WEX Inc. (WEX) Earnings Call Transcript & Summary

All right. Good afternoon, everyone, and welcome to the 7th Annual Evercore ISI Payments & Fintech Innovators Forum. I'm Sheriq Sumar. And I work with David Togut in the payments processor and IT services team here at Evercore ISI. We welcome WEX's Chief Strategy Officer, Jay Dearborn; and Senior Vice President, Global Investor Relations, Steve Elder. Thank you both for joining us today.

Thanks for having us.

Thanks, Sheriq.

Jay, to start off, do you mind just giving a brief background about yourself, what has been your responsibility so far and what you did prior to this role and then we can take it off from there.

I'd be happy to, Sheriq. And again, thanks for having us. So my name is Jay Dearborn, I'm the Chief Strategy Officer of WEX. I've been in this role for about the past 9 months. In my portfolio, I run enterprise strategy, business unit strategy, M&A and communications. Prior to being Chief Strategy Officer here, I ran our corporate payments business for the past 4 or 5 years. Joined WEX in 2016. I came from McKinsey. I was a partner at McKinsey. And prior to that was at American Express. So kind of have a deep background in payments and a good tenure here at WEX as we've grown the company from $1 billion to $2.4 billion this past year.

Yes. That's super helpful. So yes, just to start off, like can you tell us what are the top 3 priorities for WEX in 2023? And where are you focused on for this year?

Yes, yes, very timely given that we just did guidance a couple of weeks ago. Look, we're razor focused on 3 things to execute the year. First and foremost is deepen our wallet share with our existing customers. We have been, up until the beginning of last year, really focused on how do we sell our point solutions in through our global fleet, our benefits and our corporate payments verticals. But really, last year, we started to breathe life into this idea of one WEX with one single customer, and we wrap that customer with our different products. And in a kind of a crawl, walk, run framework, say, last year, we were calling kind of learning our cross-sell motion, and we've been moving into walking and finding out what those cross-sell motions are. The second one is around customer-centric innovation. If I were to typify WEX over my past 7 years here, so we're really great at building leading infrastructure. So things like closed-loop networks, our virtual card infrastructure, all of that great stuff. In our area of opportunity is how do we then pivot and focus on the customer, provide them the solutions they need and then pipe it into that infrastructure on the back end. So very much focused on front ends in building products that delight our B2B customers. And then the final one, I mean, as everyone knows, there's just a huge amount of uncertainty in the macroeconomic environment today. And so we're hyper focused on capital allocation and monitoring what's going on -- in our own portfolio as well as the macro portfolio, making sure that we change the levers throughout the year to hit the obligations that we have, but also don't shortchange those obligations. So really hyper focused on monitoring the portfolio, monitoring the macroeconomic environment and determining whether to deploy or pull back as this year progresses.

Understood. Yes -- no, that's super helpful. Health and Employee Benefit saw a strong SaaS account growth in the fourth quarter. And Melissa mentioned that some of the pickup was due to the enrollment season in the fourth quarter. But thinking through your sales strategy for Health and Employee, can you help us understand what has worked and what hasn't? And how is WEX positioned differently from your peers in this market?

Yes, sure. I mean I think I'd start with, it's just a great business for us. We got into the health business right before the benefits business, right before I joined in 2014 through the acquisition of a company called Evolution1. At that point, that company was doing about $80 million in revenue, and we ended this past year north of $0.5 billion worth of revenue from this segment. So it's just been a tremendous growth story and built on the back of this secular tailwind of consumer-driven health care in the United States, HSAs, FSAs and kind of all these tax-advantaged stored value accounts. What's unique about us in the marketplace is we have a single platform that administers these accounts, provides a privileged access into the account for the employee, the employer, the health plan, the provider. And we're able to white label that. So I think of our commercial motion, not only are we going direct to corporates as one of the largest TPAs in the nation, but we multiply that effort and that exposure to the marketplace through serving many other TPAs, financial institutions, health plans in a white-labeled way. It just gives us more broader exposure to kind of the underlying tailwind that we have in consumer-driven health care here in the United States.

Just to pile on to that a little bit. A lot of the benefit that we're expecting in this calendar year is from the custodial piece of things that we added on a couple of years ago through another acquisition. But we, today, got about $3.5 billion of HSA cash that we're monetizing right now, about a little over $2 billion of that is on our balance sheet and at our bank being invested in a bond portfolio, about $1.5 billion of it being invested. And then the rest, about $1.4 billion is held at third-party banks and it's a mixture of fixed and floating, but that's yielding around 4% right now. So that interest income piece has been a big driver of the revenue growth that you saw in the fourth quarter as well as some of the expectations for this year as well.

Great. Great. That's super helpful. Within Travel and Corporate Payments, can you help us understand how the competitive landscape has evolved? And how are you partnering with some of your competitors? And also, what's the edge that WEX provides to its client, which has helped it benefit grow so much?

Yes. This was near and dear to my heart. As I mentioned, I've run the business for the past 4 or 5 years. If you zoom out from our corporate payments offering, I think corporate payments is quite a generic concept. Really, let's think about 2 different products that we have in our portfolio. The first is an embedded payments product. And by far and away, that is a virtual card offering, API-driven where we own the card management system the processor, and we own all of the funding and the regulatory and the compliance through our wholly owned bank and e-money licenses around the world. When people think of WEX, they often think of our travel portfolio, that travel portfolio is in this embedded payments product suite, but so is everything that we do with fintechs here in the United States. We compete with a bunch of start-ups in that space, some of the larger ones that have more established traction would be like an I2C or Marqeta. And where we differentiate ourselves is we wholly own absolutely everything, including the banking provision. The four 9s of reliability, all the currencies that walk you around the world. And then the trust that we've been in this business for a very long period of time. We've got great marginal economics that help our partners achieve what they desire. Then we have an AP automation and spend management suite. So think of AP automation as pay by invoice, think of spend management that is pay by plastic or pay by card. And that very much is a direct-to-corporate solution, where we are either selling direct to corporates or the likes of American Express and Commerce Bank and PNC Bank and a handful of others are white labeling our solution and going to market themselves. There we compete with really a lot -- it's a very, very large market and we compete with many of the fintechs that we serve on the embedded-payments side of the business, but then we compete with established banks, we compete with other upstarts as well. I don't think anything has really changed over the past couple of years. There is a broad underlying secular trend towards the digitization of B2B payments period. And it's a very big market. And just like the health business, we choose to participate directly working with corporates as well as powering others through the partner channel.

Great. Great. That's helpful. Sticking to corporate payments and moving to Flume. What's the feedback been so far since the launch of last year? And I know you have been working on Flume for some time now, but are there still more functionalities or features that you -- need to be added? Or you think that you have everything that you need so far?

Flume -- so Flume, for those that don't know, this is a pay and get paid product offering in our corporate payments business, it's focused on small business, really small business. And I think we've been working on it for some time. This time -- the time has been about 15 months. It's been a very short period of time that we've been focused on this product. And the insight at the very beginning was we have a very large number of small businesses that exist in our current portfolio and those businesses have a huge amount of friction managing their paying and getting paid beyond just the fuel card provision that we help them with. So our small business exposure is primarily in our North American fleet portfolio. And so based on that insight, we've created a product from scratch, ground up, launched Q3 of last year. We've been scaling it. We just added projects functionality and invoicing functionality to it. We measure the customer count in the hundreds at this point and look to continue to scale that. I think what's key for us is we add functionality to this, which there's a very long road map of developing functionality on this, is that we don't clutter it. This -- I think this is the big insight for us is particularly in the far down market, the real small businesses, think of, if you map it to our fleet business, think of the residential construction company that has 1, 2 or 3 vehicles. How do you keep it as simple as possible and resist to the largest in the complexity and the bloat that others offer in the market space. And it's really that simplicity that is driving the product-market fit at this point.

Great. Great. Within the Fleet Solutions, you have partnerships with many large brands. And what in your view has been the biggest factor that has attracted these brands towards WEX? And is there scope for WEX to scale up or leverage these partnerships which could accelerate the top line growth going forward?

Yes, I think you're going to hear a theme here in my answer, which is similar to health and corporate payments. We like the end market. We participate in the end market, both through the partner channel and going direct. And you referenced the strength of our partner channel in the fleet space. We're lucky to work with 9 of the top 10 oil [ quotas ]. We work with the 10 top convenience stores here in the United States. We're with the 5 largest leasing companies. It's -- we've built the business in actually all 3 of our segments. On being a trusted partner, and we align our incentives with our partners and work very hard on their behalf to grow their bottom line and participate in their growth equally ourselves. We also, on top of that, go to the market directly and have our own offering often with a higher take rate. But there's a huge amount of trust that we've built with our customers and the product is built to be scalable to empower other partners to participate in the marketplace, and it seems to resonate quite well. Anything you'd add, Steve?

I think when we go to market directly and through these partner channels, the whole key to it is making sure that the partners believe that -- and can trust in you, right? And so the only way to do that is kind of through the actions over a period of years, right? And we've got a 30-, 40-year track record now of doing the right things, and that's led to all these relationships that we have, which are really important channel into that small business marketplace, that's who they typically attract. And then at the same time, we have created the right incentive structure internally, I'll say, to make sure that we keep that trust and make sure that our employees do the right thing by them as well. And we're able to offer something directly into the marketplace at the same time. And we do that across the business, as Jay said.

Great. Now switching to EV. We know you have been working on building the EV capabilities. But unlike your peers, who has been pretty active on the -- on like acquiring companies. WEX has been quiet on that front. So is there scope to grow through acquisitions? And what is the near- to medium-term focus on EV for WEX for now?

Yes. It's a great question. And I'd say, we've been focused on EV for the past couple of years, and our own thinking has evolved a massive amount as we've learned and then actually partnered with our, what is it, 600,000 customers in the fleet space, partnered with them around this EV choice that they have. I think one of the biggest linings for us is the end state of this market that we are building towards in the kind of the medium and long term, is a mixed fleet world. So this isn't a transition to EV. This is a transition to mixed fleets. And that means what our job is as WEX is to provide all of the tools that we have on the fueling side of the business with traditional engine -- combustion engines, but then add 3 use cases on EV. One is how do you enable your employees to charge at home. The second is how do you enable vehicles to be charged out in the wild. And the third is how do you enable a corporate to charge vehicles in a corporate location or a depot. And we've been hyper focused over this past year, 1.5 years to build the functionality on that second use case, which is -- what we have found, primarily the gating factor for corporates as they consider how do I invest -- particularly light-duty vehicles, how do I invest in a light-duty EV and just try it out. The second use case, which is around how do you charge on the go. It comes down to range anxiety. Is there enough power out there that I can get access to? On the go. And we've partnered with ChargePoint, which is the largest charge point operator here in the United States. We've built what is -- we call it our EV fabric that maps into all of our systems here such that we can provide EV information through our traditional front ends. And we envision a world where we'll be adding on other ChargePoint operators, both here and in Europe over the year to come. And then we're also focused on building out software solutions that allow an employee to charge at home and allow a corporate to manage depot and corporate lot charging as well. So for us, I mean, just one final thought. It's very early days in commercial mixed fleet. I mean we measure our vehicle count for EVs at this point in the hundreds. We think it'll be in the thousands here over the course of the year, then it'll be in the ten thousands. But I think it's very early days. We are very certain as to what it is that we're building for. And I think there's a huge amount of complexity here to solve for a customer with something that's a new decision for them to make. Our own internal estimates are -- we're looking at a $1.5 billion to $2 billion TAM expansion for us by 2030. And so this is -- we're all about trying to figure out how do we unlock that with the products that we offer, given the entitlement we have to unlock that with the incumbent relationship.

Understood. I believe the initial focus would be in Europe and then -- because I think that's where things are much more advanced versus then going to U.S.? And if that's the case, then within Europe, is there any specific region or country that you've been focused on? Or is it more broad based?

Yes, our exposure to Europe is quite small. We probably have well less than 10% market share in Europe. EV is progressing faster, but some of the dynamics are on a country-by-country basis there. We have been building all of the infrastructure on the back end to service our infrastructure around the world to enable a mixed-fleet solution. And so we are not focused on just solving Europe. We're focused on building solutions that solve for Europe and the United States, and both will be test cases for us along the way.

Got it. Got it. No, that's helpful. On the last earnings call, Melissa mentioned cross-selling playing a pretty important role in 2023. So which areas within WEX's entire portfolio could see the benefit from cross-selling this year?

I mentioned this kind of crawl, run -- or crawl, walk, run. I think when we were crawling, the hypothesis was that we have the most amount of customers in our Fleet segment and the corporate payments offering, particularly spend management and AP automation will be a natural cross-sell into it. And we have found that, that is a motion that will work. But I think surprisingly for us, is we've also found all other motions working one way or another. So we have sold fleet products into corporate payments customers. We sold health products into corporate payments customers, and we've sold corporate payments products into health customers. And so what we're now trying to do is say -- is refine that commercial motion. And I think keep in mind that cross-sell when we talk about it, particularly in the short term, is focused on mid- to large customers where it is a -- it's very much a physical game. It's mano v mano and how do you build relationships and have relationship managers pass off warm leads to salespeople who have domain expertise. And so we're very much focused on how do we get the systems all connected the right way, get the incentive structure connected all the right way, get the pitch wired the right way, to be able to deliver more and more revenue growth to our back book. In our long-term growth framework, which has us growing long-term revenue growth between 10% and 15% a year, we ascribed 4% to 5% of that revenue growth to back book sales, so existing customer sales. And I think of that as TAM, just TAM natural growth, and I think of that as cross-sell opportunities.

Got it. Okay. Yes. That's super helpful. Digitization of offering has also been like a primary focus. And can you elaborate or provide specific use cases where this is helping or even increasing the pace of cross-selling for WEX?

Yes. It's interest, you had to cross-sell at the end. I think at the core of all of our offerings in the -- like the bet on WEX, and part of the reason that I'm here and I get excited about this business is this long-term convergence between B2B payments and B2B software, period. And that's digitization. You see it in all 3 of our business lines. For cross-sell, I think there's tons of opportunity for us to do. Cross-sell for a small business, and that will be a digital-first offering. And think about that as a customer, it could be Sheriq's plumbing and heating in Darien, signs up for a fuel card, but then can opt into a corporate payments product and a consumer-driven healthcare product for his 3 employees, and that's all digitally native. That's not our short-term cross-sell ambition right now. That's long term with our product front ends. You'll start to see that, but that's -- I think that's -- that will be a tremendous upside for us kind of in that mid- to long term as well.

And even beyond the cross-sell or maybe even before the cross-sell, right, we've already digitally enabled our application process. So in a couple of the quarters last year, more than half of our new fleet sales came in completely through digital channels. They found us online, they applied online. We gave them a credit approval, they gave us the data around the vehicles that they had. We mailed them off the cards like the entire experience was digital and never had any intervention from a salesperson. So we're already there in parts and obviously, a lot more ambition to go.

Understood. On the M&A front, I mean, you have done some great acquisitions in the past, but 2022 was a relatively quiet year, can you provide us some pipeline for M&A in 2023, 2024? And where do you see the scope for adding more capabilities. And the second part of this question is that your leverage stands at the lower end of the target range. So do you think that WEX has the opportunity to do large size acquisitions? Or would smaller acquisitions be the way for WEX to move forward?

Yes. There's so many thoughts there, Sheriq. Yes. I think '22 was a quiet year, but let's keep in mind '21 was a very active year, right, where you saw leverage go above what our long-term range is and kind of -- for everyone's edification, we think about cash flow and rev leverage, our long-term guidance on leverage is 2.5x to 3.5x. We selectively may go above 3.5x up into the 4s if we've got the right opportunity in front of us, and we did that in '21 and then have paid that down that leverage as well as had the EBITDA expansion over the period of time. From a cash flow standpoint, I mean, we generated on the $2.4 billion worth of revenue last year. We generated $700 million worth of free cash flow. This is a very, very profitable business. And we think our long -- again referring back to the long-term growth framework. We grow on average over time, revenue at 10% to 15% in our ANI EPS, so adjusted net income EPS at 15% to 20%, which suggests increasing leverage over time, which then translates into cash flow that allows us to really invest in 3 things. It's the organic growth, it's M&A. And then it's selectively and opportunistically buying back shares. On the M&A front, we've got a very active pipeline, and we have maintained a very active pipeline, but we just haven't found the right value against the hypotheses that we're chasing. My hope is that the private markets, privately held entities continue to kind of re-mark their valuations, and there'll be great opportunities for us to add on and welcome new products to the WEX family, but that just hasn't been the case yet. Not to mean that we aren't trying, we've got very active pipelines and hopefully, we see some filing there over the coming months.

Got it. On share repurchases, since last 3 quarters, you have been actively repurchasing shares. Can we expect this trend to continue where we could see a stable and applicable approach to share buyback. And the second part is, in the absence of any material acquisition, can we expect buybacks to accelerate? Or do you think it will be better to save the cash for any future acquisitions?

Steve, do you want to take a shot first?

Yes. I mean, I'd start, Sheriq, with saying we don't think it's neither-or, right? I think we can do both. And so we have historically been, as Jay put it very opportunistic with share repurchases, meaning we did quite a bit last year about 1.9 million shares, I think it was last year. But prior to that, we haven't really done much for a number of years. But at this point, we had $700 million of free cash flow this year. We think we can do both at some size. And so I wouldn't say that we're going to spend every dollar on share repurchases, but I do think it will become more common, more routine, but still having that opportunistic piece to it where we're a lot more interested when the share prices are well where the valuations are well, at least in our estimation versus higher. And that said, then we would probably save up a little bit for acquisitions. As Jay said, we've got a pretty robust pipeline, but you can't really always time those things where you want to.

Got it. On the Travel and the Corporate Payment side, for 2023, the guidance is around 7% to 11% growth. And I think there has been some pushback from the investors because obviously, travel has continued to rebound. There is still potential from Asia. I know you had pointed out to some macro slowness and also the true-ups from Mastercard. But can you help us understand as to why the -- are there any other things involved in this, which is kind of expecting such a slowdown? Like do you expect corporate payments to be that soft that you would be at the 7% to 11% range for 2023?

Yes, I think there are a couple of different moving pieces to it, Sheriq. I think -- and just for context here, again, if you go back to the long-term growth framework, we're trying to grow revenue at 10% to 15%. And as you would start to back into how do you get to that from the different business units. We expect Corporate Payments and Travel to be at 10% to 15% revenue growth, Health to be at 15% to 20% growth and Fleet to be at 4% to 8% growth on average over time. There are couple of different things that are happening. First and foremost is we went into this budget cycle in the guidance cycle with not pretending to be economists ourselves, but taking what we saw on the Street as what the forward guidance was on GDP growth and then taking what we think is a very appropriately measured approach to what we're going to deliver over the course of the year. And as we map that to the corporate payments segment and travel segment, it was softer than what our long-term growth is for this year. A couple of things that are also happening is we had some true-ups as you mentioned, that we'll have to lap in Q4 of this past year. And we do expect Asia to recover a bit more this year than it has in the past. But when you kind of put all of that together, we were comfortable in that 7% to 11% point. Now what I will say is through the first couple of months of this year, we've seen continued momentum in the business overall. And if we need to either adjust up or adjust down, we'll be doing that on our normal quarterly cycle.

Got it. Got it. On the quarter, how has things been tracking versus your expectations that you had provided on the earnings call? Are there any surprising weakness or strength that you're seeing in any of the segments? Or are there any early signs on the macro front that you are starting to see now? And I think that would kind of create some risk to your guidance for the quarter?

Well, look, I think we just released guidance just a couple of weeks ago. So we only have the benefit of another couple of weeks. But maybe I'll just reiterate a couple of themes that we talked about in the call. I think OTR continues to be a place of some softness. And as expected, it is a bit soft versus prior year. I think travel continues to be pretty robust, maybe surprisingly robust. I think the health business, where we had -- we guided for quite a bit of growth over the course of the year continues to meet that high expectation. But here we are kind of 2/3 of the way through the quarter. I think we're -- a lot of the themes that we talked about in the call are holding true. I don't know, Steve, is that is there anything you would add?

Yes. I think largely, I'd say the trends we kind of talked about are, as you just said, kind of holding true the local fleets are continuing to do well. And some of that is just continued benefit from kind of the office reopening cycle. We were still kind of dealing with Omicron a year ago. So I'll say the comps are a bit easier there. Travel, same thing, right? We were still dealing with Omicron a year ago. And so travel is going to be quite strong in Q1. But also, as Jay alluded to earlier, we kind of alluded to the -- or guided to the slow economic environment for the back half of the year. And we hope we're wrong, frankly, right? We hope that we have a really robust economy, but it doesn't seem like that's going to happen right now, but we'll see how that plays out. And so that did temper our expectations for the back half of the year, right? We built in some slowdowns in volume for not just our OTR folks who are already seeing it, but our local fleets, our travel customers and corporate payment spending, volume, all those things. And health is pretty resilient, so not a lot there. But so far, all those trends that we kind of talked about a couple of weeks ago -- haven't been that long a period of time, but they do seem to be holding up okay.

Got it. Got it. So last question is on the margin front. And just in terms of the priority, in terms of like how important would it be to kind of preserve the margins like in '23 and '24? And like in a macro downturn, I mean, I suppose if things go worse than what was initially expected, will -- do you have the flexibility to kind of maintain the margin or probably even increase the margin in '23 and '24?

Maybe I can give a couple of thoughts and then Steve, you did add a couple of thoughts. I think first, like if you have a really severe downturn. So let's talk about recession. The things that are going to impact coming through our P&L are going to be PPG, new sales, credit loss rates. PPG, you can't do much about. We've seen PPG drop in the past. It recovers thereafter. We've carried the business to take advantage of when it goes up. Rising interest rates, we've hedged those really well, not with actual hedges but more natural hedges with our custodial income that we have in the health business. We can tighten our adjudication, we can tighten our monitoring, we can tighten our collections, work along the way. So those are the levers that we have at our disposal. So I think I mentioned at the very outset of -- Sheriq, when you asked me about the 3 priorities for the year. The third priority was around this very intense focus on our portfolio and how it's actually delivering over the course of the year. And we will adjust up or adjust down based on what we're seeing in the portfolio, in that portfolio's performance in the context of the macro. That's 1 of our top 3 priorities for the year. I'd say just one final thought for you is we've mentioned this in a couple of the last calls, we -- in a very kind of surgical way, we've been focused on this $100 million expense improvement program. Over the past year, the $100 million is on a run rate basis by the end of 2024. And that gives us more flexibility on the margin standpoint and buffers the business against margin pressure that we may see in a downturned economy.

That's it -- sorry, go ahead.

Sorry. One final thought on that is we expect about half to 2/3 of that on a run rate basis done in this calendar year with the remainder to come in the next calendar year. So we'll get some benefit from that this year.

I think that's all the time that we had. Thanks a lot, Jay. Thanks a lot, Steve. It was super helpful and thanks for joining us today.

Thank you, Sheriq. Pleasure. Take care.

Bye.