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

Good morning, everyone. I'm Steven Wald, one of the payments and processing analysts at Morgan Stanley. I want to welcome everyone to our Morgan Stanley Payments and Fintech Symposium on behalf of myself and James Faucette, who you'll hear from later today with Visa. Before I start off here, I just want to read, "For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative." So with us to start off the symposium this morning, we've got Jim Eglseder, Senior Vice President of Investor Relations at FLEETCOR Tech. Jim, thanks for being with us.

Thanks for having me. It's a pleasure to be here.

So FLEETCOR, obviously, a mixture of a lot of different businesses with a lot of different secular growth drivers to it. But at this current unique moment in time, some are being more impacted than others. Just wondering to start off, if you could give us sort of the lay of the land in terms of what you're seeing quarter-to-date through May or early parts of June versus what we were seeing through April when you updated us during earnings.

Yes, sure. And I think, obviously, we put out the slides out of the earnings deck to give you a very granular visibility into the business lines and how they are performing. And certainly, that's second week of April, at the time, we believe it was the bottom. And it appears that indeed was the bottom as virtually every single business line has continued to get better week over week as we've moved further away from that beginning of May period when we announced. Certainly, some are doing better than others. When you look at fuel, Western Europe is further ahead than the U.K. who was locked down a little later but a little harder and little longer. The U.S., by and large, continues to get a little bit better every week across all the businesses. And then the U.K., like I said, it's probably a little bit further behind. But all of the businesses, with the exception of the airline piece of lodging are meaningfully off of their lows as we continue to get better activity across not just the U.S., as states open, but across the rest of the world as folks get back to normal. So by and large, we think that, obviously, we gave you the GAAP earnings expectation of down 20% in April. Hopefully, assuming that credit stays as good as it appears to be behaving that we should be able to maintain that, if not get a little bit better as activity gets back. But by and large, we feel pretty good about the recovery across all of our businesses, certainly not back to normal, so we don't feel that good. But we like the progress that we've made thus far.

Awesome. So maybe you mentioned credit, and I know maybe we're jumping a little bit that term, but maybe it's a good place to start in terms of getting a sense of how much is buoyed by things you're seeing with stimulus in your conversations with your clients versus how much is just business returning to, let's call it, a new normal. What are you seeing on the credit side? Does that look like it's also improving off the lows or are you sort of still a wait and see there?

Yes, I think we're still wait and see. Obviously, we had feared a big credit wave coming through when this thing started happening back in March. Certainly, we have a substantial portion of customers that we extend, at least, short-term credit to in the fuel side, including on the small business side, which is where a lot of folks are worried, but we've been pleasantly surprised how benign credit has been. And certainly, it's difficult to point to, okay, what exactly is the driver. Certainly, there had to be some stimulus benefit from that. Secondarily, I think as largely a provider of what we'll call an essential service, if you're a business that has to drive, the fuel card is one of the first bills that you're going to pay. And lastly, I think we do have fairly short payment terms. I think on average, our billing cycle is 14 days or 7 days to pay. So given that we're June 9 here today, we're almost, what, 6, 8 weeks in. So we've gone through 2, 3 billing cycles at this point in credit, while certainly late and early-stage delinquencies are up a little bit. It's not anything that we had feared. So I think from our standpoint, it will be interesting to see as the states start to reopen, as activity starts to approach somewhat normal levels, a lot of the businesses that said, okay, I can make it through to when business starts to roll again, and now we'll really get a better view into how we think this is going to go forward. But to the extent that things continue like this, maybe the curve, the loss curve will be a little bit lower, but a little bit longer, but it's a little too early to tell right now.

Okay. Great. And sticking with what is mainly a fuel process -- fuel segment issue there on credit. Can you talk to us a little bit about what you're seeing on the go-forward growth aspect of things, the sales process that you have? I mean I know we talked around earnings, sales and new account adds was something you guys wanted to keep intact for the longer term, knowing things would come back. But I'm just curious how things have resumed and whether clients are sort of at a point where they can resume those conversations in a greater math to drive more growth from you guys versus what we just talked about, which is more sort of the existing business?

Yes. I think that's the balance right now. Certainly, over the last year or 2, we had moved substantially towards digital offerings and digital on-boarding of clients in the fuel space, as we moved away from kind of a feet on the street, pounding the payment type of approach. Over the last couple of months, we moved even further into the digital aspect of that, targeting industries that are less impacted and/or growth impacted. However, there is some reservation today that if a customer is calling us for fuel credit, okay, well, we are probably going to think twice about that because there must be a reason. So we're going to do a little bit more work on the industry, a little more work on the client itself. So that at least in the short term, that could temper growth in the fuel business just as we're a little more cautious. Now from a sales process perspective, I think things are recovering nicely. There was pretty much a full stop in end of March and even in April as all companies, including our customers, figured out how to get their folks working from home and continue to operate a productive business. But now, one now that all that is kind of in the rearview mirror and folks have figured out how to be productive and actually work from home, now they're getting back to looking at ways to improve the efficiency in their business. And the selling efforts are start -- folks are actually starting to take our call. I was talking with Ron, our CEO a couple of weeks ago, and his comments, in typical Ron fashion, hey, I continue to be pleasantly surprised that how much demand there still is for our products out there. The folks still want these products that we offer to help them manage their businesses. So hopefully, by the end of the second quarter, we get back to -- we're not -- we don't expect we're going to be back to normal sales processes, but certainly well off the bottoms and approaching the type of sales productivity levels that we were seeing through February. So by and large, again, the sales process, the receptivity, the willingness of customers to interact digitally seems to be going much better. And the last thing I'd say on this is we've always been more interested in selling more digitally just because the efficiency aspect of it. It's been more the receptivity of the customers, smaller customers are more receptive because it's less complex. The larger customers is more complex. Therefore, they're less receptive to it. However, their receptivity seems to be softening and a willingness to do things differently seems to be helping the recovery a little bit in sales.

Right. And that's helpful as you parse it out. And maybe as we're thinking of the different pieces of the business, we can talk a little bit about the OTR with the road segment. And I know you guys talked about this, and we'll have WEX up in a bit, and they were saying, similarly, there was relative strength or relative resilience in this as essential functions of the economy remained pretty resilient through the bottom. How are you seeing that road map change going forward as we resume business as usual or the new normal and maybe less activity is focused on the over-the-road piece? What are you seeing there because that was previously a relative area of outsized pressure before all the disruptions?

Yes, it was. And I think in the over-the-road space, just in all the fuel spaces that I'm looking at across my reporting, continues to get a little bit better every week. Okay. So relative to over-the-road, when you think about what's happening there, certainly, the consumer is starting to spend money again. Goods are going to have to be moved to replenish that. There will be parts of it that are more impacted than others like retailers, but we don't have any meaningful exposure to that. But I think when you look at the over-the-road dynamics, I think there was a relative proportion of oversupply in the industry in 2019 and into 2020, and that really hasn't changed at this point yet. I think that will shake out over the next 3 to 6 months, if you will as folks realize that, okay, I can't make a go of it, and that's part of the credit discussion that we had earlier. What does that mean from a credit perspective? For us, it's the relatively short payment terms. But I do think that there is still a bit of a -- there will be a continued pressure on that over-the-road segment throughout 2020. And then we'll see what 2020 brings with how robust the recovery is, maybe that helps it. But luckily for us, the over-the-road segment is, call it, roughly 1/4 of domestic fuel. So it's -- I mean small is not the right word, but it's not an overly large proportion of the business for us.

Got it. That's very helpful. So let's switch gears maybe into toll. We can always come back to some of the fuel stuff. But maybe into toll and a different experience going on in Brazil or I guess time line with dealing with the pandemic. And one of the things that I think was perhaps different than some people had expected around earnings was the level of exposure to volume-based revenue. So that's held up relatively well from your prior comment. But from a disruption perspective, as we get further into this, what would you need to see for a disruption to that subscription-based side of the revenue? And is it fair to characterize the headwind in toll is mainly around the growth of the business rather than the business you currently have?

Yes. I think that's one way to think about it. But I think you're right. We are -- I don't think we were surprised, but we were pleased with the stability of the tags and the revenue in that business. In the face of the shutdown -- I mean 85% of the revenue in that business comes from the monthly fees on the roughly 5.5 million active tags we have in circulation. And as we kind of think about it, even during the Brazil trucker strike 2 years ago now, we didn't see a meaningful change in attrition just because you couldn't drive on the toll roads for, in that case, 10 days. And we think that, that will continue to be the case if you can't drive on the toll roads for 30 days or 45 days. The cost of a toll tag is fairly small in the grand scheme of expenses. So for you to be moving down the list and trying to find expenses to cut as a consumer or a business, you'd have to be pretty far down that curve to look for something that was $5, $6, $7 a month. So I think from our standpoint, when you look, actually, the core toll tag product is selling better than it has in a while today. Just as 1/3 of tolls are still collected in cash at the toll plazas. And the government and/or the toll plaza operators are interested in continuing to operate that way, and they've asked us to go back to selling toll tags at the toll plazas with a clipboard in hand like we used to do back in 2016 when we bought the business. So I think that, that toll tag -- core toll tag should continue to sell better than it has in a while. Now the urban tag is not selling so great today as the value proposition is not that great today if nobody is driving around in the cities like Sao Paulo and Rio, which are largely locked out, given what's going on in Brazil. So I think once the cities start to open again, the value proposition of that tag is actually higher than it was before. As folks truly do realize that, hey, there's a contactless way to pay for fuel, fast food, parking, car washes and whatnot. And hey, well, before it was a novelty, today, it's almost a necessity and there's a lot of value in that. So we do think that the sales of that tag, once we can get folks back out into the market ally and having folks driving again is probably a little better for than it was coming in. So by and large, we think that the value and the demand for the tags should remain robust as we go forward. And certainly, the incremental transactions on the urban tag, as we call it, where we earn interchange on the transaction, should be better for that business as we go along.

Right. And to your point about the 1/3 of toll still being paid in cash and the government asking you guys to go back to selling directly on the toll roads. Is that something you guys -- the last I heard from you, it sounded like you were considering a shift back that way, but you've obviously shifted your sales strategy. Is that something where you would make a shift? Or are you going to sort of do both or…

No, I don't -- I think it's just incremental. So I think the digital selling aspect of that is the way consumers expect it today, especially when it's an RFID tag, and you can pick it up at a kiosk or at a grocery store or order it online and have it mailed to you. I think, certainly, we would consider adding some folks to go back and sell it to toll plazas, but I don't think it would be a shift in how we would approach it then.

Okay. And it sounded like you were describing the added value proposition of the tags for the urban side as sort of valuable today doesn't really need anything incremental, but I'm curious how you're thinking about the pace of investment and growth of this product. Is now the time to be putting more dollars to work here to expand the partnerships you have? I know that was sort of not in its infancy, but certainly in its early days with the partners you signed up like McDonald's down there. How are you guys thinking about that expansion strategy today versus maybe waiting a year for things to get back to normal?

Yes. I think the governing factor there. Certainly, we're not going to wait because, obviously, there's a lot of value to be extracted today for adding incremental partners. For us, the bottleneck is how do we roll out the hardware, even if I had 5 new partners that wanted to sign up today in various parts of the business, do I have the infrastructure and people in place to be able to hang that hardware at the locations as to be able to improve that distribution. It's almost like 10, 15 years ago when Starbucks went from opening 1 store a month or 1 store a week to 1 store a day. Well, it's a very different process. And that's what we're really in the process of doing is not just managing the cost associated with this hardware implementations, but do we have the infrastructure in place to do so. We took a meaningful step forward last year or 12, 18 months ago as we signed up McDonald's and now we're in over 400 McDonald's with our readers. So we got the second largest fast food operator, Habib's, online, and we continue to hang hardware on those folks. It's just -- it's part of the balance of finding the right folks to be able to do that effectively, that is challenge. So I think FLEETCOR tends to be balanced in our approach. Certainly, we wouldn't overly impact the expense base of that business today in order to accelerate the hardware rollouts tomorrow, but might we shade a little further into that space if we can sign up a new partner or 2 to do so, we might do that, yes. But I think the other thing is this. If we can hang that hardware to payback because the interchange earnings on those incremental transactions is pretty quick when you think about it. So to the extent that we can see an acceleration in usage at the places we're hanging, it might help us fund the next slug of hardware installations as well.

Okay. That's interesting when thinking about the payback. And that kind of leads me into -- maybe the last one I'll touch on here in toll is, is how you think about the, let's call it, 1-, 2-, 3- or 5-year outlook for the mix of revenues here. It's obviously -- it's like over 80% driven by the subscription right now, if I have that right. So how do you see that over the next several years changing as you move towards a more usage-based segment breakdown?

Yes. If we get it right, certainly, the percentage of the revenue that would come from subscriptions should continue to get smaller as a percentage of transactions on which we and entertain should get larger. So I don't know, it's tough to predict what that relative proportion, or what the size of the business could look like going forward. But if you roll the clock forward 5 years, that nonsubscription, that urban tag portion of the revenue should be meaningfully larger than it is today. So I hesitate to kind of give you a number because folks will just hold me to it and ask me for an update on it all the time. But I mean that's the goal. Certainly, that's what we're after we bought the business in 2016 was the urban tag aspect of it recognizing that the core toll tag business in and of itself was not a mid-teen grower. But the value and the economics of the incremental transactions of the urban tag is what we're after. And we're finally at a point now where we have meaningful distribution. We've got a couple of hundred thousand urban tags in circulation and growing quickly, and we think that, that will continue to become a bigger portion of the business.

Yes, fair enough. I won't try to nail you for the number. Certainly, was going for it, but I'm not going to push it. So with that, let's switch into corporate payments, which obviously is a clear area of focus for a lot of people who are in the stock today. And it's a relative bright spot, right? So maybe we could just keep it at -- not so much at a high level, but everyone talks about corporate payment or B2B in these broad terms. But what is it exactly? Or what are the areas of true incremental appeal to the various clients who are coming to FLEETCOR directly or indirectly to use the corporate payments product? What's appealing to large enterprises versus small businesses and these disruptions more than it did before getting them to take a closer look now versus 3 years from now?

Well, I think just the value proposition of being able to manage even a portion of your IP up to all of your IP remotely is resonating in the marketplace today. We've maintained for a long time that some sort of economic slowdown might actually be good for that business as businesses that our current virtual card customers today might be looking to maximize the rebate associated with that. And looking to figure out, okay, what other vendors can I pay with the virtual card? Or to the extent they need to rightsize the expense base, maybe they're willing to move some of their volume to virtual carder holders. Before, it was like -- it wasn't that interesting for them. I mean inertia is the biggest challenge to getting a large middle market or enterprise-type of client to do something different. It's just said, "Hey, I have an AP department that does whatever they do. I don't have to think about it. I've got 15 other priorities on top of my list before I get to that." And it just works. Well, today, the last 2 months, it wasn't working. So all of a sudden, if that Treasurer or CFO or CEO of the company is spending time on this payables function, we're probably going to look to modernize it. Okay. So whether it comes from just the virtual card side of things or the better technology and interface we have on the international payment side of things, all the way up to the full AP outsourcing, where the pitch there for invoice pay is, hey, meaningfully lower fraud risk. We take care of all of the servicing for it, you push us the file, and we handle all of the back-end work there, including if there are any questions. And we actually collect all the bank and vendor information on your behalf. So that the proportion of your AP cost that we can take out is substantial. Think north of 50%, 60%, 70% in certain instances, where you can actually handle all of these payments on an outsourced type of manner, and it takes away a lot of your headaches and enables you to move your folks that were largely doing a support function into a -- hopefully more of a revenue-generating function as you redirect them to doing something that's more productive for the business. So all in all, you get the lower fraud risk, the better economics, if you will, and the ability to point your -- the ability for your folks to make your payments remotely, which may or may not have existed prior to this certain things. So I think folks that only considered at the margin before are reconsidering it and the call volume and the interest and the interactions and the virtual participations we've had have been meaningfully higher across the board, but especially Nvoicepay with full AP. So it really is a culmination of having the right product set in place and the right approach and the right value proposition, interacting with a true almost emergency need on the customer base. So we're trying to maximize the ability to capture that attention today as you would expect.

Yes, absolutely. That's good color on the different products there. Maybe trying to nail your feet to a number here in this segment because we can see how the growth has been so healthy. If you back out items like the cross-border piece last quarter or the payroll card aspects of late 2019, this has been basically a 20% growth business for some time. And I know you guys have talked in the past about managing, I guess, smart growth, knowing there's a lot of incremental growth you could get, but you're sort of trying to manage the growth of the business to be healthy. Obviously, the demand is greater now today. So is this something where and as we sort of resume business as usual and businesses come back open, or get more people back into the office and reassess their business planning that you could see it really accelerate beyond the 20% for a period of time? Or is that not something you guys are willing to, I guess, take to the bank at this point?

Yes. I think it's not -- I mean, it is part of willingness to take it to the bank, but part of it is not. I mean, if you think about it, that virtual card sales cycle tends to be very strong because the implementation cycle tends to be long. And the selling expense associated with that in the near term is very high because you -- if we wanted to materially change the growth profile of that business, we had to hire a bunch of salespeople, get them trained up, get them productive, get their pipelines full. And what do I have in that first year, nothing but an big expense drag with the promise of a hockey stick like growth on the other end to some degree, if you will. So certainly, the invoice pay product, we can get up and running and onboarded in a much short period of time. So maybe that's a place where we might consider investing in incremental dollars. But FLEETCOR is a growth-by-design-type company. And especially given some of the other profitability, whether it be credit or lower revenue hurdles that we have today, we don't really want to fan the flames of softer revenue growth at the expense of higher business growth today. So I think it will be much more of an allocation of sales resource dollars discussion. The conversations that are being had at the management level today are, okay, how do we manage expenses in line with the current revenue outlook? And if we are going to reallocate some sales resource dollars from where we're going to take them into where we're going to put them. And I think we may be more willing to take some of those sales resource dollars out of one or the other businesses and put them in corporate pay, given the relative interest in that business today and the relative willingness of folks to interact and sign up for those new products and services. But I would not expect us, instead of saying, "Hey, we're going to cut -- target to cut expenses, mid-single digits plus." Maybe it only be low single digits as we reinvest in that business. I think the core DNA of the company today is really about balance, and I would expect us to continue to push on with that. The one thing I would say is, yes, it's grown over 20% over the last couple of years, but it hasn't been because we're investing to grow the business at 20%. It's just been that the closure rate and the onboarding of the clients and the near-term upside after we onboard clients, has produced those higher growth rates. So I think that's part of the challenge of managing expectations around the growth rate of that business is just because of what it's done over the last couple of years, isn't because we've invested to grow with that pace. It's been somewhat of a fish jumping in the boat. So it's a good problem to have.

Right. Okay. So you guys will continue to keep the resources there and focus on this area, but it's fair to say then that this is something that still will take several years to really catch on because of the planning process and the implementation time line. That's…

Yes, I just don't know that we're going to have a meaningfully higher growth rate than we've shown over the last couple of years just because more fish are jumping in the boat. But at the same time, you should expect that business to continue to grow at very robust growth rates and to the extent that we can use some of that payoff to fund incremental sales people. I mean John, who runs that business today will forever tell you that, hey, if you double my sales force today, I'll double the business in 2 years. The problem is, what does that do over the next year? So I think the revenue growth challenges and some of the expense management challenges that were faced here today just provide another consideration as we look at what we're going to do from a sales investment perspective in that business.

Totally understood. So we've got about 5 minutes left. I want to make sure I check to see if we're getting anything off the web. And one question that I'm seeing is about the granularity of what you're seeing on the fleet side in terms of activity. Now obviously, in some states have been open for a while, some are just starting to open, are you able to see a notable variance on a state-by-state or regional basis in the fleet segment? Or maybe in your other segments, are you able to track the level of sort of idled mobility across your segments in those areas versus those that have resumed more normal activity?

Not really. So certainly, as you look across our fuel business, us and our primary competitor. I mean, between the 2 of us, who we have a substantial proportion of the total fuel card business in the country. So we're both fairly representative of the overall GDP activity of the country. Certainly, when we look at the small- and medium-sized fleet, those have come off the bottom so nicely. They're probably improving a little bit faster than the over-the-road trucking segments are. But we do have reporting that should -- that enables us to see on a state-by-state basis or at least that I've seen. But anecdotally, if you look at being in Atlanta and Georgia, you and I were talking about this before we jumped on the live call, the amount of traffic and volumes outside of the office areas here in Atlanta, I would venture to say are back to 75% and 80% of pre-shutdown volume. So there's a lot of folks out. There's a lot of folks that continue to be out doing what they're doing, the landscaping trucks are -- all of the folks, the contractors are out doing what they're doing. So once you get outside of the office areas, activity, at least in one of the first states to open has been and continues to be pretty robust. And I would expect that to continue to improve in all the states that are little further down the curve of the reopening side of things.

Okay. That's helpful, even anecdotally. But interesting to see that it's still sort of difficult to see so granularly. Maybe we could switch towards M&A in the few minutes we have left. This is, obviously, a key driver of some of the growth at FLEETCOR over several years. And you guys have gotten more vocal in the last several months about asset prices coming down and opportunities that previously were thought to be, I guess, out of reach, valuation wise or to set up wise maybe coming back into play. Is that trending as expected since earnings when you guys made those comments? Is that still a wait and see? So what -- give us the update there in terms of conversations even at a high level you're having? And I know corporate payments is a clear area of focus. But are there any other areas that have come into focus since those comments during earnings?

Yes. I don't think things are materially different than what we were seeing back at the time of earnings. Certainly, other than public company valuations have recovered incredibly well since that time. The expectations, the sellers' expectations generally don't change that quickly. So certainly, the public company valuations are easier to see than private company valuations. And the bid-ask spread between what we thought the valuation adjustment should be and what the sellers were thinking, while it's certainly come in, not as fast as we would have liked. And that's not a surprise. I mean, sellers' expectations kind of like prices at the pump. They're sticky on the way down. They go up immediately, but they're sticking on the way down. So I think from an activity standpoint, when I look at the folks that are back in the office here, because we're in the office, the office is open, for at least a Phase 1 opening, the entire BD, the M&A team is back in the building, and they've been back for weeks. So the work is being done, trying to identify the products and the assets we're interested in, the due diligence process continues to move along on the assets we were interested in before the shutdown happened. And we've got some folks that are knocking on doors and making sure assets that may -- that we may or may not have thought would trade at any point in the future, recognize that, hey, we're a ready and willing buyer to the extent that you're exploring strategic alternatives. So I think by and large, we continue to press the issue on the value of being associated with a big successful company with a strong balance sheet and strong liquidity characteristics like FLEETCOR. And certainly, hopefully, the sellers at some point will recognize that a bird in the hand is indeed worth more than 2 in the bush, and we'll get a few larger things done. But relative to segments, I think most of the activity continues to be in the core pay segment, just because that's where most of the assets are. We were interested in and continue to be interested in a lodging asset or 2 still. On the toll side, there may or may not become an asset that becomes available there. And certainly, on the fuel side, anything that we might do would be international. So I think a lot of the projects that we'd identified early on, we continue to work. Maybe there's a few incremental assets there that we're working on now that we otherwise might not have before. But I think it's a long process. I'm not sure that things have accelerated meaningfully today, but ultimately, we're opportunistic and assets are sold and not bought. So you just got -- you ought to be into a strike when the opportunity represents itself, and that's what we're working on.

Totally fair. And maybe I'll ask one last one right before we run out of time. But any sort of acquisition opportunities you'd consider that would open up another core segment for FLEETCOR or sort of just looking for sizeable assets within those main areas you just mentioned?

Yes. We would consider opening up another -- a fifth growth vertical. I mean, if you consider, and we've said for a long time, I don't know what that might be. But it wouldn't surprise us in 5 years down the road, we had a fifth growth vertical in the mix, in addition to the other 4. So we're open to that to the extent that we can find a meaningful sized asset that give us a good position in a new market or a new product set and we be open to that as long as it had the same characteristics as the rest of our businesses with the high recurring revenue nature, the high barriers to entry, the network effect of having a lot of customers on one side and a lot of merchants on the other. Basically, there could be another vertical out there that looks like our businesses today from our perspective, which is why we're in the businesses that we're in today. But that's what we'd have to find to be able to do that.

Okay. That's perfect. And with that, I'm going to wrap it up. It looks like we're out of time. But Jim, thanks for joining us. It's a pleasure to speak with you always.

Thanks, Steven. Absolutely.

And hopefully, we'll hear from you soon. And for everyone else, take a 15-minute break. And on this track, the Fintech Symposium track, we'll have WEX up next at 10:15. Thank you.