WEX Inc. (WEX) Earnings Call Transcript & Summary

Good morning, and welcome to the virtual Wolfe FinTech Forum fireside chat with WEX, hosted by Wolfe's senior analyst covering payments, processors and IT services, Darrin Peller. [Operator Instructions] And now I hand the call over to Darrin.

All right. Thanks. Thanks, Dociana. And then thanks, everyone, for joining again this morning. I know it's an interesting world that we're living in right now, but moving to the virtual format, we thought, was the right thing to do, just given, a, the number of travel restrictions and cancellations as well as, b, really just everyone's safety and really taking that as the most important part. So look, with that said, I just want to thank you all joining and most importantly on this, I want to thank Melissa and Steve who are with us now on this call. Melissa, the CEO of WEX, which is a company that we've been covering and recommending for some time. So Melissa, thank you again for joining us.

Sure. Thanks for having us.

Okay. So why don't we start off, I think, really just to get to the key point of what's going on in the world. I mean your recent preannouncement addressed what you were seeing at that point in time around the coronavirus, obviously. You have an OTA business that has -- I think it generates around 10% of your revenue. Frankly, your update was really almost exactly in line with our estimates that we had published right before that. But since then, we've, obviously, seen more traction around it. Unfortunately, more spreading around it in the U.S., and we've also now seen this price war with -- on oil. Maybe just start off with if there's any updates you want to give or any way you can help us put some context around your assumptions you took when you updated your estimates recently.

Sure, sure. So when we gave our updated guidance, let me talk about what we were seeing in the business and how we came up with the numbers. So in January, we saw very targeted, very small amount of weakness in a couple of countries in Asia. And Feb -- as you progress through February, you saw more pull back in travel in Asia, including traveling in Asia from other regions. And then as it moved into Italy, you started to see weakness in European travel. So when we came up with our guidance estimates, it was not just taking what we were seeing at that point in time, but assuming that you could see that trend continue. So the weakness particularly in Europe continue into March. And in terms of what we were seeing in the fleet business, it's much smaller scale, a little bit of targeted softness in the over-the-road part of the marketplace, which we think was related to -- is not having as much supply to deliver coming out of China. And so we call those 2 things out, and we had also included in that some softness from fuel prices. The way the fuel prices tend to translate into what we see, there's typically from a drop in crude, there's a period of time between when that drop actually translates into the retail price at the pump. They tend to be a little sticky in holding on to retail prices over time. And so we do think, if you see that drop in crudes continue, you'll see that cycle through the business, but there's a lag of when it happens.

Okay. All right. So right now, I mean, based on your prior update, it doesn't sound like -- given there's a lag effect even on oil to the actual pump prices, that there's that much different versus what you announced, maybe even a week ago. I know it's been so -- things are happening so quickly.

Yes. And there's a lag in travel too because we're seeing not just what people are -- we don't see the bookings we see when somebody is checking out on the travel side, and this is a lag between when we -- what we see happening in our business.

Okay. All right. So we'll have to wait and see. I mean, look, I think a lot of the market is just based on how the stock is trading. It is assuming that there's more to come just based on the spread to further parts of the world and travel being more significant. I mean it may be too early for you to know right now, but I mean, I think at this point in time, your recent preannouncement helped at least. But it was really just first quarter primarily at that point, right?

That's right.

Okay. Any quick updated thoughts on this -- while we're on this topic, on the eNett and Optal deal? Just given, obviously, that's still heavily focused on OTA, on travel. I think Bookings their largest client. Any thoughts on either the valuation of the asset or anything else you want to comment on?

Yes. We like the asset strategically for us. If you look back in the previous type of issues, there's been a snapback in travel. It takes 6 months. So it doesn't happen immediately, but you typically are seeing kind of V-type of pattern that happens regionally. And then having that travel rebound at the end of that period of time. And we're still all waiting to see how this plays out. But that's what -- if you look back in history, that's been a pretty consistent pattern. It's going to be, for us, still a period of time between now and when we actually would close the transaction because we have to go through both regulatory approval and prepare for our financing. So there's some steps between now and when we close the transaction. And then the other thing I'd say is just a reminder, that announcement, we had locked in the number of shares and those shares were locked in at the VWAP price 3 (sic) [ 30 ] days prior to announcement -- prior to sign. So the shares that were locked at the price -- our share price at that point in time. So inherently, there's been a change in the valuation as our stock price has changed...

Okay. All right. That's helpful. All right. Why don't we take it a step forward now in terms of beyond just the very real near-term coronavirus impacts? When we think about the bigger picture here, I think it's important just given, God willing, we'll be through a lot of this stuff within this year. And yet, there's a huge dislocation in the market on valuations versus perhaps '21 earnings power or beyond. So maybe just start off, if you can update us on your view on WEX from a longer-term standpoint. Around what kind of mix the revenues you want to see, maybe, a couple of years out between fuel, travel, corporate payments and health? And maybe if you want to just quickly give us an update on the potential profile of each of those segments longer term, again. You guys have given some guidance, but unless something's changed, maybe just refresh that.

Yes, sure. So I like the way that the business has become diversified. So the unifying theme for us is we want to make sure we have the best-in-class products, and that we're providing a really quality service experience since we really have focused heavily around the technology and making sure that we're the leader from a tech perspective in each of the markets we're in. But the markets themselves are large markets, they're growing markets. And so from a long-term perspective, we like the way that we're able to differentiate in particularly industry verticals. Fleet for us has been -- it's a very predictable part of the business. We win new business on a consistent basis, and that's based on product differentiation. We're more of a dominant player in the United States, and so we've still got expansion capability in the rest of the world. But that business for us grows at a lower rate than the other parts of the business. But think of that as kind of a steady good cash flow generator, where our differentiation is the way that we win in the marketplace, and we're coming off a really great year. Last year, we had strong growth in our fleet business as we brought on the Shell and Chevron portfolios, which we're continuing to see the benefit of the first half of this year and then it's embedded in the business thereafter. For us, travel is a way to expand the business on a more global basis. It is a part of the marketplace that we have good macro behind us, as you see, good growth rates in that part of the industry. And we already have relationships with the largest online travel agencies in the world. And so we think of that as a continued avenue of growth for us as we can extend and do more for the partners that we're in that part of the business with. And then on the health care side, it's been a really great growth story for us. It is a market that is growing almost regardless of what happens around it. So as you see, continue to see increase in health care costs, see more and more of a movement, thinking of HSA accounts as a wealth management tool. And so you've got new partners that have entered the marketplace associated with that. And so from a growth perspective, we've got really great macro trends behind us. So each of these markets are in large markets. There's still a lot of market share to be had and each of them are growing.

You talked about medium term -- I think your medium-term guidance talked about 4% to 8% growth in fuel, travel and corporate being 10% to 15%. And then the health side, being, I think, 15% to 20%, if I remember correctly. Is that still the way you think about the businesses? Anything different?

Yes. No, that's how we think about the businesses. And from a long-term growth perspective, we said revenue would grow 10% to 15% and earnings 15% to 20%. And if you look back at our history, we've been a little above, actually, the top end of revenue growth number and in the range of our earnings growth. Fuel price just caught.

Okay. Yes, yes, yes. On that note, just before we -- well, let's get into the fuel segment on that note actually. I mean the company has clearly done well from a market share standpoint, right, whether it's Chevron or Shell or just other even smaller-sized businesses. Are you expecting this market share shift to continue? Are there any other larger players out there you can see moving over? I mean just -- again, you're saying 4% to 8% growth organically, the overall market seems to be growing more in the low single-digit range when you look at just transaction growth.

Yes. We continue to win business. We continue to have really strong pipeline. That is an unusual -- it's an unusual year to have both 2 of those large private label portfolios come together in one. But we do -- we periodically win private label portfolios. But on a day-to-day basis, we just continue to bring in new business, and that's really on the strength of the products that we have in the markets that we're in. We also continue to bring in new portfolios in Asia. And so we've added into our private label portfolio mix there. A lot of them we don't talk as much about because they tend to be startup portfolios where we've got people entering the marketplace that don't have a large existing portfolio, but we think of that as a positive to long-term growth trends.

Okay. And just to be clear, I mean, from a fuel price standpoint, again, you're saying some of the near-term changes are not going to necessarily show up in the pump on the retail price side for the medium term. In fact, our energy analyst, actually, some of us at Wolfe think that at the pump price, they may not change so dramatically just given there's maybe offsets, actually, just given people may not be travel -- flying as much and there may be more vehicle usage. And so it's hard to tell exactly, but when we think about your fuel exposure, it's what, 20% of your revenue is driven by gas prices, if I remember it correctly or about that? Is that about right?

Yes. 21%, yes.

Okay. And so when we think about your ability to offset swings on that front, can you just touch on, you, as a CEO, how you think about pulling that lever if necessary just given the dramatic move we had yesterday?

Yes. When I think about fuel prices, we manage the business, really, thinking about it more fuel price neutral. But we're cognizant of what's happening from a macro perspective. We actually really started limiting hiring second half of last year. We started to see softness in same-store sales trends, which were down about 3% in the fourth quarter. We started to limit hiring just because that, just in case, what was happening to the economy. And I think that that's been a good thing. That seems to have [indiscernible] at '20. So for us, it's more making sure that we're not adding into the fixed cost structure. There's a little bit of variable costs that go with their travel business as we use an outside processor still for a piece of that business. And then we will continue to look at how are we investing money, making sure that we're investing in areas that we feel like we're going to continue to grow in the long term, so not to be over-reactive, but also be cognizant of what's happening in the environment today.

Okay. All right. So just going back to the opportunity around market share. I mean so it sounds like you've, obviously, done well. You continue to expect that to proceed that way. I think I even asked this on your earnings call, but any nuanced market share shifts you're seeing maybe because of the FTC tie-up with your competitor?

I wouldn't make a direct correlation between those 2. I think that part of why we do win in the marketplace is, there's an element of trust that's required within these private label portfolios because we represent their brand. And so I think that the -- our brand has historically been viewed with a lot of transparency, thinking about things from a long-term perspective. And I think that does play into how we win, particularly the private label portfolios. If you look at a lot of the existing portfolios we had, we've extended them to 10-year agreements. And that's -- I think that's a testament to that. But I wouldn't make a direct line to the -- to that happening.

Okay. So just good service and, obviously, offering more products, it's not really, from your perspective, a big inflection or shift because of your competitor going through some things with the FTC or anything along those lines?

No. I think that -- I think people are making choices that are based on their own research and their own set of business needs. We often win -- the private label portfolios is a combination of brand and knowing that we're going to represent their brand well and also the ability to grow their portfolio. We've got a really good history of being able to bring something into the fold and changing the growth profile.

Okay. Just when we think about your growth rate -- again, if you go back to that 4% to 8%, just to wrap it up somewhat on this segment before moving to the others. Can you help -- we get this question a lot. Just help us bridge from what's generally been same-store sales growth that's been relatively low in the industry to your 4% to 8%? I mean is it -- how much is it pricing? How much is it new businesses coming on? How much is it maybe WEX EDGE, which we can talk about also and what that might be adding in new products? Just if you can give us a little more color on that.

Yes. The biggest driver for us is just unit growth. And you can see that in our history that we bring in more business. And as we add new customers to the mix, we're getting a benefit of that. And I'd say that's the biggest driver for us. There's a little bit as we add new products in, that I would put that in the kind of the smaller category compared to this new business.

Darrin, I'd add that it doesn't necessarily have to come from somebody else, right, there's still 1/3 of the commercial fleets out there in the country that are basically all small businesses, but they're not using a fleet-specific solution. So displacing a general-purpose card or cash still happens quite frequently, and you can still penetrate that base of...

Is that what it is? It's only 1/3 at this point that -- or there's still a 1/3 left that's not using one of the fleet programs?

Yes. I mean it might be 30%, but it's up in that range, yes.

Okay. That is helpful. And what about pricing? I mean I know you touched on most of it being just unit growth. But has pricing been a driver for you guys? And do you see that still being an opportunity?

Yes. We think that pricing is just kind of business as usual now. We look at where we are in the marketplace, and we've made some tweaks, but we don't think of that as a large driver. Think of that as a small driver for us.

Okay. And then WEX EDGE. Again, we hear about other products out in the market, adding growth rates. I mean how far along are you on what you want to be in terms of testing this? How has it been progressing and resonating with clients?

Yes. So WEX -- so I think of this as a product spectrum for us. WEX EDGE will launch in the second quarter of this year. So it had done more of a product test, if you will. The test went well, we're going to do more inclusive launch. So we do expect to see benefits from this, but put it in the context of what we're doing is offering an ability for our customers to buy at a discount a bunch of different items that they've shown interest in wanting and needing in the marketplace. So this isn't -- we're not extending to the ability to buy anything, it's buying some very targeted things.

Okay. All right. Let's shift gears just in interest of time, the travel and corporate payment segment, you -- again, you talked about 10% to 15% opportunity -- growth opportunity over the medium term. If we had to break that down, just start off by telling us between the corporate and -- in a normal environment, putting aside coronavirus and travel issues right now, what do you expect each piece of those -- of that to contribute to that 10% to 15%?

So you get back to the individual ones that you said before. So fleet, 4% to 8%; our corporate and travel, 10% to 15%; and health, 15% to 20%. And then this year, we're seeing health really -- we've talked about that being a little bit over 20% because we still got a little de-annualization effects of DBI flowing through.

Right. And I guess, I was getting at, within the travel and corporate piece, which is 10% to 15%, how much is travel supposed -- should be growing versus the corporate side longer term?

So travel, the marketplace is growing 9%. So you can kind of like extrapolate and say that end will be on the lower end of the 10% to 15%, which is what we've seen historically. Now if you add in part of what we'd like about eNett and Optal is that the Asian marketplace is projected to grow much faster than what you're seeing domestically here in the U.S. So over the long term, we think that that part -- that will lift the growth profile of that part of the business. And that corporate payments, much smaller part of the business, growing at a much higher rate.

Right. Why don't we just -- before we get to travel, which has been a big discussion recently. The corporate payment side, I mean, if I remember correctly, that was growing well, well into the double digits, right? What do you see as the -- your strategy on corporate payments, B2B payments versus a pretty interesting marketplace now of private and public companies? What is different about what you guys are able to offer there? And what kind of sustainability do you think there is?

Yes. So there's a couple of places that we're playing, I think, particularly well in that part of the marketplace. The ability to offer the technologies. Again, we kind of go back to, we make sure the technology is the best-in-class, and we've been doing that in a couple of areas. We've done it with financial institutions kind of -- of all sizes who are taking the product that we have and rebranding it and selling it into the marketplace, and that's contributing to the growth. And then we've worked with other fintech players, we're embedding a payment in what they do and the ability to take the technology, offer it through an API, embed it into their core product set and become the payment experts behind the scenes has been another place that played particularly well for us. So I think of those as 2 avenues that have played well. We continue to also win in the direct marketplace, but we have a relatively small direct sales force. And so we've been really emphasizing the partner channel.

Okay, okay. And I mean, from your perspective, is the addressable market one that's still super-early? It sounds like it from everybody else we talk to. But what are you seeing in terms of growth opportunities, still running at the same rate or similar rates what we've seen in the last few quarters? And then when you think about what the pain points are for the adoption of B2B payments, can you just touch on that as well, and how you're helping your clients overcome that.

Yes. I -- when we've preleased, we'd actually talked about seeing strength in corporate payments. It's an interesting market because it is -- still feels like one of those markets that are early stages, that -- there's a lot of opportunity. I think that part of why we're winning with other fintechs is because technologists can talk to technologists. And there's magic that happens when that happens. And so I think that there's been a benefit for us there. The kind of wholesale change in the marketplace where you're seeing migration, we aren't seeing like this kind of massive wholesale change. We are seeing kind of a change in attitude in what we would say is we think that you're seeing people who in their consumer worlds are used to doing things in a more digital way, that are in the workplace that are starting to be open to thinking about facilitating payments in a more digital way as well. But it feels more like a kind of a slower migration in mentality and -- as opposed to kind of this mass adoption. But there is definitely more interest than what we've seen historically.

Okay. That's great to hear. Let me shift to the travel side. Look, it's a topic we're getting tons of questions on, given the short-term questions around travel and coronavirus and some of the preannouncements by Bookings and others. So when we think about the way you guys get paid for this business, maybe just remind us how the business model works. What the exact flow through would be to somebody's -- Bookings numbers or Expedia's or whoever's. I know Bookings actually is not a client yet for you guys, it's potentially over time. But when you just touch on the business model and how it flows through that would first be helpful.

Yes. So it's actually pretty simple. We get paid when people check out, and we earn a percentage of the stay. So think of that as interchange, and then we share a piece of that back with our customer set.

Right. So some of this is probably going to be, in terms of Bookings, that didn't occur or won't be occurring into the second and third quarters, right, depending on what travel does?

Yes. I think the way that I'm, at least, starting to think about this is -- thinking of this as kind of those b's that I talked about before where we see a decline in travel. So that may happen regionally and not all at once. So that seems to be as this is spreading the way that it's playing out.

Okay. All right. All right. So that's something now we're going to have to keep an eye out for. But we should assume it's pretty correlated in terms of the 10%, I mean, maybe on second and third quarter and what we're seeing at those volume levels. To you guys, but to your point, maybe regionally, it will impact differently so it may not be 1:1. It's not global, perhaps, hopefully. As far as the -- go ahead, Melissa.

Yes. We've been -- on that front -- no, on that front, we have seen stability in Asia. It's still down, but it hasn't -- the decline, at least from what we're seeing, declines have stopped. And so that's at least a positive point.

Okay. No, that is. That's good to hear. And then, hopefully, it starts to stabilize here at some point and we get through it on the other side. So look, on that note, looking longer-term now, I mean, this is a business that also, you're saying you're adding Bookings.com. It gives you the scale. Just touch on for a minute again, what is the differentiation you can offer there? And what is -- once you close this deal with eNett and Optal, what is that going to give you guys you didn't have before in terms of scale and differentiation?

Yes. It's both of those things. So as part of what we like about this. It gives us the ability to play off long-term travel trends in regions of the world that have higher travel rates. So we like the growth profile, and you can see that play out in their history. We also like the -- just the sheer scale of the combination of the 2 brands. There's a lot of natural synergies that come together from our businesses. They're running 2 stand-alone businesses now. So we know that by collapsing those together that you actually get synergies from that and then collapsing it with the rest of WEX, you get more. You also have an ability to have multiple product offerings in the marketplace. A better compliance structure globally because we bring things in the United States with the ownership of our banks that they didn't have before. And so we like it from a customer perspective because of the product offerings we can enable, and we also like it from just a scalability perspective.

Okay. All right. That's helpful. Look, just in interest of time, why do we shift. The U.S. health care or your health care business, can you just walk us through what's driving the strength there? And obviously, that's a nice counter -- somewhat counters -- or just it's less cyclical business, to be honest. But what's driving the strength there for the -- in the U.S. business? What are the puts and takes there that are drivers that we should think about enabling that business to sustain at these rates, which have been very strong?

Yes. And I'd say the same things. We've really focused around investing in the technology. We talk a lot about product features that we roll into the marketplace, and that's to make sure that we have the best products in the marketplace. We have gone to market through these partner channels and the partner channels as we've brought in -- people like Voya, MassMutual, Bank of America, these are really great brands that are thinking about the deposit base that comes from an HSA is a really strong wealth management flag. So I think part of why there's such a benefit in this space is you've got really great macro with health care costs continuing to increase, but also new people that are entering the marketplace. So as we add new partners, they bring growth. And then with the acquisition of DBI, just added another channel into the market for us. So we can go into the marketplace directly with DBI and that has been a really strong acquisition for us. It's outperformed what we expected in the marketplace. I think it's a combination of all of those things coming together.

That's helpful. All right. Look, just in interest of time, I mean, we have 5 minutes left, and there's a few questions from the audience. So if it's okay with you, let me take some of those now, and one of them I was going to ask anyway, so I'll just combine it. But I mean, look, the stock is obviously down a lot given concerns around coronavirus, the whole industry is obviously derated. For you guys, there's concerns over travel and there's concerns over now the impact on fuel -- on the fuel segment. I guess, first question would be, it feels like some of this is hopefully short-lived, we would hope, for maybe a couple of quarters, we don't know. But -- I mean the stock is acting as if there's a 30% discount to your earnings power versus -- and potentially even longer term. Do you have any thought on that? I mean is there anything that you think would have to change over your -- in your business functioning from a couple of quarters of lower revenue that would translate into something on '21? Or do you think '21 could be relatively unchanged or maybe even better, if there's pent-up demand? And I guess that to sort of dovetail that question, maybe, Steve, you want to help with this, but there's definitely questions we're getting over the debt covenant levels and where you guys are on that in terms of whether there's a depressed earnings power for a couple of quarters or so relative to your debt levels?

Yes. So I -- what I tell people internally is we focus on what we do every day and the stock price historically has sorted its way out. And in terms of the business, if you look back historically in these travel trends, they have bounced back. So it hasn't been a reset, it's been a bounce back to prenormal days. And so I think some of what happens in 2021 really is dependent on that. For us, again, that's only 10% of our business. Our fleet business is really quite predictable. And our health care business is doing great. So the -- in fuel prices, even if you kind of look at the impact of fuel prices, I think if you translated yesterday's numbers into fuel price, it's only about $0.25 of impact and so -- $0.25 of fuel price impact, which it should only be like 4% of our earnings. So the -- kind of the market reaction was -- seemed to be disproportionate to the financial impact of our business. But if we keep doing what we do and are transparent with the investment community, and that, for us, has led to really strong results over time.

That's very helpful.

Darrin, I'll just pick up on the leverage a little bit, too, right? So we're at basically 3.5x leverage at the end of the year, and we said when we close eNett, presuming it's kind of midyear, we'd be no more than 4.5x. And so, obviously, as time goes on, we're going to continue to delever until we close it. And so that will be helpful. The company is still generating cash and able to pay down debt. So that will all be helpful. But from a covenant perspective, we've run all kinds of scenarios. We actually have effective upon closing of the deal of a new covenant package from our bank group that takes max leverage up to 5.75x. So if you say we're closing at 4.5x or 4.3x or 4.4x, or whatever the number is, we've got about $180 million worth of EBITDA cushion before we come to that covenant level, which is a lot. And fuel prices aside, that's a lot. So that's a good place to be and we'll -- can stand it. So the longer it goes on, the more cash we'll build until we get there. And leverage should just kind of naturally come down.

Okay. So you really have no concerns from a covenant standpoint in terms of the near term, even if there is a couple of quarters of depressed earnings power?

Yes. I'd say, in that short term, I mean, things would have to get a whole lot worse than what we're seeing right now in order to see a $180 million change. And even that, remember, it's a trailing 12-month measure, so the business would clearly have time to react. Even if we're down a couple of points in Q1 and Q2 is going to get worse, whatever it is, we'll have time to react going forward as well.

So it's just the -- so for us, at least, we're looking for stocks that have some of the more higher levels of dislocation versus '21 earnings power, and it doesn't sound like anything going on now is going to have a material impact on '21, assuming your covenants. The covenants are okay, which sounds like they should be. So I think investors should probably take a deep breath and keep some of that in mind, whether it's for companies like yourselves or even some of the others with some of the reset valuations. But anyway, guys, listen, I want to thank you for your time. We're about out of time now. And anyone in the audience, if you have further questions, feel free to just reach out to either me, and I will forward them or, obviously, you can reach out to Steve as well. The next panel is going to be at 11:25 and it's going to be a panel discussion on e-commerce. So at this point in time, Melissa, Steve, I just want to thank you guys very much for joining us, really helpful. I wish you guys only the best of luck in getting through all these noisy times and scary times. But God willing, we'll all be through this and come out better on the other side. So anyway, thanks again.

Yes. Thank you.

Thanks, Darrin.

All right. Be well.