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

Okay. Great. Welcome, everyone. Thank you for joining us here at the 25th Annual Credit Suisse Technology Conference. We're very happy to be joined by FLEETCOR this morning. We have Charles Freund with us. He is the CFO of the company. We're going to walk through some pre-scripted Q&A, but we're going to make sure we leave some time at the end for audience questions. So there's a microphone here in the front that you could step up to if you'd like to ask a question of Charles and the team. So with that, Charles, thank you so much for being with us today.

Thanks for having me, Tim. Pleasure being here.

All right. Excellent. So I think we're going to kick it off actually with some exciting stuff around just an update on some of your more recent trends. So we're 2 months into the quarter. Could you just talk a little bit about how things are looking or trending maybe across some of your core business segments?

Yes. Tim, I'd say that things are going basically in line with expectations. So we provided our guide at the end of last quarter. And so far, so good. Obviously, with the emergence of the new variant, we're keeping an eye on things. But thus far, we haven't seen anything that would take us off track of what we provided a month or so ago.

Okay. All right. That's a good way to start things off. Maybe we could just talk a little bit about the recovery potential across your business. Different aspects of the business have recovered at different rates. Maybe we could talk about what's exciting for 2022. Maybe we could start with a little bit sort of the travel segment, whether it be lodging or the corporate payments.

Sure. So as we look forward into 2022, I'd just start and say that yes, we have seen some recovery this year. There are some areas that we see further opportunity. Let me just start in the fuel space. So here in North America, I'd say in over-the-road trucking, we've had a sluggish recovery in the large fleet segment, primarily due to the driver shortage. So as the industry continues to recover there, we should see volumes and some revenue improve. In our international fuel segment, we have a few more white collar workers, and they haven't all returned to work yet, right? And so as offices eventually reopen in Europe and people start commuting again, we should see some benefit there. Shifting over to more travel. We have seen a rebound in our lodging space, but the employment shortage here -- kind of the labor shortage in North America has held back the workforce recovery a little bit. So there's still more upside there. And certainly, the international air travel segment, so domestic airline, fine, and that's rebounded quite well and actually came back sooner than we thought in 2021. But the international has been pretty stubborn. And so until borders really fully reopen and that activity recovers, we still have opportunity there. And then in kind of the corporate payments space, we do have some clients that are in hospitality and travel-related types of industries. And so again, as we continue to see lockdowns around the world and such, there's going to be still a bit stubborn, but we view all of that as upside optionality for next year.

Great. Thank you, Charles. I think that was a great way to kick things off. We talked a little bit about near-term trends. We talked about recovery in various components of the business into 2022. Let's now move to an exciting area around corporate payments, which is clearly a big focus area for investors. Specifically, I wanted to start on your approach to SMB corporate payments. And clearly, you made the acquisition of Roger, rebranded Corpay One. And I think the market appreciated. You put out a quantitative or quantified a goal in terms of cross-sell, 10% to 20%. Maybe if you could just add some color and elaborate to that, please?

Sure. So this is really a convergence of strategies. So in fuel, we've been talking about our Beyond Fuel strategy for a couple of years. Initially, we started by just offering additional credit and kind of a general purpose credit card that people could use. It's really evolved now that our Beyond Fuel strategy is cross-selling a bill pay solution. Similarly, in corporate payments, we've talked about moving down market, taking our mid-market software and then bringing it down. And what we found was that reengineering that software, simplifying the workflows and all the screens didn't make a whole lot of sense, which led to our acquisition of Roger. And so that is a cloud-based, very, very new system, built just in the last 3 or 4 years; very, very few customers on it. And the whole idea is for us to take that bill pay solution, cross-sell it to a base of hundreds and hundreds of thousands of small business fuel customers. And we're starting here in the U.S., we're targeting about 100,000-150,000 that we're going to go after and try to convert 10% or 20% of those. Our initial approach was, hey, "I've got a bill pay solution, let me just cross-sell it." and we looked at that and said, is that really the way we want to go after this? And instead, what we said is, no. Let's take our time and actually revamp the platform a little. So not only do you get the bill pay solution, but you also see your card accounts on one single platform. And you have a credit line that you could use for your card accounts and for your bill pay. And so that unified customer experience and the ability to leverage your credit account with us, we think, will be an interesting differentiator and help kind of hook the clients into using the bill pay solution. So that approach has evolved and has required further development, which has delayed our cross-sell effort. But nonetheless, we are targeting 10% to 20% kind of conversion going into next year. So very, very excited about what that could entail. We estimate that the revenue potential there, if you look at it like a small business fuel card customer, by capturing all their other bill pay spend, it could be a 50% to kind of 100% revenue per customer uplift. So -- and beyond the revenue uplift, we also believe and I have seen in other businesses that if you have multiple solutions with a single client, it helps with retention. It's stickier. And so for those various reasons, obviously, we love the revenue, but also strategically, I think it'll position us quite well.

Okay. Excellent. So 10% to 20% goal in terms of the cross-sell, looking at a pie of -- or an opportunity of 100,000 to 150,000 of them. And you mentioned the 50% to 100% potential revenue uplift. Putting that all together, I know this might be a little bit of a tougher one, but how many points of growth do you think that could potentially add or how supportive to the growth algorithm could it be for the segment overall?

Yes. I'd say it's a bit early days. So we've done a very, very small pilot before we even finished the 2-in-1 platform and saw about 10% of the customers paid multiple bills using not just our fuel card bill but other bills using the platform. So I'd say it's a bit too early to tell. We like the opportunity. We think it's interesting, but I can't quite quantify it yet. And some of that is also around, who takes the product. So let me explain. In a trucking fleet, where fuel is 30% to 40% of their operating expenses, by capturing bill pay and getting other spend, it's not that much of an uplift. In other businesses where fuel is a very, very tiny component, and I run a bakery, but I have vans that deliver, fuel is a fairly small expense, but I spent a lot on materials and other things, utilities, whatever it may be. There, the uplift could be pretty dramatic. And so it really does depend on who adopts it. So what we want to do is run a few campaigns, see where we're getting the traction and then be able to quantify it.

Okay. Excellent. I think that's great context. And again, you gave some great numbers in terms of the cross-sell and the opportunities. So I'm sure the investment community appreciates that. So thank you. Let's talk a little bit about the 3 subsegments that you laid out in terms of the segment. So direct, cross-border and channel partners. Maybe just put some context around the sizing there, which I know you disclosed, and talked a little bit around how investors should think about the medium-term growth rates at each of those components.

Yes. So overall, our corporate payments is kind of a high teens or 20% type of grower. In those various categories or subsegments, our main focus is in direct, which would also include that FX business where we're going to clients and selling our solutions. The -- and those things will grow faster in terms of revenue than the partner reseller business. That business, we don't really sell a lot of new clients; some, but not a lot. It's not a big focus. They grow organically, right? They go out, and they sell clients. So they're growing organically, but the take rate there for us -- our keep rate is fairly low. And so they'll grow volumes at X percent, but the rate is half of what we might get or even less of what we would get direct. And those agreements are also tiered pricing. The faster they grow and the bigger they get, right, the rates that we keep continue to decline. So it's marginal. It's helpful to take the volume. I like the volume because I can negotiate with networks and do other things. But in terms of a revenue growth play, really, we're focused on the direct side.

Excellent. Okay. Charles, before we move on from corporate payments, I just want to touch briefly on for next year, for 2022, and you've talked about sort of the high teens guide. Also, there's the 75, call it, still not recovered or highly impacted customers within the corporate payments segment. How should we be thinking about the recovery of those into next year in terms of how much of that might be assumed in that high-teens guide?

Yes. So a lot of those clients are in industries that continue to be affected. So it's this hospitality, travel-related industries. And obviously, with the new variants and things that are emerging, we're cautious around including much recovery there. So for now, we're going to assume status quo and view that as potential upside.

Okay. Great. Okay. Let's move on to the fuel segment. So maybe we could just talk more at a high level around some of the puts and takes around growth, how we should think about that segment into 2022.

So the fuel segment is a growing business. It's doing quite well from a sales perspective. And so you've noticed our bookings are up quite a bit. A lot of that is in our domestic fuel business here in the U.S. where we've leveraged digital marketing to an extent we've never been able to before. And so I'd say organically from sales as well as good retention, that business is going to perform well. There are, as I mentioned, the areas around OTR with large fleets here and then some of the white-collar stuff in Europe, that's still a little sluggish because of COVID and the labor shortage, but nonetheless, a growing business.

Okay. Excellent. So you mentioned in the record sales. Maybe just put a little bit of context around that in terms of those new bookings, those new record sales, is part of that related to sales force investment? And also, when you say record, meaning you literally signed up more new business than you did during a year like 2019 pre-COVID and then also expectations for those new sales looking into next year, which I think are also pretty -- you're pretty optimistic about that as well.

Yes. So when we talk about sales, we are talking about annual recurring revenue, ARR, and it would be the highest quarter in the company's history. And two key areas where we saw great sales, obviously, the full AP solution, which we've called out numerous times, but the other areas would be around fuel with the digital selling and in our toll business in Brazil. So we've leveraged numerous channels there, and it's growing like a leaf. In terms of -- I'm sorry, second part of your question?

It was around next year. So you already have sort of surpassed the sales levels of pre-COVID, which is impressive. Should we think about that trend continuing next year in terms of yet another record year?

Yes. And so our objective each year is to grow sales slightly faster than kind of top line organic revenue. We always want to just keep pouring sales investment money in and generating a return in a profitable way. And so yes, I think we're looking at another 15%-20% over this year.

Okay. Excellent. In terms of the mix of the overall business, so the fuel segment, because other segments have grown slightly faster, the mix of the fuel segment has come down a little bit over time. Should we think about that continuing to happen? And it is kind of 1/3 of the business by 2025 a rough way to think about the mix of the fuel segment?

Yes. I'm not sure if the number that you just said is the right number. But yes, we continue to make investments in other areas, both from a sales investment perspective as well as M&A, that continue to diversify us from fuel. So I love the fuel business. It's a great business. We have very defensible moats. It's obviously a massive customer base that we can cross-sell into. So I like the business, but we are making investments in other places, to your point, to grow both organically and inorganically faster. And so by definition, the mix will shift over time.

Okay. Excellent. Okay. There's a few follow-ups we could come back to on fuel, but I want to make sure we save time at the end. So why don't we move to another topic that's exciting for investors, which is your digital sales strategy, which absolutely delivered strong performance in terms of adding some of those 50,000 new accounts. Maybe just put some context around what this digital sales strategy is and how it's been benefiting FLEETCOR.

Sure. So we embarked on this journey probably about 4 or 5 years ago. At the time, we were, like many companies, just bidding on Google Adwords and pick the word, set a price and leave it alone. What we did over time is, first, upgraded our technology stacks, put all the websites on the Adobe cloud content management system, took their demand gen piece, which was called Marketo before it was acquired, so we used that, and basically built the teams, data scientists, technologists, et cetera, to build this platform. And what's that allowed us to do is dynamic bidding based on the profile of clients that are showing up wherever they show up. So whether you're searching, you're on Facebook, you're on our website, whatever it may be; all of this is dynamically driven based on the profile of our existing customer base. So I go and look at hundreds of thousands of clients, I'd say who's attractive and how do they come to me, through which channel, what geography, what day of the week, did they apply; all these different parameters, hundreds of them. And I optimize and say, okay, based on the value that, that client represents to me, I'm going to either bid high or bid low to get their eyeballs. And so that's happening real time, and it's ever evolving. It's like AI, right? The more data I get, the more I feed it, the smarter I get in terms of my bidding strategy. And so that took us a couple of years to build that capability. And then just in the last, call it, a year or so, we've really embarked on other channels, social media with Facebook and LinkedIn, et cetera, and now even digital TV. So I'm not big on buying Super Bowl ads. But if I know that I can target someone that has the exact profile that I'm looking for and send a commercial to their screen, that I will do. And so we've been running these pilots, and it's been terrific. The beautiful thing about this digital approach is it's like turning a dial on your stereo. I just want the volume to go higher, great. I just turn the dial. So we had a campaign we did a couple of months ago where we said, "I'm going to give a couple of extra million dollars, go and see what happens." They turned up the dials, and the return on the incremental investment was the same as the original. So we saw no diminishing returns. And so I don't know what the top end of that is, but what I do know is it's at the moment scalable and I can turn the dials. Now in that, we don't want to turn them too fast that we degrade existing margin because even at a 60% net sales expense, every incremental dollar does cost you something in the current year's profitability. So we're always balancing that level of investment with our margins to make sure we keep it in balance.

Great. A follow-up on that. So you're going out, and you're digitally acquiring customers. Maybe just bring it to life for those of us who aren't operating in the business. Once you have that customer, what is the time frame and the process to get them from in the sort of sales or bookings category over to converting into revenue? Our understanding in generally is that in tolls, that can be pretty quick. In fuel, that can be relatively quick as well. And then maybe in corporate payments, it could be a little bit longer, a little bit more process or integration setup required. Is that fair? And maybe you could elaborate on that.

Sure. So one thing before I do that, I just want to make sure this digital platform that we're talking about in dynamic bidding, predominantly, is a North America fuel system. We're now building similar capability over in Europe, and we're also going to turn this U.S. engine on to our small business bill pay. So yes, I'm going to cross-sell to existing clients, but I'm also going to take this dynamic bidding platform and start to go direct to market with bill pay as I have that platform ready. On your question in terms of converting sales to revenue, yes. So digital, North America fuel converts very, very quickly, within a couple of weeks, predominantly because they're small businesses. It's not a big implementation cycle. They get credit approved. They get their cards in a couple of weeks. They start using them. They're off. Tolls is a similar thing, very, very immediate. Within corporate payments, it does vary. So if you're on a full AP or virtual cards type of solution, yes, I've got to get you enrolled. In many cases, I'm going to be integrated with your ERP already. If I'm not, that's going to require work. If I am, there may still be some configuration we have to go through. Then there's the vendor enrollment process. In most cases, I have a lot of vendors because the ecosystems that I've built, they may not have all of your vendors, so there may be opportunities. So we run campaigns to call on vendors and convert them to virtual card acceptance. And so that can take time, where I might book a client and say, this client, it may be worth $20,000 to me for virtual card, but it's going to take me 6, 8, 12 months maybe to really fully ramp from signing a contract to getting that thing done. So it does vary. In corporate payments, though, about half of our business is in cross-border FX. And so that can be fairly immediate. So when we have sales there, we recognize them pretty quickly, particularly if it's a trade that has to happen tomorrow. An example would be I'm going to buy a company for a couple million -- for a couple of hundred million dollars in Brazil and need to convert the currency to reals. Okay, it's a spot trade. It's a big thing, and it happens. Other things are a bit more recurring, but even there, it's not so much vendor enrollment. I'm using my -- our existing bank relationships and such, so we can turn it on pretty quickly and get to revenue pretty fast. So it does vary. Corporate payments is not just one holistic thing. It varies within the subsegments.

Great. Okay. We'll move to the next topic around the tolls segment. So last quarter, you reached 6 million tags, which is an impressive absolute number and a nice base from which to monetize from. So whether it just be toll or Beyond Toll. Maybe you could talk a little bit about, one, the achievement of that 6 million tags number, what that means. And then maybe more importantly, when should investors start to think about that Beyond Toll revenue opportunity starting to become much more meaningful and material?

Sure. So yes, when we bought the business, we had just over 4 million tag holders. Now it's north of 6 million. So that is real organic growth there. And what I'd tell you is that it's come through numerous channels. So we sell at toll booths, call it a point of sale. You need it now, you can have it now. We sell through retail outlets. We sell digitally online. We sell in malls, a kiosk. We sell through vending machines. So we have very, very good sales coverage around the country. And all those channels are up and contributing, which is super helpful. In terms then of what's that opportunity look like on Beyond Toll, the big, big game here is in the fuel space. Why? It's recurring. The size of the transactions are meaningful. It's great if you can go to McDonald's and spend $6-$7 for your meal, but the MDR on that transaction. But if you go and fuel your vehicle, particularly at these prices today, and it's $70-$80 and I get a sizable MDR from the oil company, that's real revenue and it's recurring because people need to continue to fuel their vehicles. And I'd say Brazil is -- because of the biodiesel and such, they're, I think, a little less focused on the EV side. So nonetheless, we view that opportunity as pretty sizable. So we've started to build out that network. I give you some context that at the start of this year, we had 500 gas stations around the country, predominantly in and around Sao Paulo. Our goal is to get that to about 5,000 to 6,000 sites. This year, when we exit the year, we'll have over 1,000. So we'll double. Now we're going through our budget planning, CapEx allocations as such to decide how fast do we want to go next year? Do I want to add 2,000, 1,000? We have the capability. We've leveraged third parties. And so getting the technology in place. It's just a matter of pacing that vis-a-vis cost and return. And I don't want to go too fast and not be able to market behind it because the whole idea is, you sign up gas stations, then you market tag holders. You don't want to go to 6 million tag holders and tell them, hey, I got this fueling network. Where is it? It's in Sao Paulo. Yes, but I live in Rio. Sorry, I probably shouldn't have told you that today, right? So you build it, you market around it. You build it further, you market around it. That's kind of the game plan. So this we view as kind of a 3 -- call it, circa 3-year type of build. We've already -- like I said, we will double the number of gas stations by the end of the year, 3-year plan to get to 5,000 to 6,000. The transactions we've seen already double year-to-date, so versus last year, some of that is, right, some COVID recovery, but obviously, the footprint that we're building, we're seeing the volume come through. Now relative to the size of the toll, right, it's still -- to your point, it's not meaningful yet. But as we build that network out, we think in 2 to 3 years, it could be pretty substantial.

Great. I want to -- we have plenty more questions, but I want to pause briefly for the audience to see if anyone would like to hop in and ask a question of Charles. If you'd like to, you can just step up to the microphone. Go, please.

[Technical Difficulty]

I'll just rephrase the question briefly just for those who might have not heard. In terms of bill pay, I think the question was, who are you winning share from? Is it organic growth? Where is it coming from?

Yes. Predominantly, this is still green space. So as you get into bigger clients -- let me make sure we're clear. We have 2 separate bill pay platforms, one is designed for mid-market and one is designed for the small business market. In the mid-market space, we are pretty heavy in construction, automotive, some hospitality, but that's -- that thing, if you move -- it's probably target around $50 million of revenue to, call it, $750 million, maybe $1 billion of revenue. Again, above $1 billion. It's a different competitive set, and banks will actually do some work. But in that kind of mid-market space, a couple of hundred million, still a lot of white space. And so people have staked out areas in certain verticals, and we tend to be pretty good in the construction and health care vertical. Others play in, say, media or real estate, and it's all around that ecosystem. It's having the ERP integrations. It's having the sales force that knows the space. It's having the vendors enrolled, so I can penetrate the AP file and monetize the spend in that bill pay. So a lot of that is still white space. We get into the small business, I mean, it's -- you don't see anybody else yet. And we haven't really pushed that button in terms of selling hard because we've still been tweaking the platform to make sure, again, that I can have card accounts with bill pay and offer a credit line that I think different -- will differentiate us. Not so much against the competition because it's not takeaways, but it's just motivating someone to try it. And then once you try it and you like it, now you're hooked.

Can I have a follow-up?

Yes. Sure. We have a couple of minutes. Yes.

[indiscernible] [fuel or you currently more time still get to the SMB bill pay digital value ].

Yes. And so today, we use digital across all of our businesses, but we're further advanced in the fuel category here in North America. And our idea is to take that platform, the technology, the processes, the people and shift their focus, not to turn away from fuel, but just to add bill pay for small businesses into that mix. And so we'll be launching those campaigns later this quarter and early next year.

Great. Thank you for the questions. Anyone else from the audience? If not, we have one that we could wrap up with here. All right. Great, Charles. We didn't get to quite everything, but that's okay, sort of part for the course. Why don't we at least just wrap it up with thoughts on 2022. So you've talked about 20% sales growth, $0.50 of incremental accretion. Of course, there's fuel price impacts always. Maybe you could just talk a little bit about that top line outlook and then also how we should think about margin expansion in 2022.

Sure. So as you mentioned, we did a few acquisitions. So we'll have grow over benefits there in the first half. The macro environment from a fuel price perspective is setting up pretty well. Keep in mind that, that does affect our AR balances, so that can have an effect on interest and bad debt kind of rates. Keeping an eye on FX. So the Brazil real has weakened. I mean the dollar has basically strengthened against a bunch of currencies, but that one affects us a bit. So keep an eye on that. But yes, organic sales, good. Retention continues to be quite good. So we're setting up for a nice, nice year. I'd say a couple of things related to margin. There is still some normalization of credit performance and T&E, right? When my sales people go back out on the road, I actually have to pay for the hotels and trips like this and things. So that's going to come back. Credit was incredibly good performance in the first half of this year. That's going to normalize a little bit. So -- and then these acquisitions that we've done, they are great businesses, but they don't quite operate at our margins. And why? Because they don't necessarily -- are not in the SMB space. So we acquired an FX provider, and we acquired some of the lodging that serves insurance companies. And so the pricing leverage there, not as high. And therefore, it doesn't flow down to the bottom line. And so the EBITDA margins for next year we're going to need to normalize to reflect those acquisitions. But otherwise, setting up to be another record year.

Great, Charles. I think that's a great place to wrap it up. Thank you for that context on 2022. I just want to say on behalf of everyone at Credit Suisse, I want to thank you and the full FLEETCOR team for being with us here at our 25th annual conference. So thank you again.

Thanks, Tim.