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

All right. Good morning. I'm John Davis, the payments and fintech analyst here at Ray J. We're excited to have FLEETCOR's CFO, Charles Freund join us this morning. We're going to -- this is going to be more of a fireside chat. But please, if you have questions, use the Q&A functionality within Zoom or you can send me an e-mail, [email protected]. So first off, Charles, thanks for joining us.

John, thank you for having me.

So I think one of the questions I get a lot, and this is not just a FLEETCOR question, but also I think most businesses, this is a once-in-a-lifetime pandemic, obviously, negative impacts on revenue and margins. But just curious, what surprised you guys the most? And what potentially could come back stronger on the other side of the pandemic? Maybe, I don't know if you want to go by business line or just maybe the biggest 1 or 2 things that surprised you.

I'd say the 2 things that surprised us most, first, were that there were certain pockets of customers and/or products has -- were going to be hit disproportionately by this pandemic. And so the shutdowns -- we've never seen anything like it. And so some of our products, which are more travel-centric, like T&E cards that you give to white collar travelers like you and me, who would normally be doing this face-to-face, but we're not. We would be using those products. And so economic downturn hits more segments in a similar way, and this was quite targeted to some of our products. Some of them weren't hit nearly as much. But things like T&E, cards, we have a commuter product in Brazil. And when everyone was working from home, no one commutes. And so that product was disproportionately hit. And obviously, the airline business for us is down some 50%. And in terms of what surprises, maybe to the upside, was our credit performance. We really anticipated there being more shock to the system, so to speak. But whether it was the stimulus or other actions of small businesses, midsized businesses, we really held up quite well through the pandemic, our bad debt rates exiting the year in unbelievable shape. So quite excited about how that positions us for the go-forward year. I think our portfolio is in really good shape. So I would say, in terms of recovery, we've got a couple of things that are still pretty far down that have good ways to come back. So even as our overall business has bounced back, there are a couple of pockets, particularly airlines, that are still quite depressed. And so we see that as future upside as the economy reopens and people start traveling more.

Okay. Great. I want to hit on the Corporate Payments segment. I think that gets a lot of investor attention and rightly so. You guys did an interesting acquisition with Roger recently. So maybe just talk a little bit about that deal, how it fits within that segment and kind of what the strategy is on a go-forward basis.

Sure. So John, we built a Corporate Payments business that has a pretty robust product suite. So we can handle domestic payables and international payables. We can do it on a fully outsourced basis, where we can provide certain tools that people use to supplement their own AP processes. So we really like that business. However, what we built was really more mid-market and kind of lower end of enterprise kind of prospect that we were targeting. And if you look at our other products, which are more expense management solutions, like fuel cards or lodging services or even the toll product, we have a ton of small business clients. And when I say small, though, we're talking $25 million less, $10 million in revenue and less, really small clients. There are hundreds of thousands of them, 500,000, 600,000 that we serve directly. And so what happened was this more complex Corporate Payment suite of solutions didn't really fit for the small business market. So we have Corporate Payments serving mid and enterprise with a great product. We have all these other customers that you couldn't really cross sell to. And so we scoured the market. We looked at various products that we could either -- product providers we could partner with or potentially acquire. And so we found Roger. We think the technology is great. The company is only 3 years old, super modern technology, and it's built for that small business client. It really targets companies that are circa $10 million or below in revenue. And so what this does is it allows our Corporate Payments business to now sell to new prospects that are further down market called small businesses. It also allows our lodging, our fuel and other sales teams -- sales and marketing teams to cross-sell that Corporate Payments solution into their base of hundreds of thousands of clients. And so we think this is a gamechanger for FLEETCOR in terms of providing a solution set that covers the entire spectrum of the Corporate Payment prospects as well as allows us to take our expense management portfolio and turn it into a Corporate Payments portfolio.

Okay. No, that's really interesting. And then maybe talk on Nvoicepay a little bit. That was a really interesting acquisition that you guys did a couple of years ago now. How is that going? I saw you recently got some industry award for technology, but just curious on an update there.

Sure. So Nvoicepay has been a terrific deal for us. It really got us into what we call the AP automation space. So this is where you fully outsource your payment processes to FLEETCOR, and we pay all of your invoices regardless of modalities, whether it be virtual card, check, ACH, wire, international or domestic. And so prior to that, we had certain tools to help you with a pay. This allows us to take over AP for a mid-market or enterprise level client. The acquisition has done quite well. We had record sales last year. We've got a big backlog that we're working to implement. So we actually outsold what we were capable of implementing. And part of that was demand was up because people wanted more automation, less people processes, less manual processes in the back office. And that's what things like Nvoicepay or Roger do, it allows you to outsource your bill payments. You don't have to write checks. You don't have to prepare the file to go to the bank to set up the ACH, et cetera. So by outsourcing, people can either reduce headcount or basically just take away the risk associated with making those payments on their own.

Okay. Great. And then as we think the Corporate Payments was a high-teen grower pre-pandemic, obviously, for some of the things you called out earlier, the virtual T&E card and some others that, obviously, were impacted last year. But how should we think about this? Is this still a high-teen growth business on the other side, potentially higher with some of these new acquisitions? And then maybe just briefly touch on the competitive landscape because Corporate Payments and B2B mean a lot of things to a lot of different people. But just curious kind of who you run up against most in the different segments of the market?

Yes. So yes, it is a high-teens growing a normalized base. The 2 things that are holding us back, one is T&E product, which we would cross-sell with our virtual card or AP automation. And so -- because white collar folks aren't traveling as much, that product is severely depressed. And then there were a couple of pockets. So because we serve mid-market and enterprise clients, talking about thousands of clients -- not hundreds of thousands, but thousands. And so it doesn't take too many of them if they're really sick to kind of hold you back. So an example would be we serve cruise lines. They use our virtual cards to make payments for AP. They also use our cross-border payments to actually pay people in all the different countries where they originate from. And so that segment or that industry, super depressed in COVID. And so you have a couple of small -- a couple of industries like that, that kind of weigh down the rest of the book. So as things come back, again, that should come back and normalize. In terms of who we run up against, it depends. So at the highest, highest end of the enterprise segment, you've got banks, right? And that the banks will do the work for their larger clients. What is that work? It's going to do things like vendor enrollment for virtual cards. So you have to call into the AP file and make sure the vendors accept the product. You need to integrate with various ERP solutions, and that level of integration is quite important to streamline the AP process. And so up to -- down to a certain level, the banks will do that work. When it gets further down, they're really not interested. Otherwise, in that mid-market segment, we'll compete against American Express, both for virtual cards and for our T&E products. And if you get into more of the travel vertical, we'll run into certain folks like WEX, et cetera. So I'd say it depends again on the segments we get further down. Obviously, we partner with/competes with some other players like AvidXchange kind of the $10 million, maybe to $25 million or $50 maybe million in revenue kinds of prospects. You get further below that, you Bill.com. But John, as you know, the further down you go, the penetration of these products is negligible, low single digits into the small businesses. So the amount of runway here, I mean it's open feel for all of us.

That's super helpful. Maybe switching gears to the fuel business a little bit. Obviously, that one is directly impacted by COVID and the slowdown there. So maybe any comments on year-to-date trends? Were there any impact from the February inclement weather? And then maybe we'll move to the bigger-picture question of EVs and kind of what the long-term strategy is there. And how you guys think about that over the next, call it, 10 to 15 years?

Sure. So the fuel segment held back a little bit in this early part of the year, partly due to the shutdowns in Europe. So our European business is predominantly fuel-driven. And so those shutdowns, hated to see them come, they came. They lasted a little longer than we would liked. So that's held us back a little bit. In terms of the inclement weather that we saw in Texas and other states, hit us for about a week, but things bounce back pretty quickly. So -- and some of our cards are actually used by some of the emergency services workers, utility companies, the flat house that are their on the streets, municipalities, et cetera. So yes, we saw a little blip for a week, but nothing that's sustained. In terms of EV, and I'd say, John, this is a question we get a lot, is EV the death of fuel cars? And I think it's a misnomer and people calling it fuel cards, it's really a fleet card and it does a lot more than just buy fuel. There's a whole slew of parameters and controls that are set up on the front end that allow you to kind of operate your fleet in accordance with your policies. There's then all kinds of alerts and reporting on the back end around usage, usage of the vehicle, consumption of energy, et cetera, and so the whole point of these cards isn't the actual buying, it's the controlling and reporting of the fleet and its buying patterns. And so all the same services that we do for fossil fuel vehicles, we would do for electric vehicles. I'm going to try to control, let's purchase. So you only plug-in the company vehicle, you don't plug-in a personal vehicle or spouse's vehicle. How you use your vehicle. So if I get x miles per kilowatt and you get more, maybe I'm running on in same mode with my Tesla every day. And that's not good for a fleet or fleet manager. So you want to stop that. You have to see it. You have to be able to compare these usage patterns exactly what we do with miles per gallon reports for fossil fuels, et cetera. And so today, we have mixed fleets throughout our business. People who operate trucks that have diesel, cars that have gasoline, buses that have compressed natural gas, and the list goes on. EVs are just one other energy using vehicle, and we want to monitor the consumption and the use of -- and pay for it as well. Another factor, John, that helps with our expense management solutions is around reimbursement. And so instead of having your drivers pay for energy and then submit receipts, and then have to get reimbursed, and the fleet manager have to take those receipts and scan them or enter them into a system and then start to analyze the data that tells them, we try to eliminate all of those processes. We do the exact same thing for electricity. So when someone plugs in their vehicle every night, it's consuming energy every day. We want to make sure that we can reimburse the utility company, the energy provider on their behalf and then invoice the customer. And so again, the employee doesn't have to come out of pocket. So we think, again, all those same processes apply, and we're pursuing various technologies, partnerships, et cetera, in Europe, where EVs are moving a bit more quickly. So here in the U.S., they represent a fraction of new vehicles sold each year. The vast majority of new vehicles going on the road are fossil fuel driven, particularly commercial vehicles, right? The dump trucks have -- there's no electronified dump trucks that I'm aware of it. So it's going to take a long time for that cycle to happen. However, it is moving a bit faster in parts of Europe, particularly in the Netherlands and the U.K., where we operate. And so in those markets, we're working with providers to help build out the solution set. So where do people fuel? When you have an electric vehicle, where do they recharge? You can recharge at home. You can recharge at an office or a depot, you leave your vehicle overnight. You can recharge at a hotel where you may be staying overnight. Or you might just recharge out in the public domain, right? Just like stopping at a BP station, but now BP electric station. Great. We're building our network. And so our cards or our mobile apps will be accepted at retail charge points. We're partnering with the hardware and software providers to handle the at-home charging. So all of the data regardless of where you recharge, all of that data can come to us, so we can pay the providers and provide all the reporting back to the fleet managers. So we view it as just another type of fuel, quite frankly. And so we're building out the capability in Europe. And whatever we see that works well there, we'll then take it to other markets as they catch up in their EV transition.

Okay. So how do you think about the monetization? Is it any different from the way you monetize today on a kind of a more of a per-transaction basis? Would this maybe more of a monthly recurring fee? Just talk about the monetization, how you think about that and how that could change over time.

Sure. So already today in our fuel card business, we charge certain types of monthly fees or may be a monthly card fee for the reporting and the controls and the maintenance of an account. There could be a standard account fee for reporting and such. We can't charge per transaction. But on an EV, they get plugged in every night, that might get a bit high. And so people might not like that so much. So we'd have to tailor it. On the actual purchase of the energy, it's going to be a smaller dollar-sized transaction, right? Electricity is a bit -- is certainly cheaper. In this early stage of EV adoption, what we're finding is that the merchant discount rate, not interchange, but the actual discount rate that we can achieve gets from the providers is actually much higher and standard interchange that we see in networks or what we can get for diesel or gasoline. So the margins are high. So for now, there's not much of a difference. In the future as things normalize and more competition comes in, we would expect that would probably moderate. And so on the actual purchase, what we get from MDR interchange will be lower. However, to your point, there are other types of monetization opportunities. Let me give you an example. Take an enterprise or mid-market client that has 1,000 vehicles. And today, I send them 1,000 pieces of plastic and they go and they fuel at BP, Shell, Total stations wherever they go, and I provide them reporting and such. Well, tomorrow, each one of those 1,000 vehicles, if they do change to EV, are going to have their own at-home charging port. And someone has to maintain that, and software has to be put on that and be maintained and anti-tampering and such. All of those things are now incumbent on the vehicle owner, which, in a company vehicle, that's the fleet manager. The fleet manager doesn't want to deal with that. And so we're partnering with those providers to see what services can we or should we provide in terms of distribution, maintenance, software, et cetera, that we might, again, charge a monthly fee per vehicle for that type of service. It takes the responsibility and burden away from the fleet manager. That would be an example of where an enterprise client today who doesn't pay anything for my plastic. It might have to pay something for that type of service.

Okay. And then maybe last question here on the fleet business. If we think about the recovery, maybe just talk about the puts and the takes from a volume and yield perspective. Obviously, some of the smaller fleets will be kind of later to come back online, some of the more profitable ones. So maybe just talk a little bit about the volume yield dynamics as we see the eventual recovery hopefully this year.

Yes. So as you mentioned, the larger fleets did tend to recover a bit faster than the small fleets in our portfolio. So volume got ahead of revenue, so to speak. So there'll be a little bit of rate pickup in the further recovery of the small businesses, but I'd say that dynamic is not so severe as it was in the early part of the pandemic.

Okay. And then maybe moving to margins, that's another hot topic amongst investors. Obviously, you have 5 different businesses with different margin profiles, all recovering at different rates. But if we were to blend it together this year, how should we think about margins as revenue comes back? Do you think you -- guidance implies flattish margins this year? Maybe what you get expansion? And maybe talk a little bit about what the investments being made kind of ahead of that revenue coming back that might taper margin expansion in '21.

Yes. So 2 areas. One, in terms of kind of the world reopening, as businesses reopen and people want to travel, so will my salespeople and such. So I'm going to have some expenses that flow back with that. And so we're planning for that as our sales. We're planning a massive sales year this year, 30% versus last year. And so in that regard, we would expect some bad debt to pick up and come with that. So those things they'll hit. The other thing we're doing is we're investing ahead on this Roger acquisition. So whether it's direct sales in the Corporate Payments arena or cross-selling in fuel, lodging and other places, we're beefing up the marketing spend there. We're investing in new teams, cross-sell teams. And so that's going to be a big investment that will come before really revenue because it's such a tiny business. So there'd be a couple of areas. When businesses reopen and come back, we do expect that margin to come back at a pretty high rate. So in the second half, we should see margins start to tick back up a bit, particularly around this airline business. We bought 2 different airline lodging providers. But obviously, with their volumes down over 50%, they're struggling. They're margin profile is very unattractive at the moment. However, we're incredibly well positioned there. And so when they come back, I'd say we should see a shift in that margin profile, particularly in that business.

Okay. That's great. And then maybe shifting a little bit to the balance sheet. Despite the Roger acquisition and some of the others you've done more recently, still very healthy. I think still levered well under 3x. Obviously, Corporate Payments gets a lot of the attention, but valuations are healthy to say the least at this point. But maybe just talk a little bit about what the M&A priorities are, any specific segments, either corporate Payments or maybe outside of Corporate Payments that you think makes sense. Are there any capabilities within Corporate Payments maybe that you're looking for? I think that's obviously one of the strengths of the balance sheet, and you guys historically used it very well. So just curious there what the thoughts are on M&A and maybe also buyback.

Sure. So as always, we're active in the market. We've got a good pipeline. It does cut across basically all of the product sets. So in each of our areas, we've got a couple of deals, more so in Corporate Payments. It's an area where we are focused, but I wouldn't want you to think that we're exclusively focused there as we do have other things going on. They also cut across size. So things are quite small that are more capability-driven, things like Roger. Two things that are more midsized, and those would be things somewhat like AFEX, which we're looking to close kind of early May. And so in terms of those types of assets where they have -- bring immediate profit scale, et cetera, those are more down the fairway for FLEETCOR. But as Roger shows, we're open to buying things to build capability. And as you mentioned, there are other things in the Corporate Payments value chain. The things that lead up to a payment, whether it's further invoice automation things, supply chain, finance, other things that you could do in advance of the actual payment. And we're looking at those things all the time. In terms of buyback, always open to that when it makes sense. Obviously, we have to balance our pipeline and the anticipation of what's going to close when with buying back shares, but obviously, we're always looking for those opportunities as well.

Okay. And then maybe how do you guys think about growth versus accretion? When evaluating M&A, there's a lot of B2B assets out there that are pretty expensive and may potentially would be dilutive for a year or 2, but would definitely be growth accretive. So just curious on the thoughts there on how you balance the two.

Yes. I like your term there, balancing the two. And so if it's a very large deal, we have to see it becoming accretive fairly quickly. That doesn't mean the first year, but fairly quickly, right? I don't want to bet the farm on a deal that has 3 years of dilution. That's not my game. Smaller deals, i.e., if they're dilutive for a year or so. But it's just -- it's one of those things where, to your point, it's the balance of deal size and how long is that really going to be dilutive for us. And so we like things that are accretive, but we're not to the exclusive -- exclusion of other things that are capability-building or, onto your point, top line growth drivers provided that we have real strong conviction that the synergies are more than a promise that they'll be delivered.

Okay. And then maybe turning to the full year '21 guide. Obviously, I joked with people, it's a lot more art and science at this point trying to predict 2021. So I don't envy your position there. But just curious how much impact you have, if any, from what hopefully will be stimulus here in relatively short order. And then also maybe just talk about the factors that kind of gets you to the high end of the guide or the low end, and just kind of what's embedded from a macro perspective.

Yes. I'd say the 2 things there that are important to us. One, sales, right? So we have to get our sales going. Good news is we had a great exit to the year. So last year, we're like 50% of the prior year sales in Q2 and then were 80% of prior year in Q3, over 90% in Q4. So we had a great trajectory as we exited the year. So we need to deliver our sales plan because that's how you get growth. But the other thing that we factored into our guidance is a broader recovery in the economy. And if you were to look at kind of our customer softness, what we call, we're still down about 6% across our book in terms of volume and such. And by the time we get to Q4, we need to get about 2/3 of that back. That's kind of -- or as we exit the year in 2021, we're thinking about 2/3 of that recovery needs to come. And as long as that does, then we'll be fine. Obviously, new variance and keep my fingers crossed that the vaccines do actually work and such, I haven't gotten mine yet. I don't know where you are on the list, but I'm pretty far in the back of the line. And so my hope is that all that works, and we -- for the things that we're seeing, people are optimistic that the second half is going to be pretty good. And so we're hoping for the same.

Okay. Great. And I had an investor question that just came in. As a reminder, if you have a question, you can use the Q&A function on Zoom or send me an email, [email protected]. So this was just a longer-term question. Anything that's happened in -- with COVID that has structurally changed the business for better or worse over the next several years? And then I'll just tack on top of that, any reason or any change to the kind of long-term top line growth algo of, call it, 10% and bottom line of 15% to 20% on a normalized basis?

No real change in the algorithm. I'd say in terms of distribution, we've shifted harder to digital, probably even faster than we thought. And so obviously, face-to-face sales were difficult. In the pandemic, we've learned. how to Zoom all of us, obviously, even today. Telesales, we've had to shift to at home. And how do you manage people at home? Again, we've made that transition. But we've really reoriented things more to digital, and with that have kind of found a way to do more demand generation and some more top-of-funnel marketing. So we feel really good if people come in and search for fuel cards or other types of products that we have. But if you're not searching for that, you're searching for how do I manage expenses in a business, how do I build business credit, where do we show up and how do we engage a conversation, casting a wide net and then slowly directing people to our products. And so we've started some different campaigns in that regard. And so far, knock on wood, so good. And so I'd say that, again, that's going to fuel more and more digital-driven sales, which will then bag with a more digital customer experience. And so the combination of those things, I'd say, the pandemic has helped accelerate that transition.

Okay. Another investor question here. Just looking for an update on the gifts business. Any thoughts? I mean, obviously, over the years, you guys have contemplated selling that or maybe doing some sort of JV. And then just bigger picture, are there any other verticals, maybe tangential verticals or business lines that you're not in today that would potentially be on the radar from an M&A perspective? Or are you pretty set with the different business segments you have today?

So as it relates to gifts, obviously, it was hit pretty hard by COVID and the shutdowns of the malls and retail shopping. Starting to come back, which is good. We've also done a few different things there. So prior to COVID, we had bought a digital gift card provider, which was, I guess, forward-thinking because when COVID hit, that really took off. So people still wanted to buy Christmas gifts and such, but just not in the malls, they bought electronic gift cards. So we saw that do pretty well through the season. The other thing we're starting to shift to there is more B2B-type distributions, so think more incentive cards and products. So it's not purely consumers buying gift cards. It could be gift cards given to an employee in recognition of service, sales, et cetera. And so we continue to operate that business. But until things normalize with COVID and such and we get back on kind of a normalized volume track there, I think we're probably not active in the market to do anything with it because people want to see where the thing really normalizes out, which retailers survive, et cetera. So in terms then of other segments, FLEETCOR, we're focused on outbound payments. So if you think of an expense or cost of goods sold, anything where a company is making an outbound payment that can include things like payroll and benefits for employees, anything that -- where an outbound payment is being made, we're open to being in that game. So whether it's related to cost of goods, employee-related expenses or other types of operating expenses, look to see us in market sniffing around those acquisitions.

Okay. That's helpful. And then maybe jumping back to B2B. As we think about, how do you handle the channel conflicts or whether you want to call them frenemies, the AvidXchange and the Bill.com to -- who you partner with. And they're big partners of yours, but you also compete with them. So how are you thinking about that relationship developing over the long term? And is there any kind of go-to-market channel conflict? Just curious how you guys handle that.

Yes, I'd say, because the penetration at this point is so low, we really don't have much conflict per se. And we also have -- we serve some of the same verticals. But in other cases, we have some strengths where others have others like Avid in real estate versus some of the stuff that we're in. So I'd say at the moment, there isn't a lot. Over time, could there be? Maybe. But they're good partners, they're important, they're not material to our financials at all. But we enjoy the partnerships with them, and we think there's plenty of runway still to go before we have any issues.

Okay. And I think I have one last investor question here, and then we'll wrap it up. But curious thoughts on competitive landscape within the fuel business, where that stands today? And more importantly, how that could change over time with EVs? Do you think you have a massive competitive advantage being there today and kind of being in a pull position? Or do you think about new entrants potentially trying to enter the market with the shift to EVs?

Yes. I like our position, John. And the reason I say that is, even though EVs enter market, they don't take over immediately, right? And so if I have a fleet of 10 vehicles, I'm a small business. I'm not switching all 10 vehicles to EVs overnight, but I may switch 1 or 2 per year, and I'm on a 5-year replacement cycle. Okay, that's fine. Now you have mixed fleets. And again, it goes to the same dynamic I mentioned before. You want the fleet manager or kind of 10-vehicle fleet, quite frankly, it's probably the business owner who's worrying about all those expenses and assets. I want centralized reporting by 1 provider who can make my life easy. And so there may be some people who are EV specialists that get in. That's certainly possible. But nonetheless, because fleets generally won't transition all at once, we like the mixed fleet dynamics that our business will have.

Okay. Great. Well, I think we're going to wrap it there. Charles, thanks for the time. This was super helpful and informative. And thanks, everyone, for joining. Have a good day.

Thanks, John.