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

Okay. Let's get started. Good morning, everyone. Welcome to day 2 of the Credit Suisse Technology Conference. My name is Nik Cremo. I help lead the payments and fintech research team here at Credit Suisse. I'm delighted to have the FLEETCOR team here with us this morning. From FLEETCOR, we have Alissa Vickery, CFO of FLEETCOR; Mark Frey, Group President of Corporate Payments and cross-border specifically; and Jim Eglseder, Head of Investor Relations. Maybe just to kick things off, I wanted to hand it over to Alissa just to provide a brief overview of FLEETCOR.

Good morning. Everybody awake? All right. So just real quick for those of you in the room who aren't familiar with the company. We are a expense management company that leverages a network of merchants and customers to help us to facilitate better ways to pay across a B2B segment of the market. We do that primarily through 2 key verticals. One is our vehicle mobility services, line of products, and that's focusing on fuel, lodging, tolls. And then we have our corporate payments wing, which focuses on I'll call traditional corporate AP and direct AP, direct payables as well as the cross-border space. So we are -- we do business in more than 100 countries globally, and we're on target to hit $3.4 billion in revenue this year.

Thanks for that, Alissa. So first, I just wanted to touch on some of the trends that you saw in the third quarter and kind of what you're seeing quarter-to-date. I know that same-store sales has been around low single digits in the last few quarters and it's been flattish in the fuel segment for the last few quarters. But any notable changes to call out over the last 2 months?

No. I think we're meaningfully on track with where we were the last time we released earnings and expect that we'll finish the year strong. I think from a same-store sales perspective, we're probably more at business as usual now. So we usually run plus 1, minus 1 on average. I think coming out of COVID, you saw that get a little bit stronger than we had historically seen, simply because of the low grow over. So we feel pretty good about the rest of the year -- going into next year.

It's great to hear. So since we have Mark here, I think it makes sense to dig into cross-border a little bit. But before we do that, Mark, could you just let the audience know a little bit about yourself and your background? .

Yes. Thanks, Nik. Pleasure to be here, everyone. I've spent my entire career in the cross-border payment space, 20-plus years working in FX, in trading, sales, front office. Ultimately joined the organization that was acquired by FLEETCOR back in 2011. So a little bit more than 11 years with the organization and have been leading the go-to-market strategy for the past number of years.

Great. Thanks for that. So next, I think it would just be good to give a high-level overview of the various subsegments of the cross-border business, across cross-border, direct, full AP with indirect and the partner business.

Yes. It is a very diverse business ultimately. We have a few key tracks of value propositions that we sell to our clients. So one is a payments automation business. So this is not like Visa and Mastercard. This is very much a wholesale trade and full AP solution for cross-border-focused organizations that are moving money around the world. The second part is really a currency risk management strategy and ultimately delivering risk management solutions to corporates who are doing business internationally and trying to help them manage their currency exposure. We also have an invoice automation solution that's tied to the Global Payments Automation service. That is really a full spend management solution from the point of processing and invoice all the way through to the vendor beneficiary.

Great. Thank you. So I think it would make sense just to take a deeper dive into the cross-border business. And first, just starting with what the business is and what it's not. It gets compared a lot to Visa, Mastercard's cross-border business, and it's not the same thing. So it would be helpful.

Yes. The travel and tourism segment within our business is really a wholesale travel and tourism business, where we're focused on supporting the mid-market. Ultimately, that is clientele of the regional banks. So we're focused on wholesale trade and full AP solutions for that mid-market sector, not necessarily small business focus, but very targeted towards the mid-market and a growing partner wholesale business as well.

Got it. So I mean, like how does the business work? What's the value prop to customers? Who are you competing against?

Yes. Our prime competition are regional banks. 19 out of 20 of our customer takeaways come from banks. So think of the second-tier regional banks in each geography in which we operate, not just in the United States, but Australia, U.K., Europe, Canada, Singapore, other markets as well where we're expanding. The value proposition is really quite straightforward. We're going to provide an automation solution ultimately to process payments more efficiently and manage your back office in terms of moving money internationally, in terms of international AP. And then we'll also help manage the risks so that you can do business in foreign jurisdictions with the same confidence that you can domestically. So allowing our customers to either source product internationally or to sell product internationally, ultimately risk-free or as risk mitigated as possible.

So next, I wanted to just get your thoughts on what's driving the acceleration in the cross-border business. It started the year high teens. And last quarter, you put up like 30% growth in cross-border?

Yes, growth is really accelerating. We've had a really nice first 3 quarters of this year, and that momentum is taking us through to the end of the year. We just completed the acquisition of AFEX, which was a comparably sized organization. It was about 66% of the revenue profile of the existing FLEETCOR business on June 1 of last year. We spent the first 6 months of that deal really integrating the platforms, taking all of those customers, moving them on to the Corpay, FLEETCOR tech stack, consolidating the entire operational process. So it was a big lift over that first 6 months. But since that time, since the start of this year, we could really begin to run, repricing those customers, extending our wallet share of those customers and selling more solutions to each of those customers that we've acquired.

Understood. So I think it would be just good to get an update on the sales pipeline for cross-border and how long it takes new customers to ramp and what kind of visibility that provides in the next year.

Yes, we've had record sales performance this year. We're up about 20% off of the previous record from last year, continuing to accelerate into Q3 and had a very strong quarter. The pipeline is as healthy as it's ever been, it's probably well diversified in terms of the product mix between payments and hedging and also the geographic mix ultimately, with APAC and EMEA really growing nicely from an overall sales perspective. Good momentum. And also with respect to that payments automation solution, we've been really focused on moving and speeding up the time line from customer signing to revenue accretion, ultimately realization. So I'd say a couple of years ago that time line for an integrated API customer would be 12 to 18 months from the time that we first signed contract before revenue began to materially scale. We've now accelerated that to probably about 5 months from the point of contract execution, implementation taking 30 days or less and scaling revenue much more quickly to get to full share of wallet within 5 to 6 months typically.

Great. So just in terms of the revenue composition of cross-border, I know the majority is payments related and the remainder is largely related to hedging. But can you just provide an update as to what that mix looks like and what's been driving more of the revenue growth these days?

Yes. It's about 70% payments automation, 30% risk management. Both of those segments growing within a few percentage points of one another. So the growth is relatively balanced on a percentage basis. The business is a little bit more overweight payments, and we like that. We think that fits the growth profile. In terms of the regional breakdown, it's about 50% North America, 35% EMEA, 15% APAC. Those 2 latter regions are faster growing, obviously, [ has less mature ] businesses. So we think that the geographic balance of the business is part of what we really like about.

Got it. So you mentioned APAC. And wanted to get a sense of like where that business is, like ballpark to 2019 levels, like nothing specific, but I know a lot of our other businesses in that region are tracking well below. Is that the case for you guys or...

No, we've fully recovered that business. So we're ahead of where we were in 2019, 2020, positive growth the last couple of years. The really exciting market for us that's just opened up in Singapore. So we've established both the payments license and a hedging license as a broker-dealer in that market. It's a small business today and subscale, but we think we can really accelerate that nicely. And we'll see very meaningful growth of more than doubling that business next year. And our Australia business continues to run really, really well. I think that the big focus in that geography is to build payments automation capability, Aussies love risk management solutions and trying to get them to automate payment solutions and move away from the local regional banks has been a winning formula for us.

Great. Next, it would be good to get an update on the GRG acquisition, time line, ballpark for earnings accretion and how we should think about the growth of this group of customers.

We're scheduled to close the Global Reach deal the first business day of 2023. So it is sort of a straight down the fairway FLEETCOR-type earnings accretion deal. The goal is to take a 15% EBITDA margin business and take it up to 50 or mid-50s within the first 12 to 18 months, really replicating the game plan that we put in action with AFEX and that we think we can replicate many more times in the space.

That's great. And on the back of that, I mean what does the pipeline look like for future deals in the cross-border business?

It is very similar to what we've done. So there are some things that we're looking at to bolt-on capability and technology to our existing network. And we're always focused on building out that proprietary network because we think that's a big part of what allows us to win versus the banks. But in terms of deals, we see more sort of portfolio acquisitions ultimately similar to what we've done with AFEX and Global Reach. And almost every one of them comes with some incremental capability or newly established licensing jurisdictions ultimately that allows us to break into new geos, and that's part of what we're looking for as well.

Great. Yes, accelerated time to market. So how should we think about the runway for cross-border specifically within Corpay One? How realistic is the cross-sell opportunity to deliver cross-border payments to other segments such as international fuel?

We are excited about the cross-sell opportunities that exist across the FLEETCOR platform. Corpay One is really that small business solution that we can embed our cross-border capability within and go after small business customers at scale. So we're running a friends and family testing program right now that we like the results from, and we expect that we will go live in Q1 and start pushing some of our small business customers onto the Corpay One platform. The goal of that is to expand the wallet share opportunities to the other FLEETCOR products as well.

Got it. That makes sense. And then I mean, you got -- like, AFEX was a deal that gave you a lot better diversified geographic mix. How should we think about opportunities associated with new geographies going forward?

I think there's tremendous opportunity for us. So opening up Western Europe is going to be a big focus for us over the next couple of years. So we do have a very strong business in Spain, Italy and in the Nordic regions. The Benelux region is something that we think is highly attractive that we want to grow in. And we're set to launch in France in early 2023 as well and excited about that market and the potential that it holds for us. And it's really a plug-and-play solution. We have the language capability already built into the platform and to the business, and it's really about just finding the right talent and beginning to run, leveraging the pre-existing licensing footprint that we have already.

Great. So we've heard Ron talk about the idea of building a much bigger wholesale business within cross-border. So what does that look like? And how should we think about the time line for when this will begin to have an impact?

Yes, it is an exciting part of the growth story going forward. So traditionally, the business has been very much a direct sale business going direct to the mid-market corporate customer. Increasingly, our focus has become reselling to fintech aggregators ultimately that can deliver small business clients at scale and then also Tier 1 money center banks that are coming to us for geographic capability in LatAm and Africa. And so I really think of that wholesale business is kind of like a barbell, very large institutions coming to us for specific corridors and then smaller fintech aggregators that really don't have that international capability, and our goal is to help commercialize that payment flow that exists within their ecosystem.

Got it. So last one on cross-border and then we can touch the rest of the business. But where are we in terms of packaging up the platform for one point of integration for channel partners?

We're really at that stage where we're ready to launch. So we've got a couple of partners that are coming on board now that will be co-partners of both the domestic business, the full AP automation business as well as cross-border, one point of integration to connect those customers to both value propositions, something that we are excited about because it allows us to target a whole different category of customer across the corporate payments franchise.

Got it. So on the direct and full AP business, can you just review the go-to-market approaches in these channels? And what's been driving growth these days?

What's been driving growth is, I think, technology. So we built a full suite of partner-based solutions in terms of automated partner onboarding to be able to onboard downstream clients of our partners in a more efficient fashion and an updated suite of API products ultimately that is driving a simpler, cleaner integration for our partners that allows us to scale a lot faster and implement faster.

Got it. So then speaking to the broader corporate payments business, I know that FLEETCOR is generally diversified across verticals. But what are some of the larger verticals to call out? And like how big are they? I know that construction is one that is top of mind for some investors.

Construction is big. Automotive sector is big in North America. The intellectual property verticals, especially big in the cross-border business because of the concentration of international payments. International payroll, tourism wholesale as well is a big sector for us.

Got it. And then the high teens 2023 preliminary outlook. What does that imply for the various subsegments between cross-border direct and partner?

So I think what we're seeing in the cross-border business is direct and the partner business are growing in that high teens, low 20s in both categories. In the domestic full AP business, we're seeing high teens again in the direct channel or the direct business and mid-teens in the channel business. So strength across both sides in both parts of the platform.

Got it. So maybe one for you, Alissa. We can shift things to the fuel segment. But can you just talk about the trends that you've been seeing in that business? I know that overall the business has been strong with a few pockets of weakness with some of your SMBs in the U.S. similar to your competitor. But what are you seeing in Q4?

So in Q4, we're kind of seeing more of the same as we came out of Q3. We'd say it's still strong business. And we're starting to see some pockets of a little bit of softness, but primarily in our North American trucking small fleet sector. And so what we're seeing is as the spot rates come down, those independent truckers who may have bought their own vehicle during the good times are flipping back and going to work for the bigger fleets. And so you end up with a little bit of mix shift between that higher rate single guy going back to the bigger OTRs. And so I would say, overall, we still feel pretty good -- we feel good about the segment. And as we track into the rest of the year, really keeping a close eye on the bad debt specific as it relates to that smaller sector of the market.

Got it. So in the last 2 quarters, you called out a slight moderation in new sales activity within the fuel segment. So how much of that is intentional to protect against credit losses versus demand-driven, if any?

I would say most of it is driven by our need to adjust that. So we, I think, openly said on our third quarter earnings call that we've already cut the tail off to some degree, making sure that we're watching that lower credit quality client, raising FICO scores a little bit for barriers to entry, but also watching the terms that we lever out to those -- the customer bases to ensure that we're not taking on too much risk.

Got it. You guys have been there before, so...

We have, yes, and we certainly survived harder times. And so we're bullish.

Got it. So while we're on this topic, when we think about 2023 and the 200 to 300 bps margin expansion that you're targeting, what are you guys implying for credit losses there?

So for going into '23, we're implying that credit losses should remain consistent with the full year number for '22. There will be puts and takes to that, and we'll continue to monitor that. Obviously, we haven't set guidance yet for '23. And so we'll be able to provide a little bit more color on our upcoming earnings call. But generally in line and flat with the current year.

Got it. You're pulling back on sales, I'm sure, it will help tremendously, sets like about half.

Right. So it's truly an active management situation.

Sure, investors, we're glad to hear that update. So yes, just going back to the cross-sell opportunity within -- for corporate payments into the fuel segment customer base. I know that you're targeting a few hundred thousand clients. Can you just provide an update on Corpay One more generally and how the cross-sell is going?

Yes. So we're about 18 months, I think, into this one or so. I think where we are today is probably a little bit different than our original thesis when we acquired Corpay One, Roger at that time. But today, we have about 5,000 clients on the platform. I would say that over the last 6 to 9 months that we've really taken a look at who we're offering those products to. And so we're in that refinement phase of trying to make sure we target the right customers who have the right spend, because it really does us no good to go target a bunch of really tiny small SMBs that may have no spend, right? And so you want to make sure that you maximize those sales dollars.

Absolutely. All right. So we definitely have to touch on the lodging segment just given the momentum that, that segment has seen in the last few quarters. And I don't think the travel part needs an explanation, but it would be great if you could just unpack what's been driving growth in the other parts of your lodging business with workforce lodging and the insurance business.

Sure. So we really love our lodging product, I'll just start with that. We've done 6 deals in 6 years in the lodging space. So not something we're looking to stop doing anytime soon. And within lodging, we have kind of 3 core subproducts. We have our workforce solutions. We have the airline-targeted product. And we have insurance. Workforce 60%, the other 2 are about 20% each of the overall business. And within that, we do see airlines growing substantially. Obviously, it don't -- obviously, there was a very low grow-over in terms of hitting mid-50s this year. But we do expect to continue to see strong growth across the line.

That's great. And while we're on this segment, I've gotten a few questions over the last month on -- is FLEETCOR going to see any impact if we have any strikes from the railroads and then also if you guys are seeing any impacts from some of the severe weather we had in hurricane season like Hurricane Ian.

Allright. I'll say we are closely watching what's happening with the railroads. It does seem like the government is trying to take a strong hold there as well and be proactive, but we'll watch and we'll see. And then in terms of -- sorry, what was the second part?

Just any impacts from hurricane.

Oh, hurricanes. I would say not as of yet, and there is an emergency aspect to our lodging business with a direct contract with FEMA. Initially, the first -- the hurricane hit the -- Ian, yes. When Ian hit, that was primarily an area of Florida where there's secondary homes. So those homeowners don't need to necessarily be displaced. But yes.

Okay. Makes sense. I'm glad we cleared that up. So, yes, shifting to the tolls business. Can you just provide an update on the sales momentum that you've seen in that business and how much line of sight you have into mid-teens for 2023?

Yes. So tolls is our business down in Brazil. We refer to it broadly as tolls, but super strong growth, very strong management team in place there that goes to market with a superior product, amazing brand recognition in that country. And we really see this product continuing to expand its breadth of offering in the context of our beyond toll offering. So imagine, you have this RFID tag in your vehicle, yes, it gives you access to all the toll roads, right, and it's subscription-based, which is even better. Then we parlay that ability to allow that RFID functionality to allow you to gas up at the fueling station without ever getting your card out, which in Brazil is a big deal due to safety. Same with getting into parking lots, paying for fast food and then leveraging that further into condo associations to where we're just built into the infrastructure. It's built into certain vehicles even that are manufactured and sold within the region. And then as we continue to double down, figuring out incremental services that our customers might like, like an insurance product, say, "Hey, I don't ever drive, but I'm going to drive these 3 days because I'm going on vacation. I'm going to rent a car." You have to have personal insurance to be able to rent that car. And so they can sign up for literally a 3-day insurance policy through our platforms. And so just trying to be a one-stop, one solution in that vehicle mobility space in the country.

Got it. People are very excited about the tolls business and the Beyond Toll specifically. And on the last earnings call, you gave a nice update on the fuel portion of that, that's supposed to exit the year at a $10 million run rate. How quickly can that scale now that the sales channels are all pumping?

Yes. No. So I think we feel really good about it being able to scale. We've implemented the functionality for the RFID to be read at fuel stations throughout the country to a volume of -- I think we've doubled it in 2 years. I think we're over 2,100 stations right now and have a really strong volume presence in both Rio and Sao Paulo. And so we're continuing to invest in that hardware functionality throughout the country. And so we expect to add another 500 to 1,000 stations in the coming year. And so just as you get that coverage, you create a true network and [ I thought tie in to the user, ] so they can just pull up and that's the modality of the select for payment.

Nick, I think just to clarify, the $10 million was transactions, exit run rate transaction, not...

Thanks for clarifying that, [ Jim. ] Yes. So another question on '23 margins. Where should we think about the sources for the 200 to 300 basis points margin expansion target across like the segment? What operating expense lines you're pulling back on?

Yes. So I'll say, historically, we have run somewhere in that mid-50s range for an EBITDA margin. And so this is probably just getting us back to sort of business as usual. We had a meaningful investment that was, quite frankly, facilitated by a really strong macro over the last year. And so this is really being a little bit more diligent about that discretionary spend, but also it's things like stock comp returning to more in line with where we've been historically, maybe down like $30 million from last year, so that will be a part of it. And then as well as a consistent bad debt number from '22 going into '23.

Great. So I'm going to hit you with another macro question. I apologize, but I'm obligated to. So I just wanted to go over the financial model and the recession resilience of FLEETCOR. So first, I mean, can you just walk us through the components that build up to the 10% organic macro neutral revenue growth target across same-store sales, net new clients, new products? And how we should think about how each of those components behave during a recession.

Sure. I mean I would first say that as we plan our business, we are always doing this on a macro-neutral basis. We don't want operators to necessarily get credit for a fantastic macro, but we also don't want to deem ourselves because we can't control fuel price, why we can't control FX rates. And so we really plan these businesses to grow organically and strongly on their own laurels. I'll second that with we do have a very strong retention rate across the board. So we have retention around the 92% threshold. You layer into that plus 1, minus 1 on same-store sales, a 20% reinvestment in sales in the coming year and a 50% bleed over of everything you sold in the prior year going into the following year. And so that model just produces math that supports a 10% or so organic imprint growth for the revenue line going into next year. And so, it is quite granular when we talk about revenue, when we talk about sales, we do a bottoms up. We're really thoughtful about what we're selling, how much it cost us to sell those products. And then fundamentally, what growth margin that supports in the company.

Got it. We know that a lot of FLEETCOR's products help companies manage and reduce expenses. So like how would you expect demand for those to trend in a recessionary environment?

Yes. So I would say our products do tend to be nondiscretionary in nature. Short of a complete global economic slowdown, even if GDP is down 4% to 5%, we're not going to be down that much. We're going to be probably down 3% to 4%. And so just always remembering the nature of our products really facilitates the recurring nature of the revenue model. You may have Mark's trucking that has 20 trucks in a good time, but he might come down to 17 because he just doesn't have the volume to support the incremental vehicles. So in that scenario, Mark's still buying my fuel, he's still buying my lodging services, he's just not buying quite the same volume, right? And so you have just -- it's more volume and mix shift in those environments.

Got it. That makes sense. And then if we look at the business overall, is there any way to parse, it is ballpark how much is SMB, how much is mid-market, how much is enterprise? We know you're diversified across the 3. That's a question that we get a lot.

Specific to the fuel space or overall?

We could take overall, but we could take it by segment.

It's really going to vary by the segments. Certainly, in fuel, call it, 25% to 30% is big enterprise over-the-road fleets. Another 35%, 40% is going to be SMB. And then there's -- the rest is kind of middle-sized fleets there. When you look at the lodging business, it will vary by business within it. Workforce is probably half and half, enterprise fleets versus SMBs. And then obviously, by definition, the airline is going to be all enterprise customers. And then insurance, we service most of the large domestic carriers here in the U.S. Cross-border, it's a middle market business, and we target businesses of $50 million to $500 million. So there really is no SMB exposure in there, there also really is no enterprise exposure, it's pretty granular in nature. And then Brazil, of the 6 million toll tags we have in circulation, about 1 million of those are B2B, about 5 million are actually consumer. But the thing to remember there is 80% of the revenue is subscription based where we earn, call it, $7 or $8 a month for every one of those 6 million toll tags. So the incremental volume that's coming on from the Beyond Toll program, we do earn MDR on all of those incremental transactions. So there could be a little bit of exposure there, but Brazil kind of operates on its own economy and -- economic cycles, if you will. So we wouldn't expect it to be super consistent with the North American economy. So it really is different by business.

It makes sense. Well, unfortunately, it looks like we're just about out of time. So any closing remarks to leave the audience with?

I think I would just say we're super excited about FLT. we've done a lot of great things over the company's 10 years as a public company. I've personally been there for almost all of it, short of the IPO. And so I'd really love investors -- potential investors to understand that we have a much stronger company today than we did even 5 years ago, and we feel super good about the networks we've built, the platforms they sit on and our ability to service our customers regardless of a macro head or tailwind. And so this really is a meaningful B2B business play in a recurring revenue type environment. And so I would just say give us a look where -- we believe that we are quite the valuation deal these days. We're hoping that, obviously, the multiples improve. We didn't talk about capital allocation, but super bullish. So I hope you agree.

Great. Well, thank you guys so much for coming. We really appreciate it.

Thank you.

Thanks, Nick. Cheers.