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

Welcome to the Deutsche Bank 2022 Tech Conference. My name is Nate Svensson. I cover the payments and fintech space with Bryan Keane. And I'm very excited to be joined here by Charles Freund, the CFO of FLEETCOR. We're going to go over some questions that we prepared, and then open it up to the group for question-and-answer. So Charles, how are you doing?

Fantastic, Nate. Thanks for having me.

Yes, thank you for being here.

So just to start off kind of high level, tell us about where you think the company is, big picture, how is FLEETCOR positioned coming out of the pandemic facing all the macro headwinds that we have. What are some of your key strategic priorities in the next months and years?

Sure. So I'd say overall FLEETCOR is positioned about as best we've ever been. So through the pandemic, we've continued to expand our product set, our capabilities. As you can see in our results, sales continue to be incredibly strong. Retention is strong. So organically, the company is doing quite, quite well. Macro-wise, mixed bag, right? Fuel price has been a bit higher than we had thought. Interest rates are going up, okay. But basically, from the organic strength of the business, we feel really, really good. The strategic priorities for the next couple of years, we have a kind of a plan, a 3-point plan across all of our clients to increase the number of clients, to sell more, increase the revenue per client and then also expand into adjacent segments. So an example would be increasing -- more clients, right? We've expanded our digital capabilities, doing really well with that in fuel. We're going to bring that to other product categories, scaling channels that work so just invest more. In terms of more revenue per client, we're adding more features, expanding our networks and capabilities. We can increase the value proposition and charge more or capture more spend per client. And then in terms of entering new segments, getting into white-collar travel and the lodging segment, getting to urban dwellers with our toll products, et cetera. So in all these cases, that 3-point plan, and we're executing against that.

Great. That's great. And so I hate to beat a dead horse, but this question is going to come up every fireside chat that we have, and it's on macro. And you kind of touched on fuel costs, FX. But maybe you can just kind of call out some of the underlying assumptions going into your second half guide and if anything has changed with regards to your expectations for fuel prices, for lodging prices, for spreads or FX since you reported earnings last month.

Sure. So when we went out with guidance, we had, I believe, $4.64 in fuel price for Q3 and then $4.29 for Q4. So we did model kind of a forward decline in curve. With that, we did expect, particularly Q3 fuel spreads to be higher as that normally is an offset for a declining fuel price. And basically, we're seeing that. Fuel prices have come down. Spreads have been quite good in the third quarter thus far. In terms of FX, the British pound and the euro are actually doing a bit worse than we thought, but that's more than offset by the Brazilian real that's doing much better. So on balance, we're fine there. And then in terms of interest expense, we assumed kind of a 2.2% LIBOR in Q3 and a 3.2% in Q4. So again, following that forward curve. Wait and see what the Fed does, right? We'll wait and see. But so far, things are lining up kind of as expected.

Got it. Got it. That's helpful. And I think just sort of like looking at the results that you've had recently, and one thing that stands out is the strength you've had in bookings and retention. So bookings were up 36% last year. Retention is still really strong at 92%. So maybe you can go over some of the factors that are driving that strength, and what your expectations are on your ability to maintain that strength in the face of a potential economic slowdown.

Yes. We're super focused on organic growth, which is basically just sell more versus what you lose in terms of retention. So sales-wise, we've made further investments. We mentioned digital over and over. It's been mostly limited to the fuel business, so we're expanding that into other areas. In terms of where we see real big strength, the lodging business way outperformed. And so in terms of coming out of the pandemic, you've got more people out on the road. They see the demand for the lodging product. Hotel prices are up. And so again, people want to save against that. So lots of demand there. We've had some robust airline sales. We mentioned the Delta app on the recent call but otherwise straight out airline sales being helped by our Levarti acquisition, which provides more software to the airlines to digitize their operations. So that's opening doors and getting things closed. We're super excited about that. Our Brazil business is just rocking and rolling. So we've continued to expand the value proposition by building out our network, offering ancillary services to our 5 million consumers there. And so that business has been up tremendously versus last year.

Great. Yes. So you touched on a lot of different products, service lines, et cetera. So hopefully, we can dive in a little deeper on each of those with the next set of questions. So moving to the fuel segment. Fuel revenue was up 7% last quarter, sort of aided by rising gas prices. But one thing that jumps out to me is I read the news, and I hear things about like refinery throughput and SPR releases and things that are beyond my purview as a fintech analyst, right? So maybe you can talk about some of the things that you're doing on your side to help stem the volatility in commodity prices and how you're going to help drive -- continue to drive organic growth in the fuel segment.

Sure. So the 7% percent was actually organic growth. And so I think on a print basis, it was about 18%. So you can see the benefit of the fuel price. We've kind of modeled that business in terms of how much we invest in sales and lose it be kind of a mid- to high single-digit business going forward. And it's just a function of sales investment because we are overinvesting in a couple of other categories. And so in terms of that future growth, continue to do digital sales. And we are expanding into this EV category in kind of a big way, which we can talk about a little bit later. And so we're playing a little bit of defense with the fleets we have, but we're also moving into offense, which will help, again, grow that category.

Got it. So let's jump into EV. So you mentioned on the last call, 4,000 EV clients in Europe. Just wondering, is there -- can you say what that number looks like in other regions like the U.S.? And if the U.S. is lagging behind Europe, which it likely is, how long does it take for U.S. to get to the levels that you're seeing in Europe? And maybe you can talk about some of your strategic plans in the EV space.

Sure. So most of those clients in Europe are in the Netherlands. We do have about 1,000 maybe that are using EVs in the U.K. When I say they're EV clients, they may have 1 or 2 vehicles in their fleet as they're slowly migrating. Here in the U.S., it's less than 100, right? So we're well, well behind. It's easier for a country like the Netherlands to make a move. They're about 5% of population, about 3% of our land mass -- or no, sorry, 0.4% of our land mass. So it's just -- it's a tiny place. So when you're talking about coverage, range anxiety, things of that nature, it's easier them -- for them to build out the networks and then make the move. Here in the U.S., it's just going to take a long time. We've got issues around demand, right? All the EVs in the country are in a handful of states, some of which are really pushing hard like California. But otherwise, a lot of folks aren't overly interested or pushing it. It's going to take a long time to get EVs to the people. So we have supply chain issues and other things that are keeping it kind of slow, the infrastructure build-out, the grid, upgrades, et cetera. So it's just -- it's going to take time. But we're planning for that future, right? We're all climate-minded. And so we want to be helpful in that transition. And so we're building products to enable fleets to make the move to EV in a smart way, continue to control all their purchasing, manage their fleets with robust data and then shifting our revenue model a bit to be more subscription-based because that's what is important for the fleet manager. It's about the data.

And so any -- I guess, just it comes to mind, any impact from the recently passed IRA bill where there's sort of more emphasis on EV build-out? Or is it just too soon to tell?

Far too soon to tell.

Got it. Got it. So sticking with the fuel segment for a little bit. On the last call, you talked about tightening your credit underwriting standards in the fuel segment. So maybe you can dig more specifically into specific actions you're taking to tighten the credit underwriting, and if you have any sort of outlook on when credit might normalize for you in that segment?

And so in the fuel segment, we acquire most of our clients through digital channels. And we're trying to do that on an end-to-end basis, so not human involvement. There is still, but we're trying to minimize that, obviously, for efficiency. And so we've got kind of dials in, in terms of credit underwriting but also fraud prevention. And the tightening has really been on the latter. It's fraud prevention. When you have a commodity that spikes up in price, fraudsters come out, and they want to try to grab that more valuable commodity. And so what we did was we were looking at activity online and looking at suspected fraud. You don't know if it's fraud, right? You're trying to make sure you balance what you're letting in vis-à-vis the fraudsters and such. And so we tightened that up a little bit because we saw a lot of inbound traffic. So the credit policy hasn't changed. Credit scores, size, et cetera, that hasn't changed, all around fraud prevention. And we've done a nice job balancing that out vis-à-vis others. So in terms of going forward, if there is a recession, I think we're very well positioned. COVID taught us quickly how to pivot whether I'm changing my credit policy for new clients, I'm pulling in credit lines for existing clients, whatever it may be. And so we're prepared if that shows up. We haven't seen anything yet. But if we need to, we can pivot quickly.

Got it. Got it. That's great. So moving on to the corporate payments segment. Obviously, B2B payments, hot space in the payments and fintech world. We saw great growth in 2Q kind of led by full AP outsourcing, in which I think grew 47%, which is great. So maybe you can dive specifically into that, talk about your strategy to drive more sales through full AP outsourcing.

So for those that aren't familiar, full AP, it's basically we take the entire payment file, and then we pay all the vendors however they need to be paid, whether it's by check, ACH, virtual card, through a cross-border network, whatever it is. So it's basically a full outsourcing of your AP. That business has grown like a weed mostly because we're overinvesting in sales. I'm pushing more sales there than, say, fuel. So investing a lot. And we've transitioned our sales force. So instead of focusing on selling a point solution like a virtual card or a purchasing card or a T&E card, we're trying to lead with full AP. And we get the full payment file and then can execute and monetize whoever we need to. And so that has more stickiness when you have that full solution. So we're really, really focusing our sales force in that regard. Our more recent acquisition of Accrualify helps to build out that platform, particularly in the mid-market. And then down market, we've gone a market with Corpay One, and we've got some exciting things we're doing there.

Got it. So I mean you just mentioned Accrualify. That was my next question. So what's specifically about that company excited you? So now you have their invoice automation capabilities. So maybe you can talk about why you decided to do that deal, what specific capabilities to bring in the table and where you plan to go with that relationship.

Sure. So in bill pay, there's kind of 2 different things you need to do. You need to capture invoices and run them through approval workflow software and make sure it's ready for payment, and then I need to execute the payment. Mostly in the mid-market, we were predominantly on payment execution, leveraging then our existing proprietary virtual card and cross-border networks to monetize those payments. We had some software on the front end but not enough in the mid-market. More of our invoice automation was in the lower market. And you need more sophistication when you're dealing with mid-market clients. And Accrualify's a great business, super modern technology. And so we're bringing that into the front end, so we can use OCR and other data capture to get invoices into the system, work them through approval, and then we already have all the payment execution on the back end. So we think this is a great -- it's not big. It's a couple of million, small single-digit millions in terms of revenue, but we think it's going to really amp up sales as people are looking for that full solution.

Got it. Got it. So we've talked a bit about the fuel segment, talked a bit about the corporate pay segment. So maybe we can talk about your efforts to sort of cross-pay -- cross-sell more corporate pay solutions into your fuel client base with things like virtual card and bill pay. So maybe you can talk of some areas where you're investing and sort of where you see the long-term fruit of your effort bearing out?

Yes. So this is still super early days, but the way we've decided to go to approach this is we're signing up lots of clients each quarter and in the fuel business in particular. And they've not had an experience with us. So they've never seen what my fuel UI looks like. So our idea now is to take clients where it makes sense and onboard them directly to our full Corpay One platform, which has bill pay capability and FX capability and fuel card capability. So we'll bring them on, and they'll have the fuel card reporting and controls. And they'll have these other modules that should they want to use them eventually, they're there. So they're already onboarded. And that will enable us, we believe. It's less of a cross-sell and more just kind of an upsell of what you're already using. So that's kind of our new approach. We think it's -- basically, it will be frictionless because the new client has no experience in any other platform, but it will enable us to turn things on over time.

Got it. So in one of your earlier responses, you talked about how excited you were about the business in Brazil. So it leads to the toll segment, right, and just incredible performance there. Results continue to accelerate. So what's driving that? Is it just pent-up travel demand in Brazil? So how is Beyond Toll impacting those results? And sort of where do you see the increased demand once the summer travel season kicks in, in the Southern Hemisphere going?

Yes. So our toll business, it's phenomenal. I was down there a few weeks ago, and it's hard to believe the strength of the Sem Parar brand. It's kind of like you're going to go make a Xerox or you blow your nose with a Kleenex. It's -- if you use a tag, people just call it, it's a Sem Parar. They go to our competitors and they say, "Can I have your Sem Parar tag?" They say, "No, you can't." But nonetheless, so Sem Parar, a ubiquitous brand, one of the most well known in the country. We've built an incredible, robust -- incredibly robust distribution capability there. When we bought the business several years ago, it was 4 million tags, now over 6 million. So we're selling at toll posits. We're selling with field people. We're selling in malls and kiosks. We're selling through vending machines. We're selling at supermarkets with tags like a prepaid card kind of tag. We're selling online digitally. So we've built all this robust capability to reach the market. We've expanded the value proposition of the product to include not just tolls and parking but fast food and fueling, even access to condominiums, which is also a distribution channel and getting it out of your house. And oh, by the way, if you want to turn it on for fuel or other things, you can. So again, all of this, it's just basically anywhere you go. In your car, we're trying to simplify your journey using our tag. So it's super robust and a differentiated value proposition vis-à-vis our competitors, which allows us to get more ARPU. So really, really robust business, long runway there. Because of the strength of the brand, it's trusted, the relationships we have with 3.5 million consumers, 5 million consumer tags and another 1 million business tags, cross-selling into that group with ancillary products like auto insurance, things of that nature, we think it's a big opportunity. So we're piloting that now.

Got it. And is there anything you can say either quantitatively or qualitatively on where you see the summer travel season going in Brazil or other places in the Southern Hemisphere?

Yes, it's interesting. About 40% of all sales of tags happened in the fourth quarter, at least in the last couple of years. And then it's like 20%, 19% happened in the month of December. The reason is that's their summer, and folks are heading out to the beaches. And they need to travel on the highways to get there, so they load up on their tags and such. So always see very, very robust sales in the fourth quarter, which then leads to revenue in the next. So we're super excited to see how that goes. In terms of Beyond Fuel, which you mentioned -- Beyond Toll, which you mentioned, it represents about 10% of the revenue now of that business. So it continues to grow. But we're still a few years from where we want to be. We've got about 1,500 fueling stations right now. We want to get that up into the 5,000 to 6,000. So we have a few years of still build out of that network. And once we do that, we believe we'll have the network build-out between urban centers and the connections along the highways that will create the network effect to really amp up that volume.