Corpay, Inc. — 2023 Q3

Sure, Sanjay. So it's really mostly in around our Corporate Payments business. And so we have a couple of interesting counter-parties where we might separate something and actually have a pure play that has more scale and synergies and stuff. And so we're kind of in the final mile of working through those conversations and seeing whether there's something there.

Yes. I think generally, the comment I gave is comp. So if you look at the various macro factors and the way we're exiting both fuel price spreads, FX, et cetera, I'd say that sitting here today, it feels like kind of a neutral-ish to maybe a smidge positive. And so obviously, our organic stuff puts that to the side, right, that it is between print and organic. But I'd say I did want to just provide a bit of a preview that unlike this year, Sanjay, with interest rates up, whatever, 400 basis points, that the grow over basically across some of our key profit levers looks quite good. So the setup looks way more normalized than it has in the last couple of years.

It's a great question. Good to talk. We can only get into this debate, Tien-Tsin, tonight. So yes, we've got a couple, I'd say, of additional transactions that we're looking at to fill out a couple of the product lines. But this is -- I don't know how clear I was in it, but mostly an organic play where we get -- we use basically these big consumer active blocks, right, of accounts and just match it up with what we already have, right, which is the payment network and the merchants. And so the million dollar question there, Tien-Tsin, is just that velocity. So when we show 2 million people some additional related things, what's the take rate going to be? So I'd say that most of the thinking, both studying what we've done in Brazil and obviously studying this deal, the view is that it's organic.

Yes. And Tien-Tsin, we wouldn't expect it to be margin dilutive. Again, look at Brazil as our bellwether. It has attractive margins across the rest of our portfolio. So we think that's a good indicator of what the overall business can be as it expands.

To add on to tension, as you know, we're always lower cost, right, than new, new accounts.

Yes. Let me start, Tien-Tsin, just on the segments, yes. So segment one will be vehicle, which will be our global Fleet business, our Brazil business and then honestly, really, this consumer, which is a big part of the Brazil thing today, so the PayByPhone and the other things would be in that. Second business, obviously, Corporate Payments and then third business, Lodging. So those would be the three lines.

Yes. And for your modeling, we're really just combining Fleet and Brazil today. And so based on how we report operating income and how you may model the business at a more detailed level, it would just be a simple summation of those two. We wouldn't anticipate any type of shift in the margin profile. It's just bringing those two together into the vehicle payments segment.

Good question, Darrin. Mostly everything, right, is going well to post, I don't know how many quarters now, 20%. But quite a few from where I'm looking at going forward. And I think the sales inside of the 17% were in the mid-to-high 20s for that line of business, so that tells us that we're selling a lot. There's a lot of demand. In terms of what's working well and not well today, everything is working well with the exception of that channel business, which we've spoken of.

We haven't seen erosion on the supplier level either. We continue to see good network expansion. Cardable spend continues to gradually move up. So the interest level from the merchant side and the supplier side continues to be favorable.

Good follow-up. I think ultimately, Darrin, we just like the business more than some of the people that looked at it. So when you look at the tax leakage and dilution from that, I'd say that we spent a lot of time making that a better business than when we shopped it 3 years ago. And so the premium that we were looking for about what it's worth today, right, to pay the tax, I think people didn't get close enough to where we or I wanted to see the thing. So we feel good enough to hold it.

Yes. Look, great question, Ramsey. So if you step back, our current business is really in 3 markets, 3 countries, call it, 90% of the company. Right here, Brazil and the U.K., so that would be the answer. So we're -- of the $1 billion target, we're, I don't know, $350 million or $400 million consumer payment business in Brazil today and close to 0, right, in the U.K. and the U.S. And so part of this PayByPhone idea was to get a big customer base in the U.K. and in the U.S. where we already have these networks again was the idea. So there's no plan, for Tien-Tsin's other question, for us to go fire a young man to far away places and to try to build a business where we don't have networks and management and stuff. So Brazil, U.K., U.S., in that order, is how we're thinking about it.

Yes. Good question. And unclear, I'd say. We thought -- I think I called this out because we started to see it in Q2. So again, let me go to the top and maybe this will be helpful. So inside of our Lodging business, we serve, call it, 4 or 5 different customer subsegments. So we do things like airlines, insurance, railroads, construction, things like that. So one of those segments is kind of this project-based segment. So think like consulting firms, retail merchandising people, environmental companies. It's only, I don't know, Ramsey, 300 to 400 clients in it. But they field pretty big teams of people. They go to places and stay for a while. So maybe 10 people go to a city and stay there for 2 or 3 weeks. So that's the nature of the business.

Good question, Pete. So I'd say it's been a pretty busy and active, whatever it's been, 6 or 9 months strategic review. So look, the good news in it is when you put out an ad like that, it does generate incremental activity. So we do have, as I said, not only some separation discussions still going. But we've surfaced some additional M&A targets that are kind of interesting in and around the same space as people look to the phone. So look, I think our priorities around capital and leverage are kind of the same. Our target is 3. I think we're running, I don't know, 2.5 or 2.6. We're buyers of our stock. Obviously, at this price, if we grow 9% to 11% next year, we grow the bottom faster. That's a 10x EBITDA multiple for company compounding in the team. So we're buyers of our stock. Let's say, 3x leverage, we'll go higher.

Yes, good question. So if you look at our print for 3 quarters and even into our guide, I think we've stepped up sequentially, as we said, right? EBITDA margin, I think I quoted between 54% and 55% this quarter. And I think Tom and I look at it kind of the same number for Q4. We kind of looked at our plan for next year, similarly, which gives us a little more money because we've kind of gone past some of these capability acquisitions. So I'd say we'll ramp up the sales and marketing investments a bit but look, initially at least, to try to keep the exit of our margin kind of between 54% and 55% as kind of the target for next year.

Yes. It's a good question. So let me start by saying that most of the competition for the prospects that we're trying to get are on business cards. So in the older days, there was cash and house accounts and other things. And now when we look at the customers that we want to have that we don't have, many are on business cards. And some of those are on our competitors' fuel cards as well. And so the idea is really to go to new accounts with a combined -- effectively, a business card and a fuel card in one. So -- and target that against verticals that use fuel cards that have people in the field. Think of like field services like HVAC or construction, things like that.

Yes. I mean, I think you can see it a bit in the KPIs that it's volume. I mean it's really not rate. So in the 2 big businesses there, the payables business and the FX business, it's volume and it's what you said. I think I just quoted it that in Q3, again, I think the sales of those businesses were up 28% year-over-year over the prior, and we had a blockbuster first half. So you've got this huge implementation backlog effectively of new volume, new business that's coming on the books, which helps give us the predictability. A lot of the sales we're making in this quarter or next quarter will obviously be implemented in the spring and the summer next year.

It's Ron. So happening, I'd say, a little slower than we'd like but happening. So again, it's -- I guess, we're about a year into the pivot. I can't remember how clear I said it, but it's worked, right? In Q3, the credit losses in that business went in half from $24 million to $12 million, and our outlook for this quarter Q4 is $25 million going to $10 million, so down $15 million. We have traded a bit of late fee revenue, right, because we don't have those small accounts that are going later or obviously going bad. So I'd say that it's in process. It's been pretty complicated to turn that digital engine to bigger accounts to make sure that they're creditworthy and that the algorithm is working. But we're seeing I think, as I mentioned, sequentially an increase in the what we call [ above-5 ] card market there.

Yes. And I wouldn't also lose sight of the international business. It continues to sell quite well. Year-to-date, 10-plus percent levels of sales growth. So that also helps generate the overall fleet performance that you're seeing.

Yes, there is no margin profile in that business, right? That's been a go-go growth business compounding, I don't know, 20% to 25% the last 3 years in their preliminary plan standalone into next year. Into '24, it's another 25%. It's circa, call it, $50 million next year, call it, $40 million this year, pro forma, going to $50 million, kind of earning virtually nothing. So the -- again, the big idea is what we can do with it, right, which are two things. One, we've got a ton of businesses that are already -- the employees are already using their app here in the United States and in the U.K. So we're obviously going to go to our business clients and hopefully dramatically increase the amount of B2B parking that the company has instead of "consumer parking" where FYI, the rate is substantially better if you're working for a business.

Bob, good to hear your voice. So obviously, there's a few different flavors that we're working on depending on who the counter-party is. There's actually a pretty fascinating structure that we're looking at where we could spin out an asset of ours effectively into a private entity and have someone else combine their assets into the same private entity. We would obviously control and own some fair amount of that company. So we'd consolidate it, work on the synergies, and then basically IPO that a different day. We're looking at another scenario where we would literally put our asset into another company. So there's a few different combinations.

Another good question. They're kind of 60-40 in terms of revenue, but they're both kind of compounding around the same level. And I'd say early days, without Ron pushing too hard, I'd say next year is high teens to [ 20% ] again. More to do to give you that final number. But I think -- yes, I think we believe, given the sales again that we got in the Q and the backlog that come online next year. And then we've got a couple of monetization ideas to get more card, if you will, with some of the accounts. So I think it's -- even though it's big, I think we feel good about the thing just keep getting up and going again next year.

Nate, I'll take that. Again, I'd say the international markets continue to perform quite well, both Mexico, in Australia, Europe, U.K., all of them performed very well. But even within our U.S. business, we saw our enterprise segment do quite well. Even some of the over-the-road trucking was able to do some level of positive growth relative to the overall blended growth rate. So while the international markets carried most of the weight of the positive growth, we did see some pockets within the U.S. business that was also accretive to the overall. As we said, some of the small fleet business is just struggling a little bit in terms of filling the bucket back up with the sales activity as we've pivoted upmarket.

Yes. It's another good question. I think the whole thing turns on the existing active customer file. So the big learning, I think, in Brazil, just to walk back in time, is if you recall there, the original consumer business was mostly tags initially. So hey, you go to the toll booth, you go to a store, you go online and, hey, I want a automatic toll tag, and I get one, and I stick it on my windshield and there it is. And so the big idea a couple of years ago there was to get people onto the phone, to get those same people that had a tag to be on the phone.

And in Brazil, that's over 60% of the customer base is using multiple products. So it's a number where we feel like we can get some really good penetration over time as a significant number of people would do just as Ron described, that use case of I wanted to use one app to service the multiple types of activities and, ultimately, payment transactions surrounding their vehicle.

Yes. Let me just give you one thing, which I found fascinating. You like this or not. But to me, it's a bit of peanut butter and jelly. Hey, you've got a phone in your hand, and you're doing parking, getting to the park here. I'm going to be here for an hour or whatever. And then you carry it away and you go on the app and you extend your time another hour. So I know exactly when you parked, when you're leaving and stuff.

Yes. Trevor, good question. I'd say probably too early a set of days to give you a super good answer. I'd say that we've done more work as we started sooner around the Corporate Payments. And because that stuff sells and then installed later, there's way visibility into the forward year, right? I kind of know what the backlog is as we head home for Christmas. So I think the big question of where we come out is, how much juice from the new, new stuff? So obviously, the baseline global Fleet business has been kind of low single digits the last few quarters. We obviously have 2 kind of big upsides around this new product line and new channel.

Trevor, that's certainly a contributing factor in terms of the synergies that we're able to realize with Global Reach. We did a lot of heavy lifting over the spring and early summer to move on to one platform. We're able to eliminate some of the back office costs, technology costs. That was a significant contributor. And then just the positive operating leverage within the business and just look at the structural dynamics of that business and how the 20% revenue growth against a relatively stable fixed cost base are just going to generate positive operating leverage and drive margins higher. So combination of synergies and structural components would be the things that contributed to that.

Yes. So that's such a mouthful, Ken. So I'd say, first off, we're not sure, right? We've been working at this, and we have a couple of attractive combinations. But I don't want to leave this call where people think, hey, it's a day to complain, and Ron is resting or something. So that would be point one. I'd say they're possible, but I don't want to handicap it beyond that. That's number one. Number two is it depends on the structures again. So one of the structures that's kind of interesting is this idea of us spinning assets into a private entity and someone else. And in that case, it would almost look to me like a FLEETCOR company where we have a minority investor, which we had that world before, so I'm busy thinking about that thing as I am today.

Yes. That's a good follow-up. I'd say not much. I mean there's a little bit of it when FX volatility kind of right softens and kind of where the dollar was, whatever, a few weeks ago. But I'd say it's really on the margin. If you look at again what we're printing there, it's just -- it's the sheer volume growth, which is adding just more clients and more spend. And I'd say we're generally pretty stable, with maybe a smidge softness to your point, here and there. And then remember, for us, the diversity in that business, right?