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

Everybody, welcome back to Day 2 of our Barclays Emerging Payments and Fintech Forum. I'm honored to have Alissa Vickery, Chief Financial Officer of Corpay with us here today. Alissa, thank you so much for being here. Again, I think you were here a couple of years ago, and it's great to have you back.

Thanks.

Why don't we start with where I have been starting quite a bit at the conference with just sort of your view, macros top of mind, your view of sort of what you're seeing out there? What is the economy and sort of trends look like from your vantage point?

Right. So I would say, obviously, a lot of inks spilled out there on this topic and a lot of chatter. And I mean, quite frankly, I think for our business, what we're seeing is just not a lot there yet, which is obviously kind of a good place to be for now. But we're all watching it. We're all keeping our eye on the horizon. The political environment obviously creates a little bit of churn, if you will, out there in the marketplace as well. But right now, our volumes and our trends are up. They're steady. They're right where we kind of expect them to be at this time of the year. And so regardless, I would say, of perhaps the broader news media and market that exists out there on the topic is just not much to say here. So time will tell. But for now, we're kind of in a good place.

Yes. That is a good place. So I wanted to start with your Corporate Payments segment. And maybe sort of more of a background question to kick off. Can you give us an update on the mix within Corporate Payments, virtual card versus cross-border/FX? Maybe we can start there. And I also had something, how much is direct versus indirect in there as well?

Sure. So as a reminder to everybody, our Corporate Payments business is made up of 2 sort of sub products, if you will. They are domestic payables business, which you asked about in terms of direct and indirect, and we have a bit of our International Payments business, which is primarily the cross-border/FX product slate. And I mean to say that we are thrilled with the performance of these businesses would be an understatement. We do think of it as one product offering because the same customer can participate in both the domestic payment as well as the international payment solutions. And so this business has grown rapidly, as hopefully most in the room know and you're aware of over the past few years. It's interesting even with their growth because they've sort of maintained the growth together. There is a bit of a 60-40 split, 60% is cross-border or those International Payments with 40% being more of the domestic and then sort of double clicking within, I'll call it, the domestic payables. The direct business represents about 90% of that revenue today, which we genuinely love because that's sort of the bread and butter. It's where the higher rate, the higher touch point with the customer, we'll call it the stickiness that the customer tends to live with the residual being sort of that channel or indirect.

And on the international side of the business, you guys recently inked a deal with Mastercard, where you will become the exclusive provider of cross-border services to their FI customers. Talk about that relationship a little bit, that deal and how it will work.

Yes. Just -- I mean, we are super excited about this relationship. We've been partners with Mastercard in the payment space for more than 10 years now. And as we've sort of grown up, if you will, as a public company and come to something that's of quite some scale, are interrelatedness, if you will, of some of our product sets and sort of where we're trying to go in the marketplace are clearly aligned. And so there's been a vision to try and figure out how do we work more together. And so what this transaction is, is Mastercard has agreed to invest around $300 million into our cross-border unit. So again, we just talked about payables is the domestic and the international. So just on the international side for a little under 3% stake in that business. And 3% isn't a whole heck of a lot. But what it does is it sort of gives them some visibility into the space. It's something they're interested in. They've been clear with us that it's something they want to understand better. There are a lot of complexities to the business. And so they'll sort of get a look under the hood, if you will, to some degree. But what we get in exchange is a great exclusivity partner with Mastercard backing us as we show up to financial institutions. So we've signed a partnership commercial agreement where effectively where their exclusive partner walking into Tier 2, Tier 3 banks, where what we've discovered is -- and it's sort of amazing to us that most of those clients that are served by that tier of bank, now the room can correct me if they got better data, but about 50% of the International Payments those banks make on behalf of their customers. They actually make those payments in U.S. dollars, and they ask the end customer, oh, you want EUR 100,000. Well, how many dollars do you want? And so it becomes this very, I'll call it, inefficient payment where you're giving all the spread and the economics potentially to that back-end customer. So our goal is to partner with these banks with Mastercard giving the very warm introduction because oftentimes, trying to get in the room with the right person, even though we think that we're a market leader in Corporate Payments, that bank may be, well, who is Corpay? Well, here's Mastercard. Mastercard says to that CFO or that CEO, hi, here's the Corporate Payments leader from Corpay. They're our partner, here's what they do for us. You should consider them for your product. And so we're a bit bullish and excited, if you will, on the opportunities that the relationship may strike for the future.

And of the -- you mentioned some growth acceleration in terms of cross-border revenue growth, and you also called out the investment that Mastercard is going to make in you guys. What is the -- is there an integration process? Or what do those dollars get allocated to? What's the path to that acceleration?

Right. So I would say the dollars are sort of a mere valuation mechanism more than anything. If you want to be in our house, you must contribute and then, obviously, the partnership. But from a longer-term play, especially as we enter 2026, we believe those FI, the financial institution partnerships that are going to come to fruition as a result of our relationship should lend itself 2 to 3 points on cross-border revenue into 2026. Now the ramp you asked what work exists that will have to be accomplished to be able to get there. It's mainly getting our teams aligned, figuring out how we go into market together, who are the right parties. So I would say it's probably not a lot of homework as much as getting ramped and getting going together. Two big companies, you got to get aligned, you got to understand what you're saying and then show up.

I see. I see. I wanted also to ask about a recent announcement that -- about the minority investment in AvidXchange, you guys have a lot going on. Could you provide a little more color on what Corpay is bringing to Avid in terms of synergies, distribution opportunities and vice versa?

Right. So I'll just double down on what you just said, we do have a lot going on. It has been probably really one of the busiest quarters that I can remember in some time, especially Ron asked me to step in. I was like he said, that will be quiet. There's nothing quiet. It was never quiet. So again, super excited here as well. So what we've done is we've invested $550 million approximately. It will all play out at closing probably sometime in the fourth quarter for about 1/3 of the AvidXchange business. We've partnered with a private equity group, TPG, who will be the majority owner. And so obviously, before we agreed to sign a deal, trying to come to sort of a meeting of the minds around what is it that we're looking to do? What are the growth strategies? How do we think we should go to market? And ultimately, the things that we bring to the table are we already have scale in the space. We already have, I will call it, some know-how around how to win and then how to win in a profitable way. And so we'll obviously share that view and that mindset and help define with TPG as the controlling partner, if you will, how we go and execute on this thing. Now they are the controlling partner. They will lead the charge, but these private equity guys tend to be a bit mercenaries. I'll repeat Ron's words. And we expect that if we're able to execute on the plans that we've sort of mutually come together on that we have a real opportunity in the longer term to win here.

Another news item that caught my attention. There were some rumblings about an acquisition of Alpha Group, a U.K.-based company, the Board rejecting the initial offer. Do you have -- can you comment on that? Do you have any expectation to continue bidding on the asset?

Unfortunately, I cannot comment on this any more than the press release that's on our website, and I think that they put out as well. So...

Okay. Fair enough. You have to say that and I have to ask.

That's fair. That's fair.

And I guess then kind of taking a step back, there's a lot of activity here. You've made a lot of moves kind of on the chessboard. In terms of M&A, how should we think about your sort of future appetite for M&A? Is there still plenty of dry powder appetite to keep expanding in that way? Or do you need to pause and take a beat? Or should we think about it?

No. I would say that we -- our appetite is high, and we are not pausing. We've talked about it a lot internally. The pipeline can come and go as we all know. And right now, where the prices are and the quality of the assets that seem to be available in the marketplace really, I'll call it, put fuel to the fire, if you will, around sort of the classic Corpay mentality. We are going to put capital to work, and we're going to put it to work in the most effective and efficient way, both from an investor perspective as well for the future of the company. We're not going to go buy things just to buy them. We're going to buy the things that make the most sense. We talk about it a lot, trying to make sure we go deeper and not wider. So what are the things that bring scale to the businesses we have today and introduce us to incremental verticals or clients that perhaps we haven't played as much in the past, but really do contribute either from an infrastructure, a customer, a scalability perspective and, quite frankly, are accretive to earnings. I think we -- for a little while, we were in, let's go buy capability, and we've done that. We feel good about where we're at. But the future really is how do we put our dollars to work and buy things that really propel the company forward, probably a lot in the Corporate Payment space, specifically, is where you'll see us focus.

And what are you seeing out there just very broadly speaking in terms of the M&A environment? Are sellers kind of a little more reasonable with their valuations? It feels like some things are clicking on popping, not just for you guys but across the Board. Is that -- have things changed over the last couple of years in terms of the bid-ask on these assets or...

100%. I mean, I think Avid is the perfect example. I'm not sure if we ever publicly said it, but it was a very different price a couple of years ago when we wanted to first look at acquiring it. And quite frankly, it was dilutive to our earnings. And so 2 years down the road, even as an equity method investment, this thing will be accretive to earnings going into next year. So it's just a different ballgame today.

That makes sense. Changing tracks, so to speak, over to Vehicle Payments. Maybe you could give us kind of a status report on the North America fleet business, kind of what your guidance implies, where you're at now, your confidence level about getting from point A to point B?

Right. So I would say a lot of focus on this business, and I don't think there will be any big secret in this room. I'll do a little bit of a history lesson, 3 years ago, when interest rates went from 0 to something other than 0, where we are today, we made a purposeful shift in our business model to focus more on upstream. So a slightly larger customer, more healthy customers. So we had previously spent a lot of time and effort focused on micro SMB. So I think 1 to 5 employees, so very small businesses. And what we learned is those businesses really do operate a lot more like a consumer, especially in market downturns. And so we pivoted and we pivoted hard. And so I think when you pivot a large business in terms of the sales engine, specifically, the math has to work. If you attrit at a certain rate, then you have to sell and double that rate to maintain potentially a higher growth rate than perhaps where you've been historically. And so as we've done the pivot and gone more upmarket as well as hiring in -- I don't know we talked about this a little bit, a Chief Revenue Officer, who is hyperfocused on U.S. Vehicle Payments as well as some lodging and payables where we think there's a bit of the overlay, if you will, customers who would likely benefit from multiple offerings, we do see some positive trends. He's been in the seat now -- actually, I was talking to him yesterday, a little over 7, 8 months now. So enough time to where you're starting to make some headway, starting to streamline some of those back-office infrastructure, processes, people, just how people think even in having a common leader. And so I would say, same-store sales trends are solid. Five quarters running, we are dead on where we expect to be. Retention has gotten incrementally better. Year-over-year on Q1, we are 200 to 300 basis points better on the retention line. So to us, that says, we're doing some of the right things. We're not churning the customer as quickly as we were. And PS, when we say churn, like we have less than -- I think it's less than 7.5% churn rate. So that's pretty doggone good on an annualized revenue basis. And so with that math, as long as you can then go sell, assuming your same-store sales don't go too negative on you, somewhere in the realm of our 20% goal, which we openly say, hey, we're going to grow sales 20%. We issued around 10%, 20% minus 10% contributes to 10% organic growth year-over-year, and the TAM in the space is huge. And so we think the combination of the sales focus, the improved retention and then, quite frankly, just rolling the ball forward, right, this is a big business, you don't turn it around overnight. I think the results have sort of dictated that, combined with some of the customer wins, we talked a lot about an enterprise win over in our Corporate Payments space. We also had a couple of large enterprise wins in our Vehicle Payments space that really are implemented and starting to ramp now in the second quarter. And so I would say it's the combination of all these things together that really do give us confidence as we move into the middle and back half of the year that the -- our trends and our metrics imply that our results are achievable. So we feel pretty good about it.

Good. And I wanted to revisit something that you said just now about exiting the micro fleet category. Does that -- and this kind of dovetails into a question about kind of the macro resiliency of the fleet business. Does that put you in a better position now? Or as you're booking from like a credit perspective, you have a bit of a better credit overlay because you've kind of exited some of those riskier customers. Is that a fair characterization?

I think that's totally a fair characterization. I think the one thing I meant to say earlier was our product was really nondiscretionary. And if you have businesses that are a little bit higher quality and more stable who are going to just withstand, we'll call it, the economic ebbs and flows because again, back to the recession, who knows. So ultimately, those customers are healthier, better quality, they pay their bills. And when you really focus on that micro SMB, you're just another form of credit for them, especially when credit markets are tighter and interest rates aren't 0, effectively, you become a lender of last resort. That's not who we're interested at being. We have a nice product that provides control, that provides oversight for those businesses on the spend category. And so ultimately, it becomes much more, I'll call it, stable in those environments when things can maybe do get a little tougher.

And this is a bit of a redux of the macro question that I asked you, but I wanted to ask specifically about your fleet business. Not seeing any kind of -- in the OTR business, in particular, not seeing any kind of pull forwards or tariff-driven gyrations and demand there or is it...

I was talking to this business leader 2 days ago on this topic. And so what I've learned is the sector really that's impacted is this intermodal sector of the freight and the fleet business, which is really rail, shipping, so where they're coming from, the shipyard on to land. And most of those freight companies, the fuel product is managed internally. So that's not us. So we're more OTR, and the OTR products right now or the OTR driver -- freight operators, they're really hyper focused on making sure their payloads are full. And so what he's telling me is, are they being cautious? Of course, they are. But right now, we're not seeing any impact associated with tariffs related to those freight customers that are our customers. So time will tell. But right now, no churn there, if you will, or no bring forward. I will add, we'll see how the summer goes because that's something I think we're all looking for, especially with the good weather, the holiday season, people just generally being out and about more. So more to come there.

Yes. And then again, in terms of you guys being active, Brazil -- in the Brazil business, you've done a couple of deals down there, Gringo and Zapay. Talk about how those fit into your strategy? And maybe just in general, you're kind of evolving strategy on Brazil.

Right. So Brazil is an interesting place. If you haven't been there, I would say, super fascinating, but our toll product, which is really where we started in this space is really a bit of a subscription model, if you will. And then over the years, we've identified incremental product offerings that really fit the needs of our over 7 million discrete toll tag app users on top of this. And so that country is extremely reliant upon vehicles. We learned it time and time again. And so Zapay and Gringo fit nicely into the suite, probably quite frankly, more of a home run than we even anticipated. So these companies are in what we call the vehicle debt business. And what is that? So effectively in Brazil, every municipality within major cities, and there can be 10 to 15 municipalities within Sao Paulo alone, each have their own ticketing. So if you violate the parking, you get an auto ticket, if you run a red light, if you -- trying to think, you speed because they're speeding cameras. And what ends up happening is you don't actually know that you've received the ticket because it can take the government, anywhere from 30 to 90 days to actually get the bill into your mailbox. And so what the app does is that it enables you to see all of your violations in one place, and everybody has a violation. Even our CEO, which is amazing because he talks about he's like, I had no idea, I had 3 tickets because I mean, you're just driving down the road and probably Brazil has a lot of traffic. We'll just leave it there. So maybe you're driving in a way that perhaps you wouldn't otherwise. But anyway, so what it does is it has enabled us to have an incremental product offering to our more than 7 million app users. With these 2 businesses, we gained another 20 million incremental users. And so -- and I didn't explain the product quite well enough. So you see it all in the app. But if you pay your bill in Brazil within 30 days, it doubles. It doubles. And people know this because they're waiting for the bill in the mail. So if you can get in front of it and pay your bill within the 30-day window, you actually save a significant amount of money. And what we do is we charge a fee for those savings and for that convenience, if you will. But now connecting that vehicle debt capability within our base software solution, if you will, within their cell phone I hold my hand up like I got a phone in my hand, but it fundamentally changes the game and in a meaningful way for these customers and just makes the product offering that much more compelling. So it's pretty slick. I'm always impressed every time I go. I have the team always sort of give me, I call it, the world tour, where we drive in the car and we can see what all the toll solution or the RFID solution can actually do and...

Do you intentionally get tickets?

No. Well, you will see. And maybe I want to show up, the President will have a violation just so he can show me on the app.

That's interesting. Candidly, I did not appreciate the depth of the value proposition, that's a pretty necessary service that...

It really is. Back to -- we sort of stumbled upon it and then we stumbled upon another and like, this is great. And so it's -- I know it is -- sometimes people think, oh, results far -- like what we're doing down there is super, super fascinating, especially in this Vehicle Payments space. It is the epitome of what it can be, if you will, across the market space.

Very interesting. And then on lodging, that's one where I think we saw a little bit of decline -- organic decline in Q1. Maybe just talk about that segment. It's all -- it's faced a little bit of a headwind. What's going on there? What should we kind of expect?

Yes. I would just say, for first quarter, we did have a bit of a tougher comp, which I think is a bit of what contributed to our organic growth, which was effectively flat. But Q1 prior year, we had a little bit of distressed passenger business as a result of the Middle East conflict, which I want to go back and look at the calendar like, I barely remember what happened last week, a little than a year ago, but -- so there was some volume spike that didn't repeat just because that event didn't repeat. And then I would just say more holistically, we've just seen a little bit of softness, softness from our customers. So they're experiencing softness, which then we become the beneficiaries up to some degree to the extent that perhaps our client has lost a client. So their freight volumes on a plane will be lower, so they don't have as many loads that they're running. And so if they have 2 less loads a month or 2 less loads a week, then it sort of has contributed to a bit of that of where we are today. I would also say from a sales perspective, it's a bit of the same story. So these businesses are also falling under our new Chief Revenue Officer, who has taken these teams and tried to bring them under the fold, reenvisioning sort of how we execute as a team and just doing it in a very deliberate way. So what we know about our product set is it is -- it does provide cost savings. It is a better product for our customers than just going to the market and trying to solution set their own room rates. And it provides, I'll call it, the oversight and the ability to control that spend in a managed way. And so we fundamentally believe that as we continue to execute in the back half of the year that there's the opportunity to move sort of to this mid-single digits.

And you guys do a little bit of business with FEMA in that segment, too, that provides -- that causes a little bit of variability.

That's a fair statement. I think what that does is you end up with higher volume but at a lower rate on that FEMA business. But it does provide the incremental, I'll call it, if you will, volume in the network, which we obviously like. They're a good partner.

Ron, on the Q1 call also mentioned some -- quite a few noncore divestitures, I think, totaling $2 billion. Can you give us a little more color or commentary on what that means where in the business should we be thinking you might?

Yes. So I think he gave a little bit of color. And obviously, we did mention that -- I think he said $3 billion, so $2 billion in the Vehicle Payments space, perhaps $1 billion in lodging. Thank you, Jim. But yes, at this time, we're -- it's very early days. So we haven't hired bankers. We haven't done anything other than we've identified things that potentially are noncore and trying to think about what our next steps are. So if our goals as a company from an M&A perspective and quite frankly, as a strategic perspective is to be focused on the things that drive growth and drive shareholder value. Then it feels to us like things that are growing rapidly to achieve a higher multiple for all of us. But then, quite frankly, are just a more valuable and profitable business in the long run, that's probably where we're going to focus our efforts on Corporate Payments. So we just talked about 2 deals in particular. And so I think if it gives us the ability to leverage some of the working -- some of the liquidity that might be derived from those dispositions, we would consider doing that. We're not -- this isn't a fire sale. This is going to be at the right price for the right buyer. These are good businesses, quite frankly. And so time will tell, but it just gives us another lever if in the event that we want it and we think it makes sense.

One kind of thematic idea that seemed to be a little more present just in terms of people's conversations around Corpay was electric vehicles, and that's sort of the evolution of the economy and of the automotive industry towards electric vehicles. I know you guys have done some work there. Can you give us kind of an update not only on what you guys have done in order to be ready for that, but also just sort of like what you're seeing out there. It feels to me like the whole narrative has kind of slowed down a little bit, but you tell me.

Yes. I would say very much so. I mean, this is a space where we absolutely went out and acquired and/or built the functionality that we needed to be able to service our fleet customers, primarily in Europe, where this was more of a thing, right? The adoption of EVs has been at a higher pace and then specifically also in the U.K. And so trying to figure out how we serve our customers who actually already had the demand and had the desire to start mixing their fleet, and so we effectively just bought the things or managed and grew the things that made the most sense for our business. But I think your read is right. Like this is not the hot topic anymore. If anything, I think Europe in terms of regulation has sort of backed off more recently. I think you see it with other regulation like CSRD even, which is driven towards this whole -- it's the equivalent of ESG here in the U.S., right? So they said, oh, maybe we've overstepped. And I think the combination of sort of taking a step back by the governments along with, quite frankly, the cost of adoption for EVs, we're well positioned should it become more meaningful thing in the future. But we really do think this is a decade thing, not a years or even certainly not months. So this is a longer-term play. We're well positioned to serve our customers. And again, just to repeat what we were saying historically, and it continues to be true, we really are agnostic to what the fuel type is, whether it's petrol or electricity, we're ready to serve. And quite frankly, in the electric charging market, whether it's your consumer or a commercial business, the ease of use that we are able to deliver through the solutions we have developed just, quite frankly, make a very complex thing, way simpler. And so we're ready to serve. We're already serving, but it's very early days, and it's small.

Fantastic. I think we're out of time. Thanks so much for being here, a great conversation.

Thank you. Appreciate it.