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

Sure. And so to your point, we felt a very sizable impact in Q2 of last year. We have seen recovery. And so on a global basis, we've seen kind of a 50% kind of recovery as we exited Q4. The small fleets, good news is they've held up in terms of a retention perspective. So we haven't seen a lot of bankruptcies or bad debt or companies leaving our services. It really is more of a softness or what we call kind of usage of the product. It's just less frequent. They're just buying less. Now whether they've taken half their vehicles off the road or they just have fewer jobs to go pursue in terms of workload, whatever it is, they're still in business, they're still using our products, it's just not as often. So we think there is good recovery upside still to come in 2021 as the vaccines and other efforts take hold. We do think the stimulus packages were helpful in helping those companies get through the worst parts of the pandemic. We have seen folks participate in PPP and other types of programs in other parts of the world as well. So I'd say in terms of timing and such, unclear how quickly the thing will come back. We believe that Q3 and Q4 should see some meaningful recovery, but, obviously, it will depend on how the rollouts go.

Got it. Got it. And then just thinking about that same strategy and how it applies internationally, it seems like a lot of the growth potential, at least the areas of low-hanging fruit, internationally are on the large fleet side. And you guys have sort of deemphasized that part of the business in working with the large fuel companies because there's a difference in terms of profitability. I mean how do you guys think about the international fleet growth opportunity? And maybe what are you guys doing to sort of strategize around the opportunity there?

Sure. And so in Europe, a lot of oil companies do market fuel cards directly. However, they prefer to work with large fleets. As you move further down market, due to sales acquisition costs, credit costs, account management costs, et cetera, they will often outsource or have resellers who take the product and market it on their behalf. And FLEETCOR plays in that space. So we are a reseller of oil company cards in the U.K., Continental Europe, all the way across to Russia. And so in -- and Australia and New Zealand similarly. So we're a reseller down in the small business. And so if you were to say deemphasizing, we're continuing to be interested in major oil partnerships. We will offer processing services to major oil companies so they can process payments for large fleets. But in terms of going direct, we are still small business focused. We will use their products where it makes sense. And then in many geographies, we have our own products and networks. And that's where we'll focus on the large fleets, where the convenience of a broader network, whether it's our AllStar network in the U.K., our CCS network in the Czech Republic, et cetera, where we can go across different oil company sites, we think that's -- that provides a nice solution for those large fleets that need that convenience.

Got it. I apologize, let me break in here and let the attendees know that they can ask a question. [Operator Instructions] Maybe just moving on to the topic of EVs. It's a hot topic given some of the Biden administration commentary and other government efforts. Also, Tesla stock has been on a tear, people thinking about EV in the future. Maybe you could sort of provide some insight how investors should think about this shift. Maybe some more color on what FLEETCOR is doing. And maybe help us think about the impact it's going to have on your business, pros and cons and the financial impact to you guys.

Okay, so EVs.

Lots there. I'm sorry.

Yes. That's okay. That's okay. It's a big topic. So first, we're watching and we're learning. And so EVs are growing in terms of sales, growing quite rapidly. As a percentage of all new vehicle sales, it's still relatively small. And so we're adding every year new fossil fuel vehicles to the base of vehicles here in the U.S. And so the shift to EV, while it's coming, is slow. It's faster in other places. So it's faster in Europe, particularly in the Netherlands, but it's still -- EVs still aren't the predominant new vehicle sales. So I'm still adding more fossil fuel than I am EVs. So yes, it's a transition, but that's it. It's a transition. And it's going to be -- take decades to make a meaningful shift. So with that kind of context, what we're doing in the Netherlands and the U.K., where EVs are selling more quickly as a percentage, a couple of things. We're looking at how people recharge. And based on what we've seen and research that we've looked at, about 50% of rechargers are at home, people plugging in overnight. And then you've got a mix of people using either destination sites, so this might be a hotel I'm staying at overnight, supermarket or shopping mall where I pop in, whatever it may be. So I'm going to a certain destination. There's another group that would be at more of a workplace. So either I plug in at the office or if you think of more like a commercial aspect, a van or a pickup truck. I might have a depot where I leave it overnight, and then take my personal car home and then come back. So that -- those charging stations. And then you've got people who'll be out on the road, right? So instead of buying diesel or gasoline at the Shell station, I'm going to plug in at the Shell station. So it's that mix of potential places where you can fuel, which is a little bit different than how things operate today. And what we're doing now is figuring out how to serve a fleet manager's needs across those different charging options. So a lot of people say, oh, we -- your product just buys fuel. And that's a misconception. Our product is a fleet card. It helps a fleet manager manage the purchases of fuel vis-à-vis the usage of the car. And so how many miles per gallon are you getting? Are all those miles being used for business purposes? Are you making sure the energy going into a car is specific to the company car and not a spouse's vehicle or someone else's vehicle? All of that same control of energy consumption vis-à-vis vehicle usage, the reporting, all of that is still applicable whether I buy diesel fuel, gasoline or electricity. I want to know that it's business spend for business vehicle usage. And so all the same controls or reporting would apply. Similarly, one of the benefits of our product is that you don't have all the fixed pay-and-reclaim process. So in some companies that don't have fuel cards, they have drivers pay for fuel, and they submit receipts. Then you got to gather the receipts, and they got to plug them into some kind of a system, and they need to analyze them. And what -- did they buy at the right place, the right time? Was it the company vehicle? I don't know. Maybe, maybe not, right? And so there's all that process. And in many cases, drivers don't want to be out-of-pocket for buying fuel and waiting for a reimbursement. It's another advantage of having a fuel card. Similarly for electricity. When I plug in and now I have to pay the utility company for electricity and then go to my company to get reimbursed, I don't want to have to do that. And in some cases, it causes personal cash flow issues for me. And so that ability to pay a merchant for energy on behalf of an employee who's consuming that energy for business purposes, that same model applies for electricity, diesel, gasoline, compressed natural gas, hydrogen, whatever you use to propel your vehicle. So controls in reporting, reimbursement of an energy vendor, that's our business model. And so what we're doing now is partnering with charge point operators to accept our payment products, whether they be card based or mobile apps. And so if someone has an electric vehicle in their fleet, they can go and buy electricity, and we'll follow that same kind of reimbursement and get all that same reporting. It's important to keep in mind that not all fleets switch on a dime, right? If I have 100 vehicles, I'm not going to replace 100 vehicles all at once. And so there are going to be mixed fleets just like we have today. I have -- people that have trucks buses, cars, all use different fuel types and, in some cases, even different networks, but I can consolidate all of that into comprehensive reporting for a fleet manager. Similarly, I want to do that with just adding electric vehicles that go to charging networks. As we mentioned, a lot of the charging is going to happen at home. And so now, what does that mean? It means that today, where people use retail networks to refuel and the infrastructure and the cost associated with that is software and technology, and now I'm taking that and turning it into a unit of 1 per vehicle. So not only do I have a company vehicle, I also now have a whole charge box that plugs in. And that has hardware, it has software. You need to make sure it's not tampered with. There's all kinds of things now that the infrastructure is shifting from the retail environment to a company that provided the company car. And the fleet managers don't want to deal with that. And so what we're doing is not only partnering with the retail charge point operators but also with the hardware and software providers of those units to again ensure that the data, the controls, all of that feeds into the comprehensive reporting for a fleet manager. We've even made a small minority investment in a software company that allows you to take that data and then reimburse the utility company and settle that merchant transaction without having to go through the expense and reimbursement process. And so we're looking at all these models. We're going to track and see what best suits fleet managers' need vis-à-vis their recharging practices. And then we'll take those best models and deploy them in other geographies as they start to ramp up their EV conversions.

Got it. Got it. And that 50% number that you mentioned in terms of people charging at home, like is there a bifurcation between like consumer and commercial?

I haven't seen enough of the data yet to make a comment on that. And so for now, I think it's all combined.

Yes. It would seem to me like that might be more applicable to consumers than commercial. But that's just my guess more than anything else. Just sort of shifting to corporate payments. B2B payments are obviously solving for a lot of problems in multiple industries. You talked about how that became a big focal point for FLEETCOR after the Comdata acquisition. And it seems like you guys are pretty strong in some key verticals like construction, media, health care, you mentioned previously. I mean what distinguishes you in those verticals? And then what is the opportunity? We've had a couple of B2B panels in this conference, and it just seems like it's early days and there are so many different players sort of coming at it. How does FLEETCOR distinguish itself?

So in terms of kind of that vertical orientation, we think, particularly in the mid-market, kind of low enterprise area, that vertical specialization is a winning approach. And the reason is that it creates an ecosystem. And so there are basically 3 components. And so one is the customer base. I need to have a couple of customers, right? And then those customers allow me to then build a vendor database. So I need your AP spend. Now I go to your vendors and I start to build the vendor database. And when I have enough vendors in that, it becomes easier to sell to future customers. So I have a lot of construction companies, and I have a lot of construction supply vendors that are in my database. Creates this nice ecosystem. The other component of that is ERP integration. As companies move further up in terms of their revenue, their complexity, et cetera, they'll start to specialize in terms of the ERPs they use. They get out of the QuickBooks and Sage and they get into more specific industry-type ERPs. And so in construction, there's 5, 6 meaningful platforms. And when you're integrated with all of them, again it's easier for users. It's easier to sell the next company. If I come to you, Sanjay, and say, you're in a construction company. I'm in these 5 ERPs. And 90% of the time, you're going to be using one of them. I don't have to do integration work to get you up and running. I'm already there. And so that helps as well. So that's the ecosystem. Customers gives you vendors. Vendors give you more customers. Customers' ERP helps enable, again, more sales into that customer base. ERP integrations can also lead to referral sales. And so as you enable your product on an ERP solution and people say, hey, I want to be able to pay with that Pay Now button, but it is disabled. Now in order to get that, you need to go talk to FLEETCOR. And then they'll come and talk to us. We upload them and then enable it on the ERP platform. And so it creates this beautiful ecosystem. But again, it's because of the vertical orientation. And so construction, media. We're big in health care. There are other verticals we look at and evaluate. There's still runway even in those to go. So we definitely like that, particularly in kind of that mid-market space.

And -- but as far as that full AP, you have multiple solutions for your customers. But I'm not sure it's very well understood sort of what your solutions actually do and why you win against others. Maybe you could just talk about sort of your competitive advantage there.

Sure. So there's 2 main solutions when it comes to full AP. One is what we have historically called Nvoicepay, an acquisition a couple of years ago. And that product is really specific to mid-market and enterprise-level clients. And what it allows is kind of more sophisticated workflow around invoice approvals. So think about a company's policies. The bigger you get, the more advanced your policies may become in terms of who can approve what, at what levels, of what nature. There may be multiple approvals. You may have to go through various hoops in order to get an invoice approved for payment. So they structure that. It can be across different offices, et cetera, et cetera. But basically, what the solution does is allows you to manage that workflow and then pay all of your invoices to all of your vendors, domestic and international, regardless of how the vendor wants to be paid. If the vendor accepts cards, we'll pay that way. If the vendor wants a wire, we'll send it. They want ACH? We got it. If they want -- still want paper checks, we'll provide that service for them. And it allows you to basically outsource your AP process as it relates to more of the execution of the payment. So it's payment automation. You don't have to have the checkbook in the office. I don't have to send a separate file to my bank to administer the wires. I don't have to do all those disparate processes which have risks, they require people, et cetera. We take all that on and guarantee the payment for you. And so workflow and then payment execution, we take that on. The other solution which we've just recently acquired, what we call Roger, is the acquisition that we made in January. It's a similar-type solution, but it's purpose built for small businesses. So think it's kind of $10 million in revenue and below. And similarly, this has workflow, but it's designed for a small business. And so it's not nearly as complex as the Nvoicepay platform. It also has invoice capture, so for scanning, expense receipt capture and all those types of things. And it integrates into more horizontal ERPs like QuickBooks and Sage and such, which are more applicable in the small business market. Super excited about that offering in that it takes us into a segment we didn't really play in from a corporate payments perspective, but we're quite large in when we think about our expense management solutions, fuel and lodging and such. And so we've got 500,000, 600,000 small businesses around the world which we think we could cross-sell this application to and actually bundle it with our other solutions to provide a comprehensive outgoing payments management system for small businesses.

Got it. So Charles, you talked at a recent conference about sort of zeroing in on corporate payments as potential places for M&A in your inorganic targets. Could you just talk about what capabilities you're looking for?

Sure. So some of the things that we might look for would be backing from the payment itself, right? There's the payment execution, then there's workflow to get things approved. There could be things around supply chain financing, which we could either do organically or inorganically. There may be things around procurement and purchasing, all elements that lead to a payment, right? And so we're not really focused on accepting a payment. That's not what we do. We do outbound payments. But anything that would touch that or lead into it would be potentially in scope for us.

Got it. It seems like that's a lot of where the future value is anyway, right? A lot of the differentiation happens before the payment or after the payment.

Well, it's interesting. I mean monetizing the actual payment, we think, is quite attractive. And so depending on which modalities you use to pay the vendors and such, we think there's a lot of opportunities still there, particularly when you look at even cross-border activity.

Right. Got it. So I want to talk about Brazil because it's obviously been through the pandemic and you seem to allude to the urban opportunity as being under pressure given the malls and the inability to sell tags there. I'm curious what the growth of that business should be. And when do you expect to get back to the low teens that you've historically seen in that business?

So that business, terrific, terrific business. Our sales were challenged for some period when they closed the malls and such. And so where we sell there, in kiosks and whatnot, yes, that slowed down. However, Brazil, while it's not fully reopened, has come back. Our tag sales have actually been incredible. So in Q4, the Brazil sales represented some 20%, 25% of like all the company sales. And the reason is that not only did we sell -- all those channels come back, but we actually deployed people at toll booths selling to clients in line as they were waiting to pay with cash. And so we doubled down there and on existing channels, which the malls have reopened. And so we're -- our sales were historically better than ever. In that, some 30% of all those sales, were still urban tax. And so that strategy is continuing to play out quite well for us. Where the big opportunity now is to create more usage of those urban tags and even convert some of our other tag holders to the urban products. And the way we're going to do that is continue to expand our network. And so we've got really good coverage in terms of parking at the malls and parking at the airports in certain cities. There's still opportunity in others. But our fuel network is quite small. And the reason that is, is we're being very thoughtful with how we deploy capital to build that out. But we think that opportunity is multiples of what the pure toll opportunity is. And so it's -- very excited about the runway there for the next several years. The pandemic, when it slowed down the toll business, it really affected activity of parking and activity of fueling. Somewhat affected our fast food activity as well because people just weren't out and about quite as much. As things continue to reopen and as business activity rises, that kind of Beyond Toll purchasing will also come back. And that's been a bit of a drag as we make MDR on those purchases, which was subdued because of the pandemic. But the business has been incredibly resilient. The majority of the revenue, 80%, 85% of that revenue, is more subscription based. It's a monthly charge per tag. And we didn't have people canceling tags through the pandemic, and so it's held up pretty well organically, all things considered.

Okay. Great. I guess my final topic, I wanted to talk about the lodging business, right? Unlike other travel-related businesses, the lodging volumes, excluding the Travelliance piece, are almost back to normal given the blue collar-type workers. Longer term, what do you think the growth potential of this business is? And maybe you could sort of give us some kind of algorithm that gives you same-store sales plus market share gains plus new products and services get you to X growth rate. Maybe you could just help us think through that.

Yes, I'd say it's a terrific product, has a great value proposition for clients. In the hotel space, the cost of a hotel room, of an incremental hotel room, is almost nothing for a hotel owner. And so for bringing them incremental volume, we can negotiate terrific rates, which we then can pass on savings to our clients. Today, we have maybe 15%, kind of 20% share of the workforce lodging in the U.S. So we think there's a lot of runway there. We are continuing to sell and grow organically in that respect. We're also cross-selling other solutions. So whether they be purchasing cards or this full AP solution to both our travel clients as well as the network operators, so think hotel operators, independent franchisees who need those types of services. So we think the combination of continued lodging sales, beyond the lodging activity in terms of air travel and other things when it comes back, which we also offer now, and the cross-sell of some of these more corporate payments-types products to that base will certainly help fuel future growth in that business. And so it's -- follows -- it's -- the characteristics of it are a lot like fuel in terms of as -- and attrition and such. And we aren't big in the small business arena, but I think we're -- we've got the thing set up now, to your point, where it's operating quite well and back to kind of its historic growth trajectory.

Got it. Well, we've run out of time, and we got through a lot. So thank you so much for being efficient in your answers. And thanks again for attending and joining us for a little bit of time today. And hopefully, next year, we can do this in person.

That would be great. I look forward to it. Thanks, Sanjay. Bye-bye.