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

So thanks, everybody, for coming back. My name is Dan Perlin, I head up the Fintech practice here at RBC. I'm delighted to have the management team of FLEETCOR joining us today. And it's interesting, there's a lot of things we can talk about, but we have Mark Frey here, who's the Group President of Corpay Cross-Border, which is a very interesting topic. I suspect many of you maybe don't know enough about it. It definitely dovetails into B2B. And then we have Jim Eglseder, who is the Head of Investor Relations, who we're going to lead off with because we all want to just get an update on the strategic review process. So Jim, before we get into discussions with Mark, maybe you can just tell us where we all stand on these things because we read the news. It sounds like things are happening.

Things are happening and things are progressing. Obviously, on the last call -- first of all, thanks for having us Dan.

No, thank you so much. Really appreciate the support.

And the audience. But strategic review, we announced back in the first quarter. Ron, our CEO gave you a bit of an update in the second quarter saying, "hey, it's progressing, and it continues to progress. So we're doing the work. We were in the conference last week as well. And a lot of the spreadsheet work or the lab work should be completed by the end of the second quarter. We'll give you a process update when we talk in August. They had a few folks say, "hey, so, you're going to tell us what the outcome is in August and it should not be the expectation." but we'll be able to provide you, "hey, where we are and kind of a better range of what we're contemplating." But I do think that all options remain on the table, whether it be spinning out some of the noncore things, most of our businesses we would consider core. It's been another question. But hey, we're open to all alternatives. And ultimately, our CEO, Ron owns 5% of the company is perfectly aligned with what shareholders want and to maximize shareholder value. And we've been historical buyers, but that wouldn't be that were not historical do something different guys going forward.

Yes. You seem to be very proactive in terms of creating value over the years, and this is just another chapter it seems like in that journey.

It is. I think it's important to understand that we didn't start thinking about this in February, March when we got to knock on the door. This is something we've been working on for a year. They simplify how we talk about the company, let's simplify the corporate structure that let's pay some noncore assets and see if we can get distraction value. Let's remove some of the overhangs that we think are on the name. So this is all things that have been working along and frankly, the extra eyeballs, the extra attention, the extra interest in FLEETCOR because of it is frankly okay with us.

All right. Mark. So not a lot of people have had an opportunity, I think, to meet you in the past. So it would be great if you just spend a few minutes on kind of your background, and the responsibilities that you have here in running Corpay and Cross-Border.

Yes, I appreciate it, Dan. Thank you. I spent my entire career in the cross-border payment space in the nonbank world, primarily focused on selling to mid-market corporate organizations and financial institutions. I joined Cambridge Global Payments, the precursor to Corpay, which was the first acquisition that FLEETCOR did in the cross-border payment space. I joined that company in 2017 and was the Chief Operating Officer when the company was acquired. So since then, in 2018 became the group presidents, and have been running the business as the Head of the P&L, the operations globally and our overall strategy for the business.

That's great. So let's spend a minute on what is in Corpay, right? There's AP automation, there's cross-border, there's commercial cars, there's bill pay, like there's a lot to cover off here. So maybe spend a few minutes talking about each one of those areas for you and then how you think about those opportunities for the whole company.

Yes, there's sort of 2 ways to think about the business in terms of separating a little bit. So we think of a cross-border business that is largely a payment automation and a currency risk management business for the mid-market corporate space. We certainly sell capability, particularly making emerging market payments to Tier 1 financial institutions. So if you think of the world's biggest global FX banks, they don't necessarily have correspondent relationships everywhere in the world in the Southern Hemisphere, we make those payments on their behalf. And then on the domestic side of the business, which is about 40% of the $1 billion top line, there is an AP automation, complete outflow, workflow solution that we provide to our customers. That's about a $100 million business. And then there's $300 million of other capabilities from T&E and specialized cards to virtual card capability that round out that domestic solution.

Okay. Interesting. Now you just did an acquisition at the beginning of the year of the Global Reach Group. Can you just talk about the importance of that acquisition for your business? And then how that fits into the broader context for FLEETCOR?

Yes. Global Reach was an exciting deal for us. It was the second major acquisition that we've done in the cross-border space since Cambridge joined the FLEETCOR family and have been busy since January 3, was the first business day of the year, it was when we closed the deal as of last week, we've actually fully integrated that business. So lifted all of the customers in the tech stack, move them on to the Corpay operational platform, consolidated the brands and the sales teams and the back office functions everywhere in the world. So it is truly one business ultimately which is our usual go-to-market strategy when we do an acquisition in the cross-border space. So Global Reach was exciting for a couple of reasons. It gave us greater geographic penetration in the U.K. and Europe that are already big markets for us. And sort of solidifies our leading position in the nonbank space there, and it adds a little bit of capability to our existing position in Canada, which is sort of our home domestic market for us, if you will. But it also came with a little bit of capability. So some automation in terms of the ability to onboard customers and KYC automation at the point of onboarding to streamline that process, makes it easier to acquire and more cost-effective to acquire new customers. So we've taken that technology and brought it in-house and put it on the Corpay tech stack. And it also came with some really interesting risk management capability that allows a greater ability to capture spend for customers and analyze that spend to make better risk management decisions in an online environment. So again, we've listed that technology and put it on to the Corpay stack as well.

Okay. That's great. at a high level, like corporate payments, B2B payments, whatever you want to call them. It's a super fragmented space. It's very crowded in terms of what people say they do. Maybe we can bring it down to what they really do. And I think it's oftentimes very confusing even to someone like myself, who I spend a lot of time just trying to study what's going on in that world. So I have a couple of questions for you. One is, what is your sweet spot when you think about the addressable market? How big is that opportunity for you, not looking at the $125 trillion or whatever is going to flow through the space. Like what's the real market and then when you think about what differentiates your product solutions what would you say are the kind of the top 2 or 3 things that are most important or resonate with clients?

So it's a really interesting question, but I think something to keep in mind is that for all of our corporate payments businesses, 9 out of 10 of our customers come from banks, you primarily compete with banks. So you can sort of get lost in the weeds of thinking about price compression and other things with other fintech players. That's not really part of our reality. We're competing with legacy financial institutions and pulling those customers away based on better technology, greater customer centricity and the ability to integrate and be close to the customer. And that's how we win, whether it be on the domestic side of the equation or cross-border. It's really about the technology and the ability to craft customized solutions and move faster and be more customer centristic than the big financial institutions. Our core demographic is the mid-market corporate space. That's where we focus on both sides of the house. So in the domestic business in the United States, that's our primary market that we're competing for, and the same thing in the cross-border space. We do have an institutional channel partner business that exists in both sides. But primarily, it's a mid-market corporate direct sale business that continues to acquire customers at an impressive clip and doesn't experience price compression as well.

Yes. Why do you think financial institutions aren't more attuned to go in after this market? I mean.

It's a hard market for them to address. So it's legacy technology, in many cases, we win and we differentiate based on technology and customized solutions. It's the network of ERP systems that we're connected to, both horizontal ERP systems that cut across many sectors as well as specialized vertical ERP systems that service one market segment very deeply, and we have a strategy to go after both of those. And then it's combining that customer centricity in the technology with payment execution. The working capital solutions that other fintech players can't necessarily do at scale that we can do as a large corporate. So we really believe we've got somewhat of a unique opportunity to charge a new path right up the middle of the market, where we have a lot of the capability and balance sheet strength and financial profile of a large financial institution, but the customer centricity and the ability to integrate with customers of a smaller fintech but just across many more platforms. than a smaller player to us. So we have, I believe, a very unique position in the marketplace and an opportunity to continue to consolidate.

Yes. What's the go-to-market motion that you guys have for this? Like is this a more bespoke product that you're going and selling kind of specific to the client itself and then you have a sales team that goes after that? Or is it like a relationship manager. We've got platforms we can sell more of these things. Like how does that all work for you?

It's really both. We have a series of point solutions that if you're looking for, a, you're looking for a solution to a particular pain point that we can deploy just that solution and then potentially use our relationship management to cross-sell into the broader opportunity and integrate and sell more product to the same customer set, whether it be domestically or on a cross-border basis. but it could be a full AP outsourced solution as well, where our customers coming to us and they're looking for mid-market corporate in the United States that has a particular ERP, we can flick the switch because we're probably connected to the same ERP, we can automate all of their domestic payments and turn them into virtual card and the international ACH or we can send the virtual card payment or their international payments as well by a Swift or an in-country channel or by a card. So it's really the full capability suite that allows us to win.

Are there specific industries that you tend to find most success in based on kind of the mid-market and your product suite and relationships that you've built in and forged over the years?

Yes. Again, it's a bit of a mixed answer. So there are certain vertical markets that we have found tremendous success in. So if you look at the domestic business, it is -- we've had some success in the logistics, transportation, construction, on motor verticals. In the cross-border business, it's legal, intellectual property, financial institutions, manufacturing, international payroll, executive relocation. In all of these areas, we've taken specific capabilities that are relevant to that market segment, put some new front-end technology in terms of solving some customer pain point on the front end and then deploy that capability to that vertical integration at ERP that we're connecting to. But it goes beyond just those specific verticals. So many of our customers just fit into a horizontal ERP segment, and they're coming to us looking for a generic AP automation, whether it be domestic and/or cross-border at the same time.

A lot of those verticals that you mentioned initially, like logistics, and it seems like they almost dovetail into some of the other parts of FLEETCOR that are really at core for FLEETCOR. So maybe you could talk to how that has evolved and maybe capturing some of those industries.

Yes, it's been a very interesting conversation for us of looking at the Corporate Payments business and just how much lap there is in the lodging space and in the vehicle mobility space that we have for traditional FLEETCOR Enterprises and seeing that there is some overlap of customers, yes, we could be selling to different individuals within the corporate entity. But the prospect base, there is a huge amount of overlap, almost 40% in some of the business of prospects that overlap. So obviously, significant opportunity to only establish a relationship and an integration. But then cross-sell other products and services into those relationships. And so we see that as being an even bigger part of the story going forward.

Yes. I had some questions around cross-selling in particular around that because that 40% number is pretty high. And I'm wondering where are you in that process of being able to cross sell? Like you've identified them or you're going after them now?

Yes, pretty early days, really identified them. We know who they are. We know what they're looking for. It's now about execution. So we're -- I'd say, especially in the U.S. domestic business where there is a significant overlap in the vehicle mobility space as well as the lodging space. So we're going to see a lot more effort put against that in cross-selling those customers in the coming quarters. And in the cross-border space, same thing. We're seeing significant overlap with our U.K. businesses and see significant upside in Europe as well.

Can you speak to maybe some of those geographies because they don't feel like they're hitting on all cylinders, some in Europe feel pretty good. U.K. feels a little weaker. So maybe as you look around your business, where you're seeing pockets of strength, pockets of weakness? And if it is weakness, what are kind of the expectations for those to start to reaccelerate again?

Yes. So if we look at the corporate payments cross-border business first, it's a $600 million business, 55% EBITDA margin. Think of it $250 million of it quite simply is North America; $250 million U.K., Europe; and 100 million Asia Pacific with a heavy emphasis on Australia. So we've seen significant strength in the cross-border space in U.K. That's where a lot of the growth is coming from. So North America is sort of growing mid-teens. Europe is growing 25%, 30%, APAC is growing close to the line average of 20%. So we don't have any geographic weakness in the enterprise, and we see significant market expansion for us to not only continue to sell in our existing markets in which we originate but especially in Europe and APAC, lots of room for geographic expansion as well.

Okay. Here again, corporate payments, I feel like I've been talking about corporate payments or B2B payments for like a decade or more. I'm just going to stop at the decade that seems long enough. And yet, we're still massively fragmented. And so the question is, like has technology finally caught up such that this can actually be something where people can actually start to talk some real market share as opposed to this massive fragmentation. And then like what are the biggest gating factors for making this a much, much bigger business over the next couple of years? Because it feels like conceptually, it should work more quickly than it has. But in practice, everyone still struggled to like make a real business out of it.

Yes, it's a great question. If we look at our corporate payments franchise. It's a $1 billion business with a very profitable profile of 55% EBITDA margin that we're growing high teens, low 20s, depending on whether we're looking at domestic or cross-border. So that business is beginning to get some scale. I think the interesting thing in the thinking of the fragmentation and the second part of that question that we always get is, do you expect price compression to come in this segment? And we really don't see that -- any evidence of that today. Our margins are expanding over time. We're becoming more profitable. Our overall gross margin is growing over time because we deliver more value relative to the incumbent. The incumbent 9 times out of 10 is a financial institution, whether that's a smaller regional player or a global Tier 1 financial institution. That's where our customers come from. Now we can win and compete very favorably against the fintechs where you see that fragmentation and small market share that's spread out over a vast number of names. But really, the big opportunity for us is to go after the mid-market space and to hunt bank customers. That's where we compete very well. That's where we win at a very high success rate. And there's an incredible runway in front of us in terms of all of our geographies.

And the other one thing I would mark in, probably our biggest differentiator is the payment execution networks that we have, both in cross-border and domestic. Nobody else has that, especially at the scale that we have. So as we kind of look at it, we expect...

Just elaborate on that a little bit, that's a good point.

Yes. So if you look at our domestic business, our virtual card vendor enrollment enablement capability is market-leading and super robust, so that when we come across a new name, chances are those vendors already sit within our network. So we're able to commercialize those payments at a much greater rate than a smaller fintech or even a financial institution. That same sort of principle applies to the cross-border business as well, where we're sending payments to more than 200 countries around the world with significant strength in the Southern Hemisphere, making payments in emerging markets where Tier 1 financial institutions, the who's who of the global FX world come to us to make payments in Brazil and Colombia, Chile, Peru, Nigeria, Uganda and other nations in the developing world. So that payment execution capability in that network that we built on both sides of the house is a real point of differentiation allows us to win, both in the mid-market space, but also in the institutional space such that the BofAs and Citibanks of the world still need capability in certain geographies, and we are the ones that they come to.

Interesting. So is that one of the reasons why you don't see kind of some of these newer fintech start-ups really as your competitors in that space, you're dealing with the banks?

Yes. I think the competitive moat in terms of both that network and is in the cross-border space, it's the regulatory licensing network that we have around the world, that creates a very deep competitive moat for those fintechs to get over.

Yes, it's a big compliance. It's an asset and a liability, I guess, in some ways, right? Like it's an asset because it creates this big moat, but got to keep them updated.

Once it gets to scale, it's less of a liability and more of an asset, but it's been 20 years of grinding to get there.

Yes, yes. That's a very good point, though. It's a very good point. So I just wanted to talk about some of these what we call 1Q nuggets like the Corporate Payments revenue increased 19%. Your Corpay payables are up over 30%. Speak to the pipeline that you see kind of currently and how quickly do those things get implemented such that then we could see them into revenue, because it's been a pretty fast-growing segment already.

Yes. So in that AP automation space, let's say the pipeline is as rich as it's ever been, record quarter results in Q1. And I see no reason why that would -- that trend would change. So the pipeline is robust. We continue to acquire at a record pace. When we integrate or implement with the new customers, the ramp time on the full AP space is somewhere between 4 to 6 months.

It's not bad.

So relatively quick to market in terms of the solution. Of course, the revenue scales from there and will hit sort of peak at 18 to 24 months in terms of where we optimize that opportunity. In the cross-border space, we get to revenue realization of full wallet share a little quicker. So we integrate with customers anywhere from 10 days to 30 days in terms of the initial ERP integration, and we get to full wallet share within 6 months.

Yes. So that's much faster. The -- you did 21%, I think, in the quarter and cross-border. Did that include the acquisition? Or is that just stand-alone by itself.

That's inclusive of.

That's inclusive. Yes.

We normalized the acquisition in the prior year.

Okay. So then -- so it's really like a pro forma number.

Yes.

Yes, yes, yes. Okay. So again, like that was a number that really stood out to me. So I'm just trying to understand all the attributes as to why that's happening at these levels, you think it's sustainable at high teens, low 20s over the course of the next several quarters.

So if we look at the cross-border business, and we look at each of our 4 originating markets today are all growing either high teens or over 20% in terms of our overall expansion. So we're still seeing mid- to high teens in North America, which is our largest most mature market, well north of 25% in U.K., Europe and APAC growing around the line average of 20%. But we also see significant runway for geographic expansion and not to far flung places, so places where we're already originating some customers, we're now putting boots on the ground and building distribution engine leads to a significant uptick in terms of customer acquisition. So we've recently expanded to Portugal, which is a new originating market for us. And France will come later this year, where we expect to see significant runway in terms of growth, both on the payment automation side of our business as well as the currency risk management. So continuing to play out that geographic playbook ultimately to take the same solutions, the same go-to-market capability, deploying in those markets in the mid-market space. sees the same overall result. In some cases, though, we see that geographic expansion. It comes with less bank competition as well, and more underserved markets by the local regional banks. So some of these geographies look incredibly attractive in terms of future runway.

Yes, I was going to ask you about that because as you start to think about when you have this compliance network that allows you to go into those markets to begin with. But once you're in there, you can talk about Portugal and things like that, I'm thinking much less penetrated just in aggregate from the banking perspective. So that sounds like it's true. And just what are the opportunities you think that presents you?

So it's a tremendous opportunity for us. The big thing is the licensing and the language capability, of which we both have in each of these geographies, we have a big business in Brazil, but obviously, within the fleet network that has very close eyes to Portugal and something that we'll continue to build upon. Our French business is somewhat nascent today, but we've been originating customers in France for a number of years. enough to prove to us that the market is no different than the other geographies in which we operate. So it's really just about building that distribution engine with the language capability to go into those markets.

Okay. And I think in corporate payments, you talked about it accelerating throughout the year. Is geography like geographic expansion, the main reason for that? Or are there a host of drop down menu?

It's a host of things. The core geographic markets are continuing to grind away in the high teens, low 20s. And I see that's not necessarily going to change anytime soon. The rate of comer acquisition in the cross-border business is as high as it's ever been. We're setting a record sales quarter after quarter and continuing to find success with the full AP solution as well as the risk management solutions. And so we really -- we're going from strength to strength from an acquisition perspective.

Okay. You obviously see the payments, and you can see the volume. Are there any things to kind of call out there, both in terms of just recent trend data how you think your clients are -- their clients also are spending? And is there any kind of bifurcation in terms of SMB pieces versus large enterprises in terms of where the dollars are being spent?

Yes. So a lot of the spend that we see from our customers is nondiscretionary. So there isn't a lot of fluctuation necessarily up or down. So GDP is up or down, plus 1 or 2 basis points or percentage points, it doesn't necessarily fundamentally change the flow that we see from our customers. Obviously, we've seen T&E spend tick up a little bit, which is a small part of the overall corporate payments business, about 10% is T&E related. But for the most part, we see relatively stable spending patterns across most of our customers and no cost for ARM from an overall macro perspective. So certainly, we went into this year thinking, hey, everyone's talking about a global macro recession, and that has borne itself out to a lesser degree in certain geographies around the world, but hasn't fundamentally changed our customer behavior, how they're interacting with us.

Okay. And then the one thing you mentioned SMBs all the way enterprises, right? This our corporate payments business is a middle market business. We don't have any SMB exposure. Now where we have seen some SMB softness is in the fleet business, in the fuel business, both globally and in the over the road. So I think there's a bit of a misconception that, hey, all of those PV players do the same thing for the same end markets. That's just not the case. So broadly speaking, I said last week, and we're seeing nothing that's not in the range of what we would expect when we talked last in May. So broadly speaking, things are holding up just fine.

And where there is softness, I think it is in that SMB category, not in the mid-market space where our corporate payments businesses are really targeted.

Yes. So just to put a finer point on the SMB because there's a lot of questions about the kind of end market demand and strength. When you look at your trends kind of April, May trends, and I don't know if you want to give April trends, but no real discernible difference there. Are you surprised by the health actually, of SMB, as we continue to be surprised.

I mean most of the stress we saw even in Q4 and Q1 was in the micro SMB, 1 to 5 cards or 1 to 5 trucks to the super small guy, maybe running this business out of this basin, it tends to operate a lot like a consumer. Once you get a little ahead of that, we're not seeing any of the same kind of challenges that we're seeing even in the micro segment. So it really is fairly, I hate to use the word contained, but segmented at this point to the super small guys, not seeing any real change across any of the businesses, frankly, even in places like the U.K. and Western Europe. Trends are holding up surprisingly well.

But you said, you saw a little bit in the fleet business.

Yes. Then -- you can see it in the growth rate, you can see it in the bad debt, the credit? It's just that micro, that super small guy that is out of gas in the mid last year when everything changed with higher fuel prices and the incremental government money that was being thrown around everything else. It's just a different environment in which they operate today.

Yes. Surprised the lodging business is so strong. Yes. I mean -- so what's the back story there? Because it seems like it was surprisingly strong for a lot of people.

Yes, it was a little surprisingly strong for us as well. I think that business grows in the high teens, longer term, probably mid- to high teens, right? So coming in, in the mid-20s, frankly, the new software product we bought last year called Levarti and the airline piece is certainly helpful when we can now manage to address passenger events, on behalf of airlines. And I don't know if you remember, but there's a lot of flight cancellations in the first quarter that every time we sell a room there comes in at a way higher margin than we do for the pilot and flight attendant. So those types of things are certainly helpful. What it really is driven by the incremental capabilities and the -- that we have in those segments. So do we think that -- we've got some pretty tough comps in lodging in the second third quarter. I think, 36% and 44%. So should we expect the printed organic growth number of this businesses to certainly slow in the middle of the year, absolutely, something back down to much more normal.

Yes. The lodging business also has a highly efficient selling engine. We continue to be impressed at just how well they sell and differentiate in the marketplace. And really doing well in terms of new customer acquisition.

Yes. So any catalysts that you're looking at, potentially in your business line over the course of the next, I don't know, if it's a year, 2 years, a couple of quarters, you picked the duration. We're just trying to figure out what to look forward to.

Yes. I think the big push that we see from the mid-market corporate space, large corporates and even the institutional clients that we service, the big financial institutions, it's all payment automation and the ability to integrate directly with their native solution, whatever that is, or their ERP and that's where we really find that, that investment that we put in over the last 5 to 10 years is really beginning to pay significant dividends. So those customers that are coming to us in an integrated fashion, they're stickier. We get better economics. The retention rates are way higher. And so we see that as being a significant point of differentiation that we have today, and we're continuing to invest in that capability all the time. So part of the view of -- it's a fragmented market, because there's not just 4 ERP systems, there are hundreds of ERP systems, whether they're vertically focused or horizontally focused. So for us, it's connecting to each one of those players and having a robust capability to knock them out one after another, which allows us then to sell into that entire network of customers, sometimes with the commercial agreement and sometimes on a referral basis. So that is a huge emerging trend that we see in the market that has been in place for a number of years that is beginning to accelerate and gain more momentum.

Yes. So the last minute we have here in the context of a big strategic review, and you're responsible for running this business. It's clearly one of the businesses that I think people find to have a lot of value that could be unlocked. Is it a business that could run and stand on its own as you sit here and think about it today, does it have a lot of dis-synergies that would have to take place if you broke it apart. How do you think about that?

So in the cross-border business, no, there's not any significant dis-synergies. It is a business that is relatively stand-alone, that can run on its own. In the domestic payables business, there is some overlap with our vehicle mobility business. That corporate payments business was sort of born out of the card processing capability that came from the fuel business. So there's a little bit of work that we would have to do there. But is these are businesses that run relatively stand-alone and continue to grow.

Great growth, great margins.

It's a nice place to be.

That's good. Good. Well, thank you so much for being here. Really appreciate it, and we're looking forward to the next chapter in this company's evolution. So thank you very much.

Appreciate it.

Thanks.

Thank you.