WEX Inc. (WEX) Earnings Call Transcript & Summary

Good morning, everyone. Welcome back to the second of the presentations for the payments and fintech symposium at Morgan Stanley. Once again, I'm Steven Wald, one of the payments analysts. And I'm joined by Steve Elder, Senior Vice President of Investor Relations at WEX. Steve, thanks for being with us.

Thank you.

So before I begin, just want to read again, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

All right, Steve. So let's kick it off. I know you guys have been pretty visible quarter-to-date and out since earnings. A lot of questions on how things are trending since April, and you guys gave us the update during earnings, but I'm just curious if you could take us through the businesses piece by piece and how those have tracked versus the numbers you put out during earnings?

Absolutely, Steven. I'll just recap the April numbers. It's all out there as part of the earnings materials, but the gallon volumes within our fleet segment in the month of April were down about 20%. It breaks down to about 25% decline in our North America fleet business, which is the local businesses, if you will, in the U.S. The OTR, the over-the-road trucks, held up a bit better in April. They were down about 11%. And then the international volumes, depending on where you were in the world, anywhere from, say, 30% to 50% down. So overall, when you kind of average those out, that was down 20% in the month of April. So since then, things have improved. You could see it starting to get a little bit better towards the end of April, and that has definitely continued through May. So day to day, week to week, you can see the improvements. So the same kind of 3 subsegments, if you will, in the fleet side. The North America fleet business is still double digits. It's probably in the 15% to 20% range versus the minus 25%. The OTR is low to mid-single-digits declines right now. We've actually seen like individual days where we're pretty flat but still, overall, down from -- the international businesses are still down from more in the range of 30% versus the 50s at the worst, depending on the country. So when you kind of blend it all together, from May, we're still down, call it, 10% to 15% but definitely seeing some improvements there. I will add that, specific to the fleet segment, the fuel prices are obviously a piece of that as well. In April, we averaged $2.04 per gallon. In May, it was actually $2 per gallon. So we -- as fuel prices came down at the beginning of April, we were getting a little bit more benefit. Again, in the last, call it, week or 2, we have seen prices starting to make their way back up, but that will be another piece that we want to keep an eye on as we go forward.

Great. That's very helpful. And maybe just a follow-up on that on the differences. Obviously, you talked about on a segment-by-segment basis or even subsegment basis. But can you talk a little bit about what you're seeing maybe geographically in terms of the differences between open and closed states and what's driving the rebound? It sounds to me like it's uneven on a segment basis. So it would seem like it would make sense that some states are driving more of that rebound, whether it's an OTR or some of the other pieces of your fleet business or travel business.

Yes. I don't have quite as much detail at a geographic or industry level for May, but we can clearly see differences in April. The states where the -- in the U.S. at least where the lockdowns were more severe, we had bigger volume declines. So the East Coast, the West Coast were higher than the overall average. The Gulf Coast states, the Rocky Mountain states were better, meaning less impacted than average. And the Midwest was kind of at average basically. So you can definitely see some differences by geography. You can also see some differences by industry. Anything that had to do with -- lots of different industries. And I'll say anything, obviously, that had to do with consumer products or restocking grocery stores, those kinds of things, they were very, very strong in April. And I think they're kind of leveling off at this point as the supply chains have caught up. Construction was very strong overall, which we think about it as like road building and bridge building, those kinds of industries. So the states kind of carried on with the projects they were anticipating. But there were lots of areas that were obviously impacted. The only thing to do with restaurants, for example, was pretty well shut down. We had an impact in our over-the-road business from the auto manufacturing plants being shut down. So we do business by hauling parts in or paints in or things like that. So all of that was down. And just about -- again, just about anything other than construction was down. Oil and gas was probably down the most, but it's only a couple of percentage points of our total volumes, but they were down quite a bit, for obvious reasons, in the U.S. I imagine that will continue as well. But as I said, pretty broad-based, pretty consistent, definitely see some impacts where the lockdowns were more severe, but also seeing definite signs of improvement as those lockdowns eased.

Totally makes sense. All right. So I'm going to get this one out of the way so we can focus on a segment-by-segment basis. The eNett and Optal deal, you guys -- you came out with your statement during earnings. And then that ended up being answered, obviously, taking you into the courts in the U.K. Last I heard, it was in relatively preliminary hearing. So maybe you could provide us an update on what you're seeing there in terms of the progress of that and what the, I guess, range of potential outcomes are for the business financially or strategically aside from to close the deal or don't.

Yes. I'm not going to say a whole lot about it for obvious reasons. Right now, we came out with our position that we believe there's been an MAE at the target companies at either eNett or Optal. And therefore, the conditions to close the transaction hasn't been met and so we don't intend to close the transaction. They, not surprisingly, disagree with that assessment. And there's a lawsuit pending in the U.K. courts. The only activity really in the court so far has been around what is the timing of a trial, which is still, I'll say, to be determined. So the sellers have asked to be expedited. The judge so far has said no, but the next time we get back together in court, we'll be addressing that topic of whether it will be sped up or not. So we don't really have a whole lot of visibility into the timing. And right now, our contention is we don't have to close the deal. They're going to court to compel us to close the transaction. So those are the 2 outcomes at this point. And kind of anything else other than that would just be hypothetical at this point, so we don't really want to dive into any of that.

Totally understood. Okay. So let's switch gears now that we've dealt with that one. Obviously, I know that comes up with every appearance you probably make. Let's talk about the fleet business. What are you seeing in terms of client health? Obviously, stimulus has been helpful to some clients, probably more than others, and it's bolstered the economy more broadly. So I'm curious what you're seeing in terms of what you view as maybe temporary support for activity or among your clients from a credit perspective or activity perspective versus what you see as a more sustained comeback in terms of activity levels. And maybe while we're talking about the existing business, we could then shift into what you're seeing on the sales side and how that's resumed or maybe it's still being held up as the reopening starts.

Yes. So from a credit perspective, so far, the portfolio has held up really quite well. At the end of Q1, there had been only a very slight deterioration in the accounts receivable aging. Now you have to layer on to that the fact that we adopted CECL for the first time. And so that has -- that's a bit of a wildcard, I'll say, and something that we need to look at going forward. But compared to history, the aging of the portfolio was pretty consistent and losses were relatively in line. If it had been any other kind of economic backdrop, we would have said, "It's up a little bit, no big deal." But given the kind of the economic backdrop, it's got a lot more scrutiny. And so far, even through April and May, that has largely kind of held up, right? The accounts receivable aging is still in relatively good shape. The balances -- the accounts receivable balances have declined quite a bit since year-end now, which is partially, obviously, a reflection of overall volumes, but we were down about $500 million in receivables in -- at the end of March compared to year-end. We were down about another $500 (sic) [ $500 million ] in April. And in May, I think we're down somewhere -- we haven't closed the books completely yet, but probably $200 million to $300 million there. So receivables at the end of last year were $2.6 billion to $2.7 billion and nearly cut in half at this point. So we've collected a lot of balances. The aging is in pretty good shape. Now I think the reaction from the government and the PPP money has certainly -- it certainly hasn't heard anything, right? And to what degree it's helped, we can't really assess directly, but it certainly didn't hurt anything. And so what we're watching is, when that runs out, what do things kind of look like at that point? And so that's kind of several months out probably still at this point before those funds really run out. But we're hopeful that the activity levels of the businesses will come back where they'll have a chance to address their -- basically their activity levels and get their costs in line so that when that money runs out, they're kind of back on solid footing again. And if you can remind me the last part of the question.

Yes. No. So I was going to dovetail into the sales aspect, but while we're on it, I think one of the reasons that this comes up so often or maybe piques people's interest relative to normal times where it could be elevated in 1 quarter or others, it speaks to whether there's something other than just temporary cash flow disruptions or whatnot. I mean technically speaking, it is an extension of credit. So if someone needed to bridge the gap or something for a month or that's one thing. And like you said, you wouldn't have normally looked at this as unusual or too crazy in any normal circumstance. But if we're watching for businesses potentially folding at an elevated pace, that sounds like it's something that is creating an elevated visibility or something that you guys do want to watch. So that's, I think, probably more why the question is just, is this something where the elevated credit or seasoning is something that looks different from a complexion perspective versus a normal just blip higher in, in credit losses?

Yes. Q1 is seasonally higher for us typically, and it was -- this Q1 was no different. Again, it was probably 1 basis point or 2 higher than you might have liked, but really, again, not all that significant. So most of the losses that we have and where the risk in the credit is with small businesses. And oftentimes, there's no like formal declaration of bankruptcy or something like that. They just kind of stop operating, and you don't hear from them again. But to this point, we haven't really seen any sort of, again, significant increases or degradation in aging. So it's holding in quite well. But we are vigilant. We are going to keep watching it until the entire economy gets on a little bit more solid footing.

Totally makes sense. And that actually brings me into that second part of the question I was initially trying to get at, which was, as you guys think about the go forward, right, the new business aspect versus what you've got on the books already, it was my understanding as we sort of came into 2020 that, that was shifting to be SMID-focused now that you'd won most of the major North American fuel mandates. So can you talk a little bit about what you're seeing in terms of our businesses back at the table in terms of having these conversations to implement a WEX solution? Has that paused materially? And how is your -- I guess, what's your level of caution relative to, say, 4, 5 months ago in terms of implementing a lot of these new SMID clients, which you pointed out just now, like that's more of the area of focus for, I guess, deterioration?

So let's say from a sales or a pipeline perspective, we definitely went through a lull, I'll say. I wouldn't call it a material thing, but there was definitely a slowdown in activity towards the end of March and early April when all of WEX was wondering how to work from home and our customers were as well, right? They were trying to figure out how does Zoom work, for example, right, things like that. And it has picked up significantly since then. I'd say largely things are progressing as you would expect. You're making progress on the larger deals. You're signing the small guys. And I would point out, for the smaller fleets, this is something that we've been doing for 30 to 40 years over the phone. And so the phone is now in your home instead of in an office setting, but it's the same process. We're able to sign business. We're able to implement new customers. We're able to make progress on larger contracts. All those kinds of things are happening now. And I don't really see that having a major or a long-term impact, again, aside from that kind of, I'll call it, a month of slowdown in the middle of the quarter here.

That's helpful to hear in terms of the timing of the slowdown. You guys have talked a lot about, I guess, in more recent conference appearances since earnings, some of the other products in your fleet segment that maybe don't get quite as much attention. Obviously, you've got telematics. You've got some of the analytics platforms on the back end that help businesses save a lot of money. And I think that's of relatively greater importance now given fuel price exposure has been a common theme of questions over the last several months, obviously, with the fuel price volatility. So what is it that WEX is doing here maybe within the segment to diversify away from fuel price exposure? You guys have had a reticence in recent history to directly hedge that exposure. So what are the areas where you can diversify away in terms of moneymaking offerings that are not levered to fuel prices that might resemble what we've seen with your peer fleet core in terms of the beyond channel? Or maybe they don't resemble them at all, but could you just walk us through what the opportunities are there?

Yes. So I would start with -- we had hedged fuel price exposure in the past, and it worked in some ways in that it smoothes out the cash flows, but in other ways, we just spent an awful lot of money. And with our counterparties, it didn't really get the any kind of premium in the multiple or any kind of difference in correlations or anything like that. So I don't expect that we're going to actually hedge. The strategy for the last several years has been grow in the nonfleet parts of the business. And even within the fleet segment, let's look at areas where we can add services to our customers that are not fuel price dependent. And a couple of them, obviously, with the telematics, the analytics platform. The most recent one is, we call it WEX EDGE. There is a bit of a fuel component in there where we have -- basically, we're targeting smaller businesses and bringing group buying power to them. So we've negotiated with some truck stops to get discounts for over-the-road type fleets. We have a nice relationship with Bridgestone to get tires and a very nice user interface that makes it very easy to figure out what tires you need for your vehicle, schedule the appointment, exactly what the price is going to be to -- for you to walk out the door and you end up paying for it with your WEX card. So that's a nice piece. We've also integrated hotel rooms, which -- through our relationship with Expedia, obviously not a large focus at this point. A year ago when we were developing this, we thought it would be a much bigger piece. But with people not traveling nearly as much as they used to, that's been a bit of a lesser focus on the launch. But also just -- this is the start, right? The idea is let's leverage our customer base, let's -- and the services they provide so that they have a new group of potential customers to market to. And our small business customers can get some discounts that might otherwise not be available to them, and WEX can facilitate that and earn some, basically, a marketing fee off of that. So that's the idea. And it's just starting, right? We've just launched it in the last month or so. And early on in terms of adoptions and all that, but early indications were, when we tested this a while ago, that customers liked it. And so we're hopeful that we can turn this into something a little bit more meaningful in the future, but it's probably a little bit too early right now to give really rosy projections on it.

Totally understood. It's just good to sort of see where the business is going. And speaking of, we can talk a lot about the sensitivity right now, but speaking of opportunity, some of the areas that are more, I guess, ripe for market penetration, international areas and maybe some of the longer-term shift towards eco-friendly or hybrid fueling. I'm curious what the conversations have been like with your international clients or potential international fuel mandates that you could get and if there's been any shift there from the economic disruptions to businesses and whether they've thought about outsourcing some of their fleet solutions to you guys. Particularly, I know Europe has been one that's been a stubborn area of growth for a while. Or separately, if we could talk about what you guys are seeing in terms of opportunities like the longer-term build-out of hybrid fuels.

Yes. So if I just think of like the oil company programs within Europe, I'd say, largely static from the updates we've given in the past, right? There's definitely conversations going on, some more advanced than others. I think the multi-country, the real -- the major oil companies are probably going to sit tight for some time. And there's not a lot going on there, but there may be -- I still think of it as a long-term opportunity, but the conversations are going on, but I don't really think there's a whole lot of near-term opportunity in terms of significant growth coming out of Europe. In terms of more eco-friendly or hybrid type vehicles, still a long ways off in our minds from a commercial point of view. I think with oil prices and fuel prices as low as they are, it makes the economic difference between the 2 that much greater, right? It's a lot cheaper to run your truck on diesel fuel today than it was 6 months ago. So it just makes that gap to make up a lot bigger for a hybrid. So not a lot of change, not a lot of fee change, I wouldn't really expect any coming out of this either.

Completely understood. Okay. So let's switch gears into travel. That's obviously been the epicenter of a lot of disruptions. And so I'm just curious. You've made some comments. And I think Roberto had said it's something to this effect as well more recently that you guys were watching for any indications that hotel activity might decouple from airline activity. And I guess I'm just curious: a, if we could talk about -- are you seeing anything there as people come out of their homes, where people are indeed taking a wave of just driving to hotels and driving volume for you that way that doesn't seem to go along with the level of airport travel that's been quite depressed for a bit now? And secondly, if you could just walk us through what WEX' travel program is levered to, whether it's mainly domestic, international, just as a reminder of those exposures.

Yes. So we primarily are serving online travel companies for hotel programs. It's a pretty global product, our customer base. So where our customers are located is probably 70% to 80% of the pre-COVID revenues, I'll say, were customers based in the U.S. But if you look at where those -- where the spend volumes occurred, it was more of a 50-50 mix between U.S. domestic or U.S. volumes versus international volumes. So what that implies is there was a fair amount of people going on to a U.S.-based customer and booking a trip somewhere outside of the U.S. But it is all leisure activity or at least very, very largely leisure activity. It's -- again, the vast majority, it's hotel room transactions versus air transactions. We have not really seen much of a pickup. So in April, volumes were down about 90%. They are, I'll call it, pretty flat from that. Could they be down 87% or 85%? Yes, which is obviously numerically a slight improvement, but still, to me, quite down and quite depressed from where they were. Some of the -- what we're talking about in terms of people driving, that's just reading research or what people believe, will be how people start to travel again. What are the profiles of -- when international travel comes back? What are the profiles of the first types of people who are going to do that? And is that going to affect us or not? Those kinds of questions. But at this point, we're not seeing any of that kind of coming to our volumes.

Okay. That's helpful. And certainly, as the reopening starts, there's -- it's not back to business as usual for the areas you're serving, right? The hotels themselves have stringent rules on cleanliness and whatnot. Is it -- do you think there's a sense of the price has to come down to provide a good enough deal for people to, I don't want to say risk it, but to make the trade-off worth it? Or is there something that we're just not seeing yet in terms of the supply/demand curve that would affect the rebound? Or is it just simply it's too early to say and people are still just stuck in their homes, so you're not able to see those trends take hold yet? Because I would imagine if people -- hotels are sort of stuck cleaning rooms longer and they can't have as many people in as many rooms, that perhaps the deals aren't quite as good as maybe some people think they're going to be to warrant driving 5 states over. But maybe is there any granularity you're seeing there in terms of what's made the market just different today versus 5 months ago?

Yes. I mean you'd probably get a better answer from somebody in the hotel industry than me on that kind of stuff. I think all of those things make perfect sense to me. I think, to me, people will start traveling again when they feel safe. We've all been at our homes for months now. This is the most consecutive days I've spent at my own home in 15 years, but -- and I'm ready to move on. But at the same time, what -- for what, right? I want to get out, but at the same time, you got to feel safe getting out. And I think that's going to be the key for folks to kind of return, right? There's no compelling need for the family to go to Disney World. It's something that everyone wants to do. But until you feel safe doing it and you're going to have a good experience, then you probably wait. And so I think people are just waiting until they feel comfortable doing it.

Yes, fair enough. I totally get it. And I think we're all certainly ready to get out of our houses. But like you said, to where and how safely. So let's switch on that note to some brighter topics. Corporate payments is the bright spot for you guys and a lot of other players in the space, and everyone seems to look at that as the savior of a lot of these industries. What's the demand been like? Obviously, it's upticked in terms of people wanting to revolutionize their businesses, but these have long implementation cycles. And I guess, I'm curious, you guys lead with the virtual card. What are your thoughts on continuing to drive forward the product to the virtual card side? What are your thoughts on how much faster the business can grow over the next year plus and whether you need to build out more in the partner channel or go more direct to achieve incremental growth here?

Yes. So corporate payments for us is -- that accounts payable product, and it's performed very, very well for the last year plus when you -- we were often quoting spend volume growth last year in the 30% to 50%, 60% kind of ranges. And it's been a great addition to the product set. We go to market directly with our own salespeople, dealing directly with corporate customers. We mentioned last year, we signed a top 10 hotel -- excuse me, hospital chain. So a nice win there. We have seen a lot of our growth, though, coming from indirect channels where we are partnering up with somebody who's more in the software automation or AP automation kind of process and teaming up with them to let them do their thing. But at the end of that process, when it's all ready to be paid, that's where we want to kind of plug in and hook up with folks to put those payments on to a virtual card. The work-from-home environment has certainly increased the interest, the number of implementations. So the top end of that funnel looks poised for some growth right now, but we haven't seen it kind of coming through in the numbers just yet. Again, there's been a lot of demand for implementation through that partner channel, which is typically where we get the smaller businesses coming through, but we got to turn that into some volume and some revenue for us. It's a good time, and there's a lot of interest and it kind of dovetails with what others in the industry have been saying. But we're not quite seeing it come to the numbers yet. We were in April down about 5%. I'd say May was pretty consistent with that. We're seeing some signs of some pickup more recently, like in the last week or 2. But so far, it's been not as hard hit, but certainly not the growth that we had last year either.

Completely understood. And certainly, as you talk about the opportunities and where things might be outsized growth over the next several years, one of the areas, separate of corporate, that you've seen strong growth in organically and then also through acquisitions is your health and employee benefits. So maybe if we just quickly segue there before we run out of time to talk about some of the comments more recently about -- obviously, this has been a strong grower. I think Roberto said the other week you guys almost expect to kind of be in a similar range to where you've been even pre virus this year, but the longer term is employment, obviously related, beyond being able to serve the COBRA side. So I'm just curious how much the employment asset could really drive down the pace of growth. It didn't sound like you were saying it would shrink but perhaps would grow less robustly. But certainly, it outpaces the pace of employment and wage growth in any given year anyway because of the uptake of these HSA and FSA accounts. So I'm curious what the sensitivity is that you could potentially see on this side of the business if employment were to take longer to come back.

Yes. I think when we look back on this period of time, we're going to say, "Oh, the health care business kind of did what it always did. It grew in the -- whatever, 15%, 18%, 20% kind of numbers." And I think, as Roberto said last week, I think it was, we're probably going to be pretty close to those numbers this year. We're going to get there differently. We're going to get that through more COBRA. We're going to get there through more, I'll say, like temporary types of accounts that employers are putting in place to help employees get through this period of time. I think longer term, the 2 forces playing out around HSAs are -- there's an uptick in unemployment. That's obvious. If you've got an HSA and you are newly unemployed, you're going to keep that HSA as long as you've got a balance. If you spend down the balance and you're still unemployed, then probably not a real reason to have it and so it goes away. We do also offer FSAs and HRAs and other types of accounts that are a little bit more tied to employment. So in the near term, you could see some pressure on the accounts, on the account numbers just because of that uptick in unemployment. But as you said, the COBRA products that we offer are largely offsetting a lot of that. They're growing pretty rapidly at this point, unfortunately, right? It's not something that you want to be your growth industry. So I think the flip side to the HSA argument with unemployment is there's been this thought over the last couple of years that with such low unemployment levels, that employers were hesitant to move their employees on to high-deductible insurance plans. If they didn't like it, then they could literally find another job pretty easily because of the really low unemployment rates. With a higher unemployment rate, they might be more willing to transition their employees onto those plans, which would be helpful. How it all plays out, it's probably a 2021 kind of thing to really know when we get through the open enrollment kind of period. But those are kind of the competing arguments, right? The higher unemployment rate, less opportunities, but potentially more employers transitioning to high-deductible plans.

Right. Absolutely, and certainly a balance. So interesting to hear in terms of -- it's not direct one-for-one, but certainly could directionally move with it. I totally understand. All right. That's going to take us the time. But Steve, I want to thank you again for joining us. It was a pleasure to have you. And we'll take a 15-minute break, and we'll be up next on the fintech symposium slot with LendingClub.

Thanks, Steven. Take care.