Corpay, Inc. — 2023 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and welcome to the FLEETCOR Technologies First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jim Eglseder, Head of Investor Relations. Please go ahead.
Good afternoon, everyone, and thank you for joining us today for our first quarter 2023 earnings call. With me today are Ron Clarke, our Chairman and CEO; Tom Panther, our new CFO; and Alissa Vickery, our Chief Accounting Officer. Following their prepared comments, the operator will announce the queue will open for the Q&A session. It is only then that you can get in line for questions.
Okay. Jim, thanks. Hi, everyone, and thanks for joining our Q1 '23 earnings call. Also joining us here today is Tom Panther, our new CFO, who is now official, so delighted to have Tom here with us. Upfront here, I'll plan to cover 4 subjects: first, provide my take on Q1 results; second, I'll share our updated full year 2023 guidance; third, discuss progress on our value creation and simplification plan; and then lastly, I'll comment briefly on our newly formed strategic review committee.
first, to eliminate overhang related to the Russia and FTC case; we're working to reduce complexity and present a simpler company; and finally, EV, we're working to demonstrate that we can basically succeed in this energy transition.
first, we are actively exploring the divestiture now of a few noncore assets, so that's underway; second, we're considering moving to 3 reporting segments versus today's 5; and then lastly, we're continuing to evaluate a brand change for the entire company to Corpay that would better reflect really the broad set of corporate payments solutions that we're offering. So expect to make decisions on these simplification ideas over the next 90 days.
Thanks, Ron. It's great to be formally onboard and to have joined the FLEETCOR team at such an exciting time. The last several weeks have been a great opportunity for me to learn the business by spending in-depth time with our people to better understand our markets, products, sales strategies, key initiatives, technology and much more. There is more for me to learn, but the team has been incredibly helpful, accelerating my journey up the learning curve.
[Operator Instructions]
Tom, welcome aboard here. Great to have you. I had 2 questions here. There's a lot to dig into. But Ron, I guess now with the new segmentation, how should we think about long-term kind of normalized growth for the Fleet business now that we've added some other things to that segment? I know in the past, you've talked about the segment being kind of like 4% to 8%. Does that change with the new classification? And perhaps maybe we could also address Brazil in that same vein.
Yes. Pete, it's Ron. So I'd say kind of in the base business based on how we're allocating sales and marketing investment, we're probably still in that target range, kind of mid-single digits. But I think the couple of wild cards on it are AEV, right? Does that thing, particularly with the early view we're getting of the economics, does that help accelerate it along with that consumer leg? And then B, do we get the cross-sell thing to hunt a bit more? so I'd say the wildcard is those 2 things. If those 2 things come in, obviously could accelerate quite a bit.
Okay. That's helpful. I know the toll businesses in Brazil, switching to free flow. I know it's been a benefit to some toll payment administrators here in the U.S. when E-ZPass went free flow. Just curious your take on how that could impact the business nearer term.
Yes, that's a good question. So, so far, it's good news. It's -- for those who don't know, it's pretty early days in Brazil in terms of trying to make the transition to free flow. So they're actually testing it in one region. So the good news on that for -- obviously, for the toll operator is, hey, there's no more gates and stopping people. The bad news is the, whatever, the 20% to 30% of the people that don't have electronic, have a [ clue folly ] way of paying after the fact.
The next question comes from Andrew Jeffrey with Truist Securities.
Ron, I wonder if you can update a little bit on the selling motion as you move up market in fuel. It sounds like you've met with some pretty good early success. But can you just kind of elaborate on what that looks like? Can you continue to go to market using primarily digital means? Is it more kind of feet on the street? Is there a pricing or yield difference on some of those bigger fleets? Just want to try to understand how that might compare to how the fuel business looks prior.
Andrew, another good question. So point one is we already sell up market, so although we don't say it, call it, I don't know, 40% of the sales even in the U.S. business are kind of not digital, 40% to 50%. So we're already kind of in the business is point one. And point two is, I'd say, even more so internationally, we have way longer time and see there with universal networks, so we sold a bigger account for a lot longer.
Okay. That's helpful. And then I like the U.K. mixed fleet disclosure slide from a revenue standpoint. Is it safe to assume that you see similar unit economics or maybe think about it as contribution margin in addition to more revenue? In other words, is operating leverage in those mixed fleet EV offerings?
Yes, I'd say that's way too early to call, right? We've got a tiny, tiny, little EV business and set of assets and cost structure. So our 99% focus at this point is on the revenue side, right, and figuring out how to serve these clients and win. And I don't know if people think it's a big deal, but as I kind of dug through the data, I'll say to everybody, it is a big deal, right, that companies, real clients that we have are willing to pay us more money to be more helpful in more places, and if you look at the chart, kind of significantly more money.
The next question comes from Sheriq Sumar with Evercore ISI.
I just wanted to get a sense on the trends in the month that you saw in the first quarter as to was there a sequential decline in the month of March versus what you saw in Jan and Feb? Or was it highly consistent across all the months? And early read across how trends have been in April and any areas of weakness or strength that you have seen so far?
Yes. Sheriq, it's Ron. So no, I'd say, if anything, the months are increasing, why we're a snowball business where we add more than we lose. And I think -- I don't know, but probably March has more workdays, so it would have been a higher print. And I did call out we've had a pretty good peak here in April, both revenue and other trends that I'd say it's kind of spot on the plan, which obviously fits with the guidance. So we're still just not seeing much. We built a plan, whatever, a few months ago, and as you can hear from the results and the April comment, we kind of track in the -- right where we thought.
One follow-up. On Corporate Payments, if I remember correctly, on the last quarter, you had mentioned that the growth will be around 20%, north of 20%, but now you had like around high teens, unless I'm wrong over here. So I just wanted to get a sense as to what's causing the difference in outlook for Corporate Payments?
Are you trying to pick on, hey, it's 19% instead of 20%?
Yes. No, I thought it was more like 20-plus percent, so I thought it probably was more like a [ 50, 100 basis point ] of decline. Yes.
Yes. If you go back and read kind of prior scripts, I would have said high teens to 20%. So 19%, I think qualifies as high teens. And I did say I think it's likely you will see in 1 of the next 2 or 3 quarters to think -- tick above the 20%. So again, we try to build, design that business to run right around the 20%, plus or minus, so still highly confident of that.
The next question comes from Sanjay Sakhrani with KBW.
Ron, appreciate the commentary on the strategic review committee, and it seems like you're onboard. I know in the past, you've considered divestitures or sales of some of the businesses, and the price simply was not compelling enough. I'm just curious, one, has the backdrop changed in terms of that pricing? Or are you just willing to make the deal in the name of simplification? And then second, maybe you could just talk about core versus noncore, sort of how you guys are looking at this.
Yes, Sanjay, on the first part of your question, the backdrop has changed our value of our earnings, right? So historically, I'd say up until, call it, the last 1.5 years, we traded in the mid- to high teens EBITDA, kind of next 12 months EBITDA sort of trade at, call it, 10, 11x is the first part of the backdrop. So a price from a third party that would be a lot higher than where we are would be more interesting to me than it would have been when we traded obviously at 15% to 20%.
Okay. Okay. And then just a follow-up on the Russia sale. I guess, can you just elaborate a little bit on what specific approvals need -- are needed for the -- from the Russian authorities, I mean, how much time that takes if this presents a risk?
Yes, that's also a good question. So I don't know how many months ago, somewhere 3 to 6 months ago, the Russian government created a separate, I don't know if you call it agency, commission, group, whatever it is, for this purpose of international western companies trying to exit and effectively created a sign-off requirement, almost like an antitrust or something, oversight. And so as western companies like us make deals, right, sign SPA to sell things, then these go to this group, this agency, this committee, whatever it is, and they opine on it. Hey, we're happy to approve this deal; or, hey, we'd like to see this or that.
The next question comes from Ken Suchoski with Autonomous Research.
Tom, congrats on the new role. Great to connect again. It's great to hear the comments on the portfolio review and that you're moving quickly on that front. There have been some discussions going around that FLEETCOR should consider breaking up the business and maybe ring-fence some of the things that might be weighing on the multiple. So I guess, one, what is your preliminary analysis pointing to in terms of value creation as well as any dissynergies that need to be taken into account? And I guess if you were to go through with a potential corporate action, what might a separation look like and how should we think about the timing around that?
Yes, Ken, I'd say it's too early really to try to answer that. We're, whatever, 5 or 6 weeks into kicking this thing into gear and studying it. So we don't really have a super-formed view. I think I kind of said what I said, which is we're underway. We've run, tumbled a bunch of numbers. We're obviously out talking to people. So really, we're just working our way through the options, and as I said, would be in a way better spot for a clear answer to you in 90 days.
Okay. Okay. We'll wait on that, Ron. I guess as my follow-up, can you talk about the trends you're seeing on the corporate payments side? I mean it kind of feels like the current macro slowdown or recession looks a little different than '08, '09 and maybe businesses might be pulling back ahead of the consumer. So maybe you could just talk about how you're feeling about the spending trends in the Corporate Payments segment. And then any puts and takes across the underlying businesses within that segment?
Sure. I'd say that I think we report spend in some of the appendices here and stuff, so it continues to be strong really across the board. I think maybe most importantly is the sales are just record levels. I mean our Q1 sales in our Corporate Payments business was not only an all-time high. It was an all-time high by, I don't know, 50% or something. So we're pouring money into advertising the brand now and reaching more people. We've got more people on the street. We finally have a really put-together product line.
The next question comes from Trevor Williams.
I want to ask on corporate payments in the cross border business in particular. Maybe just a higher level if you could give us a refresher just on what differentiates you on the cross border and the FX side. And now with AFEX and Global Reach, just the main benefits you get with that added scale and then how that feeds into the durability of the growth that you're seeing there?
Yes. That's really super good question, Trevor. The first and most important thing I think I'd say is who do we compete with. So how do we get business and who would we lose business to? And the answer is banks. And because we mostly serve the middle market, it's Tier 2 banks. So it's super important that everyone has that in the brand. We're playing little league. But maybe we're playing Minor League Baseball versus Major League Baseball.
Okay. Got it. And then on the Fleet segment, any help just on how we should think of the cadence of growth over the course of the year? Is the pivot of new sales to the larger customers as those start to flow through? Ron, I think you said earlier on, getting to the mid-single digits. But just any way you could put a finer point around timing and just as we're thinking of the next 3 quarters, just progression of growth in fleet would be helpful.
Super good question. I'd say think of it as just stepping up. So if it's, call it, 3 for the print for Q1, we're going to end middle kind of [ 3, 4, 5, 6, 3, 5, 6, 7 ]. It's going to step up basically based on the plan we've built. So kind of 1 point or so acceleration sequentially.
The next question comes from Bob Napoli with William Blair.
This is Spencer James on for Bob Napoli. The new sales definitely impressed us. Ron, could you maybe just provide a summary of what's driving the strength in new sales and the components of that number and what's driving the strength there? And then maybe if you could touch on how the digital ad environment might -- may or may not be impacting new sales motion.
Yes. I'm not so sure, Spencer, the second part of the question, but the first part, I can cover, which is, yes, it was a crazy good sales quarter, right? We're [ tallying guys ] up 31%, and that's in the face of taking the gas off of our North America Fleet business, right? We used to get, I don't know, 10%, 15% of the business in that micro segment, and I just shut it down, right, to try to contain. So it tells you that the rest of international fleet and all the rest of the businesses grew faster even to 31%.
Great. And as a follow-up, maybe an update on credit and fraud trends in the Fleet business.
Yes. So I don't know if we -- Alissa print that or not. So it's a smidgy bit better sequentially from Q4. And again, based on when we started to take the actions, most of the benefit in terms of improvement is expected in the second half. So we're seeing a lot kind of in our -- what we call our delinquency roll rates. So we're staring at the last week. We have super good visibility into Q2, which doesn't necessarily impact the credit reserve we'll take for this quarter but super does for the following quarter. So we can see that thing really coming down.
The next question comes from James Faucette with Morgan Stanley.
I had a couple of follow-up operational questions here. Retention in the quarter was really strong. I think it was like 91.2% but was down about 100 basis points from last quarter. And I know you just mentioned kind of the credit actions taken. But can you expand if there were any other factors driving that? Is there seasonality, et cetera, that we should be aware of? And how are you thinking about that for the remainder of the year?
Yes, James, Ron again. No, that's it. I mean the reason it shows up there is what we call involuntary attrition, which is about half of our losses, right? So let's use 10% not to hurt our head. Hey, 10% of our customers quit us every year. We quit 5 of them, which means we get uncomfortable with your credit profile and so you're not our customer anymore.
Got it. And then just a follow-up on -- there's been a lot of conversation obviously on segments and strategy, et cetera. But from a realignment perspective, at least as you've redefined some of the segment definitions, any change to how that strategically impacts those businesses or planned go to market, et cetera?
That's really a super good question. Yes. Let me say what I think kind of the insight is, and it comes a little bit from how we started on kind of a product-centric view of our lines of business versus a market rider or a customer-centric view. And I think the Brazil guys that I called out at the top of the call, they've proven that if you want to redefine your business as, hey, I'm going to help vehicle-related drivers make payments, whether they're a business guy driving around or whether they're a consumer driving around, all those things that you pay related to the vehicles, right, fuel, toll, EV, maintenance, stopping for food, parking, now even insurance, that those things -- getting into those shows that the businesses and the consumers believe that our business has the right to offer to provision all of those payment things and having all those things on one account seems like a good idea to them.
The next question comes from Jeff Cantwell with Wells Fargo.
And just to follow up on some of the questions about core versus noncore and you giving us a ton of color on this. I just wanted to bounce something off you and see if you would agree that this is a fair statement that, over the years, amongst Fleet, Corporate Payments and Lodging, there would be potentially a number of operational synergies amongst those 3 segments. And so the clear follow-up question to that would be could you maybe give us some comments on Brazil within the context of core versus noncore. Just curious how that piece of your business ties in with the rest.
Yes, I think Jeff, I kind of just said it. To me, in some ways, Brazil is the lead dog, is kind of the poster child for really how we should think about the portfolio, right? That, hey, when we bought that business 7 years ago, it was mostly a toll-centric business, and it's transformed, right, in the -- like I said, selling 5 or 6 things to the same, both businesses and consumers. And notice how we're selling EV, right, to both businesses and consumers. We're just basically repurposing the networks and the tech. Well, obviously, that's what Brazil has done, right?
Okay. And my follow-up is for Tom. For those of us who have not covered you at your prior, would you maybe just, if you don't mind, give us a sense of how you think strategically and also conceptually about managing the business and so forth? Would love to get your thoughts on what your mindset is as you're coming onboard here.
Sure, Jeff. Look forward to working with you and good to work with many of you on the call that did cover EVO. My DNA as a finance person is really to approach it from a business-centric perspective. I've had the benefit over the last month or so being able to participate in a variety of meetings here, really learning the company firsthand, and getting grounded in how the business operates is centric to how I and the rest of the team within finance thinks and supports the business.
The next question comes from Mihir Bhatia with Bank of America.
My first question just has to do with the consumer EV build-out that you kind of mentioned, Ron. Can you maybe expand on that? Is the idea there to build a FLEETCOR consumer brand? Or are you white labeling? Is the -- I mean, I guess, based on some of your other comments about Brazil, is the thinking there that using EV instead of tolls, you can do something similar on the consumer side as what they have done in Brazil using tolls as the wedge if you will?
Yes, that's a good question. So as I mentioned at the top, the motivation initially here is repurposing assets we have, which are networks, right, in tech. But your comment about brand is a good one. So the first thing I'd say is some of that build initially will be under other people's brands, where we'll be kind of Intel Inside. So what I mean by that is think of us going to an EV car manufacturer. Pick Volvo, Renault, somebody who's making EV cars and they want to give their new buyers an easy way to find public recharging and pay for it. They're going to use our network and our app.
Understood. And then just switching gears to this year, and obviously, you're seeing some sales momentum that you've highlighted. But just in general, as you sit here today, do you think things are getting better or worse relative to 3 months ago? Because there's a lot of conflicting data. I guess, from your -- the data you are seeing, are you seeing any pockets of weakness across your offerings? Or is it really just the macro is the only -- like outside macro is a big question mark for you?
Yes. I know it's the question on everyone's mind, but I guess I'd make a couple of points. So first is our best internal metric here is what we call same-store sales, which basically isolates existing clients in the period that we had in the same period a year ago and just ask, hey, are they getting healthier or sicker, and the answer is healthier. So across our -- across the globe, at least among our clients, they're plus 3% healthier than they were 12 months ago. So that's kind of point one.
This has concluded our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may all now disconnect.