WEX Inc. (WEX) Earnings Call Transcript & Summary

Hello, everybody, and thanks for joining us. We've got with us today, CFO, Roberto Simon, from WEX; as well as Head of Investor Relations, Steve Elder. So gentlemen, thanks so much for joining us today. Really appreciate it.

Thank you.

Great. Maybe we'll hop right in. And I wanted to ask about kind of current volume trends. Obviously, it's pretty topical right now. You had some good color on your recent earnings call. Can you just kind of walk us through what you're seeing in the environment now in your portfolio now in terms of performance and volume metrics?

Of course. So if you recall from the earnings call 2 weeks ago, the trends didn't appear not to be getting any worse through the end of April. What also is important is that with many states now beginning to reopen, even if it's a first couple of weeks in May, we are seeing some improvements on the volumes, and we are careful now that this will continue as more states reopen. And the other thing I will mention as well, if you recall from the earnings call, our fuel prices in the past couple of weeks have also improved from where we were at the end of April. So when you combine both volumes and fuel prices in the past couple of weeks are really trending in the right direction for us.

Okay. Okay. And maybe you could maybe go a layer deeper in terms of what you're seeing in terms of specific regions, if that's possible, or verticals just kind of take a kind of a layer deeper in terms of picking up your mix?

Yes, of course. So we can talk a bit about the different businesses within the U.S. and then talk internationally. I think that would be a good flavor for you. If we start within the U.S., I would say that the over-the-road business is holding up much better than the other parts of the segment. In the month of April, while the overall volumes were down 20%, on the OTR, we were just shy of 10%, 11%. And obviously, this makes perfect sense. As you know, with the OTR business, consumer products or grocery stores have been strong in the past few weeks while at the same time, we have been experiencing the significant slowdown on the oil and the outdoor manufacturing. So when you put overall, the OTR business, cash performed better than the whole segment. If we talk within also the U.S. on the North American fleet, you know that our customer base is -- it's mainly local fleets. And as you can expect with the government shutting down part of the country is where we have been more impacted. If you think -- I could give you some flavors, one within sectors. So the construction business has continued to be strong and has been the only industry vertical that remained positive compared to last year. And then on the other side, areas like white-collar salespeople have been pretty much shut down due to the government restrictions. Within regions, if we think about the regions, the East Coast and the West Coast are down more compared to, for example, the Rocky Mountain area and the Gulf Coast regions. And the other thing we can say is that both, as I mentioned before, we are seeing improvements in the states that are starting to reopen. And obviously, we are tracking that on a daily basis from an state point of view. And then if we talk about what we are seeing internationally, the international markets have been, overall, weaker than the U.S. Australia has been really very, very similar to the U.S. pattern. And then on the other side, on the European side, our 2 businesses have been performing, the volumes have been lower and this is because, obviously it's not only about what is going on within the countries where the lockdowns have been more severe than here, but at the same time, there has been restrictions on the borders crossing from one country to another. We are also seeing improvements in the month of May. In the past 2 weeks, we are seeing also improvements like in the U.S. So we keep monitoring both sides of the world on that front.

And so some of the non-U.S. geographies, not necessarily Australia, the reason there -- you think that they're weaker, it's just simply that the -- is it that the quarantines there were more severe or the national borders are tough to cross or why is it more different than the U.S.?

Yes. Those are the 2 main reasons. So in some states, or in some countries under quarantine, has been much more severe than in the states. And at the same time also, and I know very well because I have -- I'm originally from Spain, but I know they are having a lot of issues moving goods across the different countries. And that's because their borders are closed, and there's large traffic jams in order to cross specifically for the trucking industry. But again, if I compare to where we were 2 weeks ago and where we are today, the improvement is also significant. Well, I can give you an example in Italy, at some point, we were almost -- and it's a small amount of our business, as you can imagine, but we were over 60% down in the month of April. And now, a week ago, it's because we did a Board meeting with our JV in Europe, there was an improvement of over 20 points just in the past week. So we are seeing that as the countries are opening up. We are also seeing an improvement on the volumes.

I see, I see. And something else in terms of related to mix, and this is something that I'd always been meaning to ask you guys, just -- are your small fleet customers necessarily servicing small business? Or can you have small fleets that are also servicing large enterprise? In other words, how do you see the exposure in your business in terms of the end market exposure, small versus large? Not whether your fleets are small versus large, but do you have any visibility to saying, we're this much exposed to SMB at the end of the day versus enterprise? I don't know if you guys could ever have any visibility to that, but something I've been wondering.

I will let Steve to see if he got something to add. I will give you my first perspective. I think that most probably not the small SMB businesses, and we see it here on the New England area. They are still doing their work. Obviously, there may have less volume because people are being cautious. But they are continuing to do their work unless they are on a lockdown or they are not allowed to do so. I would say that probably the enterprises of the world, they are going to be on a worse position than the small fleet. That's my -- I don't have the information available, but that would be my guess based on what we've seen on the area. And Steve, if you have any other comment, please.

Yes. I don't know that we've ever like kind of tried to answer that question, Ramsey, but I would suspect you, I mean, we've got, whatever, 10 million vehicles in the U.S., 15 million worldwide, something like that. I would suspect, given that breadth, that it's probably going to look a lot like the general patterns of the country.

That makes a lot of sense. That makes sense. And then, Roberto, how are you -- in terms of the data that you're looking at, are you facing a lot of kind of business closures in your portfolio? Are you seeing -- so attrition, obviously, would increase in a context like this. On the other hand, the flip side of it might be that you're seeing some businesses that weren't active maybe returning to activity. So I was just wondering if you could comment on how you're seeing sort of attrition and/or rejuvenation as it were in terms of the impact from the virus?

Yes. Yes. Well, the way I will look at it today and probably -- is that this question is very much interrelated with the credit exposure or the credit losses. And I can give you some color if you want where we are on the credit losses. But so far, credit has held up pretty well. And I mean, the first quarter was decent. And therefore, our attrition rates have also held pretty well. I believe that the PPP program from the government, it's helping the businesses to get through this period of time. So we will have to see what happens when those funds are gone, how the businesses evolve, and how the things are going from there. But so far, the attrition rates that we have seen have not changed dramatically. They are within the norms that we have seen in the past.

And then on credit, which to your point, is very much related. I guess first, is it fair to look at the prior downturn as kind of a benchmark, meaning the prior downturn, meaning the great financial crisis, as kind of a benchmark for the range of credit outcomes in your business? Or has your mix changed to such a degree or other factors have changed that maybe it's not a fair way sort of benchmarking for what's going on today?

Well, I would say 2 things. So #1 is every crisis is different. So we don't know if this one is going to be similar or not to the 2008. What I can tell you is that from the business, obviously, from 2008 to today, it has grown a lot on both ends. On the OTR space, we bought EFS, and we have significantly grown that market. So that part of the business is probably less volatile from a credit loss point of view, especially on the big over-the-road companies. At the same time, the small fleet business, we have also grown it a lot, specifically in the past year, 1.5 years with Shell and Chevron. So I would say to you that if you think overall, yes, the business is much bigger, but I don't think the mix is very much different than where it was. What I think -- if you recall, when we had the earnings call 2 weeks ago, in 2008, the overall fleet credit losses for the full year were 25 basis points overall. And there was one specific quarter that -- where we had 45 basis points. And the reason why -- and Steve knows much more than me on that front because he experienced it in life. The reason why it turns -- it goes quickly, it's because remember that those -- our credit exposure is very short term. So we either collect the receivable or we write it off within 6 months. So it changes very quickly. That's why when we were on the earnings call, I pay a lot of attention to our account receivable balances. Where if you look from December '19 to Q1, our AR dropped $500 million. And then from the month of March to April, where we have already a number, there's another over $500 million decline on top of the $500 million. So we are talking already a decline of $1 billion on receivables. That's really good news because, obviously, that helps us in the collection cycle. And as I said before, because the credit exposure is very short term, you either collect it or not.

And how do you -- this is -- I don't know if -- almost more a sort of a philosophical question. How do you balance trying to recover from the crisis and drive growth and sort of opening up the credit aperture with trying to protect yourself at the same time? Like what -- it's kind of a chicken or the egg type of question. What do you -- how do you know when it's time to kind of open the pipe up again? It's a tough question, but yes.

Yes. Well, it's a tough question. We would like to know the answer every time...

I'll let you know.

Yes. How to open a new account and how to close one before it goes bankrupt. I think that's how much credit we give to a potential or to an existing customer is always a balancing act in any economy environment. Being the economy good and being the economy bad. Because even when it's good, if you go too far away, you can also have a worse exposure or a worse credit loss than in the situation where we are today. So it is just a matter of where to draw the line between granting credit and not. And one of the things that we do and we have improved a lot in the past few years is that we use the scoring models as a first pass, and we don't change the cut-off ranges too frequently. So we go through a methodical process. And if you look over time, I mean the behavior should be very consistent across all the periods.

Okay. I wanted to ask a non-COVID-related question. You guys launched this WEX EDGE product recently. It looks like it opens up to nonfuel spending opportunities for cardholders. I guess can you just talk about that product a little bit? And should we think about that as a compelling growth opportunity for you guys going forward in terms of capturing more of the wallet of your existing customers or other customers?

Yes, absolutely. WEX EDGE, obviously, it's something that between -- last year, Shell and Chevron and now with COVID. It has been a bit -- but it was a bit on the side, especially last year because of Shell and Chevron was so important for us to have those 2 portfolios in place. But let me give you a quick look of what the product is. So it's an exclusive saving platform for our WEX customers, and that provides access to offers that the customer would typically not be able to get on their own. It also provides a convenient way for these businesses to easily purchase and secure those products and services that they need as fleet businesses to run their operations. So at the end of the day, what we do here is we lever or they lever the existing WEX fuel card relationship with this additional offering of the products and services that is very beneficial for their business. And we are looking to bring additional value. That's, at the end of the day, what we want to do with these offers of the products and the services. And at the same time, by saving them time and money where possible. But -- and also allowing them to utilize the WEX credit limit that we were discussing before. So it's a bit, obviously, we want to have more share of wallet from them. But at the same time, they get benefits both in time and money. And at the same time, we get more share or more spend from them.

I see. Okay. And so that entails you guys kind of going out and effectively signing -- forming relationships with individual merchants who you want to include in the plan in terms of offering the discounts and working on an economic arrangement there effectively. Do you see yourselves expanding that kind of distribution utility of the product over time? Or is it going to be sort of more focused on very targeted items that are relevant, maybe to your fleet operators, most relevant to your fleet operators?

I think we will see. But what I can tell you is, I remember, when we bought EFS, Scott Phillips, that was the CEO of EFS at the time, and he's running our overall global fleet business. He already had in place some services or products or offerings, it was not called WEX EDGE, to their customers. So I think it's going to be evolving over time, and we will try to adapt to the needs of our customers, the services and the products that they want. I mean I could think not only being on the merchant side, but helping them as they go from the East to the West Coast, can we help them with -- on the travel side. In hotel inns and hotels and any other things. So I think it's going to be evolving, and we expect that to expand.

Okay. I wanted to ask now about a completely different topic. I know there's some big news that came out on last earnings call, and that's about your decision to not consummate the eNett, Optal deal. I guess can you -- first, just give us an update in terms of where that stands and also just talk about kind of how you kind of came to that decision that, that was the right move to make.

Yes. So if you recall from the earnings call, and Melissa talked significantly about it, we considered the position very carefully and closely with our advisers and our Board. And we came to the conclusion that there has been and is a material adverse effect. And as a result of that, we are not obligated to close, and we don't intend to do so. That's the conclusion that we came and communicated to the sellers.

And this is playing out in the U.K., is that correct?

That is correct. Yes.

Okay. I see. And there's no potential time line or it's just something that will -- the courts will sort it out over a long period of time or is that the way to look at it? Or...

That's the way I will look at it. I mean, when you go through these processes, everything is going in England and whether the sellers disagree with our position on the MAE, and we will let the process play out. We intend to vigorously defend against those claims. But given where we are in the process, it's too early to predict the outcome and the time of when a decision or when there's going to be an answer on that front. I really believe it's too early for now.

That's fair. Let's talk about corporate payments a bit. The volumes there held up nicely in the quarter. Why don't you give us your thoughts, Roberto, on how you see this crisis kind of impacting that business? And maybe what the key drivers there are now versus the future?

So if you recall, I mean, our B2B payment has continued to grow in the last few months or few quarters. I mean -- and if you recall from Q1 this year, we grew 18% and it -- we were -- I would say mildly impacted by the downturn in the economy in the month of April. I mean you saw on the presentation that we were -- [indiscernible] was 5% in volume. It's clear that businesses are spending less. But at the same time, this product is new in the market, and there's still a lot of initial adoption. So even if you have 10 customers, and they're spending 10%, 15%, 20% or less, there's still so many customers that's still out there that if you compare 2 or 3, your overall business is going to continue growing. So that's the way we are seeing it. That's the way we have seen the impact so far. And again like everything in this particular situation, I believe it's going to evolve. And that's why we have put a lot of effort in monitoring all the KPIs in terms of volumes and customers for our different businesses.

And do you see -- I mean, I'm thinking right now, if I'm a corporate looking to pay my bills or automate my payables and utilize electronic payments, I mean, it would seem to be a bit more of a necessity right now, right? There's no one sitting in the office to look envelopes and mail invoices. I mean do you see a kind of a tailwind emerging out of this crisis in terms of accelerating adoption of B2B payments?

I think -- I really believe that that's the case. I mean even let's -- let's be a WEX, or you guys. Everybody is working from home. So the need is there, and it's a matter of how all of us and how the industry is going to tackle the need of the customers with the adoption curve. And I truly believe that there is a huge opportunity in front of all of us in this segment in the coming months. It takes a while, obviously, because the person that is used to be in the office, making checks, first thing he's going to try to do is continue doing the checks. But everybody is realizing now that the pattern is going to change and the consumer behavior too.

And you guys go to market in different channels, basically direct and indirect. I mean can you give us any color on, I guess, channel performance as well as your end market mix. I'm sort of curious, I've been following WEX for a little while now and this part of your business has been evolving, I think especially since you bought EFS. Can you talk about some of the vertical overlays here and as well as the channel kind of overlays?

Yes. Let me give you first a quick overview of the segment, and then we can dig in a bit on the corporate payments. So on the volume that we reported pre-COVID, our corporate payments overall in the segment was approximately 20% of the volumes and 40% of the revenues. Obviously, in Q1, that improved or increased for 2 reasons because the travel volume and revenue dropped but at the same time, the corporate payments business grew. So I wouldn't say that there are any particular industry concentrations for us in these products. We look at what we were discussing before. The accounts payable as the product and the process that is very similar in all of the industries regardless of what you operate, it's the accounts payable process and how to make the payment on the accounts payable side. On the go-to-market, we have talked several times about the direct and the indirect channel partner. So when we go direct, obviously, we have salespeople. If we go indirect, we use the partner channel. The partner channel represents less than half of the total spend, but they have been contributing significantly more on the growth. And obviously, when you have a partner that is doing well, it's going to quickly ramp up your volumes. But overall, it's -- the partner business is still a bit less than 50% of the spend volumes.

That's super helpful. And then on your health care business, presumably, that's relatively well positioned here. Maybe you can walk us through the different mix in that business and how -- what the impact has been there. And I know you've got some products that are probably doing pretty well like your COBRA product, maybe you could just talk about some of the different puts and takes in that segment for us.

Yes. I mean, first thing, obviously, we continue to believe that this business will continue to grow in the mid to high teens. Q1 was another great quarter despite of a few weeks of impact from COVID. Our legacy WEX grew, if I recall, was 14% or 15%, and the DBI business performed still ahead of our expectations when we bought the business a year ago. So the combined business was over 15%, 16%. And what we are seeing on this particular situation today, there are -- I would split it in 4 different things that are impacting, 2 are positive and 2 are negative. I will start quickly on the negative because they are more time related. Obviously, there's less spend on elective and potentially at the same time there are -- there's potential for fewer accounts due to the higher unemployment. Especially on the spend side, this is a matter of weeks as the government steadies in some of their restrictions. Obviously, people will have to get back to the doctor and spend. And obviously, on the unemployment side, we need to see where the bottom is. And from there, obviously, we expect that to improve. On the positive side, in the short term, couple of things. New accounts for special purposes to get employees through this period of time. That's one benefit. And the second one, as you said, is obviously the increase on our COBRA business, that in the recent weeks is growing very, very nicely. But overall, if sitting today with what we have seen so far in the market, we still believe in the long-term growth of the business, and we are very pleased with the performance. In fact, we have continued and we are going to continue investing in this segment here in the U.S., in the half.

Okay. And speaking of making investments, maybe we can talk a little bit, Roberto, about the capital allocation, balance sheet deployment. I mean how are you looking at that going forward? I mean I understand there's been a great appeal on the market. And presumably, maybe some, not to put words in your mouth, debt repayment might be moved up the stack a little bit perhaps, not true. But maybe I'll let you speak to that. Like how is your capital deployment mentality sort of changed over time?

Yes. Prior to COVID, we were expecting to close a significant deal, and now we are in the middle of this. So I would think it's fair not to assume that we will either build up more cash or pay down debt balances in the short term. And just recall, where we closed the quarter. We closed with over $500 million of corporate cash in Q1 compared to $370 million at the end of the year. So we had a great quarter in terms of cash flow generation. But even if I go back on the past 4 years, the company has been utilizing the free cash flow and all the improvement on the free cash flow that we have been having to generate the cash and have it ready for M&A activity that we did, especially when we did EFS, then we did a couple of tactical acquisition in '19. And going forward, obviously, the situation is going to be clearly towards pay down cash and/or debt balances, and at the same time, continue to increase our corporate cash on hand and the liquidity available to us.

That makes perfect sense. And then why don't we also talk a little bit about the expense side of what's going on right now in terms of some of the measures you've taken to reduce expenses. And I think the question that is on folks' mind is this isn't just specific to WEX, but it will be very interesting, obviously, to get your view. How much of what you're seeing now in terms of kind of tactical expense reductions might prove to be a more permanent, stickier reductions, kind of as we go forward?

So the way I would characterize the cost cut is like an adjustment to the structure of the reality of the volumes we are seeing in the short term. So everything that we planned earlier in the year and in the past quarters, they had a reason. There was a reason behind those planned investments. But as we -- as the economy starts to come back and things start to move back, I mean, we should expect, over time, as we have seen that improvement to reprioritize some of these expenses and investments and slowly bring them back as our volumes improve. But at the same time, as a management that we run an organization, we always try to free up some capacity to continue doing investments. I mean let's remember, we -- our goal of continue growing this company on the long term, 10% to 15% in revenue, doesn't come free. And we need to reprioritize all our investments. And obviously, if we can continue doing things on cost reduction, which we have done it in the past regardless of this situation, also reinvesting in other areas to make sure that our growth, if not the same, accelerates. So I will see it like in 2 phases. Volume, the structure has changed in the short term due to volumes. And as the volumes start coming back, we are going to be reprioritizing all these investments.

Got it. Okay. Unfortunately, we're out of time. It was short and sweet, unfortunately. But thanks, Roberto. Thanks so much for being here. And Steve, I appreciate your time as well. And take care, guys, and we'll be in touch.

Thank you so much.

Thanks, Ramsey.

Bye.

Bye-bye.