WEX Inc. (WEX) Earnings Call Transcript & Summary

All right. I think we're going ahead and get started here. I'm John Davis, the payments and fintech analyst here at Raymond James. We're excited to have Melissa Smith, CEO of WEX; along with Steve Elder, Head of IR, with us this afternoon. We're going to start with the presentation followed by kind of hybrid Q&A for myself and the audience. So with that, I'll hand it over to Melissa.

Thank you. So I am not going to stand behind the podium because I don't think you can see me. So for those of you who don't know WEX, we're a B2B payment platform that is geared towards end markets that are large, growing and we're a market leader. We set out on this journey about a year ago to really define the purpose for WEX. The purpose for us and how we think about the business is we want to make sure we're simplifying the business and running the business. So our customers are all businesses, and we want to make sure that we're removing some of the friction that they have every day for running that business. We have an ecosystem of offerings. So think of this as we've got an integrated technology platform that is serving a number of different service verticals, and here's a snapshot of some of the products that we have. We want to make sure that we're simplifying benefits. And so, for us, that means using our technology stack to help allow people to use HSA, FSA accounts, a number of different tax deferred accounts where we're providing the technologies to make sure that people are buying things that they should buy that are tax allowed. We're also focusing on mobility. So I think of this as fleet customers that have vehicles as a byproduct of broadening a business, that could be anywhere from a local contractor up to an over-the-road customer. That anybody in that category that, as part of their business, needs to own a fleet. We provide services to them to allow them to purchase fuel and do that in a very efficient way as well as understand the total cost of ownership of their vehicle, which is migrating now into EV ownership. And then on the pay and get paid component, we offer embedded payments products and AP facilitation products, all, again, geared towards B2B customers. And we do that, if you think about the underlying platform is making sure that we're doing that in a way that's reliable, scalable and that we're doing that in the way that meets our customers where they are. So some of their customers are super technically available, in which case we're offering up an API that they can integrate to others are actually a little bit further down that journey, in which case we're embedding into their systems. And so one of our core capabilities about 1/3 of the company are technologists. We had a great growth cycle. If you look back, when we first started at WEX, we're about $50 million in revenue. You can see last year, $2.4 billion. So we've had a really great growth record. We grew revenue 27% and earnings 48% last year. If you zoom out, our long-term growth framework says that we're going to grow revenue 10% to 15% and earnings 15% to 20%. Let's tell you how we're going to do it. So we actually -- if you go through each of our segments, we have long-term growth work for each segment that we're in. But in addition to that, if you kind of zoom out instead, if you look across all the different categories, we're going to grow 4% to 5% from our existing customer base. So again, we're in large growing markets, and some of that is because the market itself is growing it. Some of that is because we're cross-selling across our portfolio that leads to that 4% to 5% growth. Last year, we overdelivered on that. We had 14% growth in that category, some of which was a pickup from just the pandemic rebounding. On net new customers, we're going to grow 3% to 5%. So one of the things that our core competencies is bringing in new customers across the business. We operate in a multichannel approach. So each part of our business we're going directly in and through partners. So it's, again, another reliable part of the business model. It's the net of attrition, 3% to 5%. We have very high retention rates across our portfolio. On average, last year, that was 4% growth. We are also delivering new products into our customer base, and that is bringing 1% to 2% growth as we continue to go in that journey. We have a high degree of customer focus on our innovation. And so those innovation capability for us has only increased as we've moved 80% of our technology base is in the cloud, it will be 100% of what we want to be in the cloud by the end of this year. M&A for us is 2% to 3% of the overall growth profile. So that led to the 10% to 15% growth. And then, as you see, the scalability of the model give a really nice ability to drop through revenue to earnings, and that leads to the 15% to 20% growth. The last thing I'd say is, like, why we succeed? When we look across each of the markets that we're in, we're operating, again, in large markets. If you go across each of our verticals, our fleet business operates across a large marketplace in the United States, in Europe and in Australia. Our health and benefits offering also is a really large market and growing. And what we're doing, as you all know, B2B, the corporate payments marketplace is a very large market. Travel specifically also growing. So we look across each of these categories, large markets. We're in a leadership position across, if you go, in each of those categories. We do business with 9 of the 10 largest oil companies in the world, 8 of the 10 largest online travel agencies in the world. And we do business with over 50% of the Fortune 1000 with our health and benefit offerings. So it's a really great business, reoccurring revenue stream, about [ 80% ] of the business is reoccurring in nature. And as we build product capability, that is, for us, a great network effect. We continue to build out functionality we can operate across the portfolio. We also get an effect of retaining the data that we have with each of the transactions over $200 billion worth of transaction volume went across our platform last year, and that created a whole data set where we're able to take the information that -- we're learning from customer behavior patterns and update and modify the overall profile that we have with our product set. And the last thing I'd always say that we have great culture. The people that work at WEX, I think, make a difference every day, and that's part of why we have such great retention rates for their customers. And that's all my presentation.

All right. Great. We'll go into some Q&A now. I'll ask a few and then if you have a question, just raise your hand and I'll call on you. So Melissa, you talked about the impressive kind of growth algo at WEX of the 15% to 20%. You gave the guide this year is quite a bit below that. So maybe just at a high level, obviously, there's multiple factors, which kind of walk people through why we're looking kind of low to mid-single digits this year, at least as the initial guide? And maybe also touch on macro and any conservatism built in given all the uncertainty?

Sure. Love to. So our overall revenue growth, again, is 10% to 15%. That's assuming neutral fuel prices and neutral FX. So if you actually look at '22 to '23 neutralized for fuel prices, we're in our normal range, albeit kind of on the low end of that. And the reason why is that we had assumed in our guidance that we're going to have a slow growth environment in the second half of the year, we're a little cautious because of all the uncertainty there is in the marketplace, but not because of anything we're seeing in our existing portfolio. So we're just transparent about the fact that we assumed in our guidance in the second half of the year that there would be a slow growth environment in our underlying guidance.

Our fleet segment is actually a really great look into the economy. And so far, what we see with you look at our -- what we call our local fleets, but people that buy gasoline at gas stations. So not the big over-the-road trucks going to truck stops. But the activity there is still robust. It's still growing. And part of that is just kind of recovering from the pandemic. But there's absolutely no sign of any slowdown at all in that right now, and they've done very, very well, and we've done well just bringing on new customers there as well.

Okay. And then we'll talk about -- touch on everybody's favorite topic, EVs. Just you guys have done some early steps on M&A. Maybe just talk about the EV strategy, how you kind of see a mixed fleet world and what that opportunity brings to WEX?

Yes. So we have -- almost 19 million commercial vehicles that we do business with globally. And to kind of put it in perspective, 200 vehicles are using EV products within our portfolio. So it's like we're very early in the adoption curve. But what we're hearing from our customers, what they are interested in is an integrated offering that allows them to integrate their ICE-powered vehicles with EV vehicles so they can understand the total ownership of the -- total cost of ownership of their fleet. And they want to have that payment mechanism and the billing integrated. And so it's creating this whole new opportunity for us in the marketplace to make sure that we can service their needs. And the product offering that we've been focused on in the short term is really geared towards that. So making sure that we have a network, a closed-loop network that we build out and the ICE -- with ICE vehicles is making sure that we have that same ability with EV. And so we now have offerings in the United States and in Europe that allow that capabilities where people can charge at the fly as they go. And then we're building up functionality for depot charging at at-home reimbursement with the idea they're going to have this 1 integrated offering back to our customers. And so it's really early. Early adopters right now are largely state fleets, government fleets, those who have ESG reporting requirements that are kind of pushing for adoption, but really early. And what they're finding is they're going into the marketplace and trying to place orders, so that it's a very long cycle for them to actually get possession of vehicles. So it's dribbling in. The way that we've thought about this is that we want to make sure that we're positioned for our customers kind of regardless of when it's going to happen because it will happen over time. And we're focused on creating products in this -- for this mixed fleet environment that we're going to be in for probably 10-plus years. From an economic perspective, which is another question I get frequently, that economics right now are on our products. We charge between $3 and $20 per month per vehicle. In this new environment, we believe we're going to be able to charge between $5 to $20 per month per vehicle. That's certainly playing out with the -- our sample size of 200 right now is that we're in the range that we had provided at Investor Day, even though we're offering actually just a small piece of functionality in the marketplace right now.

Okay. And maybe a couple of more questions on fuel. So there's been a lot of talk, obviously, spot rates are down a lot. And I get a lot of questions. How does that interplay with your business? Is that a leading indicator? Or at the end of the day, if the miles are driven, you're still getting paid. So maybe talk a little bit about what happens when spot rates do go down, and how that does impact your business?

Yes, sure. So in our fleet segment, about 1/3 of that portfolio are over-the-road customers. The rest are think of anybody who might have a vehicle because think of it like a Ford F250 that a contractor might have, or a [ florist ], or a removal service as a whole host of type of vehicles that sit -- that's the other 2/3 of the portfolio, but the third, that piece of the business, larger carriers aren't impacted as much by spot rates, but smaller carriers are. It's part of what makes that part of the business a little bit more cyclical. We did see spot rates decline pretty rapidly last year. And what happened kind of third quarter-ish of last year was that the people that own smaller fleets were parking vehicles and starting to work for the larger transport providers, and you started to see kind of this mix shift. In the fourth quarter, you started to see, for us, same-store sales within that part of the portfolio was negative 3%. So to your point, it started to affect miles driven compared to the kind of high to pandemic. And we've seen that continue into this year. So as Steve said, if you look across our portfolios, we're seeing strength across the business, similar to what we had projected going into the quarter. This, too, similar to what we had projected going into the quarter, but is soft. We do hear from that customer base that they expect to see pickup in the second half of the year. See if that plays out or not, but I think they're actually feeling pretty bullish. And from looking at the overall portfolio, we've seen that really stabilize in the -- even starting at the latter part of last year. Anything you'd add to that?

I think. I mean, just spot rates in general, there's no direct correlation to us, but in what they indicate in terms of demand for trucking services would kind of be a look into that 1/3 of the fleet segment that is over-the-road trucks.

Okay. That's helpful. And then maybe last 1 on the fleet segment. Credit losses are a little bit higher in '22 than I think you initially expected. I think you're calling kind of flattish kind of losses this year. But maybe just talk about what drove that up? I know there was some fraud involved in kind of the outlook for credit going into '23.

Yes, sure. So embedded in those numbers that you saw up there was an elevated credit loss number in 2022. There were 2 things that drove that. First, we saw a much higher level of fraudulent activity across the portfolio, which was driven in part because you've seen chip adoption happen within the local fueling locations who save more of that migrate to the over-the-road marketplace, so the truck stop locations. Been a lot of work between us and the 3 merchants that are more dominant in that space to make sure that we're providing perfection for those customers, and we're rolling out more products for that customer base. We guided saying we think that the fraud losses we had in the fourth quarter would be similar in the first quarter and then trail down in the course of the year. But I'd say that's the minor. The other piece is credit exposure and [ similar ] credit perspective and the very last part of last year, similar to what was happening with spot rates, you started to see those small over-the-road customers. So it's really small in size. Over-the-road customers started to have a trouble with the drop in spot rates and the increase in fuel prices. And so we have seen an increase in charge-offs that were occurring with that like one very small part of the portfolio. So overall, if you look at our credit portfolios, we've continued to see stability and strength with the exception of this 1 piece, which is the over-the-road small business customers. So we provided guidance for the year for this. We assumed that we would continue to see that bubble run through in the first half of the year. And again, second half of the year, we're assuming that there is a low growth environment. So there would just naturally be a little bit elevated losses associated with that.

Okay. Great. And then maybe moving to the corporate and travel segment. We get a lot of questions on just the competitive landscape there. I think it's pretty opaque for a lot, obviously, it's a huge, huge market. You guys have dominated travel for a while. So maybe just talk about who you see there, what the competitive landscape looks like? And then, Steve, maybe just touch a little bit on yields and kind of why that's been trending down over the last year or so?

Sure. So if you look in that business, you talked about travel that we've been a dominant player in the travel marketplace. We've really benefited as you've seen the rebound in travel. So our customer, again, in that case, is an online travel agency. So if you were to book a hotel room, you would book that with an online travel, you'd say you would pay with your consumer card. And then we have an integrated payment that's happening, that's making a payment to the hotel on behalf of the online travel agency. So highly integrated from a workflow perspective into their systems. That's what we call an embedded payments product. And so we've seen really great growth in that product set. And importantly, because we own the underlying infrastructure, we're the issuer, we're also the processor, we own the card management system. It's a very scalable part of our model. It's something that we do highly reliably, which is really important, as you might imagine, to that customer. They want to make sure that, that transaction is happening anywhere around the world, and it's happening very reliably. And so it's an important part of our model. From a competitive perspective, I'd say, like the competitors are similar to the way that they have been for quite some time. The competition comes from financial institutions, which are largely regionalized. So you see pressure in each area with different FIs, depending what market you're talking about. I'd say that's the primary competitor there. That same embedded payments products that we use for the online travel companies, we do a bunch of other things related to that, which is about cross currency and capability. But we also provide that functionality for other fintech companies, which, again, they're taking a work stream, embedding a payment into that work stream, and we monetize that together. So there's a share between us and them of what we earn for interchange. That part of the marketplace can, I would say, again, competitively, not many big changes in that marketplace. And so it's been a competitive part of the business. The reason why we win in that space, again, is reliability that we have and the ability to provide all those services. So instead of just 1 component of that, it's the ability to be the issuer, the processor in owning the card management system. And then if you go to the second part of travel and corporate payments, in that segment, we have an AP Direct offering that we have in the marketplace. We do that both directly and with the sales force that we've been building. And also we do that through partners where we provide the technology to them. In that case, it's larger financial institutions. And so we bring in business in both of those cases. So not -- I'd say there's no real big changes in the competitive environment for a while across that space.

From a rate perspective, the net interchange rate, the segment itself earns about 90% of the revenue from interchange, right? Where they're issuing banks, we are in the issuing bank interchange as published by Mastercard or Visa, and then we share a portion of it back with our customers. And so since it's most of the revenue, it does get a bit of scrutiny. But what we've seen over the last couple of years is we have a number of very large relationships with online travel companies who, as you would expect, get good rates. And as the rebound has occurred in travel, the net rate that we report has trended down over time because of the mix of it all. If you look at it on an individual basis, the actual rates that we earn from our portfolio of travel customers and our corporate payments customers have been relatively steady. We were lucky enough to bring on 1 large fintech last year in our corporate payment side. So again, they got a preferential rate, I'll call it, and that rate turned down a little bit over the year from a mix perspective. But largely, it's been pretty stable over the last couple of years, and you just got some mix issues in how we reported out.

Okay. And I think you guys guided this segment to 7% to 11% growth, which is slightly below the kind of targeted range. Obviously, you grew really well last year on the COVID rebound. So maybe talk a little bit about kind of from a macro perspective, is some of that just comps and a little bit of uncertainty later this year. And then maybe talk a little bit about your Asia exposure through eNett and Optal and kind of where we are on that recovery? And could that provide a little bit of juice upside this year?

Yes. So the 7% to 11%. So again, we have this underlying assumption that you're going to have a low growth environment in the second half of the year, and that would affect some of the incentive structures that we'd have compared to 2022, which is why we're guiding in that range. We are continuing to see strength that's coming through right now in the business. And so that's an assumption that we have in a forward view. In terms of travel in general, so if you look at pro forma 2019, so assuming that we own eNett and Optal, compared to what happened last year, we were around 100% of the total spend pro forma back to 2019. However, transaction volume was still below the 2019 levels in room rates. And so not because the bulk that we're doing or hotel payments were higher. So making up for some of the -- we're still not seeing a full rebound in transaction volume with a rate pickup. If you look at across the world at the different parts of the world that we do business with, about 20% of the volume historically has come from Asia-Pac. There was only about 10% to 12% in the fourth quarter coming through. So, to your point, there's still some pent-up demand, we believe, in that part of the marketplace. But also in other parts of the market, we think there's probably a little bit of pent-up demand, too.

Okay. No, that's helpful. Maybe before I move to the health segment, any audience questions? All right.

Got a question.

Is there any opportunity to do merchant acquiring, maybe in other markets and building out that business that is not part of the strategy?

So we've looked across the different product efforts we have. We've made choices to where we're using closed-loop network and where we're using an open-loop network. Because of just the size of the acceptance base that's happening globally, we've chosen to use an open-loop network with our travel products. And so far, that's really the path that we've chosen to go down.

Maybe switching gears over to the health segment here. Obviously, with higher rates, gotten a lot more focus from investors recently. So just talk about, obviously, you've guided to 25% to 30%, which is well above kind of where you guys target. How much is that from rates? How much is just the core underlying business, new wins? Maybe just a few comments there will be helpful.

Yes. It's a great part of our model. So when we first entered the Health and Benefits business, we had about $85 million worth of revenue in 2014. So if you flash forward last year, we had a little over $500 million. So it's a compounded annual growth rate of over 20% and from '14 to 2022 so for a long period of time. We said that we're going to grow our long-term growth targets here are 15% to 20%, but we've -- have expectation in 2023 that to be higher, 25% to 30%. About half of that is coming because we became a custodian a couple of years ago, and so we're earning interest income with those custodian assets. So about half of that growth rate is coming from that as you see an increase in interest rates and then just we're bringing more of those deposits into the business. The other half is coming from growth in existing accounts. We had a really great open enrollment season. You can see, from a selling perspective, we really overdelivered going into this year. So strong account growth that's coming through as a result of that. In addition to that, you just have this nice tailwind that comes behind this business as you get this migration to consumer-directed health care accounts and you've got growth within the account base and you've got health costs going up over time, all of those things can accumulate to the rest of the growth.

Okay. Great. Maybe we'll turn to the balance sheet. Obviously, M&A is a big part of the story. Leverage, I think it's about 2.5x, very comfortable. Maybe talk about where you're kind of willing to go for the right deal? What you're looking for? And have you seen any changes in valuations? Obviously, Stripe sent some shockwave to the market recently in kind of the last ray. So have you seen private market valuations come down at all yet, kind of still waiting just any comments there.

Yes. So our target leverage range is 2.5 to 3.5x, so we're now just a tad below that. And just kind of -- if you step back in the capital allocation, the way that we think about it, first, internal capital, we care about the fact that we're delivering products in the marketplace that are meaningful to our customers. The second thing that you saw in our framework up there is 2% to 3% growth is coming from M&A. That being said, we're very patient acquirers. And so we have been going through, and we'll continue to go through a process where we evaluate assets compared to both our strategic and financial criteria. And if you look at the places that we've been interested, we're interested in EV and innovation, largely though we're making investments in that because we've got some early-stage companies. We're also engaged in looking at assets that are in the travel and corporate payment space as well as assets that sit in their health and benefits business, either scale plays or product extensions. And so it is a very rigorous progress. We're moving assets through that pipeline. I think you're seeing different things. Corporate payments, in particular, there's still a gap. We're finding between, in my mind, didn't ask, but public company comps and private comps and so patient, looking at that. And so we've had a bias towards building in that part of the business for a while as a result of that. I'd say more normal multiples in the rest of the portfolio of assets that we're looking at. But that's just a normal process for us. We'll continue to evaluate assets. We'll talk and move those forward. And in the meantime, one of the things that we did last year, we started more actively doing share buybacks. We feel strongly about our stock and that we still believe that it is undervalued and as a result we were moving assets to share buyback. We will continue to do that opportunistically. We actually increased the amount of authorization that we had in share buyback. We had done a bunch of modeling and really felt comfortable even in a recession model that we could do both because we have such a high cash flow generation business that we could opportunistically continue to buy back stock and do M&A. And so a lot going on in that front. Anything you'd add?

No, I just think that we were aggressive buying back shares last year. It was almost $300 million that we bought back last year, and we have just under $500 million authorization still left.

Okay. We're about out of time. Any last questions from the audience? All right. We'll wrap it there. Thanks, Melissa and Steve.

Yes. Thank you.

Thank you.