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

Welcome back to Evercore ISI's Sixth Annual Payments and FinTech Innovators Forum. I'm David Togut. I lead the payments processors and IT services research team at Evercore ISI. Delighted to welcome Charles Freund, Chief Financial Officer of FLEETCOR. Charles, thanks so much for being with us here today. We greatly appreciate it.

David, pleasure being here.

Your 2022 guidance calls for 9% to 11% organic revenue growth in mid-teens adjusted net income per share growth driven by your 2 largest businesses, fuel cards and corporate payments. For this year, what are the potential tailwinds for fuel cards and corporate payments to take you to the high end of your growth ranges? And what are the potential headwinds that could lead you toward the bottom of your ranges, both for revenue and earnings growth?

Yes, David, so in terms of fuel cards tailwinds, obviously, you've seen the increase in retail fuel prices over the last couple of months, well above what we guided to back in January/February. And so with the most recent spikes in oil to the conflict in Ukraine, that has not yet passed through to the retail price. And so we're seeing in the last couple of weeks before that crisis around $3.70 versus our initial assumption of $3.40. And for every $0.10 movement in the retail price, we see about a $6 million lift in revenue annualized. So that will flow through. Don't know if that will sustain. But certainly, that's something we've seen as a potential tailwind for fuel cards thus far. On the corporate payments side, 2 things. We didn't assume much of a recovery in some of the more affected verticals that were down due to COVID. So the transportation segments and other things, travel, hospitality, things of that nature, so to the extent that the world continues to reopen, that could be some potential upside in that business. The other thing we did not assume in corporate payments is a flow-through of inflation. So we're seeing inflation around the country as you know like we haven't seen in decades. And we're just not quite sure how companies will respond. Will they absorb it? So if I'm a manufacturing company and inflation hits my cost of goods, I still want to produce the goods, I'm going to absorb the cost. But in terms of more discretionary operating expenses, unclear that'll all flow through or people will just tighten their belts. So we really didn't assume anything, and that could be some potential upside to those numbers. On the flip side, never know what's going to happen with COVID, could come back. My hope is not, and hopefully we'll respond differently going forward, but you never know. And then the flip side of oil prices going up is it can shock the economic system. And so we want to see how that plays out, particularly on the continent of Europe as that may affect volumes going forward. But we haven't seen anything else yet.

Understood. Your 2022 outlook calls for 20% growth in new sales. What are the major drivers of that 20% new sales target by business segment? What are the factors that could enable you to exceed that target? And what factors might cause some headwinds?

Yes, so I'd say the vast majority of that sales growth is coming from more investment. So we're planning sales to be up some low 20s, and our investment is up 17%, 18% year-on-year. And so what that's doing, what you can see there is with production being -- going up higher than expenses, we are getting some small benefit from enhanced productivity or a slightly better return on the sales investment that we're making. And what that is, is things that are working, I'm scaling, and those have good productivity while I'm also testing new channels, new campaigns, new strategies. So a lot of it additional investment, but it's going to getting -- or we anticipate it will get a good return. Where that investment is, it's across the board, right? We're trying new channels all in a number of different places, continuing to scale the digital channel, which is working very well in our fuel business and allows us to target small companies in a cost-effective way. We're starting that digital journey in our lodging segment. We've been beefing up our corporate payments teams last year. We have a lot of new people that we're going to hopefully season this year and get more productive. So I'd say mostly investment across the board with continued productivity coming with the digital transformation.

Just double-clicking on that, Charles. On your fourth quarter call, you also highlighted your emphasis on digital sales production and in digital advertising and staff. For this year, how much will fleet invest in digital transformation? What are the major components of that, and how much will flow through operating expenses versus being capitalized and absorbed by the cash flow statement?

Yes, so 2 slightly different concepts there. So on the digital selling side, this is just a shift of strategy, right? So we used to have a lot of outbound telesales people. And what I've done is turned some of them in -- most of them into more inbound telesales people who are following up on digital leads, helping people complete full applications, but all of that is coming through a digital demand gen effort. And so it's a shifting of resource and then a scaling of what's working. And so that's more on the digital sales side, and we'll continue that and that flows straight through -- those sales will flow straight through to revenue. On digital transformation as it relates to our core processing systems, the approach we're taking now is to segment the systems into their various component parts. So think of an authorization layer versus a card management layer versus a merchant settlement versus a transaction pricing engine. And we're -- so we're segmenting each of the systems and then moving component by component to the cloud. It's a slightly slower approach than a lift and shift of an entire system to the cloud, but it's safer, we think more prudent and even allows us to start to consolidate elements of systems. So as I look at a component across multiple systems, and if that component is very similar, then I can migrate them all to one single component in the cloud. And so you kind of kill 2 birds with 1 stone, you might say so a move to the cloud for flexibility and security while also consolidating elements of systems. We're investing about $8 million to $10 million a year to make that migration. And I would say that it is a multiyear journey. And of that investment, 80-plus percent is going to be capitalized, but it is a multiyear journey to get us to a different place.

You made strides with your Beyond strategy and your Brazilian tolls business, which was one of your most resilient businesses through the COVID downturn. What are your 2022 targets for STP, the Brazilian toll business, including your objectives to expand your Beyond strategy?

Yes, so it's a great business. Its resiliency largely came through the revenue model, which is mostly subscription-based, not volume-based and so super helpful during the COVID times. That business continues to do quite well in terms of sales across all of its channels, whether it's sales at a toll plaza, sales at a kiosk, at a mall, at an automated vending machine, at retail drugstores on a rack, digital sales through the website, really, really strong sales performance in that category. And that's powering kind of low-teens growth -- organic growth in that business. And so in terms of then Beyond, a big focus has been expanding fuel acceptance of our RFID tags. So when we started 2021, we had 600 gas stations out of circa 40,000 in the country. When we exited the year, we had 1,200 gas stations in the country, and we have a plan to then double that here in the year 2022. And it's a kind of if you build it, they will come with model. And so we've seen volumes, transaction volumes also double. And as we build density in urban areas and then connectivity of fuel sites along the highways, we should see an acceleration of that network effect as we have more and more coverage throughout the country. Our goal over the next couple of years is to get to circa 5,000 to 6,000 locations nationwide, which will again be focused on big urban centers where if I can get you to use your tag for fueling and parking and fast food, I can dramatically change the revenue per tag holder and then the highway connectivity to ensure that we get the vast share of wallets on our tagged product.

Got it. You've been active on the electronic vehicle front, including a recent acquisition, plus investments in EV software companies that facilitate at-home recharging and reimbursement. For this year, how much you plan to invest in your electronic vehicle business between operating expenses, CapEx and acquisitions?

Yes, so we don't really plan for acquisitions. So to the extent that we find something that we need or we're interested in, then we'll make those investments but that will be a little bit more opportunistic. I'm not setting aside money specifically for EV acquisitions. We did make minority investments in 2 companies, 1 in the U.K., 1 in the U.S., to help us evolve our product strategy. In terms of investments, we're also making Beyond those minority investments. We do have dedicated teams working on both product marketing and then IT development specific to creating one single platform where a fleet manager can see all of their vehicles spend and such. And so making sure that, one, as the migration occurs, we're ready with what customers want. One thing we don't want to do, David, is put a stake in the sand today and say we know what the future looks like, and therefore, we're going to build out and only follow this one course of action. We're really trying multiple models in different geographies piloting them with our clients and listening to their feedback, what do they value, what do they need most and why? And that will then direct our investment strategy as we move forward. But we're investing several million dollars in those dedicated teams and IT development. And it will be an ongoing effort to match the migration of our clients and what their needs and wants are.

How far is fleet along in building out a large-scale cross-border B2B payments business, looking at your acquisitions of AFEX, Cambridge Global Payments and invoice pay, is this 100% of what you intend to do? Or are there other pieces of the puzzle that you'd like to add to this combination?

No. We're never done on the M&A front or in building and buying businesses. And so really delighted with the AFEX acquisition. So this was a cross-border business that looked almost identical to our Cambridge business in terms of geographic footprint and the types of products and clients. And so we've now migrated all the clients off of the AFEX systems and are now, in 2022, migrating some of the back-office reporting and other things off of their systems, which allow us to realize terrific synergies as we shut the systems down and close redundant offices and operations all around the world. And so it's kind of a classic FLEETCOR deal, a look-alike product where you get great back-office synergies. We kept their productive salespeople, and so we continue to have a growth engine for that business going forward. So really delighted with that and what it's going to contribute in the year. It's also changed our view of the FX segment and what deals could look attractive. In the past, we might look at a company and say that their systems aren't very good, and therefore, I don't want to pay for them and such. But given the synergies that we can recognize by moving off of their systems, and we now have a proven playbook on how to do that and have seen that we can be successful and retain the customers, it opens our eyes to further M&A in that specific category. As it relates to broader cross-border -- not cross-border, sorry, but bill-pay-type activity, there are further elements of the value chain on either end of the spectrum that we could get involved in. And so before a purchase is made, we could get more into the procurement side. We have relationships with hundreds of thousands, millions of merchants. And therefore, could we do more in procurement and advising our customers to who they should go with to maximize their rebates and such. On the other end of the spectrum, after things are bought and such and when they're about to get paid, could we get into more things like supply chain financing or digital dynamic discounting and such? We certainly could do those things. We think we have a really good, strong proposition to-date. We could expand on either end of the payments value chain or purchase value chain. We've also, I think, now have good coverage in terms of segment. And so when we started, we were really in the mid-market with our acquisition of Roger now rebranded as Corpay One, we have a tool that can really go down market to sub-10 million revenue-type companies and provide a service that's simple enough that they can really make you [indiscernible].

Yes, if we could double-click on Rogers or Corpay One, just to understand how far along you are in your strategy to move down market into the SMB space along with the opportunity to offer full online bill pay to your global SMB fuel card base?

Yes. And so acquisition has gone well. We continue to sell about 1,000 clients a quarter on that downmarket solution, but it was pure bill pay. And when we started marketing that to our fuel card customer base, the feedback we got was, it's a good system, but it's a separate system. I have a fuel card portal, and then I have a different portal for my bills. Can you bring the things together? And so we took a pause of it on that cross-selling and went back to reengineer the product. And so now what we're going -- going to go to market with is something that where you can pay your bills and you can manage all of your cards, whether they're fuel cards or more general purpose type purchasing cards but have one single view of all of that, call it a spend management portal for bill pay and expenses and be able to leverage your credit line across products. And so if I've under -- I'm not using all of my credit in my fuel card account, can I leverage that now to pay bills? Yes, you can. And so that's the idea. So we've just wrapped up bringing kind of what we call our 2-in-1 solution of cards plus bill pay, and now we're going to go back out to market. Still very early days in terms of our cross-sell efforts, so that is more upside to come.

Lodging was FLEET's hardest hit business in 2020 with solid recovery throughout 2021. What's your outlook for lodging-related growth in 2022?

Yes. And so our lodging business, as you mentioned, was hit hard, and the hardest-hit part within lodging was airline-related lodging, where we provide hotels for traveling crews for staying overnight as well as distressed passengers when flights are canceled. And so in 2021, we did see a rebound in domestic air travel -- it came back sooner than we thought. And so that was a good news story. But the international travel is still lagging well, well behind what we saw prepandemic. And so we think there's opportunity, and we're anticipating some of that in our guidance for this year. We have lodging, I think, in and around 20%, 20% mark for this year. And so some of that is recovery. Some of that is also more sales. They just really lit up their digital sales channel in January. It was actually up about 2x from what it had been running. And so early, early days, but we think there's more upside there on an organic basis.

Just to double-click on that for a minute, Charles. Yesterday, FLEET announced the acquisition of Levarti, an airline software platform company. Could you talk for a minute about Levarti, how that fits into your strategy within lodging and airline technology broadly speaking?

Sure. So Levarti basically helps to digitize an airlines operation from check-in at the desk, whether it's for the airline or an app for the traveling consumer, all the way through to checking in at the gate when you're on board, if you want to buy something, the app is tied in. So as a consumer, again, all the payment can go right from your app, tracking your bags, recovering them. Even if there's a distressed passenger event, it communicates through the app. It says, fine, we'll do all your rebooking, and we'll put you up in this hotel overnight. In the past, that's what the software would do. And then airlines would turn to us and say, okay, now I need these hotels. Can you guys fulfill that? Of course, we would. What we're doing now is creating a seamless experience and so digitizing airline and the customers' experience, digitizing all of that, but then creating a seamless transition to the provision of lodging for crews and for distressed passengers. We think it also, because we'll be digitizing other parts of the airline operation, there could be other elements to monetize along the way. So this is more of a capability build. It's a fairly small company with very modern technology, but we think it enhances our proposition to new airlines, gives us things to cross-sell to some existing airlines and creates opportunity to monetize other elements of the journey.

Understood. Given the situation in Russia and Ukraine, could you just update us on your Russian business? I know it's very small, but if you could just remind us how large it is as a percentage of revenue and effectively what services you're offering in Russia?

Certainly. So Russia is all in fuel. It's all in our fuel segment or product category, I should say. And it represents -- we planned it at about 3% of our 2022 guide. Obviously, the devaluation of the ruble recently, 25% to 30% will have an impact. The Russian Central Bank has recently increased interest rates, and we hold customer deposits and cash in that country. And so roughly about $90 million, of which 70% is customer deposits. The rest is ours. And then so we'll be earning 20%. That'll offset some of the impact of the ruble devaluation. So revenue will be down. Some expenses will also be down due to the ruble coming down, partially offset then by higher interest, which hits my interest expense line, not EBITDA. There's about 600 people in country. It's a very autonomously run business. It has its own fuel card processing system. It has its own ERP accounting system, its own HR management system, and does not connect with our Central or Western European networks or IT systems. And it does very, very little in terms of cross-border activity for customers fueling in other countries, a little bit over in Poland and Lithuania and a little bit in Ukraine. It's predominantly a Russian-centric business and runs in isolation. We're abiding by all the sanctions and continue to be in contact with the business. The volumes thus far have held pretty steady. We have seen a recent decline in sales activity as folks are concerned about the economy and distracted. So we've seen about a 20% decline in kind of inbound leads and such. But so far, the business continues to operate in the main as it has been.

So because it's a domestic Russian business, is it subject to U.S. sanctions at all or not?

Certainly, you cannot do business with people who are on the sanctions list, and we've moved cash from Russian banks that are on the sanction list to international banks that operate in country. And so we are abiding by all the sanctions and keeping our eyes out for any further developments.

Understood. On December 22, you expanded your Term B credit facility by $750 million and shortly after the FLEET Board of Directors added $1 billion to its share repurchase program. For this year, do you expect to be more active on share repurchase or acquisitions? And what types of companies are in your acquisition pipeline currently?

So David, as it comes to capital allocation, our first protocol is always what I call attractive acquisitions. Those can either be accretive like an AFEX deal where we can see the synergies straightaway and can consolidate operations and such without too much risk. And so we love those types of deals. There are also capability plays, which may or may not be accretive, but give us further capability to sell either new products to existing customers or allow us to enter a segment that was previously unserved by us. And so we have acquisitions in our pipeline that would fit kind of both of those categories. Predominantly, I'd say we are overweighted into the corporate payments space, but we do have things in the pipeline that could fit in our either a lodging product category or even our fuel product category as their vehicle or mobile employee related. We're unclear as to the balance between the acquisitions and buybacks. But I would say that, given the current price of our stock, we have been active. We had a 10b5-1 that ran through January, which we disclosed on the earnings call. And then in our recent 10-K, you can see we have been active in the month of February, and we'll continue to opportunistically buy back shares when they're discounted as they are.

And then the other side of that with pressure on the market and likely valuations, generally, are you starting to see more attractive valuations in the acquisition pipeline than let's say a month or 2 ago that might cause this year to be a more active year for FLEET from an acquisition perspective?

Yes, we actually had a few deals that were very, very near the finish line at the end of last year. And when we saw valuations start to turn down, we paused a few of those deals and have now reengaged. And so I think everyone realizes that expectations have changed somewhat, but we have a number of things that are near and dear. Our pipeline is always full. We've got about 12 dozen-plus deals that are in various stages. We have a few things that are very, very close.

Understood. What's the status of the lawsuit filed by the FTC against FLEET? Do you see this being a drawn-out court case? Or is there a potential to settle this in the near term?

There was a motion filed by the agency months ago to move the jurisdiction of the case out of federal court and into the FTC's own administrative court. The federal judge denied that motion and has kept the case in her court. And she has also set a court date for June. And so we expect to -- for that case to likely take several weeks. And then it will be up to the judge how long she will deliberate and then decide on the case. Hopefully, we'll have some clear resolution by the end of the year.

Is there the potential to settle this out of court? Or do you anticipate going to court in June?

There's always the potential, but we're planning to go to court.

Got it. If you could update us on your U.K. AllStar business. That business went through a pretty big transformation a few years ago going to chip cards. What are some of the trends you're seeing in the U.K AllStar business currently? And what are the prospects for this year as a whole?

Yes, I'd say we made the transition, and the reason we made that transition moving from AllStar proprietary cards to a cobranded Visa card that was basically to allow people, if they desire, to enable beyond fuel purchases, right? And so the AllStar card, if it's swiped at an AllStar-accepting location, it's treated and settled like an AllStar card. However, if you desire to use that card outside of the AllStar network and you've enabled it from a controls perspective to do so, then you can buy things that would run on the Visa rails. And so it basically allowed us to broaden our spend per share of nonfuel spend. That conversion happened and is [indiscernible] continues -- and the fleets continue to use the cards. In terms of activity, what I'd tell you is that 2021, we actually saw a mix and so, in the U.K., white-collar workers who often receive fuel cards as a benefit as part of their auto package based on the return to the office, and so that segment of sedan-driving white-collar office-bound people, simply that has -- that volume has not come back yet. On the flip side, as people were locked in their homes and ordering digitally, lots of packages and things, we did see more volume come through on our light van and truck fleets that were delivering all of those packages. And so that actually was a benefit for us of the lockdown, you might say. And so net-on-net, the business continues to perform very, very well. Delighted they had record sales last year, and I'm looking forward to another good year.

Got it. What are the primary business risks that you're managing in this environment? We talked about Russia a little earlier and your small fuel card operation there, but what else is on your radar screen?

Yes, I mean, we're keeping a close eye on broader inflation and how it affects both top and bottom line. Luckily, we have some offsets, right? So if inflation hits our spend, we get revenue. It hits our costs, obviously, that hurts. But nonetheless, in places where there are high, high rates of inflation like Brazil, there are contractual agreements in place that pass the inflation on both for us for revenue and then vendors for our expenses. We're also seeing interest rates move a bit. right? And so that can affect me in terms of the debt I have, but on places where I hold balances like in Brazil where I have $300 million, $400 million earning now 12% interest, but it helps to offset some of this currency issue -- inflation issue. Also, the spike of oil does help us on the revenue line, but it can have a ripple effect through broader economic activity. We're just going to keep a close eye on that and see how that plays out. But we'll keep monitoring credit trends as that ripples through, if it ripples through.

What do you see as FLEET's greatest underappreciated strengths?

David, I think I mentioned 2 things. One would be we've got a great track record of growth, both organically and inorganically. And so our ability to continue to do deals and integrate them, we did a bunch of deals last year. We've got a robust pipeline. I think that's one key strength. Some recognize, some don't. I'd say our ability to sell in a cost-effective way so we can continue to grow organically without ever declining or unprofitable margins, I think that's also a key strength. Obviously, the fact that we generate so much cash gives us a lot of optionality in terms of acquisitions or buybacks. And in our guide, we don't assume further buybacks. So we take a pretty conservative approach as regarding the capital allocation. So I think that's a key strength and can help us weather downtimes, if there are any. And then obviously, the resiliency of our model as we came through COVID, yes, we were affected, but we were able to manage through it, and we've rebounded very, very quickly and are back on our long-term trajectory.

Terrific. Charles, thanks so much for being with us here today. We greatly appreciate your time, your insights, and look forward to tracking developments at FLEET as the year progresses.

Thanks, David. I've enjoyed it. Good to see you again.

You, too.