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

All right. Let's get started. We're super excited to have Jim Eglseder, Senior Vice President of Investor Relations at Corpay with us here today. Welcome.

Thank you.

And good to have you. I guess to kick things off, can you maybe share a little bit about what's on top of the mind of the management team at Corpay for 2026?

Yes. Obviously, we're deep in the budgeting process right now. I kind of refer to it as the annual budget beat down season at the company. We're operators and just the organic growth of the company, setting a plan and setting the underpinnings of that to deliver the 9% to 11% organic growth that Ron outlined on the call last month. That's what we're trying to achieve today. Obviously, the growth rates of the businesses can be a little bit different. Vehicle payments is roughly half the company, grows at double digits. If you get core payments to grow in that mid- to high teens and get you in that target as it is. So that's where Ron and Peter in the businesses are today, crafting a plan that achieves that. So that's what we're focused on today.

All right. That's awesome. And I guess maybe looking more to the near term, looking at the fourth quarter, as of the last earnings call, trends were generally pretty consistent across the business segments with improvements. And also, you provided a pretty encouraging preliminary 2026 guidance...

Not guidance.

On the back of favorable market setup. And then October trends you mentioned seem to be also supportive of the outlook. Maybe can you just -- it's been a couple of weeks. So maybe can you provide an update on what you're seeing across the business now that we're kind of looking -- heading towards the end of the quarter?

Yes, there's no meaningful change sitting here on December 2 today. We don't have November in yet, but we haven't seen anything that would cause us to feel any different about our ability to deliver the outlook that we gave in 2024. I think the feedback I've gotten across most of the companies that have been on the conference circuit, we've been out there as well as everything seems to be okay. In spite of the relative consternation, our customer underlying trends are good, aligned with what we had expected. And the reason Ron brought up the October numbers as well, you got 1/3 of the quarter in already and everything is coming in as we would have expected to. So yes, no real change.

All right. Awesome. It's great to hear. And maybe just moving to the segments and I guess, corporate payments, the most important one to start with. So a lot of exciting developments in the segment across the board. It probably would be great to hit on a couple of key topics. First, on the underlying drivers of the strong mid-teens organic revenue growth in the segment year-to-date and line of sight to mid-teens organic growth to 2026. Maybe can you just talk about some of the underlying drivers?

I think if you step back a little bit, a lot of it is driven by the model. Right? The revenue retention of the company is at 92%. Corporate payments, both domestically and internationally runs between 95% and 99%, generally speaking. So when you have that little attrition, it's "relatively" easier to create a mid- to high teens organic growth rate, but it's a customer acquisition game today. Chris. I think folks, while we continue to impress upon our investors and prospective investors that we compete 90%, 99% with banks. Banks have all the share today. They have 90%, 95% plus of all domestic payment flows. They have 90%, 95% plus of all international payment flows today. We have, call it, between 10,000 and 20,000 clients in each of the corporate payments businesses out of 200 to -- I don't know how many hundreds of thousands of prospective middle market clients that exist around the world. So we don't have any share. So our entire objective is, go out, get the payment files domestically and internationally and just sign up more customers. Right? So if you retain, call it, between 95% and 99% of your revenue every year, you got a pretty good starting up place for next year. And as long as you invest appropriately in enough sales and marketing to drive that incremental growth to both offset the leakage and hit the growth rate that you want. That's what the model is designed to do. And it is fairly formulaic. You know what your average salesperson produces by time and territory. You know what you want your growth rate to be. It's almost you sticking into a spreadsheet and outcome, it spits out, go hire x number of salespeople, invest x number of dollars in additional sales and marketing. I think the other thing that we continue to get questions on, hey, you name competitor, X, Y and Z. Everybody is talking about going after the B2B opportunity. It's easy to say, it's hard to do, and everybody has a different definition of middle market companies. Our definition of the middle market company, which is where we focus is think companies with revenues of $300 million to $500 million up to $1 billion in revenue. So call it middle market to larger middle market. Some of the peers that we get asked about are super small business or even lower middle market, right? But we're all just competing against banks and trying to chip share away from banks. And our view over the longer term is that payments, both domestically and internationally, it's just the next thing that banks will have used to own a decade or 2 down the road, just like the networks, just like the acquirers. I mean we work with a bank, we're at a bank conference, but it's just not what the banks are focused on today.

All right. That's very helpful color. And I think you often cite the market penetration by different segments. Can you maybe just recap for us the enterprise versus mid-market versus I guess, maybe even lower tier, what's the kind of penetration rate do you see it?

Yes. Usually, that's more of a vehicle payments question as opposed to a corporate payments question, right? If you look at the total vehicle payments category, it's about 1/3, 1/3, 1/3 today. It's 1/3 U.S., it's 1/3 Europe and 1/3 Brazil. Most of the payment statistics that we think about and talk about are kind of U.S.-centric. And it's really pretty different by size of fleet. The largest fleets in the country, the big contract carriers that you see, the trucks on the road all the time, the delivery companies, they all have a fuel card program, a fuel card provider, and it's either us or our primary competitor, WEX, right? It's not a surprise, but they're big enterprise customers, and they don't pay either of us very much for the service that we deliver. When you go down market, think fleets with 25, 50 trucks or less, we estimate there are only 40% -- most 50% penetrated with the fuel card as most of those businesses continue to use just a general purpose credit card, and they chase drivers around for receipts and try to make sure they're only buying what they're supposed to buy, right? So that's where we spend most of our time selling is into that down market fleet. Why the penetration rate is lower and the economic profile of that client are just better. And that's what we've done for 25 years, and that's what we continue to do. Obviously, we fell off the wagon a little bit over the last few years as we migrated away from the micro client segment. And we delivered mid-single digits organic growth for the North America vehicle payments business in the third quarter, and we expect to do the same in the fourth quarter and then a pretty good jumping off point into next year since we're already there.

All right. Awesome. Before I go back to the vehicle payments, I think it's a very good segue, but there's a couple more corporate payments topics. I just want to follow up on. And also in the corporate payments that you're seeing, basically, you and a lot of competitors serving the middle market are still competing against the banks that's like the biggest competitor still. Okay. And then I guess in terms of your customer mix, you've mentioned the decline in revenue per spend volume in this business as you mix shift towards new payables and cross-border enterprise clients. Maybe can you talk a little bit about how you think about the enterprise opportunity and maybe the trajectory of this metric in the coming years?

Yes. I think it's important to understand that the focus of the business continues to be 99% middle market companies, right, signing up more middle market companies and domestically, you're trying to ge t them to do something a little different than they're doing today. 40% of all B2B payments in the U.S. today are still done with paper check. Right? Somebody is printing the checks, taking them down to the CFO's office, signing them, they get stuck in an envelope with a stamp and put in the post, right, to get them to outsource their AP is a little bit different. So over the last decade or 2, we've been working, maybe not single-handedly close to it to educate companies about the benefits of outsourcing their AP to us, right on the cross-border side, most companies that have cross-border needs today are already doing that just with their bank. And the largest global money center banks that actually have real capabilities don't really want to take the call of the average middle market company because there's not enough revenue for them, which is why we found very fertile ground to continue to sell into that middle market space. So Ron talked, our CFO, our CEO, talked about signing up an enterprise client on the AP side earlier in the year. They were trying to solve a different problem. They had multiple AP centers around the U.S., and they were trying to drive efficiency across the organization to create a better outcome at the corporate level. And we had a conversation with them, and they're largely ramping. I think we also talked about $1 billion a month in volume. Very little of that's carded today, but the opportunity is there. But for us, it's a client acquisition game. This is not a share of wallet game at this point. This is not a take rate expansion game. It's a client acquisition game as we just continue to sign up more clients and put them on our platform. And it's a bit of a land grab, and I think that's where we're focused today. So if we can pick up an enterprise customer along the way, that kind of demonstrates the value that, hey, we have a program and a product that works for the middle market, but we also have a program of product that works just as well for the largest enterprise customers in the world. It's a pretty good per to be able to walk into somebody's CFO's office and say, hey, by the way, we can help both of you, and we've already proved it.

All right. That's awesome. And I think you've outlined this before, but I think it's pretty important from a longer-term strategic perspective, how do you see the corporate payments business growing from the expected $2 billion plus of revenue in 2026 to 5x the size longer term?

Yes. I think our CEO's comments on there was a little bit to help folks kind of look up from the trees and look at the forest and look at the opportunity. And we've grown that corporate payments business from 14%, 15% of the company in 2018 on its way to 40% plus of the company today. And there's no shortage of TAM or opportunity out there, right? So it's easy to kind of focus in the day-to-day of the grindy details of, okay, well, hey, help us understand the confidence in your ability to create mid- to upper teens organic growth next year. Well, the reality is that we should expect to continue to be able to do that for certainly over the medium term, maybe even longer because again, there's no shortage of opportunity. And we kind of view this as shaping up over time a lot like the payroll space, right? 30, 40 years ago, all the companies did their own payroll. Today, nobody does their own payroll. Today, most companies pay their own bills. In 20 years, probably very few companies will pay their own bills. And that's the opportunity we're after. So there's no shortage of TAM. There's no shortage of share to be taken from the banks. And we think there's no reason with both inorganic and organic investment that we can't have a much bigger business than we have today.

All right. Awesome. And I guess moving to the inorganic part of the growth algorithm in terms of the most recent acquisitions, maybe starting with the Alpha Group. Can you recap for us what makes this an attractive acquisition for Corpay in terms of expanding cross-border capabilities and where you'll see. And where we'll see the greatest synergies outside of the $200 million of expected revenue contribution?

Yes. I think if you look back since 2017, when we bought the original cross-border business. So since 2019, this is the fourth cross-border acquisition that we've done. And historically, it's been mostly about scale. It's more customers. It's the customer acquisition game. We can do it one by one organically or we can buy other subscale cross-border providers that have built something along the way and just add more scale in it. We've also, along the way, picked up additional geographies, additional products and services. Alpha has a corporate business similar to what we offer today, but they also have a global bank account business that they've been able to grow from 0 to $3 billion in deposits over a few short years, right? It sells quite well, and they were only able to sell that in Europe because that's the only place they were licensed. And they were able to build a pretty good business. It was pretty attractive for us. We already have the licenses necessary to sell that in the U.S. and Asia Pac. So now that we've closed the deal, we can go to market immediately to sell that going forward. So the revenue synergy opportunities are probably bigger and more exciting with Alpha. They've been with just about any other acquisition. But we also have just the core synergies as we migrate their corporate customers onto our platform and then rationalize the expenses on the back end in the second half of the year. So you look at it, you get scale, you get a little bit of incremental capabilities. You got this brilliant new virtual bank account product that is selling quite well and quite attractive to not just corporate clients, select corporate clients, but the financial institutions as well. And with the right opportunity for us.

All right. And next one, not technically an acquisitions, it's more of an investment -- significant investment in AvidXchange, where you took 1/3 of the stake and then understand you may or may not in the future, to acquire the rest of it. What's your plan there? And maybe can you remind us what you're looking to see from Avid that would encourage you to buy or not buy? And then how can your current AP business benefit from the added scale?

Yes. I mean again, it's not dissimilar to what we do on the cross-border side. It's scale, right? We can do it individually organically, mid-teens more slowly over time or we can use our significant free cash flow generation to buy incremental scale. Now Avid does run a middle market and kind of a lower middle market business in slightly different verticals than we do today. We've looked at them over the years as a potential acquisition target. But unfortunately, their profitability and their growth profile looks a little different than our profitability and growth profile of our Corporate Payments segment today and the overall company. So we partnered with TPG to take them private. That deal closed roughly 5 or 6 weeks ago now. And ultimately, our intention in that partnership and that take private with TPG is we expect to own this business at some point down the road. We have the right to buy it at a fixed price anytime within the next 32 months, 33 months at the close. And what we're really looking for is for the profitability of the company to meaningfully improve and the growth profile of the company to meaningfully improve. It doesn't have to get where we are today from a corporate average margins perspective, but it needs to show progress on its path to getting there. And we expect to own this asset at some time. Otherwise, we wouldn't have done it. But it would have been diluted by both the organic growth rate of the segment and also the EPS of the company. And we didn't feel that that's what we would want, much less what investors would want at any given time. And we also wrote roughly a $2.5 billion check for Alpha. It was the second largest deal in the company's history and write $2 billion-plus checks at the same time, it's a lot. So we can partner with TPG. They can go in and do the things necessary to improve profitability and the growth profile of the company. And over the next 32 months, if it starts to progress along the thresholds that we know and believe that should be able to, then we'll likely hit the bid button on that time. But it's a pretty nice way to kind of sequence the transactions without impairing our ability from a leverage perspective or appetite perspective, otherwise.

All right. Awesome. And I guess lastly, can you talk about the Mastercard transaction take it the other way around? And then what's the expected financial impact in 2026?

Yes. So Mastercard, we announced over the summer that Mastercard was going to invest $300 million in our cross-border business. That deal closed this week. right? And so we now have the ability to -- we've already been going to market with Mastercard to talk to the banks and financial institutions, think regional banks and below about meaningfully improving their cross-border capability, right? When you look at the cross-border landscape, there are a handful of global money center banks that have real broad cross-border capabilities other than just sending payments by Swift to the correspondent bank network. Our pitch to these banks who Mastercard is facilitating the conversations to, they may not take our call because they view us as competitors. They're going to take Mastercard's call, and they're going to walk us in and facilitate a conversation on how we can meaningfully improve their cross-border capabilities. We already have a handful of smaller banks as clients today. We work with some of the processors as a white label solution to provide that cross-border capability today. So we think it will be attractive to a number of banks that are on our target list. And now that it's closed, we would expect to close 1 or 2 of these here maybe towards the end of the fourth quarter, into the first quarter. And we talked about, hey, maybe this could be a couple of points in incremental growth on the cross-border business over time. So you think about it, most banks spend most of their investment dollars on the consumer side of the bank. But few dollars are left on the commercial side for investment probably isn't going into the cross-border side of things, and we can help those banks keep some of their best customers for longer or maybe even forever, who might otherwise get to the point where they outgrow what those regional and smaller banks can do for them. And then they go across the street to one of the large money center banks so they fine, we'll help you, but you need to bring your entire relationship over here. So our pitch is, hey, use us from a white label or referral partnership perspective, we can help you keep that customer for a lot longer, and it is oftentimes probably one of their best customers that they want to.

All right. That's awesome. Lots of things to look forward to in this segment alone.

Yes. So just before we move along, obviously, in cross-border before we just had corporates, which there's plenty of opportunities in corporates. And now we have corporates. We have financial institutions. We have asset managers and PE funds with the global bank account product and digital currencies, which I'm sure we'll get to. There's no demand for it today from our corporates. We have the capabilities. This is not new to us, stable coins, if you will. We've been investing in this for 18 months now. So it's a bit of -- you need to build it because they will come. Well, it's been built. We can work with our clients today. There's no real benefit in G20 currency corridors for a stablecoin versus what we can do on a proprietary transaction or a swift transaction today. It's not cheaper, it's not faster. It's not any more secure. There are use cases for it that we've talked about, but we see it as an incremental opportunity for us as we continue to aggregate more of those flows and just use it as another rail to move liquidity around the world.

All right. Makes total sense. Moving to the next big segment, Vehicle Payments. The segment accelerated to 10% year-on-year organic growth in Q3, and it was supported by a return to mid-single-digit growth in the U.S. business. Can you talk about the improvement in the results in the segment compared to the last couple of quarters? And maybe just recap your expectations for next year.

Well, we haven't given guidance for 2026 yet. But when you look at it, most of the conversations that we've had this year are, hey, Brazil continues to do quite well. And I said before, it's 1/3, 1/3, 1/3, 1/3 North America, 1/3 Europe and 1/3 Brazil, right? So Brazil continues to grow at high teens rates. international or Europe continues to grow at high single-digit rates, and that's what they've grown at for the last several years. But U.S. Vehicle had gone from being a consistent quality grower to being a problem child as we've talked about it, right? We had made the conscious decision to move away from a micro-client segment that had been quite good for us because we saw bad debt spike, and we did that several years ago, and it's taken us longer than we would have expected to rebuild the sales function into a place where it can create enough absolute new revenue dollars to create the growth profile of that part of the segment that we would expect. Through all year, I've answered questions, we'd answered questions, hey, what gives you confidence in your ability to get there? Well, it's math. We could see it. We talked about the couple of hundred basis points of retention improvement that we saw in the second quarter. We feel that's a durable improvement, right? We just have a slightly larger, better, higher quality, more durable customer base today. And we're finally getting to the point where we have enough sales resources producing enough new sales to create the growth rate of the company. We've talked about a couple of enterprise customers that we won as well. That's just an indication of the overall health of the business. It wasn't a meaningful driver of the improvement. But it's really just signing up enough new clients, bringing in enough new volume at better retention rates that caused the business to inflect to mid-single digits. We printed to 5% for that part of the segment in the third quarter. We expect mid-single digits in the fourth quarter. And as we kind of sketched out the 9% to 11% expectations for next year, all the business that we have today pretty much just need to keep doing what they're doing today. And how do we do that? Well, you invest enough in additional sales and marketing to deliver the growth rate that you would expect. And that's as I started -- as I mentioned at the start of this, is the advantages of the model. So as long as some of the inputs or the underlying factors don't change, which we wouldn't expect them to, you know what the investment needs to be to create the outcome. And that's what gives us our confidence in our ability to do that. We still have to execute. Right? But you're not trying to fix something to get it back on to the trajectory that you need to be on. It's already on the trajectory now. You just have to keep it there. It's an easier place to start from.

All right. That's helpful. And then regarding some of the divestiture candidates in the segment, maybe can you just share some additional context in terms of the business profile, growth profile and what makes them potential divestiture candidates and what are you looking to get?

Yes. Earlier in the year, we talked about potentially divesting a couple of non core vehicle payments assets in the International segment, right? They're good quality assets. I kind of describe it as, hey, you have core and super core inflation. Well, we have super core businesses like fuel cards, and then we have core businesses, which are still vehicle related, but they may not be the -- they're certainly not the core fuel card opportunity. We've seen some other assets in and around these businesses that traded at some pretty good prices. like, if we can get that price, maybe it makes sense to kind of take some of those proceeds and remix it into more corporate payments. That was the thought earlier in the year. We knew we were going to write a big check for Alpha, which we did. And as Peter, our CFO, said, we expect to end the year, call it, 2.8x leverage after you account for the incremental debt and the checks that we wrote there as well, right? So originally, it was, hey, what happens if another acquisition opportunity came down the road that we want to do shortly after we did that deal, where would the liquidity come from? So we looked at some of these assets and our books are in the market today. first round bids were due back last week, this week or something along those lines. And if we can get some decent prices for them, they grow at or slightly better than that part of the business average. The profitability of them is quite good. But today, given where the stock trades, well, maybe it doesn't make more sense to go back and use that liquidity to look for other acquisition opportunities. It might make more sense to buy back shares at the current valuation, right? So we're not liquidity constrained. We was never done or considered to need to be done to be able to buy Alpha. It's really, okay, how do you create the most flexibility after that deal closes to make sure that you're in a position to be able to do what you think is right for shareholders and what you want to do.

All right. That makes sense. And so looking forward to the update. And I think from last call, I think you shared it's -- you're probably going to see some outcome within 90 days of the earnings call.

We'll know a lot more in 90 days when we talk in February, whether it's, hey, what the likelihood is of one or both of those things closing or the initial bids weren't what we expected them to be, and we're happy to keep those assets. But we'll know a lot more when we talk in February.

Right. And it's not contingent upon being able to sell both of them at the same time, right?

Two separate processes. One is larger, one is smaller. Obviously, the smaller ones are easier to -- the checks are smaller and easier to get done, but we'll see. We're not running a fire sale. These are still very good businesses that we're happy to continue to own. But if there's an opportunity to remix faster towards more corporate payments and/or buy back more shares of a high-quality company at low valuations, that could make more sense.

All right. And I guess maybe quickly touching on lodging. What are some of the steps you're taking to maybe revert the sales back to the level it was in 2023? Or maybe like if it turns out to be like a secular slower growth business, what will help you make the decision of whether to keep the business or divest it at some point?

Yes. I mean this is just a lack of sales. We just haven't been able to recreate or regenerate the sales effectiveness necessary to drive the growth we would expect in that business. So we've owned that business since the company went public in 2010. Until the last couple of years, it's been a double digit, sometimes even a 20% grower over that time. Certainly, the last couple of years, that has not been the case. We think it's mostly an us problem. right, as we continue to work and reinvigorate the go-to-market activities, getting the right salespeople in place, getting the right sales motion in place. We believe we can get that back to double digits. But to your point, as Ron mentioned, I think, on the May call in response to a question, we're not interested in owning a business that can't grow double digits. So if we run another year forward and we don't feel like we're on the trajectory to achieve that, we could make a different outcome. It's still a great business. It runs at better than corporate average margins. It continues to be accretive to the overall results. But it's -- we need to do with it what we did with U.S. vehicle and get it back to a place where it's just consistently producing results that are in line with expectations. So we don't have to keep talking about, okay, what's the problem? And what are you going to do to fix it.

All right. That's awesome. And then maybe just picking back up to the corporate level in terms of capital allocation, I guess, between investing sales growth, other M&A opportunities and share repurchases, you certainly touched on some of this. And I guess from just your recent conversations with the investors, what are some of their views on where you want your leverage to be, whether there's an appetite for that to go above 3x or maybe go lower?

Yes. As we kind of think about capital allocation, right? This year, we're going to generate in the order of something about $1.5 billion in free cash flow. And from a technical free cash flow definition, there is some volatility there. So we use adjusted net income as a proxy for free cash flow. Right? So I think $1.5 billion or so. And from a capital allocation standpoint, we already invest organically at what we think is the efficient frontier. The idea is to deliver 9%, 11% organic growth to be able to do that consistently over time. That's what we're trying to build plans to do that today. Generally speaking, the next and highest best use of every incremental capital dollars in accretive M&A, right? We're good at it. We've done roughly 150 deals in the company's history. It's a competitive advantage for us. And we've been able to create a lot of value on that. But as I kind of describe it, the last gating factor when Ron and the Board are deciding on whether or not to do a deal is how do we feel about paying you a relatively high multiple you're subscale asset versus buying back my own high-quality company, this is trading at relatively lower valuations. Sitting here today, that bar is much higher for incremental deals. So I think you would expect us to be much more buyback heavy in this type of environment where the valuation -- relative valuations are where they are today. But we're not constrained. We have the ability to do both. Certainly, delevering is another option, and that's probably the least likely outcome, even though that's likely how we will give our outlook next year is assuming delevering, right? And oftentimes, we would -- most of the time, we would only delever in anticipation of doing another deal where we need the incremental capital, right? So we get very high marks for our capital allocation history and diligence and creating significant value and being opportunistic and buying back shares when it makes most sense and buying companies that create incremental growth going forward when it makes the most sense. we can do both.

Right. Awesome. Jim, I'd like to open this up for any audience Q&A. If you have a question, feel free to raise your hand. If not I have a final follow-up for Jim. All right. I guess you've had -- we had a dinner so well attended last night and a lot of investor conversations. Anything you feel like still misunderstood you want to emphasize or?

Yes. I think for us, it's probably the biggest thing is if we deliver 10% organic growth this year like we would expect to do, well, if you look back over the last 5 years, we've done that for the last 5 years. Yet we continue to get tons of -- or not tons, but some questions on the durability of the organic growth model going forward. I think it is a bit misunderstood of just the durability of the economic model, the businesses, the highly recurring nature of the businesses today that generate a lot of cash that provides a lot of optionality. So it's something we've done since the company went public in 2010 and since before that, we would expect to continue to be able to do that going forward. Ron, our CEO, has run the company for 25 years. He's not going anywhere. He is the glue, if you will. And for us, that 9% to 11% is kind of the benchmark. The ability to deliver that with some operating leverage and significant free cash flow gives the ability to deliver EPS growth at mid-teens plus. That's what we're trying to achieve.

All right. Perfect. Thank you so much Jim.

Thanks. Appreciate it.