WEX Inc. (WEX) Earnings Call Transcript & Summary

Welcome to the Wells Fargo TMT Summit 2020. Your session will start momentarily. Please note, this session will be recorded.

Good afternoon, everybody. Thank you for joining us. We're thrilled today to have from WEX, Roberto Simon, the CFO; and Steve Elder, the Head of Investor Relations, extraordinaire. So thank you, both, for joining us and sharing some time. I know you had a busy day. [Operator Instructions]

So that being said, maybe just kick off with something that came out of the quarterly call that jumped out at me because I remember it happening during the last sort of economic recession slowdown, which was a discussion around investing and sort of a variety of initiatives that I think maybe caught the market off guard a little bit. But like I said, 10 years ago, 11 years ago, when we first started covering WEX, a recession didn't deter the company from stepping up and investing in some opportunities that years later, clearly, were the smart thing to do. So maybe just sort of walk us through some of those key areas of the investment dollars and sort of the thought process and the opportunity and just sort of start there, and then we'll just sort of keep on talking all things WEX.

Good. Sure. And obviously, Tim, thank you for having us today, and good afternoon. On the earnings call, if you recall a few weeks ago, we talked about a couple of areas where we are planning to spend more money compared to our Q3 financials. The first part -- as part of every year in the U.S. health care business when we go through the open enrollment season, we increased expenses in a couple of areas. Obviously, one of them being the call center because I believe there's a lot of work around the enrollment season. And this is nothing different from the past. I mean every year in Q4, we have this pop up in -- on the expense line in the -- in cost of sales. But we wanted now to make sure that everybody was aware of it. I'm not surprised because with all the things happening, we all forget about some dynamics that may be seasonal in our business, and we wanted to make sure that everybody knew about it. And even if you look now back to 3 or 4 years in the health care space, it has been the norm, both from an investment increase in Q4 as well as on the margin profile. So during the year, margins are higher. And in Q4, on the health care space, the margins go down. So that's on the health space. And obviously, as we said earlier this year, we have kept the accelerator, investing in IT, investing in sales and marketing on that segment. So -- which is paying off because we have continued to grow double digit, even though we had some purchase volume declines, especially in Q2 and Q3 started to come back. So that was the first area of investments. The second one, which we talked about was increases in the sales and marketing expense line, mostly in Fleet. And to your point, why that, I can tell you that this, as we highlighted and Melissa talked during the call, and Steve has been in other investor conferences, we have got great success recently in the Fleet market. And we are using these additional funds to take advantage of that momentum. As an example, if you recall, we gave color on the approved applications that we saw in September for both North American fleet, which I recall was up 15%. And then in the over-the-road or on the trucking business being up 21%. And this strength has continued in October and in early November as well. So all of that gave us the comfort that we should get back into the investment mode. And also, if you think about some of these marketing campaigns, earlier in the year, despite of the cost -- putting aside the cost containment, they didn't make sense to do them because everybody was transitioning to working from home. So there was a lot of disruption in the marketplace. And now although it's the new normal norm, I will call it, but we feel that it was the right time to continue acquiring new businesses. So I will think specifically this part as a reinstating part of the marketing expenses, that we have taken out of the P&L in Q2 and Q3 rather than increasing the funds because if you compare what we are projecting for Q4 compared to last year, we are not going to be investing more, but compared to Q3, we are. And just to end on the investments, we know that the Fleet -- the revenue for the Fleet segment is down year-over-year. But for the areas that we can control, being new sales and retention -- I mean the retention rates are being the lowest we have seen in many quarters. So that's -- on the front, it's a very good year for us. Now same-store sales are materially down. So it's mitigating all of those good economic indicators that we are seeing internally.

On the topic of Fleet, where -- and so you're bringing back some of the dollars that were taken out, I guess, but thinking about where the opportunities are, I mean, are you seeing some opportunities that you feel like we can get in here and capitalize, whether it's something competitively, whether it's something where this environment has just made business owners think a little bit more about how do I manage costs and manage my expenses and so let's try to get in front of them and keep this type of product out there? How are you sort of thinking about that?

We think about all of the things that you just mentioned. And some of them, we believe that there could be a change in behavior because the fact that you go to many places and you cannot pay with cash has also -- we believe that there could be a behavior change now in some of these small fleets. And that's why doing those marketing campaigns and investing in this part of the business now makes sense. As you said, when we started the conversation today, back years ago, WEX came out of the recession in a much better position because we took market share from other competitors that were not investing as they were supposed to. And that's why, for us, the new sales and the retention of our existing customers is really important.

Yes. And another question on -- staying in the Fleet division for a second here. Prior to the pandemic, there were -- there was the beyond fuel-type initiatives, however you want to phrase it, of sort of expanding the product set, whether it be other places to use the card, not just fueling up but buys, et cetera. I can even think back to conversations Steve and I had a couple of years ago about different products and services. You've got this platform of businesses, and other people want to reach them cell phone service, tires, I think stuff like that. I mean can you talk a bit about how you feel about those efforts once we sort of get past this environment to how they were sort of playing out? And then if you restart them, if they're actually still doing quite well? Just thinking about those other monetization opportunities.

Yes, absolutely. That's for us -- you probably are referring to our EDGE product. Obviously, if you recall a couple of years, not even 2 years ago, now on the -- with implementation and the onboarding of Shell and Chevron, we had a few quarters where we were just dedicated to that. And obviously, once we pass those 2 big implementations, our efforts are turning to the EDGE products. And for the most part, what we offer, this is a group buying program that we offer to our customers where we -- what we are doing basically is we are able to negotiate discounts on many things that the customers could buy like fuel, like tires, like hotel rooms, cell phone plans. And what we do basically is we pass along some of the savings to our customers. So think us basically offering more services at a better price for them. And with one-stop shop, which in this case, is WEX. So essentially, what do we do? We negotiate a group discount with one or few providers similar to what they would offer to a large customer. And we passed most of that discount to the small fleet customers, which sign on our EDGE program. And what happened here is we're a team, everybody wins. The merchant gets incremental business, the customers are happy running a better place and we also get a piece of the pie as well. So it's a win-win for everybody. That's now the program that we have been putting a lot of effort even on the pandemic because once, as I said, we did the Shell and Chevron implementation last year, the effort, regardless of the pandemic, we have been able to work on that front a lot.

So in terms of measuring, like is the engagement and the activity that you're seeing at, below or above? Is this something where -- I get that every company is trying to figure out other value-added products and services. And this seems very -- well, I guess the question I'm getting at is, are you seeing something that's really encouraging if we keep putting awareness and marketing and broaden the platform out, we actually can have a very robust platform of products and services that small businesses will really engage with? And this isn't just a trivial thing that we have, it's something that could become actually a bigger value proposition for just being a WEX network member?

Yes. I mean we would like it to be a big part of our business in the future, but obviously, we are in the early stages. We started out by doing some tests with a small, over-the-road trucking fleet and had good initial success. And then we have start rolling that into the local fleet customers this year in waves. So not everybody at the same time, but by different groups. And what I can tell you is that, so far, we are happy with the initial results that we have seen in the marketplace. As you look into the future, over time, we plan to continue adding products and services to our fleets that can buy and expand their offering. But I think it's a bit early to tell if it's going to be very big or if it's going to be smaller. I mean we have, obviously, our expectations. And I remember when I joined the company that we just bought EFS. The EFS business, they had a good chunk of what we call now the EDGE product. And the idea is to expand all of that into all our customer base, but it's not going to be something that will happen in a quarter. It's going to be -- it's a long-term play that we want to test. And it could be that it works better in some groups than others. That's the other thing we are trying to evaluate, how it's working in the different fleets that we sell to.

So one more question on Fleet, and then we'll get to Health and Corporate. Within Fleet, there's obviously a lot of discussion economically. Some industries and sectors of the economy, obviously, hurt extremely hard. Some will come back when the economy picks back up, others might be permanently scarred or damaged. As you look through your customer base, whether it be large versus small, and I know they can be quite different, do you see any sectors or types of markets, however you would think about it, that might have a longer road back? Or do you feel like generally across the portfolio of distribution channels, geographies, industries, there's no reason to believe that the same-store, that the vehicle utilization shouldn't generally be in pace with an economic recovery?

No. We truly believe that as the -- one of the indicators is what we were talking before, now the attrition rates. Attrition rates are really very, very low, lower -- the voluntary attrition is really low, lower than it has been in the past years. So that's a great indicator. Now that as things start to come back, we should see those volumes picking up. I think -- but if you break our business between -- you were talking about the dynamics, large and small fleet, sort of North America fleet versus over-the-road, they are clearly performing very different during this pandemic. At the beginning of the pandemic, the OTR business for a few weeks, it was suffering because there was a lot of supply chain disruption. And then it becomes -- that is the driver of the improvement for us. I mean in the last quarter, over-the-road volumes were up 8% to 10% depending on the months, and we are continuing to see that. Obviously, that comes with different revenue streams and the way we make money in the small fleets, medium fleets, large fleets or even when you go to the trucking business is very different. And we are seeing that through our financials, especially in Q3, where we saw late fees are down, account services are down, processing is up. But then when you do the math on the volume and the processing dollars. You see all of that because the way we make money is very different.

So turning back to health care. It's a big industry, HSAs. I guess a couple of questions. First, sort of near term, and I don't want to necessarily get into guidance in modeling too much, but a lot that goes with HSAs and employments and then COBRA accounts and is there anything, I guess, I would ask that investors should be thinking about as we go through the year-end annual involvements? We see still pretty high levels of unemployment. And just sort of thinking about account on file metrics or anything that might not follow the normal seasonal cadence that the people should just keep an eye on this, be aware of this as we move through this period?

What I would say is a couple of things. Obviously, one is how the purchase volume behaves, and we saw it in Q2 or late Q2, and we saw it in Q3 coming back. So that's an area that we keep a very close eye on, how people are able to spend their HSA accounts or FSAs and going to the doctor. So that's an area to keep an eye on. It's only 20% of our revenue, but it's an important part of it. And the other thing I would say is, in Q3, we grew double digits. We still believe that in Q4 and for next year, we're going to be growing double digits. The team is now embedded into the enrollment season. So far, we haven't seen anything to be alarmed. Obviously, we are not going to be growing the 18%, 19%, 20%. Some of the partners have slow EBITDA growth. But overall, we still feel that despite the pandemic and some of the unemployment, the business is performing really well. Double-digit growth is what we should see for a -- Q4 and as we think into next year.

And so then stepping back from the near-term and thinking about the longer-term health business and, I guess, HSA, but when you think about the drivers there, right, they're signing up new channel partners that are doing and supporting the accounts. There's been the businesses that are sort of supported by those entities to get their employees to sign up and opt into the HSA, the low premium, high deductible. And then there's a value-added sleeve of products and services that you guys have talked about, tools for conversion, things of that nature. And what's the predominant driver, you think, for the next couple of years? Is it really just getting more accounts live on the system through existing partners and signing new partners? Or is it at a point where the growth is going to be a little bit more influenced by the value-add and things of that nature that you bring in to the operating platform?

Yes. Let's think, what do we have today? If you think about our U.S. health care business, it's basically a SaaS model. So approximately 2/3 of the revenue is through the SaaS model, which basically is a monthly charge per account. And then, as I said before, approximately 20% is revenue that comes from the interchange on the -- when people use their cars to access their health care funds. And then the rest are what we call professional services and all the other things. So that's the breakdown. If you think about the driver or drivers for growth, obviously, the primary driver has been the number of accounts that we service. Most of that has come from health care from the HSA accounts, which have been driving the majority of the market growth. So that's a key driver. And more employers are offering high deductible health care plans, which allows for an HSA account as well as more employees are choosing those plans. So the combinations of both is leading to the growth in the market and the growth we have seen in the business. If you think in the next few years, obviously, that growth will continue, probably not at the pace it was growing because, obviously, the best is much higher, but we will continue seeing new accounts and we will continue signing new employers. And that's where I think it's very important talking about the distribution model because you talk about the partners, which obviously, like we do in Fleet, we have, we work in the U.S. now with 9 of the top 10 oil companies, and we have sales organizations that only serve 1 of them. We have clear firewalls to make sure that everybody has their own customer base. But part of the reason why we did the Discovery Benefit transaction was to tackle the distribution. So we have a distribution through our technology from partners, but also with the Discovery Benefit acquisition 18 months ago, it can help us on the growth rates, going more direct into the market. And if you recall, when we announced the deal, DBI was the faster-growing HSA provider among the top 20, and they have continued to grow rapidly even in 2020. I mean, I recall, even last month, I mean, they were growing only 15%. So that's something that we wanted to make sure, not only to continue growing with the partner, but having that [ not direct ] channel distribution was very important for us. And I think we have now after almost not 2 years, but it's going to be more than 1.5 years now, we have proven to our partners that we can work and grow both channels of distribution.

Is DBI focused on a different size of customer than your -- the big marquee partners? Is it more of a down-market, mid-market platform?

I mean you could [ cash ] customers that we could sell to -- from both a partner channel or from the direct distribution. And you could have not. You could have that. But for us, what is important is what I was saying before, making sure what are the rules of engagement, both from our partner channel side, but also from our direct sales side. And if you recall, when we did the acquisition, we got a lot of questions around that. And I would say that if I look back today, 18 months later, I really give us an A+ on that area. And to the -- kudos to the team because they have done a great job managing both pieces of the business and making sure that we continue growing both of them, which is key for us.

Yes. No, you're right. That was the channel concept is definitely a -- at the time of that transaction.

Yes.

Tim, I'd just throw in there that today, on the HSA platform, we service customers of all sizes. We have more than half of the Fortune 1000 in the U.S. is on our platform either directly through Discovery Benefits or through one of our other partners. But we do particularly well in those businesses because we have all kinds of different types of accounts. So think HSAs, FSAs, HRAs, et cetera. And so from an employee point of view, if you've got a choice and you change 1 year, it's the same platform. It's the same look and feel. It's the same thing that makes it much more appealing to that HR group because it saves them a lot of time and effort in reeducating. So we have a lot of small businesses on there, but the platform is fully capable and, in fact, does handle a lot of large businesses where we do particularly well, actually.

Yes. Let's turn to Corporate. I think we've got about 6 or 7 minutes left here. Obviously, travel is what it is, and that's pretty well documented and known. And when travel comes back, we know that, that part of the business should follow that trajectory. I guess, I'm curious, that being said, within travel you never let a crisis go to waste is what somebody who's much smarter than me has said. If you found new opportunities, products, services, wallet share within your customer base or the industry as that industry has grappled one of the hardest hit where, okay, here's something interesting that we could help out with when things get better, or is it just going to look the same as it always has when volume starts to come back?

Listen, I think the most important thing when the volumes went -- were down and we were very -- we clearly -- we thought about cost containment and many other things. We thought it was very important to be close to the customer. And one of the things, all our relationship people have stayed close to the customer. In some cases, we had no volumes for weeks. But at the same time, Tim, we were able to work on other things. As you recall, we were migrating to our internal platform. So we took advantage of that, and we accelerated the integration into our internal platform on most of our customers as -- so that as volume has been coming back, we have now more than 90% of the volume in our internal platform, which we will get the benefit as we get into the next year and into the future as volume recovers. And the other thing was, whatever I would call it products or enhancements or things that we were developing and working with our customers, currency capabilities, whatever you can imagine, we have kept working on those. And I think that, that's an important thing to do when you are in a situation like this. And as the things improve, the customers are going to be grateful that we didn't put on hold or we want to set up 10 new currency capabilities. Well, they are already in place. So that's going to be an incremental revenue stream for them that they may have thought it was going to be 2 years from now. But we took advantage of the situation of lower volumes, and we kept working close with them to get things settled. How the market or the volumes is going to come back? You know better than me. We can talk with 100 people, and you will get 100 different answers. We just want to be prepared. We work very close with the OTAs, and we keep the communication weekly to understand how volumes are coming back. It's coming back by regions. It's in certain currencies. It's more domestic. It's more international. So all of those things we keep now working with them and that's what we have to do.

So the last [ 3 or 4 minutes ] here. On the other side of Corporate is the B2B, right? The invoice, the AR, the AP integrated, the part that everybody really gets excited about, I think, in terms of the market. So you've obviously made some acquisitions, continue to build out a -- broader product suites, lots of energy, lots of money flowing into the space. Sort of where do you feel like you stand right now in terms of capabilities versus scale? Maybe you've got a capability. You'll build the scale over time. Or are there some capabilities that are still missing that you want to get into the fold that could really jump-start the scale side of the equation? Just how do we think about M&A, how we feel like, how you feel about the product set, things of that nature?

Yes. I think it would be good not to look at all the pieces that we have today because we have a unique set of assets in the marketplace. And I will tell you why, a few examples. First, we own a bank. So we do our own issuing and bring a compliance framework for our business. So not everybody has that. Second, we own the virtual card issuing platform both from a front and a back-end point of view, not everybody can offer that. Third, we own a cloud-based transaction processing platform, too. So each of these pieces could potentially be sold as individual pieces or we could bundle them as an offering. So we believe we have a unique set of assets as we think into the future. And we really believe there is nobody else that has a similar set of capabilities as we think now going forward. If you think about what we have been doing in the past quarters, we have been investing in a number of areas to make the platform feel like a single offering because that's also what you want. You may want -- if you want somebody to use everything. You want to pass something that feels like the same, and that is one offering. And we have been adding several enhancements that could potentially be sold individually if the customer choose to do so. So specifically, to give you a couple of examples. In Q3, we talked about bringing checks writing capabilities in-house as well as offering [ A/C ] payments. So we can be a true one-stop shop and deliver payments in whatever form is necessary. So this is clearly an area where we have a lot of internal conversations about how much to invest. And what we should expect from a growth point of view for years to come. And that's the debate, how much you invest and how much you get rewarded in revenue and profitability because we are competing. We cannot -- remember, that we are competing with the small companies that they just care about volume growth, and they don't care about even revenue or profitability, and we have to manage both pieces. But I think we are in a good position as we get into 2021 and beyond on the front.

Just real quick, we probably have a minute left. But just to follow-up on that. You're obviously a sales-driven organization. You talked about investing in sales around Fleet and Health. Like I said, just in a quick minute or so, I mean, how do we think about the sales platform? How do you feel about it? Like is this an area where there's an investment sitting out there at some point about building out partner channels, direct sales to -- in this business where you feel pretty good about the way sales and go-to-market are structured to get the customers, to get the volume?

I think -- and Steve has talked many times about that, we go direct and we also go through the partners. And we signed last quarter FIS, and we will continue working on both channels. We think and we believe there are opportunities. The economics are very different. But at the same time, I think it's good for us to be able to know and work with all the different channels as we are doing. Now we are talking about the health care and the fleet side. I think it's our sweet spot, to be in different channels of distribution in the different segments where we operate.

Wonderful. Well, with that, we've used our 30 minutes and now a little bit more. So Roberto and Steve, thanks so much for the time. Thanks for participating in the conference as well. And look forward to staying in touch. Have a great week.

Thank you.

Thank you, Tim.

Thanks, guys.