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

Welcome back, everybody, to the second session of the day. We are super honored to have Chuck Freund, CFO of FLEETCOR, joining us today. Charles, thank you so much for your time. I'm glad you could be at the conference with us.

Thanks for inviting me, Ramsey. Pleasure to be here.

I'm going to start off with a -- kind of a big picture question that often comes at the end, but I'm going to move it to the beginning, which is what do you see as the most compelling sort of 5-year growth opportunity in front of FLEETCOR? And you can even name more than one, if it's more convenient.

Thank you for that. I appreciate it. I would say, there's probably 2 things that really get me excited. One is this corporate payments opportunity. We've been chasing it now for 5 years. When we first started, we were in this multi-card and virtual card business with the acquisition of Comdata. We further expanded into full AP bill pay solutions, added in cross-border and FX capabilities. So I'd say we've got a really nice suite of modern technology, coupled with extensive networks, virtual card networks here domestically, banking and cross-border networks for the FX business, which gives us an opportunity to really monetize any of the spend that we capture. So we think there's a ton of runway there. It's a huge TAM. And we are kind of a little disruptor. We've got a small position, but we're growing fast and able to sell a lot of that business. So super excited about the runway of that going forward. I'd say the second one, which has been growing well and has a lot of runway too, is the toll business. So we are the market leader in Brazil. We've got 6 million tag holders. That's up from like 4 million when we bought the thing years ago. So it's grown nicely as is just with tag growth. But really, we see further opportunity in our Beyond Toll strategy, where you can use that same tag to buy -- pay for parking, buy a fast food meal or even buy fuel. And that fuel opportunity is quite compelling. It's a large spend category. It's recurring spend. And unlike in the tolls, where we don't really earn a merchant discount rate, at the fuel merchants, we do. And so most of that toll revenue today is just subscription-based. I pay for the tag, and it's x per month. But by buying either parking fast food or fuel, I'm actually earn merchant discount revenue. It also increases the value of the tag in the mind of the card holder. If I use it for more purposes, it's worth more to me and therefore, it creates stickiness. So we think there's a lot of opportunity to go further with our Beyond Toll strategy, not just in using the tolls remotely, but even using the digital wallet to buy other types of services. So we just launched an insurance program. We're now a broker in Brazil to cross-sell insurance to those 6 million tag holders. So we think there's a lot of opportunity there with that big, big customer base to cross-sell into.

That's quite interesting. And I want to get to the segments in a little bit. First, I want to talk about the fleet fuel card segment, the kind of historical core of the business. How would you talk about -- how would you describe the state of the market today? And I guess in terms of sort of what is the algorithm that makes that market continue to grow? It's obviously been producing for you guys for years, and it seems to continue to be producing. So how penetrated is it? Have there been any changes from the pandemic? Just give us sort of a snapshot of the markets you see it today.

Sure. And so the fuel card market sets up a little differently depending on geography. So if you're in the U.K. or Australia, New Zealand, they do tend to be a bit higher penetrated, mostly with oil company cards. So think of a branded car that you can use at a given gas chain. We compete in those markets pretty effectively with more universal products, which can be used at basically all gas stations. And so it's the convenience factor that we're selling. And so we can still compete even though it's fairly penetrated. Here in the U.S., I'd say it varies based on the size segment. So at the enterprise level, it's fairly penetrated. If we get down into the mid-market, it might be 50%, 60%. You get down to the small business, which is where we really play and sell a lot, it's about 1/3 or so kind of penetrated. In terms of our ability to continue to grow that and such, we've invested a lot in digital marketing, which allows us to reach small businesses in a cost-effective way for onboarding tens of thousands per quarter. And so we think that, that has still plenty of runway for growth. In terms of the pandemic's impact on that business, I would say the lingering effect is mostly what we feel over in Europe. So here in the U.S., most of our fuel card sales are for either truck drivers or other blue-collar-type workers, then construction or the trades people, plumbers, folks like that. In the U.K., we also have part of our business is more white collar. So it's folks commuting to work, and they get a fuel card as kind of a benefit for employment. And because they're -- not everyone has returned to office yet, as things ebb and flow with variance and such, we're still seeing some softness or latencies sitting there in that white collar segment.

Interesting. And I wanted to ask a pretty topical and/or a tactical question, and that's just about your Russia business. What are some scenarios that we might contemplate there in terms of how that business looks going forward?

Yes. It's pretty complicated, but I would tell you that it has run fairly anonymously or independent for a long time. And part of that is just geographically where it's based, part of that is Russian data privacy laws and other things. It has its own fueling network that doesn't really extend into the EU. It has its own systems, right? And so what we're doing now is formally isolating it and ring-fencing it. And so cutting off ties to the FLEETCOR corporate. In that way, that business can continue to operate and still be in compliance with all the sanctions. And so we're setting that up literally as we speak. And so we'll continue to operate it. It will have its own independent Board, and it will be governed accordingly through that. But as the owner of 100% of the shares, we'll still consolidate the earnings from that investment. That said, we are looking at other alternatives. So we don't know how the sanctions are going to play out. If they continue to escalate, it becomes impossible to operate that business or own it as a U.S. company, then we will be looking at sale options. And those options could be to people in Russia, China, India. It could even be to the management team with maybe an option to rebuy another day, when things normalize. But for now, the first step is just isolate it, and sure we're always in compliance with sanctions, continue to operate and own it and then reevaluate as we move forward.

Okay. One opportunity that you guys have had for quite some time is just -- is this sort of cross-sell opportunity eventually. You've got great corporate payments assets. You've had some sort of Beyond type products over the years. Talk about that opportunity and how you can -- how you guys think about extracting sort of yield from the cross-sell then into fleet, I guess.

Yes. So we kind of kicked off a major cross-sell initiative, gosh, it's got to be 6, 9 months ago, where we took our small business bill pay solution, this Roger business that we bought, which we rebranded Corpay One, and we were pushing that into the fuel card clients. Fuel card clients could always pay us electronically. And what we did was we took that little electronic payment portal, and we plugged in Corpay One. And then said, "Look, you're paying our bill. You can pay other bills as well." And some people took that to heart. Others said, "Wait, you've moved my sheets. I don't understand how this portal works. It's different. Help me understand, why, et cetera. And so what we wanted to do is not upset fuel card clients and kind of force their hand in this regard. For those that did make the move, they also gave us feedback say, "Hey, this is kind of neat. And I will pay some other bills, but it would be great if I had my card spend and my bill pay all in one solution, so I can see all of my spend." So it turns from a bill pay solution to more of a spend management platform. And so we took that feedback to heart and said, okay, we went back and have now been reengineering the platform. So now we can offer bill pay plus cards, leveraging the cards to actually pay bills, if you want to use that credit line accordingly. And now we're looking to plug in more FX and even potentially lodging or travel solutions. So that way, as a small business owner, a full visibility of my spend and I can leverage my full credit relationship with you, however I need to across the different solutions. So that's been rearchitected. We went live with the card solution in Q1, sold several hundred clients on that. And we'll be revisiting this cross-sell in the couple of quarters ahead.

Okay. I want to ask about electric vehicles. And I know you guys have been laying in a lot of kind of foundation for how that market -- to accommodate that market sort of as it evolves. But maybe give us an update on where you are... [Technical Difficulty]

Ramsey, I'm not sure if you can hear us, but your screen is frozen. Okay. To the extent that we're still live regarding EVs, so we've been on a journey for the last couple of years to try to figure out what people want. The migration is moving slowly. But for those that have agreed to participate in some of the pilots that we've been exploring different solutions in the U.K. and here in the U.S., for fleet, for whether it's an internal combustion engine or an electric vehicle, there are similar needs, still need to procure and buy an energy, whether it's from in the network or even at home, there still needs to be a payment mechanism to a merchant or a utility company. If the employee is making the payment, there needs to be a reimbursement mechanism. So there's still a lot of payment flow and control mechanisms that need to be put in place, whether it's electric vehicle or ICE. So we've been working on those solutions now for a while, made some minority investments in a few partners and feel pretty good in terms of our position. As I said, the migration is going pretty slowly. And so still learning and taking that feedback and evolving our products so we can be ready if and when a stronger migration occurs. In terms of kind of our strategy going forward, as we're building relationships in this ecosystem with the charge-point operators, electric vehicle manufacturers and other things, it has opened our eyes to additional opportunities to play in segments that we may not play in today, but we'll ride the migration curve. So we feel pretty good about how we're positioned with our existing fleets and helping them through the mixed fleet migration. But in terms of capabilities, whether it's working with the [ charge-line ] operators, even -- maybe even a consumer-type offering, because of the networks that we're building and such, such that the migration will actually be more an offensive opportunity as opposed to a defensive kind of play for us. So we're pretty intrigued. There are a couple -- we've got a couple of things in our pipeline at the moment, which kind of fit the bill. I can't get into too much detail for competitive reasons. But I'd say that we're looking at EV as a different type of opportunity because we can play in a few different segments where we don't really play today.

I see. And apologies. I'm having some network connection issues, so bear with me if it happens again. I wanted to ask too about driverless or autonomous commercial vehicles. That seems like it is moving quite quickly and could potentially be a tailwind. Is that something that you guys are looking at or have factored into the future road map here?

Not so much. And the reason is that, in the main, so 75% to 80% of our fuel card business is small business, and it tends to be more trades, and so the autonomous vehicle can't fix your toilet or repair your roof. And it's not going to walk the flowers up and deliver them to your doorstep, right? And so there -- the driver does play a role in those industries where it's not just pure fleet. I drive a vehicle someplace and then I'm done. Even in that regard, we shouldn't discount the value of a driver. I'll share with you a funny story. I worked at McDonald's years ago as a kid. I was in the lunch room, and the truck driver made all the deliveries to that McDonald's, came in for lunch, we're talking. And I said, "Tell me about one of the more interesting experiences you've had as a truck driver." He said, I used to drive fuel -- a fuel tanker. And one day, I was driving. And I looked at my rearview mirror, and I saw a fire on the top of the tank. I said, "Oh, my goodness, did you run for the hills?" He goes, "No, the tank was full. So I just pulled over and I went up within a fire extinguisher, and I put it out, because that's my job." And so the value of a driver goes beyond just driving. It's the care of the assets that they're delivering.

Interesting. That makes a ton of sense. One other fleet question I actually wanted to sneak in was, what is the -- and this is just sort of a general question. Right now, there's a lot of headlines about freight rates and about -- what is the -- is there any correlation between freight rates or the health of the freight sort of industry on the pricing side and your volumes? I'm thinking the answer is probably no, but I wanted to ask because I get that question sometimes from folks.

Yes. I would say we haven't seen an impact from that as of yet. Our trucking business, particularly here in the U.S., has been a little soft for several quarters, but that's mostly been due to the driver shortage that we've all heard about. And then obviously, with supply chain, there's even been some truck and trailer shortages for people that want to get into the business or expand their businesses. In terms of the freight rates, we haven't seen a degradation in our volumes as of yet.

Okay. Let's move on to Corporate Payments, which is, as you mentioned, one of the exciting sort of growth opportunities in front of the company. It's been -- I want to talk about Roger. It's been over a year -- about a year since you acquired Roger. And talk about the evolution of that product and sort of how -- what you're seeing in the marketplace in terms of uptake and how it fits into your broader strategy.

Yes. And so as I mentioned before, this is the thing we've now re-brand that as this Corpay One. And so what we bought was super modern, digital bill pay. And now we've added card capabilities and more credit capabilities and are in the process of FX and other things. Since the acquisition, we've added several thousand clients. We have launched the card capability in Q1 and added several hundred clients last quarter. We're monetizing about 10% of the bill pay payments. So whether it's through our virtual card or people paying with their credit card for a fee or even some of the FX settlement on the back end. The other thing that I'd say is kind of exciting is we're building out the distribution capabilities. So we've added over 100 accounting firms now in the U.S. that are using this product with their clients. So it's still pretty early days, several thousand clients and growing and -- but we're super excited about the runway. And as we build the platform capability with more of our services plugged in, we think we'll be able to monetize and get much higher revenue per client, which would then also justify even more sales investment.

And Charles, remind us of the target customer here. These are obviously -- these are small merchants. Maybe talk about the target customer profile and then sort of where you see Corpay One fitting in on the kind of competitive spectrum in the space.

Yes. Its -- target clients tend to be below, call it, $10 million of revenue, somewhere between 20 to 100 employees. You don't want to -- we didn't try not to target the micro accounts that might only have 3 or 4 employees because they just don't have enough bills to pay. And so it doesn't make as much sense. But that seem of kind of, call it, 200 to 100 is a decent and upsized business to justify the platform. I would say that most of those clients use QuickBooks as their accounting package. And so our solution digitize captures the bills and then provides them to the ERP for coding and such. Most of the competition is just legacy, right? People writing checks and paying bills the old-fashioned way. That said, we do -- we would compete for that green space with the likes of a Bill.com and their Divvy solution, which is their card solution, a few others, some of the smaller start-ups, but the majority of that is just old ways to pay. I'm sending some wires or ECH through my bank separately from the checks that I'm writing. I might use a personal credit card for some stock, because I'm the owner of the business. And so it's taking all of that, combining it into 1 solution for them. That's what we're after. And so we don't really run into competitors much in that regard. But if you were to say who do you look like or feel like, it'd be a Bill.com or Divvy.

I see. And this will probably also be a pretty good example of the cross-sell opportunity. I mean, that is the primary sales and distribution strategy here, I would think, to cross-sell into the existing fleet customer base. Is there also an opportunity to kind of take sales broader and wider into the general populace or small businesses?

Certainly, and we've actually been doing that. So most of the thousands, 3,000 or 4,000 clients that we have, have been more open market selling. So digital selling, working with those accounting firms that I mentioned. So the cross-sell, we started, but then we stopped. And so most of the clients have been more open market selling. But [indiscernible] again, finalize and get that platform filled out, we'll then invest more to sell it because it has more opportunity for us.

Okay. And in corporate payments, talk about the kind of post-pandemic impact. I think there -- in the middle of the pandemic, there were some specific verticals that were more heavily impacted. Sort of where -- what inning are we in, in terms of getting those -- the more impacted parts of the business back to pre-COVID type levels?

I'd say we're probably about eighth inning, seventh, eighth inning here. So we saw a number of things come back, some hospitality, right? Cruise ships are doing their best and getting out there again. Ticket brokers are actually selling tickets. People are going to sporting events and doing things and whatnot. So we did see a bounce back there. There were some clients that didn't make it, right? And so they're just gone forever. But I'd say there's a little bit of further upside, but not material. Most of the recovery is in our numbers now.

Okay. I want to ask you about the lodging segment, and that's an interesting one where you guys have kind of expanded the TAM of the segment a little bit over the years. Give us an update on that business and where you might see sort of some future opportunity.

Sure. So great business, love that business. To your point, when we started, it was a workforce lodging business, mostly focused on blue collar travelers here in the U.S. that are driving on the highways, need to pull off and stay overnight as they're driving to and from different jobs. We've expanded that in the last couple of years to including the airlines. So now we handle crews that are traveling around the world and distressed passengers. So when a flight gets canceled and you need to provide lodging for all those passengers, we provide a solution for that. And then just this past year, in 2021, we expanded into the insurance vertical where we provide temporary housing for displaced policyholders who have lost their homes due to fire or other type of disaster. Great business. That thing is it's all about the power of the network. And so our workforce lodging network was mostly highway based. The airline network tends to be around the airports and in more urban centers. And so -- and then the insurance network actually got us this more longer-term type of housing. So instead of, call it, a hotel you stay at for a week, you need to put someone up for 6 months and it's a families, they need a different type of accommodation. And so it's really, we've built out this incredible network with terrific economics that we can now leverage. When I say some of the interesting opportunities there, we bought Levarti, a software solution now that helps to digitize the operations of an airline. And so it's software on the front end with our lodging and displaced passenger solutions on the back end. So it's kind of frictionless for the airline operator. We think that will give us great opportunity to sell back to our base the software solution and really sell the new airlines, the full package. So we're super excited about that. And I'd say really an interesting thing, [ around ], is expanding the workforce lodging now beyond the U.S. And so because of the airlines, we now have lodging networks all over the world, but we only do workforce lodging in the U.S. And so now it's the opportunity to take a lodging solution and do we go into Europe and the U.K.? Again, I have a lot of customers, fuel card customers that I can cross-sell to. Or do I take that lodging network and exploit it in Brazil, right? 6 million consumer tag holders or 4 million, 5 million consumer tag holders and 1 million business tag holders driving around, do they need a place to stay? And so taking this lodging solution, because of the power of the network and bringing it to other geographies, we think is a really interesting opportunity that we're exploiting.

That sounds really interesting. And as a good segue too to talking a bit about Brazil, that's another business where it seems like there's so many different potential growth opportunities. You have the space of users you mentioned before with the insurance product you mentioned. Maybe give us an update on the that part of the business, the kind of urban user strategy or the Beyond strategy. Where are we at there? Where are we at now? I know you've got fuel. I think there's restaurants. How should we think about that business evolving? Are there more verticals to roll out? How does the merchant acceptance footprint look? That's throwing a lot at you, but give us your thoughts on state of that side of that business.

Absolutely. So I love talking about our toll business. I think it's amazing. And so on Beyond Tolls, we started down this journey a couple of years ago, Beyond Toll represents probably about 10% of revenue last year. And to your point, it does cover parking lots, several fast food chains as well as fueling. And we think fueling, because of the recurring nature of it, I may not always stop at a McDonald's or Habib's to get a meal, but I have to fuel my vehicle as I'm driving around a lot. And so the size of the transactions, the MDR we get, we think the economics are really interesting. So we think that's a huge opportunity. And it's still fairly early innings. We've doubled the size of our network, fueling network in the country to about 1,400 gas stations. We have a plan to, again, double this year. But even in doing that, we're only halfway to where our stated target is in terms of market coverage. So we still have another couple of years of build of the network itself. But the good news is, as we build it, they do come. And so if we look at our fueling transactions from a year ago, we're up 70%. And that should just continue because one thing we're doing is being careful about how we market it. I don't want to market a ubiquitous network because I don't have one yet. And so as I build the network in certain urban centers, I then market around that to consumers that operate in that geography. But I can't market to everyone yet because I don't have enough coverage. So we think there's going to be a multiplier effect that, as I have enough urban centers and they're connected through the highways that I get a great network effect that I can then market more broadly to that base. So we think that's a huge opportunity. But the 2 others that we're also super excited about, as I mentioned, we are a licensed broker now in Brazil, bringing insurance company products to our client base. We've already onboarded the first circa 30 or so and are off to the races there. So I think that will be really interesting. And then this lodging opportunity. A lot of our tag holders who our consumers use it for vacation. And so when they head out, where are they staying, maybe I can help them with accommodations. So we think it's a really interesting opportunity to expand the relationship beyond the tag. And really, it's the financial wallet and the fact that you're mobile and you're doing things, you need our services, we're here to help.

That's fantastic. Give us an update on the CAIXA relationship and sort of what inning we're at in terms of harvesting at the yield [ of that ] you will over time.

Super early, super early. So this is a distribution play. So they had -- this is the largest bank in terms of number of account holders. So it's going to allow us to reach entire country in a way that we couldn't before through their branches, their ATM networks, their relationships, et cetera. Last quarter, we basically gave the products to the employees of the CAIXA JV so they could get familiar with them. They could use them, understand them better. And just now in this quarter, we're just now starting the actual marketing and going to market. So again, super early, but it's a distribution play to help us get more tags and other products in people's hands all around that country.

Okay. I wanted to ask also, completely separately, moving on from Brazil. I wanted to ask about interest rates and interest rate sensitivity in the business. Can you remind us about how higher rates sort of flow through the model? I know there's probably some debt impact in some other places where it might have an impact. But give us your thoughts there.

Yes. So predominantly, it is going to hit our interest expense line. So we do have a couple of fees that are tied to broader interest rates, but not material. So we wouldn't really see much on the revenue side. So it's going to hit our interest expense. So we've got -- whatever it is, $6 million of debt, of which about $1 billion is hedged. And so that will flow through. In our model, in our revised guidance, we actually raised our Q2 to Q4 LIBOR assumption by 100 basis points. So we went from kind of 54 to 154 for the remainder of the year. We anticipate exiting in Q4 somewhere in the low 2s in terms of LIBOR, call it 220, 225 basis points, somewhere around there. I don't know how it's actually going to play, but we factored that into the guide. Offsetting that, Ramsey, would be interest income. So we do have cash deposits, either retained earnings or customer deposits in various countries where we earn interest on those balances. The big one would be Brazil, where they've increased their interest rate to like 12%. And so I'm earning interest on all those balances. I don't give it back to the clients. I just keep it. And so that helps to offset the interest expense that we would feel on our outstanding debt.

I see. And Charles, I'm going to sneak one more fast one in here even though we only have a minute or 2 left, which is a question just on M&A and on balance sheet deployment. Give us your updated thoughts on the environment and how you're thinking about buybacks versus M&A.

Sure. So pipeline is good. We've got things in various stages, a couple of things in corporate payments, several things -- a couple of things in the lodging space. I'd say that M&A is always our first protocol because it gives us an opportunity to grow into the future. We have raised the bar a little bit in terms of return requirements as our stock price continues to be dislocated from our results. So we have been active in Q1 in terms of buybacks, but we're balancing it. We're not being too aggressive. We want to make sure that if any of these deals are ready to close, we have adequate liquidity to do so. So M&A first, but we are active in the market buying back.

Got it. Unfortunately, we're out of time. Charles, thank you so much for your time today. It was a great conversation. I really appreciate it.

Thanks, Ramsey. Great to see you.

Thank you.