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

Good afternoon, everybody. My name is Bob Napoli. I'm the equity research analyst for William Blair that covers the fintech space. Welcome to the 40th Annual William Blair Growth Stock Conference. For a complete list of disclosures, please go to www.williamblair.com. We are excited to have with us today, looking forward to a question-and-answer period -- session with FLEETCOR Technologies, leader in B2B payments. We have with us Eric Dey who is CFO, he's been CFO since 2002; and John Coughlin, Group President of Corporate Payments. And I think the Head of IR, Jim Eglseder, is hiding somewhere in the room, if you will.

But maybe just to get started, second day of our conference and we've had a lot of payments companies attending. And we've been getting -- we had Mastercard put out some updated weekly numbers, if you would. And I'm sure we won't be getting weekly numbers, hopefully, not for many more months. But I was hoping you can give an update. It's been a little more than a month since you reported earnings. And if you could give maybe just an update on what you're seeing in the business trend-wise. You gave great volume numbers, 5-week on your -- it was really helpful when you did report earnings in a presentation.

Yes. No. I think that was great disclosure. We obviously wanted to give people a feel for what our business is and how we've been impacted by each of our major business categories. Just to remind everybody, our businesses are recurring revenue in nature. Our customer base is mostly blue collar in nature. So we believe that our business will be impacted less than most as a result of that. Most of our customers are still out there working because they're blue collar-type workers. They don't work, they don't get paid. Think of a guy doing landscaping. And guys doing landscaping yesterday, he's cutting your lawn today. I'm sure guys who are doing construction work, they're out there doing construction today. They're still fixing roads and building houses and building buildings and those sorts of things. Guys who were driving 18 wheelers cross-country delivering manufactured goods are mostly still doing those kinds of things. So our business has been impacted a little bit less than most, at least we believe that. From a volume standpoint, we believe our businesses mostly bottomed out around the second week of April, which you saw in the disclosure that we made in our last earnings call. Since then, our businesses have began to tick up a little bit. So we've seen some recovery. And I would say most of our fuel card businesses around the world, in particular, our corporate payments business was impacted in a little different way. They probably didn't really bottom out until the -- more toward the end of the month. You think about corporate payments for a second. When companies make AP payments, it's usually about a month in arrear, so it was impacted a little bit later on a weekly basis than the fuel card businesses where the volumes hit almost immediately. So again, I would say, from a good news perspective, most of our businesses, even corporate pay, are beginning to tick back up again. And as economies start opening up around the world and around the country, our volumes should start to recover as well. So we're starting to see some of that.

Okay. Anything stand out, like how about the Brazilian business? I mean, obviously, they're having -- they seem to be having a lot more issues with COVID lately, but more of that business is software-based or as opposed to transaction based.

Yes. I mean the good news, most of our revenue stream in Brazil comes from the subscription fee that we get from our toll tags. So whether the customer uses the tag or not, we're still billing them for $7 a month or whatever the fee happens to be there. So we're still getting those kinds of revenue. As a matter of fact, our tag growth is still increasing year-over-year. So I'm looking at the volumes now. So we're still growing tags in about a 5% growth rate even now, even through the middle of the pandemic. The reason for some of that is we're not only selling the old traditional toll tags the way we have, but now we're starting to sell these urban tags, which are tags that -- for customers that don't primarily drive on toll roads, but they're using the tags to buy other things first, things like parking, things like fuel, things like fast food. So we're seeing a lot of momentum in sales in that kind of area as well. Where the revenue has been impacted in Brazil is obviously customer -- are not driving on the toll roads as much, and they're not buying as much fuel, they're not parking as much. And so they -- some interchange revenue that we get from those sorts of products is obviously down quite a bit. We also have a bit of a benefits business in Brazil where companies pay for transportation for their employees. Obviously, employees are working from home, so you don't need those transportation vouchers. So we've seen some volume down in that business as well. It's down more than the other business.

Okay. Maybe just touch on credit risk, if you would. And the -- generally, the credit risk is mostly in the fuel card business. You had an issue in the FX business. But what is your -- how concerned are you about credit risk in the fleet space? How did you perform in the last recession? And how confident are you that it won't become a big issue through this recession?

First, let me comment on the last recession. So back in 2008 and '09, we were primarily a fuel card company back then. Bad debt back then, I would say, it doubled, I would say, during that period of time, but we don't have -- we don't really have a lot of exposure. Our payment terms are relatively tight doing what we do. We were -- I'm trying to remember exactly what the basis point bad debt rate was back then, but it was probably around 20 basis points. And at its peak, it probably went to about 40 basis points. So -- but again, I'm giving a magnitude of it went from $20 million to $40 million worth of bad debt back in 2008. So it was up a bit. The good news is, so far, I would say we've seen a little bit of an uptick in bad debt. Obviously, we can see all the roll rates week-to-week, month-to-month. So we can --we take a -- we have a very close watch on a lot of the trends there. And I think we've been pleasantly surprised so far that it's not higher than it is. We actually expected it to be a little bit worse. So, so far, so good, keeping our fingers crossed. It's a little bit a bit worse than the historical trend, but it's not as bad as we thought it was going to be.

And in the FX business, John, your business and one of your businesses, I mean, how confident are you that there isn't another issue -- I know you've done a deep dive there, but…

You want me to go?

Yes. I can answer that, too.

Good.

Yes. I mean, obviously, Bob, we had that one bad debt loss that we had in the first quarter. And just to remind everybody what that was, it was a bit of a perfect storm. It was a customer that was really one of the largest exporters of rice in the world. And they got caught when the COVID thing hit and the world shut down. They had a bunch of shipments they were in the process of making around the world. They couldn't deliver those shipments. The revenue stream effectively ended for some period of time. And at the same time, the FX rates in some of the geographies they were delivering the product to get very volatile, and they got in a situation where those currencies trended very negatively in a very short period of time. So there was a margin call against their position. And unfortunately, they didn't have the revenue to cover the position, which caused that loss. We've obviously since then taken obviously a deep dive, look at all the other customers and the other larger customers in that space to see if we have a similar sort of exposure. And the good news is is we do not. We've also tightened up some of our processes along the way to ensure that we wouldn't have -- we'd be exposed to any sort of a loss of that magnitude. So I think we're in fair condition. John, anything you want to add to that?

No. I'd only add that the currencies have come back to where they were pre-COVID pretty much. And so if you looked at the major currencies versus the USD, this came so far off what was historically normal that if you had a hedge position, you're out of the money in a big way. But what you have to remember that those out-of-the-money positions are not losses until the contracts come due, and those can be 6 to 12 months out there. So the fact that the currencies have come back down means that all those out-of-the-money positions have contracted materially.

That mean you get a recovery? Is that a…

Yes. No. Things are more normal now than they were a month ago.

All right. And maybe like, with John there, try to do a deeper dive into the corporate payments business, one of the more exciting opportunities, we think, to have substantial growth at FLEETCOR over the long term. And John, maybe just give a little background on that business and kind of what you think the long-term growth rate could be or the opportunities are for your business.

Yes. Okay. So it's an AP-focused business. We have a pretty unique differentiated product set. We've got everything from your traditional purchasing card to virtual cards, to full AP automation to cross-border payments and to expense management solutions. So when you think about the product set, there's very few companies out there that have that breadth of product set. The closest would be a bank. They would have some form of all those things. So we like to say that we have the full capabilities of a bank, but we're -- have the nimbleness of a fintech. But the beauty is when we compete against fintechs, we're not a fintech in that we're not a venture capital backed company that has a limited balance sheet. We're an S&P 500 company. So in a bake off, when you're going up against the company with $30 million of revenue, we have an advantage, the IBM advantage. Hey, we're not going anywhere. We're around. So when you look at that product set, we're attacking the B2B payments market, which is just gigantic. Domestically, there's $125 trillion of B2B payments made annually. And cross-border, there's even more, $145 trillion payments made annually. Just to give you some benchmark about how big is that number, the $125 trillion, that's 3x the size of all retail transactions. So it's just enormous. And the opportunity and why the growth is so high is that in the U.S. and North America, half of those AP payments are still paper-based with check processes. So think of this past 3 months we've been through with COVID. The deficiencies of a paper-based AP process have -- had a spotlight shown on them. If all you were doing was catching chat, paper mail, handing on paper approvals and then sending out a paper remittance with a check, I mean that didn't work right now. You're not going to come in to write a wet signature on a check. And so our solutions allow companies to digitize and electronify that process. And we provide a solution to make all AP payments in one process, so whether it's check, wire, ACH, virtual card or cross-border transaction, we can do it all. And so they can send us one payment cloud. Here are my 1,500 invoices. They total $3 million. Now FLEETCOR, you do it all. And they're done. And so what do we do? When we digitize it, we reduce their AP costs 75%. We reduce their need to answer the phone for service problems because we'll do that for them. So once we get the file with the money, if the vendor has a question or there's a problem with a payment, they call us. And then we also manage the fraud risk. So most companies will deal with fraud from fake vendors. They'll send them a spoof e-mail saying, "Hey, I'm Joe from Joe's Plumbing. You had -- this is my bank account number. Please send it to this bank account number now." And it's a fraud transaction. And so we'll manage that, and we'll indemnify the company against that. So we keep the payment data, and we'll diligently check to make sure it's the right vendor being paid. So reduce costs, increase efficiency and give them a rebate, and it's a proposition that's sort of met its day. It was really designed for this environment.

Now that business is about 22% of FLEETCOR's revenue. And it has 3 pieces, the virtual card, full AP and FX. What is the mix of those businesses? I know the full AP is growing -- I think, grew 60% even in the first quarter.

Yes. So I was -- the vast majority of the business is domestic payments. So more than 60% would be domestic payments. And within the domestic payments, it's sort of like a 75% virtual purchasing card and 25% full AP. But one of the things that we're most excited about is that Nvoicepay has an amazing product, but they had a limited distribution system. So they had 15 people selling. Now we have well over 100 people selling the product. All Comdata salespeople are selling Nvoicepay now. They're leading with it. And so right now, we have over 160 deals in the pipeline from Comdata alone, then you add Nvoicepay's pipeline, which is almost as big, so we're really seeing traction on the ability of the Comdata sellers to sell a full AP solution.

And that -- what is the target market for that? I mean there's a lot of players and you have Bill.com who's a partner of yours on the small side. On the SMB market, you have AvidXchange who, I think, has been a partner of yours in a more mid-market. And so you have a partner strategy. You also have a direct strategy. And so who do you -- how -- where do you play in the market? What's unique about your business? And who are your primary competitors?

Yes. Okay. So yes, we do partner with people, but I think FLEETCOR has a long history of partnering with sort of coopetition, so think of our fuel card business. We would run the oil card programs for oil companies and still sell our own private label cards. So we'll do both. The partner side of the business is, well less than 20% of the total corporate payments business, so it's primarily a direct business. That said, we play in different parts of the market. As I said before, it's a massive market. There's a lot of room for competition, and we feel the best way is to go direct and partner with people. So when you think of the market, there's a Bill.com, that's on the low end. You've got an Avid, that's at the lower mid-level, focused mostly on the property management space. You've got like a Bottom Line that's primarily focused on the bank partner channel. And then you have FLEETCOR that is pretty diverse across industries with a few strong verticals where we're unmatched in terms of our penetration, and those have included construction and health care. But if you did an SIC code list of all our customers, we'd have representation across all the industries.

And how do you want to grow that business? I think Ron had suggested that, that was an area of high focus from an M&A perspective. You guys have done a few deals there. And what areas -- how are you going to add to that? I mean I think I got the feeling that you were interested in adding something maybe in procurement or kind of the business spend management area like what Coupa's doing to add on to the payments. But I just -- it wasn't clear what you're looking to do. Where do you see the opportunities from that prospective?

Well, first, there's a tremendous organic growth opportunity that we'll continue to pursue. So as we've said, we think we can grow that business which is well over $500 million of revenue size in the 15% to 20% clip organically. So that's adding over $100 million or $150 million a year, which is no small fee organically. That said, we do look at a lot of M&A. We're an M&A-driven company. I think we'll look to scale existing positions. So there are other players in the spaces we play in today to build those up. But if you think about B2B payments, there is a value chain. And you can go earlier in the value chain, which would be on the procurement side. It could be on the electronic invoicing side or it can go later in the process, which is supply chain finance-type processes. You could also add tangential suite. So our prime competition is banks. So on the cross-border side, 90% of the market is controlled by banks. That's not true in consumer cross-border payments. About half of them are controlled by banks. So we see that shift happening. On the domestic side, the status quo of AP processes typically involve paper-based processes and then sending instructions to the bank through the treasury management system. So we see a lot of opportunity to expand the product suite to compete further with banks to broaden that -- have the full capability of a bank but the nimbleness of a fintech and continue with the strategy that's worked so far.

Great. That sounds -- $500 million growing 15% to 20% plus accretive M&A or -- it sounds like a good strategy, a big opportunity for you guys. From a capital allocation and balance sheet perspective, Ron, what do you -- Eric -- Ron. Look, what are your -- where is the capital levels today? I mean the -- I think you're relatively -- balance sheet is obviously very strong. Debt-to-EBITDA below 3, well, -- comfortably below 3. So what are your thoughts on in this market, continue to hunt for capital, if you would? Or looking obviously at M&A and M&A pipeline, or you've been aggressive in buying back stock at times. You generate very good cash flow with very high margins.

Yes. So obviously, we're in a very good place from a liquidity perspective, Bob. We've got about -- I mean, we've got about $1.5 billion of liquidity today. We're relatively low levered. To your point, we're under 3x levered. We have -- obviously, we are proceeding cautiously. We certainly were at the beginning of this -- of this pandemic. We were trying to conserve capital just because of a rainy day. But now we're kind of through the thing a little bit. We've seen kind of where the volumes are. Now we're more comfortable with where we think the business is going to go certainly in the near term. And our liquidity rates, even with volumes off 20%, we're still going to generate a significant amount of free cash flow in 2020. Our M&A group is still -- obviously, we've got a robust pipeline, and we're still looking at a lot of deals. Matter of fact, we were pretty close to a couple of things right when the pandemic hit, which we have now paused a bit. We were going in, and we want to understand more about how their businesses are going to be impacted or how they -- or how they are being impacted by the pandemic and what their business might look like as we exit the thing down the road. We're also looking ahead, obviously, M&A from a perspective of what's the right valuation for a deal before the pandemic versus what is the right valuation after the pandemic. Is it going to be lower? Is it going to be higher? I mean where is it going to be? So we're looking at a lot of things. I think we are comfortable or getting more comfortable with the fact that we may do a deal. And I would say that we'll probably do some M&A before this is all said and done. So again, we're in the same place we've always been. We want to do accretive M&A transactions, and remind everybody we do M&A because we want to penetrate existing markets further to gain more market share. What we do them because we want to add new geographies. So that -- our objective remains the same. I think we're bullish on our prospects of continuing to do M&A.

And is the primary focus on corporate payments additions? Or is it broad at this…

It really is pretty broad. We do have some opportunities we're looking at in almost every category today. I would say there's more opportunities in the corporate pay space. There seems to be more -- it's more fragmented sort of a category than the other categories are today. So we are looking at a few more things in that space. Whether we like them or not, is another story, but we are looking at some things.

Great. You have this segment called other, and then you also have gift card. So that's -- I mean…

It could be Other as well.

Which has been other -- kind of other for a few years. First of all, what is in other these days? I guess that's about 6% or 7% of your revenue, and gift cards, another 6% or 7% -- 7%, somewhere around there.

Yes. I mean other is made up of some other products that we have that are very complementary to the businesses that we have around the world. Things that are in there would include our maintenance product that we have in the U.K. as an example. It's our benefit business. That's in Brazil. It's our payroll business that we have in the United States. Those are the primary -- those are primarily the 3 products that we have. We also have a few add-on sorts of products that we sell in our over-the-road business, things like Comchek as an example. And we've got a bit of a merchant device business in there as well. So it's 3 or 4 different things that are, again, complementary to our other businesses.

Your lodging business, I mean, it's -- you have the workforce piece. You acquired a travel piece, I guess, which is obviously not the greatest timing, but a small, not a big deal, if you will. But are you seeing any changes in trends in that lodging business coming up top to bottom?

Yes. I mean, again, to remind everybody what that travel business says, we're not helping people book travel to Disney World as an example. This is a blue-collar hotel network that we market basically to our blue-collar customers that travel around the United States and have to spend nights in a hotel somewhere. Guess what? Those guys are still mostly working. And the over-the-road guys are still driving over the road. The guy who were cutting trees down after tornadoes are still doing those sorts of things. So a lot of the business activity is still out there. Although that business is impacted, it's just not -- it's not as impacted as much as some of our other businesses. I think that's down -- the core business is down something like 20%, 25%, which would be in line with kind of the rest of our businesses. The Travelliance business we acquired, again, to remind everybody what that is, it is a business that helps with airline, crew travel and distressed traveler travel as well. Obviously, since the travel space is down quite a bit, that business is actually down quite a bit. It's just relatively small, which is good, obviously, at this point. But that's what's the makeup of those 2 businesses are. I mean the good news is, listen, I mean, as soon as business activity starts picking up again, again, the objective is, hey, we should see -- we should immediately see volume increase in those businesses as well. We haven't seen a lot of loss in customers at this point. So mostly, it's just volume softness, really, more than anything else. So again, as the world starts picking up again, our volume should start picking up and our products there as well, which is a testament to the recurring nature of our revenue models around the world as well.

Great. And just on your international businesses, if you would, with the international portions, ex Brazil. We talked about Brazil somewhat there. But are you seeing better -- I mean, I think you were performing much worse out of international I think versus U.S. pandemic-driven. Has that changed at all?

Yes. Again, both -- most of our international businesses are mostly fuel with the exception of Brazil. Obviously, they bottomed out the same way the United States bottomed out, meaning the first few weeks of April. And they have seen a relatively good recovery since then. The U.K. has recovered a good bit. Russia has recovered a lot. Australia and New Zealand, we've got a business there. Those businesses have recovered quite a bit as well. So most of our international businesses have followed the same sort of trend with a decent amount of recovery since we've kind of bottomed out in the second week of April, and knock on wood, that continues forward.

Okay. Well, we're running out of time, so maybe end with a big picture question. What is most misunderstood about FLEETCOR? And why should investors buy your stock, I guess, is…

Well, we could give you the -- a little bit of a history lesson. I mean we have obviously been very successful doing what we've done over time. Again, just to remind everybody, we went public in 2010. And so over the last, call it, 9 or 10 years, we've grown our top line at a compounded annual growth rate of -- in the mid-20s. And we've grown our bottom line at a compounded annual growth rate in the high 20s. Our objective going forward is to do basically more of the same. We want to double the size of this business again. And what we're guiding people to in normal times is to think about growing our businesses organically at a consolidated level in that kind of 10% range, which translates into a little bit bigger number when you get to the bottom line because of the fixed cost nature of our business. And then we're going to redeploy capital mostly in things like M&A. So we're going to do accretive M&A with the objective of getting our bottom line to grow more into the 15% to 20% range. So that's really what we're trying to do. We're trying to gain market share in the categories of products that we're already in today. And we're trying to enter new geographies because, quite frankly, we're trying to build a much bigger global business than we have today. We think there are lots of opportunities out there in most of the geographies around the world. We operate in this tremendously large category called business payments. And we believe a lot of our products are significantly underpenetrated in the spaces that they're in like corporate payments today. So we think there's a lot of opportunity in front of us to grow this business.

And your most misunderstood, I think, piece? What do you think?

That's a good question. Jim, you talk to a lot of people. What do you think?

Yes. I think the -- I'm not sure that there is one thing. I think we still get [ pasted ] a lot as very sensitive to the economy because of our fuel business. Even though the correlation, while sometimes is higher than others, it's come down meaningfully over the last couple of years. I do think that the broader payments perspective sometimes gets lost when folks are keying in on just one specific business. But we do take a little bit more work than the average company to understand. But once you get in there and you look at the bright light, the returns that we generate, I think that overcomes some of the misunderstanding. Just takes a little more work. And I'm not sure it's misunderstood. I just think it takes a little more effort.

Underappreciated, Bob. Underappreciated.

Great. Well, thank you. I think we'll end the webcast there and really appreciate your attending the conference. Hope you have great meetings, and thank you to our clients who are listening. Appreciate it. Have a great day.

Thanks, Bob.

Thank you.

Thanks.