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

So next up, I'm pleased to welcome back Charles Freund. He's the Chief Financial Officer at FLEETCOR. Charles has been the CFO since 2020. Prior to that, he led various positions over nearly 20 years across the company. Wow. So we're excited to have him. He's obviously got a lot to learn from.

But maybe we start with some of the external factors that are out there in the macro, obviously, the unfortunate events in Ukraine. Maybe you could just talk about FLEETCOR's exposure in those markets.

Sure, Sanjay. Thanks for having me today. And so FLEETCOR operates a small fuel card business in Russia. It's about or was about 3% of our global revenue prior to the devaluation of the ruble. That business runs fairly autonomously. And so the network is specific to that region with a little bit crossing the border to Ukraine, Lithuania and Poland. The vast majority is Russia. We have about 600 employees in that region. It does operate on its own IT network, its own proprietary processing system. The Russian data privacy laws are quite strict, and it requires us to really keep that business segmented and isolate it from our other businesses. It continues to operate in line with all sanctions issued thus far. And so we're staying in compliance and keeping close to that -- how those things evolve. The devaluation of the ruble over the last week, it's been about 20%, 25% versus what we had budgeted. And so based on, call it, a $90 million business, that does have an impact. On the flip side of that, the -- in response to the devaluation, the Central Bank of Russia did increase its interest rates from 9.5% to 20%. And so we have cash in country there to the tune of about $90 million, 70% that is customer deposits where they prepay or provide a security deposit. The remaining is cash that we've accumulated through earnings. And so that money is now earning 20% per annum. So that is a bit of an offset. But yes, we continue to operate. There is a very minute portion of our cross-border FX business, about 0.5% of transactions would somehow touch either Russia or Belarus. And so we basically turned them off. Okay. So no money flowing in or out of the country on our rails.

So as we think about the business inside of Russia, has it been impacted yet? Or is it still sort of running?

No, we've checked in with the management team, and it's running. The volumes are stable. What we've seen is a small -- I wouldn't say, small but call it, 20% decline in sales activity for new accounts as obviously, folks are distracted in the region...

Okay. All right. And as we think about sort of any offsetting expenses, understanding the rate, I mean, do you guys anticipate making some adjustments there? Or should we just assume, to the extent that there are impacts on a go-forward basis, does that just sort of flow down to the bottom line?

Yes. And so the revenue impact that the ruble devaluation is slightly offset by expense savings that also correspond. Some of their expenses do come in through U.S. dollars as they license things like Salesforce.com, technology and other things like that. So not all of it gets devalued, but yes, there will be a bit of an offset there. We anticipate that we'll be operating that business basically in isolation and letting it run. In checking in with the management team, we are also re-rating the credit portfolio there. We have about 50% of clients where we take prepaid deposits. The other 50%, we do issue credit. Sometimes we get security deposits in regard to that, but nonetheless, there is some credit exposure. And in conjunction with that, they're re-rating the portfolio to see who would be affected by the border shutdowns. So if you're in an import/export business, it's probably not going to go very well for you. And so we're going to pull back those credit lines. And so they're monitoring that actively now. Very similar to the response we have with COVID.

Got it. Okay. Great. Well, that's a great rundown of that region so that people can level-set sort of their expectations. Maybe turning to brighter things.

I would -- just, Sanjay, sorry to mention, but as we're on kind of macroeconomic kind of issues, two other things I just bring the attention. The Brazilian real, so that government has seen that region has seen some inflation. They've also increased their interest rates, and the real is now running about 7% or so higher than what we included in our guidance. And then obviously, the conflict has had rippled through to oil prices. And so with oil prices being as high as they are, we budgeted $3.40 for U.S. retail fuel prices in our guidance. It's been running $3.70 up until about a week or so ago, and that was before the invasion. And so with the recent spikes of oil prices, we anticipate that will flow through to retail within the next week or so. And so that will be a benefit for our company. Every $0.10 of retail fuel prices translates to about $6 million of incremental revenue. Now that, of course, does also affect AR balances for customers and a little bit of bad debt. But in the main, a lot of it flows through.

Okay. Perfect. Yes. So then maybe we move to some more high-level questions on the momentum that the business is seeing. New sales booking growth remained strong in the fourth quarter, along with 6% same-store sales growth. Maybe you could talk about those -- what was driving the strong growth, how we think it might flow through to revenues?

Sure. And so the sales growth driven by a couple of factors. When fuel cards, massive sales growth, largely due to our digital sales investment. So we've been very active across all digital channels, the direct search engines, social media and such. And that has created almost a doubling of sales for our North America fuel business. So that's part of it. The other part is very successful sales of our full AP offerings, both in the mid-market and small business segments, otherwise known as bill pay, but a simple way to say it. And so that's been up quite a bit. And then our Brazil operations. So we have a very large tolling business in Brazil over the last 3 years. We've been developing new channels there, all of which are really humming. And so they used to sell at kiosks and malls and things as people -- for foot traffic. We're now selling in retail stores, automated ATM machines at the toll plazas themselves. Digital channels there as well, all of which are really performing quite, quite well. On the same-store sales of 6%, a large portion of that is actually driven in our lodging business where we provide lodging services for major airlines to handle both their crews, as they're traveling, as well as distressed passengers, if a flight gets canceled and those folks need overnight accommodations. That portion of the business, it domestically has come roaring back. As COVID lifts, flights are -- people are traveling, crews need to stay. And unfortunately, due to mechanical and other issues, sometimes passengers get stranded. So that has come roaring back on the domestic side. On the international side, it hasn't yet but we anticipate some of that in this coming year.

So as we think about those sales sort of flowing into revenues, like what -- how should we think about the correlation there?

Yes. And so in fuel and tolls and mostly in lodging, what we call kind of our expense management solutions where employees are traveling around, right, spending company money, those things tend to flow pretty quickly. They're quick to implement. You distribute the purchasing cars. People start using them in networks, and then revenue starts to flow. In the bill pay situation, we monetize bill pay by taking a portion of your payments and running them through our rails of either virtual card or cross-border FX, right? So if you're paying by wire, you're going to pay by ACH, they may charge a small fee. But that's not where the money is. The money is putting it on a virtual card or across our FX rails. And it sometimes, it takes time to get your vendors to either accept virtual card as a payment or, for me, just to get your AP file fully loaded on. So those things can take a couple of months if you're in a small business sale. In the mid-market, it can actually take up to a year to get fully ramped. I take your AP file. I check it against my vendors, I penetrate your file partially. And then I have to go and actually campaign your vendors to see who will then accept. And then I fully rate your file, and that's when I've realized all the sales that I anticipated.

Okay. So there's a little bit of a lag. So I guess you guys are ramping up investment spend in 2020 because there's lots of opportunity for growth. Could you just talk about the ROIs relative to historical norms? And how we should think about operating leverage for the business on a go-forward basis?

Sure. And so we're anticipating our sales to grow just north of 20% this year. And that's on sales and marketing investment growing circa 18%. So if your sales are growing faster than your investment is growing, you're getting good productivity. Now that doesn't mean that all our new investments have higher ROIs, but it does mean that the things that we have invested in that have good ROIs and that are continuing to scale allows us then a little breathing room to try new things. And whether that's new campaigns, new types of sales channels, whatever that may be, we're constantly testing and pushing the envelope of where is the next opportunity. When you're bringing on new teams, it takes time for them to scale. So generally, the new investments do not have the same ROI as the base of investment. But on balance, I would say that we're -- our productivity is actually increasing ever so slightly.

And how much of the step-up is like new investments you're making?

I'd say it's a few points. Okay. So of the 18% growth that we're putting in. The majority of that is going to be more scaling of known things, which is how you get the productivity that we just mentioned. But there are a portion of new things, some of which will work and some of which will not.

Yes, and that's a good question. So like -- or brings up a good question. So how quickly do you pull the plug on stuff that doesn't work?

We're pretty maniacal about investment, margins and other things. And so we grow profitably. We intend to grow profitably and not decline margin over time. And so yes, we will ship it pivot and shift as we need to.

So I guess -- obviously, we've gone through quite a bit through the pandemic, and there's been many fintechs that have seen an acceleration of their business as a result. I'm curious sort of how you -- if you look across your businesses and think about the pandemic impact, has everything been a net positive? Or have there been pluses and minuses?

Certainly, pluses and minuses. In certain verticals, think hospitality and travel that may use our virtual cards or our FX solutions, they still haven't fully recovered. In terms of even certain geographies, our business in Australia and New Zealand, which has a lot of import/export and uses a lot of our FX systems, they're still way down versus where they were pre-pandemic. On the flip side, there are pockets that have really benefited. So our full AP solutions, which basically automates your AP department and require less people and less pushing a paperless contact, we've seen great demand. And that business has grown 50% year-over-year. Also in Brazil, the RFID solution, which you can use in tolls, you can use in parking, you can use at McDonald's or other fast food places, that contactless technology. So again, I'm not interacting with the people as much. I'm not exchanging cash with people, not handling a credit card carrying germs, that had a lot of demand through the pandemic as well. So it was a balance. But I'd say in general, we're still -- see a few pockets of softness that could recover as we come fully out of the pandemic.

And I guess the other byproduct of the pandemic has been a number of fintechs were sort of enabled and funded to do things around your businesses, right? I'm just curious how you feel like it's impacted FLEETCOR and whether or not you think there's been any diminution of your value proposition?

No, it's interesting. I mean, in fact, we work with a lot of the fintechs and enabled that all right? And so we run a virtual card network of hundreds and hundreds of thousands of merchants all around the world and an FX platform that can settle in over 100 countries around the world. And so we actually provide that, those utilities other fintechs. The reason is it's just the corporate payments or B2B space is so enormous, particularly when you move down market, that we're all going after this enormous opportunity. And so enabling others is actually helpful to us.

Got it. I guess when we think about another consequence of the pandemic as well as this period, we're in right now is supply chain and labor issues. How do you see it impacting your business segments? And any signs of moderation in terms of the pressures?

Yes, a couple of places. So on the supply chain issue, I'd say that's where we felt some pain in Australia because that import/export dynamic. And a little bit in some of our plastic card-based businesses, I can give you an example like gift cards where we're fulfilling on the behalf of retailers. And so some of the supply chain, particularly if there anything is chip-enabled, there's been a lot of backlog. But we anticipated some of that to happen forward ordering. So it hasn't really affected the business because we've responded pretty quickly. In terms of the labor, I'd say, in the over-the-road trucking space, particularly in the large fleet space, they can't hire enough people to put all their trucks out on the road. And so that is a bit of an overhang that we still continue to see today, and I think that's going to take some time to go through. In the workforce lodging space, this is an area where people use our lodging services where they have crews out and about on the roads. I think it could be truck drivers. It could be a railroad crew. It could be folks who travel around and cut down trees after storms. It could be all kinds of folks that are moving along the highways and staying in hotels along the highways. We've also seen a shortage of labor in those types of services. And that actually slowed down our sales last year. And there, we're actually seeing it come back. And so that's starting to lift up, and we're actually projecting our workforce lodging sales to be up quite a bit this year.

That's great. So beyond strategy, obviously, it's beyond fuel, beyond toll. You guys get lots of questions about it. I'm just curious, maybe we can sort of level set where we are with the progress that's been made there and how you see the opportunity sort of unfolding going forward?

This may beyond our time frame for today's meeting but it's a never-ending journey, right? We're always looking for other opportunities. So let me say, in the fuel card space, we're looking at enhanced preventative maintenance services to add on, which is a simple and easy, easy way to go. But our beyond strategy, let me just take it up a level. It's 2 things. It's either providing different products and services to the same clients, or it's evolving on existing product to better serve a segment that we're really not in today. It's either of those 2 things. And so an example would be in fuel cards, yes, I can bring some maintenance and add ons and some other things. But really, I want to take those customers and turn them into Bill Pay customers over time. So I'm going to add a new product still to that small business fuel card space. A different example would be in our toll business where it's mostly tolls, parking and then we evolved into fast food. Now we're even looking at things like providing reselling auto insurance. There's 5 million consumer tags in the country, and they attach them to their vehicle. Well, that kind of buying power, right? Can I leverage that and provide other types of services? Absolutely. So we look at all those types of things. In Brazil, the other thing we've been pushing on now for 2 years and continue that we've doubled the size of our fuel network, so you can pull into a gas station, never open your window. It knows who you are, you just signal to fill it up, and it enables the pump, and the attendant will fill your tank. No interaction other than that. And so we went from 600 stations to 1,200 stations with a plan to double yet again this year. Our hope is to build that up to about 5,000 to 6,000 stations in the next 2 years. And so we think that's a huge opportunity. So if you think about how much money it costs to go through a toll and what you can make on that versus how much it cost to fill up your tank, particularly oil prices today, it just cost me $100 last week, right? It's real money. And so we think the opportunity there is quite big. But in every line of business, even gift cards, which aren't core to our business, we're thinking about other services we can provide. So an example there is I provide plastic cards. Well, what if I provide those digitally, and I bring them to the Apple e-wallet. Well, it's one thing to do it on a Visa or Mastercard, just create protocols. I have to create the protocol and leverage that to hundreds of retailers, but I have -- and they pay me for that digital provisioning. It's good for them. It's good for the consumers. It creates a better relationship and I make more money. But it's just the adding an evolution of our services to do more for our clients. That is what Beyond is all about.

Right. So it seems like we're in early innings, and there's still use cases being developed all the time. Got it. All right, cool. So I guess the other thing that pandemic has done is shift to digital and the move to the cloud. And you're expecting some big increases in digital sales and you're making investments to move to the cloud. Maybe you could just talk about the progress on those 2 fronts.

Sure. So on the digital sales environment, we've been mostly focused on fuel cards and using digital as a way to sell to very, very small clients in a cost-effective way. And so it's super important for us to be able to create that kind of efficiency in selling when you're way down market. We're looking now to leverage that capability in other things. So take that same system that you've built and apply it to lodging for small business, apply it to Bill Pay for small business. So utilizing it more as a utility. So certainly, lots of opportunity on that front. In terms of the move to the cloud, FLEETCOR has acquired lots of businesses over time. We've developed our own platforms. We've enhanced our acquired platforms. In some cases, we've sunset and migrated platforms. But we have a lot of different technology. The approach we've decided to take is instead of taking an entire system and saying, I'm going to take that system and convert it to the cloud up here. What we're doing is going system by system and bringing it down into its component parts. I have authorization. I have settlement. I have card management, whatever it may be, and taking those component parts and taking each one up to the cloud. What that allows you to do is I can look across 5 systems and say, these authorization layer, I combine those, take it to the cloud, and I have one authorization that they all point. It's a far less risky approach versus a big lift and shift. Because when you lift and shift, if any component goes down, the whole system is in trouble. And so it breaks it down into its component parts, but it requires then some patience, right? This is a multiyear journey. We're investing millions and millions of dollars to do it. But in time, it's the right thing to do for our business.

What do you sacrifice doing it that way? Do you sacrifice anything? Because a lot of the newer players, when they talk about new platforms and new solutions, it's one seamless platform. Everything is done on one thing in the cloud. Yours seems to be a little bit more layered. Is there anything that you feel like you're sacrificing doing it that way?

Well, it's interesting because certain things, it could be an off layer or it could be a settlement layer, can be leveraged across systems. But other things, the specialization is how we differentiate versus more generic payment providers. So the pricing layer within a fuel card business where I'm capturing wholesale costs, taxes at a federal state municipal level that are based on different algorithms. Whatever it may be, right, all the complexity that goes into actually pricing, whether it's for a customer or a merchant, because they're not all just retail minus 3%. It's cost plus x and what is that cost based on, what is included or excluded, all that is negotiated merchant by merchant. So all of that complexity isn't in a standard processing system. So I want to keep that layer separate at all times. And so depending on the specialization of the product, I want it to be separate.

Got it. So no conversation with FLEETCOR is complete without talking about M&A. And obviously, you guys have made a couple of deals of late around sort of corporate payments. Maybe you could talk about the progress and the integration of those businesses, how that's going to enhance your product inside the corporate payments? And then what else you're looking out for?

Sure. So in the early part of last year, we acquired this company, Roger, its cloud-based, very modern companies like 3 years old, Bill Pay solution down into the small business market, really small business market. Our initial thought was, hey, we'll take that. We're just going to cross-sell it into our base of small business customers that do fuel cards. What we found though is that cross selling that and having it on separate platforms was an ideal for a customer experience. So we slowed that down. We've rearchitected that platform now. So it's bill pay plus expense management. So you can pay all my invoices and I have cards that I can give to employees. All of that comes up into one layer. So I can see all of my spend regardless of how it happens, and I can leverage my credit line across card payments as well as invoices that I want to pay using my credit line. And so we think that's a way better solution. We've just re-architected that and that's now going to market. In the mid-market, we bought a company called AFEX. AFEX is a cross-border provider with sizable operations portfolio in Canada, the U.S., Australia, U.K. as well as a few other countries in Europe and Asia, a very, very similar footprint to the company we had called Cambridge. Both of those are now rebranded core pay cross-border. And we have migrated all the customers off of the AFEX platform onto the Cambridge technology. We did it in 3 waves, handling U.S. and then Europe and Asia. All that is done. We're now in the process of cleaning up the back-office pit, vendors, bank accounts and other things. When we do that, we'll be able to basically shutter all the AFEX systems, and we're getting rid of all the redundant offices. So this is kind of what we call a classic FLEETCOR deal. The companies look very much alike. You pour it over, you shut everything down, you get enormous synergies from that. So that is well along the way, but there's still ongoing integration work and costs that we're incurring as we do that. But that should be completed by call it, Q3.

Before we get into what might be on the horizon that you're looking at, just drilling down a little bit on this, there's so many fintechs out there that are kind of attempting to do what you guys are already doing. Could you just maybe compare and contrast the difference you guys have relative to some of the newer players in the space?

Yes. We talk about this internally, and just funny, I just came out of a meeting where we talked about the value of the mother ship. And so what I mean by that is there's technology, and then there's business. And business involves sales and distribution and networks and service, it's not just the tech. And so when someone comes up and says, I've got this great bill pay thing. I'm like, terrific. How do you monetize it? Well, I'm going to charge all these subscription fees? I'm like, that's great. I don't charge any. What do you mean? How do you make money? Because I have an FX network, and I have a virtual card network, so I can monetize it on the other side. So it's free to the customer. That's a capability that when you build technology, you don't have the networks. But as the mother ship, I do. And I have, oh, by the way, several hundred thousand small businesses that I already have relationships with and have underwritten credit for that I get an offer things to. And so I'd say that's one of the key differentiators for us, is that the value -- it's the 1 plus 1 equals 3, of course. But the way that we differentiate is taking capabilities that are inherent because of what we do and the relationships we have.

Got it. And then maybe we could talk about, now that valuations have come in a decent amount for the peer set, like are there more opportunities for M&A? Or how do you feel about that backdrop?

Yes. So we had a number of deals that were pretty close to the finish line at the end of last year, and we, being that's really the CEO, paused those. When we saw valuations starting to come down, we said, look, let's take these documents and we've all agreed and put them on the shelf and we'll talk another a couple of months. And the good news is people are still talking. So expectations have rationalized some. We're, as you know, Sanjay, we're always active in market. We've got a very sizable internal corporate development team. Pipeline, 12 to 15 different companies that I just looked at. It does skew more towards corporate payments, given the TAM and the interest there, ours and others, we continue to be heavy in that regard. But it does cut across some of our other product lines as well.

And what else do you think you need in corporate payments?

Well, certainly, we're always interested in building scale. But if we wanted to look at some capability, there's a value chain, right, of a payment. First, you could start with who do I want to engage for a service, which vendor do I want to choose to actually buy something from. We don't really get involved in that procurement side. Then it's, hey, I have an invoice and I want to digitize it. I do that in the small business, on my small business platform. In the mid-market I'm not that really involved. I'll put it out of the ERP or whatever once you've already digitized it. So I could buy something there. Go to the other end of the value chain, I think you could look at supply chain financing, right? Again, I think I don't do today, and I'm mindful of my balance sheet and such, but it's something I could do, right, either directly or in partnership with others. So we do really good approval workflow of the invoice and then deciding when it's going to get paid, so you can optimize cash flow. How it's going to get paid, so you can optimize your rebates and help us make money. We're really good at all those things and actually then executing the payment, of course, however you want. But there are things on either end where we could continue to expand.

Great. I do want to touch on EV because it's another really big topic of discussion inside a fleet. You guys have obviously made some announcements as to how you're going to address EV. You can touch on those a little bit. But maybe just give us a little bit more detail on EV and sort of where you see things progressing.

Sure. So we're getting ready to get ready, right? The migration, particularly on the commercial side, is a bit slow. As you'd expect, cars are moving faster than vans or trucks, which are moving faster than box trucks, which are certainly moving faster than heavy goods vehicles or cement trucks and things that have actual weight to them. And then consumers are moving faster than businesses. But nonetheless, we see a future where yes, fleets will be migrating, and they'll be doing it for decades to come. And we want to be ready and be helpful. And so what we're doing is basically partnering with small software companies and making select invest -- minority investments to develop product and pilot and test with our existing fleets wherever we can and learn. So we're going to test and learn environment now so we can understand what they need, what they value will determine what we build and how we charge for it. Now in that regard, when you're -- we have an electric vehicle, right? There's different ways to charge and you can go out into a network. And so we've enabled our purchasing products to work in the networks and get information that way. There will be charging the way home. And so in the U.K., we've partnered with a company called Mina that enables you to grab the charge information from the actual charger and then pay the utility directly, so the employee is never out of pocket. And for blue collar drivers to be out of pocket, hundreds of dollars of electricity costs, think of it like a big appliance that's running, you're charging every night. That's not acceptable for a driver. And so this is a nice solution that we've enabled, and we're piloting it with folks in that regard. Here in the U.S., we partner with a connected car company. And so regardless of whether you charge it a charge point, at a home office, you charge at the hotel because they had a little thing, whatever it may be. The data is pulled from the vehicle itself. And so I find out where are you, what was your battery before? What's the battery at the end? Did you charge at a supercharger? So how fast did it go, whatever. All of this data is then brought to the fleet manager so they can manage the fleet, right? So it's not just fuel purchasing or it's not even just electricity purchasing. But it's data that allows me to manage the vehicle because that is a fleet manager. If you get to the end of the useful life of the vehicle and you can't realize your hoped-for value, you're in trouble. And so if you take an EV and you supercharge it once a week or every couple of days, the useful life of that battery is declining quickly. So 3 or 5 years later, when I have to turn it in, what's it worth? Be careful, be very, very careful. And so we want to make sure that we're educating people as we learn more, and we're helping them manage fleets.

How different -- I mean, obviously, you're -- there's a number of different partnerships you mentioned there because the distribution is going to be very different, I believe. Like how many other distribution areas are you looking at? How unique are those distribution outlets going to be for EV?

So in terms of charge points, right, they operate fairly kind of independent, they are popping up everywhere, right? You think of a gas station or thinking in terms of the...

Yes, I'm just thinking about, like, yes, your customers might charge on a lot, right? Like so how then would you capture, how much they used, how much energy consumption was -- that need to get refunded for, is that a lost customer? Or is that -- or is there -- are there ways for you to reconcile and do automation of payment for them?

So you're spot on why we went with the connected car strategy here in the U.S. And so wherever the car charges is irrelevant. Every time it charges, I get the data. Now if you do go out into a network, so I go to a charge point, and you use one of FLEETCOR's cards. Then I combine the 2 transactions. From the car, I get the charge information. And from the charge point, I have how much they charged you for that charge. And then I can take the card-based transaction, the car transaction and combine the 2 based on the time stamp. And now I have a full view of what that is. But if you're at home, right, you're plugging in, I may or may not know what the utility rate is, but I do want to know how much you consumed. And so then I can extrapolate and what the reimbursement more or less should be.

Got it. Got it. Okay. So we have time for one question in the audience, if there is one. If you have a question, please raise your hand. Okay. I think we've got a few seconds left, so I'll stop right there. Thank you so much, Charles.

Thank you.

Appreciate it.