WEX Inc. (WEX) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. I'm excited to introduce our next group of speakers. Roberto Simon from -- who is the CFO of WEX. And then we have the Head of IR, Steve Elder as well, who's the legendary Head of IR. Both of them have been joining us at our conference for quite some time now. It's really nice to have you back here again with us.

And it seems like the pandemic really hit WEX hard in a number of different fronts, not for reasons that you guys specifically didn't control. It's just unfortunate, you were sort of exposed in these different segments a little bit harder. What are your learnings from this experience? And what would you have done differently if you had the opportunity to do so?

Yes. Well, first of all, thank you, as always, for having us. It's a pleasure to be at your conference. As you said, and we think we have been impacted in all of the different segments differently, obviously, but all of them, have had some sort of impact, certainly. What I can tell you is our Travel business, I would say, obviously, has been the most affected, our most challenged. And then the corporate payments perhaps is the one that has been more advanced. If you recall in Q2, just on the pandemic, we were just flat of volumes. But since then, things have accelerated, which is great news for us. I think it's important, that we talk, Sanjay, about all the decisions and actions that we took, no, through the process. Starting with, obviously, we provided guidance in February. And from there, we took actions to cut operating expenses and capital expenses. But we clearly -- and were very clear, on maintaining the investments in the high-growth areas. And I think that's paying off as we are, 6, 9 months later. We also raised deposits at our WEX Bank to make sure, there was no shortage of deposits to finance our working capital. We also raised equity and capital in July with Warburg Pincus at corporate level to ensure, we were absolutely covered depending on the outcome of eNett and Optal. We had more meetings weekly. We set up new statistics and KPIs that we review weekly, a scenario planning. Anything that you want to talk. And obviously, the MAE that we declared on eNett and Optal. But I can tell you that even with nobody knowing, the crystal ball on what was coming and what is still to come, myself, the ELT and all the Board, we feel really good about everything and all the decisions that we have taken. And I believe, and we can see that, through new customer signings in the past 6 weeks and in the past 6 months, as well. And the pipeline that we have that we are a much better company and stronger than we were before.

Yes, I kind of agree. I feel like you're stronger today coming out of, hopefully, the pandemic than you were coming in. I'm curious sort of how you guys see it. Obviously, when you think about getting larger on the travel side, even though travel's still challenged. You think about some of the costs that you've taken out of the equation. Maybe you could sort of speak to that dynamic? And then what are the risks from hereon out?

I mean, as I said, we really believe and we feel, we really believe and we feel we are in a much stronger position. The revenue will come. I mean, it's a matter of how quickly it comes back but we have more customers that we did before in all of the segments and we're going to benefit from that. And we have got a lot of winds in the past quarters and our pipeline in all of the 3 segments, and Melissa yesterday about that, Is stronger, more stronger than ever. So on top of that, we have done 2 acquisitions, both in the travel space that will give us a scalability and access to other markets, that we were not -- or that we had a small presence. And the second one, was the health care acquisition, that will simplify and enhance our offering in that market. So we really feel that we are in a much better place. Now on the other side, the risk that WEX had before, and we still have today. I don't think they are different. We all know that we are economically, no, sensitive. And generally speaking, there are some parts of that sensitivity to the cyclicality that we really cannot influence, no? We are, there for the good and also for the bad, no, when things turn around.

Well, talking about that economic sense, the -- obviously, oil's had a wild swing through this whole phenomenon with the pandemic. I'm curious if you guys thought about reorienting the business away from the dependency on oil price as this was happening because it's been quite a volatile impact. It has quite a significant impact on revenues as oil swings around, even though the underlying business is doing so well. So maybe you could just talk about that. And then obviously, a lot of discussion around EV and sort of how that plays into demand for oil in the future. Maybe you could just speak at a high level sort of how you're thinking about the EV impact as a lot of capital is being put into companies in this space and Tesla stock keeps hitting highs. So maybe you could just talk about sort of the EV setup as well.

Of course. So I will start with your first question and then jump into the EV if that's okay. Obviously, listen, I remember when I joined the company in February 2016, oil prices were at $1.95. So this company is used to that. We -- I haven't been used to the $4, $5 per gallon, but Steve has and that's part of our business. We are going to go up and down. We know really well when oil prices move, how financially we are being impacted, nothing has changed there. And also how to manage our working capital and our free cash flow. So it has not changed, how WEX used to operate and operates today. And as you can imagine, through the process of the pandemic with the eNett and Optal transaction and everything going on beyond the fuel prices. It's not that we have not put consideration or thoughts on reorienting the business. It's something that we do every day. And with all the things that we have on our plate, it was not something that we took even more emphasis. What is clear is that on the long term, our, main plan or our main, -- the main things that we want to continue doing is diversifying the business, especially diversifying, from fuel prices so we are less sensitive overall. But we will always have some exposure. At the end of the day, we have a huge business and exposure will be there. It's continue reducing the sensitivity. Moving to the EV and despite, as you said, all the noise and news, we still continue to believe that the impact is a long ways out in the future. For now, the EVs, they gain -- obviously they are gaining interest but it's more on the high-end consumers and also on the small group that are socially conscious. But really, there is very little activity on the corporate world. And in the corporate world, it's funny because if there is some activity, it's more the executive that are driving these EVs versus not putting them into the fleets. So it's interesting, that dynamic. And now what I can tell you is that more than ever, so that's obviously increasing, we continue to have meetings and conversations with all of our companies. And in many cases, they are coming into us, fleet management companies, the oil companies and some of our large fleet customers. They are coming to us because they want to make sure that they still get all the operational support that we give them today. So this is really good because it's helping, us to work with them and together, working on the future.

Steve, anything to add to that? You've been there a little bit longer to see the cycle through?

Yes. Well, certainly, as far as the EV goes, I echo everything Roberto said. I mean, there are so many logistical things and operational things that need to be figured out before it can have any sort of meaningful impact. Just start with just the electricity grid. If everybody had an EV, could we -- could we charge them? Can the electricity grid handle it? And the answer is probably no. And therefore, there's a lot of infrastructure that needs to get built out like that. If you think about a charge today, a fast charge today takes 30 minutes, 20, 30 minutes. That's not sustainable when you're out on the road. That's way too much time. So I think all those things will improve. But there's just so many hurdles that are like that, that we just believe it's a long ways away. It probably happens in China or in Europe first and eventually gets here. And it probably does eventually get here. But it's something that we're embracing as to -- we have hundreds and hundreds or hundreds of thousands, really, of relationships lean on those and develop the products that our customers need at the comps.

And are you guys having like preliminary discussions with suppliers? Or do you believe, like your oil companies will be suppliers of that electricity and when the time is right?

Both, right? I mean the charge points of the world, there's a bunch of networks like that, the oil companies that -- does the convenience store chain have its gas pumps and then put an electric charging station? Probably some do, maybe some don't, but all of those conversations. And they're all trying to figure it out. But all of those are happening.

Got it. So moving on to sort of M&A. In hindsight, some of the moves you made around eNett were spot on. You guys got a pretty good deal there. And it set you up to do more M&A, I guess. So where do you see the opportunities? And maybe you can sort of size the range of opportunities?

Yes. Obviously, Sanjay, we have very happy with the outcome of the eNett and Optal deal and the risk, that has given to the company. And it has positioned us, as I said before, really well as the Travel business recovers, we are in a very well position, to capture most of the recovery. We have a lot of work to do. Also, let's put that, loud and clear. But the outcome is -- was really good. At the same time, you know that we announced a few -- a couple of weeks ago, I think it was now -- the acquisition of certain HSA assets from HealthCare Bank. That was our custodian bank. And this will allow us to capture better economics on the assets over time. It allows, no, it expands our role in the consumer data health care ecosystems. And also it's going to help us in having better and more streamlined relationships, in this market. So continue doing M&A on all of this on the same segments. I would say to you, future acquisitions, we will continue being in the segment where we operate. They have to beat, both the nonfinancial and our financial criteria. But as we always have said, we want assets that grow organically faster than WEX. And as we were saying before talking about fuel prices, we want to continue diversifying from fuel prices, which is very important for us. From a size point of view, I mean, you have seen us. We did the EFS, then we did 3 mid- to small -- we did eNett and Optal, and we have done HSA and a couple of various smalls. So it's something that -- it's good when you do transactions that give you scale like EFS and eNett and Optal and also when you do smaller transactions that give you, more offerings and you continue expanding your footprint. So you probably will see us doing both. But obviously, the actions that we took in the summer with capital, with the banks obviously, and with the outcome of eNett and Optal has reduced not the restriction that we had while we were working through the Optal -- the eNett and Optal, no, process, obviously.

And when you think about larger scale acquisitions, would that just be adding to the verticals that you're in right now? Or would you consider another leg to the stool? I mean, how should we think about that?

I mean how should we think about that? Yes. I think for now, we have always said that we want to stay in the segment where we operate. But again, we need to see out of this pandemic how things end. And then we will see if it's the area to stay or there's other areas not to look into. But for now, that's what -- where we have been focused.

Okay. Let me get into the various segments, and then we could talk about other stuff if we get there. But just taking a step aside from the pandemic, you've obviously had some nice share gains in the fleet business. A lot of them came from the large oil companies. That's obviously helping you through this pandemic as those are the businesses that are doing relatively better. Maybe you could just talk about how the complexion of the business has changed and how you expect it to come back or look as we move through this pandemic into an economic rebound, hopefully.

Yes. Well, you know, 1 thing that's important is that our business in the last 5 -- since the acquisition of EFS, it has changed a lot for positive. The EFS acquisition in '16, it gave us -- it has been a great acquisition. It turned out, to be much better than we thought, although at the time I remember, when I joined that, there was a lot of turmoil with the economy as well. But the company has done everything and more than what we expected. And listen, during COVID, this market is Brazilian. It's growing. We grew in the quarter, 16% volumes. And we have steadily continued to gain market share every quarter in this particular business, no, on the OTR side. So we really -- we have more than half of the market in the states now. So that has been, it was a catalyst, the EFS acquisition. And then the second big one, no, that comes to my mind, obviously, is what you were talking about the large oil companies. We won 2 large companies in the last 2 to 3 years. And today, we run the private label portfolio, for 9 out of the 10 largest oil companies, and each of the 10 largest convenience store brands.. And on top of that, 5 of the largest fleet management companies. So the distribution that we have there, it's massive. And as you said, and as I've been saying, as things continue to recover, we're going to see that coming back. And the last thing is what we have always done, and the company has always done that. It continue to build upon our technology, developer, market-leading products and adding new fleets through our sales organization and the sales pipeline. And all these themes together, if we look where we were to where we are today in this segment, we have -- we are much, much stronger than we were then.

When you attribute the strength in OTR to, why has it been so powerful?

I think the EFS organization, I mean, the executive, Scott Phillips, that run EFS. I mean, he knows the business really well. And power -- so organization, people, the sales engine, the technology, and the products that we offer to these companies has been a catalyst. Remember that at the time, we only had -- what was the name, Steve of Fleet 1. We had a small company on the OTR. Now we offer from the largest long-haul truckers to the smallest, fleet truck companies, no. We have all the spectrum now. So I think it was -- in fact, I wasn't clear when the decision was done to buy EFS, but that was the main reason why we wanted, to get into -- with EFS because then we were going to have the full spectrum of customers. You could see that, I mean, we continue to add -- no, please?

Just to highlight a little bit on that type platform, right? It's all powered through APIs. And so what that means is we connect into the HR system, the dispatch system, the telematics device on the truck, and we're getting all this real-time data, right? So what do you do with that then, right? Well, with the HR system, when you hire a new trucker, a new driver, that kicks off a whole bunch of instructions to us to create a card, set up the account, credit limits, all that kind of stuff, right? And the operational efficiency that brings to the business is significant, right? Instead of setting them up in your HR system, then set them up in your -- to get a card, you just do it once. And that's real nice, right? The dispatch system, we know where that -- which truck it is, which trailer it is, what types of fuel it needs? Is it refrigerated? Where is it going? And where is it going to get the best price of fuel along the route. Through the telematics device, we can identify that particular truck is actually at that -- physically at that truck stop. We can figure out how much fuel they need to get to the next one and calibrate the credit limits of the driver, shut the pump off when it reaches both. There's a massive amount of control that we bring into those transactions that is -- especially for these bigger guys, that's a huge differentiator in the marketplace and a lot of the reason why they're winning.

Great. I want to just let the audience know that if they want to ask a question, they can click on the upper right-hand side of the screen where it says Q&A and just type it in, and I'll try to ask your question. I've kind of alluded to this before, but clearly, the small fleet segment was hard hit and was most apparent when we looked at your earnings numbers yesterday, when we looked at the sort of yields, it definitely demonstrated sort of where the growth was coming from inside the fleet volumes. Could you talk about how you see the small fleet side doing coming out of this? I mean, do you feel like most of those businesses are intact or it's just a matter of the economy coming back. Or will there be challenges?

I'm going to give you a quick sentence. But Steve has been doing a lot of work with our data team, and I want him to give you some more color. But the data is very interesting. In OTR, the heavy trucks were down mostly in terms of volume. But then when you go to the local fleet, the small businesses' gallon on volumes, they held up a little better than, no, and the larger ones. And then when you go to the, what we call the small transaction sizes, which, if I remember, still were 10 or 15 gallons, less than 10 or 15 gallons, like what is the automobiles versus the large vehicles, are down more than the over 10 to 15 gallons. And we can -- we probably, can assume that, that's related to salespeople or executive, that they used to travel, and now they are working from home, no? But Steve may want to share with you some other examples because he has spent a lot of time in the past 6 months, trying to analyze all this data for us.

Yes. So in the heavy truck side, we took basically all of our transactions that we stratified them in to just -- forced them into 20% percentiles or groups. And as Roberto said, like the small guys in the heavy truck side are actually -- they're doing okay. The big guys came through the pandemic best. They had contracts, they had routes that they ran regularly. So they came through it the best, but the small guys are actually doing pretty well right now as well. So heavy truck, just in general, overall same-store sales were up 5%. That's a pretty impressive number for that group, right? So doing real well there. And when you look at the local fleet, we did the same thing, right? We stratified them into groups of 5 different groups, if you will, the biggest fleets and the smallest fleets. And there, the big fleets are actually, again, doing pretty well, but the small fleets are actually growing more now. And the other thing that Roberto talked about was we took all of the transactions in the local fleet. So just think of people going to gas stations, and we split them, it was at 15 gallons, with the idea being if the transaction size is less than 15 gallons, it's most likely a car or an automobile. And if it's bigger than 15 gallons, it's some sort of van or pickup truck or delivery -- a bigger vehicle. And the difference in growth rate there was actually pretty stark. So the small guys, the automobiles, their volume performance in the fourth quarter was down about 15%, 16%. And the bigger vehicles is only down like 3% -- 3% or 4%, something like that, right? So there was a pretty wide gap in the fourth quarter. So then you -- okay, so what's going on, right? And the only thing we can figure out is those automobile type transactions, they could be executives, or administrative kinds of roles and doesn't really matter what industry they're in, right? It could be the -- a salesperson at a construction company who's driving around in their territory, not going to a job site, but it would still show up to us as construction, right? And so it's those kinds of things. The fleet management companies that we deal with, the 5 largest that Roberto referenced earlier, right? There are a lot of cars in there, and you can see it in their volumes, right? They're down more than -- a lot more, frankly, than the average, it's much more in line with those automobile statistics. So just kind of interesting stuff. The question then is, okay, when does it come back? And we really think that's kind of tied to the vaccine rollout.

You don't feel like some of these small businesses won't starve business. Do you feel like they'll come back where the economy comes back for the most part?

I would say we do, right? I mean we haven't seen it come up in credit losses yet. It's just volumes are reduced and -- but yes, we do think it will come back when the business comes back.

They are there, but they are down in volume.

Understood, understood.

So -- which is important, no?

Good. So the question we get a lot, and I'm sure you guys get a lot is how penetrated is the market of electronic cars or electronic buying fleet payments, right? And obviously, I think the U.S. is further ahead, maybe Europe is coming. But like where are we in that trajectory? How penetrated is the market?

I mean what we can tell you, there's not a statistics that are 100% clear that you can get the report, no. But we believe and we have consistent with that, that the commercial fleet market is, it's around 70% penetrated. But obviously, with the pockets where it's effectively full penetration like the large businesses or heavy trucks. And then on the other side, you are -- other pockets where penetration is really low, which is mainly small businesses. So it varies. Now we are not going to find, no, 100% clear that -- on that front.

But that 70%, is that including large fuel companies actually doing it and they might outsource it? Or how should we think about this 70%?