WEX Inc. (WEX) Earnings Call Transcript & Summary

Thanks, everyone, for joining virtually. For those who don't know me, I'm Ashish Sabadra, senior analyst at Deutsche Bank, covering payments, businesses and information services companies. We are excited to host Melissa Smith, CEO of WEX. Melissa, thanks for giving us this opportunity.

The tough question on everyone's mind is the economic recovery. Can you just discuss, at a high level, how the different businesses within WEX are benefiting from this -- from the -- as the cities are opening up?

Yes, sure. Yes. Good morning. If you look at prospects, a lot of what we do is integral, if you look at our customers, they are first responders or people that have been operating throughout the pandemic. And so we showed a result for April. And ever since then, there's been just a very slight increase within North American fleet. Week over week, we're seeing as states reopen, a little bit of a benefit, I'd say, kind of think of it as kind of moderately better every week. Not really seeing much change what's happening in the travel vertical. And in health care, we continue to see growth in health care accounts. We talked about the facts that we've seen some spend down in health care in April, specific to the lockdowns, where people actually couldn't go and do some of the services that they would normally do, which is something we think just plays out and normalizes throughout the course of the year. And you can see that also coming back.

That's very helpful. And as a key theme, which is very central, is the digitalization. We've seen an acceleration in the pace of this digitalization with COVID-19. Again, at a high level, if you can talk about the WEX offerings? And what has WEX done on the digitalization front as well as how WEX offerings are positioned to benefit?

Yes. On the digitalization front, it was a place that we've been really well positioned going into this pandemic. We had done a lot of work around mobile enablement across our product set. And a lot of the value that people get is because we're digitalizing the processes they have. And so I'm going to walk through kind of across the platform. In the -- a lot of what we do in corporate payments, we're using virtual cards. So think of that as highly digital to start with. Everything is happening in the background. There's more of a demand and digitalization of accounts payable, just as people have moved to a work in the home environment, and we saw an increase in the number of implementations that we had with our partners on the accounts payable side in the first quarter. So we definitely see a pickup in interest on that side. Within our fleet business, there's been more demand. We have a product we've had in market for a while called DriverDash, which enables people to go and fill up, and they can automate the pump from their mobile device, so highly enabled from a digital perspective. We also added in a product recently called WEX EDGE, which allows people to buy other things using our network and to get discounts. And when they do that, it allows smaller fleets to buy things at discount rate that they couldn't do on their own. And some of the things include tires, which, again, they are able to go online, order it through the portal, set up the service experience, pay online and then just show up and have the service experience. So it was a product we already had in our pipeline, but it really plays well into this marketplace. So you had to run across the product set that we have, there's a lot of digital capabilities that was inherently built into the product set. What we're seeing is just more demand and more push to those areas across the different products. And more demand, specifically also just in some of the pipelines we have for future sales because of the product capabilities that we have.

That's very helpful. That's extremely helpful. Maybe just we'll go through each of the segments, just drill down on the fleet payments. You mentioned improvement in the volume there, as states start to open up. I was wondering if you could give any color on verticals. Like what have you seen in construction in particular? I believe it grew through the crisis, there were certain verticals, which were a bit soft. Can you just highlight how we've seen recovery across some of the verticals, anything in particular to highlight?

Sure. Construction actually was the one call out. If you look at the different vertical activity that we had, you would have expected to see oil and gas down. It's a really small vertical for us where we're doing business with our fleets in that industry, and so that was particularly soft. And then construction was particularly strong. And then most everything else was kind of just sitting at the same level. So we didn't see a lot of distinction in our first quarter results based on industry. I think what we're seeing in the second quarter is a little bit more of that playing out as more industry specific. But nothing that I would call out right now. The bigger impact has been around individual states or individual countries. We're seeing pretty large discrepancies and spend behaviors, based on the prevalence of COVID and the actions taken within each of the individual regions. In Europe, it's been more around our fleet side, as countries have been locked down. So you haven't been able to see the same movement across country lines that you have historically. So they've been harder hit. Australia has looked much more like the United States. But in the United States, you see some states are twice as impacted as others in terms of volume. So from a trend perspective, right now, what we're seeing is that restrictions are getting lifted, depending on how early they were lifted and depending on the severity of the impact that they've had and the virus that some are moving out of this process quicker than others. And if you look -- it follows the pattern that you'd expect. So the states that have been most heavily impacted are some of the laggers in terms of what we're seeing for volume spend.

Yes. That's very helpful color. Maybe Melissa, if you can provide any incremental color on your customer base. Just how are they positioned? One of the concerns that's brought up is just any concerns around SMB bankruptcy? And I was wondering if you could provide any color about -- which talks about the resiliency of your customer base?

Yes. Historically, if you look at our customer base, we have the benefit of the fact that we do business with many different companies and of all different sizes. And from a resiliency perspective, because there is such a diversity in the industries that we're doing business with, and because of the geography and the size of the customer, that's been a benefit of ours. And I think that's definitely playing out now. Also, our products are highly integrated into the operations of our customers. And so we have historically found the prevalence of people paying us before they pay others. And so right now, the one place that I had pointed out on the last call, where we have seen a little bit of weakness, is in the smaller section of the over-the-road marketplace, but that really isn't really related to the pandemic. It's been an issue that we've seen over the last 6 to 9 months, maybe longer, maybe 9 to 12 months, in that marketplace just softness because of oversupply. Across the rest of the portfolio, if you look at our fleet segment, it's about 60%, that's our North American fleet business, again, local businesses, but also really large companies that sit in the mix, 25% to 30% over-the-road and 10% to 15%, which is international. In the North American fleet, construction is the largest industry segment that we have. So it's 15% to 20% of that 60%. And then when you get below that, you really get into nothing that's significant. So you're getting maybe 5% to 7% of that 60%. And so there's a lot of diversity. In terms of what we're seeing in the portfolio, we continue to see -- look -- it's certainly a little bit worse than a normal period of time, but it's not seeing maybe big spikes or really large changes in behavior right now.

That's very helpful. And then maybe just a follow-up question on that, would be the credit losses. Those have been very manageable, even during the Great Recession. Losses, I think, were only like 25 basis for the full year. This recession is, obviously, very different, but is that a good guidepost when we think about from a worst-case scenario perspective?

Yes. If you look back, we had 1 quarter -- I think we had 45 basis points in 1 quarter. So it happened pretty rapidly back in 2008, and then leveled off to normal. And it's just, I think, a different environment. We're not -- again, it's a resilient customer base. They tend to have an affinity to the products, then it's tied into the operations of what we do. So we've historically seen very strong payment patterns. And in this case, it's not -- it really isn't the same type of trend that we saw back in '08, '09, where you saw a really sharp economic event kind of a onetime bigger charge for us, and then everything is reported back to normal. I think there's this underlying tension that sits out there across the business because people are a little bit unsure what's going to happen when the stimulus money moves out. But right now, what we're seeing in the portfolio is that there's a little bit of elevated delinquencies, but not -- we're not seeing any big wholesale change.

That's very helpful. And then maybe just a quick follow-up question on the OTR front. You gave some bit color there, particularly in the small ones and some of the challenges there. But overall, the volumes in April were a lot more resilient than the overall business. So how should we think about the OTR business going forward? And I was wondering if you could also provide some color around any difference in performance between truckload versus less than full truckload. Any color on how the OTR business is positioned going forward?

Yes. So on the OTR side of the business, it was very resilient through '08 and '09. And if you look back at how EFS, which is a big part of the business we have now, performed. So it really didn't see much of an impact in that period of time. What we've seen is more stability in that part of the business. And I think when you think about it logically, these are people that are hauling goods across the country, which has still been needed in this pandemic. And we've seen this kind of shift between the idea that some parts of retail had been soft, but that's been picked up by a huge amount of demand and other versions more basic needs type of products that have been very strong. And so those 2 things have played out in the fact that you see quite a bit of stability across the portfolio. So even though one part of the business isn't seeing as much driving behaviors, they have historically other parts who are driving more. And that played out in the volume that we showed you in April, where it was down, but it was down less than other parts of the business. And about half of our total volume is on our platform in the OTR market. So just like put it in perspective, about half the volume in the OTR market that actually uses our products.

That's great. That's great. And maybe just a follow-up question on the digitalization theme. You talked about -- gave a lot of good color about your ancillary products and services, the DriverDash, WEX EDGE. I was also wondering how -- how does the digitalization theme also benefit the fleet payment? Does it accelerate the pace of the adoption of fuel cards among SMEs, where I think the penetration is still continues to be pretty low? Does it open up new opportunities for fuel cards in the international market? Any thoughts around it?

Yes. So far, we continue to see demand in our pipeline. So I think that it's a combination of a couple of things. We -- if you look at the basic product design, it's around making sure that businesses haven't pulled one of their core costs. And when they think about adopting a product like ours, what they're thinking about is, do I really want to give my driver cash? No, and even more no in this environment. And do I really want to give them a general-purpose credit card? And -- no, also is typically their answer as they kind of move down this decision tree. And so a lot of what we have to work through in the small business marketplace is making sure that people understand the option that they have with our products. So there's some education. There's an element of making sure that we are really focused on lead generation. And talking through with small businesses what they get as the benefit of using our products. The addition of WEX EDGE into that, it's just another selling tool to be able to talk to a small business about the fact that not only can you use this to control your cost, but you can also use it to start to build into the ability to buy things at discounts that you can't normally get, and do it in a highly digital way. So we feel like it takes an offering where we've continued to see interest in pipeline development, that just adds to that by extending the offerings that we provide into our customers, but also keeping it contained to the type of things that they really were interested in buying.

Yes, that's very helpful. And any color on the international pipeline? WEX has been winning a lot of new business on the international front, any color there?

Yes. So internationally, the -- it really becomes region specific. So we continue to see our pipeline in Australia, in Europe. And in Europe, again, we're more impacted by country boundaries. So there's a little bit of noise around that in the marketplace. But in terms of continuing to build and add to the base, we continue to see pipeline development there. Brazil less so in this market right now, it's a harder market. So it depends a little bit based on each of the regions, and also on the products we have. And if you step back and say, if you look across our product sets, so we have a bigger pipeline than normal across our corporate payments products, in our health care products, which are U.S.-based and also on the over-the-road market, which is U.S. and Europe. And North America fleet a little bit lighter than normal, and travel, a little bit lighter than normal.

Okay. That's very helpful. Again, maybe just a quick follow up on Europe. You mentioned the softness in Europe because of the country lockdowns. As these restrictions have lifted -- as the lockdown restrictions continue to get lifted, even in Europe, have you started to see some tailwinds there in those markets as well?

We have. Remember, that it's only 10% to 15%. It's a relatively small part of our fleet business. We have seen that improved, not at the same rate as what we've seen, it was starting from a lower base. So the volume was down more in the international, specifically the European parts of our business year-over-year in April, but it has improved sequentially week over week. It's got further to come up than -- because it was starting from a more effective base.

That's positive. And maybe if you can switch over to the corporate payment, that part of the business was very, very resilient in the sense volumes were only down 5% in April. Can you just talk about the drivers for that growth? Is that more because of the payment shifting to electronic channel? Or do you still continue to add new clients, even in this kind of an environment? Any color on that front?

Yes. The AP market is growing very rapidly, and we're seeing a flurry of companies implement various solutions for the first time, and lots of players in the market benefits from that. So when you think about it, this is -- it's a good time to be in the market. It's hard to break apart with a shift in behavior versus new clients and how the market is impacting those clients. So when I think about this, I think about the fact that we're seeing adoption, what we're hearing from our partners that are out in the marketplace directly is that there is more of an impetus to make a change because of the fact that you've got a lot of people working from home. So we're seeing a significant demand in implementations with those partner channels. And we think about that as positive in the marketplace. There's always been an interest in the products. The harder thing has been just the bias to not change. And so this seems to be creating a reason to do something differently. And we feel like we, along with our partners, are taking advantage of that.

And that's great. And then as you mentioned, partners -- partner channel, I believe, is less than 50% of the volume, but it's growing at an accelerated pace. Can you just talk about some of your key partners? Are there opportunities to add other partners?

Yes, absolutely. So when I think about that channel, so partners come in multiple forms for us in corporate payments. One is their financial institutions. We've liked partnering with financial institutions because they are out in the marketplace. They're talking with businesses on a reoccurring basis. And so this is a product that they can add as an extension to the relationships that they already have in the marketplace. What we do is provide the technology in the background, so that they can have the type of experience that they want, white-labeled under their name. We also have been working with other fintech companies that are in the business of doing something else, and what they are looking for WEX is embedding payments capability as they face in the marketplace. So think of that as highly API-enabled facing into the market. Each of those, we've seen benefit on. With the financial institutions, it has to be a slower growth rate, but we have seen growth. And as I said earlier, we saw the biggest implementation quarter in the first quarter was they were bringing on customers. We've added people into our implementation group because we continue to see interest in that channel. On the FI side, the partners that we're doing business with they are growing, and then we do have the ability to add more into that mix. And so we -- as we're looking at our pipeline development and corporate payments, it's a large emphasis on partner channels. We do believe that we can continue to extend the number of partners that we're doing business with. We think we benefit to the partners that we already have. And then to a lesser extent, we're going into the marketplace on a direct basis. We're doing that frequently. We're doing it facing to our existing customers and initial products that people can buy from us. A little bit that we do on a de novo basis, but the emphasis we've had has been with these partnerships.

That's very helpful. And Melissa, you also talked about a pretty solid implementation pipeline, solid implementation in the first quarter. Did COVID and the work-from-home, did that impact any of the implementation, ongoing implementation? Or is that impacting any of the leads going forward?

We had -- on the lead basis, we had probably 2 to 3 weeks where we had to collectively figure it out, us and our prospects. And so we saw a little bit of a lull in the very beginning of moving to work in home, but we've largely overcome that. And we spent some time, in the beginning, making sure that we were really beefing up our ability to sell remotely both in terms of skill, but also in the technical capability. And so from a pipeline perspective, we have continued to see people advance through the pipeline, even larger accounts continue to advance through the pipeline. And as to smaller customers -- so we have seen a little bit of both areas where we think we're benefiting from adding more into the mix. And again, I think that's a lot about digital capability, and then some places where we think things are a little bit softer than what we would normally see, which is related to either distractions from some of the customers that are sitting out in the marketplace from a prospecting standpoint or just the ability to reach. And so again, if we kind of look across all of that, in health care, we think we're benefiting from that. Corporate payments, we think we're benefiting from that. Over-the-road, we think we are benefiting from that. And then on the North American fleet, we think particularly with a small end of the marketplace that, that is a little softer than normal, but we think that's related to just getting people's attention in this environment. And then travel for more obvious reasons, it's a little bit softer than normal.

Sure. And maybe just on the travel, we can't complete the conversation without talking about eNett. I was wondering, is there any color that you can provide on the next step time lines? Will you continue to -- I don't know if you can comment on whether you'll continue to proceed on the regulatory approval as some of these things will get worked out in the courts? Any color?

Well, it's so early in the process. So we don't really have an update on timing, that's going to be determined by the courts in the U.K. We will continue to take the steps required by the contract, which includes pursuing regulatory approvals.

Okay. That's helpful. Let's talk about the health care business. How do you think about the long-term sense for high deductible health care plan, particularly coming out of the crisis? What are you hearing from employers or your partners on that front?

Yes. On the health care plan, we are not really expecting any long-term impact to the growth of HSAs, particularly coming out of that. It's an attractive way for employers to reduce cost and give employees significant flexibility. What we are seeing, though, is a really strong interest in adding partners into the portfolio. So we have a really good partner pipeline. We also have continued through DBI to see a really good pipeline associated with customers there. And then in addition to that, on the COBRA side, which is one of the products we have, we've seen, as you might imagine, a really oversized amount of interest.

That's helpful. And then on the partner side, you already are the HSA provider for 8 out of the top 20 HSA providers. Is there opportunity as you talked about increased interest on partner front? So is there opportunity to do further share there? And also, is there opportunity to gain share of the wallet at existing partners as well?

Yes. On that side, part of the -- what I've been really amazed in this market is the fact that there continue to be new players that are entering the space. And so we do business with many different types of partners. The most recent trend has been adding in both financial institutions, but also more investment players, who are thinking about the HSA market is a good way to add another benefit to consumers out into the marketplace. So adding it and thinking about it as more of a 401(k) account. And so as we've had more players continue to enter the space, and look at this an opportunity, then there had been investment plays, financial institutions, you've got insurance companies. And then kind of going across the mix, you've got a little bit of everything, where people are either looking at the extension of the benefit play or they're looking at it as an extension of an investment play. And so we just have continued to see benefit of adding new partners into the marketplace. They continue to extend offerings into the marketplace on their white label basis. And it's just a trend that as you look at the period of time that we've been in this space, we've been benefiting that. And as we look forward, we think that, that will continue to be a benefit for us.

That's great.

And in terms of the existing partnerships, it's more about those partners continuing to grow. We do think there's an ability, in some cases, to extend market share. But the kind of the more frequent opportunities just having them continue to be in the marketplace, having us supporting their needs, making sure that the technology is playing out in the marketplace, and that we can support the ways that they want to differentiate so that they can grow their portfolios.

Yes, that's great. And then Melissa, you also talked about COBRA that's being a big opportunity at this time like this. Can you just talk about how you build that business? How the Benaissance and the DBI acquisition has further cemented your moat in that particular business?

Yes. So yes, we had bought a company called Benaissance number of years ago, and we were interested in a couple of products that they had, one of which was COBRA. And so that really enters us into the COBRA marketplace. And what we wanted to be able to do is offer COBRA functionality to our existing partners, and so just having another product on the same platform that we could offer out into the marketplace. When we bought DBI, they also had COBRA capabilities. So the combination of those 2 things have made our offering even more meaningful into the marketplace. And in this place, we continue to see growth. And again, in this marketplace, what we've been doing is making sure that we're well positioned to deal with the demand and the potential interest that we're seeing in the products.

That's good. Maybe if you can just talk about the cost takeout. So you've announced or WEX announced a $60 million of cost takeout for 2020. I was just wondering if you could kind of give any color on the progress on those cost takeout. And is there an opportunity for further cost reduction, if required?

Yes. So when we came up with that number, what we've looked at, we had, obviously, set the year out for it to be a growth year, which is how we came into the year, was the company growing and doing well across the different verticals we're in. When COBRA happened, we really stepped back and said, we would make sure that we're set up to deal with the current environment, which meant that we wanted to reset the amount of capital that we're spending and also look at the cost structure. We'd already put a hiring freeze in place. And so this $60 million was a combination of removing some planned headcount additions that were geared towards the growth that we had anticipated. And also we went through the workforce. We furloughed some employees. We did a small reduction in force, and then we looked at discretionary spending. So we took a number of actions really just to make sure that we felt like the cost structure was set to the appropriate level based on the trends that we had seen at that point in time. We also -- when we set our goals of what we wanted to take out, we were looking at what I believe was a pretty conservative model because we decided we wanted to really go and be aggressive about what we're doing on the cost side and not feel like we're chasing it based on evolving trends. And so far, I think that has played out well for us.

Yes, that's helpful. And just going back to your long-term guidance. Again, I understand the situation is, obviously, very fluid. And recoveries, we are still very early days of recovery. But just as we think about some of the industry trends, the trends that you talked about, the digitalization, the strong moat that you have around the business, the strength that we've started to -- or a recovery that we've started to see. How quickly can WEX go back to its long-term growth? And then is the target that you've given out, the 15% to 25% earnings growth, 10% to 15% revenue growth, is that the right way to think about the business in the mid to long term?

Yes. I want to start just by saying we feel very good about the verticals and the diversification that we have across the business. We think that, that's playing out well even in this marketplace. And so we remain very confident in the long-term growth prospects of the company. I think that we just need to get through this period and begin to see how the economy comes back before I can tell you specifically timing. I think all of us wish we knew the answer to that. But from a -- when I look at structural changes or potential structural changes across the portfolio that we have, we have clearly in our travel vertical, some structural changes affecting the long-term of that. But if you look at the rest of the business that we're doing right now, across many areas of many different types of B2B payments, we feel very comfortable around the trends that we're seeing and the long-term growth prospects that we have. And if anything, this is a time that we've -- if you look back in the way, part of what we learned was that it's a time that you actually can be aggressive in the marketplace and position the company well for what happens afterwards, and we're pretty focused on the future growth curve of the company.

That's very helpful, Melissa. Again, thanks a lot for giving us this opportunity. With that, we'll stop, and thank you very much.

Thank you.