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

You're giving a little warm up before we get it. The process is progressing, you can expect us to do a thorough job and all of that. Our North Star related to the process is value creation, right? But that North Star existed long before an activist came and wanted to better understand the company. And as Ron has said, we're in violent agreement that the company is undervalued. And you look at the various businesses that we're in, some implied multiples and stuff like that, and you sit there and say, absolutely. we totally are a 100% aligned that the company has some multiple expansion opportunity. I think many companies coming out of the kind of Phase 2 of the post-pandemic era, kind of that '21 time frame. Just kind of got roped up in what's going to happen with cannibalization in fintech and software and all that kind of stuff. And having been in the -- having [ Fico ] haven't been in payments for a little while, I kind of got lobbed into that group. But we're going to be very focused on value creation and focusing on what we can control. And that means we'll be very thorough in terms of the quantitative elements of this. As we've indicated, we hired Goldman Sachs to health management and the Board with that evaluation. That's progressing, progressing well. But to do anything strategic, which is implied in the phrase, strategic review, requires a counterparty right? You can quantitative yourself to craziness. But at the end of the day, if you're doing something strategic, that means there's some other kind of counterparty involved. And that's kind of where the -- it kind of depends, right? I mean -- but what I would say is there is nothing forcing the company's hand. We've put up great numbers. We've got proprietary networks. We're a diversified organization. We've got outstanding products, deep customer base, high retention, yes, [ on and on and on ]. Yes. So there's not a forcing mechanism here other than what is the best way to uncork untapped value. And so as Ron said, all options are on the table, but options to execute a strategic review are not entirely in our control. And so if doing what we can control, maintaining control of our own destiny, we'll take that path if that's what we need to do.

Switching over to the fuel card business. Sometimes I get this question from investors about what is the state of the market? Is it -- how penetrated is it? small market, large market, et cetera. It's always -- you guys obviously have the best view of that question. How are you looking at it?

Yes, if you divide it just in the thirds, large, medium and small, just to keep it simple. That large market is quite penetrated. The over-the-road trucks, the semis, they're well penetrated. They're established companies. They've bought into the spend management that a fuel card provides. And so that's more trading market share. But then you get into the medium size and you're dealing with maybe only 30% to 40% penetration where companies have gone and bought a fuel card. Otherwise, they're kind of just using corporate cards or more other prepaid things at various stations that they can go to, depending on the size of their route and things. And then you get into the smaller and I say small, still kind of 5 vehicles and up, not kind of the 1 to 2 that we were involved in more recently. There, the penetration is much lower. So you've got a massive market, billions of dollars of spend that there's still opportunity from an awareness and education standpoint. And one of the things that we're doing to try to drive some of that awareness and get more share of wallet and sales activity and energy is by leveraging the Corpay One acquisition that we did not too long ago, where we can go to target customers and even existing customers and say, okay, here's a fuel option for you, but here's also a multicard option for you. It can do a variety of things. It doesn't have to just be fuel-only. It can also be your garden variety kind of corporate card, T&E types of things. How do we get you up kind of the spend management value proposition? Here's the data that we can provide you. And in this environment where being spend conscious is very important, having those tools and capabilities and that pitch to a treasurer or a CFO I think is -- plays well. So there's -- it's not kind of an old and fully penetrated market as some people may think when you think of fossil fuels and cars, and that's kind of little cliche.

And...

Yes. I was just going to say the biggest barriers at that small customer level, you've got to remember is either their personal credit card or cash, quite frankly. And so they're using quite antiquated method to pay for fuel or spend or whatever it is and probably aren't doing a great job tracking it between your business versus their personal set of books, right? And so it's just that added value prop and where there's a ton of potential market that still exists.

So that's why you're really competing with in the small market. It's not necessarily another provider. It's cash. It's whatever house accounts or...

Inertia, right.

And a general for risk corporate cards, I understand. And in Corpay One, where are we at with the rollout of that product? Is that something we can give us any preliminary read on how that's going? Do you have all your sales systems in place to step across? Or is it still early...

It's still early days is what I would say. Just for the benefit of others, Corpay One is a full AP application that, again, just as the word suggests, allows you to kind of manage end-to-end the AP process, but more down market. So we have more of a mid-market solution through a variety of acquisitions that we had done. And I think where we are viewing the real advantage to that is to cross-sell that 1 product into that fleet business because that's where you see -- not over-the-road, large trucks, but the medium and small fleet companies. a right example of companies that you can provide a multicard solution, maybe even go the full AP route and really provide them a card solution that's multifaceted. So we still have the assets that are available for the mid-market solution, which will be predominantly sourced and serviced out of kind of the legacy corporate payments group. But then we also have the opportunity to be able to use that functionality with businesses where our kind of initial inroad as maybe fuel, but maybe we can expand that share of wallet by also providing the multi-card solutions as well and then ultimately, potentially full IP.

But adding to that, too, it's really focused on what we call our same customer within that SMB segment. So it's not the small customers who only have 1 or 4 cards to their primary spend is only fuel. That's not who our target is because I think we figured out, hey, they don't have any other spend. And so being quite selective who we make the offering to what kind of terms that they receive as well as just continuing to monitor and watch it. And so I think Tom said it, it's early days there. And so I think we view it really as an add-on, a nice to have. but certainly something we continue to watch and keep an eye on.

It just becomes part of the basket of products that we can deliver to customers.

Yes. Also in fleet, when I think about the expense, pre-pandemic, there was a particular mix, it seems like came in the pendemic; the SMB side of it maybe fell off a bit the OTR, big trucks kept rolling. I felt like there was a normalization occurring. Lately, you hear a lot of headlines about things like freight recession, et cetera, that might be having a disproportionate impact on the small market. How should we think about, I guess, 2 related questions? One is just the mix of your business, maybe to make it -- to simplify it, maybe [indiscernible] I think versus today, small OTR versus smaller fleets? And then second, just related is the credit environment with the small fleets and how you're managing through that volatility?

Let me take the latter, and I'll give Alissa the...

The good one.

We're going to perform in a historical perspective and -- but in terms of the current environment, we're being very selective in surgical, particularly around those smaller cards, call it, 5 cards or less just because we want to make sure that we're doing a bit more than just kind of a auto-approved digital underwriting, things of evaluating time and business, maybe getting personal guarantees. A little bit more work, not so much where it's tons of friction, but it helps keep the fraudsters out and it also allows you to make sure that the customers that you're getting in are customers that you feel comfortable with are going to give you the right level of revenue and reduced write-off risk. So we've seen good improvement in terms of the delinquency buckets and roll rates and I think the overall strategy of pivoting away from the small and going to the super small micro to more of the small and up, call it, 5, 10 vehicles/cards and up is working out well. there's a time for some of those smaller providers. But right now, I think our focus is predominantly on that kind of avoid the micro and move up a little bit. And I'll let you comment on kind of your pre and post-pandemic?

Yes, I would just say pre-pandemic. I think the cost of capital is really low. And so new entrants into that SMB or micro SMB subsegment for our product, we're really just kind of in a healthier place just because the world was in a healthier place, if you will. They could get access to funds, they can borrow money, it was relatively cheap. I think that trend continued during the pandemic to some degree, especially as the spot trucking rates went way up. And so a lot of people who may have been with the larger over-the-road fleet may have said, I'm going to go do my own thing now. It's way more attractive, oh, and plus the government was basically funding the ability for a small business to stay in business, right? And so I think that shift in the macro in the context of interest rates in terms of no more free money. I think that dynamic is really kind of what resulted in where we are today. So I think it's just being quite purposeful given just what the world looks like for that smaller customer.

Moving on to corporate payments, which we already touched on with Corpay One, but in the virtual card business, putting the cross-border piece aside for a second, it's interesting. You guys have continued to put up the numbers there. There has been some other AP automation players out there who have called out specific weakness. But when you really kind of drill down there, it seems to be very vertical specific. And so I guess the question for you is, I mean, are you -- I guess, first is in that business, are you seeing any width of deterioration in any of the verticals? And I guess the second question is, is that a fair assessment that you just are stacked in the right place in terms of...

As Alissa said, we see on the core corporate payments space, we're middle market, larger companies, not quite as vulnerable to the shallowness of the [indiscernible] of the economic environment that we're in. A lot of their spend we would put in the category of nondiscretionary. So on the margin, there may be some things that they're opting to not spend money on, but that's totally lost in the wash and the economy would have to dramatically change for that to change. I think the real answer to your question is less about the pace and more about what we've been able to do from a spend and back to your question about realization and implementation, the sales and the value proposition that the team has been able to put up has been extremely helpful, obviously. And I think what you're seeing is more and more adoption in terms of companies in terms of the value proposition and what you're moving pieces and parts and potentially all under our full AP solution -- AP model to something that's more digital, that's integrated into their ERP. Their ERP alone doesn't have all the bells and whistles, but some of our capabilities have, there's just more adoption for that. There's a value proposition there where they said they say, gosh, yes, you're right. I can actually save money and not just through headcount reductions, but just through lower cost per invoice, I can actually save money with these solutions. So now the business case sells itself from a financial perspective, and it's finding the bandwidth in order to do the onboarding and the implementation within those organizations.

I know we were talking about strategic alternatives in a certain direction, but at the same time, you guys are clean balance sheet, very cash generative. Is there a way to further accelerate the strategy? I know you've been acquisitive in terms of -- in certain parts of the business, it seems like on that virtual card side of things, software layers are all kinds of different ways to go to market. Is that a place where, let's just put aside the future configuration of the company for a second. Could you accelerate your strategy with M&A?

Yes. I don't know if accelarate because I feel like we're running pretty hard as is and regular interactions again in my early days in terms of what the M&A environment looks like and what's the target list and what evaluations look like. I think the thing that's the greater accelerate is the external environment, what happens to valuations? What happens in those companies' cash flows? What happens to some of their owners? As you know, these things -- it's a 2-party model in terms of a buyer and a seller. And so I think the greater accelerant -- as you said, our balance sheet is in great shape, both in terms of cash and low leverage. And therefore, it's really just a matter of what the environment like. And devaluations for the sellers come down where you sit there and say, these are transactions with a little or no dilution and yet you get product capability, distribution, whatever associated with the trade. And so there's people dedicated all day long, wake up every day in FLEETCOR, that's all they do is understand the marketplace and figure out how to continue to expand in inorganic ways.

Fantastic. Out of time. Terrific conversation. Alissa and Tom, great to have you both here.

Yes, thanks for having us.

Yes.

Thank you so much.

Great, thank you.