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

Welcome, everyone, to day 1 of the UBS Global Technology Conference. My name is Nik Cremo and I help cover the payments and fintech sector here at UBS. Just one quick housekeeping item. If you have any questions for Tom, feel free to submit those through the conference app, and then we can address those towards the end of the conversation. So with that, I am excited to have Tom Panther, CFO of FLEETCOR, with us today. Thanks for joining, Tom

Yes. Great, Nik. Good to be here.

So you've been at FLEETCOR for about 9 months now, and it's been a very busy first 9 months for you with divesting the Russia business, completing a large portion of the strategic review. You acquired PayByPhone and the list goes on. So heading into 2024, what are you most focused on? And also, just what's the biggest adjustment then coming from EVO?

Great. Well, it has been an active 8 or 9 months, as you've said, Nik, we've accomplished a lot. We've done a variety of things. What I would say in terms of the focus on 2024 is just continuing the growth trajectory that we're on across each of our 3 primary segments. We can unpack that a little bit more as the conversation goes on in terms of what some of those key initiatives are. But just very focused on how we continue to capitalize on the market that we operate in and continue to gain as much market share as possible. We feel like we are gaining market share in our business. We've got proof points to demonstrate that. And I think we'll continue deploy certain strategies to achieve that. In terms of the transition for me, I guess, one, I'll start with the similarities. It was -- my career has been focused on financial services and financial institutions. So I've been exposed on the banking and payment side, my whole career. So that's nice to be able to walk into FLEETCOR, which was literally 5 miles down the road from where EVO is, an easy transition even from being in Atlanta, a global company just like EVO was a global company, all of those things that were quite similar. I'd say the area though just greatest adjustment that I spent a bunch of time and continue to spend a bunch of time on is just understanding our revenue model. And my approach as CFO is really to kind of dig in on some of the details and really kind of understand how things. I'm a big believer in that if you understand the inputs, then the output will take care of themselves. And so understanding the revenue model and how we price customers, what are the variable costs associated with those respective revenue models has been something that I've been very, very focused on. And I think you've got to be able to understand those things and all of those different variables in order to have an influence on them. And regardless of what markets we're in or what products we're talking about, we just have a lot of different ways in which we go about pricing customers, and that's been a complicated process I spend a ton of time looking into and understanding.

I can imagine a lot more different business segments. Okay. So just starting on the fleet segment. We get a lot of questions here. So maybe like if you exclude Russia, it's been low single-digit grower this year, ex macro. Can we just start on the trends that you're seeing in Q4 to date? Is that about similar to what you saw in Q3?

I think it is similar. We continue to see really good performance from our international business, both in Mexico and Europe and Australia. Those markets continue to perform well. It's not that the U.S. is -- overall has some level of softness. It's more around our SMB business where we've seen some level of revenue softness, not from the base, but just from the standpoint of our pivot away from the micro customer to the more upmarket lower -- larger SMB, lower middle market is where we've seen the challenge in getting those sales identified, closed and into the book of business. We analyze the base regularly. The base has stayed relatively consistent. It's just the level of new business coming in since upended as we pivoted away from SMB and upmarket that that's caused a little bit of that revenue softness. But we see the trend continuing along that same trajectory. We think there continues to be some good upside associated with the business on a go-forward basis, particularly as we introduce some of the new products that we talked about during our earnings call, where we think we'll have additional opportunity to grow the legacy business and then we can talk about the whole movement into the fleet transformation and consumer side later on if you want to get into that.

Yes, absolutely. Before we do that, so on the last earnings call, Ron mentioned you guys are targeting about 25% sales growth for the U.S. domestic fleet business in 2024. So can you just walk us through kind of how you're getting there between some of the salespeople you added and as well as some of the new products?

Yes. So our go-to-market is a blend. So one, it's some element of digital that then stimulates lead generation in terms of inbound call volume. We also have outbound lead generation, and then we have field. So we do all of those and continue to invest in those. So some of this is just the engine of sales and marketing dollars spent correlates back to the level of new business that we can generate. And so it will be refining and moving forward with that, where we'll continue to invest the dollars in order to generate the sales. Meet on it regularly in order to get valid tangible proof points. But on top of that, you mentioned some of the new products. One of the things that we're particularly excited about that we've already rolled out is the ability to have a 2 in 1, if you will, card that allows it to work for both fuel as well as business expenses. So we think it's a product that is particularly attractive in the market where we can go to new customers and our base, but particularly to new customers in that lower middle market segment of the overall market and be able to sell both the fuel and a business card. It provides the same kind of spend management features that comes with the ordinary fuel card, but also provide the opportunity to offer a business card as well. And as we get them into the fold and they see the benefits of that, we also think that there's opportunity to do virtual card and ultimately bring them along the product journey to be able to do potentially full AP depending on their needs. That's the thing that's nice about our product set is that we can bring them along a product journey based on what their needs are. And if they want something super specialized and relatively narrow for just their fleets, we can offer the fuel card if they want something a little more general than we can offer the business card. If they want something that's a bit more modern, we can do the AP file and virtual cards. So the whole range of that, I think, comes together into what we think is a pretty attractive sales opportunity heading into the next year.

Got it. And then -- so just to clarify, the main distinction here with the 2-for-1 card versus what you guys previously were doing is that this is targeted at new customers versus the base?

New customers versus the base, not that we would ignore the base, but yes, and also larger. One of the things that we think was a bit of a misfire with respect to the prior strategy a couple of years ago, pre-pandemic, was that we were selling into smaller companies, business expense, AP-type products that really were the companies that didn't even have much of an AP business to begin with. So that was a bit of a misfire of what we've learned through the maturation of our corporate payments business is that the best way to sell AP product is to sell the companies that have a decent sized AP operations and so that's what we're targeting.

Understood.

And we put a lot of marketing resources against that real feet on the street that we're bringing in and experienced people who have card experience that can sell this. They're scattered across the United States in terms of field and have massive networks of lead generation. So we think we've got the right sales engines to be able to bring some real interesting business in. And when you bring these businesses in, I wouldn't necessarily call it elephant honey, but it's definitely up market where you're getting customers that have $100 million, $200 million, $300 million in revenue that you're able to get some pretty signing wins against a handful of closes.

Got it. And with time to revenue in the fleet segment being a little faster than some of your other businesses like corporate payments. Do you think it's realistic for that business to accelerate into the mid-single digits in 2024? Just with all these various...

We're not done with the planning process. I don't want to get out ahead of that. We've got some work to do and business leaders to get signed up to their growth targets and things like that. But I think you can certainly say that we have expectations that the business does just the U.S. alone, put international aside, which is kind of a 10%-ish grower, the -- even without Russia, the U.S. alone, we think has that kind of potential to grow at that level. It's a huge base. It's almost $950 million business. So getting that from low single digits to mid-single digits is not an insignificant number on the increments in terms of when you think about the number of sales that you have to generate close and get onboarded and transacting.

Got it. So next, it would be good just to come back to the fleet transformation plan, the goal to accelerate that segment into the double digits. Maybe if you could just kind of walk through the various pieces of that.

Yes. This is something that we're really excited about. One of the things about the strategic review and even before the strategic review that the company is very focused on is value creation, and we felt like the single biggest way to create value was around the fleet business. After all, it was almost half the company. And so if you're going to improve the overall multiple of the company, you've got to be able to focus on the big chunky stuff and not some of the ancillary things. And so as it relates to our fleet transformation idea that we rolled out on the earnings call, we identified as kind of 3-pronged. One was the business card that I already talked about where we think that can bring real advantages to that business, where it's a fuel and a business card, coupled together, ubiquitous network of usage, whether it's on our proprietary rails or a Mastercard. Two is continuing the investment on the EV side. We've seen some real tangible proof points of our EV assets being something that customers -- existing customers are really attracted to. We spent over $150 million over the last couple of years alone on EV-related assets, and we're seeing those get some real traction. And the U.K. is the best use case for that, where we see customers who are making their own transition from -- I won't say, from because I think that creates a bit of a misnomer, making the transition toward EV because they still keep their combustion engines, their ICE vehicles. It's not that they get rid of those and trade those in for an EV. They morph into EV by the next 2 or 3 vehicles that they buy are EV. So we keep the fuel business and then add on the EV. And so they come to us and say, "Hey, we love your network on the fuel side. We love your products, the spend management, the controls, the reporting, the discount, all of those things, can you do the same thing for EV and through the assets that we've acquired, the networks that we've contracted with, we have over 60% coverage, 20,000 charge point stations across the U.K. that's really attractive. And we see that continuing to pay some significant dividend related to the fleet business. And then the third idea, which is one that maybe was not necessarily telegraphed, but one of the things that we've been really looking at over the last number of quarters was entry into the notion of how do we augment the fleet business by having an opportunity to enter into the consumer market. And we had an opportunity associated with PayByPhone, which was a company owned by Volkswagen that had 6 million registered users across the U.S., U.K. and Europe. And the park that use a parking app and what we see there is basically an extension of what we do in Brazil, where you start with an anchor product and build around that anchor product of multiple use cases of payment needs associated with a vehicle. And again, I'll use Brazil as a great proof point where years ago, we started with a toll tag and sold customers a toll tag where they pay $5 a month, 25 AI to first -- for a monthly subscription to use a toll tag to pass through tolls. But as we got that captive audience and got them moved over to an app and things like that, we started to put other use cases around that where we now sell them insurance. We have enabled their tags to work in fuel stations, to work in parking, to work in drive-through restaurants, all of those things. I won't go through the whole story, but when I was in Sao Paulo doing one of my visits to get to know the company, we went along a little bit of a tour of Sao Paulo and got in the car and did all of those things. And it was quite amazing how all of these things work off of just the low tag that was on the windshield of the car. And all that's integrated into a payment engine that allows those payments to get paid on generally a monthly basis. So that idea of taking an anchor app in that case tags and in the case of PayByPhone parking and having the 6 million users who look at that app every day to park widen their spectrum of buying needs to be able to show them opportunities for EV charging or for service and repair and maintenance of their vehicle. We have 40,000 garages in the U.K. signed up into our network. So at a high level, it's that combination of customers and networks and they kind of feed each other. If you have lots of customers, you're very attracted -- networks are very attractive to you. If you have lots of networks, customers are very attractive to you. Those 2 things and what FLEETCOR has been able to develop over almost 25 years is a massive customer base as measured in numbers of drivers in the millions and networks that can't be replicated by our -- by anyone else, at least not in any kind of near period of time. And that's what we do, whether it's in the lodging business or the payments business or the fleet business. It's this combination of bringing customers and networks to and facilitating those transactions in digital form. And so we see that as something that we can do to an even greater scale on the fleet side through those 3 things, but particularly that entree into the consumer side, where over the next, call it, 3 or 4 years, we think there's an incremental $500 million to $600 million of revenue opportunity that otherwise wouldn't show up if we had just kind of stayed the course.

Understood. So just going a little deeper into the consumer vehicle payment strategy. So of the 6 million users, can you give us a sense of where they're dispersed geographically and then how that informs your sequencing of this initiative?

Yes. So 40%, I'll call it, 2.5 million are in the U.K., 35% are in the U.S. and then the residual, the 25% are in the Continental Europe. So call it, 2.5 million, 2 million and 1.5 million just for rough math. And from a parking perspective, we'll mine all of those 6 million to meet some of their B2B needs. There's basically a two-pronged strategy to the PayByPhone acquisition. One, I would say, is very easy to execute in near-term benefit where we can go to those 6 million users and start -- sorry, we can go to our customers, our B2B customers and say, we now have a parking solution for you because many of our B2B customers, they're not -- well, over the road, tractor trailer, long-haul vehicles, most of our customers are 50-mile radius band that work and park every day. They park every day to deliver things, to repair things, to go about doing what they do. And so we can go to our existing B2B customers and apply our strategy of not only do we offer you fuel, not only do we offer you EV. But oh, by the way, we can also offer you parking, where we can take away the friction of your employee having to go through the traditional reimbursement model of keeping up with $5 or GBP 6 or EUR 5.5 receipts and reimbursing and all that kind of stuff, we can go to the employer and say, "Hey, if you get all of your employees on the app, we can handle the parking needs of all of your B2B customers, their drivers. So we think we can do that and then started piloting that right away. And we think that's particularly attractive because the economics associated with the B2B model from a revenue per trans perspective are much higher because it comes with subscription model. But the other angle on the PayByPhone is being able to take those consumers and be able to offer them those suite of products. We'll start in the U.K. One, our networks there are more advanced. It's the largest of their 3 major markets. And so we will begin working on the opportunity to put in front of those existing PayByPhone customers, whether it's through the app they have today or something else that we can build. The opportunity for them to see insurance to able to see service garages for them, to be able to see fuel opportunities, all of those types of things that we already have network. So it's a combination of let's leverage the network that we have and put them in front, using a phone, put them in front of the various customers that already exist today.

Understood. So on the last earnings call, Ron mentioned that you guys are evaluating a few other deals in the consumer vehicle payment side. So what type of assets do you think would augment your strategy the most?

Yes. I think for the most part, we've got the assets that we need. I think I would not expect us to have a significant amount of capital deployment related to this execution of the strategy. I think more of our deployment will be around the sales and marketing side, but we don't see this as being margin dilutive. Again, given the launch point that we have, the fact that we're using the phone, which is extensive distribution, digital model. But that's not to say that if we didn't see assets out there that brought with it large customer bases like the PayByPhone or large networks that were easier to buy versus create from scratch organically that we wouldn't entertain those things. But I think those would be more on the margin. There's nothing holding us back today given the customer base and the networks that we have from executing the strategy. So it would be more as things present themselves than a gating item for us to move forward.

Understood. I want to make sure that we touch on a preliminary 2024 outlook that provided on the last earnings call. So can you just walk through the high-level assumptions for the top line of 9% to 11% organic and you clarify what you mean by the macro neutral?

Sure. Sure. So on the call, what we were trying to do is just provide the setup for how we see 2024, it wasn't intended to be a guide and -- but at the same time, we wanted to try to just provide some view of what the things look like. And so from the operating businesses, we are far enough into the planning process where we felt like that 9 to 11 midterm target guide that we have quoted in the past is something that we think is still within the range of our expectations. Where we fall and what businesses and how all that shakes out is some of the stuff that we need to close out the year and figure out. But the larger point of that call was particularly kind of picking back up from last year where the outlook associated with some of those other, what I call surround-sound type areas was much more challenging. We were dealing with bad debt that was elevated for 2 quarters in a row, and we're dealing with interest costs that were higher. We get the Fed had started high teen. There was uncertainty around what is fuel price and FX and everybody was thinking that we were heading into some level of a recession. It was a matter of when and not if, and it was a matter of depth and severity of the recession. What we were trying to clarify is from the macro economy perspective, we see it as remaining stable to neutral from this point forward. We don't see certainly the same kind of headwinds that we were facing from a comparable perspective. We think we've lapped and cured a lot of those headwinds from bad debt coming down, from interest cost lapping, from more fixed debt than what we had before. So all of those things, I think, are neutral relative to our run rate. And we see -- and it's really just based on what we read, we're not economists, but it feels like in our 3 major markets of Brazil, U.S. and U.K. also in Europe by extension, that the macro environment seems relatively stable from this point. It feels like the central banks have threaded the needle to maintain some level of a soft landing. If there is a recession, it feels like it's going to be mild and shallow and short in duration. And so we see the outlook for 2024 to be something that has kind of a low level of variability off of what we see today. Many times when we talk about macro externally and internally, we are very focused on FX specifically and fuel and how those translate into our revenue and to some degree, our expenses when it comes to FX. And so that level of macro, we also see is relatively neutral from here. Fuel has some level of a 3 handle, has come down over the last, call it, 6 weeks. But people are projecting fuel to kind of stay in this 3 -- call it, $3.50 plus/minus $0.25 on either side. And it feels like the currencies that we operate in relative to the U.S. dollar, the Brazilian real and the Sterling being our 2 most major one. Right now, it has actually been favorable. The dollar has weakened a little bit as the tone has softened a little bit. So right now, FX is better than, say, where it was 6 months ago. So all of that just feels like a stable environment for our planning purposes, where we don't have a big overhang that we're having to overcome. And so I think our focus can be on going and optimizing those businesses and their performance and executing our strategy and not having to deal with what we call kind of some of the below-the-line noise of bad debt and interest and things like that, that we're a bit of a challenge that we were coming off of last year.

Understood. And so just to clarify, so if you pull aside the noise from fuel prices, FX, currencies, interest rates, do you think the general economic underlying demand from your customer base and sales type of that should generally be stable?

Yes, we think that's stable. Obviously, some may be a little bit stronger than others. We continue to see very good momentum on the corporate payment side and things like that. But as a generalization, given -- putting aside kind of the puts and takes on the margin, we see a relatively strong level of demand. And just generally a trend as companies -- what we sell to companies is the ability to have more effective spend management and be able to pay expenses more effectively. What better environment to sell that value proposition into than an environment where companies are dealing with margin pressures and wanting to optimize their bottom line. So if we can come to them with value propositions to help them optimize their bottom line, fairly low point of challenging of onboarding. It's not hard to onboard our product. Some a little more time consuming than the others, but measured in months, not quarters, then it's an attractive value proposition. So we think the customer demand will still be high because what we offer is a value proposition that is very attractive to them.

Understood. So the other part of the outlook was like you guys are aiming for 54% to 55% adjusted EBITDA margin which is up like 100 or 200 bps versus the full year of '23 for what you're tracking towards. So can you just walk us through the puts and takes of that, Russia coming out, which is a headwind. You also have PayByPhone, but then you have Corporate Payments generating operating leverage. Like what's the level of confidence that you can get there? And like what are some leverage that you can pull to get there in case the demand environment is lower?

Yes. So I think one, maybe the easiest way to deal with some of that noise of Russia out, PayByPhone in just what do we think the exit rate is going to be for Q4. And we think the exit rate for Q4 is somewhere in that 54% to 55% range. And so that becomes our jumping off point into 2024. There will be quarterly seasonal variation across the margin, but we see that as a reasonable expectation for the full year of 2024. That would still be up relative to 2023 since our full year average margin this year is probably going to be ex Russia somewhere around 52.5%. So we'll still be up relative to the prior year. But -- so from that standpoint, I think we've got a fair amount of visibility and confidence in that. In terms of levers, it's continuing to manage expenses with a high degree of discipline, especially costs associated with some of the functional areas and things like that. We'll look to get those efficiencies. On the PayByPhone, we'll look to get synergies out of that acquisition, more on the top line than say on the base. But we think there's definitely efficiencies there. I think we quoted it was $0.04 or $0.05 dilutive in for Q4. I would not annualize that number. We'll get efficiencies that caused that to be much lower today. We even hardly be able to find it in the overall 2024 number. We'll refine that as we come out with a more formal outlook for 2024.

Understood. Just wanted to pull the audience for Q&A. We've got about a minute left. Okay. So we will just pivot back to a question to end on. On the strategic review, there are 2 remaining parts outstanding, which is you guys are evaluating just broking some small noncore assets and also looking at a strategic partner probably around the Corporate Payments business. Any updates to provide there?

Yes. Well, on the former, obviously, I wouldn't spend a whole lot of time thinking about what some of those noncore assets would be. There are things just around the margin that will just always be looking at to potentially dispose of if it made sense in a particular market to do something that we thought was more strategic deployment. So that would be more of a payer to trade kind of transaction that business doesn't have as much strategic focus of ours. So let's get rid of it in order to allocate capital somewhere else. But those would be small and insignificant relative to the overall company. In terms of the more meaty potential transaction around some type of structural change in Corporate Payments. That's something that we're in late innings of evaluating as we work through the strategic review process, we came to the conclusion over the last several quarters with us and our advisers and our Board of really kind of now narrowing the options down to whether or not we would do something with a strategic partner. We're a big believer that the way you get 1 plus 1 to equal 4 is by partnering with somebody finding synergies, looking for opportunities to cross-sell and things like that. And so if we could find a marriage with a particular partner that we think gives us the opportunity to do things in a tax-effective way, avoid any type of dilution that's different than just an outright purchase transaction then that's something that we would consider. We had anticipated maybe being able to land those types of things, those evaluations by our earnings call in November. But when you're dealing with other parties and complicated transactions, you can't control the time line. But we feel pretty confident that we'll be able to control -- resolve it by February. But what I would say is nothing is a foreseen mechanism. It's not a paid a complete that we're going to do something. It's something that's going to be -- something that if it makes sense, we'll do something. If it doesn't, we're excited about the business that we have and the opportunities ahead of us and that we will continue to execute those strategies. So it only -- we felt like it was really additive on a longer-term basis.

Understood. It makes sense to us. Unfortunately, we are all out of time, but really appreciate all the insight you provided, Tom.

Good. I appreciate the opportunity, Nik.

All right. Thanks, everyone.

Thank you.