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

Good morning, everyone. I'm Ashish Sabadra, senior Analyst at DB covering business and information services companies. We are excited to host Charles, the new CFO of FLEETCOR. Charles was appointed CFO on September 1, and he has led several division or businesses at FLEETCOR, including strategy, business development, global sales, developing market as well as the U.K. card issuing business. So congratulations, Charles, on being appointed the CFO.

We want to kick off the conversation with a discussion of your strategic priority as the new CFO, and if you plan to make any changes with that, Charles, if you can provide any color.

Thanks, Ashish, and thanks for hosting us today. I appreciate the opportunity to get to know you better and share a little bit more about me here. So in terms of changes as the new CFO, I've been with the company for a long time and have worked side-by-side with our CEO, Ron Clark; and our exiting CFO, Eric Dey. So philosophically, I'd say we're quite aligned in how we think about leverage and operating the company, et cetera. So I wouldn't expect any big changes. Eric is built a terrific team of folks in finance, accounting, tax, legal and human resources. So as I take over those functions, I'm not seeing dramatic personnel changes being required, which makes my life easier, as you can imagine, as the incoming CFO. What I will do, however, is focus a bit more on some of the strategic initiatives or direction for the company. It's been an area that I've led for years sitting beside Ron Clarke. Now I'll simply act more as an adviser to him while still running those various finance and other functions.

Charles, that's very helpful color. And before we go on to the strategic initiative, maybe a question that's on top of everyone's mind is just the recovery coming out of the worst of the COVID crisis. I was just wondering at a very high level, at the company level, you can talk about the recovery, we'll obviously go through the individual segment, but at a very high level, if you can talk about the recovery coming out of the worst crisis?

Sure. So we continue to see recovery in this quarter, albeit I'd say it's mixed depending on the lines of business. Some are stronger than others. Across the board, we've seen stability for sure. But I'd say it's not quite as fast as we might have hoped. So the proverbial V-shaped recovery is not necessarily what we're seeing here. But things are stable everywhere and in some places continue to improve as we move through the quarter.

That's very helpful. And we'll definitely delve into more details in each segment. Maybe if we -- if you can kick-off with the corporate payment business to start with. Corporate payment had some headwinds going into the second quarter. Can you just talk about some of the headwinds, and what we have seen coming off, again, from a recovery perspective?

Sure. So in that business, it's important to keep in mind that the performance lags a little bit. So as you get invoices and then you have 30 days to pay, that volume trend kind of lag our other businesses, call it, fuel or lodging and such. So corporate pay really didn't bottom out until the May-June time frame, and is now back on the recovery swing. And within that, there are some segments that were pretty significantly hit, particularly in our V card business or product line, things like travel and entertainment or elective health care, even oil and gas and some retail. And so those categories in and of themselves were responsible for kind of high single-digit part of the volume decline that we saw in Q2. And so some very specific segments that were hit disproportionately hard by COVID. And so we see the pace of recovery there, it's coming, albeit though probably lag economic activity recovery a bit, again, because of that invoicing delay that I just mentioned. And part of our corporate payments business, albeit not a majority by any stretch, a relatively small piece, but a part of it is T&E cards. So by their very nature, these cards are used by traveling professionals to buy travel and entertainment, food, hotels, maybe even air travel. And as we've all been working from home and travel policies are kind of locked down, that product in and of itself has been disproportionately affected. So even if the customers are healthy, just -- they're just not traveling. And so we expect that will probably lag a bit more until we're all back to normal at some point. In terms of kind of the long-term view, though, it's a great business with a lot of TAM, and I'd say our long-term prospects are great, more well positioned, and we do expect kind of high teens to 20% kind of growth in that category overall.

Yes. No, that's very helpful color. And definitely, you have the secular tailwind behind you. B2B payment is definitely an area where we see significant growth. And just talking about the recovery, we did see virtual card volume improved quite a bit in July. Can you just talk about what drove the improvement, the pipeline for new businesses, and how quickly can you onboard those customers?

Sure. So specifically, in our virtual card business, demand is still good, albeit it's a lot of face-to-face selling. And because of that, as we're in lockdown, I'd say sales are down a bit versus where we lengthen to be or where they've been historically. On the flip side, folks who have been sold and signed contracts are much more eager to implement. And so what we're doing right now, while things were in lockdown for some companies and industries, we're actually working through our implementation backlog, which historically would take us 12 months from, call it, contract signings to ramping up a contract. We're working through all that backlog now and trying to accelerate some of the implementations of things we've signed literally a year-or-plus ago. So it hasn't slowed down our business per se. Demand is good, albeit the face-to-face selling has slowed things a bit from a pipeline perspective, specifically in virtual card.

Okay. That's helpful. Maybe just switching over to the Cambridge business, which is the cross-border payments, FX business. We saw some good improvement there as well in July. Can you just talk about what's happening on that front?

Sure. So our Cambridge business is made up of kind of 2 different services. So one is simple cross-border payments. I produce goods in one country, I ship them to another to then be sold. And so in that case, I might hedge that or if I'm paying a supplier for the goods that -- it's just a cross-border payment. There's 2 things going on. I pay for goods that come over, it's cross-border payment or I'm shipping the goods to be sold later, and I might hedge that to make sure that my costs and my revenue are aligned. And what I'd say is the majority of our improvement that we saw last month was actually through the higher cross-border payments. And so we love that business, recurring business, folks hedging, revenue or costs. So it flows right through their basic revenue or cost models, so it's nice and recurring. In terms of onboarding that kind of business, one, let me just say the pipeline has been good, sales have held up relatively well there vis-à-vis our other product lines, and the implementation cycles are much shorter than our virtual card, where you have to enroll vendors. And so for cross-border and hedging-type products, it's literally a 3 to 4 week type of implementation cycles if we're moving quickly. And so I'd say good sales there with good implementation cycles. So part of the reason why we're seeing that business do okay.

That's great. And then moving on to the full AP business. That grew a solid double-digit even during the COVID crisis, although a bit of a slowdown as we went through the quarter. Can you just talk about the pipeline there and how we should think about the growth in that particular business?

Sure. So that's been a great acquisition for us when we bought invoice payback in April of last year. And just to make sure it's clear, the volumes that we're reporting publicly or specifically our Mastercard volumes, where we're using virtual card to settle with merchants. And the reason we do that is that's the primary driver for revenue in the business. And so when we acquired Nvoicepay last year, we -- they had a merchant file, so virtual card implemented suppliers that, that they could pay. At Comdata, we had another database of suppliers that we would pay for virtual cards. We basically combined the 2 databases. And so what happened is almost overnight, you got a lot more penetration of virtual card enabled suppliers in the invoice pay book. And so because of that, we had some pretty high comps to crawl over. And so that's why you see the kind of "slowdown" in terms of year-over-year performance. But nonetheless, in terms of our pipeline, with folks working from home and looking for more paperless solutions, the demand for this type of AP "outsourcing" has gone up dramatically. And we've been shifting some of our Comdata sales resources to actually focus on this full AP solution. And so our book, call it, kind of new customer signings is up circa 100% kind of year-over-year. And so we're delighted with the sales and the demand for that. We've also been successful in signing up some new ERP partners. So this is more indirect distribution, where they'll take our product and turn around and then market it to their ERP clients because our solution will be integrated with the ERP, it makes kind of a seamless experience for the end AP user. And so all in all, I'd say, good -- great pipeline, good partner signings and delighted with that business overall.

That's very exciting. And maybe on the same front, you talked about taking some of the Comdata sales guys and further selling full AP. I was just thinking about FLEETCOR has hundreds of thousands of customers in the Fleet segment. Is there opportunity to cross-sell full AP into that customer base? Or also how should we think about cross-selling, cross-border payment into the full AP and the other way around? Any thoughts there?

Yes. So in terms of the Fleet segment, generally, we tend to focus more down market. So we tend to focus our sales on small- to mid-sized businesses with a lot of digital selling involved there. So the average fleet size is quite small. Our -- currently, our full AP offering within Nvoicepay is more mid-market and up. Historically, they've been more enterprise driven, and they're coming down into the mid-market, where Comdata, virtual card, Comdata corporate payments has played historically. In terms of getting to that really small or micro market, we still have product development to do and whether we do that in-house or we partner with someone or we acquire someone, I'd say we're still working through that. It's a segment that has caught our eye, but at the moment, there's a lot of fish to fry in the enterprise and mid-market space. And nonetheless, we've got our eye on that. In terms of kind of more bundled or cross-selling of corporate payments offerings in general, so think full AP with cross-border solutions in Cambridge, we're taking a kind of multi-step approach here. So in the U.S., we're actually going through an exercise to create a unified brand to go-to-market. We're creating a unified portal where AP folks can use all of our products and see them all in one place. And we're doing that, that unified portal, using a basic API strategy. So we'll create one API layer that will then plug into the back end, FX, virtual card, full AP solutions, but then present them all in one unified way to an end customer. And so as we go through that exercise, we're also then looking to reorganize our sales force in the U.S. to be more full AP focused, and we're bringing them all together under that one brand pitching, call it, one product experience that will then leverage all of our corporate payment services.

That's great color. And then just in terms of verticals, you've had some really -- like Comdata had some really strong verticals, let's say, construction, health care, media. And then I think full AP in the dealer vertical. Are there opportunities to further expand into the verticals, other new verticals that are opportunities? Or how should we think about vertical versus a horizontal strategy focusing on the mid-market, as you mentioned, in the enterprise market?

It's a great question. And I'd say, yes, there are some other verticals that we are exploring. That said, one of our primary strategies for reaching them is through the ERP partners that we're talking about. And so creating that integration for a product experience is certainly important. But even more so than leveraging the ERP companies establish distribution in their existing customer base is a way to grow quickly into those various verticals.

That's great color. So shifting gears a bit to tools; those grew through the COVID crisis. Can you just talk about how COVID has influenced the value prop of toll tags in Brazil? And what's driving that strength in the tolls business even during COVID?

Sure. So toll tags by their definition are a contactless payment mechanism. So there's no human interaction. There's no need to handle a physical credit card or cash and so as COVID has decreased, our desire to interact with folks face to face, demand for the tags has been robust. The resiliency of that business, however, is largely due to the business model itself. So that business vast, vast majority of the revenue is generated based on toll subscriptions. So it's a monthly charge to have the toll products available. And because of its convenience, people are okay paying that subscription fee even when they don't use it in a given month. It's not terribly expensive, as you can imagine. But because it's recurring and it's built and in most cases, we're simply charging a credit card for that amount, it hasn't been affected by the downturn in volume. So usage is down, but the revenue remains stable because of its subscription nature.

Yes. No, that's very helpful color. And then as you mentioned, it's contactless payment. And in this kind of a social-distancing world, the value prop actually goes up. So how do you think about the urban tag opportunities? And maybe if you can just provide some color around which cities are you present in? How much more opportunity do you have there? Have you seen increased traction from merchants? Any color on that front?

Sure. So as you mentioned, urban tags, we embarked on a strategy few years back to go after folks who don't use toll roads very often, but might have use for a contactless solution for things like parking or fueling their vehicle or even buying lunch using a tag through a fast food drive-thru. And so as we embarked on that, I'd say, it's been an incredibly exciting journey. We've continued to build out, still relatively small, fueling network, but we've signed 2 -- the top 2 fast food chains in Brazil, McDonald's, and then number two, Habib's. And we've got fairly good coverage of parking locations in São Paulo and some in Rio. That said, the urban tag sales have slowed in COVID because a lot of the sales were provided through places that had foot traffic, shopping malls, the parking lots of shopping malls, et cetera. And so as they shutdown and people stopped going outside, the sales slowed. We're starting to see that come back in the last month or so. So we're super encouraged, and demand seems to continue for those products. One of the things we did see for those that did adopt is that drive-thru use was pretty resilient through the whole quarantine. So whereas folks may not have been going out to dine-in a restaurant, people still wanted to go grab food and as they went through the drive-throughs, they continue to use the tags. So that was quite encouraging.