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

[Audio Gap] With us today and, Jim -- who leads FLEETCOR's Brazil business; as well as Jim Eglseder on the IR side. Thanks to both of you for joining us today. Greatly appreciate it. Armando, I think the last time I saw you was in -- at the end of 2019, down at the Atlanta headquarters. It seems like about a decade ago, for what it's worth. But regardless, why don't we jump right in here?

Could you give us your view on the Brazil market, in general, the sort of longer-term growth potential for the business and for FLEETCOR in Brazil? And also, if you can weave in any type of pandemic-related shifts that you're seeing in the market that might impact the business over time.

Yes. Thanks. Well, first of all, thanks for having me here. It's a pleasure to be here and talk a little bit about Brazil and our businesses. Regarding the Brazilian market after the pandemic, I'm quite confident that it's for the better, especially because we are in a convenience payment business mostly, in Brazil, which is with Sem Parar, with the automatic payment systems for tolls, fuel, et cetera. So the convenience element to it. And the health-related, the no-touch, no-contact, whatsoever, payment. I think it's something that we can see this behavior linger. They're not wanting or being happy of avoiding on touching things or too much contact. So we see a lingering effect. And it's just -- should linger enough, in my view, that will create habit. So people will be used to new forms of payments for new use cases, and that's exactly what can benefit our business in Brazil. So I'm quite confident that it's for the better. And regarding the short term, I mean, I think, all of people following a little bit Brazil, which -- we were hit by a second wave. I think things are -- the good news is that things are getting better as we speak. So it's a big improvement in the last 30 days. I would say that we are probably a few months behind the U.S. and U.K. for better days. So -- but it's coming. The vaccination, it's progressing. Obviously, not as fast as people could hope, but it's a good light, we can see the end of the tunnel clearly here.

Okay. That's good to hear. I wanted to start with the core tolls business. And can you elaborate on the sort of backdrop for that business, the growth runway, in particular, sort of government's appetite to build more toll roads? And sort of what is the long-term cost fix there?

I think it's a very good question, especially because we -- our service, it grew beyond the toll-centric-only motivation for acquisition and for maintaining clients for a few years. It's one key element. I will answer the toll-related, but it's a key element because since we acquire, we'll be in a quest really to evolve the business to way more use cases, way more locations beyond toll. And it's not only to get new clients. It's not only to get -- obviously, it's 4 new clients from new segments, quite important there. It's a -- we'll talk about it shortly. But for the core business, it's becoming not adjacent but central to the value proposition. So we are the dominant force in the toll paying -- automatic payments business in Brazil. We remain this. And -- but what we are different is that it's way more use cases. We have thousands of locations for parking, et cetera, et cetera, et cetera. And coming back to toll-only view. I think the long-term for more toll roads in Brazil, it's absolutely mandatory. I would say the country doesn't have an alternative. I mean the government and the states and the federal government would not have the money, simply put, to build more roads. And more importantly than even building, maintaining properly those roads that they build over time. So I would say the country doesn't have a plan B for having more tolls over time. So I'd -- but it's -- but to execute on that mandate, it takes time because it's -- a lot of roads are federal, but a lot of roads are state-owned. So it's case by case. So it's a process that it's demanding, but I would see that there's no other way around it, really.

Interesting. And so, another interesting point you just made was that the -- maybe these 2 businesses shouldn't be conceived separately, meaning beyond tolls and core tolls if the value proposition is starting to really -- some synergies in the value proposition there. And we're definitely going to get to the beyond tolls products because those are very fascinating. What about the -- how do you -- what about the distribution model for getting the tags out in this kind of core tolls environment? Yes. I know it's been interesting, I'm sure, through the pandemic. And what are your -- what are the opportunities to kind of expand distribution?

It is -- first of all, just a brief history in the last 2 or 3 or maybe 4 years, also since acquisition, we expanded the distribution channels quite a bit. We were very centrally dependent on our kiosks on malls and gas stations on the roads, et cetera. So our own kiosk to sell our tags and our services. And since that, it became quite different. Now we have retail like Walmarts of this world, drug stores. We have banks that actually distribute some of our -- and now we have one new deal that we also talk about later on. But we had way more web, we have telesales, we have so many other alternatives to selling. And I would say, I'm just mentioning this because it's -- I would say, it's halfway done. We created, and we are still not at full potential on how those additional channels that we developed. So we think we have a long runway to keep pushing web, tele, retail and obviously, the existing malls, the kiosks, and the on-the-road, the on-the-toll booth sales as well that we brought that back from extinction. It was, back in the day, 10, 20 years ago, something that was important and then went away for several reasons. And in the last 12 to 18 months, we just brought it back to life, and it's a massive channel again. And it's just as recently as the last 12 months, and now accounts for maybe 1/3 of the sales. So it's quite exciting what we are doing in retail. Retail, we have now thousands and thousands of locations with our tags. And it's still a long way to go, both to have more locations and to sell more at each location. So I think we have a long way to keep pushing those additional channels. And on the partner channels, that's one front that we are scratching the surface, I would say, with being POC with this -- with one company or the other, but there are a lot of things to get done as well. And I will only make one additional comment on the additional runway on channels. We -- I know we announced public that we signed with Volkswagen, VW, here in Brazil, we signed with Nissan. And then we are signing with others. So the manufacturers now are on one channel. So the cars, the new cars, they are leaving the plant. When you buy a new car, it comes with a tag already. With just easy 2, 3 steps process, you activate that tag. So it's also a new channel that it's, I would say, halfway done. It's on the way to become something relevant as well.

Very interesting. Very interesting. And right now, in terms of the revenue model, again, this is just the tolls piece. I think it's a subscription-type of a model. Is there an evolution that could happen there with the revenue model where you could actually start earning on the spend as well rather than just on the subscription?

For the standard toll automatic payment, I don't think so that we will fall related with the toll itself because of regulation. Remember that the long term -- that the concessions at 20, 30 years in the future, every -- a new contract sign, and those contracts, they don't -- if they don't have already included the MDR part of it or that element, it's simply not allowed by the concession rules. However, what we can and are doing is that there are other things that we are beginning to do that is beyond the regular tag. That's beyond the toll, that's beyond the tag. So we are POC-ing, we are piloting this exciting initiative to have a very similar experience, but with an app-based solution. And that, it doesn't fall in the same umbrella as the tags, and that we can explore MDR. So we're beginning to break the mold there to have MDRs from the concessions out of this additional adjacent technology so that can be -- we can get this from the hedges. And as those hedges become relevant, maybe becomes relevant, but the new technologies on the toll roads, which are not as at only tags, that has an opportunity.

Sure. Interesting.

And one additional element to it is that remember there are subscription. Almost all of those subscriptions, they are not exclusive for toll. So meaning you buy because you are a toll user, but the subscription gives you the right to use elsewhere beyond the tolls. So as we have more beyond tolls and those beyond tolls usages have MDRs and have additional revenue, naturally -- it's a core toll user so they buy because of toll, but as they use other use cases, we get MDR on top of that. So it's kind of related. The client is a toll user, but they end up using some outside the tolls and that carries MDRs.

That's a great segue to talking about the beyond tolls business, which is really, I think, a success story in terms of just internal innovation and evolving this product. So give us an update on -- and maybe an overview and an update of sort of where you're playing the channels you're playing and how they're progressing in the beyond tolls side of things.

Yes. It's -- yes, we're very excited. I think it's been quite a ride in the last 2 or 3 years to develop this initiative. And there are 2 angles that we can discuss this topic. One angle is from the network, and then from the clients. From the network, we've been developed since the last 4 years, more and more nontoll use cases and nontoll use locations. I mean, McDonald's, the drive-throughs, way more fuel locations, and we have way, way, way more parking locations. So having the additional nontoll network was essential to build the framework for this additional business to work. And that's been our ongoing effort, a multiyear effort. And right now, we have -- I mean, we used to have hundreds of parking locations, mainly airports and big malls. Now we have thousands of locations. So it's quite a big difference. Even on parking, that is a category that we were already present for a long time. Now we changed the game in quantity. So we are present in a lot of the smaller locations, and also now in office buildings and even in residential condos, so we are moving into those locations. Okay. You can think of -- you live your condo, you already use the tag to get in and out access, and then you get to the office and you have your tag in and out, and if you go out to the mall for a lunch or for dinner, you have -- so all those additional elements, it's growing. It's all beyond toll. And once we have those locations, we can -- what I just mentioned, we serve better the toll-centric clients that are already acquired because of the toll. So we get more revenue, we get more stickiness because of this. So that's one side effect. And the other one is that we would get clients that would not buy our service just because of the toll-centric offer. So -- but now you can move the needle on their decision-making, and they buy. They buy also because of toll, but they wouldn't buy only because of toll. Now they buy because there are so many locations for parking, so many locations for drive-thru, so many locations for fuel. So it becomes like -- if you have in your office, it's almost mandatory -- becomes mandatory. If you have in your condo, it also becomes almost mandatory to use the tags. So it's -- so all of the sudden, we are having more stickiness on existing clients, and getting a whole new segment of clients that wouldn't buy our offer, that didn't buy us for the last 10 or 15 years. Because we are very well-known in the market in Brazil. It's -- everybody heard of us. Everybody heard our offer 10, 20 times. So the idea is that what will make them change after hearing 20 times and not buying the tags. It's because now it's different. Now you can fuel. Now you can do this, you can do that. So we are seeing a big, big, big demand on those additional plans that play to that segment. So we talk to the clients to the market differently. Now we play, if you're an urban user or if you are a guy that only goes on the roads now and then, twice a year, for vacation. Now we have a product for you because you can use on a daily base or weekly basis in town, in city, et cetera. So now we are talking to those people through digital and through all the medias possible. And now we are getting a lot of sales. I mean, the last 12 months, during the pandemic itself, it becomes a huge hit. I mean there was a point that we were selling 1/3 or half of our sales on new products. So it's a massive interest because people are more at home. So they were not traveling as much. But now with a broader value proposition, beyond toll value proposition, expanded value proposition, all of a sudden, you can move the needle [indiscernible]. So we were hitting record sales during the pandemic, historic all-time record sales, which is incredible. And I think it's a lot to do with having the expansion of the network, the expansion of use case and have planned in communication that cater exactly to that different public.

And on the expansion of the network, talk about the process and the pipeline. Are there merchants coming to you now and categories coming to you saying, we want to be a part of this? Or is it more of a push, more of a pull? Do you have a sales force that's engaged, kind of knocking on doors? How do you expand the network?

I think it's a very good question. And what we see on the day-to-day is that once you get the first one in one category -- let's say, McDonald's, we've got McDonald's. All of a sudden, everybody wants it. So -- but to win the first one in a new category, there's some work to get it done. Once you get it, all the others want it as well. So we signed McDonald's, and it was a huge hit. And then all of the sudden, the #2 guy called Habib's, which is a middle eastern fast food chain in Brazil, very large, they also want it. And then we got another one, Pizza Hut. And then -- so we are just having a line of additional players there. We had -- on gas station, we had only Shell and then BR, the biggest network, also wanted. So we signed with BR. And now we are signing with other smaller gas station networks as well in Brazil. So I think it's a chain reaction of sorts. It was the same with having a little bit on a different, not on the usage, but on the sales channel like when once we got Nissan -- it was the first contract we signed to get the tags installed. Once we got Nissan and it was a hit, it was -- they would advertise this as a cool, new, modern thing. So everybody wanted as well. So it's kind of moving in that direction. So I see a lot of demand on existing categories like gas stations or even drive-throughs, we still have a long way to go, but for new things as well. We see insurance companies looking for us, say, "Look, why don't you tag along insurance option for your clients?" It can be even on the usage base. You can say, "Look, the guy can buy for a week because he's going away for the weekend. So you can buy insurance for the weekend or for the week or for the month." So a lot of interest from other players with other products. So I would say there's a reasonable runway there. And when we think of the new technologies that we are -- that I mentioned on the toll for the app-based solution that has a very similar experience. That give us also a whole new avenue for growth growing the network and use case because you are not, no pun intended, tagged to the car. If you are on the phone, all of a sudden, it's very easy to go to the convenience store. So all of a sudden, you can go to other things that you do, but you exit the car and then you go do something and come back. So there's already interest on those additional layer of network expansion that can be adjacent to the car, but not necessarily in-the-car usage. So that's a long runway right there.

That's great. And sounds like network effects are forming in real time as we look at it. That's terrific. Well, this is probably a good time to ask about your recent CAIXA announcement, partnership announcement. That seemed like a very compelling new channel. Help us understand how that works and what the opportunity with that partner and maybe that channel could be.

It is a massive opportunity. With CAIXA, everything is massive. I mean they have dozens of thousands of locations. That's their network. It's -- they are -- because it's a government-owned and they are the primary bank for the government actually to be present for citizens everywhere. They are everywhere. So even when it's a smaller town, they are there. So if we can get it right, and I believe all the elements are there, it can be really big. Obviously, for anything with a bank of this size, it takes a decent setup or ramp up, et cetera. But I think in a couple of years, it can be massive. And to me, there's one element that it's behind. I mean there -- CAIXA is a big bank, there are other big banks in Brazil. But CAIXA, historically, didn't explore their channels, their existing network, much more than existing and core products that they had. So it's a brand-new thing, a brand-new strategy that they are building. And they are very serious about it. They are signing different deals to explore the network in a massively different -- so they want to unlock a value for CAIXA that was dormant because they wouldn't sell anything else besides the core government-based products. So it's -- I think we -- it's a strategic decision that is moving at light speed at CAIXA. So we want to be there, catch that wave. And I think it can be really, really interesting. And it shows a different -- when I mentioned partners, I mean, partners -- CAIXA is one partner. Obviously, it's a massive one. But there are others that could potentially -- I mean, there are insurance companies are looking for us. There are other banks, there are smaller banks, there are digital banks, there are all sorts of partnerships that can serve as additional channels to us. But CAIXA can be massively relevant in a couple of years.

Is this the beginning of a new distribution channel that isn't only limited to CAIXA? Could the bank distribution channel be a new direction for you? Or is this sort of -- this is the partner, you -- kind of the horse you picked in the market, and it's the best sort of bank channel partner, and that's kind of that for that?

I would say that for a massive bank, we should stick to this partner. And -- but there are certainly other players with different flavors that we can certainly keep pushing, the digital banks, the start-ups, et cetera, fintechs. So there are other players that can become relevant over time. But I'd say, for the traditional big bank perspective, it's most likely that we'll stick with the one that we just signed. So that seems to make sense to concentrate the efforts to make it work to the fullest potential.

And this one may be for both, you, Armando, and Jim, which is to say, do you have any thoughts on kind of the timing of when CAIXA might become productive for you? I understand it's a big organization, a big integration. Probably the answer is no comment, but I just thought I'd throw it out there.

Jim, do you want to take that one? I would just...

Jim's saying -- yes. You're on mute, Jim.

Yes. And we'll come back with you at a later day. Like -- it's going to take some time to set it up. And at some point, down the road, we'll share more about it.

Had to give it a shot. I appreciate that.

And one comment on CAIXA that I didn't say yet is that it's not only for toll -- for tags, it's a deal for almost all of the products that we have in our portfolio. So all the B2B products, the fuel cars, the fuel RFIDs, the transit vouchers, there's a lot of other elements to this. So it can really leverage the whole portfolio of businesses that we have in Brazil. We talk more about the same product, the tags, because it's the biggest business, but it's -- all the other elements of the business in Brazil are present in that deal with CAIXA, which is very exciting.

We only have 2 or 3 minutes left here, but I wanted to ask you about the -- is there something unique about the Brazil market in terms of the solutions that are really resonating? And I know when you bought Sem Parar it was already a pretty big dominant player on the road toll side of things. Is there an opportunity to expand your business into other Latin American markets? Or are there different dynamics in those markets that would preclude you having that opportunity?

I would say that the uniqueness is that the Brazilian market developed this one technology, one network for tolls in the whole country. And that's not usual. In a lot of -- think about the U.S., you have one solution down in Florida, not in New York and not in California. And they may not talk to each other, at least at first, maybe eventually. But it's not a national product. It's not a cross-border product. And Brazil just became this, a unique solution that it becomes great to have synergies, to have really scale, and to get it done. I don't see any other country adjacent to us with a big enough market that can say, "Look, we are putting all the efforts to go to next." And remember, sometimes moving to the next country, is just as big as giving focus to 1 or 2 states in Brazil. For example, if you go to the GDP of a couple of states in the South, it's similar to the neighbors. Sometimes, it's not very natural to have as big an opportunity and as ready because of the development of one solution to the whole country to move to other. But I think we keep looking because those things evolve. And eventually, with the experience that we have, if there is a right initial elements there present, I think, we'll be active on the opportunity.

Terrific. I think we're just about out of time here. So I wanted to -- Armando, thank you so much for your time today. It was super insightful. And Jim, thanks for your time as well.

A pleasure.

And have a great day. Thanks, again.

Thank you. Bye-bye.

Bye-bye.