WEX Inc. (WEX) Earnings Call Transcript & Summary

Welcome back, everybody. We're very pleased to have Melissa Smith, CEO of WEX joining us today. Melissa, thank you so much for being here. Greatly appreciated.

Yes. We're happy to be here.

And we're going to dive right in.

I want to ask you about the -- most about the fleet fuel card market. It's been such a consistent kind of grower as an industry for so long. How should we think about the market opportunity going forward? And what is WEX's sort of growth algorithm within fleet? How much of it is secular, share gains? How do you build up the growth rate?

Yes, it's been a great part of our growth story. So we've set out long-term targets that we're going to grow that part of the business 4% to 8% annually. And if you look the way that we've done it historically, it's largely just been from shared gains. So it's the -- we've continued to win business and bring business, and both from competitors and also from people that are using cash and general purpose credit cards. We've just continued to grow that base. On top of that, we've said from our long-term perspective, we're continuing to introduce new products. We've talked about the idea that we are expanding the network that we've developed with Mastercard's open loop network. And so we see this as an opportunity to continue to meet our customer's needs by expanding the offering. And so things like that are embedded also in our long-term growth rates, but I would say that the primary driver is to continue the great sales efforts that we have in the marketplace and continue to pick up new customers. It's a great market right now. We continue to win in the marketplace. Highly digitally, about half of our new sales are coming through digital channels. And with elevated fuel prices, we're seeing just more interest right now.

That's great. And the fleet segment, as with the rest of the economy, it was impacted by the pandemic mix changes around enterprise, SMB, labor shortages, fuel price volatility. I think there's even been some chatter in the news lately about diesel shortages. It seems like the environment is very volatile right now. Sort of how would you characterize the recovery in fleet? And coming out of pandemic sort of -- have there been any structural changes coming out of the pandemic? Or what sort of inning are we in?

Yes. Sure. With our fleet business, one of the things that we'd learned is that a large number of our fleets just continue to do business, kind of almost despite what was happening with the pandemic. So we certainly saw, in the beginning of the pandemic, some usage that had declined. That gradually as the economy reopened, we saw that coming back online. And we think that kind of the last piece that's tied to that is, if you think of some like a sales driver, like a pharmaceutical sales fleet, which is the last part that's still suppressed within the base. But other than that, our total volume is up 15%. And our payment processing volume, if you compare that to 2019, so we've seen continued nice gains as same-store sales have increased, but also just great sales momentum. And those 2 things combined have really brought us back to that we're beyond our '19 levels with a little bit of opportunity, we think, still remaining.

Okay. And some other headlines. Trucking freight rates seem to be on the decline with fuel prices up sort of steeply at the same time. Does that have an impact on your business? When the environment gets a little more difficult for truckers, does that have a downstream impact on your business or not?

Yes. And I want to parse this into pieces because we get questions a lot of, do elevated fuel prices does have a direct impact on miles driven. And within our portfolios, which are businesses, we really just don't see that corollary where people continue to fuel. What they'll generally do is fill up more frequently. So we have more transaction volume, but the total amount of miles driven remains consistent. The second part is more around what's happening within the over-the-road market specifically, which is a segment of our business. And if you think of our fleet customers, they're largely people that are driving light trucks or vans. So think of like Ford F250s. And that's the bulk of the portfolio, but we do also have offerings for the over-the-road customer base. And what we're hearing from that customer base is what you've talked about a little bit of softness within that portfolio. But I would say it's just a little bit where they're seeing some of these kind of huge momentum trends that they've seen over the last couple of years softened a little bit with spot rates. From a volume perspective, we really haven't seen an impact on our overall volume.

I see. And Melissa, this is quite topical, and I mentioned a second ago. In terms of some of the really fresh news about diesel shortages on the East Coast, is that something that you're seeing or your customers are talking about?

We're not seeing it have like a wholesale impact within our customer base. Some of the products that we offer our customers shown them where they can actually buy fuel. They historically have used those in order to locate the lowest cost of fuel. But we find when there's periods of issues, let's say, there is a hurricane or a shortage, people will start to use those products in order to help locate sources of fuel. And so it's a place that we feel like we can actually play a role and help them figure out how do they work their way around these issues.

And also diesel prices are up quite a bit because of the shortage. So in a sense, that's not a bad thing for you all.

Well, Yes. I would say, actually, that part of our customer base, we earn transaction fees.

Right, right. Good point.

So -- no, not as much for a direct link, but certainly true with the North America fleet customer base.

Good point, good point. I wanted to ask about electric vehicles, and that's something that we increasingly get questions about. It seems to be really early days when it comes to how commercial fleets will absorb or adapt to electric vehicles. What are you seeing out there today? And if you have to take a guess, like what does the time line look like for more wider-scale adoption?

Yes. No, there's interest, very small amount of adoption within our customer base, for 2 reasons, I think for one, a lot of our customers had some experience with hybrids several years ago, didn't have a great experience and -- or a little leery going into this. So the people that are on the forefront of this tend to be government fleets or really large fleets that have ESG reporting requirements. We feel like we play this pivotal role in this marketplace, and we have an ability to help our customers go through this transition. Where there's a lot of confusion in the marketplace, people are trying to really learn how do I operate a vehicle. What they're looking for is an integrated offering. So as they migrate, they'll have some gas part vehicles. They'll have some EV vehicles. They want to have a product that combines that together into one offering, so they can understand the total cost to their fleet. So the offerings that we're developing allow people to charge their EVs on the fly as they're on the road, working on depot offerings and also at home charging. It's with the idea that we're agnostic to what kind of vehicle you're -- and whatever source of fuel you're using, making sure that we're integrating that information and providing that same quality of not just data, but also the ability to track the cost associated with the vehicle, and there's a lot of unknowns when enter into the EV world. So I'd say there's interest, not much usage that's in our portfolio. And a lot of issues, even as people with elevated fuel prices, I think it has increased the level of interest, but getting access to vehicles is a real problem. So even the large fleets that we have in our customer base, think of the government fleets, they're many years out in their ability to actually bring those vehicles into their portfolio because of ordering cycles and the fact that they have vehicles right now that they need to cycle off. And so our goal is to make sure that we are in the forefront of this, working with our customers, continuing to develop product offerings. We see this as a great opportunity to meet our customer needs, but do something also which is good for the environment and help support our customers through that transition.

It sounds like you guys are laying the foundation sort of to be able to adapt to the market as it evolves, if that's a fair characterization.

Yes. I would say that we want to be in forefront of this. And so we are certainly listening to what our customer needs are, so -- which is something that we're very customer-focused and how we think about innovation. And so certainly, those conversations are forming the prioritization of the work that we're doing. But as we've gotten more and more involved with this, with our customers and our partners, we see that we offer this unique opportunity to play a role here, but also that there are many other products that we can develop over time. We're very focused right now on just the ability to bring into the marketplace, and we've announced a relationship we have expanded with ChargePoint as our initial offering in order to make sure that we can expand the acceptance needs to our customers. And so that's our primary focus right now, but we're extending the thinking of what we can do over time as well.

And what about autonomous vehicles in terms of autonomous commercial vehicles? It seems like there's a lot of very interesting developments there, and that seems like something that might even come faster than electric wide-scale sales. How does that impact you guys? That -- it sounds -- it feels to me like they're more of a tailwind.

Yes. I think that it's really exciting in terms of reducing costs. And particularly now with labor shortages and a number of companies are experiencing, I think there's nice solve there. It is still early. You are seeing more activity and, specifically in California, here in the U.S. And so it will continue to evolve, like the other technologies that we've talked about. I don't think I would put that in the forefront, but I would say, coincidentally, it will be coming along with the work that's happening with the EV. And both we think offer opportunities for us because each of those new sources of technology and new ways of operating creates complexity. That's a place that we play well in.

Great. I wanted to ask a more tactical question before we move on to some other parts of your business. Just about the interchange rate and fleet, and I know that fuel price volatility can kind of have an impact there. So how do you think about interchange kind of trending as we go forward here?

Yes. So I think let's start with our fleet business, which I think is your primary question. So within the mix of our portfolio, the over-the-road customers, the fee model is a transaction fee, which is blended into that rate. Overall, our rates are actually pretty consistent. But from a mix perspective, as fuel prices increase because some of those are transaction fees, the rate actually drops. And so we've said that we expect to see that volatility as steel prices move around in the course of the year that, that's going to affect the blended rate. But from an overall pricing perspective, there really isn't anything that's happening in the background.

Okay. I want to shift over to Travel and Corporate Payments, which is, I think, a pretty exciting part of your business. Tell us about Flume and the product for SMB clients? What's the value proposition there? How does that help your customers?

Yes. Flume, we're really excited, in part, because this is a new way of working for us. We've been really excited about the journey that we've gone on to move our technology into the cloud and move everything that we're doing new into the cloud over the last several years. And this is like just a live example of our ability to create something, move it into the marketplace really quickly, do it with a customer-centric focus. And so we've been able to start with alpha customers who were existing fleet customers that we already had a product of ours. They're smaller businesses. They were interested in removing some of the workflow that they have within their business. And so we took some thesis around how you can send store receipt funds all through a digital and web-based depending on -- in the customer applications. And so this is the concept of paying and get paid geared towards a small business is something that we've brought into the marketplace with Flume. Because we already have a trust relationship with these customers, and we talked about the fact that we do business with over 400,000 smaller businesses within our portfolio, we think that this has this great opportunity to really tap into the needs that they have. So went through an alpha launch/beta launch. We're in the marketplace live right now. We do believe that we're going to learn a lot and continue to evolve the product that we're really excited. We're gearing this towards businesses that have $15 million in revenue or less. I think this is relatively small businesses, and most of them have fewer than 10 employees. So really small. And the testimonials that we're pulling out of that so far are great. Customers talking about how it allows them to do their work on the fly in a much more digitally enabled manner.

And how does Flume fit in? How do you think about the competitive landscape with Flume? I know you guys also provide virtual cards to other kind of AP. Automation platforms Is one small part of your business, but how do you think about fitting into the competitive landscape?

Yes. So I mean, again, it's a pay and get paid model, and so there are other people within this space. A part of what we believe that we can differentiate on the ability that we were able to create this from scratch, which is interesting because it allows us to not have to think about any of -- any legacy systems or platforms and really start fresh. Also do that on the backbone of some of the underlying technology we have, like our world-class processing system. I think that, for us, is a differentiator in the marketplace because, believe it or not, a lot of the people that are in the space have been there for a while. And then secondly, the fact that we have these existing relationships with our customers allows us to really tap into their needs. And many of these customers are people that we brought into the digital age for the work that we've been doing with our fleet products. We have a trusted relationship. They are really experiencing, for the first time, these types of automation. And so we're really excited about the fact that we can build upon that existing relationship and do something that we think is really to our purpose. I mean, this idea of simplifying the business of doing business, we think we actually have the ability to do that with Flume. And so part of what we're doing right now is testing -- market testing, not just the product itself, but the way that we're marketing it.

And on the travel side of the segment, it really feels like travel is roaring back. Virus levels be damned, it just seems like travel is roaring back. What are you seeing across that part of your business?

Yes, and I would say that, that's true. The travel business, just a couple of call-outs, for us, we're primarily involved in hotel payments. The large amount of our spend is cross-border payments to people moving across countries. And what we saw in the first quarter was that we were down about 70% from 2019. We're going to lag a little bit because when we are actually reporting revenues when people are staying at the locations, the upfront booking, by April, that had moved up to 75% to 80% of 2019 levels, and we continue to see that evolve in a positive way. And so we definitely are seeing continued travel and an interest from the consumer and this pent-up demand getting out there and experiencing the world. And one thing I could add to that, like one of the things we did during the pandemic is really focus on the cost structure of that business. And so increased volume actually does drop through really nicely from a profitability perspective as a result.

That's a good segue to my next question, which is about yields in this broader segment. I think the longer-term trend, especially on the travel side -- particularly on the travel side, has been that yields have kind of come in a bit. How should we think about that over the next several quarters? Is that something where you expect some stability? Or is it just sort of as you scale this business yields will -- that's just the price you pay for the scale that you gain basically?

Yes. So one of the things that we had done, I think we've done for a couple of quarters now, is actually break out the rate between what's happening in travel and what's happening in the rest of corporate payments. And so let me talk about corporate payments first because the rest of corporate payments, there's 2 products that sit within there. There's an embedded payments product, which, from a product perspective, looks actually quite a bit like the travel product. It is geared towards making sure that we are highly integrated into the operations of our customer. It's much more of a technical play within their systems. And so we're facilitating payments on their behalf, highly integrated, highly scalable product offering. And then a more traditional AP automation play where you're going to see higher rates, but more cost associated with that. With the corporate payments part of the business, we've said that we expect that the rate will blend down during the course of the year because we're seeing more embedded payments get mixed into the portfolio. In particular areas, we're rolling Avid into the portfolio. We also expect to see that continue to increase profitability. So even though we're going to see the rate on that side decline down, highly profitable part of the business as volume trends continue to increase. On the travel side of the business, what we've said is that we think the rate will be relatively consistent with the full year rate last year. We had a little bit of an uptick in the fourth quarter of last year related to some of the true-ups we did at the end of the year. But if you take the full year rate, that's what we expect this year to play out to be largely. Then there may be a little bit of mix within that portfolio. But -- so that's what we expect if you actually disaggregate the portfolio. And then depending on what happens from a mix between those 2 things, you could see some shifts in the total rate.

I see. That's super helpful. And one last question on travel. How is the eNett, Optal business doing? Is that -- I seem to recall that there was a little bit more potentially Asia exposure, if I'm not mistaken. And I'm just curious about how that business is trending relative to investment.

Yes, yes. Europe has been roaring back. Asia has been slower in the rebound, and that is still true. And so we've definitely seen more benefit from Europe than we have with Asia. But overall, when we look at the eNett and Optal transaction, because of the work that we've done to integrate the business from a synergy perspective, we've seen good volume returns across that business. We've got some market share gains that we've seen some of the spend volume shift towards eNett and Optal. And so we've got an advantage of that since we've acquired the business and also the synergies to bring the business together. And so overall, that transaction is coming together nicely. And there's a lot of work bringing that on because of the way it came on, that we actually felt really good about the way that this has landed and our ability to continue to work with the customers in that space.

Great. On to health care, and that has been a nice consistent performer for quite a long time. What do you see as the bigger growth opportunities for you guys in health care? Is there -- are there more parts of that ecosystem that you can kind of get into? Or is it more now just about kind of scaling what you already have?

Yes. So within our health care business, we are excited in the fact that we will continue to see growth. So there's underlying just growth in the marketplace just to start with. And so that's the kind of the first part of the growth curve within that part of the business. On top of that, it's another place that we continue to win new partners, win new customers directly. And so as we continue to get market share gains there, that's going to be a growth option for us. We're increasing the ecosystem of services that we're providing. Originally. we started with HSA and FSA accounts. We extended that to adding COBRA capability, which has been a really great addition to the business and then benefit administration. And so as we've continued to evolve the end-to-end service experience we provide for our customers, there's also been an incremental benefit of that. So if you look at like the benefit admin business that we bought, we've significantly increased the sales and pipeline activity from when the business was running standalone because the ability to offer just more with that customer set. And so there's this additive effect of as we continue to extend services, it also -- it helps the whole part of the business, not just this one extension because you have a more compelling product offering within the marketplace. And so market growth continued to win new business and then extend the ecosystem that we have in place. And we think those 3 things, plus the fact that now we're getting a benefit of revenue coming from the deposits, which is another -- it's just another source of revenue for us to add to the mix.

And one the theme that I think is really interesting with you guys is just the cross-sell opportunity more broadly across the business. I think with -- you were talking about Flume earlier, about you have existing customers, et cetera. Talk about the broader kind of cross-sell opportunity. Within your mix, where are the best sort of synergies? Where do they lay? And how do you execute on that?

Yes, and I'd bifurcate it into those 2 pieces, There's the small businesses. So those are just increasing digital offerings to the small business customers that we have, and Flume is a great example of that, but we intend to do more in that space. And then there's the larger customers where it's more relationship-based. We're setting up processes, where you are sharing leads across the business in a more formal way than we've done historically. Changing the organizational structure helped with that because it just gave more exposure across the Americas with the offerings that we have, and the ability to actually then cross-populate is much bigger. As an example of that, we have a conference next week that we've historically done for our health care customers, health and benefits. This year, we're extending that to across the whole system where you can allow customers from one segment of the business to have exposure to others and also the offerings that we have in the marketplace. And so we're just -- I would say just getting started on the cross-sell, but we're excited because only 1/10 of our customers we know are using cross-pollinated products.

Are there any kind of sort of systems or technological work that needs to be done in the back end to kind of continue to unlock the opportunity?

We're big users of Salesforce. And so there's nothing that I would say that we can't do within the systems that we have.

And what about some of the synergies from the deals that you closed? I think at Investor Day, you mentioned that there was something like $80 million of synergies that you plan to kind of unlock from the deals that you've closed in the last few years. What are the opportunities there? What types of synergy are we talking about? How do you unlock those?

Yes. A large part of that was with eNett and Optal. We talked about the fact that we had $30 million in the bank. We had a $40 million target associated with that. By the end of this year, we'll be at $35 million. And so the last piece for us is the consolidation of the platforms, which is the last remaining component of that, which, for us, allows us to focus even more on product development within the existing base. We're going to bring into the marketplace some things that we're really excited about as part of that -- as part of the consolidation of the systems, but it also creates efficiencies of the complexity of running multiple platforms internally is something that goes away once you actually merge these systems together. And so that's the -- I would say, the last remaining piece of any of the integrations that we've done so far is the platform integration, which is normal for us, do all the rest of it first, you're combining the technology and the background last, and that's the last phase of the synergies, which will happen at some point in 2023.

Okay. We've only got, unfortunately, a couple of minutes left here, but I wanted to ask about balance sheet deployment and M&A. You guys have always been consistently have a great deal of time, pretty active with M&A. What are you seeing out there? I think a lot of investors on this side look at the landscape and think, well, the tech multiples are sort of crashed. And therefore, there is -- it's a bit of a buyer's market. I'm not sure we're quite there yet, but in terms of just the mentality of the sellers. But what are you seeing in terms of availability of assets? And what's the broader strategy with -- maybe with M&A to start with?

Yes, yes. Well, I'll start with that. So from an M&A perspective, we're looking at product extensions, which has been a place we've been particularly focused. So we need to buy or build, and we're doing some of each. The ability to continue to expand geographically in those things that create scale. And so those are the 3 primary buckets that we have been focusing on from an M&A perspective over the last probably, at least, 7 years. And in terms of multiples, I'd say those that are in need of capital are very much hot in the marketplace. Those who have shored up their balance sheets are -- have -- or sitting on capital are less active. So from a multiple perspective, I think that there's a difference between the type of assets that are out there in the market. We're definitely seeing more interest of people selling than we have over the last several years. But I'd say the kind of what's happening in the public markets is -- has not fully translated into the activity that we're seeing outside of the public markets yet. So definitely some compression, but not as much as what you've seen in the public market so far. So I think I don't -- I feel like this is -- we're just seeing the beginning of the trend, but we're not all the way through that yet.

Yes, yes. I think you're absolutely right about that. We are out of time. Thank you so much for joining us today. It was a great pleasure and insightful comments. Thanks for joining us.

Thanks very much.