WEX Inc. (WEX) Earnings Call Transcript & Summary

Good afternoon, and welcome to Citi Fintech X. We're in the bottom of the ninth inning here on our 4-day journey, and I'm really excited here. I'm pleased to welcome Melissa Smith, Chair and CEO of WEX. We have plenty to talk about here. Melissa, welcome to Citi Fintech X. It's a pleasure to have you.

Thank you. Thanks for having me.

That's great. And we also have Steve Elder, IRO for WEX as well. Everyone knows Steve. Great to have you. Okay. So let's dig in here. We have a bunch of topics to go through. But I just want -- I want to set the stage a little bit. Prepandemic, certainly, in our view, I think it was fair to say that WEX has really come along in the last couple of years, largest provider of fuel cards, rapidly scaling in the corporate payments arena, which was fairly new area for WEX. I mean obviously, travel, you've been there for quite some time and now branching out into corporate payments. And truly, since -- in the last, what, 3, 4 years, really becoming a best-in-class solution for consumer-directed health care administration and solutions there. So for me, a really remarkable journey in the last couple years in branching out your capabilities and solutions. Now obviously, the pandemic has had its effect on a lot of companies, and certainly, it has for WEX. In last call, Melissa, I believe, you really talked about getting back to growth being the main priority here. Obviously, improving pandemic conditions, the vaccine news that we're getting here is going to help greatly. But can we discuss what do you believe is in WEX' control here? Getting back to that growth, what is the big priorities there?

Yes, sure. So if you look at the growth history of WEX, it's really come largely from organic growth, and then we've supplemented that through M&A. And it's been a combination of we add new customers and we make sure that we retain the customers that we have. And then we've historically gotten a little bit of a benefit from our existing customer base. And so what we've really been focused on during this pandemic, when I talked about this return to growth, is making sure that we continue to add new customers. And we've done really well in this marketplace. And it's something that I'm particularly proud of for the sales and marketing teams here at WEX. I think that they really have connected with prospects in the marketplace. And they found ways to position the products that we have that make it even more meaningful during the pandemic period of time. And so we've seen really a pretty rapid increase in sales and specifically in over-the-road business, but also really good pipeline development in both in our health and what we're doing in corporate payments. So that, for us, is really important to the future growth of the company. So we've been very, very focused on bringing on new customers. We've also been very focused around making sure that we're rolling out products that can bring in incremental sources of revenue. I know we've talked about WEX EDGE, which when I think about the products that we're bringing into the marketplace, they're each bringing a little bit of incremental boost to us. And so in our fleet business, it's been this focus on making sure that we're bringing products into the market that the customer base are interested in, but also continue to diversify the business we have away from fuel prices. And so we're seeing some incremental benefit of that as well. And then the kind of the final leg of that stool is around M&A, which I'm sure we'll talk more about. But as we've made sure that we've been positioning the company from just a really strong balance sheet, which puts us in a position to execute eventually on the M&A front, too.

It's interesting, you have companies that go through challenges and they end up learning a lot about themselves internally, how they operate, maybe it's cultural. What are some of the learnings that you've discovered about WEX going through this period?

Yes. I'd say a lot of learnings. I think that the pandemic is difficult as it is for most companies. We will come out stronger because you do learn things. And for us, one of the things that's always impressed me about WEX culturally has been just the resilience of the company. It's part of -- you see growth -- in 2013, we’re $700 million. And so the fact, we were $1.7 billion last year, that -- there's a lot of work that goes in. And I don't think everybody can always appreciate that externally, the amount of effort that requires to grow a company. Now this last several months, there's been a really big focus around concept of really questioning everything so that you're making sure -- because you're in an environment where you don't really know what the outcome is going to be, none of us do. And so you're trying to scenario plan for a bunch of unknowns. And I think that's been a really big learning for us is really questioning everything, like any underlying vendor that we're doing business with. Just are they viable in this long period of time, all the way through the way we put together contracts. And so I think that it has put us in a spot where, I think, we were already resilient, but I think people are thinking about things in ways that they haven't in the past. And I think that there's a benefit to that.

That's really interesting. And obviously, the last year or 2, WEX has made quite a bit of moves on the transformational front, particularly moving some new processing on cloud and other areas as well. But how do you think about the pace of execution on some of these transformational initiatives going forward given -- obviously, we're still in pandemic conditions here, even though there's a light at the end of the tunnel? And also, I will touch up on this more, but potentially the distraction with the tie-up of the eNett-Optal issue there. So how should investors think about that?

Yes. One of the things that I have felt for a number of years, technology has been one of our core pillars. It's part of why we've always won in the markets we're in, but we wanted to make sure we really set a journey probably 3 years ago to make sure that in any environment, that our technology would stand up. And so that meant that we were really focused on agility. A lot of that was moving into the cloud, moving things into micro services that things were more -- just more resilient depending on what was happening in the environment. And also, it just allows you to do things faster. So we really made huge progress. And it was a place that we always felt like it was a strength anyway. But over the last several years, we've moved -- we just finished our last major fleet platform movement into the cloud. And we're probably about 2/3 of the way through the cloud migration across the whole business. We've done that with very little disruption. And we're seeing just really great benefits in terms of performance, reliability, cost, kind of, across the board. We've seen benefits there. We've also increased automation. We now have -- we brought in a group of people internally that's been working on artificial intelligence, and you've seen a lot of the robotics work that's really moved throughout the company. So I feel like if you were to look backwards where we were 3 years ago, which was still a place where we were winning business because of our technology. It's even more so true today, and we feel really good about the glide path we're on. So the pandemic, when we really stepped back and decided how we wanted to prioritize the money that we're spending this year, we continued to move forward those efforts because we think that they were important. We did move things out -- think of that as like a quarter. So we elongated some of the projects, but we really didn't put our -- any emphasis change around the fact that we think this is important to the company.

And I would imagine product development velocity is going to be a lot better at some point -- obviously, when we get through this period, but…

So one of the things that we had done, now it's been at least a year, if not 2, where we moved things into an agile methodology and really focused on cycle time and releases. And so across our portfolio, we've been doing releases. I think the longest cycles for us are generally a month. And so we have rapid deployment. And there's parts of the system where, obviously, they're much more disciplined and rigor around that. But it's a combination of evolving what we've been doing on the QA front to be much more automated with -- and then altering the systems and the processes around that have allowed us to just move a lot faster.

That's great. That's very interesting. Now we got -- investors obviously have called us quite a bit. We have to address the elephant in the room per se. I want to talk a little bit about the eNett-Optal litigation that you're going through to the extent that you can and feel comfortable with, of course. But first, maybe can you provide us with an update where we are in this whole process? And any sense of the timing on potentially new developments?

Sure, sure. So I'd say kind of the big thing of late, which I think you're all aware of, but we are very pleased with the outcome of the preliminary trial of specific issues, and that was something we spent a lot of time working towards. The next few steps that shows really to -- we both have appeals in that are waiting to be heard. And so that's still in a wait-and-see mode. So we're really dependent on the timing of the court system. And then the second part of the trial which will come, we think, next year, it's, again -- it's up to the court of when that happens. But they have been expediting the process, which has been helpful. So we think that, that could be second quarter-ish next year, although, again, we don't really know for sure.

Sure. That's helpful. Certainly, from the earnings calls, it does seem that WEX' confidence in the matter whether there was a material adverse effect or not, it really remains unchanged, and you do seem to be pretty confident there. But prudently, you've also taken a number of steps, you’ve raised some capital to buffer your operating position, who knows what can happen, obviously. But maybe you could talk a little bit to your level of comfort with WEX' capital position right now? And maybe how you see that standing up, perhaps things don't go the way you expect?

Sure, sure. So just to reemphasize what you said, we do believe that there was a material adverse effect. And that was the intent of the word and the contracts that we both agreed upon so that we do feel strongly about that and, I'd say, if anything, probably more strongly today than we did several months ago. And in terms of preparing -- I talked earlier about really stepping back and thinking about anything that could happen. We wanted to make sure that we were prepared in case, as you mentioned, the court system went against us. And so we really have shored up our finances, and you can see that by the amount of cash, we had over $1 billion of cash -- corporate cash on hand at the end of the third quarter. And so we are very well positioned in order to close the transaction if that was what we were required to do.

Now the question we do get from investors, and I understand there could be sensitivity on this question. So I understand where you're coming from. But there is also the upside scenario, right? We do have the vaccines that are coming. And you could see potentially this pent-up demand in leisure travel come back. Obviously, it will take some time. But given that scenario, and I'm not going to ask you, are you considering reengaging in this deal. But at least, is there the option for WEX to go that route if things work out a little bit more on the macro front?

So I'm just going to reiterate, we believe that there's been a material adverse effect, and I don't think I can comment.

Okay. Okay. That's fine. That's fine. I appreciate that, though. So let's focus a little bit more on the segments here. Let's -- certainly in Fleet Solutions. You can make the argument that at least on a co-branded and the Enterprise Fleet Solutions, it's a fairly penetrated market, particularly in North America. How would you characterize the competitive environment in SMB? There's this notion. Obviously, WEX has always had, I think it's about 1/3 of the fleet card business has been typically SMB, small fleet. But it seems like you may be playing a bit more in a competitor sandbox going forward in that area. How do you think WEX is poised to win market share in that area?

Yes. So if you look at the way that we win across the portfolio, it is different based on the size of the fleet. So the really large fleets we're winning, talk about technology, level integration, the features and functions that we have, really important to that customer set. It's been part of why we continue to win business in that space, both in the North American fleet side but also in the over-the-road space. When you get into the partner portfolios, it's a lot about our sales and marketing capability and it’s combined with the product, so the ability to grow portfolios and that really translates also when we go into the marketplace directly. So our core competency, which is what the oil companies have outsourced us is around now digital marketing. Yes. And before that, it was still lead generation, but it's much more modern in how we're approaching the marketplace now. But the marketing capability that we have, what we're able to do is really go in and understand what customer segments are looking for in the product. In some cases, they are very brand loyal to a specific brand. They're not moving much from a particular geographic area, in which case that we can play to some of the private label offerings we have. In other cases, that may not be as true and they need broader capability or they don't have a particular brand loyalty, and so we can play that with our direct products. And so our ability to get into the marketplace, market that effectively and have an offering that has just eased, which is really important to that customer base. So I think all that complicated product set that we have, we simplify that into something that's mobile-enabled and push that out to that customer base. And so we've continued to take market there. It's actually less competitive in that part of the marketplace where any large customer, if you hear us name somebody on a call, it is a competitive win. When you get into the small fleet marketplace, which we don't tend to talk about in terms of the named fleets, those would be more likely to be either someone who's paying cash now or general purpose credit card. So still lots of market opportunity.

I think WEX' fuel card business is always thought of certainly more upmarket, great capabilities. I would argue, probably more, one of the leading edge areas, technology-wise, a lot of bells and whistles. But then as you get into that small fleet, it's about convenience, right? Is that the main differentiator?

It's convenience control. What you hear from that customer set is they don't really want to use a general purpose credit card. They've gotten to the point where they don't really want to give their employees cash. They're not really aware of an offering like ours. And so we actually have a pretty high close rate once we get awareness. And so that marketing part is really important to that customer set. And if you look across our portfolio, our average size customer is like a 14-vehicle fleet. It's actually relatively small. Even though we do business with some of the largest companies in the U.S. specifically, it still slants towards smaller businesses just because of the makeup of the market.

All right. No, that makes a lot of sense. And I want to remind investors, you can always ask a question on the question box to your left, I'd be happy to pass them through. I want to talk a little bit about credit right now. WEX has done a pretty good job in managing credit so far. And how should we think about the interplay between credit extension and driving new sales? I mean clearly, credit is a valued commodity in today's marketplace in this environment, especially. So I mean do you see credit availability becoming more of a key competitive component over the next few quarters?

That's a good question. I think of it as really interwoven with the product. And so when people are looking to us, the primary thing that they're looking for, you mentioned convenience before, it's convenience and control. So think of credit as kind of like as a secondary. And of course, I mean, we've got, obviously, some very sophisticated credit tools that we've developed over years. And so we use those in order to make our decisions. And if you look at our history of credit loss, it's been very strong. I don't think of it as actually changing that much, I guess. Like it changes on the fringe, but it doesn't actually -- we don't see wholesale changes. Even if you go back to 2008, I would say there wasn't like a big wholesale change in the prospects or what they were looking for. You do get a little bit if you ask the customer prospects, what's most important, credit creeps up a little higher, but it actually doesn't -- it's not high enough that is typically swaying the decision.

Oh, wow, that's interesting. So it's really convenience at the top of that pyramid?

Convenience and the idea of control.

Controls, yes.

One of the features that people particularly like when you think about a small fleet in particular, they like the idea that they can lock it down to just fuel. So -- and that one mechanism, you can lock it down to fuel, you can do fuel and lubes. And so control that we have around purchasing is really attractive to a smaller customer set. And even if they choose not to use it, it's the idea that they can is something that's really important to them. And as you get larger, kind of the more sophisticated tools around like visually being able to display a whole fleet behavior pattern, so you think of it like a scattergram that goes on to a screen that -- where you can easily identify outliers, that becomes more important. So it's much more sophisticated, much more integrated. But smaller fleets do care -- all of them are looking for how can they control the behavior. With the oil company customers that we do business with, they also offer discounts and so there's a pricing element that's associated with that, too.

Right. How is that discount level trended? I mean I was thinking as fuel prices decline, maybe the value proposition isn't there, but obviously controls major, major component of the value prop. But does the discount levels change with the overall price of fuel? If, say, for instance, if we were to see fuel prices come back in any meaningful way, would that discount become more of a lever to grab new customers?