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

Good morning. Welcome to day 2 of Citi FinTech 13. My name is Pete Kristensen, I'm on Citi's payments processors and IT services team. Great to have Tom Panther, CFO of FLEETCOR join us today. Let's get right into it. I want to start a little bit -- thinking about the last year. You're coming up -- you're coming up to your first year...

Yes, all of that anniversary coming.

Yes, exactly. And I'd love to hear like maybe how some of your perceptions of the business, how they've evolved in the last year. Maybe let's touch upon the opportunities that you have available to you sensitive to asset quality, even the culture itself.

Yes, it would be great.

So one question, and I just get to talk for 35 minutes basically...

Why not. No, it's been a great journey starting at FLEETCOR in April of last year, I came from the acquiring side. So I saw more of the enabling retail companies predominantly in a B2C environment, helping collect cash and collect receivables, whereas FLEETCOR is much more on the spend management, helping companies spend money across a multiple of modalities and use cases and more on the issuing side. And prior to being at EVO, I was at SunTrust Banks, where I got into the credit side and into things that was more on the issuer side. So I was a bit more able to kind of play all of my experience a little bit better at FLEETCOR. What I would say is what I've been particularly impressed at FLEETCOR is the sales culture. The sales culture is very much ingrained. It is culture. Yes, sometimes you throw that word around, but it really is culture. And it starts with Ron. Ron is very sales oriented, but it's not just, hey, I want more sales. It's more -- because that's easier to say, but it's harder to do. It's really about he and the we really get focused around how we do it. Whether it's new products, whether it's our proven methodology of sales and marketing spend, whether it's how we go to market with digital versus field versus outbound, it's really a -- I wouldn't call it scientific because that sounds maybe a little bit too hardened and institutionalized, but it is something where we really focus on those inputs that drive that sales culture. And then it's the reporting, and that's something that my team is responsible for. It's the reporting of those sales. It's holding people accountable. It's our commission plans. I mean, all of those things -- or things that I've been impressed. Clearly, that existed at the other companies that I've been associated with, you don't survive if you don't sell, but you -- companies that excel are generally excel at sales and I think this company excels at sales.

Every year, we typically do our transactionality trip down to FLEETCOR HQ and our meeting with Ron is one of our favorites of the whole year. Just on that as he digs into a lot of the components, and it's a lot more than just throwing money at the problem. But I would imagine, coming from EVO totally different type of strategy set up, the way you attack the market. FLEETCOR is a lot more P&Ls to manage a lot of niche businesses, great position but still niche onto their own. Like how do you think about from a CFO perspective, managing that, thinking about coordinating all those P&Ls together and to put together that fleet formula, 10% top...

Yes. 10, 13, 19, I heard 10, 13, 19 during the recruiting process repeatedly, we can unpack that a little bit if you want, in terms of what I mean if others aren't familiar with it. But be listen, it starts with a team. So I was fortunate to come in and have a team that was experienced, knew the company well. They've been patient with me. They've been good teachers, starting with Jim here, who's been great in terms of teaching me some of the history of the company and the way things work. But our model is one where I think of the organization as kind of these global shared services, functional leaders and then a decentralized local empowerment on execution. And that's not just describing the finance organization or the HR organization, but I'm also describing the company that way. We have group presidents over each of those businesses. And regardless of the matrix of the org chart they have end-to-end responsibility and control over their businesses. So we run them, not by any means decentralized because the mothership is very involved in their business. But we do give them that local empowerment and that enablement to be successful that kind of brings the -- maybe the span, the geographic span from Australia all the way to Sao Paulo, Brazil, and everything in between of FLEETCOR under a little bit more control and then the products a little bit more under control. And then we've done a lot and there's preceded even the big strategic review. But we have done a lot around messaging and simplification and telling our story in a way that you can actually get it out in an elevator before you have to get off, and before that didn't happen. Again, it precedes me. I'm trusting the feedback that I've received from others, but before that didn't happen. And now I can tell you we're a spend management company that predominantly supports B2B companies, and we help make payments easier and more efficient for the them. Boom. That's what we do. And we do it in a bunch of geographies and we do it with a bunch of products. But other than that, we're moving billions of dollars around the globe every day in a multitrillion dollar business.

Fantastic. You jump into right to my next question. Next month, the artist formerly known as FLEETCOR becomes Corpay.

That's right. That's right.

And it speaks to the transformation that you're going through and recharacterize your business. Just walk us through what are some of the changes that we should expect at least to your external clients, where are they going to see that maybe is different? And perhaps let's quick overview of the motivation behind...

Yes. I mean we're excited about it. We're excited with the name change. We think it gives the company kind of this opportunity to kind of have this fresh branding opportunity, fresh marketing opportunity. It better describes what we do. Right now, less than 35% of our revenue comes from fuel-related products. Well, when you walk around and say I'm at FLEETCOR, what is that? Well, we do all the stuff around corporate payments and lodging and other types of vehicle-related payments other than fuel. That's 65% of the business and our name doesn't really reflect that. So a lot of it is just another way. It's not a silver bullet, it's just another way of many for us to get our story out. So we're excited about that. That will be coming out in March. Our ticker will be changing from FLT to CPAY. So we're excited about the ticker change. At some point, we're probably going to get back up here and do a little bell ringing and celebration. So we'll get that on the calendar with the NYSE. In terms of what does it mean? It's predominantly what is an enterprise name change. Our local market names, names that those of you who follow us would know, SIMPAR in Brazil, AllStar in the U.K., CCS in Prague, those have tremendous brand equity and those aren't changing. Now over time, we may introduce a little bit of our brand and name underneath a division of Corpay and things like that, but we'll continue to go to market in those local markets with a brand that has a tremendous power. So it's really a messaging to investors, you to prospective investors, to employees, but it also resonates with our customers because there is a lot of relatedness in our business, and we're going to market in a very relatedness way. And now we can talk about the breadth of our business in a way that before it was just a little awkward.

Right.

It wasn't impossible. I mean, obviously, we've been successful. We put up good numbers. So it's not like it's been a headwind. This is just more of letting the ball roll down hill, whereas it just works better. I can now go to cocktail parties and tell people what I do, and people get it. Before FLEETCOR what -- FLEETCOR...

I can -- I give that you get payments in the name as well...

But Ron having a real -- he's having FLEETCOR withdrawals. I'll tell you...

I can understand that.

You can imagine.

Yes, I can understand that. I mean it's -- it's been his child for so long and the success that the business had has just been tremendous. I do want to take a quick lap around 4Q, and some of the things that we saw in the business that quarter. I do want to hit on some of the softer points.

Sure.

First of all, it comes up in most of our conversations, the channel business within corporate payments, we know it's 5% of the segments, $50 million...

You got all...

But I think what was interesting about what's happening there is what it says for a lot of your partners in that category itself. But at least from the function and the service that Corpay provides, I think get used to that.

Well, that business has been Corpay. So you are spot on.

But how should we think about the flattish volume growth that you're expecting, is that transaction activity? Is that new contracts that you've implemented? If you could just go through that and then, how should we think about commoditization in that space? And then -- and the strategy...

It is unfortunate that a business of $50 million on a $4 billion business got so much attention, but it is what it is. But I would say about 2023 and what manifested in 2024, if there's a word to leave you with, it's transition. That business was going through a bit of transition in 2023 to kind of culminated in that fourth quarter year-over-year decel that we referenced. It's a business that has, give or take, 10 or 15 major customers. We do the processing for them. And some of those customers were going through transition in 2023. What does that mean? It may mean that they were buying other companies that gave them the opportunity to bring a service in-house. Hey, listen, power to you. You just spent a bunch of capital, you better use it. And so that created some either minimalization or displacement of some of our volume. Some of it was, they decided to get a cheaper rate and save a penny, and we're not in to take rates and spreads that are ridiculously low. I mean it's a high-margin business because there's very little incremental cost that comes with it. But at some level, that becomes a race to the bottom, and we've got more important and more interesting things to spend our finite resources are. So it was just going through a transition in 2023. We're confident that 2024 will be stable, stable relative to our run rate. There will be some continued grow over issues in terms of the comparable and things like that, depending on when customers' volume subsided. But it is a business that, I would say, is not one that we're overly clearly focused on and growing. We're focused on the 95%, not the 5%. Yes, people wake up every day and cultivate those relationships and want to continue to provide good service and also grow the business. So I'm not saying that. But that's not what -- it's not the business that fueled our growth in the past, and it's not the growth -- the business that's going to fuel our growth going forward. It's just on the increment when you're dealing with, not the total revenue, but the incremental revenue, it was the piece of the increment that caused the overall segment to come off of its 19% to 21% growth rate and have a little bit of a hiccup at 15% in Q4.

No, fair enough. No, I think the reason why it is grabbing attention, so people can back it out and see the success rate that you're seeing in the 95% of the segment, and we'll get to that in a sec. I don't want to spend too much more time on 4Q, but lodging comes up a lot in conversations. This was a mid-teens grower several years ago, and then we've seen a lot of changes, a lot of acquisitions. You've gotten into new verticals so on and so forth. And then some of these verticals are exposed to things like weather and -- what's going on with the airlines. How should we think about normalized growth for this segment now? I mean obviously, there's going to be some comparable issues this year, particularly...

Particularly in the first half.

Right. For the air crew business and then on the insurance side. But the underlying workforce business, how should we think about that?

We're still very bullish on the business. We still think it can be a double-digit grower. We think it exits the year as a double-digit grower. So we think there is a need, a demand for the business in the marketplace. Why? Because employers are always going to need to be sending their employees out into the field. And we service that need for a variety of types of employers, not employers like the ones that people here work for, but people who are actually doing more manual labor, field services kind of things. So we think there's strong demand. We like our product set, and we think we're unique in that we provide a full suite of services to that employer. We're not just helping them make a payment. We're helping them manage the booking. We're helping them control the spend and have visibility and controls around the spend. Yes, we're helping them with making the payment and doing that all in one-stop-shop type things. We're giving them access to 40,000 hotels in our proprietary hotel network, 15 of which are proprietary, 40 or more -- the other 25,000 are fill-ins. And then we're providing reporting. So there's -- we support an end-to-end process for the company, and we think there's strong demand there. The business, coming out of COVID, it was -- I think the last couple of years has been about how do I find my footing? How do I find my footing coming out of COVID? You had obviously the comparable from '21 to '20 was impacted directly by COVID, and the '22 to '21 was impacted by a spring back and then '23 to '22 -- how do you find your footing? And so I think we have found, I think, an environment now where the business has found its footing. There have been some softness in some of the smaller customers that we have that we're just taking a bit of a pause on some of their spend. They're like, listen, we would see that they were using us less, and in the summer months, when it's particularly the peak season where they've got people out in the field, and we picked the phones, and said, why are you using this less? Is there something that you don't like? Or is there something we can do differently? And a lot of said listen, we're weathering the same economic environment. I would say clearly, it wasn't a bad environment, but it's just cloudy outlook, how many more rate hikes, that type of things. So I think as we exit the first quarter, we get into the seasonal period where that business does better, we're expecting it to rebound as well. We've got a new leader in there who brings a lot of lodging experience, nothing against Ron Rogers, he's a terrific leader of the business for a number of years, but it's also nice to get some fresh perspectives and somebody who's got his own network of contacts with a lot of our hotel providers. So we'll keep investing modestly in the business because we think it's got a nice -- fits nicely within our portfolio. It's about 15% of the company.

Right. I want to ask one more about 4Q then let's go into some more deeper questions revolving the strategic review. The product portfolio is quite vast at Corpay. And yes, we just kind of talked about 2 areas where there was some softness for one reason or another. I want to take the flip side of that. What were some areas of the business that maybe surprised you to the upside, or you're starting to see some real momentum?

The international fleet business last year was outstanding. It performed exceptionally well, low double-digit grower, great margins, very good...

This is the partner business like -- think of like your relationship with Shell? Or is this more independent?

All of the above. So when I think of our international fleet business, it's got a partner business, it's got the U.K., where it's the AllStar brand. It's got our EV business. It's got our business in Prague. It also even has Australia. So all of those -- Australia was -- it had Russia until August 15 and of last year. So it's all of those -- it has our maintenance business, where we have relationships with over 10,000 garages where fleet managers can direct their drivers to take their vehicles for maintenance purposes. So that whole business has just done exceptionally well. And so that was one that regardless of a little bit of an unsettled economic environment in some of those regions of Europe. It's done quite well. The U.K. economy was one that had a bit of a tougher go over the last, call it, 12 to 18 months, and it still weathers through that. And it's our brands. Our brands are just so strong in those markets. They really are. And so the sales engine, the base, all of those things just performed really well. So I feel really good about that business. I do feel good about the payables business, and what -- I mean cross-border had an outstanding year, whether it's sales and the sales that they were able to put up and then translate that into revenue, the cross-border business and our direct payables business on the channels side had a great business. Terrific sales numbers, outstanding retention and also some good success on some new products that help keep the product lineup modern and fresh. And Brazil, I know sometimes people say, oh, it's south of the equator, it's old tag business. Well, that business today is anything kind of -- but a toll tag business. 35% of our sales and our revenue and stuff like that is coming from non-tag related service.

I can remember, it was 2 years ago, it was like 1 point of growth or 2 points of growth, now 35% of the sales. That's just amazing.

And even in the U.K., over 30% of the sales are in nonfuel-related sales today in terms of the things that we're doing in the U.K. in terms of diversifying that. In Brazil, we're now interfacing customers in our networks, not just through a toll tag, which is really just kind of a little sticky -- sticker that they put on their windshield, but they're used to do it on their phone with the app and the QR code. They're using a credit card that we've launched in the market that runs on the Visa Rails and has a ubiquitous network. So now we're finding ways, this is our -- this is kind of our secret sauce, our competitive differentiator of customers and networks. Millions of customers, some B2B, some B2C, and proprietary networks and finding ways for those customers and networks to interface. And they feed one another. What do customers want? Networks. What the networks want? Customers. And so it's this constant seesaw between us growing. When you think about where are we going strategically, whether it's organically or inorganically, it's really with a big focus on how do we grow those 2 core pillars of our organization.

I remember, obviously, parking was a first use case that will be on tolls opportunity. Fast food restaurants. I remember McDonald's calling it out. It was a big efficiency play. But than there was some CapEx drive. It took a little bit of time, but you started building out that fueling network, pay by fuel tag whatever, that seems to really caught fire. All of those are doing well. And is that enabling -- like so I'm comfortable now using my toll tag to fuel. Am I going to start using that on fast food, I'm going to start -- am I using that more parking. Is that...

Yes, yes and yes. And of our 6 million toll tags, we have 3 million people using the app every day. This is an app that has one of the highest -- of all the mobility apps, think of like Uber and Lyft, but in Brazil. This has one of the highest utilization levels of mobility apps in the market. The [ Simpar ] our brand is huge. It really is. And so those 3 million users are getting all kinds of information on this app that they look at every day. And now we're also able to reduce our CapEx spend instead of buying the fuel with a camera that reads the RFID barcodes...

Right through the app.

Right through the app, so I can now reduce my CapEx spend dramatically. And now if they're not on the app, we can also give them a credit card. Credit card works all over the place. But what I would add, Pete, to that lineup of products that has just gone like hot cakes and we think is a great use case for elsewhere is insurance. That insurance market is almost a $20 million business and, what, 2 or 3 years, Jim?

Yes.

Yes. So and yes, the insurance regulatory market is different in Brazil than it is here in the U.S. But for the most part, the insurance that we're providing is not collision. It's more add-on type products, roadside assistance, maintenance, those types of things. And so -- and just to be clear so people don't think we're an insurance company, we're just in the middle. We're middleman. We're middleman. Somebody else is the insurer, we're just getting a commission for selling the insurance. We think this is something as we think about our consumer strategy and what we did with PayByPhone is something that has a tremendous amount of opportunity. It's a strategy that clearly has to still be -- has to be proven. But PayByPhone does over 220 million transactions a year. And here are people who are parking their car and they may be parking in an area that may not be the best area in the city that they're parking it. And not only can we -- they're sitting there looking at their phone and putting in their license plate or that type of thing, and we can have something pop up for GBP 2 more pounds or $2 more dollars or EUR 2 more, would you -- because we know you're going to be there because we know when you come, we know when you go, would you be willing to pay $2 more of that dollar to ensure your car such that if it's broken in while you're parked at a football game, your -- we'll cover your deductible for you. How many people would take that? And then flatten not all 220 million transactions are people sitting there parking in areas, but even if you could get a fraction of 220 million transactions, doing things that allow us to be able to reach consumers in points of needs with unique solutions, they get customers and networks, feeding one another so...

It's like a giant fan going to [ Filey ] right?

Can you imagine how many people would take that take that. They will take it all day long.

A little extra protection there.

There, we charge them at least $5, so it's not $2.

I do want to talk about the strategic review -- no major changes in terms of asset allocation or product portfolio changes. But you did come out of it with I feel from Ron's characterization with a new appreciation for some opportunities -- like and particularly in vehicle payments, [ corporate ] payments as well. Like what was it about that process that reinvigorated like the vision that -- we kind of knew you were bullish there, but like what about that process got -- it seems like you've doubled down.

Yes. I think that's -- no question, we are a more clear-minded, strategically laser-focused organization today than we were a year ago. And the company was always very focused on that. I know that even though I wasn't there, I know that just from talking to people and the stuff I read and see and all of this, it's patterns, it's rhythms within the organization. So we are better for it. It gave us an opportunity for deeper introspection, I think is what I would say, always very introspective, always very strategic. But this just put an added emphasis on that and gave us some opportunities to talk to people, advisers or people in the industry, companies in the industry that just enriched our thinking and our knowledge. It convinced us as we did the some of the parts math that the #1 way for value creation -- and we were focused on value creation before clearly. I mean there was a lot of frustration in the sector about multiple compression and why and what's causing it? And is it Russia? Is it FTC? I mean, all of these storm clouds now gone. But it allowed us to be even more focused on how do we move forward? And what the math told us was, we've got to get that fleet, now vehicle payments business to a point where we and our investors recognize its value, its durability, its growth potential so that a multiple can be assigned to that business that people recognize is something that is a lasting business. I think the EV overhang. We've done a lot to deal with the EV overhang. The marketplace has done a lot to contain I will say, what EV is and what will it be? So I think that's been helpful. And so not only did we come out of it with just laser focus that we got to get vehicle payments in that 50-ish percent of our business in the right spot and continue to invest in it, but we also learned a lot in terms of potential business combination structures going forward. We talked to a lot of people that it would have been awkward to talk to in the past in terms of creating the wrong signals and things like that. And so I've never -- what I hear Ron talk about is he's never been more convinced that we're working on the right things than right now in his 20-plus years of running this company.

Wow, that's compelling. As it relates to the vehicle payments business, the company has spent $150 million on EV investment. You talked a lot about the unit economics for mixed fleets, PayByPhone acquisition, certainly, in consumer, which is a bit of a divergence from the company's past. Should we think of it as maybe not on a product level, but at least from an opportunity or a structural level, is Brazil the right analog for Corpay to repeat that success, whether in the U.S. or Europe? Take us through that...

It's an excellent analog in that you started with a core product, a toll tag that was just, as I said, a sticker that you put up on your windshield, and turned that into this network of multiple use cases that -- at first use just the toll tag to execute those and then we've got these other modalities. And -- but it's not always going to be that same product and it's not always going to be those same networks. We're going to cater it to the environment. But the notion of an anchor product particularly tied to an app because this is how we -- I mean we're glued to these things. We keep these things within 3 feet of us at all times. And so that way of interacting with customers through an app and then bringing them together, those customers and those networks onto that app, allows them to interface in ways that they haven't been able to interface in the past. And we think whether it's in a consumer or an individual or whether it's an employee in a B2B arrangement, we think we can simplify their environment, their experience. We can put on one app where to charge, where to fuel, where to park, insurance, where to go get your tires changed, where you can get your oil changed. There are so many use cases around a vehicle that we just kind of -- are a little bit numb to it at times.

Right.

I mean even Brazil created an API into car washes. So when they guide drives up to the car wash to get his car washed, the RFID reads it, and say...

Yes. I have that myself.

Yes, so a subscription -- It's just -- and then registration. Think about being able to connect potentially on the compliance side and ticketing and in eco areas where there's environmental limitations in terms of what regions in Europe you can drive in, those types of things. There are so many different things that -- and how can we penetrate those? How do we have the leverage to make those connections because we bring a massive customer base or who those companies, agencies, whatever it may be, that says, "Yes, I want access." I mean that's what been our success on the EV side. Our network in the U.K. is over 80% coverage. 60,000 charge points. We added Tesla in the fourth quarter to our footprint in Europe. Why? Because we can go to a charge point operator who's invested millions of dollars in hardware and software and say, would you like access to our 1 million drivers in the U.K.? Absolutely. I want access. And I'll pay an MDR to get because why? I need cash flow. And so it's one thing to build software, but not to have anything to connect it to or customers on it, as I mentioned on kind of our M&A strategy, it's how do we buy things that bring heft. And that's really what we're focused on.

That anchor technology, that anchor network, that anchor products...

Yes. And that's just been said back to your original question. Brazil is a great analog. It will just be a different anchor products, different networks...

Similar approach to each market.

We're not going to do fast food. I mean fast food in Brazil is just a completely different experience. There's only 1 or 2 even fast food providers in Brazil. Here you go to fast food everywhere. It's maybe assess something about.

Really. No...

So fast food isn't going to be our network that we're going to be building out in the U.K.

We're almost on time here. But back on the strategic review, I think you've laid out the case we're investing more, particularly inorganically on corporate payments. I don't think it's as much about capabilities there. It's about building scale and getting more clients on boarded. I think that -- I think it's simple to understand relevant. But on the vehicle side, like what's that algorithm at least from an M&A perspective -- that capabilities out there...

Some I'd put it in the minor to modest category, probably more minor than even modest. But if there are networks particularly that allow us to enhance that strategy of introducing customers and networks together, PayByPhone was a great example. We actually got a 2 for. It was both. We got 6 million customers on 3 different continents, and we got a network of parking locations. So we were able to get both, and we're working to cross-sell that across our B2B. So I think that would be the prototype, probably not of that scale. We spent USD 300 million for that business, not to that scale, but it gave us something to kind of say, hey, we're serious about this transition to B2C. We've got 6 million customers in the bank. And now let's use that to hold to be able to move forward. I think as we think about vehicle in general, it would be things that were add-on capabilities that brought both customers and our networks and allowed for a lot of cross-selling.

Very exciting. Well, Tom, thank you so much. Great to have you, and really exciting to see how this develops for the next couple of quarters.

Appreciate the opportunity, Pete.

Thank you very much.

Yes. Thanks.