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

All right. Well, good morning, everyone. We're going to kick off our next session. My name is Dan Perlin. I head the payments, processing and IT services practice here at RBC, and I'm delighted to have Jim Eglseder joining us. Jim's the Senior Vice President, Global Investor Relations at FLEETCOR. And Jim, thank you so much for joining us today. I know you've been busy recently.

Yes. And thanks for having us this morning, Dan. We appreciate it. Always love the opportunity to evangelize the story to the extent we can.

Well, with that in mind, why don't I let you start, for some people that maybe aren't quite as familiar with the story, to just give us a high level of really what FLEETCOR is all about.

Sure. Happy to. So we're one of the world's, if not the world's largest, global payments company. We go to market in 4 primary categories. Most folks, if you're familiar with FLEETCOR at all, the name does signify that we are a significant player in the global fuel card market where we provide payment options for companies to manage and control their fuel spend. That's our largest business at just over 40% of the company. That was the genesis of the start of the business almost 20 years ago. We went public in now 2010 and are one of the, like I said, the largest players in that market globally. We command about 50% or so of the market here in the U.S. and then about 40% of that total fuel card business internationally. We're also one of the largest corporate payments players in the U.S. and internationally as well, and what that means is we do virtual card payments. We facilitate international payments. And we can also take on your full AP in an outsourcing type of manner, and that's where a lot of the excitement is in that space today because of the TAM, as some of our friends at Visa and Mastercard talk are north of $100 trillion. We also own the second largest toll business in the world, in Brazil. We command 90%-plus of all electronic tolls in the market that are collected on our 5.5 million tags, and it's just a great business for us down there even during the current situation that we find ourselves in today. And then we also own the largest discount hotel network in the U.S. as well. We have over 35,000 hotels in our network, and we sell somewhere between 35 million and 40 million hotel nights a year. Obviously, parts of that business are significantly impacted in the current environment, and we can get out into that as well. But by and large, we have a solution for everybody as you help to manage your employee spend, whether it be in a fuel card or a T&E card or something along those lines or your non-payroll spend from a payments capability. So we've put together quite a selection of products and services for our clients.

Yes. You run the gamut, Jim. There is no doubt about that, and modeling it is equally challenging sometimes. So -- but let's just start at a high level. There's a lot of questions around the demand environment, which is incredibly fluid these days. And I know that Ron had mentioned on the last call that you guys were kind of in the shutdown phase, looking forward to this recovery phase, evolving and reopening. So where are we now? How do we -- how do you kind of bring us forward into the current environment? And how are you framing the current business?

Sure. I think we're clearly in recovery mode, especially being headquartered here in Atlanta, in Georgia, where Georgia was one of the first states to open up. We've had a front row seat to the recovery. And as I've mentioned to you a bit ago, coming into the office while there's nobody in the office land -- in the office complexes, like where our headquarters is, basically, the volumes out of the highways and the neighborhoods and whatnot are probably at 75% to 80% of what I would call normal summer volume. So we've seen a substantial recovery in just activity in -- that we have visibility to, and then we can look across our businesses as well. We gave you a pretty granular look on a week-by-week basis in our earnings presentation. And it's very clear today, as our businesses continue to improve week over week virtually across the board, that, that first or second week of April was truly the bottom, and we're moving up and improving from there. Every single one of our businesses with the exception of the airline portion of the lodging business is getting better week on week. The corporate payments virtual card business probably bottomed out in the middle of May and continued to improve off of there. And the only reason that was later than the rest of the businesses is because invoices are paid in arrears. So in May, they were paying the April invoices, which are obviously much more significantly impacted than the March invoices that were paid in April. So clearly, in recovery mode, I think, even from an M&A perspective. Back in April, May -- well, on the earnings call, we were kind of in preservation mode. Now like you said, certainly, things have moved forward there. The BD team is busy as beavers. The M&A team, working on deals and continue to push forward on the things that we were working on before and trying to figure out what the right price is. But by and large, we like the recovery that we're seeing across the board, and hopefully, it continues. We're not anywhere close to being back to normal, but hey, we're well on our way there and we're in a much better position than we were 6 to 8 weeks ago.

Right. So suffice it to say, the April volume numbers or the revenue numbers that you had talked about maybe down 20%, that's clearly bottoming out. And as you think about the May volume trends, those are clearly higher than that. I don't know if there's any KPIs you want to share with us specifically, but it sounds like, directionally, that's where things are heading.

That's right. And when you look across -- obviously, we have a lot of different businesses in a lot of different geographies. So when you think about, for example, the fuel business, which bottomed out at somewhere between down 20% and 50% between the domestic U.S. business and the U.K. business, which was the hardest hit, all of those businesses are back, call it, for the most part, 50% off the lows. By and large, the Western Europe and, for example, Australia and New Zealand are much further up the recovery curve. I would put domestic business of the U.S. in second place and then U.K. business is a little bit further behind just because they were locked down a little later, a little longer, and it was a little deeper just because of the business and customer mix that we have there tends to have far more white collar folks in the business that are still working from home as opposed to the vast majority of the portfolio, which is blue collar, essentially essential services. But yes, everything across the board is looking much better.

Okay. Well, since you started with fuel, let me jump there just for a second and just talk about -- fuel prices have been kind of all over the place, and it's, I think, always helpful to remind the investors as to how that really impacts you. It's kind of 2 ways: one, right, you talk about the spread dynamic and maybe you can share how that works with us; and then, obviously, the point of sale. So if you wouldn't mind maybe walking us through kind of the spread dynamics, I think, and the things that helps is some of the volatility around that.

Yes. We've got a couple of significant portions of the fuel business. And when you look in our disclosures, I think the last quarter, from a percentage basis, roughly 11% or so of our total revenue comes from interchange basically on our fuel cards. We run the Mastercard platform so we earn Mastercard-level interchange. And then we also have a proprietary closed-loop network where we have over 50,000 individual gas stations in our network that will take our own Fuelman branded card. And on those transactions, we earn spread. Basically, we earn a portion of a spread between the wholesale and the retail price of fuel, which historically has been around $0.15, $0.16 a gallon. Certainly, in a -- the spread actually moves opposite fuel prices and tends to act as a bit of a natural hedge. So in a falling fuel price environment, which we're clearly in over the last 8 weeks or so, the spread tends to gap open because we all know that prices are sticky at the pump and the retail price falls much more slowly than the wholesale price. As that wholesale price falls, the spread between the wholesale and the retail price of fuel gets wider, and we keep all the incremental spread. So in a quickly falling fuel price environment, on the wholesale side, like we saw in the end of March into April, spreads gapped open meaningfully and, frankly, stayed at their historical wide levels for all -- for 6-plus weeks. Certainly, normally, that adjusts relatively quickly over a couple of weeks. But as the price of oil has moved up and the price of fuel has moved up, therefore, the wholesale prices have moved up correspondingly because the spread has started to come in. But it does help offset some of the direct fuel price pain that we're seeing because of lower prices at the pump.

Got it, got it. That's helpful. So if we just take a step back and think about the long-term kind of growth algorithm of the business, and we've always thought of that as kind of 9% to 11% organic; 15%, maybe 20% kind of cash EPS growth. Anything that's happened structurally in the current environment that would keep you from being able to hit those targets more medium and long term?

No, I don't think so. Structurally, we look at all of our businesses, and they all tend to be fairly recession-resistant. We don't tend to lose a substantial amount of customers in a downturn. Certainly, there's going to be some bankruptcies in any downturn, and we expect that to be the same in the current environment. But by and large, the volumes that we give up on the way into a downturn, we tend to get back on the other side. For example, in the fuel business, if you have a plumbing company with 20 trucks in service, well, in a slower economy, maybe they only run 15. But as soon as the economy recovers, they put those other 5 trucks back into service, they hire their 5 drivers and volumes tend to pick back up. So we don't believe that anything structurally has changed that would impair our ability to do that. That's been our objective since we went public back in 2010. It continues to be our objective, and we are a growth-by-design company. We invest specifically to grow our businesses at prescribed rates with the objective to have that be around 10% or the 9% to 11% that you said there. Generally speaking, we get a little bit bigger number when we get to the bottom line. We do have a relatively high fixed cost structure, think on the order of 70% or so. So we got a high flow-through rate from every incremental revenue dollar that we get. And then the 15% to 20% adjusted EPS target, we get there via capital allocation, preferably accretive M&A. We've done over 80 deals over the last 15, 18 years. We're very good at it. We're a very disciplined acquirer. And with very few exceptions, we've materially improved the profitability of whatever we bought within a year or 2, okay? And then if we can't find attractively priced targets for us to buy and add into the mix, we do have the ability and have shown the willingness to do share buybacks. But ultimately, it's 10% organic growth, 15% to 20% adjusted EPS growth is the target. And if you look at our performance since we went public at the end of 2010, we've put up numbers in the mid-20s to upper 20s for revenue growth and adjusted EPS growth. So...

Yes. You've had a fantastic track record. And you do -- you talk about having a very systematic approach to the business, and I think that's true for the sales growth formula as well. But I did want to talk about maybe some of the puts and takes that you saw in the lower sales bookings in the last quarter and maybe what your thoughts are around kind of managing that number.

Yes. I mean obviously, sales growth that we reported in the first quarter at 2% is well below the 14%, 15%, 16% that we target and that we have historically been able to put up. As you've seen, every company, including ours, pretty much stopped what they were doing, focused internally, figured out and mobilized resources to get all of the folks working from home. And then it took probably 4 to 6 weeks for the world to get everybody working from home productively and then to turn their focus to, okay, well, I have other problems that I need to solve, whether it be managing my fuel costs; whether it be "I can't pay bills because I'm still largely on an antiquated paper-based system where I have to print, write, sign and mail a paper check. Well, I don't have anybody in the office to do that," and all these things basically that historically have been an in-person sales type of operation has moved digitally. So we obviously transitioned over to a much more digitally focused sales effort. We are already moving that way. I think over the last year or so, 30%, 40%, 50% of our new fuel customers have come in via the digital channel. So certainly, there was an interest on our part to move more efficiently into the digital selling, but it's much more about the receptivity of the customers that wasn't necessarily there historically. But over the last, call it, 4, 6, 8 weeks, we've seen a shift in the customers' willingness to interact and actually sign up online. So we are seeing a recovery in the sales pipeline and the sales productivity, certainly not anywhere close to normal. We're still down year-over-year, but we like the trajectory that we're on, similar to the recovery that we're seeing in our other businesses. And hopefully, by the end of the second quarter, we're at something that's within spitting distance of normal productivity levels, but time will tell.

Yes. Fully understood. In this vein of kind of digital shift, your corporate payments business would seem to be well positioned for that. It clearly had a good -- kind of held up incredibly well in the quarter. Maybe can you talk to kind of the 3 components of that business? And what are really the key dynamics that are driving that, and that being kind of virtual card, the full AP suite and then the FX portion?

Of course. So when we look at that business today, which is almost $500 million annual revenue, like you mentioned, there's 3 separate businesses -- not exactly separate, but 3 individual businesses as we kind of think about it. There's the cross-border payments business, which is about half of corporate payments today, and that's where we facilitate the making of international payments on behalf of companies. So you can either use a bank and they tend to command about 90% of the market or you can use one of the largest players that are nonbanks, like us, to make that payment. So we help you pay your lawyer that you have on staff in London who wants to get paid in local currency. If you're a domestic U.S. company, we do that in your behalf. We also have one of the largest domestic payments businesses here, paying with a virtual card, which is essentially a onetime-use Mastercard that you can use to pay your vendor in lieu of a paper check or an ACH. The B2B payments market here in the U.S. is estimated to be somewhere between $10 trillion and $15 trillion. Half of that is still done with paper check. We offer you an alternative that is much more efficient, much more secure, and in which case, you can earn a bit of a rebate as part of the interchange sharing that we would offer with you. And then we also, about a year ago, bought Nvoicepay, which is a full AP outsourcing solution where you can outsource your AP payment function to [ me ]. So we can take your entire AP file and pay your vendors however they want to get paid. And that business is absolutely resonating today in the current environment as companies have figured out that, "Well, while I never really paid any attention to my AP function before, today, I can't pay anybody because I can't get my folks into the office. I can't -- do I really want to put a wet signature on a paper check? And do I really want to mail that wet signature?" So the volume and the interest in that product is up significantly over the last couple of months. So it was almost tailor-made to benefit from this type of environment, and we do expect to see an acceleration in that shift towards the digitization of payments that should long outlive whatever downturn we have here as companies realize that, "Hey, I didn't really pay much attention to that function before, now it's a problem so I'm going to pay a lot of attention to it and I may as well modernize it while I'm there." And generally speaking, we can help those customers take out up to 75% of the cost of their AP function by outsourcing it to us. So it really is a very modern user interface. It's a very seamless process for them. And it's -- we have some of the best-in-class technology that we have to help our medium-sized middle-market customers that we target across all of those businesses. Think customers with revenues of $50 million to $500 million. That's below the threshold that most banks fish, but obviously, we've got a significant-sized company with very good capabilities that we can offer those customers as well. So we like our competitive position.

Yes. Can you just talk to the implementation cycle a bit in terms of timing as we think about the AP and also the virtual card? I mean it sounds like those trends are clearly getting accelerated. You may have like a compression cycle that pulls a lot of this stuff forward that would have otherwise happened.

Yes, they are. I think there's a very wide range of timing from an implementation cycle on a pure virtual card. It's a very long implementation cycle because it's a hard IT integration, so it may take months. And generally speaking, we kind of think of that business as, hey, everything we're implementing this year, because we have an implementation calendar that we're following in conjunction with our customers, was generally sold last year. So that one's going to take a little bit more time just because of how long that implementation cycle is. When you look at something like international payments or, frankly, full AP, it's a much shorter integration because largely it's done via soft integration like an API or an online user interface or something like that. And then in the case of the full AP, in certain circumstances, we can have a customer sign and up and running in as quickly as 3 weeks. So obviously, that's super fast relative to the longer time frames that you're looking at on the virtual card. The head of that business was at a different conference yesterday, and he said we've got 160 live deals in the pipeline just on the Nvoicepay side and another 160 live deals in the pipeline on the virtual card sales folks side. So we've got 100, 150-plus salespeople selling that product across those businesses, and it's just -- it's doing really well for us.

That's great. What's the competitive landscape looking like in that environment? And I'm thinking more from some of the more modernized players, right, not necessarily always legacy.

Sure, yes. I mean obviously, banks dominate all of those markets just because they are the legacy players. From a more modern infrastructure standpoint or a competitive standpoint, most folks think of and hear of the likes of Bill.com, AvidXchange, CSI, Bottomline Technologies, who are all offering similar functionality in that we can basically help you outsource your AP function. Now do we go to market head to head? Not really because we're all targeting different segments of the market. Bill.com tends to fish pretty far down the size curve with the small business for the most part. AvidXchange is somewhere between Bill.com and Nvoicepay. And then Nvoicepay, like I said, we focus on companies in the middle market and up, of companies with $50 million in revenue and up. So by and large, all of those folks are out there chasing the same giant underpenetrated TAM that we are, but it's interesting to note that with the exception of Bottomline Technologies, we actually power the virtual card offerings for all the rest of those players that are going after it. So there's a bit of coopetition there, but frankly, we all agree that there is so much TAM and it's so underpenetrated that there's plenty of room for all of us to make hay for a long time.

Yes, yes. That sounds interesting. The -- if we shift gears a little bit and talk about tolls. I think this is the -- you mentioned you have a huge competitive market share and presence in Brazil. I think it's 85% recurring business or more. And I'm just wondering what are you seeing in terms of -- kind of on the product road map as we think about the Beyond strategy. Where are you guys in that side of the equation?

Sure. I think as you mentioned earlier, we have 5.5 million active toll tags in circulation down there on which we earn a monthly fee for the ability to use that tag. I think $6 or $7 a month for every tag. And that's -- it's essentially a subscription-based business that generates a lot of stability in the revenue down there. We also created an infrastructure at a variety of merchants down there where you can use that tag to make incremental purchases for -- at fuel stations. Two of our partners are the 2 largest oil companies in Brazil. We're in -- we have a partnership with McDonald's. Our tag is accepted in over 400 McDonald's drive-thrus in mostly São Paulo and Rio, and then we're also accepted at over 1,500 parking locations in those 2 cities as well. So you can use that tag to make those products and services in a contactless fashion, which is obviously really resonating well today. Now the tag is -- that urban tag, as we call it, the TAM of those folks who don't drive in a toll road today is significantly larger than folks who could drive on a toll road. So now we have the ability to target and offer a very relevant product to a whole new segment of customers who we didn't really have access to before. And if you consider -- the government's actually asked us to go and try to help get more cash out of the system even on the core toll tag side of things as 30% to 35% of all tolls today in Brazil are still done in cash. Now we collect 90% of the electronic tolls, plus, as the 800-pound gorilla in the market. But when we look at what we're trying to do there, we think that the contactless aspect of that payment mechanism will continue to resonate once the cities down there start to open up as folks don't want to touch cash. And certainly, the -- we now have, like I said, the 2 largest oil companies as partners. We have the 2 largest fast food franchises as partners, McDonald's and another one called Habib's. We're accepted in over 100 different car washes. And the number of folks that are knocking on our door saying, "Hey, we want you to put hardware in so that we can accept your tag at our facility," is off the charts. So we do really like the prospects of that business down there. And as that Beyond Toll, as we call it, type of revenue becomes larger and larger over the next, call it, 3, 5-plus years, now we think that could be a substantial incremental boost to revenue and revenue growth down in that market. So...

Yes. So keeping on this Beyond strategy, I neglected to kind of talk about the Beyond Fuel initiatives. And I just wanted to see if you had an update there in terms of how you were thinking about maybe the timing of that coming back as a focal point for the company.

Yes. I think I'm not sure that we have an idea of when that will come back. Obviously, from a Beyond [Audio Gap]

Jim, we're losing you a little bit. Hey, Jim. Jim, if you can hear me, we can't hear you at this point. Maybe give it a few minutes or a minute. If everyone could just be patient and see if we can get Jim back online. [Technical Difficulty]

Hey, Dan,, it's Jim. Glad to be back in.

Jim, there you go. It's like I asked you a tough questions and you disappear on me. What's the story?

Yes. I apologize to the audience for that. Technology works great, but sometimes it doesn't.

Okay. So let's back up, and you were just starting to tell us about what your thought process was for Beyond Fuel initiatives kind of here in the U.S. in terms of timing of maybe getting back involved in that.

Right. So Beyond Fuel, basically, what I was saying is we have started selling, over the last year or 2, additional purchasing capability to our Mastercard branded fuel card users where, because that card is locked down to only allow the drivers to purchase fuel, we can open an MCC code for the customer to be able to let those drivers use that card to buy something else. The most common example we use is, hey, in the construction industry, you probably need to go down to the hardware store and pick up supplies every once in a while. And the companies don't want to give their drivers a general purpose credit card, but we can provide a product for them where they can use one card to purchase fuel and also go buy things at the hardware store. But they can't use it to make purchases any place else, okay? So we've started to sell that. We've rolled it out to -- I think we had 10,000 or 15,000 customers last year, and it's contributing 1 point or 2 of growth in fuel. But over the last 3 months or so, 4 months or so, we've largely pulled back and paused the selling of that product just because we want to make sure that we didn't run into a credit issue in a product that we didn't have significant experience, volume controls and other purchase controls and history that we can use to manage that. So we do think that eventually, we'll get back to that. We probably need to see much -- probably another quarter or 2, if not a little bit more, to see how the recovery progresses and what the credit environment actually ends up being. So generally speaking, that product is still a good product for the customers, but at this point, it's a little bit on pause for us.

Okay. Understood. And in that same vein, on credit, how -- can maybe you can walk us through how you guys think about the credit risk across the business and what you're seeing in kind of the current environment with your customer base?

Sure, yes. Most of the credit risk we have in the business is in the fuel business, as you would expect, because if you think about it, that customer will buy 100 gallons of fuel at, in this case, $2 a gallon and if he decides not to pay me, he's not paying me $200. It's not just the $6 that I earn in that transaction that he's not paying me. So most of the receivables that we have on the balance sheet is in the fuel business, and just -- it's a timing difference. The terms on that fuel business are pretty short. Think on average of 14 days. So we're going to bill our customers every 14 days or 7 days to pay. So the turn is very quick, and you can see that in the lower AR balances that we've seen. Since the end of last year. They were down, I think, $0.5 billion in the first quarter, and they were down another $0.5 billion through April just as the transaction volumes and the fuel price has come down significantly. So most of the credit exposure that we have in the business is in fuel. During the '08, '09 crisis, we were just a pure fuel card company at that time focusing on the smaller fleets, and credit losses for us roughly doubled from, call it, 20 basis points to 40 basis points during that time, so still very manageable. And obviously, we have no idea what they're going to do today, but the credit experience that we've seen, the increase in late, in delinquencies, in roll rates into the early stage delinquency buckets, that had been much lower than we had feared. And while they're ticking up a little bit, just -- we haven't seen a substantial change in payment behavior, by and large, on our customers. And if you consider that we're 3 months into this now, on a 14- or 21-day billing or payment cycle, we've seen 2, 3, sometimes 4-plus billing cycles for customers today, and they continue to pay. And so do we have confidence that, that level is going to continue to go going forward? No, probably not at this time. Do we expect losses to be higher than they are today? Probably. but do we expect a doubling of losses like we saw during the '08, '09 fuel crisis? At this point, that's not the path that we're on. When you look at a lot of the other businesses, for example, in corporate pay, with the exception of the one-off credit loss we had in the Cambridge business in the first quarter, there's very little risk in that business because, oftentimes, we'll draw the money from the account before we make the payment. Or in Brazil, oftentimes, it's either prepaid or the account is tied to a credit card, okay? So as we look at it, credit for the company generally runs 5, 6, 7 basis points. So even if that were to double across the entire company, still very manageable for a company of our size.

Got it. So let's just touch on lodging for a second. We didn't touch there yet. So you've got the acquisition of Travelliance in there, and then you've got the kind of legacy business. How do you kind of put a framework around what you're seeing in that current environment? And kind of what are your expectations as we think about the shape of recovery as we go throughout the year?

Yes. And I think it's important to understand that the lodging business for us is truly business lodging. There's very little discretionary travel in there. It's not "Hey, Dan, you're taking your family to Disney World and you need to stay someplace." So volumes there have actually held up pretty well in the core -- what I'll call our core lodging business, which is the 75% of lodging business, excluding the Travelliance that we bought in the fourth quarter of last year. So as you saw in the disclosure back in May for our April volumes, that part of the business was down 20% to 25%. So 75%, 80% of those customers continue to travel because those are true blue-collar guys. Staying in hotel rooms is part of their job. They cannot work from home. So it held up really well. It's starting to tick up little by little as states start to reopen and folks start to get back on the road, but that may take a little bit longer just as projects are paused and as those customers wait a little bit to see what demand was going to look like going forward. Now on the airline side, that part of the business basically facilitates hotel programs for mostly flight crews, think pilots and flight attendants, and also distressed passengers. So as airline flights are down on the order of 50% to 75%, we've seen volumes there be down 75% and really haven't started to improve yet. We think that the recovery of that part of the business will, obviously, mirror the recovery in airline travel, which is expected -- most experts to be -- say that's going to be years before we get back to the volumes there. So by and large, still a very good business for us, but that is one of the businesses that was more impacted than the rest.

Okay. We're at our time limit, Jim, and it sounds like the business is progressing nicely. The cadence of recovery sounds like it's starting to be in your favor here. And a great discussion today. So thank you so much for joining us. I really appreciate it. Stay safe.

Very good. Thanks for having me. Stay safe to you as well. Let me know what you guys need. Thanks.

Thank you.