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

Welcome back to Evercore ISI's Fifth Annual Payments and Fintech Innovators Forum. I'm David Togut, payments and processing analyst here at Evercore ISI. Delighted to welcome Charles Freund, Chief Financial Officer of FLEETCOR. Charles, thanks so much for being with us here today.

David, thanks for having me. It's a pleasure.

Your 2021 guidance calls for 9% to 13% revenue growth and 7% to 15% adjusted net income per share growth, driven by a recovery of your 2 largest businesses, fuel cards and corporate payments, what are the potential tailwinds for fuel cards and corporate payments that take you to the high end of your guidance ranges? And what are some of the headwinds that could land fleet toward the bottom of your ranges for revenue and earnings growth?

Sure. So, David, I'm sure you could tell, our guidance this year had a bit of a wider range than historically due to the uncertainty of the environment and such. What we saw in kind of 2020 is a recovery of about half of the customer softness that we had experienced at the low point of the pandemic in Q2. So call it halfway back as we exited the year. In terms of the remaining customer softness, we're anticipating that we'll get about 2/3 of that back by the end of 2021. And so when you look at our guidance, could things recover faster? Could they recover more strongly? It's possible. Could things go more slowly, could shutdowns recur, they could. So that's kind of how we factored in kind of that broad range. We took what we thought was the most probable case, which is where our midpoint would lie. So in terms of the recovery and the range there, we recovered all the softness, okay, we're going to be better. We recover less than the 2/3 that we think then we're going to be worse. All depending on, obviously, stimulus holding businesses up in the interim and then vaccines actually working and it's all kind of getting back to normal.

Understood. Your 2021 outlook calls for 30% growth in new sales. What are the major drivers of the 30% new sales growth target by business segments? And then if you could give us a sense also in terms of where you think you have some pretty favorable tailwinds and where you might have some headwinds?

Sure. So one thing for context. Although the 2021 sales plan's about 30% up versus 2020. It's important to put it in context of 2019. And so for 2019 versus 2021, we're actually only up about 5%. And so it gives us some confidence that we can achieve the number. A couple of the drivers there, first and foremost, is that the market isn't as distracted. Obviously, in Q2, at the height of the pandemic and even through Q3, demand was just less. People were less concerned about switching payment providers, more concerned about making sure their businesses survive. And that distraction applied to us as well, right? So I had to send my telesalespeople home, my marketing people, we have to figure out how do we work from home. So on both sides, demand and us in terms of selling, we were all distracted in 2020. So that, we think, is not quite back to normal, but it's getting close. So that's number one. Number two, I pulled back some of the spend, particularly in digital, where we're attracting some clients with questionable credit at times. And so we just pulled that back in height of the pandemic. I'm now opening that back up. In fact, we're going to be investing more. So that 30% sales growth versus 2020 comes with a 15% roughly increase in sales and marketing expense. So spending more but I'm also going to get more productivity, again, because people are less distracted. The other thing that we've done is we've reopened credit. So during the pandemic, we tightened up credit lines, but we also made it more difficult for prospects to get approved, right? We tightened up our credit standards that we've now reversed in most of our businesses. And so in terms of approvals as well as the credit that we're extending, we're actually in more favorable and more, what we might call looser standards than we had even before COVID, everywhere except corporate payments, where there are a couple of verticals where the amount of spend is so great. And we just said, let's not sell into those verticals yet. Otherwise, we're open for business. So that will also improve productivity on our sales investment. And then we think that there are some very interesting cross-selling opportunities, particularly with the acquisition of Roger that we can now sell a corporate payments bill pay solution into our fuel card base, our lodging base, even our merchant base, think small hotel operators and things of that nature. So we think all of those things combined should give us a good lift in 2021 related to sales.

Got it. Looking at the 15% spend increase on digital transformation. Can you talk about the major components of that? And how much of that flows through the income statement via operating expenses versus how much might be capitalized and run through the cash flow statement?

I mean digital means different things to different people. What I'd say is we're trying to put together more of a holistic digital experience, so selling more through digital channels. We've always been quite good at what we call bottom of the funnel, targeting, if you go and Google, a fuel card or something, you're going to find one of our properties. But if you're searching for things like do I manage expenses better in my business? Or how do I deal with employee fraud, things of that nature. Engaging in that higher top-of-funnel conversation, we haven't really done a lot of advertising and marketing in that respect. But we're starting now, both through traditional digital channels, social media, et cetera, and seeing some good results early in our testing. So we're going to be investing more in that as more and more people interact digitally, and we want to continue to sell into that small business market. We believe that this strategy is highly efficient and will be effective. Then when someone comes on and says, okay, I want to apply for one of your products or creating end-to-end digital experiences. So whether that be real-time credit approvals, right, without a human reviewing the credit, real -- automated enrollment processes. So again, no touch with humans, et cetera. We're also building new more digital-enabled UIs. So a lot of people interacting on the phone all day every day. So we're building those capabilities as well for our various product lines. And in some cases, where it makes sense, bringing those UIs together, so you see a holistic view of your relationship with FLEETCOR. And then another element of that digital effort is around reporting, so creating the data infrastructure through data lakes and such to allow not only us, but our customers, more visibility and greater analytics into their spend and such. And then the last thing I'd say, as it relates to this digital transformation is around some of the ERP integrations, and this is more specific in our corporate payments business. But creating those integrations, one, to help us sell customers, if I'm already integrated with your ERP, it's an easier to sell. It's an easier onboarding experience for you as well. But they also create a nice referral channel. So if I'm integrated with someone and someone wants automated payments, then the ERP can refer them to FLEETCOR for that service. And so all of those things from the beginning of the first, we start talking together versus the end, and I'm implementing you. We're creating a digital journey across the majority of our product lines.

You made strides with your Beyond strategy in your Brazilian tolls business, which has been your most resilient business through the COVID downturn. You added 175,000 new city users in the fourth quarter on the fuel parking and fast food payments. What are your 2021 targets for STP, your Brazilian toll business, including objectives to expand your Beyond strategy?

Yes. So a lot of that success in adding those new city users has come from selling that urban tag product through our more traditional channels, so whether it's the old kiosk, but even selling at the toll plazas, people are interested in the broader solution. And so yes, we're selling lots of users that want to use parking and fast food and fuel. Our big focus in 2021 is actually building out this fuel network. So we have maybe 600 fueling locations today. And we've got a 3-year plan to roll out to about 5,000 in the next 3 years and maybe circa 1,500 by the end of this year. And so obviously, that requires capital to build out the RFID capabilities at each location. And so we want to be smart in how we do that and make sure that as we build out the network, we get more and more volume flowing through it. That will help us with urban tag sales where the network gets robust. It will also help us capture share of wallet of people who already have our tags, but now they have more options in terms of refueling. Quite excited about that opportunity.

In cross-border B2B payments, you're assuming a May 1, 2021 close for your AFEX acquisition and $0.20 per share of accretion for this year. How will you integrate AFEX into Cambridge Global Payments? And what might EPS accretion look like in 2022?

I think it's -- for those that aren't familiar with AFEX and Cambridge, so these are our cross-border FX businesses. Cambridge, very, very large in Canada and a good U.S. presence. We also operate in the U.K. and Australia. AFEX has a very, very similar geographic footprint, but they tend to be larger in the U.K. and Australia and smaller in the U.S. and Canada, and they have a few other countries in which they operate. And so these are very much look-alike properties, similar client bases, similar prospects that we're targeting, similar product offerings. And so we view this as kind of what we call down-the-fairway FLEETCOR acquisition, where I'm going to absorb the client base, I'm going to pay one of the technologies, that will be the go-forward platform. So I'll be simplifying my technology footprint and obviously creating operating synergies there. I don't need 2 country managers in each place, right? And one of the big issues that we've seen is that -- or opportunities, I should say, is that AFEX has more of a hub-and-spoke model. So the way they operate is, they go into a given geography, and they create all of the operations, compliance infrastructure there and they operate them separately. Cambridge is more centrally run out of a large base in Canada. And so our idea there is to simplify and run everything through that central group, which obviously would create enormous synergies there.

Got it. You recently announced the acquisition of Roger to move your corporate payments business down market into the SMB spaces, along with the opportunities to offer full online bill pay to your global SMB fuel card basis. You called out $0.10 a share of earnings solution this year from the Roger acquisition. When will Roger begin to contribute to EPS? And can you gauge the possible accretion for us?

Yes. So this is a very, very small company. So it's about 50 people, $1 million or so in revenue. And we pay some $40 million for it, right? So this is a small, small "business." We really bought as a product and capability we're going to, of course, continue to sell direct to customers and through partner channels, such as accounting firms and such. But the big opportunity here is that the Roger product is custom-built for clients that are about $10 million in revenue and below. That's really their sweet spot. And FLEETCOR has already built a corporate payments business, but it's really focused on mid-market and low enterprise kind of clients, I think, $100 million of revenue plus. And so this allows us to go down market, but also allows us to cross-sell into our small business base in fuel, lodging, et cetera, where we have 500,000 to 600,000 of these small business clients. And so we view Roger as really a product capability that we're going to basically give to all the other product lines to cross-sell into their bases. So hard to really say what the accretion of the thing is, it's not really a stand-alone company anymore. It's going to be a product integrated into all of our customer bases. The exciting thing there, David, is sell 1 in 5, I can get 1 in 5 of my existing small business clients, I've got 100,000 customers. I'm not saying it's easy, but it sets up pretty well.

Last year, FLEETS's hardest-hit business really was the airline lodging subsegment. For this year, what scenarios are you including for lodging in your 2021 revenue growth guidance?

Yes. So as you mentioned, lodging was hit pretty hard. That line of business does split, to your point, workforce lodging, which is more blue-collar folks driving around and doing work versus airlines. And the airlines, we really serve kind of 2 constituents: one is the providing lodging for the crews. So as they're flying around and they time out, they need to sleep. So we provide lodging for them. And then we have this distressed passenger. So any time a flight gets stranded for weather, mechanical reasons, whatever, and the airline needs to put people up in lodging, we provide that service. So all of that is dependent on volume of flights, right? More flights, more crews flight around, more flights, higher probability of distressed passenger scenarios. And so we're going to be closely tied to that airline recovery. In our mind, it's a little slower than the rest of the business. So we've seen businesses recover through the end of 2020. Some of our product lines will be more of a straight-line recovery through the year. As it relates to lodging, it is more back-end loaded. We think of Q3 mostly Q4 type of recovery for that business. We also think the domestic piece will probably recover a little bit faster than international because of some of the testing issues, requirements now going back and forth internationally. And obviously, some borders are still closed. And we think leisure travel, which makes up a lot of the distressed passengers, quite frankly, that leisure travel will also come back a bit faster than the business stuff.

Any way to gauge what percentage of the revenue comes from leisure versus business travel as we think about the trajectory of the recovery?

A crew is a crew. So whether they're flying passengers, even cargo, we have crews that fly cargo today and such. So that really doesn't matter. In terms of the distress, any airline you get on, you're going to have a lot of consumers trying to vacation. We think that's going to come back faster, but I can't gauge the percentage.

Got it. And by the way, if you have questions for Charles Freund, please do type them in on your screen, and I will see them on my screen as they pop up, and I will ask them of Charles. Fourth quarter earnings benefited from a $5 million reserve release given strong credit performance. But you've indicated that you'll need to add to credit reserves this year. Can you quantify how large the credit reserve might be for this year?

Yes. So there's a lot of factors that go into that. Obviously, the recovery of volumes of COVID comes back in a bad way, and our volumes are depressed, that will be an issue. If things come back, rocking and rolling and our volumes are really high, and you're going to have higher AR to manage and such. Some of this depends on fuel, commodity prices and such. So it's hard to gauge how -- what the actual quantification would be. What I'd say, though, is that a fair amount of the bad debt that we experience does relate to new sales. So I don't have a customer relationship with you. You're brand new, I try to underwrite you based on all the information I can but sometimes, these are bad actors or businesses that are less proven, get through the door and then they fail or they just choose not to pay us. And so the first year bed debt tends to be fairly high, and then it starts to go down over time. So in 2020, when our sales were depressed due to COVID and the earlier distractions we talked about our bad debt is now reflecting that. So keeping in mind, bad debt is recognized 90 days after someone doesn't pay me. And so when sales are down in Q2, it takes me 90 days until I start to say, okay, how many of those new sales have gone bad. And so what we're seeing right now is kind of the beneficial overhang of those bad -- or lack of sales turning into good credit performance. Because the people that I've had in my books for 5 or 10 years, they're good. They're not going bad. And so as new sales ramp up, again, we're going to likely see more credit losses come through in the second half of the year.

On a normalized basis post-COVID, you expect to resume fleet's historical growth model of high single to low double-digit organic revenue growth plus a couple of points of acquisition growth, taking you to 15% to 20% EPS growth? And if so, when might you reestablish that kind of historical fleet growth cadence?

Yes. So I'd say we build our models and such and our sales investment to target that level of growth. If we wanted to grow faster, we could invest more in sales, but that would depress our margins. So we try to really balance, sales investment, top line growth and a little margin expansion through time. That's how we have built kind of the model at FLEETCOR. What I'd say is 2021 is going to look quite odd given the 2020 calendarization. So Q1, we're still growing over Q1 of 2020, which was pre-pandemic. And the growth in '20 in Q2 is going to look amazing, right? But it's going to be off of a very low comp. And so to get to that kind of normalized level, I would say it's going to be end of year going into 2022, we'd be back to kind of "kind of that normalized type of metrics."

Is there any assumption at that point, late this year, early 2022 about the state of the economy or fuel prices or FX?

Yes. I'd say, we do need to get back to what we said in terms of our guidance, right? So if we're going to exit 2021, where we think we're going to have to recover about 2/3 of where we're at in terms of customer softness today. And I think in the last quarter, we reported some 6% or so in terms of client softness. So I'd say wait and see how that goes. But if we hit that trajectory, we'll feel pretty good heading into 2022.

In the past few years, FLEETCOR has broadened its capital allocation priorities by purchasing between $800 million to $1 billion of stock annually on occasion, diversifying beyond your historic focus on growth-oriented acquisitions. Given the current price of fleet stock compared to the valuation of the businesses in your acquisition pipeline, are you more inclined to buy back your own stock or make acquisitions?

I would say, David, our philosophy has not changed. So acquisitions of attractive properties is always our first port of call for capital. And the reason is that we buy things that we believe we can grow and get synergies from 4 years to come, right? They're platforms for future growth, whether it takes us into a new geography, a new segment, a different product line or allows us to cross-sell to our base, whatever it is, it's not a one-and-done scenario. That said, stock buybacks when our stock is trading at the right level, and we don't have anything imminent that's going to close, right, we will look for those opportunities, provides a onetime step down in terms of the share count so it's not quite as attractive as something that can grow in the future. So that's my second choice. And obviously, at these types of interest rates, delevering, I'll do, but it's not -- it's my third -- my far third choice.

What's the status of the lawsuit filed by the FTC against FLEETCOR? And do you see this being a drawn out court case? Or is there potential to settle this?

Yes. I can't comment too much on that other than to say it continues. We do expect to resolve the matter one way or another by the end of the year. But I really can't provide any further color on it.

Got it. Can you update us on business trends with your U.K. fuel card business, AllStar, there was a shift in that business, I think, to go entirely to shift to chip card a couple, 3 years ago from mag stripe, where are you with AllStar from a growth perspective through COVID? And what might that business look like coming out in that late 2021, early '22 framework, you've talked about when you might be back to your historic growth algorithm for FLEETCOR overall?

Yes. The business has held up pretty well, all things considered. Obviously, the shutdowns in Europe, particularly in Q2, Q3 were quite difficult. The more recent shutdowns are having some effect, but nowhere near the impact they had before. So the nature of the shutdowns are quite different this time around. The AllStar business does have a lot of government as well as larger fleets in the mix. And so yes, they were hit pretty hard through COVID, but they've come back in a good way. And so in terms of that business, that's another one where this Roger acquisition can really help. So we have a very strong position there in the U.K. with a lot of large, midsized and small businesses. And so cross-selling into that base, we think is a very, very attractive Beyond Fuel initiative that then turns into a corporate payments sale.

Likewise in the U.S., you've been pursuing a Beyond strategy as well with some of your highest credit quality fleets. Where do you stand with that? The latest, I think Ron talked about was kind of a focus on the maintenance, opening up some procurement for maintenance, for example, construction, but kind of where are you in that journey toward kind of building out a Beyond strategy for highest credit quality fuel card customers?

So in the U.S., our Beyond Fuel strategy started with opening up fuel cards to purchase other things. And our focus is really in the construction vertical, where we would allow drivers to buy supplies so they can complete their jobs and not have to go back to the office. Having run that for a year or 2, we start to then analyze the per card usage on a per client basis. And what we found is that the fleets, let's say, you had 10 fuel cards. Only 1 or 2 of those cards would actually then be unable to buy anything else. And so we interviewed people and what we found is that people said, look, I like the controls of the fuel card for my drivers. I don't want them to be able to buy anything else. But I want to leverage my relationship with you, my credit, et cetera, and I'll buy the supplies myself, and whether that be an operations manager or an office manager or the business owner. It was 1 or 2 cars out of the mix that they were using. So what we said is, okay, let's then go to market and call this our companion card. So you have a control account. And now I'll give you a companion card that you can use for broader business purchasing by a centralized resource. And I'd say, David, it was going fine. But when COVID hit, we really had to pull that back. And the reason is that when you have a card that's open to buy anything, I need to, one, give you a fairly sizable credit line and by sheer definition, it doesn't have all of the controls. So it's easy for me to measure velocity of a fuel card. I know where you're driving, I know what kind of vehicle you have, if you've refueled more than once a week, we're going to have a problem. I'm going to have to sit down and talk. When you have a central purchasing card, you're buying supplies. It's hard for me to know when to say no. And so when we had to pare down those sales, we pulled back. We are open again for people with, again, that have really good credit. But I'd say that our Beyond Fuel strategy is completely shifting now to Roger. And it's because not only am I going to capture the central purchases that you make for your building supplies, I want to capture everything you buy. And so I'm going to go to market and say, look, you have our fuel card I'm going to give you a bill pay solution to handle all of your outbound payments to vendors. And by the way, I can still give you that companion card if you want it, and you can use that companion card to pay any of your vendors you want for a small fee. And so we think that kind of 3-dimensional relationship will be sticky and sell pretty well.

Can you give us some perspective as to where spreads are now for the Fuelman card versus where they've been historically? And how should we think about spreads going forward, given the fuel price environment that we're in today, for example, the big increase in the price of oil were over $60 a barrel right now. What are you seeing in terms of spreads in Fuelman as a result?

Yes. I mean we had some pretty historically high spreads in 2020 in the early half there. In terms of going into this year, as we exited 2020, things were kind of more normalized, to your point. Oil's ticked up and the retail prices have gone up. Generally, you'll see a little bit of compression in those margins in a rising fuel environment. And so where we get the benefits of higher fuel prices, you get a little bit of compression in the fuel margin.

If we could shift over to European fuel card, you signed some business a few years ago in Europe, I believe it was with the Shell a kind of smaller fleet card, where do you stand more broadly in building out your TAM in Europe? And I think at the time you signed Shell to the smaller fleet contract I think Ron said that there was -- that was only about 10% of the total TAM with Shell at the time, I think, about $100 million TAM, small fuel card versus $1 billion is what Shell spends overall. Is there any opportunity to build on the opportunity you have with Shell? And any thoughts about the other big oils in Europe outsourcing?

Yes. So we're always open to opportunities. In Europe, a lot of the majors do go direct to clients for larger -- of larger fleets. So they'll sell directly to the large fleets because they don't have as much credit exposure, the sales are fairly efficient, right? I don't have to build up a whole lot of service capabilities because it's not that many clients because they're all really big. And then as you go further down market, off times, what they do is they either sell off the portfolio like they did with us with Shell or they'll sign up resellers. And so let the resellers market the fuel card products and deal with all the small customer credit, onboarding and service, et cetera. And we have those relationships in the U.K. and in Russia and Michelin in the continent. And with a couple of other oils as well, we have these types of reseller relationships. So given our small business focus and our preference, where possible, to go direct to client, not just be a processor. We're happy playing in that reseller mode, but we're always looking at opportunities. And if an attractive processing deal comes up, we'll certainly be in the mix.

What about the U.S. market for fuel cards? I mean are there any of the majors that are still doing this internally that might potentially outsource over the next few years? Or is kind of the U.S. kind of major fuel card market mostly mature?

Yes. I'm not sure if any -- I got to be honest, I don't know any of the majors that would have an internal program anymore. So I'd say it's kind of played the game, so to speak. But keeping in mind that as you move further down market, even here in the U.S. that the small business market is 50% and when you look at my sales of small fleets, it's all against general-purpose credit cards. It's small business cards and house accounts that people -- that we're selling against. And so I still think there's plenty of runway in that down market segment.

Just shifting to the Corporate Payments business. Your account payables automation business, the core business has been pretty resilient ex travel. How should we think about the growth of that business in 2021? And which verticals offer you the greatest opportunity for growth within accounts payable automation?

Yes. So accounts payable automation now means some different things. And so we started in there with our acquisition of Nvoicepay, which would be our mid-market enterprise solution. And now with the acquisition of Roger, we have a small business, AP Automation Solution. And so I'd say the first thing is we think the small business opportunities unbelievably large, right, millions and millions of potential clients. And today, I've seen estimates where it's low single digit, I mean, low single digit penetration. And so we think there's unbelievable runway there for us and everyone else in the market. So that's incredibly exciting. In terms of our more enterprise level business. We have a couple of verticals that were pretty strong, and we still like a lot. So construction, media, health care, et cetera. So I think we're going to continue to push in those areas because once you can build the ecosystem, David, it just gets easier to sell. It's easier to sell and you get happier and you get more penetration of the AP file because I keep enrolling more and more vendors that are specific for that vertical. And so I like to go and play deep in -- get way deeper in those verticals where I have ERP connections and integrations. I've got the vendor database. I've got a great referenceable client base so for all those reasons, I like to double down. It doesn't mean we're not looking at other things, but we think there's still lots of runway where we're playing today.

Got it. Well, Charles, thanks so much for being with us here today. Greatly appreciate your time and insights. And look forward to speaking to you again soon.

Thanks, David. Look forward to doing this in person.

Likewise.