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

All right. Good morning, everyone, and welcome to the second day of the 7th Annual Evercore ISI Payments & Fintech Innovators Forum. I'm Sheriq Sumar, and I work with David Togut in the payments processors and IT services team here at Evercore ISI. We welcome FLEETCOR Technologies' Interim CFO, Alissa Vickery; and Senior Vice President, Investor Relations, James Eglseder. Thank you, both, for joining us today here.

Thank you.

Thanks very much.

Yes. To kick it off, outside of selling the Russia operations and closing on the FTC litigation, what do you think are the top 3 priorities for FLEETCOR in 2023?

Good morning to everybody here. So in terms of prioritization, obviously, FTC and Russia overhangs, getting those behind us. But I would say after that, it really is just running our business and delivering on the guidance that we've committed to the Street and committed to our investor community back in our call in February. And so we're working hard to continue the momentum that we came strong out of Q4 with, and we feel quite good about where we are and how we're pacing in the year so far. I would say, secondarily, it's really building on some of the capabilities that we spoke to on our last call, and so specifically focused on EV. So we've sort of aggregated the assets that we feel like are the most important to delivering value in our fleet space. And as we've said before, we're really agnostic as to the type of fuel that is in the vehicle. Ultimately, our objective is to satisfy the requirements that our fleet and fleet operators have. And we know that, specifically in the U.K. and Europe that, that is an evolving landscape, specifically as we move into more of a mixed fleet environment. Now we'll say it is early days still. But as we continue to refine the business models, really sort of get our claws into our assets and hit the ground running, if you will, and delivering that value, we're excited for what the future holds for the fleet segment. And then third, I think we talk a lot about simplifying the business and delivering a message where people understand sort of what our business is, how we go to market. And we've talked a lot about vehicle and mobility solutions and corporate payments and really driving that clarity home in the coming year, both inside the company as well as externally. And then not short of that, obviously, our CEO is closing in on hopefully announcing a final CFO candidate.

Thank you. That's super helpful. Within the fuel card business, can you help us better unpack the growth dynamics in 2023 as you expect some re-acceleration in the organic growth, particularly in the second half? There are some moving pieces over here too, where you are repointing your sales efforts and there is -- you have micro trucking drivers moving to larger contracts, possible macro slowdown and you have cross-selling, too. So how does all this come together in 2023 for the fuel card to reaccelerate in the second half of '23?

Sure. I think it's a great question, and it's something obviously we're focused on as an org as well. But I would say, first off, coming out of the end of '22, we noticed that the macro was starting to be a challenge for our micro SMB customers. And so we really want to make sure that people understand that customers who have less than 5 cars or less than 5 vehicles on the road, these are customers that almost behave more like a consumer than a commercial enterprise. And so when the economy gets tough, those consumers and/or businesses tend to struggle more especially in a higher interest rate environment, right? And so as we saw those customers start to struggle, we hyper-focused our efforts around credit terms, credit terms tightening, lines tightening, to ensure that we weren't taking on an inappropriate amount of risk. We obviously saw some of that play out in our P&L in the fourth quarter. So as we move into 2023, some of the things we've done is to hyper target the -- our sales engine to focus on SMB customers that are just a little bit larger in size. So think 10 vehicles, or 10 cars or more. Because we believe that these customers, they behave a little bit more maturely than sort of that micro SMB subsegment. And they have the wherewithal to withstand and uphold in a tough macro environment. And so as we've repointed those sales engines, they had to learn. And as that learning and our sales teams re-pivot where the area of focus is, we believe that creates momentum going into the second half. And then, quite frankly, our second half comps are a little bit easier. And so we think the combination of re-pivoting the engines, still keeping a close eye on the macro. But the acceleration is just inherent in that business with a 92% retention rate really does set us up nicely to exit '23.

That's helpful. Moving to EVs, and I want to focus on the competition. How is the competition in the regions that you are present in? And how has this evolved over the years? And where does fleet maintain an edge over the other players in the market right now, within Europe and in the U.S. as well?

Sure. So I would just remind us all, I mean, this is a brand new market. So when we say over the years, I'm not even sure it existed 2 to 3 years ago other than perhaps in the consumer space. So let's really fast forward to sort of where we are today. And I think we've sort of pivoted in terms of how we're thinking about EV. EV really is a great opportunity for the company, which is why we've doubled down by: one, learning a lot with initial investments in the EV space, which we've then pivoted into, okay, we learned something, we've learned what works, what doesn't work, with little P&L risk; and then pivoting to acquiring those assets to where they're now part of the FLEETCOR offerings, within Europe and the U.K. specifically. So as to where it's going and what competition looks like today, I would say it's pretty limited, right? It's a highly fragmented industry today. As a reminder to everybody, just like on the fuel side, the traditional, call it, internal combustion engine fuel side, this is a network play, to a great extent. So you've got a lot of disaggregated, disjointed charge point operators who may operate a network of 5 to 10 sites throughout Europe. And then what we also know is no site is created equal. You make it roll up and forward the 10 pumps, so to speak, aren't working or they're super slow, or they might actually already be utilized by another driver. And so where we believe we can provide the value is by providing mapping services, real-time availability services to our fleet operators who share that information with their fleet drivers, so that they're able to efficiently take advantage of the economics of the network. Because as a reminder, you show up to a Tesla charge site, they only take Tesla or they only take whatever the other 3 or 4 proprietary-type payment networks are. What we've done is we've taken those disjointed networks and put them all into one platform so that, that fleet driver can pay agnostic of where they show up as long as they're within our network, right? And so we're trying to simplify that experience for a fleet driver. If you think about it from a fleet manager's perspective, having a mixed fleet of vehicles out in the field, whether they use a traditional internal combustion engine or EV, having to have -- needing all that information in one place greatly simplifies their ability to manage efficiency, drive times, routes and, quite frankly, be able to collect all of the data so that they can still continue to do that reclamation within Europe. In the U.K., it's a little bit different story because what we've done is we've -- we call it our 3-in-1 solution to where we have combined the power of having an at-home charging network through our most recent acquisition of Mina, along with over-the-road charging, so think about the charge point operator sites, but also the ability to charge your traditional internal combustion engine -- fuel engine, regardless of what type of vehicle your fleet is operating. And so the value prop there is, again, it simplifies the argument for that fleet operator. And what we're finding is, as fleet managers buy these EV vehicles, they don't necessarily plan super far in advance. It's more of, oh, I just bought 10 EVs, what now? And so they'll call us and be like, can you help? And like, of course, we have the network, we have the capability. You can use the same card that's already in your driver's wallet. It makes it a super simple experience for that fleet operator, which then makes us sort of a leading market driver of how the industry is evolving at this point in time.

Great. Great. That's helpful. So on cross-border, I have a 2-part question on this thing. So upbeat commentary around cross-border on the last earnings call. Can you dig in a level deeper and help us understand where are you seeing the most traction by geography, which customer segment? And are there any particular product that is standing out? And the second part is, how is the integration coming along between AFEX and Global Reach? And what's the plan going forward from here?

Sure. And so in cross-border and [ corp ] payments in general, I think it's really important for everyone to remember that in this space, we primarily compete with financial institutions. And so when we serve primarily a mid-market client, so customers with revenue somewhere between $50 million and $500 million, what we've found is those customers are highly underserviced and underserved by their financial institutions today. Your large conglomerate business or Coca-Cola or Home Depot, your financial institutions behave very differently when you call versus if you're a small $50 million. Yes, it's big in the picture of the world but not big to a bank, right? And so we're able to service those customers in a meaningfully personal and easy way that really simplifies their ability to make those payments. So with the acquisitions, which I think was the second part of your question, in terms of what incremental geographies or verticals that we were able to get into, so it really does expand our customer bases in the U.K. and Australia and New Zealand, as well as in Canada, primarily. And so -- and it will open up incremental geographies as well where they're smaller bases, maybe in some of the countries throughout Europe. In terms of integration, the 2 acquisitions we've made were AFEX and Global Reach Group. So AFEX is now about 18 months old in terms of it being a FLEETCOR entity. And we're proud to say that we've executed successfully on our synergy and, I'll call it, layering the portfolio of customers into our scale technology to where we're fully integrated at this point. And so that was no small undertaking. I don't want anybody to think it's super simple. But we're super happy about where we stand today and feeling the full benefit of those combined economics. On Global Reach Group, that acquisition closed on January 1 of this year, so brand new. We are in the midst of executing on our playbook, if you will, now because and we got a little experience under our belt after synergizing and bringing in the portfolios from the AFEX deal. And I think we are maybe 1/4 of the way through in terms of the portfolio integrations, but we fully expect to have it layered into our scalable technology environment by the end of 2023. And so what we expect as a result is to have a meaningful shift in the overall economics of that business acquisition into our financial results.

That's helpful. On your last earnings call, Ron mentioned Corpay hasn't been a big priority recently, and it's still work in progress. What is the near-term strategy here? And when can we expect Corpay to be a meaningful contributor to the top line?

Yes. I would say, Ron's words are probably on point there. We've sort of pivoted if you will. But what we've done is we've created a user experience or a user interface that really does combine the capabilities of the corporate payment solution with our fuel customers and their user interfaces. However, as we've taken a step back and really looked at our customer base, our priority is to figure out where does the spend exist? So if I target a super small customer who has 0 spend, I'm probably not really using my resources for their biggest and best output. And so refocusing and hopefully continuing to see upside as we move forward, but it's still a work in process for sure.

Understood. Within lodging, we saw strong growth in 2022 and expect low to mid-teens growth in '23. Can you help us dissect the growth dynamics in '23? What are your expectations for growth within the workforce? And how much would be airlines, and anything on pricing there?

Yes. So I'll reiterate that we expect that the lodging segment will grow in the mid- to high teens organically in 2023.

I'm sorry about that.

Yes. And I would say in terms of split, you've got 60-20-20 is the general rule of thumb. So workforce being 60%, airlines and insurance being 20% each. As we move into '23, we have some initiatives that are cross vertical, which we're super excited about, related to trying to utilize the power of our hotel networks and the power of our scale to really benefit the end user most specifically, but create a better value proposition overall for the customer experience. So we're excited about that. It is one of our highest growth businesses with the highest margin profiles as well. And so as you can imagine, we really like this space.

Got it. And where do we stand in adding new businesses within the lodging segment? I mean you had mentioned corporate [ ETAs ]. But what's the time line over there? And do you think it will be more organic or an inorganic addition in the segment?

I think it will continue to be mostly organic at this point. We have acquired quite a few businesses in the last 4 years or so. And so I think it's really getting those businesses up to scale and -- even more so than they are today, and really focusing on the menu approach for our customers, so that -- we know that our fleet customers often need lodging services, our lodging customers often need fuel services. And so making sure that we're delivering that value and able to really effectively sell across those customer lines.

And Sheriq, we're piloting that new business that we talked about right now. As you know, we try a lot of things. Sometimes we get it right, right out of the box, sometimes we don't, and it's test and learn. And that's where we are right now in kind of the corporate FTA business. So we'll see. Obviously, there's a lot of volume and customers to be had out there in that space. We'll see if we can effectively make it work with our blue collar and airline and insurance solutions. But again, we'll test a lot of things. I kind of liken it to what we did in Brazil with Beyond, right, Beyond Toll program. We worked on that for years before it became meaningful to the business. And when you have businesses that are $1 billion corp payments, Corpay One is going to take a long time to meaningfully move the needle in the business and/or something new in lodging that we didn't buy at scale or with scale. It just takes time when you have businesses as large as we have. But ultimately, we're always trying to find new ways to drive growth in the business. So that's the way to think about some of the new things that we're trying across...

Understood. Yes. Nice segue to the Brazilian toll tax business. For 2023, like can you help us understand as to what is the scope for further monetization per tax? Or do you think that the bulk of the growth is going to be driven from rising the customer base? And where is your sales effort focused for '23? Is it like increasing more users? Or are there any new product capabilities that you think that you could add within the tax business?

Yes. I think it's super important to remember that tolls isn't just -- Brazil isn't just tolls anymore. It's beyond that, right? And it was a nice segue, because I would say Brazil was probably our first true Beyond experience, right? I think that's how it initially pitched. And then it sort of pivoted to this no, no, we're just an all-in-one solution. We're here for all of your needs, whether you're in your vehicle going across the road to travel -- to vacation, or you're just driving across town and then you need to park at home and your condo association, which requires our tag to open the gate, right? And so it really is sort of like a one-stop shop, if you will. I think that's actually what the brand name means, Non-Stop. And so it's pretty slick technology that we've been able to utilize. And so I'll first say that we do expect significant continued growth here. We're anticipating low to mid-teens organic growth in 2023 in our Brazilian businesses. I think too, that continued growth will come from a combination of sales channels. One, we've partnered with 2 of the largest banks in Brazil to deliver our toll solution to their customer bases. So quite an interesting resell opportunity for them to utilize our products, and the economics are playing out quite nice. And so I think in the first couple of months of our relationship with even Santander, which got live very, very quickly. I think we've sold in somewhere in the range of 30,000 to 50,000 incremental tolls -- toll customers every month. And so the trajectory here is super impressive so far. In addition to that, we have a proprietary app that we utilize to help deliver the services in a seamless manner to our customers. We have over 3 million discrete app users today. That's across -- about a 6 million toll tag network. And so that's a pretty impressive penetration rate, and really being able to sell incremental services through that app and say, "Oh, you're going on vacation. You don't have a long haul insurance policy. We can sell that to you so that you have coverage just for the period of time that you need it through our services". And because we're a trusted provider, the customers are willing to sign up for these incremental uses of our product. And then, quite frankly, we've been experts at how we continue to deploy our products in Brazil. And our competition, quite frankly, just hasn't kept up. And so we're really excited about what the future holds for that business.

Thank you. But in terms of the products, are there anything that you're in a testing phase that you see that there is this scope like -- obviously, insurance has been a good success. But do you think there are more products, or more features that could be added to basically just increase the monetization there?

Absolutely. I mean I think it ultimately is getting incremental share of wallet here, right? And so that team, every time I talk to them, they have a new idea, and they have something new that they're piloting and testing. I think you'll hear -- you'll continue to hear us speak to those as we come forward on future calls. So...

Got it. Got it. 2023 margin guidance was reduced from 200 to 300 basis points to 150 basis points. And as Ron mentioned, it was due to further investments in the acquired business. Do you see incremental risk to this guidance? And on the flip side, if macro situation worsens, are there any operating levers you could use to at least maintain or probably even exceed this guidance in '23?

Yes. I would say -- it's a good question. And I think we were quite aggressive when we initially were hopeful for the 200 to 300 bps of expansion on margin. I think when we got through the budget cycle, it became very clear that we needed to ensure that we were investing in a business for the future, not just for the next 12 months, right, and so trying to balance the overall objectives of our financial performance with the objectives of running a business that's sustainable and growing into the future. And so the margin improvement is greatly driven by efficiency plays in our most mature businesses, while we're continuing to invest in our most frequent capability acquisition plays. So making sure that if we're going to say we're in EV, that we're fundamentally doubling down and investing in that business, and giving it the best opportunity to truly grow into the future, I think, is the perfect example. And then I would also remind our listeners that when we acquire companies, we acquire them because we believe they're underperforming assets. And so that inherently implies that when they come on board, they have EBITDA margins below our line average. And so as we continue to scale those businesses, play our portfolios into our scalable technology, say in cross-border, we anticipate that, that will enable us to exit the year at a much higher and more attractive margin profile than where we started the year. And so we believe that those acquisitions provide another 100 bps of improvement as we exit 2023.

Or said another way, I'll just share, there's 100 basis points of margin drag from acquisitions, the inclusion of Global Reach, like Alissa just mentioned, which will improve throughout the year. And then the investment in the Plugsurfing and some of the other things that we bought last year. So it was intentional. We'll exit the year at 200. The core expense growth is really only up 3 to 4 points, so we feel pretty good about what it is. And we will continue to operate the business. And to your question on, a, are there levers to pull if things shift? I mean we're operators. This is what we do. We keep a very close eye on the business on a very regular basis. We demonstrated our ability to do that in COVID a few years ago, and you should expect the same type of approach from us, that we're not going to forsake future growth and investments to improve the durability of the business going forward just for any...

Yes, that makes sense, yes. Again, nice segue to my next question is on M&A. Which segment do you think has the best potential to grow inorganically? And are there any specific products within each of these segments that you think needs to grow inorganically versus investing organically within that?

Yes. I mean I would say that we've focused on capability plays or capability-related acquisitions over the last 18 to 24 months. I think you'll see a shift, for one, back to accretive deals. Our intent is to build a business that grows and is -- and that you can predict. And so part of our play, always in acquisitions, we call it our play-for-playbook, if you will, is that we buy those underperforming assets, layer them into our technology, and it creates an overall accretive business as we move forward. You're going to see way more of that as we move forward. Because we really do believe in lodging and in corporate payments. We've got the functionality and the capabilities that we need now. Now it's time to go execute in those places. Now to say if valuations are reasonable and something comes up that's super attractive, would we do it? For sure. But it's always that balance between what incremental capability or geography does it give me versus what I have today, and can I see that there really is an accretive play to it as we move forward.

Got it. And looking beyond, I mean, given that your cash flow target is basically to just use it to pay down debt, but if your debt levels reach at a comfortable position, is there scope for Fleet to do large-scale acquisitions? Or do you think smaller scale acquisitions, more of tuck-in acquisitions are the way to go from here?

Yes. So maybe I'll say something about your first ones first. In terms of our capital allocation priorities, I want to reiterate that our first priority is always to find accretive deals and grow the overall business on the inorganic side. That is our first choice when it comes to use of capital. Second choice is share repurchases. And then third choice is always delevering. I think we're just in an interesting macro environment now, though, given where interest rates sit. And so I just want to make sure we meter our pivot, because it really isn't a pivot away from accretive deals or share repurchases as much as just being quite thoughtful given the cost of capital today. In terms of -- sorry, what was the second part of your question again?

Will there be scope for large-scale acquisitions? Or do you think smaller scale acquisitions would be better for you?

Yes. I think it just depends on what's available. If a whale was out there, and we liked it, and we thought we could make it fit with what we do, we'll absolutely go for it. And so there's always the ability to flex on your credit facilities if and when the need arises.

And Sheriq, you mentioned if we pay down our debt to get comfortable with our debt level, we're already there. And we target to operate at 3x or less from a leverage perspective. And that's where we've historically operated. We're willing to go above that for the right deal. But for a meaningful-sized deal and for us to do that, you should expect and we would expect it to come with a meaningful amount of earnings, which would help bring it back down in the future. So that's why anything larger would be accretive. We have spent the last couple of years doing things that are smaller from a capability side. Ron mentioned, hey, we've done a lot of capability eating over the last couple of years, now it's time to really be focused on things that will move the needle from a profitability and a growth perspective, and that's where we're focused. But that doesn't mean we won't do something small if that -- if we feel we need it. But we're certainly interested in doing more classic accretive of -- hopefully of size FLEETCOR yields going forward as pricing continues to adjust.

Got it. Got it. I know it hasn't been long since you have reported the earnings, but I might as well ask, is there any update? Or can you just provide us an update on how the quarter is tracking? Are there any surprising weakness or strength that you're seeing in any of the segments? Any early plays of the macro that you're seeing play out so far in the quarter?

Yes. I would say January is obviously in the books. February, we're working on now. But so far, so good is what we would say. It's in line with how we've planned the business on both the macro and the performance side. And so I would say nothing new to share there. And I would say we feel good about how the quarter is playing out thus far.

Got it. My last question is what in your view is the most misunderstood about FLEETCOR by the investors?

Sure. So I think it's a couple of things. I think, first off, it's that we're too complicated, right? And I alluded to this earlier in our chat, but we really think of it as 2 core things. Vehicle and mobility solution suite, where we facilitate your drivers needs regardless of where they are in the field, whether they are driving overnight, leave the vehicle, fuel up, launching services, and anything in between where they may need to access a toll road. Like, as Jim mentioned, Brazil is our perfect environment where the product really already behaves like this in an almost mature way today. And so leveraging what we know about how that product -- how it behaves, how it works, how the customer is utilizing it, and really playing that across all of our fuel, lodging and toll solutions. So that's one bucket. The other bucket is corporate payments, facilitating B2B payments for businesses to vendors. And figuring out how we can make that back office functionality as streamlined and dare I say it, revenue-generating unit. And so it comes down to just those 2 things. And then to the extent that there's cross-sell across the 2, even better. And so trying to really iterate how these products work together and how we go to market, I think, is misunderstood. And I think it really is that simple. I think second is we do fundamentally compete in our industry with financial institutions. We're going head-to-head with other banks. Rarely are we seeing, I'll call it, the SMB B2B payments businesses like an Avid or Bill.com. Or on the other side, we're rarely seeing WEX other than in an RFP for a giant enterprise-type business. And so most of the time, it's going after a business, quite frankly, that the banks aren't paying attention to. And we do a really good job at servicing those customers in that mid-market space.

Got it. I think that's all the time that we had. Thank you, Alissa, and thank you, Jim, for your time. Hope to see you next year again soon.

Sounds great. Thanks for having us.

Thanks.

Thank you. Bye.

Bye.