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

I'm Andrew Jeffrey. I'm fintech analyst at William Blair, and I need to read the obligatory disclosures, namely that a complete list of research disclosures or potential conflicts of interest can be found on our website, williamblair.com. So it's my pleasure to be joined on stage today by Alissa Vickery, the Interim CFO and CAO at Corpay. Corpay to us is one of the more interesting names on the page for a variety of reasons. One, it's an extremely well-run business where that has been a terrific capital allocator over the years. And I think probably the most exciting thing to us about the business is, it's one of the few names, if not the only name in fintech, that really gives you good B2B exposure. B2B payments are, by some people's accounts, a $60 trillion market. It's nascent. It's changing very rapidly. And I think Corpay has built one of the most unique FX and cross-border sort of full stack AP businesses in the industry as well as an excellent wide-moat vehicle payments business. So with that, I will let's Alissa run through the presentation.

All right, great. Thank you so much. Is that the remote for the clicker for the slides?

Yes, sorry. Here you go.

All right. Safe harbor. So again, thanks for having me today. I've been with Corpay a long time and super excited to tell you a little bit more about the business. So fundamentally, what we do is we help customers with all sorts of expenses and how to pay those expenses. So think about it as anything up and down the ledger short of payroll. We want to figure out how we help you facilitate those payments in a more efficient manner, hopefully help save you some money and then, quite frankly, potentially outsource some of your business processes that maybe are just a little bit antiquated in terms of your full AP function. And we'll take those payments and we'll monetize them on a card as much as possible or facilitate a cross-border payment for you as well, and effectively, create what we would call a better customer experience as it relates to a B2B payment of any kind. Generally, the products we sell are not discretionary in nature for most clients. And why is that? It's because regardless of the current environment, those clients are going to continue to buy fuel because they have a fleet. They're going to process AP payment because they still have vendor spend. They're going to continue to have individuals who are out on the road who need a hotel room overnight. So it tends to be a fairly high retention business as well as a high volume, low revenue recurring business, which generally doesn't have client concentration risk. That kind of creates a business that we can project and predict as we move forward. So a little bit more on -- in terms of the baseball card and who we are, the size of the company. We produced over $4.4 billion in revenue last year -- or sorry, $4 billion in revenue last year, going on $4.4 billion in '25, and producing free cash flow in the range of $1.4 billion going to $1.5 billion this year. So highly profitable, high EBITDA margins. We have clients and customers all around the world. But where do we primarily do business? Primarily do business in the U.S., so North America, Brazil, the U.K., Europe and a little bit of ANZ. So a lot of breadth globally where we help clients just keep businesses moving, if you will, via the payments modalities. The other thing to point out is our networks. So our networks are really what gives us advantaged ability to execute a B2B payment. So we've developed proprietary networks throughout the world, whether it's in the fuel card space or through our own ability to produce a centralized user interface for our customers and clients to do business, that network scale provides advantaged economics to us because it's all of our scale, all of our infrastructure, which ultimately lends to a better client experience but obviously better financial returns as well. So this slide shows you a bit of how we're organized and how we think about our product set. We've primarily organized into 3 segments today. We've got Corporate Payments, Vehicle Payments, and Lodging Payments, and we'll talk more about each of these as we pace through. So Corporate Payments. So this is really the growth engine of the company. You kind of led off with it, to a great degree, so thanks for the great intro. So what do we do here? So Corporate Payments are really taking, we call it, any kind of vendor spend and trying to help facilitate that payment, whether it's a domestic payable or an international payment. Today, this business represents about 35% of our revenue and growing. This particular business segment is growing at a rate of high teens to 20% organically each year. We've seen this growth trajectory for a number of years now and are super happy with how the business is performing. I would tell you, we invest purposefully to ensure that we don't -- you can only scale so quickly is what I would say so we invest at the right opportunity horizon to basically support that continued growth. Three primary verticals, which you'll see a bit of a theme as we pace through our different segments that we service customers via construction, transportation, logistics and business services. These are verticals where we've historically won. We've had a high level of let's say, opportunity across different product sets where the clients need multiple use cases. And then just to point out as it relates specifically to Corporate Payments, today, we are the #1 issuer of Mastercard volume globally. So that partnership has lent itself to being really a catalyst to the growth of the organization. Initially, they are domestic corporate payments but ultimately now filtering over into our international payments as well. One more thing I'll point out. So as I said, it's domestic payables and international payables. Those international payments, which we call cross-border, represents about 60% of corporate payments with the remaining 40% being the domestic. This slide takes you a bit on a client journey. So there's different versions of how we can facilitate payments for a client in our Corporate Payments space. It really does start with payments automation at its most core. But hey, if you're not really ready for that version of the journey, we'll just take your back office AP book. We'll facilitate all those payments. So we're going to convert as much as possible on the domestic side to a card. And then what we do is we effectively share in the economics with you, which takes a back office function, helps eliminate spend for our clients and then helps monetize that book of business. And so as you might imagine, as we've developed our vendor network, which is a proprietary network of more than 1 million different vendors throughout the U.S., it has enabled us to really proactively create economic benefits, if you will, throughout the payments ecosystem and then, quite frankly, for our customers who are able to then take advantage of those -- of that scale and those networks. The journey is different. You can have a full procure-to-pay cycle. If you just need expense management, we can do that for you as well. And then we spoke about it a little bit already with cross-border. If you have international payments, we're here and ready to serve. So as we pivot over to Vehicle Payments, so again, you'll see the theme in terms of the primary verticals of customers, which we service, but Vehicle Payments represents a little under 50% of our revenue stack today. So again, in Vehicle Payments, it's split about 1/3 international, 1/3 Brazil so international excluding Brazil, and then 1/3 North America. And what we've seen is if we can provide a modality for incremental product diversification across what we are able to offer, so Brazil is a great example of a use case. So that product started off. We had a fuel product. We had a tolls product. There was a bit of a parking product. But trying to bring those products all under one user interface and platform and really deliver a service that's unmatched in the industry and then figuring out how do we deploy that more globally, not necessarily from using the Brazil technology but that Brazil mindset in terms of how we go to market more holistically to service our customers. But the way we win here is truly because of our proprietary networks again. So again, 80% of Vehicle Payments today is probably in that fuel space, but expanding the capability of the payment to be agnostic to fuel type, whether it's an internal combustion engine versus an EV vehicle but then expanding to other spend categories as well. So think anything that you might utilize your car to then facilitate a payment, so whether you need to pay for the toll road, the parking solution, the fuel itself. And so this slide generally takes you through that unified payment journey along the lines of all the things that we envision your vehicle payment will be able to facilitate and make your life easier, both as a consumer as well as a client who has a fleet, who has multiple needs throughout the industry. Lodging is the final segment we'll talk about. This represents just under 15% of our overall revenue stack today as well. Within Lodging Payments, we have a workforce solution so think blue-collar workers out in the field doing things overnight like tree cutting, laying fiber optic wire, railroad services, things of that nature. For airlines, this is the second, so I would say workforce represents about half of Lodging Payments. The remaining 2 pieces represent 25% each, airlines at 25%, where we help, think pilots, flight attendants, distressed passengers to book a hotel room. So for the airlines, we're generally an integrated solution within their stack that facilitates their crew stays. And for a distressed passenger, God forbid we're all delayed going home, but you might get offered a room night. We help facilitate that sort of the direct ping, if you will, to the end customer. Click the link and then you're able to book your room and it creates a seamless experience for you as the end user. But obviously, for the airline, the benefit of not having everybody queue up there at the ticketing counter and try to figure out where they go next. And then finally, the remaining 25% represents our insurance business, which primarily helps displaced homeowners in the event of either a short-term need with a hotel room or a long-term stay and long-term housing. So benefits in our lodging business really is all around our network. We have more than 45,000 lodging hotels, discounted hotels within our network that allow us to be super competitive on pricing and, quite frankly, offer companies who don't have the staff or the size to facilitate a back office travel function, to utilize our networks to take advantage of discounted pricing over what they could book on their own. It's all closed loop. It provides advantageous economics for us, and that's all full suite of user interface to allow the customer and the end user a seamless experience. So we talked about cross-sell in the past, so this just kind of speaks to sort of our payment verticals that we were saying really has the opportunity where a single client might have multiple use cases for our product set. So this is probably my favorite slide. It's one that's 15 years in the making, if you will. So since IPO, you can see that we have a consistent track record of performance, both at the revenue line as well as at cash EPS. Cash EPS is a proxy for us around certainly shareholder value but also in terms of the free cash flow that we're able to then go redeploy, whether it's to support the organic growth of the business or through M&A opportunities. And I would say the revenue growth over the term has really been a nice balance of organic revenue growth as well as going and acquiring new businesses that create scale and, quite frankly, deeper moats across each of those businesses. You can see 17% CAGR on revenue and 19% net profits. And perhaps as a byproduct of the profit slide, here's our EBITDA margins over that same term or shorter term but a 6-year cycle. And what you'll see is we are not a highly capital-intensive business. Most of our capital is spent on IT except for CapEx, but we are quite judicious with our expense management by design. Our intention is to stay within that mid-50s EBITDA margin percentage. The times you see it dip are when we acquire businesses that perhaps are not performing at the line average. And then over a period of generally 6 to 12 months, we get them in line to where they're more performing, more aligned with that mid-50s. So as we think about our growth objectives over the midterm, and we've fairly consistently and our CEO is quite staunch around organic revenue growth of 10%. So we generally stay in the range of 9% to 11%, which the mid is 10% on that and we do that purposefully. We invest at a level for sales to continue to generate organic revenue growth in that 10% range, knowing it's a bit algorithmic. So if you lose 10% of your revenue and you sell 20% of your revenue every year and then same-store sales is in the plus 1%, minus 1% range, then ultimately, you produce about 10% organic revenue growth every year. That's before you go acquire a business. The EBITDA line, we expect EBITDA to continue to grow in the low to mid-teens. So our tagline here has historically been 10%, 13% and then 15% to 20% at the bottom line on earnings. Capital deployment. We do -- we are judicious users of our capital, whether or not we invest in organic growth, invest in M&A or go back and repurchase our own shares to create shareholder value over time. And just to point out, less than 20% of companies in the S&P grow at this rate. So we're pretty proud of the performance over a long time, a long period of time. We talked a little bit about this already but the capital allocation philosophy here is investing across the board. I would tell you, first and foremost, our intent is to grow organically and to go and acquire businesses. The last priority is share repurchases. We'll do it if we don't find that there are assets in the space that sort of meet our growth objectives, and I would say at the right price, so that there's something we can truly do with it at scale. So a bit of a history chart. Sorry if it's an eye chart as well. But you can kind of see where we've been over the years. Our total capital deployed since '17 of $11 billion, of which about 30% has been used to acquire other businesses. About 70% has been used for share repurchases. We do believe that we are in a bit of an M&A sweet spot this time around for '25. The market is quite interesting in terms of opportunities so we do expect this to be more M&A focused in 2025. So speaking of, what have we done so far this year? It has been busy. So first and foremost, we have actually partnered with Mastercard. If you remember earlier, I said we're already Mastercard's single largest issuer and business partner from a volume perspective. And so as we continue to, I would say, just work strategically with one another, they've expressed an interest in understanding our cross-border foreign currency exchange payments business a little bit more. It's a space that they're interested in figuring out how to monetize it for their own networks as well. And so as we stepped along the path, we said, well, what does that look like for you? And so ultimately, it came down to, hey, we'd love to have a look under the hood. All right, so how do we create teeth on that? You're going to invest $300 million for a little under 3% of the business of cross-border. Let me be very clear, this is not for all of Corporate Payments. It's the cross-border unit. We expect that investment to close early in the second half of '25. At the same time, we signed a commercial partnership agreement with them to where we will collectively go as the exclusive foreign currency provider of Mastercard to all of the financial institutions for which they are the issuer in the United States, which I think is about 5,000 banks in this network. Half of them are Mastercard so there's your TAM. Today, more than half of the payments made by these banks for their customers that are foreign-driven are delivered in U.S. dollars. So it's quite an inefficient payment for these Tier 2 and below banks in terms of how they service their clients. We want to come up with a better solution for how we either white-label our product or, quite frankly, just provide the outsourced solution for these banks and their banking partners. So that ultimately, they don't end up losing that customer on the basis of economics to a Tier 1 institution but figuring out just how we become part of their ecosystem. Historically, without being the exclusive business partner of Mastercard in this space, it just enabled us to -- we can make the phone call, but generally, who are you? Who are you with? Stop calling me. We service some of these banks today, Jack Henry being one of the largest wins in the space more recently. But we believe with Mastercard providing a nice warm lead because they already service this institution in a meaningful way, that the winning proposition becomes much easier for that bank to say yes to and, quite frankly, retain their client base. We expect this partnership to contribute probably around 2 to 3 percentage points growth to cross-border revenue in 2026. So super exciting. So why financial institutions? So one, we just think there's a big opportunity. Today, more than 90% of our revenue is our own corporate accounts where we're going and we're selling to the client via a spot trade or with a risk management solution with a hedge or a forward. So think there's real opportunity in this financial institution -- institutional client where it's less than 10% of the revenue today. Secondarily, we've recently signed or announced an agreement to partner with TPG to acquire AvidXchange. So AvidXchange plays in the domestic payables business. So remember, we were talking about Corporate Payments, 60% international, 40% domestic. This doubles down on the domestic side and the full AP solution. And so we've agreed to invest around $550 million for about 1/3 of the business. And so we've got -- I've been asked a lot of questions like why 1/3? Why aren't you buying the whole thing? And quite frankly, the answer is well, today, the economic profile of Avid doesn't support -- it's going to be better served from a private equity market perspective to go through a transformative phase, which we think is probably in the 12- to 18-month time frame, and we just don't have the patience for that. So that's better served as an equity investor for sake of my P&L. We'll work together with TPG to improve that financial performance, and then we have a call option to acquire the residual of the business 33 months down the road at a set fixed price based on their invested capital. So this investment is expected to close in the fourth quarter. And we really do like it because it plays in the same client size space that we're used to playing all in. So think mid-market, $500 million to $1 billion in revenue clients who, quite frankly, need the solution to better optimize their payment profiles but they play in incremental verticals that we're not as focused in today. Remember, we talked about our primary 3. They're also in these incremental spaces. And their 1.4 million in vendors plus our 1.4 million in vendors over the longer term potentially acquiring the entirety of the base creates real scale for us in the future, which is why we think this is a good deal. And ultimately, our intention is that we would acquire the residual once the revenue trajectory and earnings profile are more in line with our line average. The other thing I'll say is, why 2 steps? Is there anything left on the bone after the fact? Yes, it's a short answer. The scale that will be created by their vendor network and our vendor network plus instituting their customers on to our scale and tech deck, we think, really does provide the incremental second bite of the apple, if you will. So in terms of how we execute continued growth and our strategy, we've been pretty clear that we're hyper-focused on reaccelerating growth in the U.S. Today, U.S. sales -- our U.S. revenue represents probably a little around 40%, 45% of total revenues of the company. Doing that through same-store sales stabilization, new products distribution and, quite frankly, improved retention, which we've already seen the benefits of as we've improved the retention of our client base by over 250 bps over the same quarter prior year as we exited the first quarter of '25. Further integration of our recent investments and acquisitions. And then you can kind of see here on the board where we expect organic revenue growth and cash EPS to be for the year. Organic revenue at 11%, $21 in cash EPS, which is 11% growth year-over-year but 17% at constant macro if you back out the wild impacts of foreign exchange rates last year. We do expect some continued accretion to our margins as well as those acquisitions come to full scale in the fourth quarter and generate free cash flow of about $1.5 billion. So the takeaway. We're a fast-growing, highly profitable, good allocators of capital with an incredibly large TAM. So there's opportunity to continue to grow at this pace, let's say. We're the largest provider of corporate payments globally and we only have 2% to 3% of the market share. So the opportunity to continue to scale and grow here is substantial, and we're quite bullish on the opportunities of the company. We've been very conscientious about how we've grown, how we invest, whether internally or buying incremental businesses over the years. And we continue to plan to execute along those bright lines via which we sort of live and run our business by. With that, yes, I have a bunch of COA here in the back, my CAO hat.

So we've got a few minutes before we head upstairs for a breakout. Happy to open the floor to any questions. Alissa, I'll ask you just on the U.S. Vehicle Payments business, that's a business that's probably been the most challenging, I guess, from a growth standpoint over the last few years. Are there learnings from Brazil that can be applied in the U.S., namely the expansion beyond fuel cards?

Yes. So I would say the learnings from Beyond, for sure. I mean, there is the ability to potentially cross-sell the product set amongst the traditionally what I would call the vehicle payments or the fuel card market. I think beyond that, it really is -- we purposefully repivoted the business 2 years ago. We were hyper-focused at that time on these small micro businesses. And our sales engine was digitally focused on driving growth in that, I'll call it, sets of the market. What we did it 2 years ago, as we said, okay, that's enough. We're not going to do that anymore, mainly because we were seeing that the return on investment or ultimate profitability of those customers over a 90- to 120-day cycle wasn't working simply due to the health of the customer. And so at that time, we've repivoted the sales engine to go a bit more upmarket so that we're focused on a slightly healthier customer. I think that's a bit of what's driving the incremental retention improvements of 250 bps because with a big business, as you know, it takes time to turn. As we repivoted, that ball started small. You can grow that ball at a fast pace but the incremental impact is relatively small simply because you started small. As the snowball starts to build, you gain momentum. And as that momentum accelerates and the size is there, it actually ends up producing something that's more meaningful in terms of its impact on the business and its performance.

And do you anticipate more retention gains to come or do you think you've recognized the bolus of them today?

We'll see. I would say that we have somebody who's hyper-focused on that client experience now as well. That's something that's relatively new. What we cared about, how the client was experiencing us, having an executive who's dedicated to making the phone call and understanding, what went well? What's not going well? How can we improve? There's probably some fringe remaining there but we're at over 92% retention today, which we're pretty happy with, by the way. So we can maintain that as well as the sales engine really starts to accelerate that growth. We believe it gets back on the right trajectory.

Okay. Maybe with a little bit of macro improvement, too, which we can talk about in breakout...

Always helpful.

So with that, yes, we're heading up to Jenney B for Q&A.

Okay. Thank you.