WEX Inc. (WEX) Earnings Call Transcript & Summary

Hello, everyone. This is Tien-Tsin Huang. I cover the payments, processing and IT services group at JPMorgan, and super excited to have WEX back with us again this year. With us from WEX, we have Melissa Smith, the CEO; and Steve Elder, who everyone knows from Investor Relations. He does a terrific job there. We've got the virtual session, which is very different, so we're just joking about that. Happy to see most of the space live. I see Steve a little more often. With other sessions, we've been doing a fireside chat. So we'll hopefully do the same here, if that's okay, Melissa and Steve. And we'll also allow the audience to ask some questions, pushing the Q&A button here in Zoom. I'll be tracking that. And I'm happy to weave those questions in, but I'm hopefully going to cover a lot of these questions that you might have already because I did the poll and hopefully, we'll get through this in the next 30, 35 minutes. And with that, we'll get started. So again, welcome, guys. Thanks for coming. I hope quarantine life is okay, and you guys look great digitally.

Thank you. It's great to be here.

We -- I figured just to get it out of the way, Melissa, I'll ask it upfront, just -- I'm sure it's limited in terms of update, but your decision to terminate the eNett and Optal deal there. Can you give us kind of an update on what you've heard since the earnings call? I know only a few days have gone by. And maybe give us an idea on the timetable from here, what to expect?

Sure. Sure. Obviously, as we said last week, that this was a decision that we took very seriously. We spent a great deal of time with our Board and with our external advisers coming to the conclusion that we had in there an MAE. We've notified the seller of such. And their course of action, which we disclosed in our Q, was to them file a suit against us in the U.K. court. So now it's going to play out from a litigation standpoint in the U.K. court system. You're on mute.

You'd think I know by now how to do this. Got it. So it's in the hands of the court at this point, and I recognize you guys didn't take that decision lightly, and so we'll track that. From a time standpoint, I'm going to imagine there's still some time to go here. So let's dig into the business. Maybe I thought just the obligatory COVID-19 question. And from a business standpoint, Melissa and Steve, what are you all doing differently to protect all stakeholders here, not just clients but your employees, of course, shareholders. What are you guys doing differently with this thing hitting so quickly?

Yes. It's been an interesting period of time. And our first course of action obviously was to protect employees and to protect our customers. So we moved very rapidly. We were on the early stage of moving everybody to a work-from-home environment. We had the technology and infrastructure in place that we could do that. And now virtually all our employees are working in a virtually and at-home environment, which has gone actually really quite well for us. From a customer perspective, we have planned and made sure that we're communicating and connected to our customers, and that has continued in this environment. And so that first order was that. Second order for us was then really retooling the company. We entered the year, we entered the business with a plan of growth. And we're in a very different environment right now, and so we've made a lot of rapid changes around how we were spending money, where we're prioritizing capital across the enterprise, and so there's a lot of work on that front. Also just in business resilience, thinking of all the different things that could possibly go wrong across the enterprise, across all of the partners that we do business with as well as vendors. So a lot of work on that front. And we feel like we're incredibly well positioned right now based on what's happening around us.

Yes. I know as you were going into the pandemic, things were tracking very well. But I'm curious, as you've sort of reexamined the portfolio here, given what we've learned so far in the pandemic, and I know it's been really humbling for me, any changes or surprises in terms of fitness of the businesses that you have or maybe what you might need more of as a result of the pandemic?

I think we're all learning together, and the -- I don't think that I would say surprises because everything is new. But the parts that stand out for me, on the positive side, the kind of the resilience of the business. If you look across all the different kind of verticals that we're in, we're in a position where we had both our fleet business and our travel business that were being impacted. At the same time, we had a lot of stability that's been happening in our healthcare business and corporate payments. So it's been reinforcing the fact that we're in multiple industries and that we're in lots of different verticals, so that's been a benefit for us as a company. And then I think the other thing that's been a standout is the stability. If you look at the type of customers that we're doing business with, in fleet, really a lot of people that are there, that are first responders, that are really active in any environment. I think the country has been largely locked down, and we're still seeing a lot of stability in what we're seeing in our fleet volumes. And I think that was the part that was probably the least predictable for us.

Yes. In fleet, Melissa, you -- I have to say, WEX had an amazing streak of wins, right, really over the last several quarters going up into the crisis. I recognize we're on a little bit of a pause for now, but how do you think about the shift towards outsourcing as we come out of the pandemic? Do you see a change in the pipeline or the secular speed with which outsourcing has taken place?

If you look across the different products that we're in, the impetus to outsource has largely been driven by people's desire to either have somebody do work for them at a scale that they can't do individually, so there's a benefit to them or just not being able to keep up with the technology and investments that you make in the technology. So those trends haven't changed. And I think in some cases, we're seeing an acceleration, particularly in the corporate payments, where -- on the AP side, where people are more interested in pushing things digitally, where we're seeing a benefit of that. We had our biggest implementation quarter in Q1 where our partners were bringing on new customers. And so a lot of demand in that space.

Got you. So maybe just digging on some of the numbers, if you don't mind. You don't need to get too specific, but you have a great view on what's going on, on the ground. Maybe starting with fleet, can you catch us up on some of the operational metrics that you've seen in recent weeks? Are there signs of stabilization? And is there a path to recovery that you can see at this point?

Yes. And so last week, we posted data by week. And what you could see in fleet was that little improvements week-over-week over the last couple of weeks, and that's continued. So I would call it moderate or small, actually incremental improvements. But it is consistently getting a little bit better in that marketplace. And you can see very large variations in what was happening within the country in the United States here, where the states were locked down, we're down about 30%, whereas some of the other states, which weren't locked down, we're down almost a half of that. So a big variation based on the profile of the state and what was happening. So we do anticipate, as you see some of the locked down states go from -- get out of the lockdown mode that you're going to see some pickup associated with that. And then the over-the-road business has been just more stable. If you think of those customers, they're moving products across the country, and that's continued to be true.

So how about on the risk management side? I think from this earnings season, we definitely learned -- right, there's different levels of credit exposure to bankruptcies, transaction losses, loan losses. How are you thinking about risk management here? And is there a way for us to maybe benchmark or think about how exposed WEX might be? It sounds like you're not seeing too much, but correct me if I'm wrong there.

Yes. We actually started last year making changes to how we thought about credit, and I think we've really seen some benefit of that going into this year. So a lot of work that's been gone on that front, reducing credit lines where you've seen fuel prices drop, we've reduced about $2 billion worth of [ deferral ] overall credit lines and a lot of work that's happened around working with their travel partners. We had about $0.5 billion worth of receivables in that space at the end of the year, which is down under $40 million now. So a lot of work that's been going on and just good collaboration with the customers we have out there. And from a -- just an overall portfolio standpoint, the places that we have seen softness last year, which was in small over-the-road customer set, we continue to see softness in that, I suppose, in the 9 months of softness there. But other than that, actually, the portfolio has held together really well. And these are customers that we've dealt with for a long period of time. They typically pay us before they pay other bills because we're so integrated in the operations of what they do, and so we continue to feel good about the positioning. We've also done work on retailing our collections model, knowing that we're in an environment that's totally different than what we've been in historically, so a lot of work just recognizing the fact that the historical data may not play well in this environment. And so we're getting ready for that.

Right. But you put -- it sounds like you put in some work, at least maybe even back to last year, to -- from a preparedness standpoint, [ punting ] your clients, understanding them better. So shouldn't be too much surprises other than, obviously, things that are outside of your control as things spike?

Yes. And it's a normal course. We've always reinsured some of the larger credit exposures that we have to just -- and box out for us.

Okay. No, that's helpful. One more on the fleet business, if you don't mind. I was -- we've been hearing a lot about offline to online. You mentioned a few products that you've pushed out to help your clients from a fleet side. I think WEX EDGE, I wrote down. I think you also mentioned contactless. So can you expand on that? I mean what are you doing here in this more contactless world, if you will, post-COVID?

Yes. So we have rolled out a product called DriverDash. It's been out in the marketplace, maybe 2 years or maybe 1.5 years. And we are definitely seeing more demand from our customer base. It allows the customer to pull up to a pump, use their cell phone to activate the pump and then pay via the cellphone. It's been a really well-received product. We started with acceptance at ExxonMobil locations and then have added Shell locations, and we continue to add to the portfolio of merchants that you can buy from. And as you do that, it's just -- it's a way to kind of play into the market needs right now as we are seeing increased demand of that product. WEX EDGE is another way of doing that. WEX EDGE was -- the idea is creating a community buying opportunity for our fleet customers so that they can buy things at scale. And some of the things that they can buy in there are tires. It's a really good example of that, where they can go in, preorder tires, prepay, using apps so when then they show up, all they have to do is then get them installed in the vehicles. You can do hotel rooms. You can also purchase some of the other products we have in the portfolio, including our health product set that is available within that same portal. So it's a portal that we'll continue to add in and allow people to buy things that they just couldn't buy at the scale that we can enable for them.

Got it. That's helpful. So let's transition. And I know I want to cover all of your major business lines here. Let's talk about travel a little bit, and we've seen all the data from the OTAs, many of which you service. And I know it's -- you don't have a crystal ball to predict the future of travel, but what about just the secular trend and sort of the potential for more virtual card usage across the travel space. What are you doing to prepare for a recovery there no matter how long it might take?

Yes. So we continue to work with our partners that we have in this space and make sure that we're positioned to pick up the spend volume as it rebounds. We do think that, that rebound is going to take some time compared to some of the other verticals that we're in. But we're also talking to our customers about extended areas of spend that we can participate in, working with them in some of the other products that we have in the marketplace and continue to develop pipeline, add to the portfolio with new customers in the space. So we're continuing to be active in travel as well as we are in other parts of the business.

Right. And I remember you a little bit more -- I know Steve always reminds me that you're a little more exposed to hotels than airlines per se. So coming out of this, do you think that will be different? I'm just trying to understand like how the -- how your product set and your exposures might be different on a recovery.

Yes. So the customers that ultimately where we see spend, they tend to be consumer travelers, so the consumer travelers, largely hotel stays. So our patterns would follow what you see for consumer trend patterns. And again, we do think that this is going to be a longer-term change in this part of the business compared to some of the others, but we continue to work with the partners we have in this space, continue to position ourselves to assist them as they see volume trends returning.

Okay. On the corporate payment side, you mentioned it, Melissa, that does make sense, the pipeline should be building there, right? I've heard stories about how a lot of SMEs, even larger businesses, can't get to the PO box to grab their checks and to manage their accounts payable, account receivable. It all makes great intuitive sense. So remind everyone here because it's so confusing how the space is broken up. But where do you sit in that whole B2B automation spectrum? And how do you think the secular growth opportunity here is going to evolve? It feels like it's going to get accelerated pretty quickly, but I'd love to hear your views on it.

Yes. So we play largely through partners, and the partners that we have in this space that, think of fintech companies, that are looking for somebody who has payment capability. So they're servicing -- they're doing something else in the marketplace and we're fulfilling the payment on their behalf. We're also doing that white label through our financial institution partners. And so they're out in the marketplace, they're selling the product, we're providing the technology that sits in the background for them. And then to a lesser extent, we're going into the marketplace directly. And most of our emphasis has been on these partner channels. And so the places that we play, really is on the technology side of being able to be a technology provider that can link in to whatever it's probably what you're solving and make sure that we have the ability to facilitate payment on your behalf and do that in a way that's highly integrated into your overall offering. So API-enabled, very integrated.

Right. So your go-to-market, have you shifted or maybe even double down on trying to extend your exposure to some of these partners?

So go-to-market for us have been really developing other partners in that space. So I'd say, yes, it's been a big emphasis point for us.

Yes. No, just like I said, there's -- I think thanks to Visa, Mastercard, they've been educating everyone about the opportunity there, and it does feel like you're a big beneficiary of that. So just curious to hear how the pipeline shapes up. So we'll be watching you for that. I guess a similar platform for you -- similar model, I should say, is on health, right, where you work through partners and direct, et cetera. Healthcare utilization is down, but there's a lot more need for assistance on the health side, including COBRA. So can you walk us through, Melissa, a little bit about how the health business should perform here during this pandemic period?

Sure. So we've highlighted the fact that we continue to see account growth in the health part of our business, and that's really just as we've continued to add new partners into the mix as they've continued to grow their portfolios and then what we've done directly through our DBI acquisition. So we're seeing the benefit of that coming through in our portfolio. We do expect -- we've seen spending down in the second quarter, which we think is kind of a noise in the quarter as opposed to a noise in the year as people will largely do the services they need to do, spend the money out of their accounts that they just couldn't do a lot of that, kind of more discretionary spending, with a lot of the shutdowns that were happening here in the second quarter. And then we are seeing this nice build in the pipeline. We're interested in the products, some of which are just our traditional products, but also much more emphasis around our COBRA products, which is -- it's a byproduct that we're producing in the overall economy. So we think that in the second half of the year, we're going to see a benefit of the build that we're seeing right now related to COBRA specifically.

Yes. It sounds like there could be some pent-up demand there on both sides, in terms of the pipeline as well as when people go back to work and get back to go and get elective health care taken care of.

Yes, yes, yes. It's been a -- it's a great part of the business. And I think that one of the highlights for us is just showing how much stability there is in health care in general.

Yes. So I'm not trying to pick your favorite kids here across the business, but just prioritizing travel and corporate payments and fleet, fleet being quite large, I know travel and those with some near-term pressure. Have you reorganized your thinking on investments here based on, again, what we've learned from the crisis?

Yes. So we actually did re-order how we are investing money this year. And we did it with this mindset of this is a different environment than we hadn't expected to date as we entered the year. And so we really have made some pretty dramatic shifts. But when it comes to CapEx, we're thinking about investment across all the businesses that we're continuing to invest. But the levels of investment have varied, where we have really been making sure that we're investing more in our health division. In this environment, we just have a really good line of sight into the benefits of those investments. We're playing into some of the market disruption that's happening in the broader marketplace with some of the transactions that have occurred. It's a good time for us to be investing in our health division. We are also making sure that we're continuing to invest in our corporate payments, their fleet and travel just to different degrees than what we had anticipated with which we started the course of the year. In fleet, you've seen the WEX EDGE was the first rollout. We have other product rollouts that are happening in this year, some of which are -- these are long builds that take a year to roll out. So we're kind of mid-build in some of the products that are rolling. But we feel like we've really retooled our level of investment based on the environment we're in and feel good about the way that we're investing. And if we saw some -- different changes in the marketplace, let's say, that we saw a bigger ramp in corporate payments, we're not afraid to move more money in there.

Okay. You did mention on the call $60 million to $65 million of expense initiatives. Is about 5% of your expense base. I know you have quite a bit of fixed cost in your business. Catch us up on your ability to protect the bottom line in the event of a prolonged recession here, Melissa. Is there more that you can do? I'm just curious where you are with the expense cuts.

Yes. Let me talk a little bit about how we got to the number. So we started operating off from what I consider to be a conservative model of how the year could play out because a lot of it -- I didn't want to be feeling like I was chasing the numbers in the course of the year. It's a lot easier to write it up. And so the actions we took were really, really thoughtful of the fact that we could be in a difficult operating environment this year. And so we pulled out all open heads. We stopped hiring. We pulled out contractors, largely across the business with the exception of WEX Health, and we reduced the workforce by 2%, furlough 3% of the workforce and then pushed out some discretionary costs. All of that was really protecting the growth parts of the company at the same time, so making sure we're protecting sales, marketing what we consider to be the future growth avenues. So we feel like we've taken the actions that we need to take across the portfolio. If, for some reason, we ended up with a situation where that wasn't true, things were significantly worse than -- there's always more that you can do across the portfolio. We're very cautious of making sure that we're protecting the future growth and not just earnings this year but kind of the future profile of the company as well.

Yes. I'm sure you're being thoughtful about that. I remember at your Investor Day, you talked quite a bit about how much of the business on the platform side, technology side that you moved to the cloud. That was a surprise to me. And so how far along are you in that journey to move some -- to move your tech into the cloud? Are there any step function benefits that you see, either from a savings perspective or retention or what have you? I know it's a more long-term picture question. And I know you're focused on the pandemic now, but it does seem important.

Yes. No, we keep shifting platforms into the cloud. The benefits that we've had where we can shut down data centers, which we have done, we see a financial benefit associated with that. We're kind of in the middle of making those transitions, so it's kind of [ income ] clouded by the cost of doing the transitions. But we are seeing performance benefits, cost benefits associated with the moves that we've made so far. This year, we intend to move the over-the-road platform into the cloud. I talked about that earlier this year. We might move it maybe a quarter slower than we expected because of what's happening with the pandemic, but that's still on our path. And then in the corporate payments area, a lot of that platform that actually is -- was built in the cloud, with some components of it we're also shifting over as well. So the migration that we're doing, we've delayed a few things but largely, we're on track. And when I think about all that we're doing on the digital transformation, a piece of that was moving things to the cloud. A piece of it is automating our QA process. We've moved some resources offshore to reduce the cost structure. We streamlined all the tools that our developers are working on globally, so there's consistency around tools and practices. We've enabled the infrastructure so that -- again, consistent infrastructure tools, which has been -- I can't even tell you how important it's been in this environment we've been in, where everybody is using the same Google collaboration tools on a global basis. And so a lot of those things we did over the last several years, which have given us the benefit of scaling the organization but also just making us have a higher quality experience across the globe, both internally but also with our customers.

Yes. No, good. I mean core modernization, digital transformation, big themes in tech. So that's why I wanted to ask. That's great to hear. So I have this on my listen to my questions, but we do have a question in the button here. So feel free, everyone to ask a question, I'll be doing my best to address it. But there's a question here about target leverage, does your thinking on target leverage change given what we've learned so far? I guess it goes along the lines of future M&A as well.

Yes. Yes. We've been public 15 years and think the leverage ranges have moved a little bit based on the environment. Yes. I think that this -- what this pandemic has shown us, as much as we've done lots of scenario plans, what could happen, this was not one of the scenario plans than I think anybody had anticipated. And so it would lead us to be a little bit more conservative from a leverage perspective going forward. I guess it is going to make a wholesale change, or M&A strategy, it's an important part of our growth. We always start with firstly, organic growth, but we think we've done a really great job of bringing in transactions, making sure that we're delivering on the deal thesis and getting value out of that for our shareholders. So the strategy of M&A, the type of transactions we're looking at, that's not changed, but the amount of leverage will probably be a little bit more conservative going forward than we have been. Yes.

Yes. I remember sitting across from you during the IPO process, and we talked about that same question.

Yes.

But I didn't think we'd have 2 months of the kids not going to school. Fuel hedging was another discussion that we had at those tables during the IPO. Fuel prices have come down a lot. It is what it is. But has you're thinking on hedging changed at all?

No. We -- as you remember, when we first went public, we were hedging, and the company was really -- if you look at the products we had, it was solely dependent on our North American fleet business. And so the amount of volatility that fuel prices could have to our earnings was something we felt like we needed to hedge. Over time, as we've seen a migration and diversification of the business, our thinking on that changed, and we just have felt like the hedge itself, there's a cost of the hedge -- or pure economic cost of the hedge. And that we just haven't felt like the protection you get because it's relatively short term was worth the cost that you paid. And our thinking hasn't changed from that. It's been -- our emphasis has been more around continuing to diversify the business and focus less on the kind of the hedging the kind of the artificial instrument, that you can use to protect yourself and focus more on the business part of it.

Yes. No, I think -- I totally -- I agree. So another question here from the audience Melissa and Steve, just -- can you help break out the travel versus corporate volume? It was $6 billion. $2 billion was the mix in Q1. What was it in 2019? Yes, that's the question.

I'll jump in and save the voice of Melissa if you'd like. But the -- from a volume perspective, last year, it was about 80% travel-related, about 20% corporate payments-related. From a revenue perspective, last year, it was about 60:40. So there's some pieces of the segment where we don't report volumes, but we do get revenue. On the Q1 numbers that 80:20 went -- it was between 70% and 75% were still kind of travel-related volumes. Obviously, it came down a lot in the last part of the quarter. So you're going to see that kind of flip around a little bit in Q2. From a revenue perspective, in Q1, the 2 pieces were identical. Basically, they were both $42 million of revenue, so we had about a 50:50 split in the revenue in Q1.

There's also a follow-up with a mix between air and hotel. We sort of touched upon it a little bit earlier, but maybe just also, if you can give a quick answer on that, that would be great. But what other use cases could there be here with cross-border beyond air and hotel?

So the majority of the spend is hotel. There's a little bit of air that's in there. It's primarily in Europe. Other use cases, we know that the product works more on air, more broadly than we're using it. We also note that rental cars, as you think about, as you go up to rental car and kind of the add-on services that can get offered that -- the product has applicability there. It also, if you look across the travel partners that we're in, we're only in a piece of their spend volume now. And so there's opportunity even within their existing portfolios on hotel payments, and then on top of that, vacation rental. It's been another place that we know that the product can play, where there's a lot of difficulty in facilitating payments. And it's a place that we played out a use case, and we feel like there's applicability.

I think that -- I think those are the main questions. I just want to make sure I get this one, too, Melissa, just thinking back to your Investor Day and when I first met you, again, back in the IPO, the business has changed a lot. The business has changed. And looking ahead with corporate payments, it's been defined to be a big space, a lot of potential for penetration. You're one of the scale players there. What does the business look like in 3 to 5 years? Do you think there'll be a lot more industry consolidation to get to scale, Melissa? Or could we see new players come in as a result of what we've seen recently? I'm just curious how you see the industry evolving as we define, I guess, corporate payments broadly.

Yes, corporate payments. I think you're going to see some or all of that play out. The corporate payments market, as you said, it's big, it's growing. For us, it has become increasingly a technology play. So the technology has become an important part of the product, and I would say, increasingly important part of the product. It's a place that we play well, so it's a good trend for us. But in the future, I think you're going to continue to see -- you've got these bigger scale players like us that are in the marketplace that have -- to the extent we have this ability to also act like we're a small company, so I mean being able -- make sure that we're really technology-focused or market-focused. At the same time, doing it at a scale that some of the start-up companies can't do. We like that sweet spot that we're in. We feel like that's a winning combination over time because we have the ability to meet market needs, to be able to be highly competitive in this space but also offer the scale that not many other providers can have in this space. And so we think that this is kind of the sweet spot. But we also think that you're going to continue to see new market entrants on -- offering very specific narrow functionality. And then large-scale players, which will offer kind of more generic functionality, and we want to be the person that's able to bring those 2 things together and offer very clear unique product sets and doing it at a scale.

Good. Good. We have 1 minute left. And I wanted to ask, and I think I've asked you this before, Melissa, but I'll ask it here. So what is the biggest misperception or -- how is the stock probably misunderstood do you think by most investors based on the questions that you get?

I think that people tie us into any particular vertical. Typically, the one that's not performing well in this space. So I think that sometimes people lose sight of the breadth of the offerings that we have and highly sophisticated. I think that also people underestimate the level of sophistication of the products that we have and how they're deployed by our customers because we do business with some of the largest companies in the world, and we pivot and then do business with some of the smallest businesses in the world. And so we're able to take things and make them highly -- very highly sophisticated, but also move them into a more scalable, mobilized formats for some of the small customers. And I think that just the variety of customers who we do business with, the variety of the offerings that we have and the strength of the technology that we have sometimes that gets lost in [indiscernible].

Yes. No, I totally agree. I think what you guys do is tough. Core payments is a big space. There's some scalable [indiscernible]. As I've said to you before, it's a [ fun ] thing to follow and I appreciate the time you’ve spent with us [indiscernible].

[indiscernible]

Hope you're well. Okay, guys, and thanks again for your time.

Yes, thank you.