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

All right, guys. Thank you for joining us again, Day 2 of the Wolfe FinTech forum. Really just a couple of sessions to go on the day. So thank you for staying with us today, guys. Really happy to have Tom with us the CFO, for another day or so, of Corpay. And so really happy to have you with us. And like I said, this should be a memorable one, right?

Exactly. It's my -- almost my last official act as the Corpay CFO, which has been a great run for me, but I've really enjoyed it and glad to be here, Darrin.

Thanks. And here we're here to -- we're happy to support you guys and learn more from you today. So I think maybe just for the audience, just starting off back from the fourth quarter again and total organic growth, 12%, 26% in Corpay, 8% vehicle, 5% in other. I mean, 1% in lodging. But really just thinking about that in context of the guide, right? You had 10% to 12% in '25. So just start off by what gives you guys confidence that these revenue targets are achieve able beyond the period of what I know has been relatively easier comps going up all the way through the third quarter?

We exited the fourth quarter quite strong, 12% organic revenue growth, 21% earnings growth, a really solid fourth quarter. And with that good visibility into 2025. In our algorithm, we think about the growth model based on what are same-store sales, what's our attrition and what does our new sales look like. And we have good visibility into those. Each of the businesses while performing at different growth rates, were all performing at levels that I would say were at elevated levels relative to those near-term quarterly run rates. And with that, we felt we had good visibility into what the guide is. Also, when you think about our business, it is a bit of a momentum-based business and one that is not overly sensitive to economic cycles. And so with that, I think we felt pretty good about how the core businesses were performing. If there was one bit of twist associated with our final guide is we did see between our November earnings release and our February release, some deterioration, particularly in the FX markets, particularly the Brazilian real, where the USD just strengthened significantly over that period of time coming out of the election, and that cost us a little bit of what we call print results, print revenue, print earnings, but on a macro-adjusted basis, felt good about organic at 11% and earnings on a print basis also at around 11%.

So under the surface. I mean, again, we get this question a lot, but your growth rates have accelerated, right? I mean at the end of the day, some of it is hard to distill what's actually just really the underlying drivers of the business and the sales organization kicking into gear in some of your categories and what just comps, right, or even macro to some degree. So just to make sure we're on the same page. I mean, you're your conviction in that sustainability remains as high now as it did when you gave guidance, I suppose?

Yes. Businesses continue to perform well. Trends remain encouraging. The sales engines are performing quite well, actually got an opportunity to look at some sales results before hopping on the plane to come up here yesterday and they continue to be on a consistent trajectory. So -- and sales is despite maybe sometimes the comp or the macro or some of the various moving parts within the numbers. The sales is kind of the holy grail and that is the DNA of the organization. It's what really fuels that consistent 10% organic growth. And we've continued to see healthy sales, which is nice and of itself from a financial perspective, but from a business perspective, it's the best proof point validation that you have advantaged products that customers of all sizes and payment sectors are buying your products What better way to validate that what you're doing is working.

We've had some fits and starts on sales actually if you go back a couple of years now, right? And so that impacted growth to your point. And it seems like it's on a much better trajectory. And I know there's been a new sales org under, I think, CRO, Mike Jeffrey. So if you just help -- what exactly do you see in terms of change in the business under his leadership and what's really going to happen [indiscernible]?

Yes. Well, the issue in the past was we -- particularly in the U.S. vehicle payments business and even within that, the local fleet business, we pivoted to predominantly a digital-based channel. It created a lot of micro clients coming into the organization. And so we realized, no, we still needed to be multichannel and have digital, have field, have onboarding. What Mike has done is picked up from that and really is come in and brought his sales expertise. He's a pure bread sales executive. He's been doing it his entire career. He learned the hard way by knocking on doors and pounding payment. He came out of the payroll business, which is a model that's not too dissimilar to ours in terms of just how you think about growth and customer relationships. And he's brought his sales expertise in. And with that has been a variety of things. We've done some reorganizing of people, not just consolidating the U.S. sales group across lodging payables and vehicle but actually moving people around sometimes expanding scope, sometimes shrinking scope. He's altered incentive plans. Ultimately, salespeople tend to be motivated by how they're going to get paid, they kind of see a job, do a job kind of person and how they get paid as a big impact on that. And he has modified some incentive plans. He's created consistency across the sales process. I'd say each of those 3 segments had their own way of doing things. In some cases, they had their own instant of sales force on how they track things, and he's brought consistency across that. And at the end of the day, it's just hardcore accountability. What did you do today? How many calls did you make? What were those results?

[indiscernible].

It's just -- at the end of the day, I've been in organizations where you see very disciplined sales functions and disciplined sales functions result in good sales results, especially when you're selling what we're selling, which are attractive products in large markets with low penetration. It's different if you're trying to sell something that's a tough put. We like to think that we're selling things that have a lot of value proposition associated with them. So if you create those rhythms and you do the things -- inputs equal outputs, and he's very focused on the inputs. And so it's been gaining traction.

Just quickly the freight market, I mean, it's largely lapped the pivot away from micro clients and lead fee headwinds. So just what drives transactions from here? Is it largely a function of just waiting for the freight market to turn more positive or?

The freight?

Yes.

No, I'd just say it's sales in general. I mean we aren't overly tied to the freight market. Our over-the-road business is relative to the overall vehicle payments business. The vehicle payments business is 2 -- a little over $2 billion. Freight would be $250 million, $350 million of that -- $250 million, $350 million of that. So the freight is performing adequately. It grows in kind of the low single digits. Really, the turnaround associated with the vehicle payments is that local fleet business, and that's particularly within the SMB space. The enterprise customers within that local fleet business, I think like an Amazon, performing extremely well. It's the local, the smaller ones, the SMBs that we've just got to get the sales back. We got to just refill the sales funnel.

Just all right. Shifting gears now to corporate payments, which I know has been a topic of focus for us and investors. Just when you think of the growth area, I mean, it's been very strong, 26% organic growth in fourth quarter and you have about 1/3 of that business now cross-border, right? And 1/3 AP, full AP in some channel partners. But just if you could explain the benefits and financial impact of offering this multicurrency accounts with NXP, early signs of demand? And maybe even just take it a step back and just talk a little more about the cross-border differentiation. What are you doing for the market that's resonating so much and allowing that growth? Because I think B2B as a percentage of Corpay in general is a big percentage of the -- is a big part of the story.

Yes. No, absolutely. And you summarized it well. In terms of, call it, a $1.6 billion business. Call it, $1 billion of it is cross-border and $600 million, just to make the math simple, is that payables business. On the cross-border side, as you said, we do spot payment transactions. We do hedging transactions. And one of the things we're particularly excited about is we introduced in an upscaled way, we already had this in a smaller scale, but we upscaled it to where we offer what we call the multicurrency account, which is basically being able to be the international bank for our customers. We have it across 12 different currencies, and I can go to a CFO and say, do you want to have an account by the end of the day, in XYZ of the 12 currencies, and we can generally open up that account literally within a business day. You try to do that by opening up your own account and a bank of choice within that particular jurisdiction. I've done it as CFO, it can literally take 3 months in terms of all of the AML, KYC that has to be done. We partner with other financial institutions that serve as custodian. And then we do the subledger accounting on behalf of our customer. It allows us to have a 2-way transaction with our cross-border customers. Now we have accounts that cannot only receive funds through their multicurrency account, but then it can then use as account disbursement as they pay for whatever the cross-border needs may be. And so it creates a much stickier relationship our customers were already sticky as is, but it just further deepens your relationship with them when you are all of a sudden now part of kind of their overall core nucleus of cash management. So we're really excited about it. We have several hundred billion already under custody, and we see that growing significantly over the course of 2025.

That's amazing. I mean so when you put that together with the AP opportunity more broadly, number one, I mean, what kind of cross-sell opportunity is there between the 2 sides and then we can go further into sustainability?

Yes, I'd say some, but our AP business is heavily domestic. And even there, some -- many of our customers, because we focus on the middle market, call it $250 million to $750 million, they don't -- and being in the U.S. where the U.S. market is so large, generally, they don't have a lot of international payment needs. You go upmarket and we do have customers, call it, 20%, 25% of our customer base is $1 billion plus. There, there are some international payment needs and the cross-border business can be quite helpful. So there's some cross-sell opportunity, but I would say that would be more icing as opposed to something that's core to those kind of growth numbers that we've been printing.

So the differentiation that you offer, going back for a minute again to cross-border is I mean, obviously, it's a version of something that a business could use that's probably much better than what a bank gives them, right?

Exactly.

Explain why? Why is it so much better than what they can already [indiscernible]?

Yes. It's customer service. It's product. In terms of we will sit down with them with a risk visualizer and we'll help them understand their risks. Customer service isn't just meaning answering the phone, it means sitting down with the treasurer, sitting down with the CFO and educating them about FX and derivatives. Some of these don't have a financial markets background, FX and derivatives can be scary terms, and they are uncomfortable walking down the hall and talking to their CEO or sitting across the boardroom table and talking about these things. We help demystify those types of things associated with the derivatives and FX market. And so that's helpful. We also can provide terms that are advantage to some of our customers. And at the end of the day, we have proprietary rails over 55% of our businesses -- of our businesses transactions run across our rails, not the swift rails. And so that's something that is also advantageous to us. I will say, just because of the whole stable coin I think during today, if we had 11 meetings, 10 of them asked about stable coin. We view stable coins as it's just simply another rail, a lower-cost rail for us to be able to transact. We actually have the capability today. We do very little volume over stable coin rails just because there's not a whole lot of demand for. But if demand occurred, we would be there to support it. And at the end of the day, the stable coin still needs to be converted over into a fiat currency that needs to occur in order for that to be something that the end customer can use. And so we view stable coins as kind of a neutral to small opportunity in that it would be a cheaper, less expensive right now.

So going back to the accounts payable side. I mean, it sounds like your focus there has been on software and then converting more and more payments, but help us understand the focus from sales and the efforts on go-to-market around software ownership [indiscernible].

We think of it as kind of full AP automation. We want to take a customer's AP function from what I call non-modern to modern. And we can do that in a variety of ways. We can take them along a product journey to be able to do that. But at the end of the day, we're trying to transact and process as much of their AP spend as possible. And so most of the time, we will go to them and say, just give us your whole AP file. Now we're not the BPO shop where we're going to become an outsourcer. But we can take the AP filing, whether it's ACH or check or virtual card, we can process all of it. And we can do it using our proprietary merchant network, which I think is one of the most valuable assets that we have as an organization. It's a network of merchants that we've accumulated over more than 10 years because we've owned the corporate payments business for over 10 years, but it was even started at the legacy organization prior to that. So we have developed a proprietary network over an extended period of time. And that's our deep and wide moat. I talk about it a lot in terms of a lot of people focus on the technology, the tech, the software. To me, the real value is having a significant customer base, thousands of customers, which we have. And tens of thousands, in some cases, hundreds of thousands of merchants that we have that accept virtual card, and we are simply sitting in the middle of these 2 flywheels with our technology helping fulfill the payments associated with those customers. And what do customers like? They like ubiquitous networks. What do networks like? They like large customer bases. And we offer both of those. And so we think that's one of the reasons why we stand out is just giving the scale, the size, the history and the diversification of the business.

How are you trying to drive higher monetization on those AP accounts? I mean -- at the end of the day, there's been some at least discussion of pushback on virtual card in the industry a little bit.

Yes. And we really haven't seen it. I'm sure on a one-off unit of one, maybe a merchant here opts out, but 3 merchants over here opt in. Our tech is quite tailored and it can be customized. We're not a one-size-fits-all shop. So if a merchant wants to accept virtual card from you, but it doesn't want to accept virtual card from Jim, we can accommodate that. If a merchant has a certain size transaction that works for you, but he wants a different sized transaction for me, then we can accommodate that as well. And so I think by being flexible and customizable to the situation, we've been able to maintain and actually see a little bit of card penetration and monetization creep up.

So I'm focusing on this because you really hope this could be nearly 40% of your total company revenues. And as we know, there are theoretically multiples for this kind of growth rate business and end market could be very strong relative to your overall 13x of your stock. So it's an interesting dynamic, and it brings to light just what's the next step? So you continue to have strong growth in cross-border. What it sounds like you think AP has room, I suppose?

Yes. So the sales engines in both of those lines of businesses are functioning quite well. Hundreds of people in each of those businesses, call it, 200 to 400 people in each of those businesses selling every day. One of the advantages of cross-border, it's a business that never sleeps. It's got a trading desk in Sydney, a trading desk in London, a trading desk in Toronto and a trading desk in British Columbia. So it literally is -- and think about that, just the advantage of a company that always had salespeople working. They don't have to take 8 hours out to eat and sleep. There's always an element of the company that's in motion. But -- so the sales will be a key to that. But we're also very focused on the inorganic growth as well because that is also a source of growth, not because of product capability, but just because of scale. So we're able to deploy our capital, balance sheet is in terrific shape, and then we have the benefit of generating, call it, $1.5 billion of free cash flow. That just gives you the wealth of opportunity to be selective and disciplined but opportunistic about M&A activity.

On that note, I mean, I know '25, I think, is expected to be a bigger year from an M&A standpoint relative to at least buybacks versus I think it was more balanced than '24. I know Ron is also actually -- Ron's referenced, I believe, potentially larger deals coming up or at least an appetite for potentially larger deals. I don't know how this compares to something like GPS in terms of framework, which was what, over $700 million?

Yes, a little lower.

So just how do we think about that in terms of what your appetite is for size and the size of deals? I imagine corporate payments is a piece of what you're looking at?

Yes, a significant piece of what we're looking at. That's not to say we wouldn't do something in lodging or vehicle. But -- but no, corporate payments is the focus.

The primary, yes.

Yes. And I think, one, first and foremost, we'll be financially disciplined. So it's not like there's a size level that is a knockout factor or not. But I think given the size at which the business has grown, what we see out there is potential opportunities. We think we have the appetite if the opportunity presented itself with the right financial returns that something larger than GPS could be something we would look at. We did -- Paymerang on the payable side was a little under $500 million. So as I said, the balance sheet is in great shape. The leverage is under 3. We'll continue to lower leverage just as we bring cash flow and EBITDA. And so I think we have an appetite. As you know, it takes 2 to tango, but there's music playing, and we'll see how it plays out over the course of the year. We are essentially, from a bandwidth perspective because human capital is almost equally as important as financial capital when it comes to these kinds of things. We are essentially done with the integration of Paymerang. We finished that by the end of the year. So we did that in 6 months. And at the end of this month, we will have migrated all of the GPS customers onto the legacy Corpay platform within 4 months. And so that gives us then the human capital bandwidth to then take on the next transaction should it present itself.

And within Corporate Payments, I mean, when we think about what you might want to have to even round out what you already have in terms of cross-border and AP, what types of assets make sense? Is it something that's capability oriented? Is it something that's geographic oriented?

It's really scale at this point. We really feel good about our capabilities. Yes, we get a few bells and whistles when we find a transaction like the GPS had a pool -- a treasury pooling transaction that allows CFOs like me to move money easier across jurisdictions and things like that. But I think generally from a capability standpoint, we feel really good with how those look right now. So it's really about scale. And the sales engine. We talked about that earlier, but this is a lot of direct type selling and it's relationship-based selling. We do some branding to try to soften the beaches and make people aware of the Corpay name. But at the end of the day, it's a human-to-human transaction. And many times, what we're getting is not only customers, but we're also getting salespeople and we might be building out that network and just do not underestimate the value of that network because it's impossible, I think, nearly impossible for somebody to kind of replicate that from scratch, at least not quickly. And so if we get network, whether it's more merchants in the payable side or additional banking licenses on the cross-border side, those are things that can be a real accelerant to our growth.

Okay. And it certainly seems like with the dislocation of the markets these days, there maybe both private and public, I think there could be some more opportunities in Corporate Payments.

Yes. I mean, valuations, I think '25 -- 2025, 2026 is set up well. I don't think we'll be out of the buyback game. But I think as we look at what our bias is, we like the bias toward M&A. Ronald many times joke, okay, I bought back 25% of the company and my multiple went down, okay? I'm not stupid, I can figure that he's pretty good with math. Yet I spend money on buying companies in 2015 through 2019, and I spend money in 2024 buying real companies and my multiple goes up, okay? I can learn this. I can learn that maybe buying companies is rewarded more than buying CPAY stock. But that's not to say we're out of the CPAY stock game. But I think we'll be mindful about it.

But before we leave...

Because I get the sense that you may be leaving cross-border and corporate payments in general, at least want to hit head on the bit of history about tariffs. Just as that has made news, we've gotten a lot of inbounds and things like that. I would just say that we view tariffs in the cross-border business is a near-term opportunity. Long-term TBD, if tariffs turn into a deep recession, then that's a different ball game. That's not my expectation. I think it's more of a negotiation employer than long-term economic policy. But tariffs, in general, have been beneficial to the business. One, it's created volatility. Volatility gets CFOs off the sidelines and executing with us. Two, it creates the opportunity for businesses to potentially pull transactions forward by things that they may have had out into the future. And three, it's inflationary. And assuming it doesn't go inflationary to the point where the volume dries up, we're actually getting more spend and the revenue model is tied to spend value. So while we're in the middle of the first quarter, I'm not going to comment on it specifically, overall, we -- on the near term, we view tariffs as something that's kind of net-net positive for the overall cross-border business. And neutral for the other segments, again, it's only if it resulted in kind of a...

Real demand destruction.

Actually a cliff event on recession and as you said, well, demand destruction.

Okay. Can we -- to your point, switching to the next segment. Just quickly on vehicles...

Well, you knew I had a plane to catch on. I'm kind of in a hurry.

Vehicles and fleet. I mean just a reminder of the mix of the business for us for a moment and then we'll go into what some of the opportunities are across the segment going forward?

Yes. Yes. So if you think about vehicle payments, as I said earlier, about a 2-point -- to keep the math simple, we'll call it a $2.1 billion business, $700, $700 million, $700 million, 3 times 7 is $21 million. Brazil, U.S. and International. So it's basically -- that's the pie chart of the overall vehicle payments. Business, all with kind of different places of where they are from a product and growth trajectory perspective, but that's the pie chart.

And just to that point, I mean, the growth rate of the overall segment is supposed to be low double digits, right?

I think vehicle payments is high single.

I'm sorry, I think I wrote down low double from the last time but...

That's just -- you guys are always kind of...

We're trying. We're trying. Just the expectation for North American fleet?

Yes. So I think North American fleet within that has been we coined the term problem child. Within that is that SMB local business, call it, a $250 million, $300 million business that's been a little bit of a drag. That's the one that got too close to the digital fire and just did way too much digital and kind of got rid of some of its multi distribution channels. But so overall, if you look at it in total, we see that business flat-ish in 2025, slight growth overall for the year. And hopefully exiting the year if the sales momentum continues, and the realization of those sales builds, we see it exiting the year, call it, in the mid-single digit. And that's really -- a lot of this is formulaic. Could we pour more money in? Sure, we could pour more money in. But it's probably at the sacrifice of Corporate Payments that's growing 20%. Well, would you make that trade? Probably not. So some of this is a bit by design in terms of the slow return to mid-single digits growth.

And then just maybe going a little further into the Brazil area just because it's definitely an interesting one, and you've done more deals there. If you could take a moment and just set the stage around the competitive landscape for your product there where you stand in terms of market share?

We've created a vehicle payments ecosystem, predominantly for consumers. It's a 75% consumer-based, $700 million. The business side is more just a toll tag type business, helping trucks move across the country through their tolling and ports. And so what we've created there, it started with the anchor product of the toll tag, just think of an RFID barcode stuck to your windshield but put a whole suite of products around it that reads off of that toll tag parking, drive-thru restaurants, fueling. We've added insurance. We've sold 3 million insurance products. And we also, over time, said, okay, we don't want to be bound to the vehicle as the kind of POS system, if you will. So what did we do? We implemented an app. And so we've got the app that has 3 million to 4 million users on that app every day transacting with us, which has been super helpful. And so -- and of recent what we've done last year in March and this year also in March because we had mentioned that the Gringo, which is another car registration vehicle licensing compliance company. The Gringo transaction just recently closed. So we had anticipated closing in Q1 and it did. And so that is a car registration business also done over an app, where if you're registering doing your annual car registration or if you get a parking fine or you have a license -- driver's license that you have to pay, you can do all of this on the app. It's hooked in back to networks. It's hooked into all 27 DMVs across Brazil. It's not 5 of them, it's all 27. So all 60 -- what we've done is we've expanded the TAM threefold. Because before the TAM that was tied to the toll tag was generally vehicles that drive through tolls. That's predominantly in 3 cities, São Paulo, Brasilia and Rio de Janeiro. Now all 60 million-plus vehicles in Brazil need to register their vehicle. And so we've expanded our addressable market there. We're super excited about what that could be. But the other point I'll make that over time, I've realized gets underplayed about Brazil and our business down there. is the brand in Brazil is equivalent to Uber. Who hasn't heard of Uber? If I said, who's heard of Uber, every single hand would go up. If I was sitting in São Paulo, in giving a conference. First, I'd have to speak Portuguese. But two, if I could, if I said who's heard of Sem Parar, every single hand would go up. It is that kind of brand recognition in the market. And when you're dealing with a predominantly consumer-based product, the power of the brand -- a lot of times we get caught in this whole B2B world, but the power of that brand in Brazil is incredible. And so it's given us a lot of tailwind so that we can sell this ecosystem to their consumers.

I still think that's an area of the market probably can use to do more diligence on from perspective of assets you guys really have there. Just last one is just for on the lodging business. I mean is that an area that you want to keep or you want to divest?

Yes. No, no, no. We still think it -- it's complicated, but we think the lodging business and its technology is quite proprietary. It's extremely unique. How many companies can log into an airlines pilot and flight crew manifest system know when the Delta flight is delayed because of rain and whose pilots are moving where and 40,000 hotels and all of those kinds of things. And while it's a bit nichey and it's serving a select workforce -- segment of the workforce, there's not another solution out there that can handle all the way from booking to check in, to control. In the workforce business, when we have workers, not necessarily you and I, but people out there repairing telephone lines and cell towers and laying asphalt, the employer wants to kind of control where those individuals stay what they spend their money on and all those kinds of things. So our product also provides spend, and then it also does the payment and then it does reporting and all those kinds of things. There is not another solution that does that. And the 40,000 hotels that we have give us significant back to networks, I'll finish where I started. The 400,000 hotels that we have give us incredible economic advantage that we can pass discounts on to our customers.

I know you have a flight to catch...

We do have a flight to catch.

To get ready for your next step in life in retirement.

Well, not retirement.

I mean really moving on.

Moving on to the next stage.

Good luck in the next stage. I know it actually sounds like a really cool place you're going. All the best.

Thank you appreciate it. Thanks, Darrin. Take care.

Thanks, guys.