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

Thanks, everyone, for joining virtually. For those who don't know me, I'm Ashish Sabadra, Senior Analyst at Deutsche Bank, covering payments, business and info services companies. We are excited to host Eric Dey, CFO of FLEETCOR, today.

Eric, do you want to kick off the conversation with the discussion about the recovery? Can you just discuss at a high level how different businesses within FLEETCOR are performing as the states have started to open up?

Yes. I don't know how much of the states have started to open up yet, but we actually provided what I thought was a really good page in our earnings supplement, which effectively provided a little incremental information around our -- some of the products within our 5 biggest business categories and how each of those products have actually been performing over a 5-week period of time. The good news is, is our businesses are very resilient. All of our businesses or most of our businesses are recurring revenue in nature. We have mostly blue-collar workers. So most of our products are products that are in demand by people that are effectively still working. If you look out the window, landscapers are still landscaping, construction people are still constructing and over-the-road truck drivers are still driving. Toilet papers, hopefully, being delivered somewhere and Coca-Cola is being delivered and those sorts of things. So most of our businesses, I think, are faring better than most, which I think is effectively where we are. But like everybody else, listen, I mean, all that being said, all of our businesses have been impacted to some degree, some more than others. I would say, the businesses that have been impacted, the least would be businesses like our full AP outsourced business and our corporate payments category. That business has actually performed exceedingly well. And it's kind of up even through the month of April, in the heart of the impact of the pandemic, it's been up about 50%. Our cross-border payments business also performed reasonably well over the last, call it, 30 days or through the month of April, and it was also up kind of 20, 20-ish percent or so, that business kind of likes FX volatility, which we've had plenty of. And our toll business actually performed pretty well. Our tag counts were actually up about 7% or 8% over the prior year in the month of April. That business, just to remind everybody, is subscription-based. So obviously, we keep -- customers keep paying their tag fees, even though they may not be using the tag as much as they historically have. On the other side of the coin, we've got some businesses that were impacted a little more than most. We got a gift card business, obviously, which is linked to a bunch of retail locations. Retail has been pretty dramatically impacted. And obviously, so our gift business has been pretty dramatically impacted. We've got a bit of a benefits business in Brazil, which is employee-based. And as employees have been laid off and furloughed, that business has been impacted, to some degree, by that. And then in our lodging business, it's really a tale of two cities. The majority of that business provides our blue-collar workforce is in the United States with hotel rooms. So that piece of the business has actually been reasonably -- still performing reasonably well, given the circumstances, so down, obviously, a good bit, but we're certainly not like most travel businesses. And a piece of the business which was impacted a little more than most is provides kind of crew hotel stays for airlines around the world. That, obviously, business has been impacted a little more than most. And then most of our other businesses have been sort of in between there somewhere. The good news is as we've seen from a volume perspective, we seem to have bottomed out from a volume standpoint, kind of in the middle of April, and have seen a little bit of recovery over the last several weeks, as some of the economies around the United States and around the world, begin to open up a little bit. So our expectation is for the month of April anyway, that our volumes are going to be down around 20%. And then hopefully, obviously, our volumes start to rebound as the economy start to open up a little bit. So again, all in all, our businesses, just to remind you, again, are very resilient. Most of our revenue is recurring revenue in nature. Volumes, although soft, were not driven by attrition as we haven't seen really a big step-up in attrition at this point. It really is just kind of softer volume. And again, once the economy start opening up, hopefully, the volumes start picking up as well.

That was great color, and that's very good to know that things have bottomed out and started to improve. Before we delve into individual businesses, there's another high-level topic that I want to cover is your Beyond strategy. So in addition to the strong growth in the core business pre-COVID, Beyond strategy has been a key mid- to long-term growth pillars. And I was just wondering if you can provide a quick update on the Beyond strategy? And how should we think about tolls in the mid to long term?

Yes. Well, let me start with Brazil. So we've got 2 Beyond strategies. One is kind of Beyond Toll in Brazil, where we've adapted our RFID toll pad technology to be able to be used for other products like parking, like fuel and even like fast food, just to name a few other things. We had a lot of momentum with those products, I'd say, going into the year. Historically, we sold toll tags, basically to people that want to drive on toll roads. But given that we now have a pretty expanded business case for products that are Beyond Toll, like I said, the 3 products that I mentioned, we've been selling the product as more of a what we call an urban tag or people that actually want to use the tag as a -- first of all, it's touchless technology, and to be used for people that do other things other than drive on the toll roads. As an example, most people -- everybody buys fuel. Most people park in private parking garages who have cars. And more recently, it's been adapted for fast food, and we signed up the 2 largest fast food chains in Brazil to accept this technology in their drive-thru lane. So I would say, in Brazil, it's kind of moving along very well. Obviously, the current situation we're in with COVID has put a bit of a damper on it, although our tag growth is up. We do get some interchange revenue from those other products. And obviously, the volume in those other products is down, so our interchange revenue was down from those other products. But Beyond category in the U.S. is basically us allowing our -- certain of our fuel card customers to be able to buy other things than fuel on a card based on the need of the customer. We kind of paused some of that spending or certainly, we paused adding a lot of new accounts that are in that Beyond category at this time. We're very sensitive to taking on additional spend that ultimately could result in some incremental bad debt. So we've decided to basically pause on adding new customers into the fold until we get a little further down the recovery road. All that being said about bad debt, our bad debt rates have been a little bit better than we expected. We expected to see a bit of a wave of some bad debt as we got into -- got deeper into the pandemic, and from a good news perspective, we haven't really seen all of that, that much. So most of our customers, small, medium and large, have been effectively paying their bills. So all that's pretty good news.

That's very helpful. And maybe just on the sales part. FLEETCOR always had a great sales engine. We saw that slow down a bit in March. But how do you think the sales process evolves going forward? Do you see more digital sales? And is there more opportunity just on improving your sales efficiency and driving better penetration as more digitalization picks up? So any color on those front?

Yes. Again, the sales is much like a lot of our other products. Those categories that are performing well, quite frankly, they're performing better in sales, kind of, as well. And those that are performing or impacted a little bit more are performing a little bit worse. Like every other company, our sales force has transitioned to an in-home sort of a sales force. So good news is, is a lot of our sales efforts are digital today. But again, our sales are going to be pretty impacted in the second quarter as again, we were reluctant to add on a lot of new accounts, particularly accounts that are in that smaller kind of business category. But we hope to start picking up again once we exit the quarter. So from an exit perspective, we're expecting the green lights to be turned back on, and hopefully, we'll be getting back to sales at more of our historical levels. So we'll see what happens.

That's good. That's good to know. How is the engagement by the customer itself? Are they willing to engage on a more digital basis? Or are they still distracted? So any color on this engagement or even implementation in some of your businesses, like example, corporate payments requires some amount of implementation. Have you seen any kind of pause there? Any color? Or how do we think about those picking up?

Yes, our corporate payments business is actually doing fairly well through this. I mean, again, you look at our cross-border payments business, like FX volatility. We've had a lot of FX volatility. So they've had a fair amount of new business. Our full AP outsourced business is really doing phenomenally well. Again, all of the increase in revenue is mostly through, effectively, new accounts. And we continue to sign up new accounts, particularly in the pandemic. We've seen even more account, particularly in the small to midsized category reaching out to us and want to, from their perspective, go more touchless. And obviously, that means outsourcing their AP capabilities to somebody like us. So hopefully, we'll be a bit of a beneficiary if there's any benefit to be had through this pandemic, that might be that business. So again, I think of all of our categories, the corporate payments business is probably going to fare better than our other categories effectively through this. So, so far, kind of so good given where we are. Our toll business is actually a little unique. And again, you talk about touchless. Because it's a touchless product, we have seen more people reach out to us a little bit and effectively want to use our technology in lieu of cash and card. The Brazilian government even reached out to us and wanted us to go back to an old method of selling toll tags. Historically, when this business started years ago, sales were mostly done by people standing next to the toll booth and selling toll tags kind of one at a time. Obviously, we've gotten away from that years ago and gone to many, many different types of sales methods other than that. But the Brazilian government wants to go more and more touchless. So they don't want to handle cash. And so they've approached us about having people stand next to toll booths and try to sell toll tags that way. So we'll see what kind of happens. They will get some incremental sales out of that.

That's great. Maybe just going over to the corporate payment. As you highlighted, really strong growth in full AP, really good traction on new customers there, how do you think about the opportunity there just as you -- is there -- and more importantly, how do you think about opportunity from a cross-selling perspective? Is there opportunity to cross-sell into other customers? Or even on the fuel card, you have hundreds and thousands of fuel card SMB customers on the fuel card side. Just opportunity to continue to sustain that kind of elevated 50% plus growth in full AP?

Yes. The cross-sell opportunity really in full AP, Ashish, is really with kind of the other corporate payments products more than it is with like fuel, as an example. Those other products are more single-use sorts of payment products that are there to meet a specific need of the customer. But the other corporate payments product are clearly customers that actually want to outsource some portion of their AP. And as we gain more traction at some of our other solutions or acquire other capabilities, we're out there trying to cross-sell some of those products interchangeably between our various customer bases. So we've seen some success there.

That's great. That's fair. And just as we think about -- on the corporate payments side, again, on the partner front, you have some pretty notable partners, high-profile fintech companies like AvidXchange, Bill.com. Is there opportunity to further expand that partner channel? And how do you think about direct process partner channel?

Yes. I mean, really, the partner channels worked exceedingly well. We have lots of partners today in that business. And just to remind everybody, I mean, we are the gorilla in the virtual card space. And we have, by far, the largest merchant network that accepts our virtual card process. And as a result of that, we've got a lot of companies reaching out to us that effectively want to resell our product and using our customer base. So we've been very successful at it. And a couple of the companies you've just mentioned are a couple of companies that actually use our process. And we're continuing to expand in that area, so we think there's more opportunities to come.

That's good. Just a question on virtual card. So that was a bit soft. Can you just talk about the puts and takes there? What were the growth drivers? And were there any kind of near-term headwinds in that business?

Yes. That business, the virtual card business, is actually doing really, really well. I mean, it continues to grow kind of in the mid-teens, with the exception of a couple of verticals. To remind everybody, virtual cards is made up of a number of different large verticals that we sell to today, things like, obviously, construction would be a vertical. Construction is performing very, very well even through the pandemic, so we continue to sell through that. But we have a few other verticals like health care, as an example, which has been slowed down because of the pandemic. All of the elective procedures, as an example, through hospitals and through doctors' offices are not being -- are being postponed. And as a result of that, virtual spend or spend in that health care channel is actually down more than the average because of that. But it's going to rebound very quickly as soon as the economy starts picking back up and the government starts allowing those elective procedures, again, we should see that, that vertical's volume pick back up again. We also have another fairly large reseller in the virtual category that actually resells travel and obviously, that 1 customer's volume is actually down quite a bit. So if you exclude the impact of those 2 -- that 1 vertical and that 1 account, the virtual card business actually grew kind of in the mid-teens in the first quarter.

That's good. That's a pretty robust growth profile. Maybe just moving on to the tools business. As you highlighted, you have renewed the sales effort in the toll growth, and the tags growth has been pretty solid, and it was pretty solid in April as well. How should we think about the growth there? What's really the drivers? How much of it is urban tag versus your traditional toll tags? And is this sustainable going forward, given some of the economic challenges in Brazil?

Well, that's a good question, Ashish. We'll have to wait and see. I would say, yes, we've been very, very pleased with the growth in the tags in that business. And again, we're focusing on 2 different channels. One is the toll-first channel; and then two is the urban channel, meaning, again, customers that actually want to use that technology to buy something other than toll. So we've been very successful selling that. Brazil, as an economy, is still on the upswing in the pandemic. So they've not peaked as of yet. So we'll have to see exactly how the economy is going to be impacted in Brazil going forward. So I think they're still a few months away from heading the top of the curve.

Okay. That's helpful. And my question was also a follow-up question on the urban tag users. How should we think about coming out of COVID? And particularly, in an environment where you have more social distancing, you think the value prop of urban tags should go up. So I was just wondering if you could talk some more about it.

Yes, that's a good question again. We actually think so. And a good sign is really, as I mentioned just a second ago, the government is actually reaching out to us and wants to get away from cash in the toll lane. They want to get rid of that cash toll lane or minimize it as much as they can. So they want us to sell our product back in those -- the old-fashioned way, which we like. So we'll have to see as we go forward, whether we make any significant progress with that. But yes, I mean, that technology lends straight into a cashless sort of a transaction. And again, some of our customers, like McDonald's on the fast food side, loves the product and love how the product is working for them and streamlines their process as well. And my guess, they're going to like not having to touch cash. So they actually like it. Similarly with gas stations and parking garages. Again, we've got a large -- the largest -- one of the largest networks of parking garages in Brazil. And again, if you've got a car in Brazil, trust me, you want to park in a private parking garage. So our product is in demand from that perspective. So we'll have to see how it goes to see if our demand actually picks up as we go forward.

Okay. That's helpful. Maybe if you can jump into the fuel payments business. As you highlighted, a lot of your customers are all about essential services, blue-collar, resilient businesses. Can you just talk about how -- what have we seen on that front? Those did bottom out in mid-April, but have you started to see improvement as we jumped along in May? Any color on that front?

Yes. I mean, obviously, we've got various fuel businesses around the world, and some of those businesses have been impacted in different ways. I'll talk about the United States for a second. So obviously, we've got a pretty dramatic fall off in the economy very, very quickly. And I would say we were pleased that -- I mean I used the word -- pleased may not be the right word, but our volume was down about 20%, a little -- maybe a little over 20% in the second -- in the month of April. And I think that that's better than we thought it was going to be. And again, and the reason for that is if you look, our customer base is mostly blue-collar and blue-collar workers are mostly still kind of working. I mean some of their volume might -- is lower, but for the most part, a lot of those people are still working versus white-collar workers. I mean, we're all sitting at home, waiting for this thing to end so we can get back on the road, get back on a plane and get the -- get life back to kind of normal. But blue-collar workers' work really hasn't changed all that much other than volumes just being soft. Obviously, there's some verticals within that space that have been impacted more than most or less than some others. So that's been kind of good. So hopefully, we've kind of hit the bottom and we're starting to kind of tick back up a little bit. At least that's what it looks like now. So as the recovery keeps moving forward, I think our volumes will continue to pick back up again. I mean, the good news is, is through this process or through this pandemic, we really haven't lost a lot of customers. It's really just more volume softness than it is loss of customers, which is, again, good news.

Yes. That's a great point. And I was going to ask you one clarification, the people who are concerned about SMB bankruptcy risk. I was just wondering, when you look at your end markets, verticals, customer base, any thoughts there? It looks like you haven't really had any kind of -- attrition has been pretty manageable, but I was just wondering if you had any more color on that front.

Yes. Again, as we got into this, one of our biggest fears was, oh man, we could see a bit of a wave of bad debt coming our way as some of these businesses stop working, particularly the smaller businesses. Their revenue stream is going to stop, and they're going to not pay us. The good news is we really haven't seen that. Again, we've seen a slight uptick in the aging buckets, but really not all that significant relative to where we thought it could actually be. Now there can be some one-off bankruptcies as we go through this process, and we'll kind of see what happens. We've obviously taken a close look at our customer base and look at those verticals that we think are going to be more impacted than others to make sure that we instill some processes that are going to minimize any potential losses we could have.

Okay. That's good. And then how should we think about -- just following up on your comment on credit losses, any color on how they trended during the last recession? And is there -- is that a good guidepost? I know this recession is very different, but is that a good guidepost how we think about it this time around?

Yes. I mean, it's -- obviously, we use the recession as a benchmark, but this is really a different situation. And quite frankly, we were a different business back then. Back in 2008, '08 or '09, we were predominantly fuel cards. I mean today, fuel cards represent about 40% of our revenue still, but the other kind of 60% is other products. And most of the revenue in those other products are more prepaid in nature, so we don't take a lot of bad debt risk there, which is kind of good news. If I go back and when I look at 2008 and '09, I mean, what happened to us from a bad debt perspective, I'm trying to remember exactly what we were. But at that time, our bad debt ran probably in the high teens, 20 basis points of billed revenue bad debt range. And I think at the peak of the recession, that may have accelerated to around 40 basis points. So it kind of doubled during that period of time. And the good news is, right now, the trend is that it is not going to do that, but we'll have to wait and see.

Yes. That's a very manageable level, for sure.

But again, just to remind everybody, we don't have a lot of bad debt. As a percentage, our bad debt today runs 7 or 8 basis points of billed revenue. So it's very, very low. Notwithstanding that one-off loss that we had in the first quarter, our bad debt rates has been good.

That's good. That's good. And then just on one of the things that you highlighted, construction vertical, that's a strong vertical for you on the corporate payments side, but you also had a strong product called BuilderPro for that vertical on the fuel card or Beyond Fuel side. How is that trending? Any color on that front?

Yes. I mean you're asking me how's the construction vertical doing.

Yes, just how construction vertical are doing and also, particularly on your fuel side, you had a good focus on construction vertical. You had some good products there, including the BuilderPro products. How is that vertical trending? How are your products trending?

Yes, I mean if you're asking me about construction, construction actually is one of the industries that's still performing fairly well. And I think it's because most construction projects are still continuing. If this pandemic lasted for some period of time, I think you would probably see some softening in the construction vertical. But I think right now, it's one of our better-performing verticals because people and our workers are still out there constructing. So hopefully, we're going to get a recovery sooner versus later, and we don't see a slowdown in that sector.

No, that's good. That's good. And then maybe a final point on the digitalization theme, like SMBs in the U.S., those were underpenetrated. How do you think about the penetration there? There's definitely a lot more people who believe that we'll see more a shift -- a quicker shift to electronic payments. How are you thinking about penetration of fuel cards in the U.S. SMB space?

Yes. I mean, that's an interesting question. You have to see where that kind of touchless sort of product could actually go. I mean, what we've seen is people are reaching out to us on the corporate pay side. Small businesses are looking to outsource the management of their AP function, and they just believe, "hey, I don't need to touch AP anymore, and I'm better off outsourcing it." We've got -- in Brazil, as I mentioned earlier, people are reaching out to us because of that touchless technology. We have other touchless technology around fuel. If customers want to go down that road, we have a product that can help them out kind of there as well. So we'll see where it goes. I mean, it's still early. I mean, if you think about it, we've been in the middle of this for what now, 60 days? So we'll see where it goes. But I wouldn't be surprised to see touchless products becoming more important to customers as we go down the road.

That's good. That's good. And then just going over to the lodging. The April trends there were definitely much better than what people had feared and compared to the average hotel occupancy. Can you just highlight what's the mix shift there? Why was the performance so much better than what we saw with the general hotel occupancy?

Yes. I mean, again, the performance of our lodging business, I think you'd characterize it as better than most. Our customers aren't buying travel trips to Disney World. We're not booking cruises. We're not booking airline. That's not what that business does. We've got a hotel network for blue-collar workers. These are guys driving 18-wheelers across the country and need to spend nights in hotels. I mean, they're delivering goods and services that you and I use every single day, and that activity is still continuing. And they need -- those people need to spend nights in hotels somewhere, so they're still doing that. We provide -- we've got a large customer base in there in the rail sector. The railroads are still running, and those crews need to spend the nights in hotels and in all places. So again, I think given the blue-collar nature of our customer base in that product category, it's made that category hold up, again, better than most. We are not a -- that is not a traditional travel product. And again, as the -- although it's down about 25%, as the world again, starts picking up again, that's a very resilient business, and we should see volumes tick up again once the economy start picking up. We do have one little piece of the lodging business that was impacted a little bit, but more than most. We bought a business, I don't know, about a year ago, that provided hotel rooms for effectively airline crews and distressed airline travelers. That business is down more. Although a lot of airlines are still flying, even though the planes are empty, they still have to provide hotel rooms for their crews. So still down more than most, but that business isn't impacted as much as, obviously, the travel industry as a whole.

Okay. That's very helpful. And I just want to focus a few minutes on the cost side of the equation. The margin profile in the business, you've done this business really well with a very high-margin profile compared to any of your peers. But as we think about some of the softness in volume, how should we think about the potential for cost takeout, particularly as you -- compared to when you were first coming into the year and your expense base versus where you can take that down or compared to your original expectations?

Yes. I mean, we're in the middle of that now. Obviously, we're trying to rightsize the business to correspond with our volume, it can [ reach ], our business categories, but we're also trying to be smart as well. Hopefully, we're going to come out of this pandemic sooner versus later. And we want to be well positioned to capture increases in volume as the world starts picking up again. But yes, for the most part, we are trying to rightsize the business, and we're doing things we need to do to make that happen.

That's good. And then just if you can provide more color around are there expenses which are like variable expenses, which are directly tied to revenues, which anyways would adjust down? And then maybe more on the semi-variable or fixed cost expenses that you can take out, any color that you can provide?

Yes. Well look at all those, again, the variable cost. I mean, we've got a high amount of fixed cost. I mean, if you think about it, we've got -- our EBITDA margins are typically in the high 50s as a percentage standpoint. So we don't have a lot of cost relative to a lot of other businesses. And so if our cost basis, call it, 40% of revenue, just to pick a round number. And our fixed costs run around 75%, approximately, of our cost base. So obviously, variable costs are going to vary with volume and then fixed cost, obviously, have some component of truly fixed and then semi fixed. So we're obviously taking a hard look at those semi-fixed costs to see where we can trim out. Things like, obviously, we're looking at how much money do we want to spend in IT projects that we might be in the middle of, that we may want to delay or cancel for now, things like that. We're taking a look at certain parts of our headcount to see if -- we're not going to fill open positions, as an example, or there may be people we may want to furlough, kind of as we go along. So we're looking at in a lot of -- in all pieces of our cost structure, really, to see where we can, again, rightsize that cost structure to get more in line with where our volumes are right now. But again, hopefully, our volumes aren't going to be down here that long. So we'll see where it goes.

Yes. No, that's good. That's good. Like, volume recovery is definitely going to position you well. And then just finally on capital allocation. So you've always had a pretty active M&A pipeline. I was just wondering what are you seeing in the market right now. How's the M&A pipeline? Have you paused it or it continues to remain pretty active? Any color?

No, really those remain active. I mean, we were actually getting pretty close to a couple of deals before this thing happened. We've kind of put those deals on hold for now as we continue to reevaluate, first of all, where those businesses are, prepandemic, right in the middle of a pandemic and then where they could be postpandemic. And we're also looking at what's a reasonable price to pay. A price that we were willing to pay 2 months ago may not be a price that I'm willing to pay 2 months from now. So we're kind of taking a look at that as well. If there's any -- but we are very active. Again, we've got lots of different things we're working on, as always, and we're kind of working on those deals right through this process. And hopefully, as we start coming on to this, we'll be better positioned in order to execute on 1 or 2 of those transactions. We're also going back and looking at companies we were interested in maybe 6 months or a year ago that actually weren't for sale, that basically see maybe those companies are for sale today. Or they're going to be for sale, 3, 4 months from now. I mean, they may run into a bit of a liquidity crisis and put them in a different position. I mean, lucky for us, we are -- we're well positioned from a liquidity standpoint. We've got -- we're relatively low levered. We've got about $1.5 billion of liquidity today on our balance sheet. And quite frankly, we still generate a lot of cash, even at these depressed volumes level. With our EBITDA margins being so high, we're still a high cash generator. So we're really in a pretty good position right now.

Yes. Yes, absolutely. Thanks, once again, Eric. Thanks for giving us this opportunity. I really appreciate. Thanks, and all the best.

All right. Thanks, Ashish. I appreciate it.