WEX Inc. (WEX) Earnings Call Transcript & Summary

Good morning, everybody. This is Bob Napoli. I'm the analyst for William Blair that covers the fintech space. For a complete list of disclosures, please go to williamblair.com. Welcome to the second day of the 40th Annual William Blair Conference. And we are in virtual mode and the challenges with -- we have with us Melissa Smith, the CEO of WEX. Melissa joined WEX in 1997; and the former CFO, currently Senior Vice President and Head of Investor Relations, Steve Elder. I've known Steve and Melissa for many, many years. This has been an excellent story. WEX has been a major player in the fintech space, one of the early fintech companies, if you would, in the public markets. Melissa -- and we are in line with the virtual conference. For those of you on the webcast, Melissa is having some video issues. So she is there. You can see her name. You'll hear her voice in a minute.

But Melissa, we are in unprecedented times, pandemic and civil unrest. Now how do you view this? You've been through -- you and Steve, you both have been through some tough times with WEX, several recessions and other items. How do you view this environment versus some of the tough times in the past?

I don't think any of us has seen anything like this if you compare what we've been through. And we've been through the '08-'09 time period as a public company. But when you compound that with virtually the whole world shutting down for a period of time, this is unique to all of us. And I think one of the important points for us has been just watching the resilience of our business in a very difficult operating environment.

Great. You guys gave some -- I mean this is a period of time when weekly information, weekly data trends have been meaningful. We had Mastercard yesterday at our conference and given out some data through last week. Can you give some update on operating metrics for the business? When you reported earnings about a month ago, volumes were down about 20%. And I know you've had a few things to say, but it looks like trough was in mid-April where things continuing to progress. I think you're seeing some improvement.

Yes. So as you said, our fleet volumes were down 20% in April. And we've seen week-over-week improvement every week since then. And so we're seeing small improvements. But May was down in the low teens versus 20% in April. So again, week-over-week improvement, and that's continued to happen through the first part of June. So volume has been coming back, and it's coming back in a variety of ways. If you look at some of the states in the U.S. that were shut down a little bit more like New York was -- is an example, one, where volume was down pretty dramatically in the phase where things were shut down. It's lagging some of the other states in terms of returning back to normal. So the volume trends are probably happening the way that people would expect where a lot of states have returned to a similar level, but the ones that were most impacted by COVID and some of the shutdowns related to COVID continued to lag in returning. Another thing I'd say is that if you look at the fuel prices, they were down around $2 in May, so coming back more recently. So that was lagging a little bit in terms of seeing a rebound. On the travel and corporate payments segment, the -- what we're seeing in corporate payments looks pretty similar in May to what we saw in April. So it's down about 5%. And same thing as in travel. It looks pretty similar to what we had seen in April. So those trends look like they're kind of just continuing down the same course. The health and benefit segment, we continue to see really strong growth in SaaS accounts. So we're getting a benefit of that really resilient part of our business. We are seeing less spend in Q2, which was something we had anticipated because of the lockdowns where people couldn't do some of the services they've done historically. But we think that will just play out in the course of the year as people get -- as things open up, we can see that spend level improving. But kind of the bigger thing, as you look at the SaaS accounts, that we continue to see growth there. So if you look across the business, generally speaking, we're seeing week-over-week improvement with a few minor exceptions across our portfolio.

Fleet is about 57% of your business today, somewhere around there. Can you give a little more color on which verticals within fleet are doing well and which are struggling more than others?

Yes. If you look at some of the industries that were -- that had the deepest slowdowns were finance and real estate, retail. Retail, at its worst, was down 41%. Services were down. Those industries have all recovered about 10% each. And so it's still down, so some of the deepest-hit industries. Some of the ones were milder slowdown. Construction has really held on well, and in fact, construction is now positive as we're seeing growth year-over-year. Smaller segments for us, mining and agriculture, which are smaller, both are coming up to something that's closer to flat year-over-year, so coming up more than 10 points, close to 15 points. So definitely seeing some changes. And then if you look at our private label portfolio, which is a lot of smaller businesses, that was -- went from low of negative 32% to down now, it's only down about 13% towards the latter half of May. So really strong improvement in some of those smaller businesses, just in general. So -- and again, what I had said before, you see regional variation, depending on where fleets sit, both here in the United States and then type of fleet. Our over-the-road business has held up better. It was down about 11% in April and only down about 3% in May where North American fleet was a little bit more impacted. It was down about 25% in April and 15% in May. International was down about 50% in April, still down about 30%. So it's being hit harder but a small part of our business. So there's regional variations. There's variations based on the industry. And the fleet size seem to have less of a variation right now as the other 2 seem to have more of an impact.

Okay. How is pricing? Are there risks on pricing? I think you've had the opportunity over the last several years to have some modest improvements in pricing. Is that changing in this environment if you had to discount at all? Or...

No. I think in this environment, we're thinking about -- we've always been really thoughtful of making sure, a, that the products add value to our customers and that we're thinking about our customer relationships over a long period of time. And that being said, where we have opportunity, where we think we're adding more into the mix, we've made pricing changes over the years associated with that. We're not really doing many incremental positive changes in pricing, but we're also not seeing large changes in pricing from a negative perspective. We are being conscious around things like, where people aren't paying us on time that we charge late fees, making sure that we just have really good hygiene around that and being respectful of what businesses are going through as part of the relationship that we have with them.

Great. Now one of the questions I get all the time on WEX, and I think people probably over -- get overly concerned about is on credit. I mean I think that if you go back to the Great Recession, I think that there was a lot of concern about credit that wasn't realized. But -- I mean you do have credit risk, and we are -- you are going to have higher credit losses. Can you talk about where you're at on credit today on the -- mostly on the fuel fleet business, where the risks are, and why investors shouldn't be overly concerned about your ability to manage credit in a tough recession?

Sure. If you look back in a recessionary period of time, one of the things that we found is that the products that we offer are integral to the operations of our customers, and so they tend to pay us before that pays a lot of other bills. And you could see that in the cycle performance that we had back in '08-'09. We had one really negative quarter, and then things really returned back to a very normal operating environment. And for the year, I think our losses were in the -- they were still in the 20-ish bps -- higher 20-ish bps for overall fleet spend. In this environment, it's a little bit different in the fact that we're seeing a little bit of softness in terms of aging but very little. Things have really held together pretty well, considering the operating environment that we're in. We think that the stimulus money has had an impact on people's ability to continue to make payment. It's a good thing that we're seeing now volume pick up at the same time because it allows people to continue to operate their business and have cash flows coming in for them. So from a credit perspective, we feel like we -- it's a place that we have put a lot of time and effort to make sure that we're very skilled at that, knowing who to extend credit to and how to operate in this type of environment. We've really been very clear around where we're tightening suspension rules. And we've done that in some cases where we're seeing industries having a little bit more of a risk profile. We've also retooled, are in the process of doing that in our collection tools because this is a different environment, and so we want to make sure that we're being thoughtful of the fact that things are different than they have been historically. So some of the models that we've used that's been based off historical performance have had to be altered. But so far, we're seeing really good results. And I'd say, credit's a little bit worse than it was, but it's -- but again, it's really on the fringe. It's -- and at the same time, our accounts receivable balances have continued to fallen, in part because people were making payments and in part because fuel prices have declined.

Great. And just with the pandemic and the fleet card business, are you seeing a secular benefit with less use of cash, I mean, more in the small fleets? Or is there a -- and do you think this is still a -- I think your target has been for a 4% to 8% growth over the long term. And obviously, we're in a recession, but are you -- so are you seeing some benefits from the pandemic secularly? And do you still think the fleet business should grow within that range over the long term that you have put out in your last Investor Day?

Yes. So we believe that if you'll -- specifically in the over-the-road marketplace, we've seen a pretty big pickup and ramp of interest in the products. And so -- and I don't know if that's specifically driven by the pandemic, but there's a corollary between when this started happening and when we saw an increase in interest. And so the idea of having products that are more digital, I think, is important in this marketplace. You've also seen more usage of DriverDash, which is our digital payment capability. The long-term goals that we had was -- the idea behind when we set those targets, which is still true for us, is we're going to continue to add business into our portfolio. And we're doing that now in the middle of the pandemic. We're continuing to add new customers into the portfolio and, at the same time, roll out new products. And we've talked about WEX EDGE as being the most recent version of new products that we rolled into the marketplace. But we'll continue to offer things like that where we can sell into our customer base products that are meaningful to them, so that they can buy additional items and that they can do that in a way that's really easy in integrating their business. It's a highly digital model, which really works well in this type of environment.

Right. Can WEX EDGE be material? Can it move the needle? I mean it sounds like a great product, community buying power or things like that. I mean I think there's a lot you can do with that, maybe. But...

Yes. I think over time, it can. I would say we're starting with a piece of our portfolio, offering a set of products, which have been well received. And as we continue to expand that into the rest of our portfolio and then add a new capability, we do think that it can add to the overall growth profile of the company.

Great. Travel, obviously, down over 90%. Can you -- are you seeing anything? What are your thoughts on travel like over the medium to long term? And are you seeing any signs of improvement? So just thoughts on how that recovery would take place in the long term.

Yes. So we do think travel will eventually recover, but we think that's measured over years as opposed to over -- if you're looking at the other verticals that we service, you're seeing pretty rapid improvement over pretty much everything else. And then I call out the travel vertical as being unique in the fact that there's more systemic changes in travel. And so we think that that's going to take time. We think we're well positioned when it does return, but we think that that's going to take some time for that to happen.

And your travel business is primarily consumer-oriented?

Yes. So it's people that are going to online travel agencies, which tend to largely be consumers, yes.

Yes. And as -- can you give any update on eNett? Obviously, you like that asset. I know -- obviously, the business fell off with the rest of the world. And there's a -- you are -- invoked the MAC laws, and the sellers don't agree with you. And then what would you do if you buy eNett from a capital perspective?

Yes. So there's not a lot that I'm going to say about this topic. We're in active litigation. And right now, the activity has been really relating to the timing of the trial. Regarding the financing, we feel really good about the facts that we have. And we wouldn't have made this assertion and continue to make this assertion if we didn't believe it. And at the same time, we have obligations we have to fulfill around the agreement until we sort this thing through. And one of those is continuing to look at financing, just as a mechanism to be prudent.

Your corporate payments business, it's about -- I guess about 10% of revenue and, as you've highlighted, down a lot less in the other areas, down 5%. That seems like that business could be multiple times its current size. You've made a number of acquisitions that's had strong growth until the pandemic. Can you give any thoughts around -- I mean, I think your view was that the Travel and Corporate Solutions would grow 10% to 15% with corporate solutions higher. Is that still the case? Do you want to still add to it by acquisition? And what does that -- I mean that business, could it be multiples of its current size through organic and M&A?

Yes. So if you look at the business we have right now, we're going into the market largely through our partner channels. We do that with a combination of AP products and bill pay products. And each of those have a little bit different growth profile. But if you look at our long-term growth rate, we haven't altered what we believe we're going to see, and specifically in our corporate payments market. We think that the opportunity for us continues to be largely through this partner channel. The benefit that we have seen over the last couple of years has been where we partner with other fintechs and we embed payments associated with something broader that they're doing. You've also seen some nice growth with our partner channels as -- think of this as banks that are out there, they're selling an accounts payable product. They have our technology that we're white labeling in the background on their behalf, including American Express and a number of large banks. We've seen growth in that, also think of that as kind of a high single-digit grower where the more explosive growth is coming from these fintech companies. So we like the model. We think that there is certainly more of a bias towards moving to digital. We're seeing that coming through and onboarding now. The spend volume being down is driven more based on people just not spending as much money because of what was happening with their business. There's a little bit of T&E that's embedded in there, which is impacting some of the spend period over period. But if you'd look at just the customer ramp of some of the new customers, that continues to make us feel good about this business. In terms of other M&A, we have done a little bit of M&A in the space, part of where we've looked at our capital deployment. I was just looking at return here. It hasn't been a place we put a lot of money because some of the multiples have been really high historically in the space. And so as that alters, it would be a place that we would certainly be interested in, kind of thinking about that across all the other opportunities we have across our portfolio. And we do think that it has nice growth opportunity for us.

The health care business has been a shining star since you made an acquisition into that space several years ago. 26% of revenues now; another acquisition last year, strong organic growth. What's -- what are your feelings about that business today? And I know you're going to get a big bump from COBRA. Hopefully, though, that doesn't last long. But that business has -- I mean has a great reputation in the market. You've added to it through M&A, which -- and how is that -- is that deal working the way you hoped or better? Or -- and what is -- what do you want to do with that asset, a very attractive asset?

Yes. I'd say it's been better than what we expected across the board with a series of acquisitions we've made in that space. And I'd say better, in part because of -- there's the resiliency of that part of the business, and it has performed well. We continue to find new ways to grow the business, and that has happened as really the market has evolved and kind of think when we first started, you had TPAs that were involved in this market. You had insurance companies, a little bit of FIs. But that -- the FI channel has really exploded, and it's been compounded with people that are entering the marketplace more from a wealth management perspective that are looking at HSA accounts as a mechanism that's akin to a 401(k) account. And so as the model has altered, you've seen this really big level of growth -- of our ability to continue to grow but have that in the longer term because you've got the benefit of the account base growing. These new partners are entering the space. The acquisition that we did with DBI allows us to enter the marketplace also directly. And we've been able to extend the size of the prospect just with WEX' brand sitting behind that. So we feel really good. And as you mentioned, right now COBRA, COBRA is on fire. It's up about 30%. And so it's relatively a small part of our overall business, but it's meaningful within the segment and helping with some of the volume that we're seeing. We're seeing spend be a little bit light in the second quarter, and COBRA is helping offset some of that.

Great. Can we discuss the balance sheet and liquidity? I think that was certainly one of the big concerns, the -- especially with the eNett deal. I think you leverage 3.5x, excluding the eNett deal, as you made some acquisitions. You do generate very good cash flow, I think, even in this environment. But maybe just talk about the comfort with the balance sheet, what you want to do with that leverage. And you still have, I guess, eNett hanging out there. So I mean you can't totally discount, I guess.

Yes. We feel really confident with our liquidity. Between our corporate cash balances and availability on our revolver, we have more than $1.2 billion available in cash. You talked about leverage at the end of Q1 being 3.5x. But if you actually gave credit for all the corporate cash we had, it would have been more like 3. And so as you said, we continue to generate cash on top of that. And it's one of the beauties of the business model that we have. And so while we will see some impact as Q2 rolls through in terms of just overall leverage because of the earnings impact of what's happening with COVID in Q2, we feel really comfortable with the liquidity and the cash position of the company. And Roberto went through this in pretty good detail in the earnings call, and I'd say that we feel equally strong now a few weeks later.

Great. And then just from a capital deployment and M&A strategy, are you -- would you -- do you have a pipeline? I mean you've been consistent. I mean is it -- are you -- should we expect you to be off the market this year until the pandemic at least totally clears up? Or -- and what marked portion of your business from a deployment perspective, from an M&A perspective, would you like to add to?

So at the moment, we're pretty focused on reducing our leverage. And so it's -- from a pipeline perspective, there isn't a lot right now that's active in the marketplace anyway. Right now it's been a pretty quiet market. But I'd say our primary focus right now is reducing our overall leverage and preparing ourselves for M&A in the future.

Has -- what has surprised you, if anything, about how WEX has performed in this environment? What has performed better or worse than what you might have thought?

I think the -- we do a lot of work when you go through strategic planning, looking at Black Swan events and doing a lot of testing. I think part of what I've learned was that work -- well, we didn't predict a pandemic. It did help prepare us for when things started to happen. And so we have put a lot of thought around how would we react in certain scenarios, and that allowed us to do a lot of the cost-containment work that we did pretty rapidly. And so the lessons learned for me is that, that exercise, while it can feel academic, actually was helpful to us. Another thing for me was just, again, the resiliency of the model because you've had a pretty big impact in the travel vertical, which is only 10% of our business. But with fleet, it's been pretty remarkable considering the lockdowns and how much activity had continued through that period of time. And so that -- compared to -- that compounded with what has happened in our health care part of our business. It's really the diversity that we've had by focusing on verticals but having the scale to think about the business from a horizontal perspective has been really effective in a period of time that's been challenging. And so that has been one of my big takeaways.

We're running out of time for a couple more questions. But again, we've got a few questions from investors, but you should have an ability to send questions, the clients of William Blair. If just -- I mean your targets, Melissa, and if you go back, I think, from when you became CEO, you put out growth targets and top line growth of 10% to 15% and earnings growth of 15% to 20%, including some M&A. Is that still the right way to think about WEX over the long term? And the business is obviously a lot bigger than what it was. And I think your target was to double the size of the business over 5 years from 2018. So if you just talk about those long-term targets, your goal to double the size of the business.

Yes. When I set them, they were intended to be long-term goals. We've been hitting them each year over the last several years. We've been over the top end of the revenue goal and in the range of the earnings goal. And so I think that people had kind of shifted to thinking that's going to happen every year. And I think for us, we're going to go back to -- if those were intended to be long-term targets, we feel good about those long-term targets. We gear a lot of the work that we're doing to make sure that we're delivering against those, and that hasn't changed for us. It's part of how we think about capital deployment, both in terms of M&A but also in terms of capital deployment that we're using internally as we're doing development in the course of the year. So we feel very good about our ability to continue to grow the business. And I think that sometimes, people lose sight of the fact that we are continuing to add new business right now in this environment. Our sales forces are out there, and they're still delivering against lots of the business. And so that will help propel the growth for us next year on top of just some of the rebound that will happen naturally with what's happened this year.

Great. And you partially answered my last question. But what about WEX don't investors get? What...

Well, I think that they don't always understand the complexity in the technology that sits behind our offerings. They tend to be API-driven, highly integrated into our customer set. And we do that in a way that you can do business with really small customers and really large customers. And so we add in a level of complexity when you're working with a really sophisticated customer. We try to move it more into a mobile format when we're working with either a small business or if it's a B2B2C customer. And there's a lot of tech that sits in the background for all of that. And I think sometimes, we get categorized as like a fuel card business, which kind of thinking about what we were 15 years ago as opposed to what we are now.

Great. We're out of time, but that was really well done.

Thank you. Sorry about the lack of camera.

No problem. Melissa, Steve, thanks.

Thanks, Bob.

Great talking to you, guys, and have a great day.

Yes. You, too. Bye.

Thanks.

Bye.