WEX Inc. (WEX) Earnings Call Transcript & Summary

All right. Thanks. Last session of the day. This is Tien-Tsin Huang. I cover the payments and IT services sector here at JPMorgan and happy to have Steve Elder, heads up Mr. Relations at WEX and we were just talking -- button -- oh, his button. All right. We're just talking. We've known each other for what, 18 years -- 17, 18 years? That's a lot of conversations.

It sure is, a lot of quarters.

It's a lot of quarter. But always learned and I always enjoy talking to you. You know that, Steve, you always do a great job. So let's go into the usual stuff. We'll take questions as well from the audience. And there's a lot going on with WEX. I know a lot of macro questions. I'm sure you've been answering that all day, forgive me for asking it upfront. But if you could just go through that, we get a lot of questions on given your fleet mix, especially across over the road, local, small versus large. Can you just catch us up on what you're seeing?

Yes, for sure. And the data are actually really good, right? It's pretty real time, and it does kind of give you a pretty good look into things. And through -- I'll start with the third quarter and then maybe a little bit of October. But for the third quarter, we measure what we call same-store sales, which is how many gallons of fuel, so a real unit measure, how many gallons of fuel our customers use. Our local fleets. So think of people who go to gas stations and go home at night, those kind of thing. They were up 5% year-over-year, which is a really great result, largely probably due to the kind of easy comp from last year and the reopening play that's playing out after the pandemic. But still really solid growth overall for that part of the business. The over-the-road fleets were basically flat year-over-year in the third quarter, which on the surface isn't quite as good. But if you think about the demand that over-the-road fleets had a year ago, that was actually a really good result in my mind to just kind of maintain that. Underneath the covers a little bit, especially within over the road, we are seeing things shift a little bit from the smaller businesses, the small fleets within over-the-road, having that volume shift to the big businesses. The spot rates and the trucking market have come down. Some of those smaller operators aren't finding it quite as profitable as they used to. And so they're kind of parking their trucks and going to work for a bigger guy at this point. So a little bit of volume shift under the covers. It doesn't really have a meaningful impact on volume or our revenue streams, but it's happening. If you go into the first few weeks of October when we did our earnings call, basically, trends were intact. Things were still looking pretty good. And so felt pretty good about where we were. If you look at the fleet segment growth overall, even excluding the benefit we got from fuel prices. The first -- this past quarter, we grew revenue 14%. So a really great result there.

No, for sure. So when investors call and they're looking at all the different data points to try to put together the right KPIs, what's the danger of looking at some of the public data that's out there, whether it's either the public OTRs or maybe some of the government data? What's the danger of relying on that, Steve?

Well, a lot of it -- I mean, if you're looking at just like fuel consumption, a lot of it is consumer based, which we have virtually no exposure to. So that's part one. If you -- there's a lot of data out there on trucking, a lot of it -- or especially if you're looking at the trucking companies, a lot of it is kind of price related as opposed to our revenue streams come from basically the miles that they drive. And I don't want to be too callous about it, but how much they earn is not really our concern. As long as they can pay their bill, but how much they earn is kind of what's going to reflect on them. So the price -- the fuel price data that you see publicly is -- our's lined up pretty good. We've got a mixture of gasoline and diesel. But when you take that into account, the national average is that you see reported are going to be pretty reflective of us. But the miles driven data is probably a little bit more difficult to push through.

Right. Okay. No, thanks for going through that. So the durability of the business and the readiness of the business walking into a recession, and we've seen some cycles before with WEX, how is it different now? How ready is the business for that?

Well, if you think about the last recession as being kind of a 2008, 2009 kind of time frame, business is a lot different today. I think that's probably the biggest thing, right? We -- whatever that was 14 years ago, we didn't have a health care segment. And even during the pandemic, that proved to be incredibly resilient. It didn't go quite as fast, but it's still one like a lot of other parts of our business and many others. We didn't have any exposure back then to over-the-road trucks. Now we are plus or minus 50% of the market in the U.S. for over-the-road trucks. We added portfolios with Shell and Chevron and CITGO and probably a couple of others, but over the last decade or so, and those are all small businesses. So we probably have more exposure to small businesses. But I think the point we were trying to make on our earnings call a few weeks ago is this is a resilient business and whether we see temporary downturns or not based on the macro, things do come back. And they remain -- customers and their activity levels might fall for a period of time, but then you come back. And the company will be just fine.

Yes. No, this was very clear, right, 80% of the business is recurring.

Exactly. And we call it -- when we define recurring revenue, it's basically the payment processing revenue that we earn across all the segments, the account servicing revenue that we earn, the SaaS fees, the monthly fees, all those kinds of things that we earn. The biggest piece that's excluded is the weight fees, right? So that's the 20-ish percent that we don't consider recurring.

Right. So you're growing way above GDP and the usual measures, you've won a lot of business over the years. You called some of those out. How does the deal pipeline change given this uncertain or less certain environment? And are there a lot more deals to win?

We've had a lot of success with over-the-road trucks and with large local fleets. It's not to say we're not growing in small fleets, we are. But I think kind of the outside success has been in those 2 areas. So that's an area that we have historically done well on and continue to invest in. And the technology platform kind of makes the difference there, right? The analytics platform that we have for those local fleets that makes the life of that fleet managers so much easier to identify the exceptions, take action on the exceptions to make their operations more efficient. The control we can place around these over-the-road truck transactions by having the APIs connected directly into the systems of our customers. We know who the driver is, which truck it is, which trailer it is, where they're going. We have a lot of data around that transaction that we then create product around. That creates a lot of control. And those things are differentiated out there in the marketplace. And so it's just kind of self-reinforcing, where we keep winning more business. We keep investing more in those products and services that delight those customers. And we keep winning more business.

Right. And who are you winning it from?

I mean there's only a couple of other players in the fleet market in the U.S., right? Publicly traded companies and units of other -- of U.S. Bank, but it's coming from all of those.

Okay. And last one, just on the deal pipeline in terms of activity?

Yes, looks good. Downturns in the economy don't necessarily have much of a correlation to like pipeline. You can get some correlations in like the number of new applications coming in over the web, let's say, because of high fuel prices because that's a help. If there is an economic downturn, people are looking to save costs and how can I do that? And this is potentially a way. I wouldn't call it some big life changing growth rate or something that's going to dramatically alter it, but it's a little bit of a tailwind, doesn't hurt anything.

Okay. So the Travel business, sort of moving off a fleet a little bit, following Visa, Mastercard, we're always watching cross-border travel. And I know you're doing the same as well as you've added more assets, especially in the East. So I think you're above 2019 levels, but you're probably not evenly distributed. I would think across the geographies, so tell us where you are with respect to catching up?

Yes, for sure. I mean travel came back dramatically over the last year for sure. And probably everybody here has felt that in one way or another. But from -- in the second and third quarter of this year, we were 104% and 100% of the spend volume levels pro forma to 2019. So in December 2020, we made a significant acquisition of UNIK and Optal. So as if we had owned them in 2019, we would have been a little bit above those levels the last couple of quarters. Again, when you kind of dig underneath a little bit on a transactional basis, we're at about 85% and 90% of the number of transactions, but because of price inflation from hotel rooms, we're above it on a dollar amount basis. If you look at it regionally, Europe is doing incredibly well. One of our major customers is adding hotels -- hotel properties to the merchant model, which is the one we support. And so that just kind of expands our opportunity there, and we're benefiting from that. The U.S. market is doing really well, I'll say, not quite as good as Europe. And part of that is because of the new hotels that are being added. But Asia is where you're kind of seeing the lack of activity or the lack of the comeback in activity. We're, again, pro forma for the eNett acquisition, Asia should represent about 20% of the total, but it's only running at 60%, maybe 70% of that number today in the actual results. It's really the border with China. We don't do any -- we don't do any transactions inside of China, but that Chinese citizen leaving the country and going to Australia or Thailand or whatever, that could be our customer. And that's just not happening.

Right. So still -- so 60% to 70% for that piece is specific to Asia?

Yes.

Okay. Good to know. And then on the -- anything to say on the pricing thing before we move off of travel sort of the pricing trends? The mix I know really matters for the travel.

For travel, specifically, so not the whole segment, but just the travel customer, that price has been dead flat this year. I mean that's what we expected coming in. I mean, plus or minus 1 basis point or 2, but that's just rounding errors really. So we feel good about that. That's what we planned on, and that's what we guided people to. So glad it's pointing out that way.

Okay. So let's do corporate payments, it gets a lot of attention. There's some pure plays out there, FLEETCOR is pretty vocal about corporate payments and cross-selling is a big part of it. So can you just help us differentiate the strategy with corporate payments for WEX versus, I guess, the more traditional players that are out there?

Sure. So...

It's confusing.

Yes. No. And it's a whole kind of like go-to-market approach too. So if you go to the highest level, what I would say is if you think about the payment infrastructure we have for corporate payments, it's incredible. It's -- it can do check, ACH, wire transfers, cards, right? It does all kinds of stuff. It does stuff globally. We issued globally in 2 dozen different currencies, and it's all the same user interface. And that -- by issuing locally in all these countries, we avoid the cross-border fees, right? So at the highest level, we have this amazing platform. And then it's a matter of, okay, how do you get more volume on to it, right? We go to market, what I'll say, directly with our own sales force selling direct to end corporates, which is kind of the more traditional way that you think about it or probably a lot of what FLEETCOR is talking about. Hundreds, thousands and literally millions of small businesses that could adopt a program on the platform. We've got, what I'll call them, like distribution partners, but like a channel partner strategy where AvidXchange and Bill.com with Divvy and Emburse and a whole bunch of others that unless you're really into it, not too many people have heard of them. But it's a distribution channel where they're doing something around the automation of accounts payable. But when it comes to time they actually make the payment, that's when they tap into us through the APIs. We create that unique customized 16-digit account number with lots of controls around it, customized credit limit, customized date, all that, return it back to them with a very, very high level of reliability and a lot of data around that transaction appended to that account number. And then they use that data at the end of the transaction to reconcile it, right? So highly, highly integrated software sale, really, right? But it's doing the same thing for AvidXchange that we do for Expedia or Booking on the travel side, it's the same idea. So when you think about corporate payments, right, think of it as excellent platform. We have this embedded payment play where we take our technology and we embedded in somebody else's payment stream, AvidXchange or we have the direct sale to a corporate where they come in to us through a user interface. Or at the very small end of the marketplace and I know you're going to get to this probably eventually, you've got Flume which has targeted at really small businesses, really simplified just interface over the phone to pay and get paid, very basic functionality, but really all they need.

So let's do Flume, right? That's always hard to reach. So you can't just turn it on, I assume. So what is the same thing go-to-market investment required to really make that work? Because I feel like that hasn't been a focus in the past for you.

So Flume is really -- it's -- just think of it as very simply to pay vendors and to get paid by our customers, simple. User interface on the phone. One of the favorite features of our customers is a digital check we put an image of a check on the screen. So it looks like they're filling out a check, but it just creates an ACH in the background, right? So the mental image I have, right? This is targeted at businesses of 10 people, 15 people. The mental image I have is the electrician that's out all day, wiring a house, they're doing whatever they do, they come home at night, they sit down at the kitchen table with their wife and they start writing up checks to their suppliers, right? That's what we want to get out of the system is the checks, right, digitize that, do it on the phone and give yourself a chance to get paid by your customers too. So we're essentially acting as a merchant acquirer for their employer, right? Again, fairly simple functionality, but that's by design because their needs are limited. Go-to-market right now, I'd say, is we have 450,000 fleet customers who are small businesses, and that's the initial target market, it's digital. They're getting -- when they pick up their invoices, they're getting messages, things like that. So it's all them, kind of opting into the program. Eventually we'll -- and if somebody finds us, obviously, sure, we'll sign them up as a customer. But right now, the focus is kind of internally as opposed to kind of bringing it outside of that. It's literally just launched, and full steam in probably the last 6 weeks or so.

Right. And the receptivity or the value proposition for that initial wave of SMBs is really just ease-of-use automation control? Is it as simple as that?

It's time. Yes. And it's time, right? If I can stop writing check, I can just click a few buttons on my phone, while I'm sitting at a red light. It's getting that time back in somebody's life. But the revenue model to us is a SaaS, right? So we're not relying on interchange here. We'll earn a little bit of interchange along the way, but it's mostly just a monthly fee for the program to the user. We had a great visual in our earnings call about the -- we had a pilot customer who was a contractor. And he was literally using color-coated binders or folders to keep jobs straight. And Flume could just kind of make it all transparent and make that all go away. And so you just think about the back office efficiency for that. Paying -- getting paid by the contractor and paying subcontractors, making that all transparent it gets such a point of friction in the construction industry, right? So that's the kind of stuff that they're targeting.

Yes. Yes. Now I'm curious how the awareness builds and how that goes.

We're too. We're optimistic. We're very proud of the fact that from concept to launch in less than a year, had some good feedback from those initial customers, but we've got to roll it out more broadly as well.

Okay. Let's see something quick on health. We don't get that many questions on that like we used to. I know with -- when HealthEquity first came out and when you do the acquisition, catch us up now like with enrollment season and everything else, we've had some other benefits providers here at the conference. What's the outlook given the backdrop around macro today and employment, et cetera?

So we're right in the money season, right, where I might have to hit submit on my benefits tomorrow, right? So this is kind of a time. So far, the signals are good. One of the better things that we saw was that for the last couple of years, HR departments were kind of hesitant to make changes to their offerings. There's enough going on in people's lives that they didn't want to mess up their insurances and make people worry about those things as well. So there weren't a lot of changes. We're starting to see some of that loosen up now. Employment levels are still good. And who knows what will happen 9 months from now or 2 years from now, but employment levels are good. That's a good sign. The adoptions around HSAs and the education continues. But right now, we're expecting a good open enrollment season.

Okay. So no real change from trend?

No.

Given what we know about the macro. Okay. Just I figured that was the case. I didn't know with enrollment season if there was any -- lots of changes that we could see in terms of growth. Let's do one more, and then we'll open it up EV?

Sure. Absolutely.

There's a lot of ways to ask the EV question. I know you guys have spoken at length about it, and there's a lot of unknowns and unanswerable things around the time horizon. Maybe I'll ask this with FLEETCOR and some of the acquisitions that they've done, they seem to be a little bit more focused on the consumer side of EV and learning through the consumer, thinking that, that will shape adoption, technology, things like that. Does that inform your thinking or the company's thinking on it that's important for WEX to do as well?

I think for many years, we focused on B2B payments in a variety of different ways, but it's all been business to business. And I think that will continue to be our focus. With EV, maybe the lines blur a little bit in terms of how -- just how it all rolls out and how it works and maybe there is some sort of consumer component that gets pulled in. So I don't want to say, no, we're not going to do it or that's -- it's not going to be a focus. But there might be some bleeding in, I'll say, over time. There's a lot to your point to EVs that we'll see how things roll out, right? It's -- we have live products in the marketplace today. We have paying customers today. And the model from a revenue perspective is changing from less reliance on interchange, more reliance on monthly fees that the fleet pays. There's still some transaction fees in there. But how it all rolls out and what it looks like in 3 years or 5 years or 10 years, there's still a lot of unknowns for sure. But right now, from what we can see kind of developing, we're at least optimistic that there's no bad scenario. And if you kind of develop some products and do the right things, maybe there's some good scenarios in there as well.

Yes, I definitely feel better. We did a piece on this. I definitely feel better that around whatever leakage and things like that. It feels like there's an opportunity, at least breakeven.

It's a lot more complex when you start introducing the charge at home in particular. And there's probably a device that has to be installed in that home. There's making sure that it's the company vehicle and not the private vehicle, there's reimbursing the employee, there's collecting the data, what's going on? And having -- if you're operating a fleet, you've got all different types of vehicles and manufacturers. So having that one overarching solution is important. So all the data comes in. The ability to benchmark. Is this better -- is an EV better for me? Or is a gasoline or diesel kind vehicle better for me? Like that cost equation is going to have to play for the vast majority of our customers, but the ability to benchmark it and see it and capture it and have it in real life as opposed to the MPG on the stickers never what you experience as an individual. So does the same thing happen with EVs? It's all going to play out in the real world. There's a lot to learn for sure.

Yes. No, it's fascinating. Questions? Happy to take them, if any.

This is about competitive set more or less. So we learned this morning a large bank had purchased a payments group of Volkswagen. And then there's Ford who has their pro division, which is pretty much a fleet managed-type business as well too, trying to move to a software-enabled vehicle to manage all manner of business inside that vehicle for business. What are you seeing on the competitive side? And how are you starting to, I guess, think about response, I guess?

I think the point I was alluding to, I didn't say it very clearly, was Ford's got an offering, and I'm sure it's a very good offering, right? I've never actually used it, but I'm sure it's just -- meets their needs, right? But if you're running a fleet, it'd be pretty unlikely that you have only Fords. And so if you've got Fords and whatever, Volkswagen, I think with the other name or whatever other models, right, you would end up with all these 5 different disparate systems and data sets coming into you. And that's what our advantage is, right, is that we're going to be overarching the whole thing. Again, there's a ton to learn. And from a consumer point of view or somebody starting up a new fleet, maybe they start with 3 Fords and that works just fine for them. That's something that we'll have to figure out over time. But our competitive advantage is that we've got 18 million vehicles on the platform today, and they're looking to us for answers.

Anyone else?

So you guys have a pretty strong history of M&A. And I know now you're trending towards the lower end of your leverage range, that 2.5 to 3.5 range. So just curious what you guys thinking is around that right now?

So I'd say 2.5, 3.5 is the range we've had for quite some time. We're 2.7x now. for the long term and for our history, invest in the business has been and will likely always continue to be the number one priority. The number two priority would be M&A and number three, kind of return of capital. At this point in time, though, we recognize, I'll say, what the valuation of WEX is as well as what the valuation expectations of potential sellers are, right? And the public markets valuations have adjusted pretty dramatically, but the private markets haven't really adjusted as much. Everyone believes their business is special or different. And until they need to go out and raise capital at some point, they're not going to recognize that. And that will take a little bit of time, it usually does. So in the interim, because of -- I'll call it, like a bid-ask spread, if you will, between what we're willing to pay and what somebody is willing to sell, that's probably not something that we're going to want to swallow. And so we've done a lot more around the share repurchase. We've -- through the end of October, when we did our earnings call, we had purchased $225 million worth of shares, starting in the first -- starting in the second quarter of this year. And we just increased the authorization in October by $500 million. So we've got about $575 million left over the next couple of years. So that's going to be the focus for the short term. It doesn't preclude M&A by any means. We still think we have the capacity and the ability to do both over the next few years. But right now, I think it's hard to go in and argue that this M&A transaction is going to be more beneficial than buying back our own shares.

Just quickly just a couple of more rapid fire ones on the interest rate side with rising wages, you talked about, I think...

We talked about that for 20 minutes.

I know, I know. Funding cost is boring stuff, but this is -- I think there's some built-in hedges, I think is what you talked about. You talked briefly after the call, and can you just walk through that a little bit because the funding element is important and sometimes gets over...

Absolutely. So if I just think about interest rates in general and funding is certainly part of that, there's 4 components to it, right? So we have capital structure debt of about $2.7 billion in total. Right now, $1.9 billion of it is hedged. Some of that will roll off between now and the first quarter next year. So $1.2 billion will be hedged for all of next year and a little bit more in the first quarter. $300 million of that is fixed rate. So some floating rate debt in there. We have -- the second bucket is we have operating debt at our bank, the deposits that they take in. That includes the HSA deposits that we're the custodian of. So that's $3.6 million. The HSA deposits don't really have any kind of interest rate exposure on them. It just doesn't move, but the certificates of deposit and the money market accounts that we take in as deposits, those do, that's $1.5 billion. There's a duration to the certificates of deposits. So it doesn't all reprice kind of immediately. But through next year, most of it will. So those are the 2, like negatives, if you will, of rising interest rates. But on the positive side, we've got $3 billion of HSA funds that we're monetizing. $1.5 billion is invested in a bond portfolio within our bank. $1 billion is held at third-party banks that we're earning -- half of it is a fixed rate, a little over 4%, half of it's a Fed funds rate plus a few basis points. So we're monetizing those. And that's a bit of an offset. And then the last piece, and this is the new one for almost everybody, is in our fuel business, a lot of our oil company contracts. So think like the local gas stations like we'd go to, we have escalator clauses. So as interest rates rise, once they reach a certain floor limit, once they rise above that floor limit, we can actually increase the payment processing rate or the interchange rate that we charge. And so that's a little bit of a benefit too. So you take that whole big bucket, again, we could talk about this for another 20 minutes. But if we have a 1% increase in interest rates next year, that would be about a net $10 million negative to earnings. So $10 million of incremental expense. It's going to come through as more interest expense and more revenue. So it's a little bit of netting in there. But it's not as bad as most people believe when they see $6 billion, $7 billion of debt on the balance sheet.

Anyone? 29 seconds. Anything to close out that we've missed?

I'm sure we could talk for another hour.

No more interest rates.

It's too long man. Yes, I know. I didn't even go too deep, but.

We'll leave you there. Thanks, appreciate it. Thank you.

Awesome. Great. Well, thank you.