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

Hi. Good morning. This is Matt O'Neill, payments and IT service analyst for Goldman. I'm very pleased this morning to be joined by Charles Freund, the recently named CFO of FLEETCOR. So Charles, I think you were named CFO back in August, a h*** of a time to get thrown into the hot seat, mid-pandemic. That said, you're certainly no stranger to FLEETCOR, where I believe you've been for about 20 years so far. So maybe you can give us a little bit of background on yourself. I know you've probably been tasked with doing that a few times since taking over the helm as CFO, and just some thoughts on kind of how the transition has been and what you're kind of most focused on here.

Sure. And thanks for having me today, Matthew. So as you mentioned, I started with FLEETCOR 20 years ago. I came out of a consulting firm, which is actually where I met the FLEETCOR CEO, Ron Clarke, worked on a few engagements with him. He saw some talent, so he brought me along for the journey. We came into a company that was basically bankrupt, about $30 million in revenue, losing $1 million a month in operating cash flow. So we went -- took the consulting skills and went to fixing the business. We had a vision of kind of consolidating the fleet management, fuel card space in the U.S. and then flipping the company. It's going to be a 3-year gig. It's turned out to be quite a bit more and far more lucrative for all of us, thank goodness. So I started on our corporate dev group, kind of internal consulting, capital raising. It took us about a year to get the company profitable. We're then able to raise private equity money with Summit Partners. They came in, recapped the company, $45 million. We went out and started the acquisition process, ran that for several years until we bought our first business in the U.K. I then relocated there to run our card issuing business for a couple of years, a few more acquisitions in that area. Came back in 2009 to help with a little capital raise and get us into the lodging space. Once we did that, 2010, I dedicated the better part of my life to this little thing called an IPO. So I ran that from the business side. Once we got public, Ron said, "We've gone out as the global fleet card company, but we're not in enough places. So let's get more international." He tasked me with building out our business anywhere outside of the U.S., Canada and Europe. So I brought us to Mexico, Brazil, Australia, New Zealand, went from 0 employees to a little over 1,000 in a couple of years. However, my Portuguese is really poor.

And so is mine.

We decided to hire someone who could speak the language, would be more helpful. And so I then gave my various operating businesses to other people to run, and I came into more of a central strategy area with Ron. It was back in 2000, call it, '16 and focusing on any type of project: sales restructuring, IT, reorganization, major partners, projects, things of that nature. So I've been kind of a right-hand person for him in a strategic kind of sense for several years now. But because of my deep knowledge of the business, my experience operating various businesses, my understanding of the business models, our go-to-market, everything, he thought it would be a good transition for me to take over the helm as CFO. Transition, as you said, has been interesting in COVID times. Luckily, Eric was still here during the brunt of it in Q2, but he's also left me a terrific team of very, very talented folks that are specialists in their respective areas, and that allows me to still partner with Ron a lot of strategic thinking for the company and how we manage the business, while also running the various functions of finance, accounting, legal, HR, et cetera.

That's really helpful. And just dovetailing on that before we dig in somewhere the here and now. The question we get occasionally is around kind of the genesis of fleet cards, which is obviously kind of the core of what FLEETCOR is today and just how it came to be that you guys, WEX, and really not too many other players are in the market. Conceptually speaking, why can't a bank do what FLEETCOR started doing 20 years ago?

It's a good question, and it's -- go 30 years ago, and some of the banks did provide these types of services for some of the major oil companies. They had outsourced their portfolios to the banks to run on a private label way. As companies like WEX and FLEETCOR evolved, what we found is that the system requirements, whether it be the point-of-sale specifications, the software that you're writing there or the authorization system and all the control parameters and all the specific reporting that you need to provide to a fleet, the various data points that you need to collect at the point-of-sale in order to do that, it just wasn't of interest to the banks. They viewed it as a fairly narrow place vis-à-vis the opportunity with consumer payments and such. And so the specialist and the more specialized software allowed us to create better products and then the specialization also around marketing and sales, so all the messaging, how you approach people, obviously, today is even different from a digital targeting perspective, but it was just they viewed it as a bit too vertical-specific to invest all of that time and energy vis-à-vis the broader payments opportunity. And that allowed us to really flourish and gain a strong foothold and one that I think we're pretty solid in.

Yes. No, absolutely. That's helpful. I guess, digging into the kind of running this business through the pandemic. Hoping to just talk about how the business has been managed for this, obviously, challenging time, kind of what the top priorities are as we hopefully get closer to the recovery? And maybe as part of that, you can just kind of talk about -- I think there was -- I think Ron's mentioned in recent calls about the -- what I'm sure was obvious and felt very natural at the time, sort of new jerk reaction to pull back, particularly things like extension of credit, SMB, be it in fleet or corporate pay, et cetera. And now we've seen losses actually really come through in a very much improved sequential fashion and how that sort of tees the business up for the next couple of quarters, understanding, obviously, we have to get through the tough comps in the first quarter and then, hopefully, start to see that recovery take hold at least optically in the numbers and then more so materially through year-over-year basis up and to the right.

Well, to your point, it's been quite a journey and the priorities, and the focus have shifted through time. So obviously, when the first thing hit and we realized we're going to have to shut down the offices and go work from home, right, even the IT front. So we're going to need to enable it. In a business like ours, it's one thing to send everyone home, but to keep the service levels, to keep the IT levels, it's 24/7 business, right? I'm authorizing payments everywhere around the world. So keeping that running what was a challenge. Nonetheless, we got through that with no hiccups whatsoever, which we can see in the attrition rates, which have held -- retention rates, which have held up quite strong throughout the pandemic. Secondly, you got to think about security. And so data security in our business is paramount because it can be a problem. So again, from an IT perspective, we were all over that early on as people were working remote and whether the tools they use, how they log into our systems, et cetera. Then we shifted to your point, to credit. So one, there's the extension on the new sales. So who am I going to sell to and what I'm going to offer vis-a-vis who have I already extended credit to? And how well are they going to hold up during the pandemic? In the early days, it was unclear what type of stimulus might come through, what kind of protections that might be in place. So to your point, I'd say, and Ron has said it on various calls, we probably over rotated a little bit in an abundance of caution, we like to say. So we are not -- we don't loan money. We don't have revolving credit and such. And so in that regard, our exposure is still somewhat limited vis-à-vis the banks. But nonetheless, we do extend some credit for certain customers. And as such, we wanted to ensure that they can repay that. And so we went down and locked. We've reduced limits for certain folks. We literally turned off sales in certain industries, which we knew were problematic, more exposed to COVID and shutdowns. And then in some cases, we rolled back credit limits on existing customers, which from a share of wallet perspective, isn't helpful. But nonetheless, again, out of an abundance of caution, we took those steps. Had a knock-on a couple of effects. Some positive, right? Credit losses, aside from one major loss due to the pandemic, looked really good and continue to trend really well, but it did hurt sales. And sales were hurt not only because of credit but because we slowed down a little bit, right? I had a very aggressive investment plan and we pulled it back. I'm not going to hire the new teams because no one's listening to my pitch in Q2. They're trying to get to work from home as well and some of the digital spend in certain categories. Again, we pulled back because the response rates, people just weren't out shopping for our types of products at that time. There were more pressing matters. The good news is, we've seen demand for products continue to shift back, and we've been reopening credit. And where we are today, I'd say, in fuel, lodging and other businesses, we're basically at pre-COVID levels or even more generous in terms of our credit issuance, given what we've seen through the pandemic. And in our corporate payments business, we're back to normal, except for a handful of industries that we know are still suffering and, therefore, we've redirected salespeople, just don't focus there, focus elsewhere. And so that has led to, obviously, a nice recovery in our sales performance as we measure it versus prior year. So in Q2, we were about 50% of prior year; Q3, 80% or so; Q4, north of 90%. So we've got a good upward trajectory, and we're building now into next year with more investment across all the products to accelerate that, that will have -- we're planning to have 30% more absolute sales than we did in calendar year 2020. So to your point, we've now shifted in our focus on basically on what we call offense and getting ahead of the recovery a little bit and investing so as people become more and more ready, we're there for them.

That's really helpful. Yes, I think there's a natural inclination, not just FLEETCOR, but much broader to kind of hunker down and retrench. But now I think, clearly, FLEETCOR and many others in many industries are looking to sort of be on the offensive here coming out, right, with the opportunities to take share. Obviously, FLEETCOR has got many facets to the business today, right? It's not just fleet cards by any stretch of the imagination. So as you think about allocating resources, investment dollars, where hiring is focused, what parts of the business are going to see FLEETCOR from the C-suite lean into them the most and the strongest kind of as you look opportunistically at coming out of this recovery and where are you being most offensive at this point?

Yes. I'd say we are making investments across most of the businesses. And if I put them into 2 categories, we have corporate payments, so think of AP and bill pay kind of centralized stuff and then we have what we call kind of our expense management products, whether it's fuel, tolls, lotting, whatever it may be on the road, field-based employees spending company money. And so in those 2 categories, both of which are still very interesting to us, and say, we're investing more in corporate payments, both from an organic perspective and even an inorganic focus. So focus on organic, corporate payments today represents about 20% of the company's revenue. If you look at our sales investment plan, we're actually putting about 30% of all sales and marketing investment in that line of business because we see the opportunity as being so large and so attractive and we want to disproportionately invest there. On the inorganic side, and we always have a pipeline of deals that we're always pursuing. FLEETCOR has been highly acquisitive over our history, and we continue to pursue deals around the world and in all of our product lines. But I'd say we're disproportionately focused on corporate payments, again, because of the opportunity we believe it represents.

Got it. Within corporate payments, I think this has probably been the -- while it's 20% today of FLEETCOR, it's probably one of the most exciting longer-term growth prospects for FLEETCOR as a business and from a secular perspective, as far as the broader electronification of what is still largely a legacy process of paper-based invoice, checks in the mail and so on. So I know you guys have made a handful of acquisitions, things like Nvoicepay comes to mind. Can you sort of talk about the areas of expertise that FLEETCOR sort of brings to corporate payments? I think, clearly, virtual cards are an area of expertise, increasingly leveraging software like an Nvoicepay and where and how you sort of see the business evolving and becoming an increasingly large percentage of the mix going forward?

Sure. So in our corporate payment space, you mentioned a couple. So virtual cards, we're one of the largest virtual card processors in the country, on the Mastercard platform. We actually enable a lot of other fintech companies with that virtual card capability through our system. The acquisition of Cambridge and soon-to-close acquisition of AFEX puts us as a major player in terms of cross-border transactions and so that's another capability that not everyone has, but we also enable a lot of other fintech providers with that through our systems. And then as it relates to virtual cards, we have a real strong capability in terms of vendor enrollment, and this is an important facet, how you monetize AP spend. And so whether I'm sending checks or wires, ACH, whatever it may be, the more I can shift to virtual cards, whereas the merchant accepts that and gets a lot of data and quick settlement, we get interchange in exchange for that. So it's a good revenue driver for us but you have to enroll the merchants. So even if you accept Mastercard, you don't have to take a virtual card. So I have to get you to agree. And so we've signed up 1 million vendors and are processing hundreds of thousands every month in that virtual card space. And so it allows us to monetize all that AP spend. And it creates a bit of an ecosystem, depending on which vertical you're in and such. So we have a pretty strong presence, say, in the construction vertical. The more clients I sign up, the more vendors I go and enroll, the easier it is then to sign up the next construction company because I already have a lot of the vendors enrolled. So I can penetrate your AP file and give you a bit of a rebate back. You're going to like that. Great. And the more construction companies I have, the easier it is to convince the next vendor that can bring you thousands and thousands of clients if you want to take this virtual card. So it becomes this ecosystem. And the other area, I'd say, Matthew, that's important in that regard is the ERP integration. And so it's one thing to pay people using virtual cards, but then how do you actually initiate that? Well, I can plug into your AP system and literally just pay by just hit the button, and then I can initiate that payment for you. That has 2 components. One, it makes it easier for the clients and easier for my salespeople to sell to clients. It also can create a referral system because the ERP provider can say to people, "Hey, do you want to use the button?" Or a customer can say, "Hey, my button isn't working." "But that's because you haven't enrolled in the program." "Oh, how do I do that?" "Contact Nvoicepay or contact, whatever it may be, contact FLEETCOR and they can put you on their system." "Okay. Great." And they generate leads for us in that regard. So between clients, vendors that you enroll and the ERP, you create this ecosystem that allows you to be more successful in various verticals. So I'd say we have real strong presence in a handful of them: construction, media, health care, et cetera, that allows us to compete very effectively.

Got it. That's helpful. There's 2 points in there. I want to follow-up on it in a little bit more detail. One is this kind of industry level, the virtues of virtual cards. So one of the questions that we get quite frequently is around the revenue model vis-à-vis interchange, right? Of course, it's perceived on the other side of the equation as a cost of doing business or cost of acceptance, right, from the receivers of payment. So I think there's an obvious, like, "Yes, this has interchange versus a check is implicitly free." But of course, the check is not free, right, because somebody needs to fill it out, bring an envelope, somebody needs to receive it, digest it, reconcile it, deposit it, wait for all that to happen, hope that it wasn't forgotten, et cetera. So can you articulate a little bit of kind of that sales process, the vendor pushback, if there is some, and where that comes from and is that sort of an ongoing dynamic in the industry, given some lower costs, rails are being talked about and how that might come to play going forward and understanding that, that may just transition the revenue model from one of a sort of a fee-based program model as opposed to kind of a per virtual swipe model, if you will.

Yes. And so vendor enrollment, there's the carrot and the stick, so to speak. And so let me start with the carrot. One, you're going to get the guaranteed payment. It's going to show up in your account, right? You don't have to worry if the check's going to clear or not. You don't have to worry about that. Second, you're going to get all the reconciliation data you need. All the remittance information you want, we send it all to you. So it's right there. So reconciliation, not an issue. And in terms of -- if you accept it, also, we have other clients that may frequent use, you could get a volume lift. So that's our carrot pitch. The other side of it is we have a lot of big clients, large clients. And so who has the leverage, the vendor or the client? If the client says, "This is how I want to pay you," well, I'm going to then accept that, right, from the big client. And so we leveraged some of those relationships to build the ecosystem and then have the small clients just plug into it. So that's also helpful. Leveraging off of enterprise level clients versus a lot of small businesses, it's a different kind of conversation. In terms of the evolvement of the revenue model, that's something that already happens. So if I am sending checks because that's the only way the merchant will allow it, there is a fee for that service, right? And so if you want to choose a different kind of rail or the merchant just doesn't want to play, that's fine, but there is a cost then in a different way.

Got it. That makes sense. And on the other side, to sort of round out the broader corporate pay and B2B discussion, I think you've had Cambridge for a little bit longer, but thinking about how AFEX will kind of integrate with them and thinking through the kind of synergies of bringing those 2 businesses together, not necessarily in dollar and cents terms, but more functionally and go-to-market is kind of what I'm focused on.

Sure. So we're quite excited about AFEX. It's kind of a traditional FLEETCOR-type deal. You have 2 businesses that were approaching kind of similar market segments, and they played in many of the same geographies, but with different strengths. So Cambridge is predominantly in Canada and the U.S. but also has operations in the U.K. and Australia. And AFEX is really strong in the U.K. and Australia and had some operations in the U.S. and Canada and a few other markets. And so you've got overlap, which allows you to have great synergy opportunities because I don't need 2 managing directors in each place. I don't need 2 heads of operations in each place. So you get immediate synergies in that regard, but I'm also getting, right, this -- the supplemental overlap that where I was weak, they're strong or they were weak, I am strong. And so all the boats kind of rise up in that regard. In terms of the other thing we've seen in that business, they do a bit more off-line. So Cambridge has built a nice online system and have been very successful in migrating kind of the smaller customers to that program and it's highly, highly profitable. And so we see big opportunity to kind of run that same playbook with AFEX. So from a customer revenue side and/or efficiency side in terms of managing those accounts, we see a big opportunity there. Similarly, AFEX and Cambridge, one of the things FLEETCOR brings to any acquisition is a history of doing these deals. We know what to look for, right? So the first thing we ever do is just we segment the clients every which way to Sunday. Okay. Great. And we find that there are pockets that are just not profitable. What you're selling them, how you're pricing them, what you got to deliver in terms of the service, it doesn't make sense. So you have 2 choices. Am I going to raise the prices or I'm going to exit those customers not provide that. That in and of itself will create synergies and we've identified that at Cambridge, and we see a similar opportunity at AFEX. So in many respects, we can run the same playbook that we did before, move more things online, get rid of unprofitable stuff, optimize your pricing models where it makes sense, great. And then on the back end, we can get rid of all the redundancy because of the overlapping geographies. So it's kind of a -- it sets up quite nicely for how we've done deals in the past. We're pretty excited about what we'll be able to generate.

No, that makes a lot of sense. And forgive the pun, but maybe shifting gears, I was hoping we could talk about the fleet segment and also the Brazilian largely toll business a little bit, but collectively speaking, the Beyond strategy. So I feel like pre-pandemic, those were very quickly becoming some of the most exciting virtues of building out that bold case scenario for accelerating top line growth and understanding that you're essentially expanding the addressable market from what it had been for many years to a whole area of kind of broader, albeit, still focused and targeted, either kind of commercial card spend on the fleet side or really kind of consumer spend on the Beyond tolls and the sort of urban product. So maybe we could talk about each of them in a little bit of a silo, but kind of walk through where we had gotten to, kind of what has maybe been put on pause or has kind of been back-burnered a little bit through the pandemic and now, again, moving back to that sort of thought process around the offensive, where are we thinking that those opportunities can sort of trend back towards going forward.

Okay. Well, there's a lot to talk about here. So why don't I start -- I'll start in Brazil.