WEX Inc. (WEX) Earnings Call Transcript & Summary

Thanks, everyone, for joining us today, at the end of the day. It's been a great second day of the conference, and ending it on a great note here with the team from WEX. My name is Tien-Tsin Huang. I cover the payments and IT services sector at JPMorgan, and we're going to do a fireside chat with the WEX team. With us from WEX, we have Melissa Smith, the CEO; and of course, Steve Elder, who does a great job on the Investor Relations side as well. Again, fireside chat, I will take questions from the Ask a Question portal. So if you have any questions there, I'll be looking out for them. So Melissa, Steve, thanks so much for joining today.

We're happy to be here. Thanks for having us.

Thank you.

It's great to see you. And hopefully, we can see each other in person very, very, very soon.

So I thought I'd start out just with obligatory macro question, what are you seeing on the recovery? Where are you optimistic? Where are some caution still warranted? And if you wouldn't mind just touching upon the gas shortage in the U.S., I know we've kind of moved beyond that, but it seemed like it created quite a bit of news with what's going on. I'm sure there's some implications on that for your business. I'd love to hear your thoughts on that.

Sure, sure. So on the macro level, one of the things we said going into the year, that we expected to see small incremental improvement in Q1 and in Q2, and that we thought that you'd see that get a little bit better in the second half of the year. And I would say that's still the trends that we are expecting and what we're seeing play out. Kind of real-time over-the-road business continues to perform incredibly well. The North American fleet business, we continue to see really great strong sales and a slow return of same-store sales with existing customers. As mobility opens, that continues to open. Travel trends continue to pick up a little bit. Corporate payment has done well across this whole category. And in health, we have said that we thought we would see back-ended growth in the course of this year, so kind of month-by-month, that's what we're seeing play out. So overall, it really is kind of coming forward the way that we had anticipated that it would. And then on fuel price, like fuel inventory, specifically, it really didn't have an impact on our business. We had -- we did have issues in a couple of locations where there were kind of big lines waiting to get access to fuel. And so we certainly heard about that from our customers. But if you look at our overall volume trends, it didn't seem to have an impact on overall trends.

Okay. Good. Yes, not people filling up the tanks with plastic bags or whatever. Like we're really [indiscernible] pretty wild. Okay. No, that's...

You could actually see it where the lines were forming, you could actually see like there was a day in the week where, kind of early on, where there was a bit of a spike in volume and then it just kind of tailed off the next few days. Like Melissa said, really not much of an impact, though.

Okay. No, it was definitely crazy, so I thought about you guys as that happened. So just quickly thinking about the customer side, you mentioned the same-store front and just the health of your customers. It's an open-ended question because you care about their health from a spend standpoint, also from a credit standpoint. So any surprises there in terms of client health?

Just from a credit quality, it's been very, very strong across all the categories for us. And so we've seen that flow through in very little credit losses, a little bit less late fees also. And in terms of spend categories, if you look across the North American fleet business is where you obviously see lots of different industries that are playing out. And across these different industries, it really, for us, translates into not just what industry you're in, but what exactly -- what is someone using the vehicle for. And so through the pandemic, what we saw was that the smaller companies, those people who had smaller fleets, and think of this as people who are driving light trucks or vans, they were more likely to continue to be mobile through the pandemic. And to me, that makes sense because the larger company shut down, your company did, we did, like -- but smaller companies continue to operate. And so that is -- and I say the other thing through the pandemic is it was really reassuring in a way how many essential services we really did had throughout the portfolio, so there was activity continued through lots of our customer base through the pandemic. And as things have opened up and as they continue to open up, we're just seeing sequential improvement. In terms of categories, kind of the last piece that is still coming, air vehicles. So I think heavy trucks, bingo and gangbusters, vans, light trucks have improved, but where someone is driving a vehicle that's been kind of the lagging part of return to mobility, some of those are sales fleets, but not all, some are just driving vehicles as a kind of a byproduct of what they do and they happen to be a car. And so that's kind of the lagging part in that part of our business in fleet. But you look across our corporate payments, our customers have done very well, and we benefited. Frankly, those are partners that continue to grow. We've grown with them. And health -- and our health business partners have done well. There's lots of different categories across each of our customer base, and so we're certainly benefiting by that diversity. But overall, I'd say people are in actually a pretty good spot.

Okay. Great. So thinking about the portfolio of businesses that you have, I know you've created a lot of value through diversification over time. Has the pandemic changed your thinking about the portfolio, what you'd like to add more of or maybe have less of?

Yes. I think that for us, it was reassuring to see the amount of stability that we had because of that diversification, and it also really reinforced the amount of stability is probably the right word within our health business. That business has continued to grow for us pretty much in any environment. The growth rates have varied, but it is continuing to grow. It's a place that we've been adding into. You know we acquired Benefit Express, we acquired some assets on our customer deposit assets, which enables us to do more in this space as well.

Yes. I do want to hit you up on the health stuff for sure. But I don't want to miss the importance around fleet because you have been winning a lot of business. You've talked about very healthy backlog as well as pipeline. Who are you taking share from Melissa? And is the pendulum swinging in your favor in terms of also more outsourcing, maybe more deals, more shots on goal coming here post-pandemic?

Yes. Tien-Tsin, I think that is a combination of when we win in the marketplace with smaller fleets, we're typically taking that from either a cash customer, so someone who has been paying with their further fuel and service-related activity with cash. And for us, kind of the challenge is making sure that there's awareness of our brand, and so we spend a lot of time and effort in our digital marketing campaigns with us and our partners in order to make sure that you get that word out. And we've actually -- we've seen a lot of benefit for the work that we've done on that digital marketing channel through the pandemic. And then as you get into the kind of the higher customer categories, the over-the-road business as well as larger fleets, it's either coming from Voyage or it's coming from Comdata, specific with Fleet Core.

Makes sense. So which leads me to the question I probably should have led with, just thinking about the tech platform. Sometimes we forget about the heavy lifting you're doing on the tech side and modernization and shifting to the cloud, and I'm sure that's influencing your win rate. So talk to us about how modern your tech platform is? Is there a lot more work to do in that journey in terms of modernizing?

Yes. So we started 3 years ago on this journey. We were in the marketplace. We're winning based on our technology and our products, but we felt like we wanted to be in a position that we would be really future-proof for what we saw were our emerging competitors. And we moved into the cloud. And so by the end of last year, we had over 2/3 of our transaction volume in public cloud. We're just continuing with those migrations. We'll be done by the end of next year. And we increased our level of automation. We increased the speed by which we can drop code across the business, so we just made ourselves much more agile. In the process, we've shut down a number of data centers, and so it's also made us more scalable and more reliable to our customers, so there's been a lot of benefits for us. When I think about kind of our migration and our journey, we're very far down that path. Anything that we've done over the last couple of years, we've been doing cloud first. And so new functionality have been built modular, it's been cloud-native. And you can see the benefit of that. I mean we talked about some of the wins that we've had. Even if I use fleet as an example, J.B. Hunt, we talked about that on the last call, but what we were able to do is bridge the technology that we had across a bunch of different products and present it to the customer in a way that was a unified offering. And we could do that because the systems were sitting in the cloud that we had done a lot of work on making it more modular, so it was easier for us to tie the pieces together, making it easier as we integrate assets, as we do acquisitions because we've set the technology up in a way that it's just much easier to bring in something new and integrated into the tech stack that we have. We talked about AvidXchange. I feel like that's another place where you can look at the technology and the way that we're presenting ourselves in the marketplace and really building on those investments and creating momentum as a result of that.

Yes. No, it does seem like there is momentum. You mentioned future-proof, so I'll ask you here, just on the EV. Is there a product plan to service the electric vehicles down the road? I know it's -- in your Investor Day, you did a great job talking about how far out that is, but I'm curious if that's in the product road map short term today?

Yes. Well, we actually have a product now. So in the marketplace, we have a product that services mix fleets. We have acceptance at charging locations. We report back usage. We only have about 1,000 vehicles of our 16 million that are using EVs, so it's really early. But what we've really been working with is the customers that have expressed interest, the partners that we're working with externally as well as our leasing partners to build upon the products that we already have in the marketplace and to create something even more compelling. It is a long migration. So over a number of years, what people are going to need is a mixed fleet offering, it's the ability to do both as opposed to thinking of it as one or the other. And what that allows us to do is innovate with our customers and create something that's compelling in the marketplace, which we will talk more and more about as we continue to evolve this.

Okay. No, I'm sure we'll be asking here for updates as well, but it's good to hear that hybrid sort of framework. Thank you for that. So let's do health. I'm not going to pretend to be a health care specialist analyst. We do cover a few benefits companies and obviously, HCM companies as well. So thinking about -- again, I hate to always ask the post-pandemic question, Melissa, but I know there's been lower health care utilization. Employment obviously matters here as well. So can you just catch us up on what the secular outlook looks like here for health and how it's changing and how WEX is positioned to win?

Yes. So historically, when we looked at our growth, it's been a combination of we add new partners, the partners that we have add employees, and so you get a benefit of that and then health care costs are going up. And so we've gotten kind of the wave of all of those things. We're in an environment where we're really not seeing that addition of existing employees, so we're adding new customers, adding new partners, but you're not getting the benefit of both health care spending and new employees that we have historically. And we think both of those are temporary as we migrate through the course of the year. We also saw more people choose to not move their portfolios during the enrollment season. And so make a choice but decide to do it after enrollment season, when there was a little bit more clarity with what's happening. So we have more off-cycle implementations than we normally do. And so we have talked about the fact that we think we're going to see growth that's back ended this year in our health care business, and that's a combination of some of the work that we're doing with our customers, the implementations that we are seeing. There's been new regulation around allowing foreign kit -- not foreign kit, so COBRA reimbursement, and that's an opportunity for us. So there's a whole host of reasons that give us confidence in the growth that we laid out, 8% to 12% for this year.

Yes. I mean, just like you said, employment growth changing on the positive and just people getting back to going to the doctor and getting work done, utilizations. I mean that by itself should drive some of the acceleration, so -- which is why I wanted to ask the question. So Benefit Express, I wanted to ask you on that. We've heard and understand that to be a good asset. How does it fit in your mind, Melissa?

Yes. So we've been interested in the ben admin in play for years, since we really were looking for something that was the right product, right size, and we're super excited about this because what it allows us to do is get much more insight into the data when someone is making a decision around their benefit offerings. And it allows us a hub, if you think about the ben admin as being kind of the hub in the middle of all the product offerings that we are going to have. What we've done historically has been with co-pay arrangements with HSA and FSA accounts primarily as well as COBRA payments. And so we just envision this as kind of a nice building block where we can extend the functionality that we have and the products that we have with our customers and our partners. But it also gives us a whole new addressable market. It doubles the TAM that we have in the space, and it gives us an ability to create a whole new set of data that has been really important in this part of the business. So when we look at the co-pay information, we're able to present it back to our customers and partners and talk about new segmenting, those who are saving money with HSA accounts, those who are spenders, those people that are in between. We can talk about how much money employers are actually funding into HSA accounts and really benchmark one person to another and give a lot of insight to our customers and partners. And so we think that this just extends our capability into further offerings.

Got you. And I know employee engagement is becoming very, very important. Like you said, using data to better engage with employees and health and wellness and all that good stuff. So -- but I also understand the industry is quite antiquated from a tech perspective. And so back to that tech question I asked you on fleet, like how would you stack up the tech here in health against the incumbents?

Yes. So I would think that stemming kind of across the board. And as we continue to invest in our technology, it's -- again, it's just with an eye to the future. But in today's environment, I feel very strongly about our ability to compete on the tech that we have. In health, part of why we win in the business is the ability to operate as -- on a private label basis, so rebranding and doing multi-levels of rebranding, but also doing that in a very secure environment. So we actually spend a lot of time and effort making sure that that's a part of the offering, and it's part of why we went in the marketplace is it's a combination of the technology bells is the security behind it.

Yes. Okay. No, that makes sense. I know it's holistic that you were looking at tech, but I figured I'd ask because we're trying to a little bit more on the landscape. So of course, let's shift gears to corporate payments. It's a popular space. A lot of players going after it. Co-opetition seems like it's important. We have Billtrust speak at our event, and Visa and Mastercard talking a lot about both payments from a card perspective, virtual card perspective, but also accounts payable, accounts receivable, automation. So trying to think how to ask this efficiently, where do you see WEX fitting from an ecosystem standpoint? Is there more you'd like to do? I know there's been some industry consolidation as well. But where do you want to place -- again, place your bets within corporate payments?

Yes. So the place that we've -- where we've been winning in the marketplace over the last year specifically has been embedding payments within other fintech players. And part of what was interesting for us is we typically enter markets first through partner channels, and then we add on our direct capability. We've liked the idea of going in early with somebody who's got growth potential because it just allows us to grow together. And so that's been, I would say, kind of the primary emphasis point for us. We've also started selling into the marketplace the functionality that we have with our internal processing system. It's something we built cloud-native, highly reliable. We're using it internally, but we're exposing it into the marketplace externally as well. And so we're picking very specific use cases where we think that we have competitive advantage and that we can play well, and those have been places that we've been really hyper-focused. You will see us also adding eventually into the direct sales force that we have in that part of the business as well.

Yes. I mean you've used that playbook in obviously just health, as you talked about. So given that, Melissa, with -- it does seem like -- I'd like to use this chessboard analogy. The chessboard is getting more complex. And we've seen some interesting moves from the different players on the AP and AR side. So do you think it's important to play a role in some of that industry consolidation? Are more of these companies going to become both friend and foe? Just trying to understand how this might evolve as everyone is seeking scale.

Yes. I think that it's important to play in this space. We start from a physician having scale, so that puts us in probably a different category where we -- because we have scale and we have some really great operating cost structure in that part of the business, we feel like our ability to compete isn't hampered based on scale. So it's more around for us extending the product capability we have. And if we were to see an acquisition that makes sense and hits all our criteria, then that's where we pull a trigger. But for us, honestly, we're happy building into the space, too, because as multiples are high, as you know, and sometimes you're not getting a lot for what you're actually paying. And so we're quite fine in a lot of these cases just continuing to build their way into the marketplace.

Right. With the assets and the scale that you have, because look, Visa and Mastercard, from a category standpoint, talked about mid-teens growth. Rising tide obviously helps, but I'm just thinking about the -- again, the chessboard, it feels like there could be some change, and I don't want to underestimate your scale.

Yes. But from a change perspective, what we've seen is people have been -- they've been successful where they're focusing, where they're actually pretty focused, as opposed to kind of a broad approach into this marketplace. I think because it's just so big. And so that's similar to what -- how we're thinking about it is that we're going to be very focused in places that we think that we have competitive product differentiation, and we're going to play in those spaces. We think it's an important player to the market play in because just the size of this market. You can have a small piece of the overall TAM and actually still do really well.

Yes. I mean the TAM numbers are so big. I'm almost afraid to say that I'll have...

Right. Right.

Sometimes. But again, you're rooted in corporate payments, that is what you do, so it does seem like a logical extension or investment area for you, which is why I wanted to ask the question. So before we get into the cost on the margin side and the capital deployment side, let's quickly hit on travel. I know everyone asked about the recovery, and we've heard from Visa and Mastercard here at our conference. So you're welcome to go through that as well if you like. But I'm more -- I'm actually more curious about just your -- WEX. And when I think about WEX and travel, I think you've been over-indexed to hotels. So I'm actually curious if there's a plan or opportunity to organically go into some other spaces within travel?

Yes. Well, part of the interest that we had with the eNett and Optal acquisition was the capability they had in the airline space. So yes, as we consolidate the technology and we work to bridge the kind of the best of each, which is in our plan right now is we're consolidating our tech stacks and pulling what we think is superior product across, that's one of the products that we're going to bring into WEX that eNett and Optal have developed. And so that increases our capability. We've also long believed that there's a play in the vacation rental space. And that's something from just a pipeline perspective has been in pipeline for a long time. We do see that as an opportunity.

And from a resourcing standpoint, is that a completely different investment that you need to make to get bigger in something like the vacation rental space?

No. From an investment standpoint, the technology -- so start with both our corporate payment and our travel business sits on the same technology stack. There's shared functionality across -- the cross-border capability, currency settlement capability that we have in travel, we use a lot in travel, but WEX' capability that we use also in our corporate payments business. And so when we look at how we need to extend functionality, we're thinking about that across all of corporate payments. As we build something, we're building something that's usual across. And so in terms of needing to do lots of development, there's not a lot of incremental development. The product is set up in a way that would meet that need.

Got it. How about on the pricing side on travel? Melissa, I know that pandemic was tough on those clients. It's still tough for those clients. And I know you want to be there for them. And you've got some consolidated big players in the OTA side. So has pricing evolved? Or do you expect it to potentially evolve here as we come out of the pandemic?

Yes. It has evolved. But you kind of look back over the last, I don't know, even 5 years, there is a lot more concentration. You look across our business, there's not a lot of concentration within the industries that we're in. Where you see more of that has been in this travel customer set. And so over the years, what we've seen is repricing action that's happened. I would say, periodically, we knew with a pandemic that, that was likely going to be another point. And to your -- to what you said earlier, we want to make sure that we were supporting our customers. And as we've had conversations with them, certainly, price has been important. Innovation has been important too. So for us, as we've gone through and made adjustments, we've also thought about how we want to make sure that we continue to innovate in the marketplace for that customer set. We're able to really think about that from a pricing perspective for a couple of reasons. A number of years ago, we brought in-house a lot of things that we're outsourcing, and we've kind of migrated that over the years. What that's done has allowed us to create a really compelling cost structure, which is great when you get incremental revenue. It works in reverse. And you've seen that during the pandemic as we lost revenue associated with spend that, that dropped through as well. So while we've seen changes in price, we feel very good about our continued ability to drop revenue through to earnings as you start to see spend return.

Okay. Good. Last one on travel with eNett, Optal. I know you did a great job in negotiating price there, so hats up to you on that. Just any surprises on the integration or the asset itself?

It's the first time that we've done something in the pandemic. So it's been -- that's a bit of a challenge just from a people perspective. We can't go in on an airplane and go and meet with people like we normally would. I'd say, otherwise, we had -- normally, when you go through an acquisition, we'll do a deal model. In this case, when we went through the settlement, we went through a range of opportunities, like what could this look like, and it's playing out in that range of what we had expected. The synergies, we've increased the level of synergy, and we did that because -- for a couple of reasons. One of the things we heard from our customers is they wanted the best of functionality across the different products, and so that led us to decide that we were going to collapse the tech together. And that ultimately will lead to a synergy for us. We also -- as we got into it, you had Optal operating as a standalone company, eNett as a standalone company, and then you have WEX. And so you just had a lot of duplication. And so as we got really into that next layer of detail, we just saw more opportunity to take out costs that were just duplicative. And we wanted to make sure that we're putting it into the areas that are going to cause growth in the product development category as opposed to in places where we just had 3 of the same thing.

Okay. Good. Wrapping up, I know we're almost at the end here. I want to ask just on costs and margin. You cut a lot of expenses to protect the bottom line during the pandemic. As volumes come back and, as you said, things sequentially improve, I would imagine the contribution margin on that flowing through should be quite high. So how much of the cost cuts that you've done are permanent? Can we see margins come in at a higher level than pre-pandemic? Or do you feel more compelled to reinvest that as things come back?

So even in Q1, if you look year-over-year, we've seen there's margin improvement year-over-year across fleet and health. And so it's really the travel business. So if you look at the overall travel, business is causing more of an issue. So when we think of cost, we feel like we've done a really good job of controlling costs and being very specific about where we want to deploy our cost structure. Through a combination of the synergy takeouts that we're going in the process of making right now and seeing some spend volume return in travel, that's the combination where we think we will see more of kind of that normalization. But all of the other segments, we feel like we're actually right on track right now.

Okay. No, on the cost side, I know you've done a lot. So just to get you out of here almost, I have to ask an M&A question. I know you did Benefit Express, and there's a lot of -- we talked a little bit about this a little bit in the green room before, I mean, a lot of private market activity and a lot of industry consolidation. You've been good on the capital deployment side, good with M&A. Do you feel a greater sense of urgency, Melissa, to do more deals at this point in the cycle? Or are we still in a wait it out mood?

I don't think I've ever felt like we have to. And what that allows us to do is to be patient and make sure that we're being disciplined. So we're always going to have deal flow that's going on in the background. And right now, we're particularly interested in absorbing what we've got and deleveraging the business. But that being said, we're always going to be in the marketplace and looking at opportunities where we think that it makes sense for us to make an acquisition, and we'll continue to visit that. But at the kind of the highest level, what we're trying to do is reduce the volatility that we have associated with steel prices. And we feel pretty good about that. We're talking about -- when WEX went public, when we first met many years ago, it was 70% of our revenue exposure. And I think in '14, it was still like 45%. So now we're down in the low 20s. So we've done a lot to really migrate and diversify the business. And we're also trying to just continuously increase the TAM. We want to make sure that we're a growth company, that we're very focused on how we can use and deploy capital to increase the overall growth profile of the company.

Yes. It's been a very important value creation story for WEX on the M&A side, which is why I want to always make sure I check in with you on that. So last question, and I'll let you guys get on with your day, just thinking about the stock has -- I've been surprised, the negative reaction to the quarter. Do you think, as you've been meeting with investors, you and Steve, that there's anything that's really sort of misunderstood at this point that you would call out?

I think that -- I would say a couple of things. I think that the technology, I'm glad you asked technology questions, I think that that's been an important part of our story. And I ensure that's always understood, the complexity of the technology that we have and how we operate right now. And I think the other thing with people, when they look back at the quarter, I don't think they always associated the late fee revenue with credit loss in the fact that those 2 things work in conjunction with one another. So if we had, had higher late fees and higher credit loss, with that -- it feels like that would have been -- even though you had the same number, you might have had a different reaction. And so just making sure that we're messaging that we think those things of -- it actually increases the quality of earnings, and they go together.

Yes. I think we sometimes forget. You actually want to cheer for lower.

Yes, right?

In case of -- we're cheering for the economy to come back. And look, I think the tech piece is important, just to close it out. I mean this whole modern versus legacy debate, I know WEX has been around for a while, and so I don't want to lose sight of the idea that you have been going down this cloud and digital journey for some time and that there's a reason why the sales performance has been good. So I appreciate you giving us that update. So thank you both for the time.

Yes. Thank you.

Hopefully, we'll catch up with you guys very, very soon. I'd love to come up to Maine and see you guys at some point in summertime.

We'd love that.

Sounds great.

Let's do it. Thank you, guys.

Yes. Thanks, Tien-Tsin.

Thank you.