WEX Inc. (WEX) Earnings Call Transcript & Summary

All right. Good afternoon. I'm John Davis, the payments and fintech analyst here at Raymond James. We're excited to have WEX CEO, Melissa Smith; and Director of IR, Steve Elder, with us this afternoon. This is going to be more of a fireside format. So I'll start with some questions. [Operator Instructions] So first, Melissa and Steve, thanks for joining us today.

Thanks for having us.

So once I think a lot of the pandemic impacts on your business were relatively obvious. And we're all hoping for a quick recovery as vaccines get rolled out here. But wanted to start and see, what, if anything, was surprising in how your business performed through what we hope is a once in a lifetime pandemic? And if there's any longer-term structural changes either for WEX or the industry that you see happening as a result of COVID?

Yes. I think we were generally actually pleased with, ultimately, the stability that we saw. And we credit that to the diversification we see within our customer base. But if you kind of look across the business, we've had a lot of resilience in the over-the-road customer base. And I know it seems that early on, we weren't sure what was going to happen there. But if anything, we've seen some acceleration because of the pandemic. Health care, it has been really stable for us and then continue to grow in this environment. And then corporate payments as well. So you kind of look across the business. I think that for us there was this kind of reassurance that having this diversified customer base actually is a benefit in the long term. And then also, if you look across the business, how much we've been able to continue to sell. We've really seen acceleration in the number of our pipelines, and so it's a lot of resiliency. The investments we've made over the last few years in our digital transformation, we think have really paid off in this process, and that's what you're seeing from a pipeline perspective. And in terms of structural changes, I've said for a while, we think that within our travel customer base, there's going to be some structural changes. We think that it's going to take some time for business travel to return back to a normal environment. What we are more hopeful is going to happen on consumer-based travel. And also, just kind of this trend to digital, which has been a tailwind for us in a number of parts of our business, we think that, that's going to continue as well.

Okay, great. Maybe dive in a little bit on the fleet business, the OTR business or over-the-road has been, I think, surprisingly strong towards the end of last year and into this year, offset a little bit by the weakness in NA fleet and international. But maybe just talk a little bit about the puts and takes as we recover here with -- as the vaccine is rolled out over the next 3 to 6 months, and what we should see from a volume and yield perspective, particularly in the back half of this year?

Yes, sure. I think one of the things that, it helps to step back a little bit and talk about the type of customers that we have. So over the more than 15 million vehicles that we service, there's a really big spectrum of customers. So we've got people like pharmaceutical sales reps that might be driving a car, a landscaper who might be driving, let's say, it's a Ford F-150. It could be a tree service company that's got a light truck. Or it could be an over-the-road customer that's hauling goods. And kind of across that model, we've seen a lot of variation in what's happened as it played out during the pandemic. As you mentioned, on the over-the-road side, we've seen this accelerate where same-store sales have improved, added to the fact that we've had some really good customer implementations. And so we've seen really strong growth in volume in that part of the business. We've seen this kind of shift where the larger companies that are in the over-the-road space have outperformed some of the smaller companies. And then within the North American fleet business, what we've seen is that it really depends on the industry end. So about 20% of that portfolio are in the construction trades, that's held up pretty well. But really, even within the construction trades, it's dependent on which part of that, that you're in. And then the other thing we've seen is that it's a car. So think of an automobile that's using our product, those have been kind of lagging some of the other parts of the market, which kind of makes sense. As mobility continues to open up, we think that you're going to see those customers really start to participate and use the products again more fully. And what we've been focused on are the things that we can control. So we've been really focused around making sure that we're bringing new customers and that we're retaining the existing customers that we have so that when they do go back out after the vaccine is distributed, that we're going to continue to benefit from that.

Okay. Great. And then because we talked a little bit, or you talked a little bit about construction. Just thoughts on an eventual infrastructure bill color. I think you said 20% of NA fleet. Any additional color to add there and what that could mean, how material it could be for WEX?

Yes. So again, if you look at our customer base, we hit across a pretty wide spectrum, but the construction trades are one of the categories that we've seen quite a bit of usage. So we think that with the infrastructure build that we're going to see downstream positive effect to our business and specifically, that North American fleet product set. Where the customers that we have, you could see increased spend activity, but also adding new vehicles. And on top of that, adding new prospects for us to go after from just an acquisition perspective. So we think of that as a net positive to us.

Okay. Great. And then before we leave fleet, I'd be remiss if I didn't ask about EVs, thoughts on strategy there, how the monetization model could change? And just any updated thoughts from your perspective?

Yes. And I think it's important to start just to contextualize it. So if you look across, again, over the 15 million vehicles that we have already in play, of products that people can use in order to charge, and we bundle that with what they're doing on their more traditional gasoline parts, vehicles. So they get to see what's happening across their whole mix fleet. That's hundreds of vehicles compared to the 15 million that we have. We've been working with the largest leasing companies in the world who are partners of ours, to really make sure that we understand what's happening from an acquisition standpoint and product development, as well as our existing customers. And what we've heard from them is that their desire is to make sure that they continue to data capture what's happening, within a charge transaction that they want to make sure that they can reimburse their employees for those transactions, and they want to make sure that they are really limiting any fraud or misuse, so that it's really the company vehicle that's getting charged. We know that there's a large number of transactions that occur compared to our fleet business, where you see on average 7 a month. So there's a lot more transaction-based activity than what we have historically. So I put this in the category of very early in the process, where we have a product in the marketplace that's working, and we'll continue to build upon that product as we get more insight of what customers are looking for and as this continues to progress.

Okay, great. So maybe moving on to the travel business. Want to talk a little bit about the OTAs, potential demand, hotels may need them more. And also, how we should think about the recovery, consumer versus business? And maybe just remind people, how -- what percentage of your travel business is consumer versus business and how we think about the recovery there?

Yes. So in travel, the customers that we have, the tend to grow across a lot of spectrums, but its largest segment is online travel agencies. And so the end user of that product or those who go into an online travel agency, which are largely consumers. So in terms of recovery, we've said that we think that the recovery is going to take a number of years to get back to where we were in 2019. But we do think that you will see consumers recover earlier. We think that you're going to see hotels recover earlier. And the historic product that we have at WEX is predominantly used for hotel payments. The eNett and Optal acquisitions put us more into airline. So that is a piece of the business as well. But we think hotel will recover before airlines. We think in-country travel comes back before you seek travel outside your region. But across our portfolio, we're servicing business in the United States, Asia and Europe. And so we have some really good balanced diversification around where travel is coming from. So kind of regardless of what region that plays into, we feel like we're going get a benefit of that. We've said just, in general, in terms of our view of recovery is that we think, if you look across the business, that you're going to see very moderate increases in activity within the first quarter. And that we think a lot of where you see a larger recovery comes tied to where you see broader vaccine distribution. So we think we have seen more of a benefit in the second half of the year and certainly, more in the fourth quarter. But again, what we're really focused on is we don't know exactly where you're going to see the recovery. We can't pin it down to any particular quarter, but making sure that we're well positioned for when it does happen.

Okay. Great. And then I just want to touch on the competitive landscape a little bit. This is a pretty mature market. It's been competitive for a long time. Audi made some noise about getting in the market. Just any bigger picture comments on competition? And has COVID increased or decreased? Has anyone decided to leave the travel business, from a payments perspective? Have any thoughts there?

Yes. So I would have said that across everything we do, it's a highly competitive environment, and travel is no different than that. So it is a competitive marketplace. And where we compete has historically been against more traditional financial institutions, we're competing against them with products and also on more of fintech players. And I'd say, that's been broadly true for the -- many years. So I don't think from a competitive environment that I would describe there to be any real changes in that marketplace, from how we position ourselves. We feel really good about the combined offerings that we have with the acquisition of eNett and Optum because now, we have an even greater host of product capability than we did before. We will have greater scale as we go through the integration process of integrating the businesses together and pulling out those synergies. So from a competitive positioning standpoint, we feel really good about where we are. And again, I wouldn't say any increased competition or less competition. It's about the same as it's been over a number of years.

Okay. Great. Maybe move over to the Corporate Payments business. That's obviously been the bright spot through COVID, and I think you've outperformed any expectation, people's expectations, including mine. But just talk a little bit about the drivers there. What's driven that solid performance? And how should we think about growth going forward over '21, but also beyond?

Yes. So it's a great market. And we've had to overcome what I would describe as headwinds because the existing customers aren't spending as much as they did a year ago. And so that kind of, this natural tension that's happening. And a lot of that's playing out because some of those customers are in industries where they're just not spending a lot of money, or they were spending it on things that are areas of categories that just aren't happening as much as they did in the past. And at the same time, we've been able to continue to onboard new partners and new direct customers, and those partners are onboarding other direct customers. And as a result, we're seeing this great continued growth pattern. It's a pattern that we expect to continue. We had given a framework in the first quarter. We do expect that to continue to occur through the first quarter. And when you look at the products that we're offering in the marketplace, I put them into buckets of -- we have a bill pay product. We've talked about some of the customers that we brought in on that side, FIS being a pretty big important one. And then you look at what we're doing with our financial institutions, we just talked specifically about AmEx, which is a partner that we've had for a while now, but we've continued to build upon that relationship. And then on the fintech side, what we're doing in that front is embedding payments within other fintech providers. And so they are offering something in the marketplace. They're coming to us for the expertise around the payment itself, because we have a host of offerings in that marketplace. We're able to embed a payment on their behalf, and we've seen a benefit in that part of the market as well. And so we've seen really nice growth patterns across really all of that partner channel fronts.

Okay, look, but all else equal as the spend comes back on almost the same-store sales level, we should see that business accelerate throughout '21?

Yes. So we believe that you're going to continue to see benefit of just the, kind of this digital movement, as well as, as you said, getting an added benefit of existing customer spend returning more to normal.

Okay. Great. And then maybe I want to talk a little bit about the health care business. Obviously, pre-COVID, that was a mid- to high-teens business. But maybe touch first before we start talking about growth, just the strategy. Obviously, you bought DBI a couple of years back. So just really, maybe level set for people, what exactly you do in the health care segment and what kind of a strategy is to return eventually to that mid- to high-teen growth over time?

Sure. So in the health care space, what we're doing is providing the underlying technology to facilitate tax-deferred accounts. So think of an HSA account or an FSA account or a COBRA-based account. We sell that into the marketplace through a bunch of different channels. One is through these partner channels, which probably include financial institutions and includes health care, health insurance companies, it includes third party administrators, then admins. There's a whole bunch of partners that we do business there that then go into the marketplace and sell, ultimately to an employer. And then through DBI, we have a combination of going through brokers, and directly into the marketplace. And what we have continued to invest in is the underlying technology over the last several years, where -- we've really been emphasizing is the data analytics capability, that we have in the mobile capability we have in that space because, ultimately, you've got a consumer that's using the product. And so we invested pretty heavily in mobile first functionality a number of years ago. That has played well into the marketplace. The data analytics allows you to do comparatives. So as an employer, you get an insight into whether or not you're providing a good match to your employees. How does your offering compare to others in the space, if you're a partner, you get that same type of information but on top of that, you get to compare how are you doing in the marketplace to kind of your peer set. And so that's a place that we will continue to really put some time and energy. We've also introduced some artificial intelligence tools within the servicing piece of that business, so that we have automated tools to make the customer experience better. And so the lot that we're doing on that front, we'll continue to do on that front. And from a strategy perspective, what we want to be able to do is make sure that we're providing the best underlying technology in host of services. Some people choose to just pick us as a tech player. Some people want to outsource servicing to us as well and just having a wide array of offerings. The most of the revenue there, about 80% of the revenue is coming from SaaS related fees and so we also make sure that we're continuing to invest in R&D and continue to roll out new product in that market.

Okay. Great. And then I think you guided to 8% to 12% growth in '21, which is kind of a step down from the pre-COVID level. So maybe touch on what's driving that softness this year? And what you expect to drive that kind of mid-teen growth as we look to '22 and beyond?

Yes, sure. So we went into this enrollment season. One of the things that we have seen is that, as employers are adding new people into their plans, they just have less employee growth than we've seen historically. So if you benchmark how we did through the enrollment season to our competitive set, we performed very well. But we've got a little bit of a headwind associated with just unemployment rates that you can see factoring through. What we said is we think the way that the year is going to play out is that second half of the year will be stronger than the first half of the year. So we've got a really good pipeline of implementations that we're acting on right now. So as those implementations come into fruition, we think you're going to see more growth second half of the year. We also are seeing a little bit of softness around spend. So consumers continue to not be out into the marketplace, spending on health care costs like they have historically. And you can see that tied into, even when we had the weather event a couple of weeks ago, we did see kind of a check in spending. So there's still some pressure on that, and we think that we'll get better as -- and again, as vaccine rollout happens and you start to see more things opening up. So in terms of returning to the long-term growth rates, we think it has come for us historically as we add new partners, we continue to make sure that we are helping our partners add new customers, add new customers directly and then health care costs have historically gone up. And the combination of all those things played into really strong growth rates. We think that's going to continue. And now we have this added lever as well, where we just bought the deposits from health care bank. And that allows us to really control the economics on that part of the revenue stream much more fully and also have a better customer experience in the marketplace. And so we think that's just going to help us even more. So our equation of returning to those long-term growth rates are going to really keep doing what we're doing, customer retention, helping people grow, add new partners. And then we'll have this added benefit of another lever.

Okay, great. And then I did want to touch on the 1Q revenue outlook that you guys outlaid on the call of up 0 to 2% -- or sorry, flat to 2% in 1Q. And maybe just talk about some of the puts and takes. Obviously, you have eNett and Optal, you also have some seasonality in the business, but maybe just clarify the puts and takes there for 1Q from a top line perspective?

Yes. So we said is we still think that there's a lot of variation around when you start to see recoveries. So we didn't provide guidance, but we did give a framework for the first quarter. One of the things that I think that's gotten lost in the translation is that we typically have some seasonality between the fourth quarter and the first quarter. And so as you progress from Q4 to Q1, across the portfolio, we typically see a reduction in spend, sequentially, with both what's happening in travel, what's happening in corporate payments, and I should say, in the third category's in fleet business. And so we expect to see that normal seasonality pattern play out between Q4 and Q1. We've also said that we think that our -- health care business, you're going to see more benefit in the second half than you are in the first half of the year. And so that maybe is playing out a little bit. And then eNett and Optal, in that travel business, we do expect to see that has that same kind of seasonality trend in the first quarter. So we're thinking about that business as probably less revenue than maybe what other people are modeling right now. And trying to think about what else I'm going to say. Appreciate that. So like as an example, if you look at our corporate payments business, we think, as I said earlier, that you're going to end up with about the same amount of growth that we did in the fourth quarter playing out in the first quarter year-over-year. But sequentially, that would actually put volume down. And so when we guided, we're trying to give some insight into what's happening. Do we continue to think you're going to see sequential improvement, really across our fleet business, as -- and you can see that in the stats that we put out, you could see a small incremental benefit, and we do believe that, that's going to play out in the first quarter. We continue to believe high retention rates. And so it's just a little bit of seasonality playing out.

Okay. Great. And then yes, understand that you guys didn't guide for the full year. I did want to just touch on puts and takes on the margin. Anything from an investment standpoint? I know that you invested some in the fourth quarter in sales and marketing. Any further investments planned? Or is this really just volumes coming back on, flowing through at a high margin, given the kind of a fixed expense base?

Yes. The call-outs that I would have on the sales and marketing side, we really felt like it was important to continue to invest behind some really strong trends that we're seeing in the marketplace. As we're playing out the year, we -- there's not anything that I would say of note that would call out. We're going to continue to make sure that we're -- that on the cost that are -- overhead related that we're going to continue to control, we will invest in sales and marketing where we see opportunities to do so. And then we continue to make trade up choices of where we want to invest our capital dollars in terms of new product and product development. But largely, the larger part of the play for the year is, as you said, volume dropping through as we see volume returns.

Okay. Great. I did have an investor question just come in. It says, in what area of the business are you seeing pricing pressure versus price stability? Any changes COVID has driven from a pricing perspective across your business?

When I think about, really across the business, because we're operating in competitive environments, that really cross the portfolio, I think that pricing pressure, the way that we think about pricing pressure is that we have to offer products in the marketplace that are competitive and compelling. And because we do that, we're able to offer a premium to others from a pricing perspective. But we always have to be conscious of what's happening, to make sure that, that competitive gap doesn't get too big. I don't -- I wouldn't call out anything that specific. The -- if I kind of go across the business, in our fleet business, it's been relatively stable. But again, we have to be conscious of what's happening from a pricing perspective, but it's been pretty stable. The changes that we've seen there have been more customer behavior than what I would describe as pricing. In corporate payments, always been a competitive market. I say that's still true. We've got a bunch of players in there that are competing for kind of fractions of the business, and that affects pricing in that marketplace. Within the health business, same thing that kind of the players in that space, if they can't compete on product, they would compete more in price, since we have to be price competitive, but I wouldn't call out anything that's kind of unique in that space. And then travel. Travel has historically been competitive. We've seen price pressure over the years there. I mean you can say there's anything new in that space than what has been true historically.

Okay. Great. Maybe if we take a step back. Obviously, focused recently on eNett and Optal and in the recent health acquisition or assets that you purchased. But I think you ended the year at about 3.7x levered. Historically, M&A has been a big part of the story, driving double-digit top line and 15% to 20% EPS growth. If we look -- fast-forward to the end of this year, assuming vaccine and all goes well in the world, hopefully, you'll be probably in the low 3s. So just what's on the top of the list from an M&A priority? Is it corporate payments? What's the appetite for a larger deal? But just any kind of color there from a capital allocation standpoint?

Sure. So we start with the, kind of the top of the funnel is organic. So where doing -- invest our money in terms of just continuing to build out the product and product capabilities we have. And then, each year when we go through our strategic planning process, we spent some time stepping back and saying, if you deployed capital in many different scenarios, from M&A transactions, do you like the results, kind of the composite you end up with? And in kind of the start of the filter for us is we're diversifying away from exposure of fuel prices. We're looking at assets, they increase the growth profile of the company and reduce any volatility that we have. And so that's kind of the top of the funnel. And then we go through -- does it fit strategically with where we want to go within our product set? So that being said, we end up with actually a pretty big range of opportunities, and then we narrow that through a strategic planning process. And then we go into the marketplace and see if we can acquire those assets at the price that makes sense. And that's an active process for us all the time. We've really liked how the health care part of our business has shown growth and stability through this pandemic period of time. If you look back over the last several years, it's been great, a new part of our business. It's a place that you'll see us continue to build upon. I'd say, we also have an increasing appetite to build some of the capabilities that we've been looking at. So as we look at build versus buy, we'll continue to build out the capability we have within corporate payments. We'll also look for acquisition opportunities. So we are active in the marketplace. And for us, it's really kind of saying, we've got this North Star, or how we want to operate and then you get into kind of the real-world of what you can actually negotiate. And the end result, what we're looking for is continue to advance us down our strategy of making sure that we're providing underlying technology across a series of verticals, and that we're getting the scale benefit associated with that. Yes, whether or not we do a larger transaction, I think that we've shown over time that we're willing to do both. We tend to like fewer bigger, as opposed to lots of smaller transactions. But if it lines up with our strategic criteria, we're willing to do either smaller or larger transactions.

Okay. And I think, given where valuations are today, how do you think about growth versus accretion? Is there an opportunity that maybe you would do something that would be dilutive, if it was accretive to the top line? What kind of earn back period does it need to be accretive in year 2 or 3? Or just, how do you think about that?

Yes. So when we look at it, we look -- our kind of top financial criteria is more around return. So is it -- the IRR, risk-adjusted? Do we like what that return looks like? And so accretion is second on that list. And so we certainly look at accretion that we gear more towards. Do we think this is the best return for the money that we're spending? And we've had a pretty good track record of being able to pull-through those returns to our investors. And we tend to orient more towards, in our deal models, where can we get cost synergies and kind of the icing on the cake has been revenue synergies that we've been able to really get out of transactions over time. So we don't have a hard and fast rule that I won't do something that's dilutive. But if it's going to be -- if you're talking about a really growthy play that's got a big hockey stick in it, we're going to make sure that we really have confidence around that growth trajectory before we would actually go into that spot. We've been able to find so far instead have increased the growth profile of the company but also had profit associated with them.

Okay. And the funnel focus in health and corporate payments in travel? Or would you look at potentially adding another maybe adjacent vertical that would be a forced lie to the [indiscernible] , if you will?

Yes. When we think about what we're doing in B2B payments is really kind of a fourth leg for us. And what we've been able to do with the changes we've made in our underlying technology, we're in a position now that we don't have to think about things in terms of verticals. We can think about what we can do to add to the overall product set. And so as I think about it, I don't think about really adding another leg where you put another vertical focus in there. It's really enhancing the ability across kind of the -- either the existing places we are or the horizontal of what we're doing, which is, I think about B2B payments, is kind of the horizontal of what we're doing.

Okay. And then another investor question in here. Do you view a lot of the new fintech start-ups as a threat or more of an opportunity, or a little bit of both?

I think you have to view them as both. I think that -- yes. Part of why we really went down the path of our digital transformation a number of years ago, it wasn't because we needed to, in that moment in the marketplace, we've been winning in our markets based on our technology. It was really for the moment when the competitive set changed. And so the investments we've made over the last several years have put us in a position where we can compete against these fintech players. At the same time, we are a fintech player, and we can partner with a number of them. And so I think it's both, in my mind. You have -- you actually have to have, in this world, the technology capability in order to meet the needs of an emerging, more modern marketplace. And at the same time, part of what we think that we bring into this market is we have both. We have had -- and we have the compliance structure and scale of a much more mature business. And we think that the combination of both those things make us unique in that marketplace.

Okay. It looks like we have 1 more investor question. Clearly, this is the last one. eNett and Optal, you've kind of said that this is a dilutive first half, accretive back half. And I think if we go back to 2019, there was $150 million, plus or minus of revenue. How do you think about what's embedded kind of in the accretion dilution math for this year? And is it '22 that we can get back to '19 levels? Obviously, there are a lot of -- up in the air. But how do you guys think about modeling it internally and what that business can ultimately get back to 2019 because if it can, acquiring it for 34% of the original deal price would be pretty attractive. So just curious, kind of thoughts there.

Yes. So I don't think about it with the same level of precision of what we would normally do with the transaction, but we normally would have a deal model. We're kind of working towards that 1 deal model. I think as we looked at eNett and Optal in the settlement, it was with this range of possibilities of what it could look like. And I still think that's true, but we're really focused right now around taking this asset, making sure that we can reap the synergies. We'd originally had said we were targeting $25 million. We think in this environment, we have now opportunities to have more synergies than that. So we're very focused around that. And also, being in the marketplace, talking to our customers, continuing to build out the product so that it meets the needs of the marketplace. And that's really been and will continue to be, in kind of the short term, our primary focus around that. We know that we have tremendous opportunity when the market rebounds, but we want to make sure that we're positioned in the short-term and long term. And so there's a lot of work ahead of us on that front. So I don't think of this in terms of what's the accretion model going to look like. A year from now, we're pretty focused on kind of the moment we're in and making sure we do the right things to set us up for that next phase.

Okay, great. I think we're going to wrap it there. Thanks, Melissa. Thanks, Steve, for the time, and thanks, everyone, for joining. Have a great evening.

Thank you.