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

Hi. Thanks, everyone, for joining. This is the FLEETCOR session on day 3 of the JPMorgan Technology Conference, and my name is Tien-Tsin Huang. I cover the payments and IT services sector at JPMorgan. Really happy to have Charles Freund with us virtually, of course, and we're going to do a fireside chat, and we're taking questions from the Ask a Question portal as well. So if you have any questions, definitely ask it there. I always like to see questions come in. But Charles, thank you for joining us.

Thanks, Tien-Tsin. A pleasure being with you.

It's great to see you virtually. We've always started a lot of these sessions with the obligatory macro recovery question, so I'm not going to get you out of here without asking that upfront. So if you wouldn't mind, just to catch everybody up, Charles, on what you're seeing, how healthy are your clients, your customers. If you want to maybe walk around the world, I know you touch a lot of the parts of the world, that would be great.

Sure. So in terms of, when we say, macro, I think we're specific to COVID recovery. Yes, I'd say the business held up well through the pandemic. Our client retention holds about 93%, and our credit performance has been really, really good, barring one terrible outcome in Q1 of last year. But overall, good retention and good credit performance. Same-store sales, which is a measurement of clients with activity a year ago in the same quarter, and then this year's quarter, we look at measuring that. It's down about 6% year-on-year, and that's been stable for now 2 quarters, has improved significantly. So at the height of the pandemic in Q2 of last year, it was circa 17% down. So it has recovered some, but it has a ways to go yet. Generally, that metric runs fairly flat, maybe 1% plus or minus. So we do have room still to recover. And I'd say in our U.S. business, we run about 6 -- that's 16 -- 6% soft, 70% or something of our revenues in the U.S., and so that metric gets weighted pretty heavily there. The U.K. has actually done pretty well in terms of recovery, even despite the lockdown, so the nature of that lockdown is a bit different than what we experienced in the first set of lockdowns, which allowed a lot of commercial activity to continue. Australia and New Zealand have performed very well, so they've recovered quickly as they dealt with the pandemic in a pretty harsh way, but saw good results and has allowed them to really return to work pretty much across the board. And our Russia business has done quite well in terms of recovery. Western Europe is a bit of a mixed bag, depending on which country you're in. They've done -- some have done a bit better with vaccines and handling it than others. And so I'd say there, we continue to see some weakness. And in our Brazil business, which is predominantly a toll business that generates revenue through subscriptions, haven't seen so much of a revenue impact, but the sales have been a bit soft. And so a bunch of the sales that we generate on our toll products are through stores, kiosks and malls and banks. And as those have been shut down due to the pandemic, we see that sales activity has dropped off. The good news is that the sales at toll booths themselves, so for people who are out on the road and traveling, our sales at the toll booths continues to be steady. So the demand for the product is still there. It's just we can't reach the people in the malls at the moment. But once they reopen, we expect that to recover quickly.

Now that's a helpful walk through. We have gotten questions, and I know it's since past, but around the gas shortage in the U.S., Charles. Did that have any implications for you? I know it was a relatively short period, but pretty unique as well.

Yes. So interestingly enough, we actually tracked the daily volume through that week, saw no real material impact on our trucking segment. In our small business fueling segment, particularly for what we call our Fuelman proprietary product, we actually saw volumes spike in the early part of the week as fleets anticipated a disruption. And they went and they fueled up as much as they could in the first couple of days. And then on the latter half of the week, we did see a bit of a degradation. But everything has since returned, so no material impact on the volumes. We saw a slight compression in terms of fuel margins for a week. Wholesale spikes in retail has to respond. But again, it responded pretty quickly. And so in the main, I'd say it's probably a net positive in that volumes held. And retail prices, again, you set at a slightly higher level in certain places.

Interesting. As everyone is thinking about the recovery, you're at the minus 6%, so you've got some room to improve or get back to normal, the flat to slightly positive. How should we track that, Charles? How are you tracking that? I know your mix of business varies. You skew more towards SME. So what factors should we be watching?

Yes. So in terms of that recovery, as we think through the year, we're anticipating kind of getting 2/3 of that back by the time we exit this year to go from kind of 6% to circa 2%. And as some of the businesses, call it, like the SMB kind of fuel car business, we view that as kind of a steady uptick as things continue to -- geographies open, business activity continues to improve. In other cases, we're starting to see some pretty dramatic -- not quite step function, but pretty close to it, movement, particularly in domestic airlines where there's a lot of pent-up consumer demand to get back on planes. And so as we provide lodging solutions to airline crews as well as provide distressed passengers with emergency lodging, if they need it, that domestic travel is going to boost that business quite quickly. On the flip side, the international travel piece is recovering more slowly. And so a lot of that's driven by either business travel, which is slow to recover, or as borders haven't quite fully reopened and people want to travel, they can't quite get to all the places they want to get to. So it is going to be mixed a little bit different by fuel, kind of a steady uptick through time, lodging kind of step function. And then Brazil, again, because it's subscription based, not really seeing that impact from a revenue perspective too much, albeit when parking volumes and fuel volumes come back after they've stopped the lockdown, we should see some -- I mean, a lot of boost there.

You mentioned on the retention side, things have been quite good. I think your credit picture has improved quite a bit as well, Charles, and rates are rising as well. So given those dynamics, how are you thinking about as CFO risk management pricing at this point in the cycle? Does that influence any of your thinking here?

Yes. I'd say we're extremely focused on our organic growth profile and boosting sales in any way we can that's responsible. And so when COVID hit, we got very, very tight with our credit policy, and we've continued to loosen. And I'd say, in the last quarter, we're probably about where we were pre-pandemic, except in corporate payments where we limited the size of certain clients to avoid any big blow-ups. That said, we're now looking for other opportunities to get more creative and further open credit because of the performance that we've seen. And even with the new sales that we've been generating, so our sales have recovered quite quickly, even with those new sales, as we track delinquency trends, we're still very, very optimistic that our credit performance will continue to be quite good, which allows us then to be more flexible going forward. So we're looking at those opportunities in all lines of business, corporate payments included.

Okay. Good. So that's something to watch for sure. Then you mentioned the sales picture a little bit. I know in total, you mentioned it's still selling through well at the toll side. Things haven't opened up in Brazil. But just broadly speaking, new sales, I know Ron has always trained us to focus hard on selling. I think you're spending about $200 million on sales and marketing annually now. So talk to us about, with demand improving, what kind of sales performance are you expecting from here in terms of the new sales?

Yes. So our year-over-year sales performance has been quite good. It's going to look pretty ridiculous as easy comps come up, but even sequentially. And even versus 2019, our plan this year is to be up some 10% to 15% versus 2019, which is a focus of adding more products, more sales, more sale investment, et cetera. And so what I'd tell you is that digital sales are going very, very well, particularly in our fuel card business. We've started to do more, what we call, top of the funnel marketing as opposed to just trying to force a fuel card sales, engaging people higher in the sales cycle. And we're seeing kind of, call it, 10% of our North America fuel sales are now being driven by that type of marketing, which is a technique that we can now take to other businesses. We've created the right type of infrastructure in terms of measurement, the right platforms, the reengagement at different points of the sales cycle. All of this is backed by, what we call them, a machine learning advertising bidding platform. So we actually tied our back-end revenue, attrition, credit performance so we can identify who are the right types of clients to target. All of that then goes back in. And when those types of clients pop up on Google in a search, then we dynamically bid. If they're really attractive, we bid high. If they're not very attractive, we don't bid very much. And so it allows us to really optimize that model. And so that's -- obviously, the more data that comes in, the better it does. So it's performing quite, quite well right now. Also corporate payments is doing quite well in terms of sales, both direct and with some of our distribution partnerships, and the full AP has gone gangbusters. And so that's up double digits versus last year, and that line of business has actually grown organically 180% versus 2019. So that's all good news. In terms of areas where we think there's still some opportunity, field-based sales are still coming back as more people get more and more requests for travel for permission from people. So as people will see us, we're going to get back on the road and go meet with them. The Brazil stores, as we've -- have been shot, but the tolls booths doing well, and so that should recover. And again, the credit opening further should give us more opportunity to sell more.

Yes. No, that makes sense. I mean I've always asked this in the past, I'll ask them again. Just thinking about, as we see those booking figures come in, I mean, it really translates more into 2022 revenue, right? It doesn't necessarily convert that quickly. Is that still the case, Charles?

It depends on the business. And so an example would be in the fuel card business, which is mostly small business focused, we can ramp up a client within a matter of weeks. And so they can go from being booked and sold, get the application approved, get the cards in their hands within a week, and they're up in fueling within -- by the end of the month. For enterprise level clients, it can take several months, even up to 6 months if they're really large and distributed. The area where it can lag some is on some of the corporate payments sales, whether they require more integration or if they require us to enroll the vendors into our virtual card database. And so that can take multiple months to materialize. Tolls tend to be more immediate. I sell a toll, I start billing you for that tag fairly straight away. In some cases, we'll provide promotions that may delay that 3 months for a year or something. But in the main, you're generating revenue pretty quickly on the tolls product. And then the FX business is somewhere in between, right? And so if someone comes on and they start trading with us, we can immediately start making money. There's not a lot of integration-type work to do in that regard, so that can ramp a little bit faster than the other parts of corporate payments.

Okay. Good to know. So It's a blend, it sounds like. But yes, as we see that, obviously, I would imagine the visibility in the backlog. The better it is, the better it will be for 2022.

Yes. We're very, very excited about the exit trajectory of this year, assuming that COVID recovery comes back as we hope.

Okay. Good because I've always assumed that the ROI that you get is the same, so I know it's always been very, very powerful. How about on the -- before we get out of the fleet business, just a Beyond Fuel strategy now. I don't know if the pandemic has changed the company's thinking around Beyond Fuel and where you want to double down or maybe scale back. Can you give us an update there? What products excite you the most?

Sure. So as you mentioned, our Beyond Fuel strategy has shifted a bit over time. We started with opening fuel cards up for other types of spend. So go to a construction company and instead of only buying fuel, allow them to buy some supplies that they may need on a job, whether it's paint for the house or nails for carpenters or whatever it might be. We did that for a couple of years, and then we analyzed the spend. We found that most of the nonfuel spend at those companies was on one single card. And so what we found is that people want their drivers to be locked down, but they want to leverage the credit line to buy other types of supplies, but only either the business owner or an operations manager or some type of central purchasing person was using that card. And so what we did was we shifted our focus, and we then offered what we call the companion card. So I'm going to send you 10 fuel cars, but I can offer you 1 single companion for centralized purchasing, whether it be travel, supplies, whatever it may be for your small business. Now with our acquisition of Roger, which we've now rebranded, it's Corpay One, that's now the new Beyond Fuel strategy, and Corpay One isn't just bill pay, but it's bill pay combined with that companion card, which allows you -- gives you a line of credit to then go buy things on the card or pay your other bills using that card. So what I mean by that is you may have a vendor who doesn't accept credit cards as payment or virtual cards as payment, they want checks. Well, you can opt using our companion card to pay them with your line of credit for a fee, of course, and then we'll pay the vendor on the other end. And then combining that with either the existing fuel cards that you have or if you're a new prospect, we can offer controlled fuel cards. So it's kind of a 3-in-1 solution that will be offered with 1 unified user interface that we think is a pretty compelling proposition for small businesses to handle their payments, while also leveraging their lines of credit where they need it.

Yes. So I think this is -- that was one of my questions on the Corpay side, but just on that topic alone, just thinking about -- you go back to your back book and sell this. Or is this more for prospective clients? What's the strategy to go after that?

It's both. And so we're going direct out to the marketplace with the offer. We're also working with accounting firms and other distribution partners to bring it off to the market. And then we're going to be leveraging sales REIT and account management resources within both fuel and our lodging business to cross sell to our base of small business clients and even merchants, where it makes sense. Think of like a hotel operator who pays lots of different bills, they can -- you also use this type of product.

Got it. So just with the cross-selling, I know the rebranding it to Corpay is a big deal, I'm sure. You guys took a lot of time and effort into making that right. So unifying these 4 brands and changing the sales motion around that, I mean, how hard is that going to be? How quickly can we see some of the results, Charles? I'm just trying to understand. It seems like a big change for everyone, but I'm sure if you compensate properly, you'll get the results. But just trying to level set expectations here.

Yes. It is a big change. It's ongoing. So we had to sell it internally first to make sure the different groups were comfortable, particularly on sales and account management side. Everyone is very, very excited. They can see the synergies of working with their colleagues across platforms and such, so very excited in that regard. We have launched. There will be a transition from a customer experience perspective. We don't want to slam everything over. So right now, we're notifying people as we go. We're making this transition. The website will start to look different, et cetera. The idea over time is that we'll -- we're only going to go to market as Corpay One -- sorry, not Corpay One, I'm sorry, Corpay. And that in doing so, we'll have an opportunity to consolidate all of our marketing and advertising spend. So when you think about supporting a brand and creating awareness and advertising and such, particularly around digital advertising, all the Google spend and such that we have, we'll be able to do that under one umbrella, have a higher level of conversation. So Instead of getting into my individual products, I want to talk more about what's the customer's pain points, what are you trying to solve for and then bring you to a different solution or a full bundled solution, if that's appropriate for you. So it's basically raising the level of the conversation with a unified brand that we can then tailor a solution or set for your specific needs. So a little bit more up funnel. But again, instead of spending Google for advertising 4 different ways, it's all now with 1, which we think is pretty interesting. From a customer experience perspective, again, I don't have to introduce new brands and explain them. We've also unified our API layer. So if you're a large customer and you want all the solutions, I can plug in your ERP into this one layer one time, and you get all the capabilities, similarly when we're partnering with ERP partners. Again, integrate with just this layer, and now you have FX, commercial cards and bill pay solutions that you can bring.

Got it. Okay. That's very clear. Just thinking about corporate payment and you just mentioned it with the 3 or 4 pieces, just thinking across virtual card, AP and FX, where do you see the most potential for acceleration beyond the recovery? I mean, where do you think there's the most -- what's -- will it be pent-up demand or just secular or structural demand across those 3?

Yes. I mean, what we're seeing is mostly in the full AP offering, a lot of demand for outsourcing, simplifying solutions, get rid of paper, et cetera, et cetera. And that full AP solution brings virtual card and FX with it, right? So when I take over your full AP file, I'm going to pay some vendors my check. I'm going to pay some by CH. I'm going to pay some with virtual cards. And I'm going to pay your international vendors. So full AP is actually an umbrella for the other services that we provide. So we're actually reorienting our virtual card sales force to lead more with the full AP solution. And not every customer is ready to take on that level of change, and so some of them want just a virtual card solution to eliminate checks where possible. And that's fine. We will down sell to that. But we're really leading more with that full AP product and reorientating the sales force accordingly.

So Charles, on that, the full AP, the automation, it's getting a lot of attention in the investment community. We had even Visa and Mastercard talking about how important that sector is for them, as network and virtual card beneficiaries, of course. But how does FLEETCOR as a company differentiate against the pure-plays? I think some would call them more modern digital or digital-first players that are out there. What's your response to that? I'm guessing scale is part of it, but would love to hear you answer it more completely.

Yes. So if you look at Nvoicepay, which is a recognized leader by G2 and et cetera, we bought an industry-leading platform. Similarly, with Roger, it is completely modern. I think it has only been around for several years, right? So it's built in the cloud. I mean, it is -- both of those platforms are incredibly modern. The beautiful thing is they plug into well-established infrastructure in terms of commercial card, virtual card processing, our extensive vendor database, our broad FX capabilities through Cambridge, et cetera. So we're bringing market-leading technology and interfaces and UIs with that robust kind of back-end infrastructure, scale, stability and experience. So it's kind of -- in my mind, it's kind of the best of both worlds in that specific area of full AP automation.

Yes, yes. I mean, yes, plug into Comdata. And of course, that business has been around quite some time. I'd say the size is definitely -- shouldn't be underestimated. Anything else to close out here on the corporate payment side that I might have missed?

No, I think that's good, other than just the AFEX acquisition. That is now within days to weeks confirmed. And so we're super excited to get that across the goal line, which will make us one of the largest nonbank FX providers in the world. We think that extends our geographic footprint, but provides incredible synergy opportunities for this year and next.

In complementary, obviously, to Cambridge's you guys have talked about, and your guidance does not include the impact of that acquisition. Correct?

Not yet.

Not yet, so we'll look forward to the update there. So I do want to quickly talk about tolling. You already talked about how it's highly subscription-based. You talked about the sales motion. I think we understand that piece now. But just back to the Beyond Toll piece, and same thing, post-pandemic, I know going to drive-thrus at the McDonald's and do-it-yourself parking, I'm sure, is going to be in more demand. So should we expect FLEETCOR to lean harder into those things at this point? Or is it too early to consider that, Charles?

Yes, I'd say we are leaning hard into Beyond Toll. So we're spending circa $14 million in capital this year to build out our Beyond Toll network, and it's really focused predominantly on our fuel network build-out. So today, we're in some 600 to 700 gas stations in the country, but our midterm plan is to be in about 5,500, which will be predominantly in urban centers with some arteries on the highways connecting those. And so as we're building that out, it takes time for technology to put in, in terms of reading the tags. We have license plate verification and other things for anti-fraud and such. So making sure that, that technology, it gets installed properly and such. It's going to take a couple of years, but we think that opportunity has multiples higher than tolling. And it's really a function of the size of the transaction and the merchant discount rates that we can get for that product. If you think of -- go to a fast food restaurant, you're going to get a meal. That transaction size is not very large, and the MDR is not very big. And so going on out fueling, the transaction side is going to be 5x as large, and the MDR is going to be a bit better. And so we're really doubling down on that and focusing our network build on that product.

In the CapEx and the investment, you mentioned $14 million. What's required here? Is it -- I mean, you have some presence already and you guys know the fueling world so well. Is it really putting up whatever beacons, I don't know if the right term, is to light these things up?

That's exactly right. So you go to a gas station and you need to put in the antenna to read the tag. There's video monitors, right, so we can see the license plate. There's actually an interactive screen, so you can see, Welcome, Tien-Tsin. Shall we fill you up, et cetera." And so all of this is to create, again, a touchless experience where you can get fueling, feel like you belong, et cetera, not have to give your card or interact with the attendant. And all of that is done, but it requires installation of that equipment. And so as we go through building that out across 5,500 gas stations, it adds up. And so what we want to do is be prudent in that regard, right? We want to deploy capital and build the network, market to all the tags in that surrounding area and get them to use and then continue to build the network. We don't want to build it all and hope they come, right? So it's a step through, go to this urban area, build density, create a sales and marketing engine around it, great. Once you have enough following, move to the next.

Yes. No, look, it seems very compelling. I would imagine that a lot of the tech is pretty consistent with what you're using on the tolls anyway. So yes, no, we're excited to learn more about that. That's why I want to make sure I ask you on that. And I guess just -- we got a little under 10 minutes here. Just on the lodging side, I know that has had some pretty heavy impact from the pandemic, but I remember you and Ron talking about moving more to an online sort of digital distribution model as well. So has that helped? Can you see or feel some change in the way people behave and engage on the lodging side?

Yes. That business kind of splits, and so we have what we call workforce lodging, which tend to be more blue-collar workers driving around, doing work on, say, cutting down trees, environmental cleanup, railroad, maintenance, et cetera. And so that business has actually recovered okay, similar to kind of the fuel business. I'd say the other side of that business is what we call the airline lodging business, where we serve crews and distressed passengers. That was hit incredibly hard by COVID. We acquired 2 of the 3 leading providers in that space. They serve airlines. We did it just before COVID on one and turning COVID on the other. And so what I'd tell you there is that volume continues to be depressed by 50% circa. However, we're starting to see a real rebound in domestic travel, and so we're rather excited by the potential for a rapid rebound in the second half in that business. In terms of the interaction, as you mentioned, we do have an online booking portal. We've tied that in with the GDS system. So now you can book in our network and get the best rates available. You can book at any hotel you want. If it's in my network, you get a great rate. If it's not, you don't get a great rate, but you have the convenience. Now you can manage all of your lodging travel in a single portal. You can also book airline travel. Our payment products is accepted with Uber and such. So we have created a broader service offering, so you can really consolidate. It's not limited just to our lodging network any longer. And so we're obviously -- airline travel as such is still depressed and -- but we're positioned really well for both the airline recovery and broader workforce.

Yes. And the incremental margins, I would imagine, on this business are very high. So as it comes back, this should -- we'll definitely see that, I think, from a flow-through standpoint. I did get -- a couple of people now is asking what I should be asking you to ask for an update on gift. I know probably, you're not going to announce anything here, but what about just the -- I know you've done an acquisition on the gift side. The world is moving more digital there. Are there better growth prospects now that we've shifted to digital?

Yes. So our acquisition was a fairly small company, but they had a digital gift card capability. So again, kind of leapfrog or laying into that just before the pandemic as well, which is helpful. And so what we did there is shifting from physical gift cards, which are generally sold at the point of sale in a mall or an independent shop. And now through your website, you can give gift cards, gift them to the people, they come and redeem them at the website. And so we've been cross-selling that to our base, which has certainly helped offset the impact of COVID. That business obviously felt it hard on a physical gift card side. We saw a big uptick in terms of digital card sales, and so that was super helpful. And so now, as things start to recover, we're again kind of the best of both worlds. Digital sales, I think it will continue. right? People get used to that buying that way, so that will continue. But for those that want to go out shop, they'll have that opportunity very quickly very soon. The other thing we've done is modified our distribution some. So now we're working with B2B sales organizations that will package our gift cards up as incentive programs for salespeople, service people, account managers, use them as spiffs or whatever it may be. So it's a rewards type of program for businesses, and so that's actually helping us distribute cards on behalf of our partners where we make incremental money as well.

I see. So yes, I mean, it feels like you're sort of -- pandemic or COVID-related or not, it feels like with the digital mix, it's in a better spot from a structural standpoint.

Absolutely.

Just -- because I know that's considered a lower growth business for you, but you do have quite a bit of scale. Well, 3 minutes left, Charles, I can't let you go without asking something on M&A. And I know AFEX is pending appetite to do deals. There seems to be a lot more consolidation. We've seen some interesting deals in the space, especially in corporate payments. We've been pretty busy on the capital-raising front, too. So what's going on with M&A? Is there a greater sense of urgency now?

Yes. I mean, we've -- as you know, we've raised some money recently, so did a refi and got some more liquidity. So I'd say that there's always a robust pipeline at FLEETCOR. We've got 2 or 3 things that are pretty near term, one of which would be of a similar type of size to AFEX in terms of purchase price. These are also leaning more towards traditional FLEETCOR deals where it's more of a bolt-on. We understand what the company is. We see the synergy opportunities super clearly. We have high conviction in terms of the return that we can get. That said, the broader pipeline across more of the midterm is it does cut across all -- or the vast majority of our product lines, including corporate payments. Those deals span from some larger deals that they could -- I wouldn't call them transformational, but larger deals into more small capability builds. And I'd say our philosophy hasn't really changed. We continue to look for opportunities to find things that we can bolt on and be accretive, but also look to build capability in the corporate payments arena, an area where we'll look at just about anything that comes across the desk. But we have to have incredible conviction if we're going to go through something that's very large and dilutive. We generally don't want to put all our eggs in one basket in that regard.

Right. So dilution is acceptable if it's -- obviously fits the broader strategy, and I would imagine if it enhances growth.

Absolutely.

That you'll do it. No, I'm glad to hear that because it does seem like the market is very infatuated with digital modern assets and a little bit more growth. This is it. This is great. We'll let you go, Charles, I know we're out of time, and we covered a lot of ground. So I don't know if there's anything we're missing here, but we'll let you get on with your day. Thank you so much for the time. Please send my best to Ron for me.

Well, thank you, Tien-Tsin. I appreciate it.

Great to see you.

Good to see you, too. Thanks.