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

Okay. Fantastic. Good morning, everyone. My name is Pete Christiansen. I'm on Citi's payments processors and IT services team. Welcome to FinTech 12. Welcome to FLEETCOR for joining again. I think you've come to pretty much every single -- we have -- every single one so far. So it's always great to have you guys back.

And a little bit of a leading question to start off with, this is injecting a little bit of my own personal view, but I think about FLEETCOR as a solid -- regularly a solid compounder. Upper teens EPS growth for multiple years, indications for upper-teen EPS growth next year. Segment growth looks strong. Retention looks fantastic. Robust free cash flow generation, always -- and shareholder return, an important feature of the stock. We think the stock's at -- currently at woodshed multiple levels. What is misunderstood about FLEETCOR today about its fundamentals and its growth opportunities?

So I'll kick us off. Hi, everybody, Alissa Vickery, CFO of FLEETCOR. We agree. It does feel like the woodshed, a little bit of Groundhog Day in our executive meetings when we talk about it, too, because fundamentally, we are performing. We are producing that revenue growth and that bottom line growth. And so trying to make sure that the market really understands what it is we're doing and what it is we're trying to achieve as a business. But fundamentally, trying to make sure people understand it really is simple. We are in the expense management game, and we are in the corporate payments game. Our products fit into those buckets. Regardless of how we disclose and the various nature of those underlying products and systems, it really is a game of helping businesses figure out better ways to pay, figuring out how to unify those platforms in a way to where from a customer perspective, they're able to experience really a harmonious environment, whether they just participate in our direct products in the AP space or if they're also managing expenses of their fleets that are going out in the market or staying in a hotel room or whatever it is. And so just trying to remind people, like we really are highly focused on the top line and the bottom line at the end of the day. And so it's -- we're diverse, and we're really a nondiscretionary spend category as well across our customers. And so as we move into, I'll call it, uncertain waters in terms of the world, we're not going anywhere. We're going to continue to grow this thing. We're going to continue to focus on that top line, which we've done some preliminary envelopes as we move into '23 for the revenue and sales lines. And we're bullish. We feel good about what our first pass looks like. It's early days on the full envelope, but we are a judicious user of our own capital, and we don't intend to sort of stop that trajectory of growth all the way to the bottom line. One way or another, we will achieve, and we're focused on it.

That's great, Alissa. I'm going to ask you one more. We're going to focus a lot of this on the corporate payments business because we have Rick Fletcher here, Head of Corpay. I want to ask one more question, though, first to Alissa just more generally. Great balance sheet health right now. I was looking back on my model, and I think since 2017-ish, you bought back 20% of your shares. Buyback authorization still pretty high with room to go. What is the capital allocation decisioning now, particularly at the stock at this multiple, obviously? It sounds like you want to buy back more stock. And -- but how does that equation change if you start seeing the price going up. Just generally, how are you -- what are the priorities?

Right. And so I would say from a capital allocation perspective, we continued alloc spending $1 billion to $1.5 billion per year. And we're going to use that capital either to buy ourselves back or look at what other offerings are in the market in terms of potential M&A deals. We're at a point where we are focused on the more accretive deals. We believe from a capability perspective, we really built out our suite of offerings over the last couple of years across the corporate payment suite; also, obviously, across our expense management solutions. And so really being focused on, I'll call it, scalable, accretive acquisitions as we move forward. As we think about the split, though, between buying ourselves back or buying other companies, we are looking at what those multiples imply. And quite frankly, if we're highly undervalued in relation to something we're looking at, where we know we're going to have to go do some work, it makes it a tough decision, right? And so we are inclined to buy ourselves back short of attractive M&A opportunities.

But Pete, things haven't changed, right? And we generate lots of free cash. It's always M&A first. And we demonstrated some pretty substantial discipline over the last couple of years. And when prices were super inflated, we were just like we can't pay it. And as we bought back a ton of our own shares to the extent that prices rationalize, and we like the pricing of the assets that we'll get relative to our own multiple, it will be a deal-by-deal decision. But ultimately, we love the positioning that we're in, and we love the flexibility that it affords.

Thank you. Thank you. That's great. Thank you, Jim. Now we have a really good treat today. I mean, Rick Fletcher, you've been part of B2B payments since, I think it was -- since the dawn, right? I believe you're credited -- you're one of the -- well, credited with...

I refer to myself as employee #1 from -- in corporate payments. So obviously, the company has a really rich heritage in fleet and fuel and transportation. And it was my 2-week assignment that's been 11 to 12 years now to kind of understand some set of revenue that the company was making in early days around a set of products that were beyond fleet and fuel and really kind of came up and champion the idea of creating a corporate payments division. And so we've compounded quite dramatically organically for the last 10-plus years. We still have a lot of runway. We are both a direct model as well as a channel model. We play in multiple verticals, multiple segments between enterprise, mid-market and SMB. And we just got a lot of runway in terms of expansion and growth opportunity both geographically and from a product set. So yes, I was here from the beginning and it's been a good ride, and we see a lot more runway ahead.

That's great. Now since you've been here since the beginning, you can, I think, provide us with some really interesting insights on -- I mean, I think all of us here know about the available opportunity in making payments, placing checks, all that. How has that sales cycle, the process of onboarding new clients, the education element of telling clients about all these efficiencies that you can drive, how has that changed? And do we get to a point where we start seeing a massive growth acceleration? Is there a tipping point do you believe that we're approaching on the automated B2B side?

Yes. So I mean, first, I'd say payments to just talk about the woodshed, right, payments, I think, is an interesting category. When you touch money, when you are at the epicenter of how companies operate, that's a good category to be in. I think we so much get thrown into the acquiring side of payments. We are more a network and issuing side of the payments game, which has got a lot more TAM, a lot more runway. And you guys think about commercial credit cards, you'll think about it in the traditional sense. You probably all have a corporate card in your pocket that you buy airfare and hotels and those types of things on it. So that's primarily been what a commercial credit card program has been. We've been able to take that concept and, one, put a lot more controls around it. Coming from our fleet and fuel heritage means we can build specific programs that are nuanced to the needs of our customers, wrap around those controls, expense management tools and software and workflow that would be better than a bank and compete in the traditional sense. But then bundle it over to the AP side, which from a commercial landscape is much larger but has been much more underpenetrated. And if you know anything about accounts payable, you know that it's fragmented, it's pretty bad. Most research would tell you that companies find it to be critically important, not core to their business, not something that they're good at and not something that they're spending their time on. And it's for them strategic in nature, and so they either go one of two ways. They spend a lot of their time brute-forcing visibility and compliance and controls with a set of systems and tools that are not efficient for them, bad calories. Or they just kind of say, "You know what, it's just not worth chasing the defect and what happens, happens, and we know there's some misuse out there." So when we can go out there and say, we're going to give you the ability to understand all your payments across multiple spend categories, how you're spending the money and whether that's good, they maintain the strategic side. But then all the administration, the outsourcing, the chasing of checks, the avoiding fraudsters that are trying to change ACH instructions, the moving to better payment in electronic modalities like a virtual card, that gets left to us. And that concept is really new. Like most -- that's not something that's been in the market for decades. So that awareness curve is happening as we speak, and that transition is happening. So I absolutely see an inflection point of acceleration in front of us.

On the AP side, last 3 years, you acquired Nvoicepay, Roger after that, recently, Accrualify.

That's right.

In terms of capabilities on the AP side, where is FLEETCOR today? And do you feel you have the capability set to serve your existing market but also the target areas that you're able to get?

Yes. So we always talk about payments in at least 3 aspects. The first is the funding. So you have to actually have the money. And so in payments, the ability to provide working capital to credit lines are typically how banks compete. And we can play in that way through a lot of different rebate structures, a lot of different ways to provide credit lines. And then there's execution, which is actually movement of the money. So we do that across multiple networks with a lot of different controls, and that's probably been a really big area of differentiation and expertise for us. And then the third component is the workflow or the process around the payment, either post transaction, did you spend the money that you should have and do I approve it; or pre-transaction through PO and electronic invoicing. So I think the first two, we've done really, really well historically. On the workflow and the technology, it's been something that we've done better than banks but probably not as well as a fintech. And so we -- the acquisition of -- that you mentioned of both Roger and Accrualify particularly, really enhance the workflow that we can have around that payment. And the other interesting thing about our company is we do that for both expense management and AP. Most of the companies that you probably think of -- that you can think of as a fintech or something would maybe be really specialized in AP or they'd be specialized in expense management. We are in both. And so we really believe that those together makes sense for us to go to market. They give us scale in terms of distribution and getting a cost of acquisition that's highly attractive. And so we like the assets that we have. The next-generation process to bring those together in more of a platform sale so that you can land in a spot to manage your expenses that would be fuel, cross-border, purchasing cards, bill pay. And to be able to manage all those expenses but with the scale and the precision of the point solutions that we have, not doing it kind of at a C-minus level but with the full robustness of the set of assets and lines of business that we have, that's the next generation for our company.

So you solve a lot of pain points, better capabilities than traditional banks. It seems like you're catching up with point solutions against other fintechs. Now bringing it all together, that gets you to that next level to compete directly with some fintechs. Is that how we should think about it?

That's right. And with a good attractive cost structure, right, one that is scalable and allows us to continue to drive growth and margins in a prudent way. So yes.

That's helpful. That's a great segue actually. Alissa, I wanted to talk about, last quarter, FLEETCOR started to disclose GAAP operating margins for each of the segments with corporate payments at respectable 35% GAAP operating margin, which is actually up 30 -- 350 bps year-over-year. How should we think about the level of investments in the segment? And what is really key to driving scale there, not just employee but as we think about cross-border and the other side of -- the inside of the business?

Sure. So yes. So we did have a change up in our operating segments as we disclosed last quarter, as you point out. The first thing I'll say is, from a segment operating margin perspective for corporate payments, specifically a reminder that, that number includes both our cross-border and our traditional AP or direct business that Rick manages. And so it is a little bit of mix in there. And so some of that growth is being driven by the 18-month impact of our acquisition of AFEX into our cross-border solution. We have fully integrated and synergized that business over the last 18 months, taking advantage of a single platform environment, which should continue is what you should hear, continue to drive those margins upward. As we think about capital allocation in the context of margins and specifically corporate payments going forward, we always like to say we don't treat our children the same. Now everybody is going to get a little bit of something different depending upon what the sales engine looks like. And whoever is growing the fastest is -- tends to be where we tend to invest the most. And so when we really think about the business from an overall perspective, trying to -- where we started, that's what's helped support that top and bottom line growth of the entire organization. But obviously, you're spending a lot in the corporate payment space. And so we continue to expect that, that will drive...

What a greater opportunity for incremental margin.

Absolutely.

Yes. And roll-ups. I mean, as life goes on and matures, the segment that I'm in will be roll-up. It's kind of more nascent. There's more start-ups like most businesses or industries as they mature. They'll start seeing consolidation. And our business is absolutely ripe to be able to do that from a cost structure perspective, distribution and go-to-market, from the addition of capabilities having aggregate synergies amongst each other and just from a management perspective. So it's just a function of pricing and for us to be able to make numbers work. But I think as this market challenges those newer entrants, that's a dynamic that comes our way and is helpful for us.

And Pete, really, the incremental margins, it's not going to be just a stairstep, continue to march up. Because we will continue to buy businesses that, by definition, underperform from a margin perspective, which is why we buy it. So we'll continue to see it down and then work back higher, but it provides a tremendous amount of continuous upside to the profitability of the -- of that business and the overall company.

The good old FLEETCOR playbook?

Exactly.

M&A playbook?

You got it.

Okay. All right. That makes sense. Now let's talk about segment mix -- subsegment mix within corporate payments. I think there's a lot of confusion around that. Obviously, cross-border has become a much larger piece, but I think there's this misnomer out there that a lot of the business has been that channel business. It seems like more of it is becoming more and more direct, which is great. But then on the cross-border side, it's mostly direct and you're looking to increase the channel side of that a bit more. How should we think about the point solutions within corporate payments and how they'll manifest mix-wise over the coming years?

Well, I think you said it well. I mean the business that I ran and operated started from kind of a channel play to begin with because that was how the business went to market. It's got a set of assets and processing and network and compliance that if you're looking to get into commercial cards, you can sort of plug into us and get a ready-made package. And so that's been good for us. It's been good growth. It's highly profitable. We continue to go into different segments. The addition of full AP enables channel partners that are -- or what I call payment adjacent, like ERPs or electronic invoicing. They don't actually do payments, but they are right up abutting the payments. And so there's upside for us to get different types of channel relationships both at a reseller and referral nature. But we have increasingly from the origins of our day put a direct distribution out there, and they're growing that faster. And so really, when you think about, again, the history of the business, that distribution, that direct distribution really isn't that old. It's probably about 7, 8 years tops of when it was really born and invented. And so that will be a much bigger part of our business. You mentioned on the cross-border side, it's been the opposite, huge direct. And as we've acquired a set of capabilities, both geographic and product-wise, it really enables that business to be a very attractive platform that other players in the space will want to leverage. And so they've got kind of a different evolution. But basically, direct and channel go very symbiotically together when you're trying to manage a business. It's a hedge. It's again going to the cost structure and the play that makes us profitable. So we like multiple models.

So I mean, the AP model -- the AP business, that model of networking makes a lot of sense. I mean you got to have all the client databases, all that kind of information. But you're saying also on the cross-border side, you're seeing a bit of that networking as well that's helping to fuel kind of growth, kind of that self-fulfilling perpetual kind of growth just from a networking perspective. If you're using FLEETCOR payments and I got to use it, then this guy's got -- I mean, should we think about that as a tailwind for the cross-border business?

Yes. I think we see a lot of upside for that group to be able to expand into different channels. Again, the vision that we have to be able to help companies across multiple spend categories is what some of the other players out there are trying to offer to their customers, perhaps in niche ecosystems or verticals. And so within their customer bases, there are people who want to do cross-border payments who have to do that through some choppy workflow and mechanisms. So being able to offer cross-border payments into a broader solution is attractive to those and early days for that segment.

That's interesting. Alissa, I want to talk a little bit about scaling the corporate payments business, particularly as it relates to cross-selling into other segments, particularly the fuel card business. We know that's an initiative. You have a huge client base on the fuel card side. Where are we in that -- ultimately in that progression there in terms of making FLEETCOR more ubiquitous for all its point solutions and scaling them, cross-selling them into things like fuel cards?

Yes. I would say we're -- it's something we're very much on. It's on the initiative list. I would say it's probably still earlier in the days in terms of effectiveness primarily as we move towards more of a unified platform approach so that our customers can really see the various products all in one place, go and select their incremental asks and needs. So hey, I need a fueling solution. Oh, no, now I need an AP solution or I need to make this payment into the U.K. out of my U.S. bank account, right? And so it's something that we're focused on, but I would say it's still the beginning of it. And I'll let Rick speak more to it.

Yes. And it's kind of a minority piece. I mean I've talked to people who maybe had the misconception that the growth that we've had has relied solely on cross-sell into a base or using fleet and fuel -- No, in fact, most of what we do is outside of fleet and fuel. To Alissa's point and the one I made earlier, we want to have a sales team that evangelizes a broad set of solutions, I think we're getting increasingly good at that, while not losing the focus of point solution distribution as well as landing people on a platform that can solve multiple needs. Now that's going to be [ horizon ] in nature, right? That's news. You stitch different pieces and parts that are highly complex together. But the overall vision, we think, is highly compelling. It does not exist in the market. I don't think many companies could ambition to do it, certainly without the success ratio that we have with the assets that we have, set of product assets that stand on their own that are particularly robust in and of themselves and some distribution that's highly effective and has a good return on investment. So we like ambitioning to that.

Makes sense. I mean it's the obvious customer set to hit because you're -- they're pretty captive. And I think most investors think about B2B generally as very highly fragmented.

Yes.

So it makes sense to take your time with that and do that right the first time. But I want to take a bit of a bigger-picture view back to that market fragmentation issue. Rick, how do you think the industry is evolving in terms of standardization, information exchange, how the networks are providing support there? And also, I mean, you've mentioned roll-up consolidation. Particularly in this macro environment, I would imagine there's tons of opportunities there. But generally, how do you think -- I mean you've been through many cycles in this industry. How do you think the industry is evolving? Like what should investors be really focused on?

Well, I would start with this, it's crazy fragmented today. What does fragmented mean? There's all kind -- there's hundreds of thousands of buyers and there's millions of suppliers that are all using different systems, different data flows. And even within a company, they could have multiple processes, multiple spend motions, multiple systems, varying degrees of opaqueness or transparency on their own compliance. And so it's a mess. If I was going to say what is happening from that state of high fragmentation, it's probably the proliferation of more fragmentation as more players come into the space as more complexity comes in. I certainly think that there are folks that are endeavoring to try to bring some cohesion. So the networks is an example for Mastercard Track or Visa Connect, these are really good ideas. But in the short term, that fragmentation will remain. So for us, we like that because it's a managed complexity that allows us to do better job than kind of traditionals like the banks, but also at a point of scale that we can bring at least some cohesion to the fragmentation within a business. So the fact that we have purchasing cards and T&E cards and ghost cards, virtual, full AP, expense management software, POs, electronic invoicing, allows us to bring some administrative leverage that hasn't really existed versus where companies normally gravitated to treasury leverage. They go to their bank because it's another form of lending or cash management. That really plays into our world. And because we've been in this space for a long, long time, things like vendor networks, we've got a couple of million vendors that we pay every year. We know how they pay, how we pay them, what's the best modality. We know conditional acceptance that allows us to get the most card ability. That creates a different economic pool that others are able to -- our competitors are able to achieve. And so that manifests itself in the way that we price or the value or how we bundle those services together. And so we like our position in it, but we know it's highly complex.

Well, that complexity, that fragmentation, I would assume gets bigger the more you go downmarket. And it looks like that's why you're positioning the business to go downmarket.

Yes. Because as we go downmarket, I mean, we come from a base that's got much more of that data. So out of all the vendors that are out there that accept the virtual card, more accept the virtual card from us than anybody else. So the portals that we use, the way that we send the remittance, there's a familiarity that allows us to go down that market and probably do so better than people who were just starting out. But there's still a lot of landscape and landgrab to go get both on the customer and issuing side as virtual cards and full AP remain largely underpenetrated and then also on the supplier side of things.

Makes sense. Please feel free to put your hand up if you have any questions. I've got two or three left on my own, but if you'd like to ask. I wanted to change the topic a little bit here. Listen, I want to talk a little bit about the announcement to sell the Russian fleet card business. Any update that you can share with us on how that's progressing? And I mean, how do you feel about FLEETCOR getting the right multiple for that business? Because we do know it's highly profitable and so on and so forth, but given issues related to that, how should we think about it?

So first, I'll say, our Russian business is in the fuel space -- the fuel card space just to make sure everybody understands that. And in terms of the process, it is ongoing, and we're in the midst of the process with the investment bankers and with the potential buyers. And so I would say we expect to have a meaningful update for everyone in the next 90 days or so when we release earnings next time. But in terms of the ability to capture the value associated with that business, we feel pretty confident, actually. I'm talking to some of the banks over in market. They're willing to lend to businesses that are cash flow-positive and that are -- have the ability to pay back on the lend quickly. And so that's what this business is. There's a reason we've really enjoyed it over the years. There's off at 75% margins or so. And so I think we feel pretty good about our prospects and the ability to capture as much value as possible.

I would imagine it also frees up a little bit of spend that you can redirect.

Absolutely. So our intention is, and I think we publicly said, to offset the dilution -- the potential dilution, we will be buying back our own shares with that capital.

Okay. All right. Rick, I -- from what I understand, you're one of the earliest pioneers of the virtual card back in your Comdata days.

Yes.

How do you think about the virtual card now in terms of its adoption? Does it still have a long way to go? And what's your sense for the trajectory of unit economics on virtual cards?

Yes.

Is it becoming commoditized?

Yes. So for those in the room who maybe don't know, virtual card is obviously not a physical card, but it's really, particularly in this context used in an AP setting. It's a check replacement. So it's a card that's invented for a single purchase, onetime use, as a check replacement. And what that does is it gets and extracts some set of economics from the merchant that can be used towards the program, manifested itself back to the client in the form of working capital or a rebate back. And so today, it is a minority share of the overall payment modalities between check and ACH, which are the traditionals, but remains a pretty significant portion. And for the AP programs that we are able to develop, create a cash back or a net positive working capital that funds the AP departments and back offices and new technology. So it's quite significant. I mean, I think at the heart of your question is, hey, are vendors going to be willing to accept a lower price, a merchant discount from their pricing? And to that, I say yes. There's a lot of reasons why vendors take less money than what they invoice for a payment. They get paid faster, they get paid more secure. It leverages the processes that they already have in place. Someone told them to do it. So it's an indirect procurement tool. And so all of those dynamics are natural and makes sense. I think, if anything, there will be more products that create more texture for the value extraction between a merchant and a payment that we're working on. We do a lot through our proprietary networks. We do a couple of billion dollars through our own networks in an AP setting. So we will see more types of products. But the virtual card itself has got a lot of legs. Again, not all vendors accept it. If we were talking about 100% or 90% of vendors, you can look at it and say what moments in time that might be some headwind of acceptance or things. But pretty much all the fundamentals for why someone would accept a card existed yesterday and today and will exist tomorrow. The biggest aspect about it is that the buyers -- because the buyers haven't used it, we haven't gotten to all the vendors. Now we've been doing it longer. So you mentioned we literally the very first card Mastercard to ever be constrained to a single use. We did back 15, 20 years ago. So we invented the thing. And since then, we've been collecting a set of data to be able to figure out where to send those conditional acceptance. There's multiple ways that vendors accept a virtual card that we've got a lot of capabilities for. So the next program that we sign up gets all the benefit of the 15, 20 years before to immediately get you to a point of scale that, quite frankly, a lot of our competitors don't do. And so we have continuous enrollment capabilities to make sure that, that curve and that acceptance rate is really high. Most companies have a vendor churn of 15% to 20% a year. So if you did a program and you didn't maintain it, it would have traded out to you. It would be 15% of where you started in just a couple of years. So that kind of stick-with-it-ness is core to our business and why we exist.

That's interesting. Let's call for any questions from the field. And then I'll ask last question here. Ron, CEO of FLEETCOR, he was asked last call, what are you most excited about in the next 5 years? You talked about corporate payments, and I think he was really talking about the fact that available opportunity is just so, so, so massive. I'm going to ask you differently. What's your second favorite reason why you're excited for corporate payments? Is it like sales momentum? Is it like new product development? Is it the market starting to come together?

I love the assets of this company. I love payments, first and foremost. I think payments are cool, and they are not out of style. I like the assets that our company has on payments. This is a network business. You want to say, what does FLEETCOR do? We are a network. And if you're an economist, you know what that means. We touch money. So when you touch money, you can be very profitable, and you have a lot of control. And as you scale and get bigger, that only improves. And so our ability that -- very interesting that I'm on that I know Ron is excited about as well as -- we have acquired all of these capabilities over a period of time for what they represented by themselves. We bought cross-border for cross-border. We bought lodging for lodging. We started in fuel because that's where the company went -- we got into virtual cards when we bought full AP for what they represented. But what now we have the opportunity is to take those incredible businesses that stand on their own and bring them together, bring them together from a branding perspective, bring them together from a distribution perspective, back-office synergies and scalability, the platform idea. So the assets of this company to go and play in that many categories in the way that we do it for direct, for channel, for enterprise, medium and small business, it's a complete and total category play. That's what I'd say. It was -- like FLEETCOR is a complete and total corporate payments category investment in play. And so I think that's what's really cool about it.

So definitely not a woodshed category.

I mean it's not so. It's completely not so where this multiple is. So yes, we're bullish.

That's great. All right. Well, Alissa, Rick, Jim, as always, great to have you here at FinTech 12. We'll see you next year at FinTech 13.

Yes. Thank you so much.

Thank you.

Appreciate it.

Thank you so much. That was great.