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

Okay. We're going to get started. Good afternoon, everybody. Thank you for attending. My name is Bob Napoli. I'm the analyst for William Blair that covers FLEETCOR. FLEETCOR is a leader in the B2B payment space. We have with us today, CFO, Tom Panther as well as Jim Eglseder, the Head of Investor Relations. Tom was here last year, but with EVO Payments, who recently was sold to Global Payments. So we're excited to have Tom back at one of the companies that we cover and at FLEETCOR. So Tom is going to have a presentation. And then after that, we'll have a breakout upstairs.

All right. We're good. Well, thanks. Bob, as you said, it's great to be back, and it's also great to be at FLEETCOR. Nothing against having worked at EVO for the last 4 years, but I've really enjoyed the time at FLEETCOR. Maybe just quickly in the way of background, I've been at this for 30-some-odd years in some combination of finance, accounting and risk roles in both payments and in banking. And I always like to come back to Chicago because I started at Arthur Andersen and it's nothing like coming back to the homeland of where Andersen started. And so my kind of [ MO ] has always been around bringing a combination of business, industry and finance experience together in order to drive shareholder value. And how do I define shareholder value? It's growth, it's efficiency -- growth, efficiency and ultimately share price, right? I mean, it's all about driving market value. And so that's really kind of how I think and lead, and I think it works very well with the FLEETCOR mantra as well. So I got a little bit of a challenge of the after-lunch draw. So I'll try to make this interactive. Maybe I'll move around a little bit. So your eyes just aren't fixated on one thing and try to make this as interactive as possible. A few use cases in here to maybe help the brain think a little bit as well. So FLEETCOR, there's probably some people in here who don't know what FLEETCOR is. At its very base level, it is a spend optimization company. Maybe you would have thought I said, no, it's a payments company. Well, it does payments. But really, its value proposition to its customers is how do we help customers spend less money. Well, who doesn't love that, right? I mean our salespeople should be able to sell that all day long, and you'll see that they actually are quite successful in selling it. But we help companies, primarily in a B2B fashion, a little bit of B2C in Brazil, which I'll get to in a minute. But we help companies enable their employees to transact in a controlled fashion, where they get reporting and analytics and help them spend money wisely. And we do that primarily through digital mechanisms. So kind of our snapshot of scope and diversification. As you can see, relative size, this is last year, a $3.4 billion company, this year will probably be just south of $4 billion, sizable scale. And sizable scale across a variety of elements, which I think creates a nice diversification for our portfolio, whether it's product, whether it's geography, whether it's some B2C, primarily B2B and the network. One of the things I've been most impressed by during my time at FLEETCOR, which by the way is about 60 days is kind of my time here officially in the role, actually kind of unofficially in the role, but won't get into all those details. But is it the network, the bottom right-hand corner. The network of merchants that it has to be able to fulfill transactions through, gives it its secret sauce. It's proprietary competitive differentiator because if you can control the network, you can draw customers to it, and you can have some level of pricing power associated with it. And that is over its -- over the company's 20-year history, both organically and inorganically, what the company has been able to do is really grow its network and argue kind of a network is second to none out there. So that's a little bit of what FLEETCOR is. Now it's more around how. How do we do that? Well, we have a mix of businesses, Corporate Payments, and we'll unpack each of these here over the course of the discussion. But in Corporate Payments, our vehicle and mobility solutions business and then as well as our Lodging business. And you may kind of scratch your head and say, how do those things go together, kind of how do those fit together? I go back to the overall premise of the companies. Employees transacting in a controlled manner where they get a good experience and the companies save money. And you'll see in the next series of slides, how we achieve that business objective, albeit through businesses that maybe at its face don't necessarily seem like they fit well together. You'll see in fact that they do share some commonalities as well as have some unique elements as well. So first, Corporate Payments. Every company spends money. And so think of this as kind of that most -- that first layer of supporting the company's spend management needs. And across Corporate Payments, you'll see there from a customer's perspective, our primary focus, and this is more has to do with legacy than capability. But the construction, the transportation, the business services or field services are some of the primary customers where this business started. But it's really -- our solutions extend well beyond that. And the products that we offer here range from anywhere from a plastic card all the way to virtual card, all the way to full IP. But again, I come back to kind of those networks. We are the #1 issuer of Mastercard in the entire Mastercard network from a B2B perspective. That gives you a sense of volume and customer base that we have and you can see the $1 billion -- [ $115 ] billion of volume, and it represents 23% of the revenue of the company. Within Corporate Payments, we have a large cross-border business, and that's the comment about the FX and the number of countries and foreign currencies that we can support. So this is kind of the solution set that we offer. And as I said earlier, it's anywhere from plastic, your normal [ garden-variety ] corporate T&E card, all the way through full [ AP ] and cross-border. So we offer a wide range of solutions. This can be [ a la mode ] or all of the above. Whatever the customers' needs are, we'll meet those needs wherever they have them. But it's a full suite of capabilities that we have across the Corporate Payments space. We can get into some of the stuff at the breakout session, if you're interested, but these just give you a little bit of a view of kind of the workflow. I'm a visual learner. I like to learn experientially. So this just kind of gives you a sense of kind of what the workflow looks like for a customer that would have some of our bill pay solutions associated with it. And then on the cross-border side, this is associated with companies that are transacting in nonfunctional currencies, generally multinational companies that have to pay a cost or an acquisition, whatever it may be, an outflow in nonfunctional currency. They have to -- they're euro-denominated, and they need to buy something in sterling. We really service the middle market here. We compete against the banks, but we service the middle market, which we think is fairly underserved, and our solutions and our capabilities enable us to really attract and grow this business north of 20%. Overall, the Corporate Payments business grows in the high teens when you combine both our core AP business and our cross-border business, combine those together and it's high teens grower. So vehicle and mobility. As you can see, it's 57% of the organization -- of the company. It pumps 11 billion gallons of fuel, and what's interesting is you'll notice, if you were watching very carefully, the first 3 boxes here, construction, transportation and business services and manufacturing, although it's not the third, it's the fifth box, those same 4 boxes existed on the prior slides that I referenced. I'll just click, just to prove my point, the exact same because of the overlap between some of the businesses. So I think it's an important point that even though it may seem like at face value, how does vehicle and Corporate Payments go together, from a vertical perspective, we do operate across many of common verticals. Talk about relatedness in just a minute. But here, again, I come back to beating the drum on networks. We have a vast proprietary worldwide network. We operate in Brazil, U.S., Canada, U.K., Western Europe, Russia currently and Asia Pac, primarily Australia and New Zealand. So we have a vast proprietary network. We transact both on a closed loop and an open loop. The open loop is through that Mastercard relationship that I referenced earlier. But with the emerging growth of migration towards EV, particularly on the commercial fleet side, we've also begun building out our network to be able to support companies that may have electric vehicles that they use for their business purposes. We can charge them or we can pump them, doesn't really matter to us. We're kind of agnostic as to whether or not somebody wants to put gas in their car, whether they want to put kilowatt hours in the car. We'll leverage our networks to be able to support that payment for them to be able to charge their vehicle just as much as they want to be able to fill up their vehicle. And then in Brazil, we have a variety of product offerings, and I'll cover that on another slide. I think it's a pretty interesting story within Brazil. We do all this through technology that is very customer-friendly. We want to make sure that our customers can tap into our vehicle ecosystem in a mobile and in a technology-friendly way. And so regardless of their needs across the various products that we offer surrounding the car, we do that through a mobile-enabled feature. So Brazil, quick use case. So this is kind of the bellwether of what we would like, both the U.S. and Europe, to be. You're an individual, you get up in the morning, you go to -- you go to work, you have to drive through a toll. We've got the solution, we've got a toll tag. That same toll tag allows you after you get through the toll to fill up your car. You go to fill up your car, it automatically links to the fueling station, you can pay for your gas, never have to get out a piece of plastic, it automatically interfaces. You now got your car full, you're going to the office, you got to find a place to park, your toll tag, which really isn't a toll tag, as you can see, it's really a tag, now allows you to pay for parking by using the device that you've bought from us. It's now time for lunch. You need to go to a fast -- drive-thru restaurant. Rather than getting out your wallet, they ask you've got to roll down your window to get the food, but rather than having to exchange cash or credit card, the toll tag automatically reads the POS system at the drive-thru restaurant, and it pays for your food and off you go. Then it's time to -- you realize, hey, I could use a little bit of additional insurance on my card, let me go out to my app. We actually offer through -- we don't underwrite the insurance, but we're essentially an agent for the insurance. We can offer you different add-on insurance features associated with your vehicle and be able to provide things around different forms of collision-type insurance, things that are just not the overall mass collision insurance, but things were break-ins, maintenance, things of that nature. Then it's time you're going home, you need to stop, buy something at the grocery store. We offer a credit card. So this isn't associated with the tag, but we actually have a credit card that we white label through a financial institution. And it's time to go out to dinner with your wife. You get into the EV car, we now offer the ability to charge EV. So a full ecosystem of services that we've built around the vehicle in Brazil. And again, we think it's pretty exciting. We think it's things that have elements of that, that exist in the U.S. and in Europe. But it's a great use case for what we see elsewhere within the world. So a little bit on EV. It's kind of a hot topic. People are kind of fascinated by it. Bloomberg did this study that talks about over time, you're going to see on the commercial side, use of combustion engines go down and electrical vehicles go up. Who knows what the slope of these lines are. But over time, there'll definitely be an increase in electric vehicles. One of the most exciting things I've been involved in since I've been here, and I think one of the most important slides in the deck is this slide. In terms of the assets that we have built or bought associated with this emerging move towards EV. We've built the networks. We've built or bought the software, and we have capabilities to service fleets and consumers in a way that allows us to meet their needs wherever they are. So on the commercial side, we can service both commercial and existing fleets. And then on the consumer side, we can support consumers' needs for EV. That's primarily in Europe in terms of -- currently, in terms of the assets that we bought. And then in terms of merchants and the chargepoint operators, the people who are investing thousands of dollars in capital to build out chargepoint operating stations. We're able to serve -- bring customers to them through the apps and the networks that we've acquired, where this is most developed is in the U.K. That's not a function of us. That's a function of us meeting the market demand. In the U.K., there's been a faster migration primarily because of government incentives for companies to transition their fuel-driven fleets to electric. And what we now offer is a 3-in-1 solution. Again, a little bit of another use case. You can have a customer that has a vehicle that takes fuel and we -- and through our legacy product there and network, we can help them fuel their car. At the same time, the next day, that person may hop in the electric vehicle rather than the combustion engine, and we can help them fuel that at various chargepoint stations. Again, we facilitate that transaction, collect -- earn revenue associated with that. And more and more, what you're seeing in some of these fleets are saying, well, you need to charge your vehicle at home, you keep the vehicle. It's a company car, but you take it home and you charge it at home. Well, how do I do that? Because that's now going to jack up my electric bill. How do I separate my electric bill? That's kind of a nasty experience. So what we invested in several quarters ago and then closed in that and then bought the company in the first quarter of this year is a company that allows to do at-home charging. So we have software, where the person can download the software into their at-home charging station, and we pay that -- bifurcates the electricity associated with charging that vehicle and we pay the electric bill for them. Then the company reimburses us for that electricity, keep the employee completely out of it, no expense report, no rifling through utility bill in order to be able to pay the incremental electric charges. We did a -- we looked at a little bit over 250 of our customers, which would have been thousands of cars, vehicles, a better way to put it. And what we're actually seeing is revenue per card actually go up. So some of the bears associated with the fuel business is you're going to get cannibalized. Even if you do swap gas for kilowatt hours, your rates are going to go down, at least early returns in the most mature market that exists in this space. Early returns are -- actually revenue per card is actually going up because of the solutions that we offer. Something I'm really excited about in terms of the opportunity for the company. And all of that single UI interface, again, back to customer experience and technology. Lodging. This is a little bit of a unique business, but again, it's employee-based. So this isn't hotels.com. You guys are going on a vacation and you need to go find a hotel to stay at. This has offered a variety of solutions, primarily through what we call workforce, which are kind of field services companies, think of companies that send employees out into their territory in order to work on things, cell towers, railroads, tree cutting services, you name it. Generally kind of, you would say, as the name applies, workforce people, people out there doing a little bit of heavy labor. Airlines, so where we're handling the lodging for crews, both pilot and flight attendants as well as distressed passengers. And then also another vertical is on the insurance side, where homeowners may get displaced, their home gets flooded or they have a natural disaster, issue, and they have to stay somewhere. We facilitate the ability through our proprietary network, hit that word again, but through our proprietary network to put these people in hotels at discounted rates. So we have a network -- proprietary network of 15,000 hotels. We upsized that to over 40,000 hotels in order to fill in some of the gaps between what the hotel is willing to contract us -- contract with for us versus what we're charging the customer, it's that spread that we make the difference in terms of the Lodging business. You can see it's 13% of the company, 37 million rooms. That's a lot of rooms that we're putting people in every year. So again, I just got to show you when I think about this business, when you hop on an airplane or when you're driving down the road and you see a bunch of people working. But we're helping those companies, again, help their employees have a great experience. And these are some of the tools, some of the products and solutions that we offer in that business as well. So I commented about kind of those customers and those overlapping customers. This slide kind of brings that together. As I mentioned kind of the construction, the transportation, the business services, the manufacturing, those same 3 not necessarily, per se, the manufacturing exists on the lodging. So today, only about 10% of our customers overlap. But when we bounce that up against our prospect list, over 50% of our prospects overlap, which again is kind of an interesting, another use case. So you have a construction company, they own a vehicle, so they use our card or fuel card to fill up their car in a controlled fashion, where they get the data and control mechanisms that they're looking for. That company then has lots of invoices that they have to pay to pay suppliers. So they've worked with us to have some combination of our AP solutions, whether it be full AP or virtual card. And then that construction company also has to send people on long-term projects where they're staying in hotels. And so then they use our hotel, our proprietary hotel network in order to stay in hotels. That's the ecosystem. That's the relatedness that maybe back on Slide 3, didn't really make a whole lot of sense. Maybe that now we're on Slide 20, does make a little bit more sense on how we kind of bring all this together and how spend optimization, technology and networks is at the core of what we do. How we do it is just kind of the marketplace in which we do it in. All of these markets have significant addressable market in front of it. Our penetration levels are good relative to the competition, but opportunistic relative to a lot of penetration yet to occur. And this is just an example of some branding that we're kind of putting our money where our mouth is. This is some branding that we recently rolled out, specific to the construction industry, where we are actually reaching out to people and kind of giving them the added motivation to kind of see the relatedness in our businesses. So a fair amount of marketing going on into making the story I just told become reality. So quickly and just in terms of just kind of punchline in terms of thesis. Our sales focus is very much geared towards driving added growth, networks, networks, networks because, again, without the network, you're kind of beholden to somebody else to be able to deliver your products. Our IT is something that not only from a production standpoint, works, but it also from a friction standpoint is a low-friction experience. And then we got the capital on the balance sheet to be able to continue to grow the company organically and inorganically generates a strong balance sheet, high -- consistently high revenue and EBITDA and cash earnings, growth as well as low leverage and high cash flow, which is kind of our north star in terms of just our financial objectives. We're not trying to -- we could grow faster, but we prefer to grow at a consistently high but yet steady rate, 10% top line growth, call it, mid- to high teens bottom line growth, manage leverage in an effective way and generate a lot of free cash flow. We think that kind of steady growth and healthy growth and smart growth without a whole lot of bad debt expense and things like that are what provide long-term sustainable results. And actually, we beat those. So even though that last page was a little bit of our north star of our midterm through the cycle, growth objectives. This is one of the more impressive slides on the page in terms of the level of growth from a revenue and an earnings perspective that we've been able to consistently generate over a sustained period of time. And with that also high attractive margins, kind of best of breed when it comes to margins. Margins that are 50% plus and steadily creeping up. Again, we're not -- when you get to this level of altitude of margin generation, you're more focused on how do I balance the growth and the margin improvement. And sometimes the margin ebbs and flows based on acquisitions that we do over the course of the year. So all of that positive financial return then creates free cash flow and the ability to deploy capital. And so we're very strategic about how we deploy capital. Again, we generate a significant amount of free cash flow every year, kind of that adjusted net income is kind of the proxy for free cash flow. It's kind of a cash equivalent of adjusted net income. You see the amount of cash flow that we generate, we'll always look first to deploy that in M&A strategies, and we've done over 100 M&A transactions in the history of FLEETCOR. We've done 3 just this year so far and have a team that's dedicated on just looking at opportunities across those 3 primary businesses that I talked about. But where we don't have a near-term M&A opportunity or it's not really a binary thing, we also will use our free cash flow to pay down debt and buy back shares, right? Nothing surprising. But if you just look at those numbers, we bought back 25% or so of our shares over the last 3 or 4 years. So we've been pretty active on the buy back. And we would still view that the company is undervalued relative to its returns and that the buying back shares is still something that's integral to kind of our overall capital deployment. But our first place to look is always going to be buying earnings related to the long-term company's growth. So how do we keep doing that? I mentioned specialized sales on an earlier slide. At the end of the day, my perspective is a healthy company, is a company that has healthy distribution. So I wanted to end on sales. Top of the funnel, we're very focused on brand awareness and also lead generation. We do that through a variety of mechanisms. We then engage with our target prospects through a variety of mechanisms, some of those digital, some of those face-to-face through field services, some of those over the phone, some of those very electronic. And then we are very quick about converting and cross-selling and generating kind of a sales engine, if you will. It's a very strong sales culture within FLEETCOR, didn't take long to realize that when I got here. So the back door, if you want to think about it that way, we only lose 8% out the back door in terms of the experience that customers have. So a 92% retention rate. The front door is actually quite impressive as well in terms of what that funnel delivers coming through the front door. The sales growth that we've been able to generate across those 3 groups of businesses has been quite impressive. I think also in the first quarter, we showed a 31% sales growth number. So sales translated obviously into revenue, it kind of is. It's the flywheel that keeps the business flowing. And then lastly then, just to kind of sum it up, kind of a two-pronged view. From a business perspective, it's a business that has strong value proposition in terms of who doesn't want to save money, who doesn't want to control expenses and give their employees a positive experience in terms of how to transact on behalf of the company. Massive addressable market across all of those businesses was relatively low penetration, great product and great technology in order to go harvest the opportunity that's out there. And then that translates into financial returns that we think are outsized relative to the marketplace, but outsized on a risk-adjusted basis where we're not taking undue risk, we're not swinging for the fences. We're doing what we do, which is continue to run that flywheel of sales generation, high levels of retention, generate cash flow, structural changes within the business with relatively high fixed cost, low variable cost that allow us to have very positive operating leverage and generate positive free cash flows. So that's the FLEETCOR story.

We're just about out of time to sneak in one question before we go to the breakout. We always -- and a great presentation, really, really helpful. I've always viewed FLEETCOR as being a good view into the macro around the world and obviously, a lot of interesting things outside of macro, but I was hoping you could give some -- your view on what FLEETCOR is seeing in the current macro environment?

Yes, sure. Everything is kind of within the range of what we would expect. We don't read anything differently than what you read. In terms of the macro that influences us, obviously, on the fleet side, we pay attention to gas prices. Being 35% international, we pay attention to FX rates in certain of our markets and being on the lodging and the payable side, how people are spending money, what they're spending money on, how full are airports influences what we see in terms of volumes. And they're in line with expectations. Obviously, I'd always like more in terms of that organic growth. But we're not fascinating on, is GDP growing 2% or is it shrinking 2%. That's within the bid-ask range that doesn't affect how we manage the business and deploy capital and manage our cost structure. Obviously, if you had down 20%, then we would think about something different. But I think based on what I read, I assume based on what you read, you're seeing kind of a healthy consumer, healthy consumers leads to healthy businesses. Healthy businesses spend money. And because of that, it's all within our range of expectations.

Great. Well, breakout room is in Adler, and we get a lot more questions for you.

Yes, please do come and love to share more about the company.

Thank you, Tom.

Thank you.