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

So I think we're ready to begin with our next presentation. My name is George Mihalos. I am the fintech analyst here at Cowen. It's my pleasure to introduce to the conference this year, FLEETCOR, Charles Freund, the CFO. Charles, thank you so much for being here. I appreciate your time and helping us go through the story.

Delighted to be here, George. Thanks.

Why don't we kick things off? We're going to play a little bit go around the world, if you will, maybe go around the business segment, if you will. The fuel segment, obviously, corporate payments, you got tolls in Brazil, hospitality and travel. Just kind of walk us around what you might be seeing just broadly speaking within the segments since you reported perhaps in early May.

Yes. At the highest level, I'd say that businesses are performing in line with expectations. The one anomaly you might say is around fuel prices. So we had anticipated fuel prices would have a gradual decline from, call it, April through the rest of the year. And in fact, prices remained high and have actually gone up from that point. So fuel prices in April came in around $4.50 and have exited now in May at close to $5 per gallon, so that obviously has a benefit for the company. In terms of other performance, sales continue to be good. Retentions continue to be strong across all the businesses, so very much in line with what we're expecting.

Okay. That's great to hear. Another sort of high-level question, and that's obviously inflation. We'll leave the R word to the side. Let's just talk about inflation right here. Generally speaking, when I think of payments companies, I think of inflation as being sort of a net positive at the end of the day. And I'm just sort of curious, how are you seeing that across your business? And what are the segments that would be most impacted?

Yes. Certainly, we track very closely fuel prices as there's a direct correlation between that and our revenue. What I'd say is we also anticipate a benefit, albeit we haven't figured out how to necessarily track it in our corporate payments business. So as you monetize payments through virtual cards and such, that revenue stream is based on interchange, so the percentage of the transaction. So theoretically, let's say, I have these five bottles of water. If those go up in price due to inflation, I still have to buy the five bottles, but I'm going to pay more. So my invoice is higher, we would make more revenue. The issue is, how do you track that? Is it the size of the transactions, it's too volatile, who knows, depending on mix from customers. But theoretically, that would be a place where we'd see benefit from inflation. Lastly, I'd say in our lodging business, hotel rates have come up, and that has a benefit, but corporate payments would be probably the biggest area outside of fuel.

That makes sense. Charles, you talked a little bit about fuel. And obviously, anyone who drives a car can see what's going on there at the pump. But just remind us for everyone's benefit, how much exposure does fleet have? What's the sensitivity to fuel prices for the business overall? And then maybe you could remind us how we should be thinking about fuel spreads. I mean I certainly mismodeled that in the first quarter. It came in way better than what we were anticipating, but how should we be thinking about that?

Sure. So for those that aren't super familiar with FLEETCOR, about 40% of our business is in fuel payments. And for every $0.10 movement in retail fuel prices, it translates to about a $6 million to $6.5 million annual revenue benefit for the company. Now in a rising fuel price environment, generally, what's causing that is oil prices are going up. If oil prices go up quickly, retail prices can't respond fast enough and you get spread compression. Now what we saw in the first quarter and what we continue to see is that retailers are kind of taking a more prudent approach given all the volatility, where even when oil is bouncing around, they're keeping the retail prices higher. And because of that, spreads are actually holding pretty well. I'd say in the early part of May, the first kind of 2 weeks, we saw a bit of compression, but that has now bounced right back to where we expect. That compression was due to oil prices moving up. And so now, like I said, we've exited the month at nearly $5 to a gallon.

That's helpful. And just maybe to kind of finish off that point as it relates to fuel. When you think about credit to customers and obviously, the lending component to it, how are loss rates tracking relative to your expectations?

I'd say loss rates are okay. Now AR balances are higher. And so in our business, demand for fuel doesn't fluctuate too much with pricing. If I'm a trucker, I have to deliver the water. I have to make that delivery, right? I may pass on some fuel surcharges, but I got to make the delivery. And so volume continues to be okay. Similarly, in our local fleet business, where most of our revenue comes from, think of the plumbers, think of roofers. If you have a plumbing leak, that person needs to show up, right, regardless of what the fuel price is. So the demand for fuel, the usage of fuel doesn't fluctuate too much with price. Given that, however, AR balances are higher. So if I'm spending 100 -- I have 100 gallons a week, but fuel prices have doubled, my invoice is twice as much. If my small business goes out of business, it does translate into higher credit losses for us. We've seen a little bit of that in Q1. The other thing related to credit losses is also around the vintage of a customer. When you have new sales, you try to do your best to underwrite but it's not always perfect. And so sometimes, you get it wrong. And those businesses, we tend to see higher credit losses with new sales versus the base customers. You've been with me 2 or 3 years. Your business is stable. Clearly, I did a good job underwriting. Unless you get into some other type of financial trouble, we're going to be okay. And so losses, because our sales have been so good in the last 2 years, year-to-date -- sorry, 2021 and year-to-date 2022, we are seeing some of that flow through as well.

So maybe just to put a finer point on that, it sounds like you're seeing normalization more than anything else across credit trends. Nothing abnormal?

That's correct. Correct.

Perfect. Another topic is your supply chain and disruptions and truck labor inflation, all that good stuff which obviously, there's some exposure to. Charles, can you talk a little bit about what you're seeing sort of the over-the-road trucking versus the local fleets and obviously, you have more exposure to those local fleets. But what are you seeing there in terms of those end markets?

Yes. So in our fuel business, about 25% of our revenue comes from over-the-road trucking. So think 18-wheelers going across the country delivering stuff. And that business has been soft. When we say soft, when I look at customers that I have in a quarter and I look at them a year later, the volume and revenue that we're generating from them is down low single digits. And so that softness has been persistent for several quarters now due to the labor shortages that you mentioned. We haven't seen further decline from that. So the supply chain issues that you're mentioning haven't really translated into our business.

Okay. Okay. That's good to know. Why don't we shift gears to corporate payments now? Can you talk a little bit about some of the cross-sell and sales opportunities you have now that you've moved AFEX over to your platform?

Sure. And so cross-selling at FLEETCOR, I don't want to say it's a new concept, but it's something where we haven't done a lot of it before. We've been more focused on selling single products to certain categories. Now we're focused more on bundled selling and enabling more cross-selling given the portfolio of products we have across the B2B payments arena. So corporate payments, specifically, we have bill pay solutions. We have virtual card solutions that help to digitize checks. We have an FX platform. We're taking all of those products and looking to sell them back to our large fuel card customer base. One of the key initiatives that we've done, we acquired a small business called Roger. We've rebranded that Corpay One and provides a bill pay platform for very small businesses, which we can now turn and cross-sell that into our fuel card base. We're also looking to take that and sell it not only domestically, but also to our international fuel card base. We're looking at in Australia and New Zealand, where we have a good fuel card presence and a good cross-border presence. Again, starting to cross-sell in those markets. So I'd say across most of our major geographies, North America, U.K., Australia, where we have both good fuel card presence and good corporate payment presence and in Europe and Australia, where there's more cross-border activity just because of the import-export nature of those countries, we see big opportunity for cross-selling.

Okay. That's helpful. And you brought up Corpay. So obviously, I have to ask on that. The progress that you're seeing there, it's early days, just to be clear, but just kind of help us how you benchmark success there and maybe talk a little bit about the early progress you're seeing in those endeavors.

Yes. So the platform that we bought, originally Roger, now Corpay One, is purely bill pay for small business. And we continue to sell that product in the market. We have a couple of thousand clients on that product. What we've done, we went to our fuel card base, and we said, hey, would you be interested in this? Yes, but what's the issue? I want to see all of my spend in one place. I don't want to log into a fuel card platform and then have to log into a bill pay. I don't want to do that. I want a single solution. And so we've been rearchitecting and combining those platforms. So now you can have bill pay, regular kind of T&E cards, if you want, fuel cards, and we're plugging in our FX solutions. We can handle any cross-border you may have. And so it turns each of those into more of a spend management platform. So any small business can see all of their outbound bills, car payments, whatever it may be. And so that's all in process. We'll then circle back and start remarketing to fuel card clients in the latter half of this year.

And that will give you more exposure to that SMB segment that maybe you weren't as focused on originally?

Certainly not from a corporate payments perspective. Legacy corporate payments for us has really been focused in the mid-market, and this takes us down to clients that would be sub-$10 million in revenue. It also creates an opportunity where we can go back to even some of our corporate payments clients in our cross-border business and actually now market the bill pay solution for bringing it all together into one platform. So we have a bunch of small businesses that now don't just use me for FX, use me for all your bills.

So that goes to your point around bundling a number of services to the clients. Charles, anything to call out as it relates to pricing on the corporate pay side? Just there's always a focus around yields, obviously, as you're aware of. Does anything feel different there? Or is it all sort of business as usual?

I'd say we've seen more competition develop in what we call kind of channel or partner processing. This represents about 11%-ish of our corporate payments business, where we provide a platform and networks to other people who then offer corporate payments products to their clients. It tends to be a high-volume, low-rate yield business. More people are coming into that space and chasing volume. And so they're going after that and they're bidding on those things. The rest of our business, more focused on direct to end client selling, which carries a higher rate. And so what we've done is said, okay, I'm not going to focus and sell as much new partners. I'm really going to focus on all my sales investment on that direct selling. So from a mix perspective, we actually think yields are going to look pretty good. And as we're doing more of the bundled selling and selling more of a full AP solution that also carries higher yields. And as we move down market into smaller businesses that don't expect as much as rebates and such, again, higher yield. So we're all about chasing those profit pools and yield as opposed to volume.

That makes sense. And just curious, the RFP process, is the competition similar to what it was, say, a year or 2 years ago? Or is the cast of characters maybe changing a little bit?

In that small kind of that channel thing that's 11% of revenue, it is more intense. On the direct side, it's way underpenetrated. And so in terms of runway, competitive forces there, there's plenty of green space for us to work in.

Okay. Okay. That's great. Just curious on that point, is there a difference when you look at that virtual card side working with one network versus the other? Or do you kind of consider a lot of those capabilities fairly similar?

Interesting question. In a virtual card network, you're using, say, Visa or Mastercard or Amex issues their own virtual cards, you're using the rails. However, in order to use Mastercard's rails and have a merchant accept your virtual card, you have to contract directly with that merchant. You have to enroll them. So even though they have agreed, I'm going to accept all physical Mastercards, they don't have an obligation to accept virtual cards. So all the vendors need to be enrolled. And we've had a virtual card platform and are one of the largest issuers on -- for Mastercard in this arena. So we have a network of 1 million -- circa 1 million merchants that we're settling with and we've negotiated with for acceptance. And that's how you really monetize corporate payments. It's not sending out a lot of checks and wires and ACH, but can I get merchants to accept the virtual card, where I can earn interchange coming through the Mastercard network. But you have to enroll. And so just because you have a modern platform doesn't mean you have a network of enrolled merchants that allow you to monetize all of that spend. And so when you say network, yes, I use Mastercard's rails, but it's my merchant network.

No, that's a good point. Why don't we move on a little bit to lodging. Just specifically, I call it the airline business that you guys acquired somewhat recently. How should we -- is there any more recovery left there if we kind of benchmark that to 2019 levels? And maybe you could remind us how does it index to say cross-border versus domestic airliners? Or does that not even matter at the end of the day?

Yes, I'd say that within our lodging business, just kind of the three businesses. One's workforce lodging, tends to be more blue collar drivers going around and staying near -- in hotels near highways and such. And we have a segment that serves insurance policyholders who've been displaced from their homes due to house fires or natural disasters, and that's a pretty stable, ratable business. And then we have this airline business. And in that business, we serve both traveling crews, so think pilots and attendants, as well as distressed passengers. So if your flight gets canceled and you're stranded somewhere and need to get a hotel, we're providing that service on behalf of the airlines. In the airline space, the domestic travel side has come back pretty full. The international space still has room to go. So Asia is still kind of locked down. Australia is really just coming out of it. Europe is still slightly depressed in that regard. So we still see more recovery in that international side.

Okay. That's Great. So there's a little more wood to chop there if we're thinking about it that way. The question always comes up, so I'll ask it, the Russia business. Any updates there? How should we be sort of thinking about that? And it looks like the ruble is no longer a big headwind for you, guys. It was maybe a little bit different than what we were thinking back in March and April, so just curious if you could provide an update there at a general level.

Sure. And so we do operate a fuel card business in Russia. We have about 600 employees there. We've been operating there for a decade. First and foremost, we're concerned about the safety and well-being of our employees. We do have a handful of employees in Ukraine that we're supporting and in some cases, relocating if desired. The business is performing fine. It continues to basically exceed our expectations. We continue to sell and service clients there. We are abiding by all the sanctions, so we are staying in compliance. We have made moves to derisk. So you might anticipate a slowdown in the Russian economy. We've pulled back credit lines, we stopped issuing unsecured credit with new sales. Despite those activities, the business continues to perform. However, given the uncertainty in the environment and such, we are moving the business into what we call an isolation mode. So it will be ring-fenced. It will have an independent board. In that way, it can continue to operate in Russia, only Russia with Russian oversight, which removes it then from the governance of the sanctions. So EU and U.S. people can't have direct oversight or management update of the entity. So we're setting up all that governance now. We plan to implement that in the next couple of weeks. And then we'll continue to explore other options, which could be a sale to a third party, it could be a sale to management or something of that nature.

Appreciate that update. Why don't we shift gears a little bit to margins overall? I mean, obviously, fleet has always produced very, very healthy margins, even adjusting for fuel going your way now, which is obviously a nice benefit. But given inflation, given sort of the tech transformation or the tech upgrade that you're undergoing right now, are there any sort of structural changes to the margins that we should be thinking about longer term?

Not materially. So the tech modernization, as we're taking more of our platforms up to the cloud and such, this is a 3- to 5-year type of transition. So we're putting millions -- tens of millions of dollars of capital towards the effort, but it's going to take time. And so that would be a 3- to 5-year type of discussion to be had. The other thing in terms of our margins is around acquisitions. So some of the businesses we acquire don't always have the same line average. Fleet runs mid-50s, not every business does. And so sometimes, there's a bit of a reset, particularly in things like the airline business or the insurance business where you have big clients with very high SLAs and standards, the margins aren't quite the same. And so there's always a bit of a reset as we do those types of deals. What I'd tell you is that for current year, we've had a reset in terms of credit losses. Credit losses were incredibly low, ridiculously low in 2020. It kind of come back and are normalizing. So that's affected the margin in Q1. This year, we are -- have slightly higher stock-based compensation. That will normalize again next year, and that's about 1.5 points in terms of the impact in current year. So we run mid-50s. We do have fixed costs. So over time, that margin should continue to expand with resets for certain acquisitions.

Understood. And it sounds like the tech transformation will allow you to continue to invest in the business while maintaining the strong margin. Is that the way to kind of think about the longer-term outlook for...

Certainly.

Perfect. Perfect. Why don't we stop there and see if there are any questions from the audience. Okay, I'll carry on.

Not sure if you asked but [indiscernible] electronic or electric trucks [indiscernible] vehicles, how does that impact [indiscernible]?

Good question. It is often asked. And it's not just trucks but cars, vans, everything in between. So the services that FLEETCOR provides goes beyond just buying fuel. It's about data. It's the mileage of the vehicles. It's the usage of energy relative to those distances. It's the controls, who's buying, where, when, et cetera. And so even in an EV environment, there are still controls that you want to have around your fleet that allow you to manage it, measure it, compare use cases. EVs work but not for everything. They're not great in super cold environments, not great in super hot environments, not great in mountainous environments. If you're traveling with a heavy load, it's one thing. If you're delivering Frito-Lay potato chips, that's a different thing. Okay. So there are different use cases. You want to be able to measure all of that. So data is super important, and that's one of the things that we provide. And so as some fleets have started to make the migration, we continue to provide those data services and get paid accordingly. But it's a different kind of model. It's more of a software-as-a-service subscription fee, monthly charge per vehicle per se. We could charge per transaction or data feed. So slightly different models, but what we're finding thus far, and it's super early days, we're finding the economics hold up okay. Now will that continue forever? I don't know. So because of that, and people say, oh, this could have a negative impact on your fleet business, I'm not a believer, but okay, that's the bare thesis. So what FLEETCOR is now doing is we're shifting gears a little bit. Yes, I'm going to continue to evolve my product to help fleets make the migration and have full comprehensive view of their fleet costs and performance, but now I'm also going to shift on the offense. And what I mean by that is we're looking for opportunities where we can serve other participants in the EV ecosystem that are going to benefit from the migration. So even if you think my fleet business might be negatively affected, I'm looking at other things, which are going to be very positively affected by the migration. And my hope is that, that calms people down a little bit. It's -- in our mind, it's a very slow process. Large fleets tend to move faster than small fleets, and we do a lot of business in small fleets. Cars move faster than vans, which move faster than trucks which move faster than 18-wheeler trucks. We tend to skew more in the trucking. We don't do a lot of white-collar stuff outside, at least not outside of Europe. So it sets up. It's going to be a long-term thing. But we want to be ready for it. We want to be helpful in that regard, but we also want to help alleviate the bare thesis by getting on offense.

Maybe just to put up, again, another finer point on that, Charles. The penetration of EVs across your fleet customers, I assume it's extraordinarily low. Just curious if you have a rough estimate of what that might be.

So it differs by geography. And so if you said in the Netherlands, which is a little further along, it might be low double digits. You go to the U.K., it's low single digits. You come to the U.S., I can't even measure it yet. You go to Brazil, who tends to focus more on biofuel, right, and all the sugarcane they harvest, they don't want to talk about EVs in that country. Okay. So it does set up different by geography. Like I said, it sets up different by segment. But it's very, very low, which is why it's hard for us to provide metrics and a real good forward forecast. The one case that I mentioned a couple of quarters ago in the Netherlands is the one market that's a bit further along and the economics are holding.

No, I appreciate that color. Since we were to Brazil, Beyond Tolls, how is that program going? And that's obviously one that you've seen a lot of focus on it. The rollout of the petrol stations, where are we in sort of that migration?

It's still pretty early. So we doubled the size of our network last year. We've got a plan this year to double yet again. That would take us to about 2,400 gas stations in the country. Now Brazil is a big place. They've got circa 40,000 to 50,000 retail gas stations all around. But obviously, not all of them do the same amount of volume. So we're focusing on urban centers and then the highways that would connect those urban centers to build out our network. Our goal, we think, is probably the right balance of penetration would be around 5,000 to 6,000 gas stations. So even exiting this year, we're only halfway to maybe 1/3 of the way of where we want to get to. The good news is as we add the sites, the volume comes with it. So we've seen transaction volume up 70% year-over-year. Good news. What we haven't really done yet though is seen the full network benefits. What I mean by that is I've got 6 million tag holders in country. I don't want to go and tell all 6 million, hey, go use your tags at all the gas stations. Why? Because I'm not in all the locations they need me to be. I'm focusing on certain cities and creating density. There's been enough network that I market to that dense group, and I can service them and they can be happy because there's enough coverage. And I move to the next city and I do the same thing. But once I have enough cities, and then I connect through the arteries, the highways, where by the way, they're using a [ MyToll ] product on the highways anyway, that's when you'll see the broader network effect. And then I can market it very aggressively to the entire base.

That makes sense. So that's a much bigger opportunity because the average ticket is going to be higher.

Yes. And we do not earn merchant discount revenue on toll transactions. We charge a monthly fee and then if people use it or not, that's their business. But when you go to a fueling transaction, I do earn merchant discount rate on that. And so it increases the rate per tag that I can earn. It also helps with customer attrition or call it retention. So the more use cases I have for a tag holder, use it for tolls and parking, fast food and fuel, the retention is way better because people value the product more. And so one, it helps me maintain my pricing, it helps me retain my customers, and it creates a differentiated value proposition as I sell the product. So we think in terms of a 3- to 5-year midterm opportunity, there's a lot here.

Great. That's great. I can't end one of these without a capital allocation question. You guys generate a lot of cash. I think you'd say you're not seeing fair value in the stock right now. I think Ron would certainly say you're not seeing fair value in the stock. Layout how you're thinking about capital allocation going forward, whether it be buyback or M&A or -- how are you thinking about it?

So our first protocol for capital allocation is always going to be M&A because it creates capability and potential for future long-term growth. That said, we have been active in market, as you can imagine. And we're balancing that. So I'm buying back stock, but I'm also have several things in the hopper in terms of deals and making sure I have plenty of capital to go pursue those. So we're approaching it in both ways.

Just standard question I ask everyone. Private company valuations. Have they gotten more reasonable in your opinion? Are they at a point that could be attractive to someone like you?

Somewhat. So they came down a bit, but I'd say that expectations are still, let's call it, hope of the private investors. It's going to come back. Okay. And so they're kind of holding out a little bit. So it hasn't been anywhere near what we've seen in terms of the public -- the growth stocks coming down 50%, 60%.

Okay. Appreciate that color. Just want to see if there are any other last minute questions here from the audience? Okay. I think on that note, Charles, I appreciate your time.

Fantastic. Thanks, George.

Good to have you.