WEX Inc. (WEX) Earnings Call Transcript & Summary

Good morning, everybody. My name is Bob Napoli. I'm the analyst for William Blair that covers WEX for a complete list of disclosures, please go to williamblair.com. I've known WEX longer than they've been a public company. We're just talking at one point there were this little thing at Avis that was growing like a weed. And then it became public. I've known Melissa for about 20 years and she's been at WEX a little bit longer than that, and several roles, became CEO in 1997. Steve Elder, who I've known just as long as the best IR guy on the street but I'm going to turn it over, Melissa, has -- they actually did an interesting presentation last week in your health care business, but she's going to go through their deck, and we'll have some questions in the room and then we'll go to the breakout room.

CEO since 2014, not quite that old. Yes. I would encourage you to go and check out our benefits special event that we did last week for investors. It's really great and thank you for having us here. So the purpose of WEX, this is our North Star, is to make sure that we're simplifying the business and running a business. So it's really in the backdrop of everything that we do. Everything we do is altogether towards businesses. There may be a consumer at the end of our products but we always do business with another business first. With great track record of growth and as Bob was talking about, we've been around for 40 years. We've been public since 2005. We're proud of the growth trajectory that we've had. And that's resulted in some really strong financial results. So if you look at our financial performance during the last several years. So this is including the period of the pandemic, we have hit our long-term growth rates and we've increased the margin of the business. So you can see revenue on a CAGR of 13.5% in that period of time, but also had a 3% improvement in our overall margin. So very strong margin profile to the business. If you look at the business itself, we are a commerce platform. So think of us as a technology platform that plays across many different verticals, the mobility vertical, corporate payments and then benefits. You can see that in more detail on this next slide. So if you look at our customer base and benefits, what we're trying to do is simplify benefit offerings that are ultimately provided to a consumer. If you look at what we're doing in mobility, we are simplifying having a company run -- have vehicles and also employees in the field for simplifying that experience. And then with corporate payments, for helping facilitate payments around the world. We do this all across our billable commerce platform. We spend a lot of time and money. If you think about the business itself, about 1/3 of our employees are technologists. So very focused on the underlying technology. When we win in the marketplace, we win based on the products that we have in the marketplace that are built on the back of our technology; 85% of our business is in the cloud. We'll have 100% of what we want to have in the cloud by the end of this year. And so we feel really good about the capability that we have in the marketplace and to continue to build on that capability. We go to market with a multichannel approach. The way that we think about this business is we want to have as many roads leading to WEX as we can possibly have. So we typically start in any of the businesses with a partner distribution, where we're focusing around where we white label our products into the marketplace and other people are distributing on our behalf. Again, very focused on the underlying technology and reliability of the product set. And then we also go into the marketplace directly. So if you look across this very broad distribution channel, you'll see that we do business with 9 of the 10 largest oil companies in the United States. We do business with the largest leasing companies in the U.S. We do business with 8 of the 10 largest online travel agencies globally. And so if you look across how we're going through the partner channel, it's with an eye to how we make sure the technology is enabled for them to white label it then to distribute into the marketplace, which gives us another shot on goal of being able to ultimately have the business become a customer of ours. When we go into the marketplace directly that we have a sales force that is set up, we have very strong capability from a sales and marketing perspective. Over 60% of the Fortune 1000 are using our benefits products in the background of their business. We think of this as one of our competitive advantages. I'm not going to go into detail on the individual segments here from a financial perspective, but I'm going to talk a little bit about the products. From a mobility perspective, the products that we're offering into the marketplace right now allow people to maximize their vehicle costs and minimize the exposure that they have to fraud and misuse. We are very focused with that customer set of migrating to a mixed fleet environment. So what we know from our customers right now is they want to have one payment source for both the gas powered vehicles and the EV vehicles across the business, and they want to have that integrated into one payment mechanism back to the customer set. So we've been very focused around how we can create the network that we need in order to for people to buy on the fly, which is a product that we have in the marketplace right now, both in the United States and Europe, and we continue to build upon that network. We also have beta products that are in the marketplace for the ability to do at-home charging, both in the United States and Europe, and so we continue to build on that product set. And then the last component that we will offer is depot charging with this initial set of products we have in the marketplace. And over time, we see this great movement to complexity. And we are levers of complexity because it allows us more and more opportunity to strip out that complexity on behalf of our customers. So we see a lot more opportunity in this market to continue to build upon these initial set of products. We monetize that through subscription fees. So you see this migration of right now largely we have for those product offerings, our interchange or payment processing revenue for us, that interchange will move into an even richer source of revenue, which are subscription-based fees. Benefit business. Again, I would encourage you to go out and look, we did a deep dive on this last week. If you look at that business, what we're offering into this portfolio or an ability to do tax-deferred accounts. So think of this as if you have a traditional PPO plan and FSA associated with that, or as an employer, you have a high deductible plan with an HSA associated with that, COBRA benefits, transit benefits, lifestyle account benefits, all of those are offerings that our product enables to make sure that people are purchasing things that are allowed and done in a way that is very secure. And so if you look at this customer base, really great growth that sit behind this. We have said the long-term growth is 15% to 20% because you see continued movement to consumer-directed health care, which is an opportunity for us where the market continues to increase in terms of size. Only about 1/3 of accounts with an HSA, with people who have the ability to have an HSA, only about 1/3 of those actually set up an account, and then if you look beyond that those who are setting up an account, only about 40% -- 60% of funding about 40% are still not funding that account. So we have just a market ability to see a growth in the market and then on top of that, we continue to add new partners. Those partners add new customers. We add new employers. And then finally, you see this increase in health costs. So all of those things combined to a really great revenue growth profile. In our Corporate Payments business, we have 2 primary products that we offer into the marketplace. We have an embedded payments product where we embed through an API, our product into another work stream. So think of this as an example with an online travel agency, we're embedding the ability to make a virtual payment on behalf of them to a hotel. So consumer goes in to an online travel agency, you pay with your consumer card, but we make the payment to the hotel on behalf of the online travel agency. We also embed payments in other fintech players in the marketplace where they have an offering that's out in the marketplace, but they take our work stream and embedded in a virtual card payment, which enables them to have a more complete product offering. With that is -- we see the highest growth within this part of the business. We also have an AP-direct product where we fulfill on a digital basis, people's accounts payable. And with that, we have both distribution through financial institutions who white label our product indirectly into the marketplace. If you look at this business, we say it's going to grow 10% to 15% on a long-term basis. Again, really great, huge marketplace. We have continued ability to grow into. When you think about capital allocation, we're very focused around, first and foremost, making sure that we're reinvesting the business for growth over a long-term basis. The second thing that we look at is to make sure that we're thinking about synergistic M&A and we're focused around places where we can continue to extend product capability, which grows the TAMs that we're in. We have the ability to look at scale plays, which is much more of a financial play and then geographic extension. And so that's the second order for us. If you look at our long-term growth profile, we're saying 2% to 3%, will come through M&A. And then for us, we're looking at how we make sure that we maintain a strong balance sheet. We have been more recently buying back stock. And if you look at our long-term leverage ratio, we'd like to be in the 2.5% to 3.5% range. We've been willing to go higher than that in certain periods of time because we have very strong cash flow generation. And we'll then delever right now, we're at about 2.5x. When we look at our long-term range -- guidance ranges, we've got an ambition of continuing to grow this business 8% to 12% is going to come through organic growth and we've been very focused on making sure that we continue to deliver. That comes on the back of a very strong sales capability and also very strong product capability. We've been growing revenue 10% to 15% including M&A. And then our adjusted net income growth is 15% to 20%. So you get really strong leverage if you look across the portfolio because a lot of the business model is quite scalable. And then if you look at it from a segment perspective, which is on the right side of this page, we're growing our mobility business, our long-term growth rates are 4% to 8%. This is excluding the impact of fuel prices. Our Corporate Payments business, 10% to 15%, then our benefits business, 15% to 20%. And the assumption of that is interest rate neutral environment. So another way of looking at this is if you look at it from the just overall corporate perspective, if you look at the bottom of this page, those are the growth rates that we're signing to get to our 10% to 15% at more of a macro level. So 4% to 5% coming from the markets that we're in from an existing customer base. So that should largely come from the market itself, some cross-selling in there as well, 3% to 5% net new customer growth, 1% to 2% new product growth and then again, the 2% to 3% that's coming from M&A that leads to that 10% to 15% growth. So if you look at why we feel so bullish about the business model, we are in these really great large markets that are growing themselves. It's been one of the focus of ours is to pick markets where they really complicated, they're big, but they're also growing. We also are a market leader in each of the markets we're in. So we're focused on, again, that product differentiation of how we can continue to create competitive advantage from a product perspective that continues to fuel our ability to bring in new accounts. We have a reoccurring revenue model. So 80% of the business is reoccurring in nature. There's a network effect that comes from the fact that when we develop new product, that has an ability to be shared across the portfolio that brings in new accounts. And you can see that pivot wheel really extending as we're looking more and more at our ability to cross-sell across the portfolio. And then I would always say, when I talk to a customer, the first thing they'll talk about are the people at WEX. We have great relationships with our customer very high customer retention rates, which leads to strong long-term relationships. It's not uncommon for us to have a 20-plus year relationship with a customer. With that, I'll go to...

Great. A little bit of time for Q&A. So maybe start off. I've always viewed WEX as being a great view into the macro. I was wondering if you could maybe give some commentary around what you're seeing in the macro today in your business?

Sure. Love to do that. So if you look across the portfolio, so again, we do business with all kinds of different companies, both 2/3 of our customers smaller in size, 1/3 larger in size. I would say the portfolio overall is incredibly strong. It's a little bit different than what we're hearing sometimes externally. The one place that we have seen weakness and this has happened -- started to happen in the second half of last year. It was with the over-the-road customers that are smaller in size that have been in business for 18 months or less. So that customer base has continued to have more difficulty, but that's micro segment across the portfolio. The rest of the over-the-road customers are used to it being quite cyclical. So they were still in the middle of what they would consider to be a freight recession, but are used to riding these waves and so -- say they're less bullish about that ending soon than they were a few months ago, but are really quite stable within our portfolio. The rest of the business, we're seeing continued strength across smaller and larger segments in the business.

So the recession isn't here yet.

We're not seeing it. Nor are we -- if you look at our -- the aging and what's happening within our accounts foreseeable portfolio, that also looks very strong.

Great. You have a very large travel business as well. How is -- you made a significant acquisition. You started at de novo -- how is that trending I guess.

Yes. Look, travel has seen this remarkable rebound. Anybody who's been on aeroplanes is that it's fall, right? It's -- and so we've continued to really be a benefactor of that. And that is a really scalable model. You can see as we've seen spend volume come through the embedded payments actually have a great scalability to them. Most recently, we have seen a little bit of drop off in volume in Europe, but that being offset by strength in the U.S. marketplace. And so great growth year-over-year still just the growth rate has trended down a little bit in the European market, but it has been really strong in the U.S.

Great. And you did an Investor Day last week on the health care business. And that business has grown pretty dramatically since you acquired Evolution1, I think it was in 2014. What inning are we -- you've added a lot of it organic, a couple of tuck-in acquisition. Where do you see that business in another 5 to 10 years, what inning are we in, in the growth of health care?

Yes. So when we purchased Evolution1, they were $85 million in revenue. Last year, we had a $500 million plus business. And so we feel really good about the growth that we've experienced. And we've grown over 15% on a CAGR basis in that period of time. And so meaning organically, almost 30% if you look across the portfolio, all in. We're still early. We are still at a point in time where there's a lot of adoption. If you kind of start with there's still people who have HSA account capabilities that aren't actually setting up an account. There are people that are sending the account and they're not funding it. And so you've got just even within the existing portfolio, there's some inherent benefit that we still haven't received. On top of that, you've got employers that are continuing to move to this consumer direct to health care. And when they do that, then they set up HSA accounts. HSA accounts are more beneficial to us than the FSA, even though we benefit from both. We have the ability to get investment revenue of the HSA accounts. So we feel like we're still early in this process and that's why we feel really good about the 15% to 20% long-term growth.

Great. Now corporate payments. Obviously, you have the travel, which is part of corporate payments. But outside of that, how do you think about the growth of non-travel corporate payments or growth opportunity there?

Yes. Yes. So I'm going to split. Like embedded payments outside of travel, it's lumpy what we see from a growth because it comes when we signed a larger partner, those tend to be larger in size. And so I feel good about the long term, knowing that you're going to see some ups and downs in the overall growth rate. The AP Direct product is more of a steady grower and we have continued to add to the direct sales force in that case since we've had strong wins. We talked about 40 wins in the first quarter for that product. So we'll continue to grow that product and to the extent we want to continue to add to that sales force, we see an opportunity to continue to grow there, too.

And that's more of a mid-market or are you also with Bloom looking to go down market with.

Mid and down to again, like 2/3 of the business are smaller in size and we think that, that's an inherent opportunity to sell more and more digitally and cross-sell more and more digitally to that customer base.

Okay. And then, your leverage is below its average level, which is a good place to be. And the M&A market, prices have been elevated, but it seems like gradually, the prices of private companies are coming into line. What would you like to acquire? Do you want to grow the embedded payments or health care? Or what areas are you most excited to look to acquire?

Yes. I don't -- we are not seeing multiples drop that much yet. And so we are being pretty patient around that. The assets that are going into the marketplace are probably dropping more than the ones we tend to feed the type of company that's knocking on people's doors to acquire things that aren't readily for sale. And so those tend to take a little bit longer, but I would say are more sticky in terms of what the multiples look like. So we are continuing to move things across in our pipeline, but they've been pretty patient and in the meantime, have been buying back stock. We're really continue to be interested in product extensions across the portfolio. So in any of the segments that we're in, we are interested in scale -- place -- it's a scale place tend to be more in the benefit space just kind of naturally because of the type of assets that are out there and then geographically continuing to build upon the position we have outside the United States. And so we've got assets that go across that whole mix. We also have been investing in early-stage companies so not acquisition been investing within energy innovation. And so we have a very active team that has been sifting through investments. And the way that we think about this is, we are the technology intermediary as we make an investment in a company, we add that into the portfolio of offerings we have to our customers and they attach into us. And so we then can watch and see what does behavior look like and that can ultimately lead to acquisitions.

I've been asked about EVs as a risk factor for WEX for more than a decade. And it's actually getting to the point where you're getting some real momentum. How confident are you? What are your thoughts around how that's going to evolve. And how confident are you that on the profitability of EV versus gas-powered vehicles.

Yes. We get more and more confident as time goes on because we were -- you just have more live customers that it's still relatively -- and we're talking hundreds of customers and almost 19 new vehicles and so it's still early on but what we know is that people are willing to pay for the offerings that we have. The offerings we have are just the beginning. And so we feel really bullish about our ability to continue to grow not just the customers that come in but grow the different sources of revenue. And it gives us an opportunity to shift the revenue from much more of an interchange-based model to subscription fees. And so we actually -- we like that, too.

Great. Are there any questions from, we have like few minutes -- yes. You may have to repeat this.

.

Questions about the bank and liquidity issues potentially.

Yes. I'll start and you might want to add on to this but from -- the short answer is we feel really good about our liquidity. So for those that don't know, we own an industrial bank, which allows a non-bank holding company to own a bank. That is subject to its own capital ratios. And the things that we had looked at was what was happening with our HSA and our ability to fund deposits through the bank. We went into the marketplace, raised deposits. We've had no issues from a liquidity perspective. Over 95% of the deposits that we have on the business are FDIC insured. They're smaller in size. With the HSA assets specifically, the average size of those investments are a couple of thousand dollars. And so you're not seeing any shift, if anything, we're seeing a growth in that asset portfolio. There are also restrictions around whether or not people can take the money out from tax consequences in the net, so we have not seen any change of anything like in addition to the portfolio. So we feel really good about our overall liquidity.

No. The deposit base has proven to be very sticky as for many years and we're very comfortable with it.

Other questions. Yes.

Just a quick reminder competitive set with benefits and on the payments .

Yes. So on benefits, HealthEquity is a competitor in the space, Alegeus is competitor in the space. Then there's a number of people that are partners in some parts of the space, but also compete in others, so they might use our technology for a piece of their offering, but they also are competing in other parts of the business. And so from what we see in this space, we feel good about the offerings we have. We compete around the breadth of our offering, so the ability to do different types of accounts within one technology stack, also the fact that we're competing in the marketplace both directly and with a partner channel gives us much more breadth in the marketplace than our competitors do. And so we continue to build both in terms of winning competitively and bringing customers over from other portfolios, but also people are using their own homegrown systems that are migrating over to us. Accounts payable. So on the travel space, we see competition from banks smaller and larger banks primarily. And then with the embedded payments product, we see competition with more fintech players which are competing with a piece of what we do not typically the totality of what we do. And so there's a little bit more fragmentation around the competitive set. And again, the way that we compete is around an embedded payments product. It's the technology, it's the brand, it's the stability of the product. It's really across the business, we think about is tech first.

Any other questions.

Historical capital allocation, obviously been wonderful . We look at a higher interest rate environment, but . Is there a point where maybe a more balanced allocation is appropriate in terms of buying yourselves versus going out prior?

We've been very focused on buying back stock over the course of this last year because of what's happening from both our valuation and what we're seeing in external valuation. So that's definitely part of how we think about this. And particularly, if you're evaluating a scale play versus buying back our stock, that's definitely playing into the consideration that we have with one versus the other.

Any other questions.

.

The pain point of people not actually funding it?

.

The HSA.

Yes. So we each year have led something called HSA, which is we're spending time educating consumers around the idea that if you think about the largest source of bankruptcy is typically an unplanned health care cost. And so it's good for them, it's good for us. And so that's been one of the focus. I think you'll see us ramping up that education. What we've learned from focus groups is more around what matters to the end consumer and it's less about the tax savings, which is to this room, people might think about the triple tax benefit but you get to most of the consumers, it's less about that. It's more about the emotional part of not hanging to worry. And so I think we're learning more about the words that matter most to the end consumer and how we can actually affect that is a place that we're interested in.

I dive into that we have entered into the benefits administration space. So I think like open enrollment right, we create those websites, and we can build technology into when people are making those selections, you've chosen a high deductible insurance plan you really should get an HSA. It's good for you kind of thing, do you want one and reinforcing that through the technology or you're choosing not to contribute the maximum amount, you're somebody of your age, some of your demographics should be contributing this amount or the benchmark is that. So a lot of education that you can actually embed into the front end of the process as well by having that administration capability.

Great. I believe we're out of time. Thank you very much. Great questions, and thank you.