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

All right. Good morning, everybody. We'll get right into it. Thanks for being here. I guess we'll call it the Second Annual Jefferies Fintech Conference that we're going to kick off with Corpay. And Peter Walker, CFO, excited to have you here with us.

Peter, maybe just to jump right in. So you joined, I think, 2 months ago, we were just talking about.

That's right.

Maybe just high level, what stood out or surprised you so far in your time thus far?

Yes. Maybe two things I'd just share why did I join Corpay? Really two reasons, I would say, overall that I joined. One is our customer is the CFO or the office of the CFO. So I've been CFOing for about 20 years. It's really cool to be sitting in the seat of CFO of a company, and I'm the end customer, right? So it really allows me to look at the products and the markets and understand it in a unique way. Second reason that really excited me is the opportunity to work for Ron Clarke, incredibly visionary CEO. And so just the opportunity to learn from him. So that's what brought me in. And then in terms of kind of what's shown up for me, I'd say, as an upside as I've come in the business, really two things. So one thing is in our Payables business. I didn't realize quite the opportunity that we have to cross-sell Corporate Payables into our fleet card customers. So quite a bit of an opportunity for us to do that and really expand the wallet share with our fleet card customers with our Corporate Payables products. So that's a pretty exciting upside for us, and I think we're on kind of the beginning of that journey. The other thing is the Cross-Border business, right? I mean I understood the business from the outside, but getting in the business and really just seeing what our competitive advantages are, how we've been able to grow that business, the partnership we signed up with Mastercard, which is opening up a new customer segment for us and then the acquisition of Alpha, a new customer segment as well, which I know we'll talk about in a little bit more detail.

Okay. Perfect, yes, I mean we will get to all of those. But maybe we just get through the near-term trends. So about a month removed from the 2Q print. Any update on how things are trending so far in Q3? I mean we have the embedded assumption for U.S. vehicle growth to get up to the mid-single digits from slightly positive in 2Q, if that's still on track? And there had been a call out last quarter, at least on the North America portion of Cross-Border seeing some pressure from tariffs, just how that's looked over the last couple of months?

Yes. So in terms of Q3 results, we're trending right in line with where we expected to be based on what we shared on the Q2 call. In Vehicle Payments, and I know we're going to talk about a little bit more detail, we're really pleased with the mid-single-digit growth that we shared for the back half of the year, and we're on track with that. And then when we look at our Cross-Border business, I would say that North America continues to be a little bit of a headwind for us. That being said, the international markets have been a nice offset. So Cross-Border is kind of tracking exactly where we thought it would be.

Okay. Perfect. And so getting to vehicle fleet, it's been a journey over the past couple of years. You've had the mix shift away from micro fleets, getting the upmarket sales motion ramp back up and you're finally getting that U.S. vehicle growth back up to the mid-single digits based on how you're guiding for the back half. It sounds like you're trending in line with that. Maybe just talk through the main drivers of where you've seen that acceleration come from across retention, new sales, you have a couple of big wins that are layering on?

Yes, happy to. So it has taken time to rebuild the sales engine, the sales force and the customer targeting, and we're thrilled to be in the spot that we're in. Just a reminder that we're focused on fleets with 10 or 20 vehicles or greater, where the previous strategy was really a micro strategy focused on fleets with 5 vehicles or less. So as we're going into the back half of the year and expecting mid-single-digit growth, we're really seeing that coming from two spots. First is retention. As we shared on the Q2 call, it's up about 150 basis points over Q2 of last year, and it's just a little bit north of the company average. So we're really pleased with where we are on retention, and we see that holding. The other place where we've seen positivity is on the sales force side and production. And that is now large enough to grow over the large base that we have. So really, we've got retention going for us, sales going for us. And then to a lesser degree, because we're going to see benefit in this year and next year, but we did share on the call that we had 2 enterprise clients, GasBuddy and Amazon that we won. So that's a little bit of a tailwind in there as well.

Okay. No, that all sounds good. And within Vehicle, Brazil has been a really strong organic grower over the past couple of quarters, been growing over 20%. Tag growth has been consistent, growing roughly 7%. First, if you could just remind us what the revenue split looks like today between toll and then the extended network across parking, insurance, the other verticals? And then what the major contributors have been in keeping the Brazil growth kind of well above the underlying tag growth?

Yes. So spot on that Brazil has been a high teens grower for us, if not in excess of that on some quarters. So a really strong business. When we think about the revenue there, about 40% of the revenue is now coming from the extended network, the additional products that we offer, insurance, parking, et cetera. And then about 60% is coming from the monthly tag subscription business. So it really is a mix shift where we're having a lot of success with those additional products. In addition, we've shared, right? That we did 2 acquisitions in the debt financing space in Brazil, and those are also adding to the growth rate here.

Okay. That's helpful. And then just to tie together for the Total Vehicle segment, you're assuming 10% growth per vehicle in the second half. We talked about the mid-single-digit growth in fleet. That implies something like high single -- high teens growth in Brazil. Is that a fair way -- if we think of the 2 components of Vehicle, is that a fair way to think about what the normalized growth of the segment should be going forward? And if we think about '26, there's the BP deconversion. You guys have put out an 8-K, just putting some framework around the sizing of that. But any other puts and takes we should be mindful of as we think about kind of the go-forward growth rate of Vehicle?

Yes. Maybe I'll expand on that a little bit. So Vehicle Payments for 2025, revenue will be north of $2 billion. There's really 3 legs to the stool. And so when you think about those 3 legs in the stool, let's just say they're each 1/3, let's make it easy math. So if we kind of go back through the areas you were focused on, U.S. VP, we see at 5% in the back half. International VP, we see at 10% in the back half. And then Brazil, we see high teens in the back half. So if you kind of do the math on that, that's what delivers 10% organic growth in the back half, and we believe that's sustainable going into 2026. You did mention the BP sale. That will come off the books in 2026. So it's a really end of year event for us. Similar to when we buy things, when we sell things, that will also come out of organic growth. So it won't be a punishing factor there. And it was a relatively small book of business for us. And again, we just didn't want to compete given the economics that were offered by the company that picked it up.

Okay. Got it. But so it sounds like 10%, what we're seeing in the second half, that's a fair way of thinking about kind of the normalized growth rate going forward...

For Vehicle Payments, yes, that's correct.

Okay, okay. Great. We'll shift to Corporate Payments, which has been a great story for you guys over the last few years, growing right around 20%. You're guiding to high teens growth for this year. Let's start with the Cross-Border business. So you guys are the largest nonbank FX provider in the market. You've been growing significantly faster than the overall cross-border B2B market, taking share from the banks. If you could just frame what's driving the shift away from the banks at the macro level, how you guys view yourselves as being positioned relative to the other nonbank providers and then talk about the runway for growth, which I mean it sounds like, at least in our opening, that's one of the things that's kind of stood out to you at least initially in your ramp-up?

Yes, for sure. So our view on Corporate Payables that it will grow high teens. We beat that some quarters and been pleased with it. If we take a double-click into the Cross-Border business, I think the first place to start is really where we focus. So we're really focused on those middle market companies, call it, $500 million of annual revenue. When you think about the banks, right? The large banks who are competing for that business, they're really not competing for that business. They're not interested in it just because of their scale and they want to serve larger clients. When you think about the regional banks, they just don't have the capabilities that we have in the Cross-Border business. So we do think that we're very uniquely positioned here, and that's why you're seeing the growth that you are and we're having so much success in sales. And we think about the people that we have in the business, the technology we have and then the geographic reach of the proprietary network we have. So that's really been the winning formula for us. There are some other competitors in the space. But again, they're not able to operate with the same differentiation we are. And potentially, we pick some of those up in a roll-up strategy as we've done over the last couple of years to grow the business.

Okay. Yes. And that's a good segue into the Alpha acquisition. So you've announced the acquisition of Alpha. It's a $2.2 billion deal set to close in Q4 of this year. The deal gets you into the institutional investment space, which is a vertical at least right now, you guys don't have a ton of exposure to. Maybe just talk about the main appeal of getting into that market and then why Alpha particularly is so well positioned in that vertical?

Yes, happy to. So today, about 90% of our business in Cross-Border is in the Corporate segment, which we love that segment and continue to grow there. But we've done this year is, as I mentioned, really added 3 other segments. So let's take a dive into Alpha and talk about what that's brought to us. So this is a business that's been built over a relatively short period of time and had a fantastic growth. Really, one of the key drivers here is their virtual bank account that can be opened in a day or 2 across Europe. So this is when we did voice of the customer calls prior to the acquisition, this is something that we heard was uniquely differentiated to Alpha in the market and really nobody else could offer this. So that's really exciting, and they are offering it to the institutional investor client base. So it allows us to pick up this capability they have in Europe and to pick up this client base. And what we're even more excited about is they're not operating today in North America or Asia Pacific, where we have operations. So if we think about some revenue synergies right off the bat here, right? That's a pretty big opportunity for us. And then when I think about kind of the activities over the year, right? Just to kind of recap that, Corporates is where most of our revenue is today. We announced a partnership with Mastercard, which is opening us up to financial institutions. Think of that as -- think of us as white labeling our Cross-Border products to regional banks. Then we look at Alpha, the institutional investors, and then we also look at the digital currency space, which we've now signed up several partners, which we'll talk about in a little bit further detail. So going from 1 segment to 4 segments, again, pretty exciting growth for this business.

Okay. And so we're going to tick through each of those next. So the synergies from Alpha, you've talked about at least $0.50 in year 1. It's been framed as a fairly conservative starting point. Correct me if I'm wrong on that. It also sounds like it's probably more heavily weighted to revenue synergies than some of the prior deals we've seen you do in Cross-Border. So what do you view as the biggest couple of buckets of synergies? And as we think of the at least $0.50 framework, what's embedded at least in that initial outlook?

Yes. So I think that's a fair recap of where we are and our hope is on the Q3 call. Let's see timing on closing. But after we close, we'll be able to give a little bit more detail, but just kind of high level where we are today, the revenue synergy opportunity here is pretty significant. As I said, taking this very successful product to clients that Alpha already has in the EU and going to those same clients in the U.S. and APAC. We see a lots of opportunity there. I'd say on the expense side, there are synergies. That being said, Alpha has some unique software in this space and has a system developed to serve the institutional investor market, and we're going to keep that in place.

Okay. And you touched on the partnership with Mastercard. So that is in motion to help you get in front of more traditional FIs, at least you talked about kind of what you're going to be enabling for regional banks. Between that -- and maybe if there's anything else you wanted to expand on, at least do you think it's worth calling out in relation to the partnership, maybe how it's going so far, any early reads? But between that and the Alpha synergies, I mean, should we think of in '26 that these help you sustain the high teens level of growth that you're talking about for Corporate Payments this year or if those two things have the potential to maybe accelerate off of that high teens level in '26?

Yes. So maybe, I'll just take a moment on the Mastercard partnership. So in my couple of months that I've been here, I've had the opportunity to have a seat at the table with Ron and the individual from Mastercard, who's leading this, who is an executive C-suite member of Mastercard. And I'd say just been really impressed with the go-to-market strategy that we've been able to develop with Mastercard in order to really bring our products into financial institutions. And again, this is most likely a -- it's either a Corpay product or a white label product, but what we're seeing through this is significant interest. So I think we're excited that. In terms of 2026, what I'd say is we're about 2 weeks into the budget process. So I think it's a little bit early for us to say expectations for 2026, but my thought is we'll probably have some comments on that in the Q3 call. But I do think what we're seeing in Cross-Border is really reinforcing the durability of our high teens growth. So this is growing actually to be obviously a really large business for us with the acquisition of Alpha and the partnerships with Mastercard and what we're seeing in the digital currency space. There's no shortage of opportunity, and we are operating at scale. So all really exciting things and kind of expect us to come back Q3, Q4 with more thoughts on '26.

Okay. So we'll get kind of that, as you've done in years past, kind of a preview at least of '26, you think that's fair for us to expect.

Yes, that's fair.

Okay. We have to ask about stablecoins. We're talking about Cross-Border.

It wouldn't be a conference if we didn't talk about stablecoins.

So maybe we start, and I want to separate between -- maybe we do these two parts as separate questions. So maybe to start, we do what you guys are already involved with and how you are already leveraging blockchain. So you've announced a handful of partnerships with several stablecoin infrastructure providers like Circle and BVNK. What those partnerships enable or entail? So maybe we start there. And then anything else you think is worth pointing out on how you're already leveraging blockchain on the back end?

Yes. So we've been focused on this for 12 to 18 months in terms of developing our capabilities. And there's obviously been a lot of uptick and interest in this in the market over the last, call it, 6 months. So we're really excited by the opportunity this presents. We see the blockchain as just another method in terms of which currencies move across, right? So we think about our own proprietary networks. We think about SWIFT and we think about blockchain, all really similar. And what we bring to this is the opportunity to on-ramp and off-ramp and to create the foreign currency exchange, right? Those are things that the current providers within the space are not providing. And so that's what we've been doing in our partnerships is bringing those pieces to the table. And think about our role as really taking the traditional world of the current state and bringing in the digital currency world into that and bringing those 2 together. So again, we're really excited about the opportunity. I'd say it's early days. So we are executing across the blockchain today, but the volumes really aren't there yet. I think our view is probably the best use case for this, if it does pick up popularity is the fact that it's a 24/7 settlement period. So as everybody knows today, right? We're restricted to banking hours in terms settling these transactions. So we do think that if this picks up in popularity, that would be probably the most interesting use case for people.

Okay. And just to expand on that, maybe articulate kind of why you guys think longer term stablecoins or any kind of blockchain-related technology, why that would be more complementary to the business rather than being a potential source of disintermediation?