WEX Inc. (WEX) Earnings Call Transcript & Summary

Okay. We're going to get started. My name is Bob Napoli. I'm the analyst that covers WEX for William Blair. For a complete list of disclosures, please go to williamblair.com. Really pleased to have with us again this year WEX' CEO, Melissa Smith; Senior VP of Investor Relations, Steve Elder. I've known both Melissa and Steve for a very long time. They've been executing very well. They're a leader in various payments markets, including the fleet segment, travel, health care and corporate payments, B2B payments. Melissa is going to have a presentation. We'll have some Q&A here in the room. So excited to have you guys. Thank you for coming.

Yes. Sure. Thank you. So I'll talk about WEX. I'm excited to be here. I want to talk a little bit about who we are, what we do, why we win in the marketplace and why we're excited about the future. So we started the kind of the basics. WEX is a global commerce platform. Our purpose in life is to simplify the business of running business. So we're very hyper-focused around how we can remove complexity from other businesses. And if you think about the world that we live in, complexity is only increasing. And so this purpose for us has just become more and more important. And it's a place that we are focusing not just externally with our customers, but also internally, making sure over time that we are looking at solutions that can simplify the way that we're doing our work internally as well. We're really proud of our track record of execution. Bob inferred this earlier. But if you look at the last 5 years, including during a period of time where there's a lot of uncertainty, we grew revenue 13%. So our long-term growth framework has us growing revenue 10% to 15% and EPS 15% to 20%. So we grew revenue 13% and our adjusted EPS 19% in this period of time. So a couple of things that I would point out. One of the things that -- I talked about the fact we're a global commerce platform. So the way that we are setting up the technology is around making sure that we can meet many needs of our customers in the marketplace. And we do business right now with over 800,000 customers globally. So highly diverse, many different types of customers, many different types of industries. And we've really focused around creating solutions that are unique within different industry verticals. So I'm going to start left and I'm going to go to the right. But on the Fleet vertical, think of this customer base as those that are buying as a byproduct of just running a business. So they might be a landscaper or a contractor or the federal government or anybody who just happens to have vehicles as part of their portfolio. About 1/3 of those are long-haul trucks, but the majority of that business is not long-haul trucks. It's actually just local cars and vehicles. The value proposition that we've had is around making sure that we can create efficiency and highly integrated into the business. And so that as you add a vehicle within your portfolio, it adds that vehicle within our system itself. So highly integrated offering into the operations of our customers, very strong barriers of around data collection and our ability to do analytics for that customer set, great growth avenue for us. Travel and Corporate Solutions. We are -- we have 2 primary products there. We embed payment capabilities through an API into our customers' work streams. And that is called an embedded payment. We do that in travel. We do that with other customers that are other fintech players in the space, and then we have AP automation. In the Health and Employee Benefit Solutions, we're offering tax and think of any type of tax deferred account like an HSA account or an FSA account, Medicare Advantage. We provide the technology that allows people to make sure that they're buying things that are applicable according to the [ walk ] and allow them enough information in order to make sure they're making informed decisions. So if you look across, we're solving many different type of problems because the thing that wraps around all of that is we're simplifying businesses, so people can focus on other things. And we're doing it in a way that's very tech forward. We're making sure that we're integrated in the operations of our customers. We're making sure that we're highly scalable and reliable, which is really important to our customers because often their products don't work unless we're up and running. And so scalability and reliability is really important to the customer set that we do business with. We're highly focused on customer-driven innovation. And a lot of that innovation is driven based on just the amount of data that we've collected across this portfolio of assets. So we've about 800,000 customers, about 450,000 of those are small businesses. So a highly resilient business model because we go across so many different categories. If you look at the first quarter, again, really proud of the results we had in the first quarter of 2022. We grew revenue 26%. So you can see that kind of across each part of the business, we had really strong growth rates. Earnings per share -- adjusted earnings per share for us, we grew 61%. Volume across all categories was up 50%. So really great momentum going into 2022. What that allowed us to do is to increase our guidance for the year. So going into our last earnings call, we raised revenue of $105 million at the midpoint. Some of that was fuel price related, but a large part of that was also related to just better business volumes we're seeing across the portfolio, and we increased our earnings guidance at the midpoint, $1.20. So really strong momentum going into 2022. So if you were a customer and you were looking at WEX, we think about this in different categories here. We look at, first of all, the way that we approach the marketplace is both directly and through partners and across every parts of the business we sell into the marketplace with both. We are really focused around these different categories, how can we simplify benefits and benefit offerings to our customers, which is incredibly important in the marketplace that we have right now and to make sure that we're helping with mobility, whether that's with travel or whether our Fleet customers and then also pay and get paid. And as we've really looked across these categories and really broadened our technological capability, what we've been able to do is focus around how we can take pieces of functionality that was traditionally sitting in one part of the business and expose it to the rest. We've been through this effort over the last several years, where we've moved our technology into the cloud and that's allowing us to innovate much faster. And one of the great examples now where you can talk across the business around how we're combining pieces of functionality in ways that offer a new product into the marketplace. And so some of the examples we have live right now like an example of innovation that is also a cross-sell. We brought into the marketplace over just a few months a product called Flume, which is a pay and get paid model. It allows us -- and we did this working with our 450,000 small business customers. We took some of them, created a test model with those customers, really looked at beyond what they were experiencing for needs in their Fleet business, what did they need in the pay and get paid realm where we could actually help with the products that we have already. What we learned from that experience, created an alpha launch and then the beta launch into the marketplace. And as we're working with our customer set, we're rapidly learning what do they need, and we're building product weekly to meet those needs. That product bridges the existing assets we have. So the 450,000 customers are using our Fleet products with bridging into pay and get paid functionality and allows us to solve more problems that they have. And what we hear from that customer base is what they're looking for is an ability to actually have us do more to simplify their day-to-day needs. So we feel like we're just getting started around the idea of taking pieces of functionality work across the portfolio in cross-selling. Another great example we had around this front. We have traditionally had this health care conference that we do every year with our health care customers. This year, we actually did a test where we brought in not just our health care customers, but there are customers that were sitting in our corporate payments travel and Fleet business and really talked across the business of different opportunities that we have, which is incredibly well achieved and something we're going to build upon in the future. We also operate in big markets. So when we talk about the $24 billion marketplace, they're big and they're growing, which is important to us. So you look across each of the individual markets that we're in, they're growing 5% to 10% on average. If you like weight it to our portfolio, it's about a 5% growth rate across the markets that we're in. One of the goals we have is when we've done M&A historically is to expand this market, is to look for ways that we can increase the share, the total addressable market through M&A activity. But also, we're doing that increasingly through new product development. Because of our history, we think that we're in this unique position that we can do things strategically that other companies can't. So when we step back and said how we think about ESG, we thought how do we align ESG with some of the strategic goals and the assets we have. And so people and culture has always been a highly important to WEX. It's integrated as we are. We have incredibly high employee satisfaction scores. You can see that actually through really high retention rates right now when others are having difficulty with that. The part that we thought was unique for us was environmental innovation, where we can take this pole position that we're in with our Fleet customers where we have millions of vehicles that we're doing business with now. These customers are starting their journey through an EV migration. That EV migration will take a number of years. And that customer set is very interested in how you can take the information that we offer with the gas part vehicle, combine that with the information that you're going to have around an EV vehicle and package that together. So we've got offerings in the marketplace now where people are using our products for EV. We're just building on that. We think that we have an ability to actually really take our leadership position and move it into this EV space, particularly in this novel space. We also have the ability to create a whole different revenue model associated with that. It increases complexity. It allows us to do things from a subscription in transaction fee basis, which is new for us and new sources of revenue. When you go across that, environmental stewardships will continue to be important to us, such as monitoring our footprint. The biggest place for us has been reducing the number of data centers that we have across the portfolio. And then on the social impact side, one of the things we've done over the last, I think, it's been 3 years now, we believe -- in our health care practice, we have customers who are -- where we've been able to help educate with what the benefits are of HSAs. And we've had and led something called HSA Day, where for the last several years, we're doing financial literacy education into the marketplace, which is a benefit to consumers who are -- if you look at bankruptcy rates related to health care costs and it's one of the higher causes of bankruptcies. It also benefits us and the fact that it's moving more towards these tax-deferred accounts, which we provide the technology to find. So we've looked across all of the ESG of places that we think that we can actually uniquely play, and those are places that we're just building upon. So I talked earlier about our long-term targets. So we want to grow revenue 10% to 15%, 8% to 12% organically. And then see scalability across the business, and that leads to our adjusted earnings growth of 15% to 20%. We think of that as fuel price neutral. And so when we think of fuel price, FX control is how we really drive and deliver the business. Each of the segments, we've also provided some updates around what we expect to have. So Fleet growing 4% to 8%; our Travel and Corporate Payments segment growing 10% to 15%; and our Healthcare segment growing 15% to 20%. So again, those are fuel price, FX neutral and long-term targets. Just to break it down a little bit more, we had this disclosure in. So another way that we're looking at that is if you kind of step back and look at this at the enterprise level, the way that we intend to get to the 10% to 15% number, I talked about the fact we're in markets that are growing. We're going to get a lift from just the market itself across the portfolio. And on top of that, we're very focused on cross-selling. That's going to lead to that 4% to 5% existing customer growth. We have been very disciplined and I'd say, one of our core strengths historically has been bringing in net new customers. So both retaining customers is a strength of ours, but also sales and just an acquiring business across the portfolio, and we're going to continue to do that. And we think that's going to add 3% to 5% growth. We've been really building on our product capabilities. So if you look at our business, we believe in the markets we're in. We lead by the products that we offer. We wanted to make sure that we're really thinking about that as another growth driver within our business. So we added in a Chief Divisional Officer role at the beginning of this year and really reoriented the company to -- instead of being focused on product development based on line of business, looking at this geographically. So looking at the things we want to do on a global basis, but also moving our sales functions to geographic, the U.S. and then international businesses. We think that we're really building capability around bringing new products in the marketplace. We think Flume was just kind of the start of that, and that's going to lead to 1% to 2% growth. On top of that, we have traditionally executed very well in bringing in M&A. Over time, we think that's going to lead to 2% to 3% growth, that is the 10% to 15%. We will get leverage based on the scalability of the model. We're also really focused around where we can push automation and artificial intelligence internally as well we think of an opportunity to take a really good customer experience to make it even better through digitizing that experiencing and thinking end-to-end from the solutions we're offering in the marketplace and using the data that we have to create even more artificial intelligence within the company. And we think that, combined with some of the balance sheet actions, will lead to 5% leverage based on the activities that we have right now. So leaving to 15% to 20% growth. Also I'm going to throw off in a significant amount of cash in the world we're in right now. I think that's really important. And what we're showing here is now is what we generated in cash flow in the last -- since 2017. So $3 billion worth of cash. It's a part of our model is to make sure that we continue to be good stewards of cash and think about how we're going to deploy them, which leads me to our capital allocation priorities. So across the business, we want to make sure that we're continuing to invest in growth. So we look at how much money do we want to invest. It's about 6% of our revenue that we do think about as internally developed software largely. So we're developing new product capability across the business. We also are focused on making sure that we're executing against M&A that meet our strategic pillars and meet our financial criteria and then make sure that we're maintaining a strong balance sheet. So we have target ratios of 2.5x to 3.5x leverage on an EBITDA basis. We have $150 million worth of share buyback program in place as well. So when I think about WEX and our ability to operate in this market that we're in right now, again, I'd start from a place where the model itself has been highly resilient through many different cycles. I think that's been proven over the last few years, partly because we operate in these large growing markets. So the business is really focused around how we can grow in the markets we're in. We operate from a position of strength across those markets. We have leadership positions in fleet and travel. We have a leadership position in corporate payments. And we have leadership position in health. There are barriers around entering and expanding those leadership position. A lot of that is related to the just sheer amount of data that we have across the portfolio. The reoccurring revenue model, so over 80% of revenue is reoccurring in nature. And what we find is, increasingly, there's this network effect is the more data that we're collecting across the portfolio, the more informed we can make the products. Those customers that we have is -- a good example of that, the more that we actually have -- that connection point with our customers feeding our product road map and features that we're delivering into the marketplace. The network effect is tremendous. And so we're seeing a lot of benefit across the portfolio of making those connection points. And then the last thing I would say one of more important things for us, when I talk to any customer anywhere in the world, they almost always lead with the people at WEX. People still does new business with people and how we treat our people, I think, matters with how they treat the customers. And so it's always going to be one of our high orientation points is making sure that we foster the culture of the company and that, that translates to how we serve our customers.

Okay. Thank you. Thank you, Melissa. We'll do a few questions in the room here with the remaining time. It's great to see the momentum in the business and has some new information on the slides that you gave. So thank you for that. I mean one of the areas that you highlighted is capital allocation. Has there been any changes in your capital allocation? Where are you seeing the highest returns on that capital today?

Yes. It's interesting because we've had a bias historically, as you know, to deploy capital through M&A in a market where we haven't seen as many attractive assets. And so we have been deploying our share buyback program. We bought about $80 million worth of stock since, I think, we last got together. And Steve, do you have the actual share count?

Yes, it's about 520,000 shares.

Okay.

Right. Thank you. You've had really good momentum in the business. And one of the things that has stood out, I think, is the margin expansion. I mean you've obviously good growth as well. A lot of people talk about transition to the cloud. But I think you started earlier than most and so you're pretty much completed with that. Are you seeing real economic benefits? Is that what is driving that margin? Is that a big reason for the margin expansion?

It's interesting because like the movement to the cloud, the economic benefit, I would say, was kind of like third on the list. I would still say that it's true. The speed and reliability that we've gotten from moving into the cloud are definitely the most important things. So like when I say speed, we've always been really good about moving product in the marketplace, but the ability to actually move a product in the marketplace for us right now is just like exponentially different. And so -- and that starts. So we move the platforms into the cloud. We've still got a little bit more of that to do, but we've gotten the majority of our platforms in the cloud. The ability then to take a new idea, see the idea and actually deliver that into the marketplace and get rapid feedback from our customer because we're doing and have been for a while. Any new development in the cloud is -- it's so game changing in the way that we can pivot. A 1/3 of our company are technologists and to be able to actually pivot them into this arena is really probably the most important thing for us. From a margin perspective, I'd say that the things that have driven the margin is the ability to actually have scalability. So as we develop things like we in-sourced and created our operating system for corporate payments. So that transaction processing system is something we sell into the marketplace, but we use internally as well and highly scalable, highly reliable, but much lower cost. And so I think as much as about not just for the fact that we're in the cloud, but we've kind of systematically gone through and looked at our cost structure and said, we're at places that we can use technology to make that better. And I think, honestly, we only just started because when you look across the business, we see continued opportunities to think end-to-end about how you create a better customer experience and do it at a lower cost with the use of new technology. So I feel really good about the ability to continue to expand margins because of that.

Great. Thank you. Appreciate that. The EVs -- so I've been answering questions for the last 15 years about how electronic vehicles are going to disintermediate fuel gas vehicles and how WEX is or your competitor are going to be hurt by that. But it seems like should we be thinking differently about EVs and the effect on WEX' business?

Yes. I mean, I think that from an AV perspective, I think sometimes people undervalue the fact that people -- that we're in this position where people need the information that we have in order to really be fully informed as they go through this migration, and that migration is going to take a lot of time. I think some of that -- if you're out there trying to buy an EV vehicle and that's not a Tesla, those people who are driving Tesla's, our customer population, that's not going to be their target vehicle. There's a length of time that they have to wait in order to actually get access. And so we know that this is going to take some time in which time they're going to have this mixed fleet, which is way more complicated for them. So we have an opportunity to actually create products. And the initial products that we talked about is we're going to build on what we have so that people can buy EV on the fly, which is something we're doing now. We're just making it a much more integrated product, depot charging and then reimbursement for at home. All of that information provided back to the customer in an integrated fashion. Those products itself allow us to go from thinking about things towards an interchange model to much more of a subscription-based model. And on average, so right now across the portfolio, people are paying $3 to $20 per month per vehicle. We think in this new world of those products, it's $5 to $20 per month per vehicle. So I think there's this great migration. But then beyond that, we see all these other product capabilities that we can build into. So we think of this as we're in a great position to help, do good in the world, but also help our customers through this migration. And we think that this creates an even better economic model for us, both in terms of the stability of the revenue stream, but also in terms of just the pure economics.

Great. Thank you. I've always viewed WEX as giving -- having a good view into how the economy is performing with your SMB business with the Fleet business. What is your view? I mean there's obviously a lot of noise out there right now and some really bearish people on the economy. What is your view of what are you seeing?

Let's say that's the top question we've had. So if you look across our business, again, like global 800,000 customers, and so I'll talk about it in terms of segments. We had said on our last earnings call, and I'd just reiterate it. In the over-the-road customer base, which is it's 1/3 of our Fleet business. So it's a piece of the business. The customers went from growing -- really growing at a tremendous rate, couldn't keep up with demand. So what we saw and what we continue to see in the second quarter where they're still continuing to grow year-over-year. So the portfolio is still growing, but it's growing at a rate that looks more like a pre-pandemic rate as opposed to this kind of inflated rate. And so kind of what we're seeing is lots of things reverting back to more of a pre-pandemic mean. Travel has been going up. So our Travel customers have really accelerated. Over-the-road is down a little bit again. It's still growing year-over-year. And we're still seeing some tailwind in our North American Fleet business as things continue to open up across the world. And so it feels more like this kind of migrate -- we talked about the fact that we expect our credit loss to be 10 to 15 basis points, which is what you would have seen pre-pandemic. So things -- behavior patterns seem to be reverting more back to kind of almost like a norm as opposed to -- we're not seeing distress in the customer base. We are hearing when you talk to anybody across our customer segments to any business period that there are things that are weighing on people. Fuel prices are weighing on them, access to labor is weighing and cost of labor is weighing across customers, but it doesn't seem to be affecting behavior patterns.

Thank you. Just -- I mean, interest rates are -- look like they're going to go up a lot. How is WEX positioned? I know you have some benefit in the Healthcare business from holding, but just on your debt structure.

Yes. Yes. So across the business, think of things in categories for us -- why don't I talk a little bit about this, give you the opportunity to talk here too, Steve. I know he love, too, we call him the closet banker here. So we actually have this new source of revenue that we added that Bob was just alluding to where we are -- our Healthcare business, we are the custodian for deposits where people is -- they actually are taking these tax-deferred accounts, we have those deposits. We, at the end of the first quarter, had invested about $1 billion of that. We had about $200 million that we're also using as CDs or deposits that are funding what historically we used as CDs in our Fleet business. So a little bit we're using is just diversified source of funds. Majority, we've been using as investments. We said we have another $1.8 billion that is sitting in accounts where we are earning some revenue associated with that, but we have an opportunity to that onto our balance sheet at our bank and earn a higher arbitrage. And so we have an opportunity to that. We're going to roll that in during the course of the year kind of systematically and in euro, we wouldn't actually put it all in at once. So we're going to roll it in and rates have only gone up. The $1 billion is about 1.6%, right? And so new rates are higher right now, so we'd actually get even bigger arbitrage as we roll that in. I don't know if you want to talk about interest rates...

Yes. I mean just bigger picture, we've got about $3 billion of corporate structure debt, another $1.5 billion, $1.7 billion of deposits at our bank, a piece of which is the HSAs that Melissa just talked about. But the corporate structure debt is only about $600 million that's remaining floating. We've got a little bit of fixed and a lot of hedges in place. About $1.9 billion of hedges through the end of this year. And then the CD portfolio at the bank is a weighted average of about 10 to 12 months remaining maturity. So any kind of interest rate changes will take some time really to [ bleed ] into that. And at the same time, we keep bringing in these HSA deposits and investing them. So as that -- the long-term vision really is that you get a lot more balanced or stable through interest rate cycles. You've got some assets that earned, you get some debt that pays out on a variable rate, and hopefully, just kind of remain more stable. It will take us a little while to get to that point, but we're in much, much better shape than we would have been a couple of years ago.

Thank you. And just in your Corporate Payments business, there's been some competition in your virtual card business, but it hasn't seemed to affect it. You've had very good growth. You've added AvidXchange. But I mean, what is -- how do you view that business, the competitive environment and your ability to grow that? I mean, I think it's one of your higher growth rate segments.

Yes. When I think about corporate payments, I'm going to split it again in 2 businesses or 2 products, embedded payments, which is what Avid is using. So that is where you embed the payment in a workflow, highly technical play. So the technology is there. We believe that we have world-class technology, and that's what we're hearing as we're selling in the marketplace. So we feel really good about the opportunity to continue to grow that. It tends to come through at a lower rate, highly scalable profit model because there's -- the work happens in building the tech. There isn't a lot that you do actually implement. And then the flip side is AP automation, where we're continuing to build a sales force. We right now sell the technology to partners. And so a lot of mid-tier banks, MX is an example of someone who is our technology on that side. But we've been building a direct sales force, and so we see an opportunity to actually build revenue from there. And then we've got more test and learn innovation. You're going to see us roll out like Flume, where we're in this model of pay and get paid. We think actually have a lot more opportunity. So the kind of the long tail of that is I think there is a lot of opportunity for us. And we've said that the targets are 10% to 15%, but it's a huge market. We have a lot of opportunities.

Just last sneak one in on gas prices. They were well above your guidance. I don't know if people should be raising their estimates for that. Obviously, your targets -- long-term targets are FX neutral or...

Yes, yes. So when I'd say about fuel prices, so our guidance in the quarter and what we say with fuel prices is we just tell you what we're assuming. And you can -- and then the math behind if it moves, it's about a little over 20% of our revenue moves with fuel prices. And so we guided to $4.45 in the quarter. So, you can see fuel prices right now are higher than that. So we'll definitely get some upside associated with that. The way that we've managed the business is neutral. So the extent fuel prices are moving up and down, those were largely just dropped through to earnings. Typically, about 80% of that drops through earnings. I'd say one caveat they have right now is there seen such a rapid change in fuel prices that you might see a little bit more factor though in credit losses than what would be normal. Still highly net positive. So 70% goes through instead of 80%, that's still like a big number. And so yes, there is definitely an opportunity.

And $0.10 is the rule of thumb is...

About $15 million...

On the EPS, it's about $0.20.

$0.20 -- about $0.20.

Yes. And there's a little bit of offset that happens in Europe where you've got some margins, but I'd say largely yes.

Thank you. We're out of time. But thank you very much. We have a breakout upstairs.

Thank you.

Thank you.