting bigger in some of these other employee purchasing areas that aren't fuel, for example, lodging. We started to build a bigger business and certainly in the toll and the Beyond Toll. And so I think the general direction of the portfolio thinking is kind of unchanged that if you roll the clock 3 or 5 years pre-COVID, we would have said we have a bigger company in nonfuel kinds of areas. So I'd say, again, if anything, this probably maybe increases that, right? That if you said, okay, we had a view of what the mix of our company could look like in 3 years and you compare that to today's view, I'd say, if anything, that might accelerate, if you will, the mix of our company that's in nonfuel. But I think, again, to us, I think the biggest difference, if you will, looking forward is the functional things. In other words, it's not so much just the business mix that we have, but it's the way we're going to do business like the way we're going to sell, how we're going to contact people, how we're going to close business, how we're going to make implementation easier, how we're going to make things not require face-to-face, what products to invest like that P97, how much more energy to put into the mobile thing now, how much faster to build the Brazil network out? So it's not so much changing the basic strategy or structure that we had, I think it just -- it moves it a little, it might accelerate some pieces that have less risk could go faster. I think that's how we're thinking about it is we might zig and zag just a little bit different based on this.

Understood. Look, we're getting the hook here. But Ron, thanks for joining. It's great to see you both virtually and Jim as well. Stay healthy and all that good stuff. And I will definitely come down to Atlanta to see you once we get a chance to do it.

It's a deal.

Hopefully sooner versus later, Tien-Tsin.

Thanks, pal. Good to see you. Be well.

Likewise, guys. Talk to you soon.

See you another day.