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

Good morning, everybody, and welcome to Barclays Emerging Payments and Fintech forum. We got a really terrific lineup for you today, and thanks for braving the drizzle to get here. Pretty packed agenda today help yourself to food and box launches will be set out around noon. Can you help with anything, the office is down here on the right-hand side straight down. And then also, I just wanted to give a special thanks to our conference folks who are the best in the business and also Allison Gelman on my team, who is truly in this event the brains and I'm just the muscle. So I appreciate that. And with that, we are honored to have Corpay with us here today, CFO, Tom Panther. Tom, thanks so much for being here.

Great to kick it all.

So macro is always top of mind it seems maybe now more than sometimes. Give us a brief overview of what your thoughts are. What are you seeing out there? You guys have a nice overview of the economy.

Yes, yes. I mean I think big-picture macro, big economy macro, what we seen from spending levels, volumes, I think it's okay. Obviously, in our markets, whether you're talking Brazil or U.S., U.K., Europe, people have had to withstand a little bit of inflation, higher rates, things of that nature. So as that has persisted, I think generally, companies are being mindful, but I wouldn't say highly restrictive. We're not overly sensitive to the big econometric macro environment. We play in a place where we think we handle spend that is predominantly in the nondiscretionary category. So whether GDP is up 2% or down 1%, that's just vibration that we don't even pick up on. It just doesn't really impact us. But I would say out there, we just see a cautious type environment where people are being very kind of thoughtful around their level of spending. Obviously, more recently, when we think about the macro that impacts us a little bit more directly when it comes to rates, interest rates and then foreign exchange rates, with the narrative of higher for longer that particularly started to kind of gain consensus with some of the more recent economic data. Although Ramsey, we're on stage when the CPI number prints in 26 minutes. So somebody can give me a thumbs up or thumbs down on what the CPI print is here but anyway, foreign exchange and interest rate here in April with a hot CPI number 30 days ago, a strong jobs number. The Fed is sounding a little more hawkish, that certainly has impacted us more directly from a macro perspective when it comes to how we think about FX and a strong dollar and how we think about interest rates. That has a more direct impact on us.

One thing I've always wanted to ask you guys was the dynamics around bookings conversions. You've announced, I think, a pretty solid sales growth number in the quarter. How does that flow through in general to revenue? And then does the sales performance lately give you some context about the guide?

We very much see the direct correlation between what we generate from a sales perspective and then what translates into the revenue. And it's important to point out that when we talk about sales, these are realized sales. This isn't somebody just putting something on a tick sheet that said, hey, I'm going to dump this in sales force and I just closed an account. These are accounts that are actually generating some level of revenue that may not have fully ramped but we've onboarded them. We've closed the account, that when we measure sales, we call it starts revenue. Now we have to do some estimating on what that starts revenue is going to be over the forward 12 months, and that takes a little bit of anticipating what that ramp looks like and the things like that. But this is revenue that has already begun as opposed to -- we just closed the deal and we're waiting to onboard it. So that's one thing. So that one, that gives us that visibility. The ramp, the realization kind of depends on which business you're talking about. I'd say on the Corpay payables business, that takes a little bit longer because there's more integration to do when you're integrating somebody's full AP, you're getting your AP file, you're matching it up with our vendor portfolio, that takes a little bit more time. We call that kind of maybe 50-50 in terms of the level of sales that are realized in a given year. And some of that just has to do with time. I mean you closed the sale in December, you're going to get very little of it to close a deal in January, you're going to get almost all of it. The other businesses are a bit faster in terms of their realization, whether you're talking about vehicle or cross-border or talking about lodging, those, I would say, you're realizing those, I call it, the 60% level in that given year. But we track that kind of over a 24-month cycle so that we get a sense of how much of that starts revenue that we estimated potentially falls out. And there is some that does fall out where it doesn't fully ramp to the level that was estimated and things like that. But generally, we've got a pretty good -- pretty predictable line of sight in terms of how sales translate into realized revenue.

One question I sometimes get from investors is sort of what's the state of the union, the state of the market when it comes to the fuel fleet card segment. And or industry rather, what inning are we in, where the opportunities remain in the industry. Could you give us kind of a brief state of the union.

I kind of bifurcate it between freight where company's business is hauling things. Think of over-the-road trucking, generally kind of long-haul kinds of things, which for us, when you think about probably total vehicle payments is only about 25%, 30% of the revenue. The rest of it is what I put in the other category, which is more of the local stuff. I'd say the freight piece has felt the impact from some of the issues with the supply chain disruption. You had a lot of small players flood the market when freight rates are really high. Now you're seeing them kind of get washed out. And so I think the freight market would be viewed as a little bit softer in terms of just the amount of trucking activity that's going on out there. I think that the -- it will probably be a healthy process of letting the smaller guys who will kind of haul anything at any rate just to kind of stay afloat, that will eventually kind of wash itself out. And I think the larger guys will be prevailed. Where the bulk of our business sits though, is more on the middle market, SMB local fuel-related services, not where we're hauling goods and services, but where you have a van or associated with a company that's delivering things or servicing things and they essentially have to drive from point to point. And that's where we provide fuel and other vehicle-related services for them. Those are more resilient because they're not obviously susceptible to the freight environment, they're just susceptible to the ebbs and flows of their business and how their business is performing. And so I think there, we've seen an environment that's pretty similar to what we see out there from just the overall broader economy where, as I said earlier, businesses are doing okay. I mean maybe they did 5 deliveries 2 years ago, maybe there were even 4 deliveries today or that type of thing. But overall, those businesses are doing okay. And still demanding the need in terms of the demand for the product, which is a little bit in your question, Ramsey, we still see it as an advantaged product where we can provide them both control, reporting and a value proposition on discount, where we still think the products that we have, whether it's the stand-alone fuel card or in some circumstances, a broader multipurpose business card is still an advantaged product relative to what they would have [indiscernible] but relative to normal banking business card where we think it has advantages associated with it. that the typical card that somebody would have that doesn't provide them.

And last year, there was -- given the -- maybe post-pandemic freight prices and attracted more entrants on sort of that micro fleet side when that sort of normalized as it were, you guys got exited a little bit from the micro fleets. How is that process going and getting anniversary-ing that sort of multicycle?

And just to be -- and the micro here was more on that service side of the industry, not so much the small fleet over-the-road type thing. So where we pulled back is more on the local what we think of as kind of the local fleet, the fleets that are moving from point A to point B, they go back home at night, they're not hauling goods and services. They're providing goods and services in a van or a company vehicle. So yes, we did kind of pivot probably overpivot in hindsight. I mean, obviously, you never hit the bulls eye exactly, but we probably did over pivot a little bit coming out of the pandemic, what was it going to be like? Or how is outbound and field service is going to work, everything just seems to be web, web, web; digital, digital, digital. And so I think we got into that a little bit and probably pivoted -- over-pivoted a little bit to our reliance on digital. And what that did is provided probably the opportunity for these micros to come in, are credit models to be a bit more tolerant than maybe they should have been. And so we recognize to hold on a second, we're actually seeing a meaningful uptick in fraud, a meaningful uptick in bad debt, and we're losing money on these customers. They're using us, they're running up a tab on their fuel card and then they're sticking us with the bill. And so we shut that down in, call it, the second half of 2022. And then over the course of 2023, we're pivoting and tuning in terms of what do those credit models look like, how much do we do through outbound in field. And I'd say we've learned a lot over the last 15 months in terms of our go-to-market. And we're actually seeing some good progress with respect to our pivotal way from the micro, moving upmarket a little bit. When I say upmarket, we're still dealing with a lot of SMBs. Our target is a company that has 5 vehicles or more. So it doesn't have to be a large company, but we obviously move all the way upmarket to enterprise but we specifically got away from companies that were just onesies-, twosies-vehicle type, they a laundromat that has 1-van type of thing. Admittedly, I'd say it's taken us a little bit longer to kind of rightsize all of that. But I think we've got that tune. We've added some resources from a field perspective. We're selling the flagship Corpay One card now that gives us a value prop that we think is best in market in terms of what it can do from a fuel, from the business card and from a virtual card capability. And so all of that, I think, gives us some good reason to be optimistic that we can get that sales engine back to where we want it to be. Big goal on that group. We expect that group to grow sales north of 30% this year, and they're off to a good start.

And how should investors view the kind of elasticity of your credit box? Can you -- is it a lever? Is it something? What is the magnitude of the timing and the...

We can be pretty nimble. We can be pretty nimble, particularly in when we're dealing with middle market, SMB, the local fleets, I would say probably 80-plus percent is an auto decision, model driven. So we pretty much auto decision, as I said, 80% of the applicants that come in, and we get thousands of applicants a month. And so the model is geared where we ingest the information and make a decision within, literally the time the person is on the web. Now things that look like a close call or things that are bigger and more complicated, we hand that off to a team of individuals that they can underwrite that in a more kind of thorough or extensive way. But in terms of that model, we can tune that model in terms of where within the twin tiles, we decide that the approval process is an automatic yes or an automatic no or maybe, and where that maybe do we maybe adjust, ask for more information, adjust credit terms, things like that. And so just over the last -- just to give you an example, just over the last, I'd say, 6 months, we've tuned that model a couple of times just as a test and learn, swap-in, swap-out kind of process that we do in order to continue to gain more data. And we're also updating that model with some level of regularity where we'll bring new data in and create new learnings associated with kind of the model predictive power.

One recent development is the move to maybe build out a consumer offering in this vehicle payments segment. Maybe give us an update on where you are there, and what the general outcome that are starting.

Well, first, as you know and anybody who follows us, Brazil was the kind of prototype of what that consumer model looks like. Brazil is call it out $550 million business and, call it, $450 million of that -- $400 million is B2C, where somebody has a tag and -- a toll tag, and we use that toll tag through an app and through the tag itself and now credit card to interact in a variety of ways. So we had that as our kind of approach to how we want to leverage that idea more broadly. And so when we did the -- there, the anchor product was the tag and then we built an ecosystem of payment use cases around it. And thinking about, okay, how do we take this idea where we've got these networks and let's kind of focus on the U.K. for now, where we have a network obviously of fuel where we have over 90% coverage and we have EV where we now have over 80% rapid charging coverage. And we have 10,000 garages that do service and repair. We have relationships with the insurers that can provide a variety of insurance products on a vehicle. How do we take these proprietary networks that are hard to create and balance them up against a consumer? Before in the U.K., it was all bouncing them up against the B2B solution. Let's intersect our proprietary networks with our drivers that are out there, million drivers that are out there. And so the idea was, well, we think, just like it worked in Brazil, it can also work in the U.K. and in the U.S., where we can -- where there will be a demand for more efficiency, ease of use, discount where the app is just -- with a phone and apps have just become a way in which we interact with the things that we buy and consume. And so the -- to get us a leap into that world, we found the PayByPhone acquisition to be pretty attractive, where we were able to get now to add to that EV and add fuel and then service and repair network, et cetera. We also got a parking network, and we've got 6,000 customers. And so that's what we ventured off and said, let's try to greenfield is a little bit in the U.K. where I'd say we are -- is on the tech build-out the integration. So the PayByPhone app will be kind of the platform in the U.K. And we're building those integrations, first, the fuel integration, where they'll be able to see where they can get fuel and at what price. We may eventually introduce discount to that, but this was more just a value proposition of I'm a PayByPhone user. I can now go to a button within the PayByPhone app and kind of just see where I can get petrol in the U.K. But next, we'll build in the integration to our EV charging where we will get economics or garages, where we'll get economics. We've already added what we call content insurance, where they can park for a period of time. And if they want to secure the goods in their cars, the car got broken into what they are parked at a rugby game, they would be able to -- for a couple of pounds be able to have content insurance. And so we're seeing good progress there. I would say it starts materializing into where we actually have measurable usage kind of rates more in the fourth quarter type time frame is where I would say it won't be material in terms of financial impact. But I think that's when we would start to say, all right, the innovations have been built, the marketing across the app so that the eyeballs are seeing it is starting to gain some traction, and we would start to see a bit more transactional activity.

Okay. Shifting gears to Corporate Payments. Can you give us an idea even directionally of the mix of that business at this point in terms of what is the virtual card business? What is the FX business?