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

Got it. Maybe I could also use this opportunity to ask for an update on AvidXchange. I think it's a company a lot of investors know quite well from as a public company, now you have a stake. So any update you can give on sort of how that business is performing, how you're thinking about the connection with the rest of the core ecosystem as we go forward.

Yes. So I think it's been a really successful partnership. We bought AvidXchange along -- we obviously have the minority stake. They have the majority, so between ourselves, TPG and Avid management, really been focused on the next turnaround of the business, so to speak. We have been sharing in earnings calls I've been -- Ron and I have both been sharing, right, kind of updates on the business because what we wanted investors to know is hey, so far, so good, right? We're pleased with what we're seeing. We're seeing sales increase. We're seeing profitability increase, et cetera. One of the reasons we didn't -- 2 reasons we didn't buy Avid outright is organic growth would have been dilutive to our corporate payments, so we wouldn't have wanted to do that. And their financial performance would have been dilutive to our adjusted EPS. So time to work through improving the business overall, and I think that's going really well. I would say also, we've learned a lot from Avid. I'd say they really have some really strong products out there and have done really well with products. So those 2 coming together is going well. What we were really focused on in the budget process was reducing focus on, call it, noncore projects and reallocating resources to sales. So we've significantly increase the investment in sales, and that's why we're seeing a return on sales. So I'd say kind of get to the end of the year, let's see what their exit organic growth rate is. And as we see that kind of lift to our line average it becomes much more attractive than we would pull the trigger on an acquisition of the rest of Avid. Now we could buy a portion of it to gain control or we could buy all of it. It will just be kind of a capital allocation decision and performance decision when we get there. But a long way of saying, we're encouraged by what we are seeing.

Yes. That's great to hear. Great to hear. And maybe we can lead that into some sort of the long-term targets that you've talked about on recent earnings calls. So maybe I'll ask about the 10% organic growth first, right? A question we get asked all the time is like, is there the ability or, I guess, maybe the desire for Corpay to lean into certain areas of the business, "Hey, we're really leaning in the corporate payments. That's a faster grower 10% organically." Is there the potential for that to come up from 10% to a number that's higher than that? Or do you really want to manage the business to 10% organic growth because that's more sustainable, something you control more, something you have more visibility in. Obviously, there's always going to be external factors. But how do you think about the balance between a is a steady number that we think we can hit consistently or what we want to drive that higher?

Yes, great question. I would say today, we want investors to underwrite to because it is repeatable and it is durable. We've delivered it 5 out of the last 6 years. We've delivered double-digit organic growth for the last 5 quarters in a row. So I'd say that's the number that we want everybody to underwrite to. When we think about potential upside from corporate payments, I think you're absolutely right that as we rotate further into corporate payments, there's the ability to revisit that number. But until we get to that destination, we don't want to get over our skis, right? We want to repeat we want people to really underwrite to what we know we can deliver. I think it's important to kind of step back and maybe look at our overall algorithm that we've laid out, which we've got a lot of questions about. So 10% organic growth is super critical. We've got a lot of generalists coming into the stock lately and asking questions. Let me just be clear for everybody because I think it would be helpful since this is being webcast is when we do organic growth, right, we're taking out the impact of fuel, we're taking out impact of FX, and we're taking out the impact of acquisitions. So as we look into it, there's actually very few companies in the S&P to report organic growth. And so the question would be, well, like, why do you guys because it's a true measure of the health of business without these external factors. So we did get some feedback, there's some confusion about organic growth. So just be clear about what the definition is. So hitting that 10% is a critical milestone in terms of achieving the overall algorithm. The next piece of the algorithm is 13% growth of profit before tax. And that's really driven by scale of the business. And then the next piece of the algorithm is 20%-plus adjusted EPS growth, right? We're going to deliver 27%, 28% this year. And so we're able to do that not only through the business, but because of the yield of the business and our ability to create additional cash flow yield and our ability to continue to borrow against the business but still maintain a 3x leverage ratio. So that formula is what really drives us to the $50 EPS target. That we've recently shared with everybody. So hopefully, that's helpful in terms of your...

It's helpful and you preempted my next question on the $50 EPS target. I think that was a really helpful sort of like framework on getting to the financial targets, and this is maybe a little bit of an aside, but I had referred to this cross-border teach-in that you had done a couple of months ago and your last answer you asked about -- or you mentioned that generalists were coming and asking for more clarity on certain aspects of the business. Is there a desire or willingness on your end to sort of recognize like, hey, there are a lot of moving pieces, a lot of different business lines within Corpay today, seems like this cross-border teach-in was well received. Do you think you're going to give incremental disclosure incremental teach-ins to help maybe that generalist population that may be less familiar with all these moving pieces, more color in that to how the business is operating.

Yes, absolutely. I mean we made, I think, and hopefully, investors are seeing. We made a significant pivot in our Investor Relations within the last year, right? We've done the cross-quarter teach-in. We have a new investor deck out there, which really points to, hey, what is the future of the company? What's it going to look like as we rotate into corporate payments. We've the road now talking to investors for several NDRs, which has been super helpful. It was super helpful, I think, actually as we continue to refine our story and think about how quickly we divest some business and rotate divest businesses and rotate into corporate payments, we discussed all of that with some large long-only investors who've been in stock for a long time and got their opinions on it, right? So that's been super helpful, I think, in kind of what you're seeing in our thinking today. And then we did our first investor perception study that we've ever done in the history of the company. And one of the top things that came out of it, and it was great because its validation was hey, the company is just complex, right? So corporate payments is where we're focused, but what happens is because there's complexity, we talk about things like lodging, which one could debate. Is that a corporate payments business or not a corporate payments business, right? Or USBP, which is less of a focus for us, much more corporate payments. So I'd say the complexity issue we're really focused on. And then the other thing that we've gotten feedback around, which I think is totally fair is hey, you need to give us better information in order to underwrite corporate payments, right? So when we think about the 10% organic growth, what we think about is, hey, we're going to do 20% sales growth, and that would be 20% of sales off of the base of last year. Our retention rate is 93%. So we're going to lose about 7% of business, right? Some of that M&A businesses going out of business or in some of the other businesses where credit risk, we're not willing to underwrite the business anymore. So now you get down to, call it, 1 million your same-store sales, which is going to be plus or minus 1 and then a little cushion, and that gets you to 10%, right? So I think what would be really helpful for investors is we provided more of that level of granularity, maybe at least on an annual basis came out. So what I would say is we're focused on that.

No, I think all of that would be really well received. And like I said, the cross-border teach-in, I think was super helpful from my perspective. I will ask 2 maybe more thematic questions given this is the tech conference and then I'll open it up in case anyone in the audience has anything. So I'm going to ask you an AI question and a stable coin question. So...

Before you go there, just one thing I meant to kind of cover in the $50 of EP question. And then you're kind of thought about, hey, should the organic growth rate be higher over the quarter. One thing that we've been talking about overall is hey, as corporate payments does become a bigger piece of the business, right, the business should become more valuable. So we're trading at today. We do believe that that's going to lift as we further rotate into corporate payments. So the equal weighted S&P isn't like 16. So internally, we've been talking about 15 and 50. So 15x $50 EPS is like a $750 stock price. So by no means are we giving guidance on the stock raise. I'm just telling you internally as we look forward out the next couple of years, we're optimistic about the future and the valuation of the company.

$750, I think is a little higher than where we're trading now -- that's for sure. So yes, that's super helpful. I appreciate the detail there. We'll ask on AI. I think every company that has been up here presenting has gone the AI question. So maybe you could talk about your strategy, how you are using AI, both on the cost efficiency side of things, but maybe more importantly, in terms of product development, where you're seeing sort of progress in terms of rolling out new products, feature solutions to your clients across any of the particular segments and kind of how you see AI changing the structure of your business over the long term?

Yes, happy to. So maybe focusing on the product side, where we've been focused on AI is an AI agent that can replicate kind of some of the core functions that we're selling into. So think of it as an AI fleet manager. Think of it as an AI AP manager, right? So because we have the ability to see across the best and brightest of the people doing these roles, creating an AI agent that can do some of the function for them and really create value for them. So those are products that are in some level of completion or innovation that we expect to roll out. So we do think that there is value in the product. The next question would be, okay, Peter, you rolled those out, how do they monetize, right? And I think we've got to see what the reaction is to the product before we see monetization, but I think you know us well enough to know that we'll be super focused on creating monetization out of those products. If I go over to the expense side, I'd say where we're most focused on it is with -- in our engineering teams and making those teams significantly more productive because of AI. And what we've chosen to do within the current year is reinvest that money back in the business. we're about to kick off the 2027 budget process. So whether we decide to reinvest that money back into technology or to divert them money in other places or take it to the bottom line, we'll revisit it. But that would be the place that I'd say we've been most successful in terms of expense reductions or productivity improvements.

Super interesting and I'm sure you'll get many more -- many more AI related questions going forward. I will ask about stable coin. It's interesting I was going through with my team and going through our notes from the tech conference last year and every meeting for every company stable coin came up a bunch and I was going through my core pay notes, and it was a ton of stable coin questions. And I don't know how many stable coin questions you've got today. I would imagine it's a lot less than you got last year. Jim is making the finger one at me. Nonetheless, you're going to get the second question here on stable coins. I guess the question is like I don't want you to sort of rehash what you're doing strategically within the cross-border payments business. Maybe I would recall a comment that Ron made, I think it was on the 1Q earnings call when he was asked about sort of demand and what you're hearing from your corporate payments clients, right? I think you used the word -- like it's just not there yet. I'm wondering if that's changed at all over the last 6 months? Is there -- are there any areas within your business where you're starting to see an uptick in demand? Or is it still kind of more just theoretical, something that could happen a few years down the line? Just has there been any change in the overall demand environment with regards to stable specifically?

Yes. I mean what I would do is I would change the narrative and I'd say it's not about stable coins, it's about blockchain. And I think what got lost a year ago, right, with any new technology, somebody is really excited about it, right? And people heard the word stable coin and they thought, "Oh, that's a solution for everything, right? And stable coin is just the tokenized actual currency, right? It's not even the blockchain. And the blockchain is what really creates the value, right? So what the blockchain allows you to do really the 2 advantages of it is to move money 24/7 and to move money to potentially exotic countries, right? So what we firmly believed and now we've kind of seen it played out is there's no way that people -- the major banks are going to see all their deposits leave and go to stable coin providers so that they can mint stable coin and then destroy a stable coin, so they can move it over the blockchain, but rather the banks are going to develop their own tokenized network. So no surprise, earlier in the year, JPMorgan announced Conexus, Citi announced a competitive product. And basically, what they're able to do, and we've elected to go with Conexus is they say, "Hey, we can do a digitized token and we will settle it 24/7." So they're basically -- they are giving the things at stable coin quote that they would bring to the market, the cost of the Conexus network is similar to what we're paying today to move currency on the rails and the cross-border teach-in, we provided the 4 rails. But the SIP, the cost to use Swift versus Conexus is the same. The advantage of Canexus is I can credit you on a Saturday for the money that I owe you. So I think it's really important to people back and say, what is the issue and how do we understand it. So I don't see stable point as a threat to the business. I actually see the blockchain and tokenized deposit as an enabler of our business. Our thought is that we'll move a significant volume on to Conexus by the end of the year. So whether our clients are asking for it or not, we're actually moving them in that direction within our cross-border business. And I think the other thing that's important to understand kind of used this analogy in the past. If you were sitting here today and you called Cardi somewhere in L.A. and said, "Hey, I need you to deliver a diamond ring to me today because I have an important event tonight." When they show up with that diamond ring, you don't turn I'm going to use a New York analogy, but you don't turn the delivery person and say, did you take the train here? Did you take a did you drive? Right? That's the analogy to what the rails are. It's just the mechanism of delivering the value. It doesn't create any value, it doesn't exchange the currency.

Makes kind of sense.

I'm not passionate about the top.

Yes, clearly not. And hopefully, my wife is not in the audience and heard the Cardiome. Well, It could be her lucky night I will open it and speaking of that, I will open it up for questions in case anyone in the audience has any. Yes, I've got a quick one. Scott Barish from Deutsche Bank. I'm the financials and Fintech specialist. Nate did a great job walking through like a lot of the company and where we are, Peter. But I just -- you said you redid the slides a little bit, and I looked at them when preparing for today. And you've got that section of the solutions in there and spend management has such a massive TAM and you've got less than 1% of it now. Maybe talk a little bit about how and what you're going to do to take advantage of that opportunity. and the competition out there because I'm sure the competition is diverse. There's other payments companies, there's banks. Talk about like what you're doing to win some of that opportunity.

Yes. Great question. So really large TAM within spend management, right? We look at spend management, we define that as commercial card AP automation, et cetera, right? So those are the products that we have within the management space. What I'd say is we've seen others like ourselves move into that space and be innovators and capture really high values in terms of transactions for doing it. We love that because what that says is, hey, there's validation, the space needs to be disruptive and that there's value to doing that. And the main owner of the space today is banks, right? Banks are primarily providing those services or in the case of commercial cards, American Express. So we believe on the commercial card side, that we've got an advantaged product because we're able to bring our proprietary networks, either in virtual card or within fuel card into that spend management space. And then if we go over to the AP automation side, right, we're able to come in and provide a solution for a client, where typically the bank is able to provide a part of a solution like they may do the ACH for the client because the client can't do it on their own, but the client may use somebody else to print their checks. It's typically a mix of things there. So that's how I think about where we are today. Something that Ron talked about on the last call was our thought process on moving left. And so what does that mean move left? The thought is that we're going to move left across the value chain and we believe really the big opportunity there for our middle market clients is to come out with a procurement offering that, again, focuses on saving them money and creates value from them. But really, we start further along in the process. So right now, we're primarily the payments piece, but we're going to go more to the beginning of the process and actually help them with they're contracting. And I think when you think about procurement, the places where we think we can create value is things like benchmarking, things like negotiation, things like running RFPs. If you're a middle market client, you typically don't have a procurement department. You don't have access to these things. So with the advent of AI, there's the ability for us to provide this, I think, in a way that will be really helpful for the middle market.

And so just -- I mean, just a quick follow-up. I'm sure there's some other questions in the audience. But is there more that you need like in terms of like, is this a part of area where you'll look to acquire other businesses in here to have a more full offering?

Great question. So I think when we look in procurement, I think there's 2 options, right? It's always buy, buddy or build. So I think the question will be really what's the best option for us and what's the quickest way to market. Most likely, it's kind of a buy or buddy, I would think, just because there's a lot of great products that have been developing -- developed out there by companies that have no customers, right. So our advantage is we've got a massive customer base, let's partner with you and provide the solution.

Zack Gun have seen investments. I wanted to ask first, I guess, I'll call it a trade war with Canada now. Like obviously, that's a pretty big deal just given your business and everything. So is there anything to call it there risk that you potentially see with that? And then also, I'll just -- I'll bring the stablecoin question up again, take it to 3 total for the conference, which is just looking at what the banks are doing and just kind of like open USD, what do you think that they're looking to do with the stable coins and how could that potentially impact your business? Do you think that they'll also look to do kind of the cross-border side of things and just really focus on the enterprise? Or just where do you kind of see that fitting? And like what does it mean for Corpay?

Yes. So really good questions. Sorry, your first question was on because -- yes. So is this a taco or is it not a taco, right? I mean we see this stuff all the time, and the business weathers through it. So I would say we don't see a significant impact, right? If you go back to the cross-border teach-in. What we try to do within the teach-in is kind of provide you how broad the business is across the globe. We operate in 5 geographies, pretty distributed business, right? It's a very dispensable business in terms of one geography has something going on, you're going to sustain within the rest of the globe. So that's how I think about kind of the current conflict. And who knows it may be all resolved tomorrow, right, and change and turnaround. In terms of stable coins, I mean, again, I would drop the word stable coins. The banks are not offering stable clients. The banks are offering tokenized deposits and it's money movement. And this is just an extension of what the banks do today, right? The banks move digital currency and they have been for 20 years. instead of digital currency, now they're moving tokenized currency across the Internet and the advantage of it is a 24x settlement. So we see this as the banks the large Tier 1 banks really providing the capabilities of the modern day. We don't think it changes the view that they are focused on enterprise customers. and they're not focused on the middle market customers. Just the cost of the acquisition for the banks in the middle market would be so different than what it would be for an enterprise. I just don't think the economics are there for them, and we don't see any sign of that. So it's mostly owned by regional banks today.

Any last questions out there? I don't see any hands. So I will wrap up with one maybe high-level one. When you are back at the conference, hopefully in 2 to 3 years' time...

As long as you stay in this location.

Yes, exactly, exactly. I think we will. And you've successfully executed on the strategy focusing on a bigger more simplified business. What do you think will be the biggest differences between the company that investors are looking at today what they'll be looking at 2 to 3 years from now. And I guess, really, it wraps down to like what is the last message you want people in the room, people tuning into the webcast that we've with today?

Yes. So I think there's really 3 things that investors should take away. I think one, it will be a simpler company that's easier to underwrite. Number two, I would say, is it will continue to have a proven track record of performance. So confidence in the algorithm of 10, 13, 20 plus that I spoke to, will continue to be proven, and that will give people more confidence. And then the investors will continue to see that we've got multiple ways to create shareholder value.

That's great. Peter, thank you so much for your time. Thank you for coming out. Everyone give me -- join me in a round of applause for Peter for joining us. Thank you very much.

Take care, guys.