WEX Inc. (WEX) Earnings Call Transcript & Summary

All right. Great. Let's get started. Perfect. Good afternoon, everyone. Welcome to the 26th Annual Credit Suisse Technology Conference. My name is Nik Cremo. I help lead the payments and fintech research team here at Credit Suisse. I'm delighted to have WEX with us here this afternoon. Here with us today, we have Jagtar Narula, the new CFO of WEX. He's been in the seat for about 5 months; and Steve Elder, long-term Head of Investor Relations at WEX. Very pleased to have you guys with us today.

Thanks, Nik.

Thanks, Nik.

Yes. So I guess just to kick things off, I mean, WEX has delivered strong results year-to-date across all of your segments, about like 20% organic revenue growth every quarter, but the stock is still trading near trough multiples. So I mean, what do you think is most misunderstood about the business today?

Yes, sure. Let me start off with kind of a little description about WEX, right, and transitioning to why I think it's underappreciated. So at WEX, our business, the model that we go by is to simplify the business and running our business, right? So we're really a B2B payments company. And we operate really with 3 pieces of the business that form the core of what we do. One is a global commerce platform, right? And that commerce platform allows for kind of high scalability, high reliability, things that important business-to-business clients would want to ensure that you can deliver their business for them right? The second is the verticalization of our business. We've taken our business, and we've verticalized it. We've got fleets, we've got travel and corporate payments, health care. It's verticalized. It allows us to bring specific expertise to our customer base. And then the last piece is data, right? We, in running our business, have access to a lot of data on our customers, their payments and allows us to add specific value, right, in ways that are important to our customers. So in things like addressing issues like fraudulent transactions, a lot of data that allows us to support that. And in things like we have a specific example around things we've done in health care and driving HSA usage by using kind of analytic data to address employees identifying underutilizing populations of HSA catalysts and driving usage. So we put those 3 pieces together to really bring our business forward. And I think that, that gives us a couple of pieces. So one underappreciated piece is the resiliency of our business. We talked a little bit about this in our last earnings call, right? The business has had a long-term track record of growth. If you look at the tailwinds across those 3 lines of business, there's still kind of a lot of potential upside to our business. And the second piece is our strong profitability, right? You look at a lot of especially newer fintech companies, the combination of high growth and high profitability is that something you see much. We have very strong operating margins. We talked a little bit on our last earnings call, our cash flow generation, which is quite strong. And that essentially allows us to continue to invest in our business, expand to address customer needs, deliver new products to the market, new capabilities. So I think we bring all those pieces together. And I think that's part of what's underappreciated, but I think we'll be appreciated more and more.

You guys definitely serve a lot of specialized verticals with a lot of specific needs. Just to touch more on the resiliency of your business. I know about 80% of your revenues are recurring. But just given with the fleet segment, there's some oil sensitivity. So we get a lot of macro questions. So sorry to touch on this right out of the gate, but it might be good to get it out of the way. So just thinking about the components of WEX's growth algorithm, and you guys target 8% to 12% organic, macro neutral each year. How should we think about each of those components that build up to that 8% to 12% in a normalized environment and then in a recession?

Yes. So what we talked about at our Investor Day, so stepping back from the 8% to 10% is we've said 10% to 13% revenue growth inclusive of M&A, right? We think about 2% to 3% coming from M&A. So that leads you to the 8% to 10%. And again, I think you correctly pointed out, we view that as kind of a macro neutral type of number. So gas prices, FX neutral, right? And so when I think through the components of that growth, we think of it in 2 ways. We think of that by kind of our vertical segments, and we also think about it tactically. So vertical segments, we think of our fleet business 4% to 8% growth rate is kind of the long-term trajectory of that. Travel and Corporate payments is more in the 10% to 15%. And then health care is more than 15% to 20%. So that's how we think about it by vertical. When we think about it kind of tactically, we look at 3 components. We look at what are we getting from existing customers, what are we getting from new customers and then a new product revenue piece. And the new product revenue, we kind of target 1% to 2% growth from that. And then the remaining would be split, a little 50-50 between existing and new customers. I think we said 3% to 5% from existing and 4% to 5% from new, but that's how we think about it. In the -- your question about the recessionary impact. One of the things I would say not that we're a company that's new from recession, but one of the things I would say is we talk a lot about the percentage of our revenue that's recurring in nature. We mentioned, I think, in the last earnings call, roughly 80% of our revenue is reoccurring. That includes things like transaction fees for payments that we process, account servicing fees, things like that and not that those revenue wouldn't be impacting the recession, but they're highly sticky in nature, right? And even in our -- the 20% that you would characterize as -- that we characterize as nonrecurring, that includes revenue like late fees that we charge for customers. And while we consider that nonrecurring, they do tend to reoccur, right? I mean customers are consistently late even if it's not the same like customer. And there is potentially some recessionary smoothing of that. So if we see some declines in kind of recurring revenue that's more volume based, you could potentially see some benefit on the late fee side. So we think there's some stabilization in the business, but that's how we think about it.

Yes. Thanks so much for walking through all that, and very helpful. So I think you can first touch on the core fleet segment. I mean, also delivering strong like mid-teens organic macro neutral revenue growth year-to-date. And with North American fleet really being like the bright spot more recently and OTR hanging in steady with some pockets of weakness with some of your smaller customers. First, can you just give us an update on the trends that you saw in the third quarter and what you're seeing in like the first 2 months of the fourth quarter? .

Yes. We -- I mean, we've seen strong results in the third quarter. I think what we saw from our fleet segment, if I go to the North American fleet side in the third quarter, we saw roughly 5% same-store sales usage on our existing customer base with good account revenue growth that drove high organic results. On the over-the-road segment, we saw kind of a little bit more softness. Same-store sales was essentially flat. We've seen a little weakness on the smaller end of the market, our small trucking customers where we've seen kind of spot rates decline, but overall volume for that segment's been good. What we generally tend to see is there some mix and shift from smaller fleet customers to larger fleets. But overall, the trends have been positive. I think we follow gallon usage, which is a key KPI for us on a pretty requirement is a daily basis, right? So we continue to track that. We talked quite a bit about it in the last earnings call that we continue to see gallon usage holding up. We have hundreds of thousands of customers. It gives us kind of an interesting perspective on the economy in the U.S. by looking at usage of basically vehicles by hundreds of thousands of businesses. And looking at that data through October, we basically saw that things were holding up kind of as expected. That was good to see.

That's great to hear. Just wanted to touch on the 5% same-store sales growth for North America fleet. I don't think I've heard a number like that come out of WEX. I mean what drove that? .

Yes. I think a little bit of that. So historically, we tend to see a much more flattish same-store sales growth number. I think a little bit about what we're seeing in Q3 is still a recovery from the COVID pandemic. If you just kind of think to last year, things have started to open up, you still had some businesses that were shut down or not operating at full capacity. So you're still seeing kind of a little bit of that reopening. And I think that helped drive the same-store sales growth number this year. Typically, you'd see more flattish to a smaller same-store sales growth number with really kind of net new customers driving a lot of the fleet growth.

And just to be clear, that same-store sales number is a gallon measure, right? It's not a revenue measure, it's actual gallons or units of usage.

Thanks for that, Steve.

So while we're on the Fleet segment, your credit losses ticked up a little bit last quarter, maybe from some reserves increasing, also from fraud losses staying a little more elevated, I think from just like an isolated region in the country. Just curious if we could get an update on that?

Yes. We've been working through the year to address some elevated fraud losses. What we saw in Q2 was an elevated fraud loss number really around kind of 2 areas, right, application fraud, which is folks applying for basically fuel cards under kind of using somebody else's business, then get the card spending the money without having an intention to repay. And then we also saw transaction fraud, which is really going to a pump, there's a skimming device on the pump. Somebody steals the credit card number and uses it for something that -- to steal gas basically. The application fraud was much more centered on our fleet business. Transaction frauds were much more centered on the over-the-road business, our trucking business. And so what we've seen is we've made tremendous progress in the application fraud side. We've kind of implemented new controls on the application fraud front. Some of it was kind of data analytics around applications. Some of it was simple fixes like not sending a card to an address that wasn't the registered business address of the business, right? So we've been able to make some fixes to get the application fraud down. On the transaction fraud side, we did still see elevated numbers in the third quarter. We've -- what we've been able to do, I talked about our data analytics capability earlier, we've been able to kind of use all of our data to basically build what we call the point of compromise model, which is -- gives us a lot of insights into where the transaction fraud is occurring. And I talked a little bit about this in the Q4 earnings call, we're able to identify specific geographies where it's occurring, specific merchants where it's occurring in and use that to help shut down the fraud in addition to using the data to bolster our own sort of transactional systems to stop the fraud at the point of authorization. So we've been basically working with our merchant partners to identify the skimming devices, take them out, issuing new cards to customers that might have been subject to that skim. So we're still working at it. I'm very confident that we'll get the transaction fraud rates down going forward, but it's still something that we're putting aggressive work on. Specific to the question about credit losses. We did see in the third quarter the credit losses were a little bit elevated. That was particular to a certain segment of our customer base, specifically again in the trucking business, where we have a segment of our trucking business that are smaller owner operators. We saw a lot of that segment growth during COVID because of shortages of drivers, spot rates increased. We saw a lot of individuals start to own basically owner-operator trucking businesses. That trend has now reversed. We're seeing declining spot rates that puts revenue pressure around the smaller trucking companies. And so we saw elevated levels of late payments in that business, and we elected to take a judgmental reserve there as we keep an eye on it. We're -- we continue to sort of focus that on that aggressively, looking at what's the right level of credit that we grant to customers, looking at whether we change payment terms to acquire more frequent payments to smaller customers. So it's a piece that we continue to keep our eye on and address as we're going through changes the economic environment.

Yes. Something you guys have seen before and dealt with in the past, I remember. Next, I think it would be good to touch on the corporate payments business, little smaller business for you guys, but you guys have been executing well and it gets a lot of attention just given the large TAM and the strong assets you guys have there. So I mean, first, it would be good just to unpack the very strong volume growth you guys have seen this year. Obviously, maybe a little bit of a recovery, but I think it's been like 30% or 40% most of the quarters this year. So I mean, could you just unpack what's driving that growth between your channels and specifically between your partner and direct channels. And just help us think like directionally like how big each one is?

Yes. I would say that a big chunk of where our growth has been this year and the larger part of the business is really call the partner channel, we tend to call the embedded payments offering. So this is where we embed our solution into somebody else's kind of software offering through APIs. We process all the payments to the back end. It tends to be a very high-volume offering, a lot of profit potential for us given the volume. That's driven a lot of volume growth for us this year, and we continue to see a lot of potential there.

Got it. So you guys shared some interesting stats on the cross-sell and the corporate payments business last quarter. It's about like a $30 million annualized run rate. First, I mean, can you just touch on like how much of that is from some of your more recent cross-sell initiatives? And then how should we think about the size of the opportunity?

Yes. We, as a company, are very excited about our cross-sell opportunity, right? We have hundreds of thousands of customers, both in North America worldwide, and I think a very robust set of solutions that we think we can cross-sell. So specific to what we talked about Q3, that was related to our over-the-road segment, the trucking segment, where we've put some effort into cross-selling over the last few years. So we talked about kind of $7 million in the quarter through cross-selling our corporate payment solution into those trucking fleets. And I think that was indicative of the opportunity for us that $7 million wasn't all in the quarter or even in the year, but it's been a fast growing -- it's probably the fastest-growing area of the over-the-road space. I'd say it's -- roughly speaking, it's probably doubled over the last couple of years from a revenue standpoint, right? So that, to us, was indicative of the opportunity. I think the opportunity for us is can we ambulate that cross-sell of both our corporate payment solutions but also other solutions that we have in, for example, our fleet customers. We've compiled a list of targeted accounts. I'm not ready to talk about the size yet. We'll talk about this in the future, at some point, I'm sure. But we view it as a pretty substantial opportunity for us.

Looking forward to hearing more updates on that over the earnings calls. So maybe we should try to hit on the health care business, just given growth has been robust and very stable business. So you just touched on the trends you're seeing and maybe any preliminary updates on how the open enrollment season went?

Yes. I think we gave sort of a preliminary update of open enrollment in our Q3 call. It was sort of going as expected. No new updates there. I think we continue to see a robust market for our health care solutions. I think we'll have more updates on an open enrollment when we talk about results in Q4, but I think we continue to see a good environment.

Got it. So another announcement on the last earnings call is the $100 million in operational cost saves. So I have to touch on that. So you're targeting to hit that run rate by the end of 2024. First, we just talk about where you guys are taking out costs, and then where you plan to reinvest? I think you're going to reinvest about 50% of that?

Yes. So we've spent a lot of time looking at some of the cost saving opportunities in our business, and I feel pretty confident about our abilities there. We've got a number of areas. I think that I'll touch on a few of them, right? So we've looked at, what I call, our operating model, kind of level of managers to employees and doers to managers. And we've seen opportunities to maybe realign the business to save costs. We think there's considerable opportunity on the procurement side of things, right? So we've had a procurement team for some time. But we still spend a lot of money with third-party vendors. And I think we have -- really, we can enhance our ability to consolidate vendors, drive price conversions and especially when I think of our international spend, we've done virtually nothing there in the past. So I think there's opportunity there. And the third area is just kind of what I call automation of processes. We still have, as a business, quite a fair amount of manual processes, whether it's the call center or other service parts of our organization in the back office. I think there's a lot of opportunity to automate, and that's an area that we'll be investing in. And that's kind of the cost savings side. On the investing side, I think what you really see us to spend money driving innovation. I think the 2 areas where we want to invest. So one is risk, right? We talked about the credit fraud losses. I think outside of stemming credit loss, there's just an opportunity for us to do more on risk to actually drive revenue. And then it's innovation, it's new products, new capabilities, things that will drive revenue going forward.

Got it. Very helpful. So tough to touch on capital allocation. WEX is approaching the low end of your targeted leverage ratio. You guys recently upsized the buyback authorization. So I mean, can you just walk through how you're thinking about prioritization?

Yes. I would say that our prioritization remains the same as we've articulated before, right? So we target 2.5 to 3.5x leverage ratio. As you pointed out, we're down at the low end, 2.7x in Q3. When I look at how we allocate capital, the first continues to be organic investment, right, growing our business, the investment that I talked about a few minutes ago. Second continues to be M&A. We like opportunities to invest to grow our business. And so we continue to scan for opportunities. And the third continue -- will be or is returning capital to shareholders and buying back our stock. If you look at us historically, we probably allocated a little bit more to M&A. Weren't -- now we're trying to be a bit more balanced about it. We've spent a lot of time looking at what industry averages are for allocation between M&A and stock buybacks, trying to be a little bit more balanced. We've looked at what we -- our expectations are in the future for cash generation and debt capacity and our ability to both do M&A and stock buybacks. So it's something we constantly look at, and I think you should expect us to be balanced about it. But we'll move as M&A markets change and pricing changes and allocate capital to the area where we can get the best returns.

Right. So just to touch on M&A at the finer point. I mean, how is the pipeline looking today? And private company valuations continue to fall, are there any specific types of capabilities or segments that you're targeting? Or what's on your wish list?

Yes. So we continue to have a robust pipeline. I would say, I would like to see private company valuations fall further. That's been one of the difficulties for us in this past year and as we've allocated more towards stock buyback. Because one of the things that we've seen is public company valuations have come down over the past year. Private company valuations have been a little bit stickier. We're starting to see some changes, and I think you'll kind of see a reset of expectations over the next couple of quarters is my expectation. We still want to invest in opportunities to bolster our business. So across our verticals, we continue to look for opportunities where we can -- if I look at the fleet side, it's really where can we grow outside of kind of fuel card, right? We're not necessarily looking for more gas price exposure, but looking at adjacency opportunities to grow our business outside. Health care, I think we've got a pretty robust portfolio. We've got a pretty strong business there. So it's really looking at opportunities to provide more kind of benefits-related opportunities that would help a CHRO, right? And then on the corporate payments side, that's been an interesting one for us. I think there's a pretty robust opportunity for WEX to grow in corporate payments, especially looking at the cross-sell opportunity we talked about earlier. So I think we'd look for 2 things in the corporate payment side. One is capabilities that would really help enhance our direct business that bolsters the cross-sell opportunity. And the other opportunity would be kind of front ends that help us with verticalization. So we've done this in travel. When you look at our corporate payments business, it's a strong back-end e-commerce platform that we have, but it's the vertical expertise that really drives our business in some cases. And so looking for more of that vertical capability is important to us.

Got it. Makes sense. I got a few minutes left here. I mean it's a figure we could touch on the travel recovery really quick. You guys have seen very strong growth tracking for about like 100% in 2022. And I know that you're about like 107% in 2019 levels in the most recent quarter. But in terms of like a units basis or transactions basis, it's closer to like 85% or 90%. So how much room is there to go in this recovery? And like how does it look across the regions?

Yes. I mean I continue to look at there is significant opportunity to grow the travel space. I mean, I think you pointed out the key relevant fact, right? So spend levels were above 2019 levels. And that's kind of an apples-for-apples basis. I mean, obviously, we had some acquisitions that we've done. So if I sort of pro forma that for the acquisitions, we're up above 2019 levels on a purchase volume basis. But a good portion of that has been price inflation, right, at the kind of hotel room level. Actual transaction counts were below 2019. So I think you will continue to see opportunity for transaction volumes to increase. And on a geographic basis, what we've seen is Europe has been very strong. The U.S. has been strong as well. Asia has been a little bit lagging. So we have not had kind of a full reopening in Asia yet, especially in the Chinese market, where we have a stronger part of the business. So I think there's some opportunity for us to get some lift in that as well. So we're still pretty bullish about the travel business.

Got it. Very helpful update. Just going to see if there's any questions from the audience real quick. We have the last few minutes here.

Yes. So how [indiscernible].

Actually, [ this side ] just pull for the mic.

Perfect. Appreciate you taking this. How do you view Edenred's recent expansion into the U.S. market with their fleet card solution? Are they coming up in any recent RFPs that you guys have been in?

Yes. I haven't -- I assume the question was heard on the line as well. So we -- it's something we keep an eye on. We feel very solid about our position in the U.S. market. We continue to take market share away from competitors. We have a leading position. So we keep an eye on the Edenred. But I think the strength of our platform in the U.S. will continue to keep us competitively advantage there.

All right. Well, it looks like we're almost out of time. Any closing remarks to leave the audience with or...

No. I mean I appreciate you putting this conference together. I think we've had a pretty successful conference. Hopefully, we've given some perspectives on WEX and why we think we are still a great buy.

Absolutely.

Thanks, Nik. Appreciate it.

Thanks so much for coming.