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

Why don't we get started? My name is Dave Koning. I'm a senior research analyst at Baird. I cover payments, fintech and services. I'm very thrilled to have FLEETCOR with us this morning. We have CFO, Chuck Freund with us. And I think many of you know, FLEETCOR, they do a lot of different things along in the payment ecosystem from helping fleets with their credit card, purchases, some lodging technologies and many, many others, and we'll get into all that.

But maybe what we can do is kick it off a little bit. We've been doing this with every company, just kind of a state of the economy, if you're seeing any sort of recessionary pressures or kind of what the high-level macro is in your business.

Sure. So let me just first say, for those who don't know FLEETCOR real quick. So we do business payments, outbound payments. And we do basically 2 things: either help businesses with what they buy or what they pay for, right? So whether it's fuel, launching tools, whatever, it's expense management, and then it's bill pay, AP automation. Those are the 2 things that we do. Just a lot of different flavors of those 2 ice creams. In terms of recessionary pressure, well, we haven't seen anything in our business yet. Obviously, we're all working through inflation, which actually helps payments companies with more spend. But in the main, our volumes have been very steady. Our sales are actually performing incredibly well as people are demanding more expense controls given the inflationary environment and the fear of a potential recession. And so demand online in terms of digital searching for our products is actually up due to this pressure or peer pressure.

Yes. That's great to hear. And maybe we can kick it off with your biggest business, the fuel business, about 40% of revenue. What are some puts and takes there? I mean the OTR business, local, international, some Russia? Like what -- maybe kind of review some of those and what you're seeing?

Yes. The fuel business is performing quite well. We do benefit from higher fuel prices, which are at kind of record highs now. For every $0.10 movement in retail prices, it's about $6 million, $7 million, call it, $6.5 million of annualized revenue benefit for us. So obviously, that's a help at the moment. As I mentioned, online demand for the products is quite high. Within the fuel segment, it does break down. About 75% is what we call local fleets. So these are going to be vans, trucks, service workers, that nature. About 25% is over-the-road trucking. In the trucking segment, we have seen a little bit of sluggishness with our existing customers, mostly related to the driver shortage that we've all heard about for a year or so now. That really hasn't changed. So that's been pretty stable. The small business is doing quite well. We've enhanced our digital marketing capabilities dramatically over the last several years, and it has produced a lot of new sales into that book. Over in Europe, I'd say that the U.K. has bounced back very, very nicely from pandemic levels. Central Western Europe is still a little bit sluggish. And I'd say the -- in that market, in particular, in Europe, we do a little bit more white collar work. So here domestically, it's blue collar services, think plumbers and such in the local fleet and truck drivers and OTR. Over in Europe, people get fuel cards as a benefit from employment is you have more white collar workers. And because a lot of folks are still working from home, we haven't seen that fully recover. There's still more upside to come.

Yes. Is there a point at which fuel prices going up, which are a clear benefit that they go up so much that trucking companies find different ways to do deliveries that could actually like reduce the actual gallon demand?

Maybe theoretically. We've not seen that in the history of the company, so it's fairly inelastic. If I have to go repair the plumbing or fix your roof, I have to go do that service. Now I may fuel surcharge your cost, but nonetheless, the service has to be performed similarly with transportation of goods. Now if there's a broader economic slowdown and people are just transporting less stuff, making fewer deliveries, that's possible, but we haven't seen any evidence of that yet.

Yes. Okay. And how should we think about this? So the 3-year kind of stack, like we're at about 109%. I think in Q1, the way we looked at organic constant fuel constant currency, all that. I think we're at 109% of 2019. We normally think high single-digit growth in fuel. So it seems like to us, it should be more like 125%, but it's 109%. Like what's the divergence? And is there just room to catch up in the next several quarters?

Yes. So the big factor there is really in a recurring revenue business, right? I sell a customer and they use my products for 7, 8, 10 years. And it's all about selling more than you lose, right? So sales versus attrition of customers. In 2020 with the pandemic, we really slowed down sales, right? Our salespeople were distracted as we got them to go and work from home. Our prospects were distracted, because nobody knew what was happening with the world. And we wanted to be very prudent around issuing credit, particularly in the small business segment. So our fuel sales were dramatically lower in 2020. What it means that, that tranche of customers is no longer there. And so it's not so much about a catch-up, but it's now just going through our standard model of sales being higher than attrition, and then our organic growth being 10% plus overall for FLEETCOR in the midterm.

And now that's why the last -- it feels like a few quarters now you've highlighted on the call how good sales have been recently?

Absolutely. Yes. So sales is the #1 indicator for future organic growth for our business, given our retention is quite, quite stable across the portfolio. So as long as that sales investment and production continues to increase, our organic growth should sustain and improve.

And what about over the next several years, the shift to either different geos, to local, OTR, I think of local as being probably, like if you could get more and more of that, it's higher yielding. Could there be a secular shift towards more of that? Or how do you see just mix in general?

Yes, I'd say most of our new sales are coming in the local space, obviously, as more folks are ordering goods online. We've seen a big uptick in van distribution and delivery, particularly in Europe and U.K. And so yes, there could be some shift certainly in terms of our sales investment, more of that is in the local space.

Yes. Okay. And then Russia, I think the filing -- and you said this on the call to a little over 2% of revenue. I think that all falls in the fuel segment. So it's maybe 5% of fuel. You also did an impairment. I thought it was interesting you did an impairment test in Q1. Normally you do it at a different time of the year, but came back with no impairment. Is the plan then basically that Russia business is operating as normal and you expect to keep going there?

I would not say it's business as usual. So let me be clear there. The business is performing quite well. It has grown substantially since we acquired the businesses years ago. We've been operating in that market for a decade plus. Now the sanctions have created an impact. And we've obviously been monitoring that business very closely. It's ahead of its plan, which is good. And we've taken steps to protect it. So if the Russian economy, because of the sanctions, starts to tank, we've pulled back any excess credit lines. We've stopped issuing unsecured credit to new accounts. We've moved money away from all the sanctioned banks, so to make sure that, one, we abide by the sanctions, and two, if there's an impact on economy, the business is protected. With that said, we don't know where the sanctions are going to go, right? They could get worse or more severe. Because of that, we're moving into what we call an isolation strategy. This is basically ring-fencing that business to operate completely on its own. All of its own IT licenses, its own audit, relationships, everything will run independently with an independent Board to ensure governance of that entity. We'll continue to own it. We will be the only shareholder of the business. We'll still consolidate the numbers. But management from the U.S. and the EU will not be involved in the business, and that removes the nexus from the sanctions. And so that will remain in isolation strategy and in that mode until such time is either the situation is resolved and things somewhat normalize or if sanctions get worse, the business is prepared that we could sell it if we have to go that path.

Got you. Got you. Okay. And -- this is kind of -- I don't know if I'm exactly right. I think revenue is maybe 2.3% and profits 2.8%. I'm pretty close on that?

Yes. The Russian business represents now depending on FX, which moves quite volatile for that market, represents about 3% of revenue and a little less than 5% of earnings. And one of the reasons is the earnings is a higher contribution is it's a high-margin business, and we also hold cash balances there that earn a very high interest rate right now, as they are trying to boost the ruble. And so for that reason, it creates a bit more at the earnings line.

Yes, yes. But if you have to run it very separately, does that add some expense later that it might actually come down a little bit as a percent of it?

Possibly, but so far, not material.

Doesn't matter. Okay. Okay. And maybe if we go to the corporate segment, you do several different types of payments, virtual cards, T&E, full AP outsourcing, the FX business. What are recent trends in each of those? Do they diverge a lot? I mean there's so many different kind of puts and takes throughout that business.

Sure. So we kind of separate that thing into 2 buckets. So one is our cross-border and then what we call payables -- domestic payables. Let me start with the cross-border piece, represents about 55% of corporate payments. It's growing. Sales are good. We've just completed the integration of AFEX, which is one of our competitors, and we ported all their customers and vendors onto our platform. And so that has gone well. We're still realizing those synergies. The work isn't quite done yet, but it will be by kind of the end of this year, but it has opened our eyes to more acquisition opportunities in that arena where we can just buy customers and vendors, shut down operations and get a lot of synergies. So we think that's an interesting strategy for that business going forward. Still doing very well organically, but we think inorganic can do really well. On the domestic side, our full AP business, this is where basically you outsource AP to me. Give me your AP file and I will fulfill all of your payments for you. That's growing circa 50% a year. Organic sales are huge, and we've basically taken our domestic sales team and oriented them to push that product. Because of that, the virtual card stand-alone product isn't growing, because I've shifted all the sales to full AP. And on the T&E side, I'd say we've seen a bounce back as travel has started again. We're all coming to conferences, face-to-face again, and I'm sure we're all spending -- I know I'm spending my company's money today. So good bounce back there.

And are there different verticals within like some of the payments that you do that are recovering at different rates or any different trends there?

Certainly. So construction is a big vertical in that arena. Residential construction was always pretty good, given the housing demands in boom. Commercial construction has slowdown, that's now come back. A couple of areas that have come roaring back as of late is really around hospitality, travel. So cruise lines are now operating again, not at full capacity, but way better than they were. Ticket brokers, people are now going to events again, sporting events, theater, things of that nature. So we've seen a big bounce back in some of those really highly affected verticals.

Yes. Yes. And is this something -- years ago, you were growing 20%, 30% kind of routinely, then COVID hit, as a slower period. Can we get back to kind of 20% plus growth in that segment?

Yes, I'd say organically, we're kind of high teens, high, high teens grower in the corporate payment space. And then through our inorganic, we'll certainly be north of that.

Yes. Okay. And yield has been -- yield on volume has been 65, 70 bps for a long time. I mean, it's incredibly stable, actually, even though there are so many things that kind of play into it. Like is that going to continue to be stable and maybe why isn't there more volatility in that?

Yes. So we've got a pretty nice diverse portfolio. In Corporate Payments, a couple of things, size matters. So the larger customers, right, take rates or less. So as we move further down market, where we're selling our Corpay One solution to really small businesses, our take rate is higher. Where we sell a full AP solution, which encompasses software and process, not just a virtual card, but full software and process. Again, our [ keep ] rate is better because I don't have to give up as many rebates to the clients, because they value the product more. So by selling more fully pay and moving further down market, we're actually pretty excited about where the take rate could go.

Yes. Okay. That's good. And can you remind us just a little bit of -- like Avid does full AP outsourcing, and you do too, but you also work with them? Like what's the difference between kind of what they do and what you do?

So similar front-end kind of software and such. They use our platform for virtual card processing, which is how you monetize the AP spend and our FX networks. And so when I take your full AP file, I pay some vendors by checks and some by ACH, some by wire. I try to pay as many people as possible with a virtual card, because then I get MasterCard interchange, which then I can share with the client if I so choose. We've negotiated that. Similarly, if you have any cross-border payments, and I run that through my FX network, I also make money there. And so what Avid does as a partner is they use our processing system to issue virtual cards on behalf of the clients, and to settle cross-border payments. The key and why people -- why wouldn't you just go do that yourself is around the networks. So in our virtual card network, we already have 1 million vendors that we already pay and so when you give me your AP file, I can match more of your vendors to my network and then monetize a higher proportion of your payments.

And how do you convince the company getting paid to take a VCC at maybe 1.5% fees rather than just get a check for free?

Yes. And so although checks seem like they're free, they're not. You deliver the checks in the mail, et cetera, check fraud is a big issue for people. I had personally. So nonetheless, so checks have a cost. Now why would someone take a virtual card, one, immediate payment next day, MasterCard settlement, and all the remittance data that comes with it. So sometimes even in our business, people send me a check, they don't put their account number on it. They don't put in the remittance slip. And there's a whole process of reconciliation you have to go through. When we issue a virtual card, it comes full remittance data. And so that reconciliation process is super simplified.

And what are maybe the 1 or 2 things you worried about in Corporate Payments? Like what could happen either macro or client leaving? Like what could happen that would have like detrimental effects to revenue growth?

Yes. So I mean a broader economy slowdown, spending could go down a little bit. Obviously, inflation increases spend, so that's a bit of a tailwind. The -- I'd say the biggest issue for that is really just sales, right? As the business gets bigger, I need to hire more salespeople and getting good productive salespeople is the big -- I don't want to call it a challenge, but if you said a risk, yes, it's just I got to hire, train and retain people in this environment. And the war for talent is on, right? And we compete every day for it.

And in both this business and in the fuel business, what's attrition even like? I mean once a client is on the system, you don't really lose them very often, right?

So in the Corporate Payment space, it's very, very low single digits. In the small business, Corporate Payments and in fuel, small businesses go out of business more often. And so half to 1/3 of the attrition in those segments is really just credit losses. They just run out of business.

Okay. And if we move to lodging, 10% to 15% of revenue. Historically, you did a lot of the worker hotel nights. Now you do more airline worker hotel nights too, right? Maybe talk a little bit about the mix of business, what the trend -- how the trends differ now that you've expanded into some newer stuff through acquisitions?

Sure. So there's actually kind of 3 groups within lodging. One would be workforce. So I think blue collar could be truck drivers, service people out on the road, stopping at lower chain scale hotels near highways, okay, because that's where they're driving around. So that would be about half or so of lodging. Then we've got an airlines business where the crews are traveling all around the world or when a flight is canceled and you have 200 people, who are stranded at the airport, they need lodging. They need lodging overnight. And so it's kind of an emergency service for distressed passengers. And then the third component would be insurance companies. So unfortunately, every day, homeowners are displaced, either due to natural disasters or more often, home fires, happen all the time. And so when someone is displaced from their home and they need somewhere to stay, whether it's for months or could even be longer. We provide that service on their behalf. And so between the airlines and insurance, they'd be about 20%, 25% each, ballpark. And so in terms of trends, we've seen workforce come back with the reopening and such. And that thing would grow kind of low mid-teens. We see the airlines has bounced back tremendously, particularly the domestic side, which is basically back to pre-pandemic levels. International travel, particularly around Asia is still a little slow, but coming back. In terms of then the insurance business, it's very stable. Unless there's a big hurricane that displaces a lot of people at once, it just kind of ticks along with kind of unfortunately people getting displaced each and every day. So I'd say that the airlines and insurance are going to be high single digit, whereas the workforce is more like low to mid-teens.

Yes. And why isn't that just -- why doesn't that just grow with either employment growth or GDP? Like why does it grow faster? Because the number of nights at hotels, it just seems like wouldn't grow much faster than low to mid-single digits.

So it's all about how much sales investment we put against it, bringing new clients on that we don't already have. So yes, existing clients as they grow with GDP and add employees, that works. But for us, it's about selling the new clients, and bringing them on to our lodging solutions.

Yes. Okay. Okay. And do you think much changes with the yield, I'm kind of remembering $12 per night or something like that to access your network and you get that $12, is that pretty stable over time?

Yes. It can fluctuate a little bit, but in the main, yes, that's pretty stable.

And is -- are there any pockets of the world where you could grow a lot? I mean, I think of it -- you mentioned international, I think of it almost all in the U.S., but are there pockets all through the world that you could grow more?

Certainly. So with the acquisitions, particularly in the airline space, it's taken us into international markets where we have not done really any lodging sales outside of airlines. So replicating what we've done with workforce domestically, with now the networks that we have all around the world and particularly in places where I already have an established base of customers, the U.K., Australia, Central Europe. These are places we don't offer lodging today, but we could tomorrow.

And I think a workforce and insurance, I think of them is a lot of like smaller clients that you've got on your platform. I think the airlines, though, as being big pockets of potential wins. Like if you could win Delta, let's say, I don't know who your big clients are, but if you just win one. Is that the way it is like if you win 1 or 2 really big airlines, that would have a meaningful impact and the rest of the business is more small?

Yes, albeit -- so in airlines, we can upsell. So sometimes they only take one of our services. I'm only going to use you for crew, okay? And you handle distressed passengers yourself. So we can upsell and get more share of wallet, or to your point, we can sell the next airline. And then with our acquisition of Levarti, which we announced recently, we actually have now operating software to digitize the entire operation of the airline, and it allows us to then embed payments on the back end. So instead of hiring me for your crew or distressed, you basically take my software for your entire operation and those other services just come along for the ride. So there's that opportunity as well, both to new and to existing upsell. In terms of the insurance side, though, that is working with the insurance companies. So we don't work directly for the policyholders. It's not a consumer offering. It's a B2B2C. So we work with the insurance companies, they work with the consumers. Obviously, we provide the white glove treatment for people who are distressed and displaced. But our client is the insurance company.

Got you. And if we move to Brazil tolling, I think in Q1, you got back to the 3-year CAGR 10% type path again like it came right back. And I think even through the pandemic, number of tolls, if I'm remembering this right, kind of 3% to 5% a year, there're a number of tags. It just really didn't get that affected. But maybe talk through that model, like is that pretty recession proof over time? And what's kind of happening there?

Sure. So our toll business, which operates exclusively in Brazil. We've got 6 million tag holders, about 5 million consumers, 1 million business tag holders. And the majority of the revenue in that is a monthly subscription fee for the tag. So even when COVID came, it didn't go down that much. People weren't on the roads and using it often, but they were still paying their subscription fees. So that's very, very recessionary proof. Now even today, as the country has reopened, a lot of people are still working from home. And so our parking volumes are still quite depressed, 20%, 25% versus where they were. So that's an upside to come. So when people use our product to go through the tolls, we don't earn merchant revenue. We just get the subscription fee. But when they use our product at parking, fast food or fueling locations, we earn merchant discount revenue and quite healthy merchant discount revenue on the fuel side. And so as we expand the use cases and the size of our non-toll network, that can be accessed with these RFID tags, we're going to get incremental volume and revenue per tag in the midterm.

And inflation, both of fuel and everything else helps on the volumes too?

For sure. And so in Brazil, these subscription fees that I mentioned every contract that we have with a customer has an automatic inflation adjustor. And that's just the way the country runs, because it's been volatile in the past. So our supplier contracts also have it. But because it's such a high-margin business, inflation helps us overall.

And I just can't remember if you said this before, but how much is the tag revenue and how much is the volume-based like interchange more revenue?

I would say the subscription-based stuff is still circa 85% to 90% of the revenue. So that nonsubscription portion is still runway to come.

Yes. Okay. And then gift and other, about 15% of revenue, some of that's been incredibly good the last like 6 quarters or so. And I remember, Gift for a long time had been declining, and it seems like something you might want to sell even, it's done a little better. But those 2 parts of the business, are these still things you think about divesting or maybe keeping them?

They do generate a lot of cash. As long as they're not a drag in terms of shrinking, we would consider holding on, but we always look at our options. And I'd say that the Gift business is obviously recovering coming out of COVID. We've also figured out how to do more with that business. So getting proprietary gift cards into the Apple and Google wallets, which make for a more instantaneous distribution, it's better for consumers. It's an upcharge, then we can charge our clients, it's the new service, selling through B2B incentive companies. Go to call centers and hey, would you provide a prepaid gift card as an incentive. So now we've actually helped our clients distribute gift cards, which they're super happy about. So there's been a couple of things that we've done there that have actually created the opportunity to grow. This is not just plastic gift cards at the retailer anymore. It's a digitized service that we're selling in different ways.

That would be a good -- like we should have an Analyst Day soon and you should give out a bunch of those gift cards. That'd be kind of a fun, though.

I'd rather see you spend money on the T&E cards that hopefully you have in your wallet.

That's a fair point. All right. If we look high level overall long-term revenue growth, kind of how do you see it? And maybe think even what are the ranges of like kind of realistic outcomes for [ Session, Good Case ], all that?

Yes, I'd say we build our models to grow at circa 10% organically. Obviously, with macro factors, FX rates in Brazil are better this year. Obviously, fuel prices are helping and such, will do better. But it's basically a function of stable retention. And then we think about our sales investment and what does that produce vis-a-vis. So am I getting more clients than I lose, yes. And we invest enough to do that at circa 10%. The reason we don't invest more is because it puts pressure on your EBITDA margin. And so therefore, we're always balancing slightly expanding margins with ever-increasing sales investment, generating return that helps us grow the top line at 10%-ish.

And can margins still go up? It seems like high 50s, right, for EBITDA margins. I mean you crush it. And is there room -- like is the mix as we go into more Corporate Payments and probably tolls grow pretty fast, like do those things help the margin?

Yes. And so obviously, we do have some fixed portion of expenses. And so we should see continued margin expansion. It's not going to be 55 going to 60, but incrementally 1 point or so each year as we move forward.

Yes. Okay. And then the acquisition strategy, I mean, huge home run over time, right? I mean you guys see, it's been incredible. Should that continue? And if we take that 10% growth, I mean, is acquisitions, I would imagine, are accretive to the 10%?

Absolutely, which is why we separate organic versus what we actually post. And what I'd tell you is FLEETCOR generates over $1 billion in cash every year. We're looking to deploy that and more. Obviously, with our earnings growth, we have more opportunity to borrow if we want to. We've been highly, highly acquisitive in the past. We've got a very robust pipeline to the extent that my pipeline doesn't move as quickly as I'd like it to. I also have the opportunity to buy back shares, which we have done in this quarter given the dislocation between what we think our value should be and what the Street is priced it at. And so yes, we'll continue down the M&A path, balanced with some buybacks when the M&A goes lower than I want.

We have like a minute left. But do you have 1 or 2 examples since you do so much stuff around payments, you made an acquisition and then you realized, oh, that really helped that part of the business as well, or that help that there's some synergistic stuff that you almost don't even realize because you do so many different things when you pull an acquisition that can help?

Yes. And so I'd say A good example of that is what we're hearing in the small business areas. We bought this business called Roger. We've rebranded at Corpay One. And we went out and we tried to cross-sell that to some of our customers. And what they said was, yes, yes, this is all great, but I want 1 portal to do all of my spend management and, oh, so you want your bill pay plus your credit cards plus your fuel cards, plus your lodging. Yes, that's what I want. Okay, I can do that. And so we're now rearchitecting that platform. So it becomes a single portal where a small business person can manage all of their outbound nonpayroll spend in 1 place, full visibility and also access a single line of credit to allocate across those purchases as they need to. And so from a visibility and cash flow management perspective, we think it's a world beater for the small business.

Yes. That's cool. That's cool. Well, that's all the time we have, but please join me in thanking Charles of FLEETCOR. Thank you for doing that. That was awesome.

Appreciate it. Yes. Great.

Yes. I went a little bit off of this whole thing.

So good.