WEX Inc. (WEX) Earnings Call Transcript & Summary

Good morning, and welcome back to day 2 of the 2021 Barclays Emerging Payments and Fintech Forum. We've got another interesting agenda today of fireside chats and panels. And with that, we're just going to go ahead and jump right in. And we're very pleased to have Roberto Simon with us today, CFO of WEX. Roberto, thanks so much for being here.

Of course.

Maybe we'll hop right into some questions on the travel segment and the travel recovery. One of the reasons we're positive on WEX is just because you're so nicely levered to this recovery, which I think may or may not be underway at this point. Maybe I could ask you for sort of a fresh read there. Are you seeing any kind of green shoots in that business? What do you expect in terms of the cadence of a recovery there? I know it's a crystal ball question, but I thought it's a good place to start if there's any.

Yes. Obviously, the crystal ball is still out there. But listen, when we reported a couple of weeks ago our earnings for the first quarter, we shared with everybody the trends and what we're seeing, I think it was up to mid-April. Since then, the continuation of the recovery is still happening. So I believe we were 60-something percent down, and we have recovered 3 or 4 points from there. But at the same time, this is going to be a slow recovery. We have been now for more than a year, the numbers are improving every week, but they are improving slowly. And what we have seen a bit more than in other parts of the world is in the U.S. On the U.S. side, volumes have improved a bit more than on the other, more than in Europe or in Asia. But overall, slow recovery, slowly but steady, I would say.

Slow but steady. And you guys are more levered to the hotel side of travel rather than the airline side of travel such that your recovery will be when those stays occur rather than upfront at the booking time. Is that a fair characterization?

Yes. We are mostly on hotels. We have a bit of a business on the airline side. What I think is important to remind everyone is the fact that our business is mostly cross-border travel. So in other words, it's people that go from place A to place B and who use multiple currencies. If you recall, one of the reasons why we bought in at Optal was because of the capabilities they had outside of the U.S. with more currencies, not that WEX legacy travel used to have. And obviously, those volumes are going to be recovering a bit slower than when you are talking about the domestic travel. That's why I said to you that in the U.S. domestic, we are seeing a faster recovery than in other parts of the world.

Okay. And how should we think about the yields in the travel segment as the recovery gets underway? Do you -- how would you characterize as sort of long-term ability to just convert volumes to revenues in the business over time?

Well, what I would say to you, first of all, I've been more than 5 years at WEX. And since 2016, I've seen competitive market out there. It's all about working together with our customers and with our scheme fee providers. And the reality is that the pricing pressure is going to be always there. The market is very competitive. But what I can share with you is that, yes, we have done 3 times with this one, not changes with customers. But at the same time, we have also been able to recover part, if not all, of that pricing or rate pressure from our networks. And we continue working with both parties. We know that it's not going to be possible to line up a new pricing on, call it, March 30. And then the new pricing from a network on April 1, they are always going to be overlapping. But we feel very positive that on the long run, I mean we have great products. We have great customers, and we have great relationships with both the customers and the networks. And we believe that we are going to be a long-term player in this industry. And as we said, as the business continues to recover and we compare volume into revenue, that's all going to be falling into the bottom line for us.

And how about eNett and Optal? Can you talk a little bit about the integration process there? What -- maybe what you have done? What may be left to get done? How that's progressing?

Yes. Listen, we are very pleased with the integration so far. Melissa and I talked briefly on the earnings call. And if you recall, we announced -- at the beginning of the deal back in 2020, we announced $25 million in synergies. As of today, we have updated our numbers, and we believe we're going to be doing more than $40 million. And we're going to continue seeing what else we can do to increase that number. If you think where we are now with the actions that we took in late April, we are expecting to deliver in-year synergies of more than $20 million. And on a run rate basis, those $20 million will equate to $30 million on a run rate basis. So that's a huge work done so far in, call it, 5 months now or 4.5 months. And most of the savings, now they come from aligning the various functions that we have within the legacy WEX travel, the eNett business and the Optal business, so where we have been removing duplication of functions. If we think what else has to come, there's 2 other areas where we are working as we speak into 2021 and 2022. One of them is the regulatory framework where we operate, where we clearly do not need all the issuing capabilities that the 3 different entities have before. For example, in Europe, now we have, I believe, it's 3 issuing entities. Well, we probably only need 1, and in other parts of the world it's the same. So that's an area where we are working now. And finally, as we talked during the earnings call, we have to consolidate our technology platforms. And there are 2 big integration work streams going right now. Number one is moving our platforms into the cloud, and then we will be merging them and taking the best of both platforms. So that's going to take probably another 18 to 24 months. But so far, we are very pleased on where we are, and we will be positioned for the recovery. And obviously, as we move along the year, the cost on that part of the segment is going to be coming down.

And I wanted to ask to -- and I -- my impression at the answer to this question is that there's -- nothing has changed. But just to kind of put a finer point on it. In terms of the travel recovery, at Optal, your core travel business, there's nothing structurally or that has changed, the customer mix. I understand there's a little bit of yield pressure with your larger customers. But when travel recovers, there's really no change in your ability to basically monetize that in the same way that you were able to pre-pandemic.

Of course, I mean, we talk about the pricing pressure that we are facing on one end and that we are working on the other side. But as the revenue comes in, obviously, it's going to be flowing down to the bottom line very nicely. The same that cap acknowledged here, most of our cost base now, especially after most of the integration efforts that we have been doing on eNett and Optal, we have a fixed cost. We have the technology, so we have the depreciation and the maintenance of that technology. And then we have people. And as volumes and revenue starts coming back, obviously, we are going to see that coming into the bottom line.

Yes. Okay. Moving on to the fleet segment. One thing, just in general, you guys have been very, very skilled at winning these larger brand deals, and you seem to be the kind of player to beating the marketplace with that. Talk us through the drivers there. Why are you winning? What is it about what you're offering that basically others are not matching?

Obviously, Steve, he will add something here because he has a lot of history in WEX and especially on the fleet side. But as of today, yes, we won Shell and Chevron a couple of years ago in the North American fleet side of our business. But let's not forget, we also manage 9 of the top 10 oil companies in the U.S. So I would say to you that there's 2 main reasons why we consist -- why we are consistently winning in the marketplace. One is that WEX invest in technology, and we continue to do that. I mean we spend CapEx. And if we compare to other competitors, we probably spend 2 or 3x more. And then we also are very focused on customer satisfaction and customer retention. So when you put those things together, I think it's a good mix in order to deliver the best-in-class solutions for our customers. So I'll give you a couple of specific comments, and then I will like also Steve to add a bit more. But if you think about over the road and specifically since we acquired EFS, we integrate within the ERP systems of these fleet tracking companies. So with that, we have access to a lot of data for our customers. Which trucks are on the road? Where are they going? And all of that information for them is very important because they can use it to know better what the driver is doing, to put controls on purchases, to validate if a truck is physically in a place or it's not, et cetera, et cetera. So all of this puts controls over the transactions, and our customers are very satisfied with that. And then on the local fleets or on the smaller fleets, we have been making a lot of investments in data analytics that have proven to be very attractive and very lucrative for our customers because it allows them to see exceptions on data very quickly. And obviously, they can take actions with that. But Steve, if you want to give a couple of other examples recently known what we have been doing and why we have won recently a couple of the big players on the over the road?

Yes. So like the commentary that Roberto was just giving you, I'll let -- the over-the-road trucking industry is changing a bit right now to kind of respond to the consumer behaviors. So they're getting more into the last-mile delivery aspect of their operations. And so what we were able to do and in large part, this is because the platforms were in the cloud already, is we're able to merge, if you will, or join together the over-the-road platform with primarily EFS acquisition from a few years ago in the local fleet platform and develop one product for J.B. Hunt, right? So on the same card, if the driver pulls into a truck stop, they get over-the-road functionality with all the APIs and controls that Roberto mentioned. But if they pull into a local gas station, they get that same local kind of functionality as well. So I think that's going to be more and more valuable as these trucking companies continue to get more into the last-mile operations and there's others out there who we would target with that kind of a similar product. So it's a really nice win for us and -- that we highlighted last quarter with J.B. Hunt.

Along those lines, can you kind of contrast the sort of enterprise versus SMB recovery? What are you seeing out there? I know that that's been -- there's been a bit of a mix shift as some of the larger trucks have kind of kept rolling through this pandemic. What is your -- what is the kind of fresh view of those 2 market segments in terms of your business?

Listen, it's clear, no, that we reported in Q1 for North American fleet we're still -- volumes were still down 4%. So we are still impacted by the pandemic. And it's impacting different businesses. Although we have been seeing a steady improvement, I wouldn't say weekly, but I would say every month, still same-store sales are not back to where they were before the pandemic. Volumes are improving because we are also signing new businesses, but same-store sales are not. What I would say to you is that it depends, no? The weakness has less to do with the size of the business or the industry, but more with the type of vehicle that is operating. And I can give you, for example, a couple of examples, no? Just look at salespeople, no? We have a lot of the customers that the salespeople have a vehicle. But if these people are not traveling and they are doing -- they are only doing Zoom calls or Google calls and they are not visiting offices or going to see the customer, that volume is going to be impacted. So those transactions are not happening yet. And I think like the crystal ball in travel, here the crystal ball is how quickly that volume is going to come back. Obviously, it's a much smaller volume overall. But we are still seeing some pockets where the volumes have not been recovered yet.

I see. And another detail on your fleet business is the credit loss performance, which has been exceptional. And I know there's a lot of kind of moving parts in terms of why that was the case. Maybe walk us through how that sort of evolved over the pandemic? And what you expect kind of going forward for a fleet credit loss?

Yes. I'm very thankful that you bring that question. Because I really believe during the earnings, it was an area where people maybe misunderstood how good the numbers are and how we were impacted between the credit losses and the late fees. So let me give you some color there. For the past 3 quarters, I would say, 9 months, so Q3, Q4, last year Q1 and also during the month of April, we are seeing a lot of customers -- mostly all the customers paid their bills on time. And this means that, obviously, the late fee incidences are down year-over-year even though we have been adding new customers into the mix. So this is helping our AR balance and our AR hedging, which is really looking very favorable. And obviously, that has been reflected on the credit losses that we have been reporting, especially in Q1, where the credit loss, I think, on basis points was 6.2 basis points or $4.4 million, which is really, really very low. Now what happened with that is at the same time that your credit losses are very low, your late fees, obviously, are also going to be lower. And the mix of a lower revenue due to late fees but also lower credit losses because people are paying on time, I believe that from a net impact point view, it is a very positive thing for us. Why? Because although we may have a build of revenue, our portfolio is much healthier. And obviously, from an AR point of view, we carry less risk. So we feel very well and very positive on where we are so far today. And this has been continued in the month of April. So what we can also share with you is that as we think in the next months, we believe that credit losses will continue to be lower than historical levels. And the late fees will also be lower than historical levels. But if you look forward a few quarters, probably things will stabilize and they will get back to normal levels.

And is there some connection between -- is it the SMB side of the business that generates more loss -- credit loss than the larger fleets, such that when the SMB fleets recover over time, yes, that I'm it would have normalized, of course.

Yes. Yes. Most of the late fees come from smaller fleets. So obviously, as part of the -- as the business also recovers, and there's less dollars available or you know the money from the government, obviously, those things will eventually come back to normal levels. But that -- I would say, yes, there's a bit of mix, as you are pointing between the big trucking companies that they always pay their bill some time versus the small fleet where it tend to be more slower than normal. But overall, the theme is the same and as things recover over time, we believe, obviously, we will get back to normal levels there.

Okay. And I also just wanted to ask for a quick update on international markets. I know you have the European business. What have you seen there? I know it's been a choppier situation with COVID in those markets. What's your kind of updated view of Europe?

Listen, the European market, when we reported Q1, the volumes were very similar to North American fleet. We were 4% down in both cases, a bit more impacted in Europe than in the Australia or the Asia region. But overall, businesses are recovering. As you said, there has been more volatility because of the lockdowns. Hopefully, as things -- the news that we are hearing from vaccinations and the number of cases is coming -- is going in the right direction, and we expect that the second half of the year is going to be better for our European operations. But overall, yes, the volumes are lighter than all the U.S. together. But if you compare North American fleet with those international businesses, it's very similar.

It's similar. Interesting. Okay. Moving on to your corporate payments business, it's a frequent question that we're getting around the competitive environment sort of whatever you want to call the modern card issuing platforms, who have carved out niches for new use cases like, whatever, food delivery or buy now pay later, virtual card issuance, et cetera. How do you think about the competitive environment evolving and your ability to kind of hold your ground in a changing landscape?

Yes. Listen, the market is clearly very competitive, and everybody is coming with a new product, new offering and new ideas. So nobody can say that there's not a lot of activity there. But there's one thing I can tell you, and Steve also will tell you that we have -- we are very well positioned. And also, we have an offering that not everybody has, and I will tell you why. So we have a bank where we can do issuing and not everybody can do the issuing. We also have the issuing technology platform and the back-end transaction processing platform. We own both of them. One of them came with the acquisition of AOC, and the second one, through AOC, we were able to develop also the back-end processing. So we have 3 things that not everybody has. And when you put them together, we feel that we can offer in the market something that not everybody can. Now thinking in the future, obviously, there's going to be M&A activity. We heard the other day about DB and bill.com. That's going to continue. And we believe that WEX is well positioned to continue growing the business and to see larger companies emerging and to continue to be part of the consolidation that will happen in that part of our segment.

Okay. And in terms of the pandemic impact on corporate payments, sort of how would you characterize the demand environment sort of pre- and post-pandemic? Did the pandemic sort of accelerate the -- maybe there was low because of business activity stopped, but now businesses are like, "Wow, we really need a way to pay those remotely, because we never contemplated that our office might be closed for a period of time." How do you think about how the pandemic impacted demand environment and corporate payments is the question, I guess.

Yes. I mean you were spot on. I remember when we all had a call for, say, 6 weeks, our salespeople couldn't do anything. People were starting to get used to be working from home. And we saw, obviously, a delay on the signings and on the interest. But since then, if you look at our trajectory in the corporate payments in the last 3 quarters, so last year, second half and Q1, volumes are growing very nicely, revenue is growing very nicely. And we also talked about the signing of AvidXchange, that it's a very important customer and a great customer that is going to be working with us going forward. So I think that putting aside the, call it, 6 to 8 weeks, we are doing a great job, and there's a lot of interest in the products, and we have been accelerating the growth and the volume with new business.

Good. On to health, you've made some interesting acquisitions there recently. And really over a long period of time, you've kind of been very strategic kind of piecing that business together building it up. Remind us how the recent acquisitions fit into the strategy. And just talk about exactly the end state of that business as it were? Are you -- is that something we can continue to see more activity on in terms of M&A? Or it's a big question, but...

Well, listen, I always remember, and I wasn't here when WEX accessed the health segment in 2014 with the acquisition of Evolution1. But Melissa mentioned that. We had around $50 million, 5-0, in revenue at the time. And if we think with the 2 acquisitions that I will talk shortly, we believe that next year, we are going to be close to $500 million in revenue. So we have multiplied by 10 the revenue and the earnings and the margins as well. So we are very, very happy with that part of our business, and we will continue investing as much as we can in growth and in profitability. If you think about the 2 businesses, so let's talk separate. Number one, we acquired the HSA assets from HealthCare Bank, that transaction closed on April 1. And if you recall from prior calls, what it allows us is to control where the deposits related to the HSA accounts are going to be placed. And this essentially will allow us to maximize or monetize better the value of those assets going forward. And we are going to be having a very similar optionality than, for example, HealthEquity has. The second acquisition, which has not closed yet, and we are expecting hopefully to close within the next couple of weeks, hopefully by the end of May, early June. It's a bit different as it opens up a new market for us, and that's Benefit Express. What does Benefit Express? They specifically help with enrollment into benefits, develop websites, make sure that all the elections are in alignment. And we offer support to employers and employees as they go through all of that process. So specifically, we have not included the revenue. We have guided 8% to 12% on a full year basis despite the first quarter. We have -- we are expecting a very good second quarter, but we have still guided 8% to 12% on a full year for 2021, and that does not include the Benefit Express potential revenue into our guidance because, obviously, as I said, we haven't closed yet.

Okay. And walk us through the pandemic and/or macro impact on the health care business right now. Obviously, employers aren't hiring as much. What are the different pieces of business that are impacted by what we've been through in the pandemic here?

Yes. I think I will try to summarize, but unable to make a lot of sense. So this business works in the following way. Now you go through the open enrollment season, you get a large chunk of new accounts at the beginning of the year. And then as you go along the year, you may add a few new accounts. But you make most of the new accounts at the beginning of the year through the enrollment season. So that's what happened in 2020. We were in the first quarter, we had a great quarter. And then through the next quarters, things had slowed down. And this year, it's happening the opposite. For 2021, the enrollment season has been slower than it has been in other years. But what we are seeing and what we are expecting is that as we get through the year, there's going to be a better improvement or a better new hiring of new accounts as we get into the next quarters. So we feel good on where we are for 2021. If we compare our performance relative to the marketplace, we are in a very good place. I mean such accounts grew 7% for us, and I don't think in the market or relative to the market, we did much better. So as things recover, we are going to see that also recovering and going back to, call it, at least the double-digit growth that we expect for the next 3 quarters to put us, as I said, between the 8% and 12% full year.

Okay. And you touched on this a little bit in the context of some of the acquisitions on the health care side that you've done. But maybe talk more broadly about the M&A strategy at this point. What does the pipeline look like? What do you look at? How are you looking to fill gaps you're looking to backfill or other motivations?

Listen, on the money side, WEX has always been very acquisitive. There's always activity happening. What I can tell you is that our strategy has not changed. We want to continue diversifying from fuel prices, from macroeconomic forces, and we're also looking at assets where organic growth is stronger and higher than our core WEX. And the transactions that we have discussed clearly are in that direction. So that has not changed. And the example, I said, from $50 million back in '14 to hopefully next year, having $0.5 billion on revenue on health, that's clearly what we want to continue doing. Obviously, the market is very active. Prices are also high. But we were able to close the transaction of the Benefit Express, and we think we pay a nice price and a price where the company's financial is going to make a lot of sense for us and from a business point of view as well.

Okay. And we only have a minute or 2 left here. But I wanted to ask you, what is your view on potentially reinstating guidance? What are the conditions that sort of need to be met on the ground for you to feel comfortable guiding? Is it just about the volatility around travel? Or is there other factors to consider?

Obviously, the volatility around travel, it's one of them. But you also know we are sharing a lot of information that we were not sharing before, even when we are in the next quarter, to help everybody to do some modelings. It's not only travel. It's also credit losses. We talk about credit losses. We talk about late fees, for example. So there's a lot of variables that give a lot of uncertainty in -- to guide more than a quarter away. Why? Because when we do earnings, we already have not a half a quarter, but we have 1/3 of the quarter on our belt. And we feel we are seeing some trends and it's much easier not to provide information. But what I can tell you is that we have been very, very transparent with information. We have been sharing as much as we can. And today also, I've been giving you how we are seeing things coming into the month of April, which are very much in line with the projections that we share with everybody through the earnings call.

That's terrific. And we certainly appreciate that transparency. So I think we're about out of time. But Steve and Roberto, thank you so much for your time today. Really appreciate it. Thanks for being here.

You're welcome. Thank you for having us. Yes, thank you.

Great. Thanks for having us.