WEX Inc. (WEX) Earnings Call Transcript & Summary

Okay. Great. Let's get started. Welcome, everyone, to day 2 of the UBS Global Technology Conference. My name is Nik Cremo, and I help the payments and fintech research team here at UBS. I'm excited to have the WEX team here with us today. We have Jagtar Narula, CFO; and Steve Elder, Head of Investor Relations. Thanks for making it out.

So Jagtar, you've been at WEX for about 18 months now and have been quite busy more recently with two acquisitions, executing on a $100 million cost savings program. Just reflecting back over the last 18 months or so, what's exceeded your expectations since joining WEX? And what have been some of the unanticipated challenges as well?

Well, thanks, Nik. First, let me say it's a pleasure to be here. I really appreciate you inviting us, the team inviting us to the conference. It's an excellent conference, and I've enjoyed the meeting a number of investors this morning, and hopefully, more folks in the room today and more this afternoon. Yes, it's been a fun 18 months. Let me start off with the challenges, right? So joined 1.5 years ago. Fed funds rate was, I think, target was 75 to 100 basis points. Clearly, we're much higher than that. We just got through the most aggressive tightening cycle in the generation, typically not something that CFOs are super excited about. And on top of that, you'll recall that shortly after I joined, we entered into this freight recession that resulted in significant credit losses that we saw in the portfolio last year. So another challenge. And I say that because it's a good way to transition to what's exceeded my expectations. The word that Melissa and I use a lot, we use it a lot in our earnings calls, is about resiliency. And I think how we've handled these couple of headwinds really points to the resiliency of the company, right? We've consistently outperformed our performance targets. We've consistently beat and raised and posted some really impressive numbers. And I've just looked at how the company has responded. I look at, right, how we've managed the natural hedges in our portfolio to deal with the interest rate rise. I look at how we jumped on the credit loss issues, and write the great results we had in Q3. So I view it as a great company with great cash dividend yields, great investment momentum and a lot that we're accomplishing.

I definitely agree. You've been executing quite well and the credit losses have come in, I think, 7 basis points last quarter, so quite strong. So while on the mobility segment, I think we can start there. So that business has generally been tracking in line with your expectations. You guys are forecasting the business to be at the lower end of the 4% to 8% long-term growth target after comping at low mid-teens growth last year. So not too surprising there. But in the back half of the year, you're a little bit below the 4% to 8% target. So if you can just walk through some of the drivers that have led to the deceleration there?

Yes, absolutely. So let me start by saying that mobility is a terrific segment for us. It's something Melissa talked about in the last earnings call in that we really do see an opportunity to incrementally add to the growth rate in mobility. It is really a terrific business for us and one of our strengths. Now we did see some revenue growth that was lower than our long-term guidance in the last quarter. And I'd say there's a couple of reasons for that. So let me start with late fees, right? So we talked about the improvement in credit losses in the portfolio, right? So one of the things we've focused on, it was improving the quality of the portfolio. We've done a lot of work in, right, improving our credit adjudication models, our portfolio modeling models, handling credit limits for customers. And all of that has improved the quality of the portfolio, and we saw that in the results, right, the tremendous results in the third quarter. Now the one impact of that is, right, late fees go down, right? So call it the portfolio improves, less people pay late. In the third quarter, late fees was about 20% lower year-over-year. Part of that is fuel prices. If you adjust for fuel prices, call it 10% lower, that's worth about 2 percentage points of growth. Now we should lap that, right? That's coming down because of what we've been doing on the credit performance, but that's not like a new normal in terms of growth for the business. A couple of impacts we had was calendar was an issue. This quarter, Q3, we had slightly fewer calendar days, fueling days, we'd call it, than last quarter, just timing of when weekends and holidays show up. So that was worth about one percentage point of growth. And then the other thing we've talked about is, right, the freight recession, right? That's been a drag over the last year. We've now seen stabilization in the freight business. Spot rates have stabilized, but that has been a drag year-over-year. So I'd summarize it as, right, the late fees was a drag, but we should lap that. Obviously, calendars, just the calendar. Freights at a new low level, but we've seen stabilization there. So that's good. We should start to lap that. On the plus side, right, we still think there's a lot of unpenetrated business. We've got a lot of opportunity. We are one of the leaders in this sector with a strong portfolio. So we view the long-term targets and say they were achievable.

I just wanted to ask a follow-up on the trends that you're seeing in the first 2 months of Q4 and how they're kind of tracking along. I know that this is the quarter where you start to lap some of that freight recession, I believe. So maybe what are the trends looking like? And without getting too specific, do you see a path to accelerating into that 4% to 8% range at some point in 2024 as you lap those headwinds?

Yes. I'll say, just, we're a month or two, a couple of months into the fourth quarter. The volumes that we're seeing are in line with expectations, right? So we've talked about kind of the lower level of activity in freight, but it's stabilized. And what we're seeing across the business is pretty much in line with expectations. And so with what I talked about earlier, us lapping some of the impacts that we've seen in the back half of the year, late fees, right? The freight recession. We should start to see the biggest pickup -- the business pick up. I would say, I've been pleased with new business signings, and that's right alongside expectations. So we should see things normalize in the future.

Great. So one of the incremental takeaways from the last earnings call, you and Melissa mentioned that you see an opportunity to accelerate growth in that segment without putting a specific time on it, above the 4% to 8% longer-term target. I know that the Payzer acquisition that you closed earlier this month is a part of that story. So maybe if you could just walk us through why you were attracted to Payzer to start?

Yes. So I'll reiterate that we are really excited about the mobility segment, right, that we have such a large customer base. There's 600,000 customers, a leading set of products. We are highly, highly efficient selling new business there. So it's a segment that we're really excited about. When we talk to our customers in that segment, what we hear from our customers is an opportunity to give them more solutions, right? We help them manage the efficiency of their vehicles and of their fleets. But one of the things we heard and we did this as part of the Payzer acquisition was hearing from customers that it's not just the managing the efficiency of the fees, but it's managing the efficiency, essentially, of their workers or drivers, their business processes. And so this was an acquisition to enable us to do that. It was a combination of software and payments, so much like our benefits segment. It's a model that we know well, bringing software and payments together. We have a large customer base that we can go sell, right? Payzer, today, when we acquired it, had roughly 3,000 customers. In this kind of field service segment that they operate in, we have 150,000 customers, $25,000 -- 25,000 customers, of which we think is immediately addressable with our solution right off the shelf. So we just viewed that as a growth opportunity. Our customers have told us, right, they need our help there, and we think we bring incremental value add.

That's great color. So on the WEX customers that are within those HVAC, plumbing and roofing verticals that you plan to cross-sell to, can you provide maybe a finer point on any kind of timing or cadence as to when do you expect to start that?

We're starting it right away, right? So we, right, like I said, we've got 25,000 customers that we can sell to right away. So we've got -- we've closed the Payzer acquisition. We closed it out in the beginning of this month. And so we've got teams on the marketing side, the WEX side of the business, now geared up to start all the marketing campaigns to our customers. We've got people on the fleet side, the salespeople who'll actually help generate those leads. Those leads will go to the Payzer team. They've got a very, very good sales team. They know how to sell their solution. They know how to get customers excited about it. So we are ready to go. The last thing I would say about Payzer is that we just -- we've viewed this as a good kind of risk/reward for us, right? So it was a manageable acquisition for us. And -- but there's such kind of a tremendous upside opportunity and what it can do for our mobility segment and our businesses in general that we just -- we were excited about the risk we will trade off.

Absolutely. Yes, so Payzer is about $25 million, $30 million in revenue today, growing at a healthy 30% clip. Can you provide a little more color as to the composition of that revenue between payments and subscription? And kind of how early is Payzer in this payments monetization journey?

Yes. There their revenue today, it's roughly 50 -- I'd say it's 60-40, software being 60% and 40% being payments. So they've begun to monetize that. They've used third-party partners for that to do all the processing work. Obviously, that's an area where we think we could add incremental value add on them getting paid. But there's additional opportunities on top of that, that we're just starting to scratch the surface on. So not only is they're getting paid, accepting payments for installing an air conditioner or doing service work, but also its payments back to the small businesses' suppliers, the OEMs, et cetera, where we think we can offer the WEX virtual card to help facilitate those businesses to make payments. We also think there's an opportunity to attach the WEX fuel card to customers that Payzer is selling, right? Again, those are field service organizations. So they have fleets of vehicles, they have drivers that make these service calls. So we think there's an opportunity to attach the WEX fuel card and process fuel payments as well. So early days, we think there's a lot of opportunity.

it sounds like a lot of opportunity on the revenue and cost side. So just last one on Payzer. You guys are -- have a path to accretion in 2025 with some modest dilution in 2024. So any color you can provide on how we get to accretion in 2025 and what -- where margins have to go?

Yes. So what I'd say is, Payzer, we acquired them, they've grown about 30% a year. They were EBITDA positive. But obviously, with the cost to finance the acquisition we talked about was that we were -- it could slightly be dilutive in 2025 to the tune of about 1% so -- or 2024 to the tune of about 1%, which we viewed as manageable, and I talked about the risk/reward trade-off earlier. That business is growing at 30% a year with some of the synergies we bring in the sales front and leads. There's opportunities to potentially accelerate that because that's the biggest thing that Payzer needs is new sales leads, and we have a lot of customers in that space we talked about. So as they grow, right, they -- it doesn't drive additional investments in R&D. Their sales costs, the sales infrastructure is there. There won't be huge additional sales costs. So as they grow, that growth will be highly accretive. So as a result, we view that by 2025, we'll move over into the accretive bucket.

That sounds great. So just pivoting over to the benefits segment, which has had a tremendous year, growing in the mid-30s, driven by some interest income as well as adding new accounts. I know we're in open enrollment season, so is there any early reads as to how that's going?

So what I'll say, if I step back on the benefits business, we've been extremely pleased this year, right? We had set expectations of 25% to 30% growth at the start of the year. Obviously, we've done north of that, so we've been very pleased. And a big part of that tremendous growth has been our entry into the nonbank custodian business a couple of years ago. We've seen terrific deposit growth from that, and that deposit growth has translated into robust revenue growth this year. As we look forward, we're right in the thick of open enrollment season now. So we'll have better visibility as we -- we'll talk more about as we get through to the Q4 earnings call and give guidance next year, but it's going well. What I will say is, in addition to the open enrollment growth, we do expect continued deposit growth, and we do expect some continued tailwinds from interest, right? So if I think about the initial, call it, $1 billion that we invested when we got into the business, that was invested at rates that were back then about 1, 1.5 percentage points. So as we start to see that roll off over the next few years, whatever you think about interest rate environment next year, I think we're well north of that. So we will see some tailwind from that as well.

Got it. So I guess you have a little more visibility into the interest income that you're generating in that business going into '24. Yes, I mean, given the lag effect on yields, you guys are at, I think, like 450 bps last quarter. So just looking ahead to 2024, you would still expect that interest income to continue to grow and not really be a headwind to growth?

Yes, absolutely. Absolutely. That's exactly what we expect.

Okay. Great. So pivoting over to another strong part of the business, the travel component within your Corporate Payments segment. Can you just discuss what's leading to the outperformance relative to the overall OTA market?

Yes. So obviously, you would expect that business to at least perform in line with overall OTA travel. The economic reopening has been good for travel. As you pointed out, we've outpaced that growth. In fact, if you look at our volumes, Q2, 3 -- Q2, Q3 of this year, we're 50% higher than where we were in 2019. So clearly, we've been outpacing market growth. And there's a couple of reasons for that. So one is the merchant model that OTA has used, right? So we've got a tremendous footprint in that market. We've got 8 of the 10, top 10 OTAs. Our solution is really robust. And those OTAs have been increasingly transitioning to what's called the merchant model, where they accept kind of a payment upfront rather than waiting for you to pay the supplier. That model is predicated on having a solution like ours to process the payment. So as the OTAs have transitioned increasingly to that model, it's resulted in -- which then falls into our platform. It's resulted in us outpacing the market in terms of our growth. And that's something we expect to continue in the future. The OTAs have not transitioned 100% to the merchant model. It's still where they're trying to drive their growth. And so we've benefited from that. We've picked up some share of wallet with some customers. And then, also, I would say this is more on the revenue side rather than the volume side. But we are seeing in areas where -- we have multiple offerings that we offer to the customers, some of which are kind of more premium because they facilitate cross-border payments better and they help with back-office reconciliation. And processing comes with a higher take rate. And we've seen some adoption of that solution, so that's helped on the revenue side as well.

Understood. And thanks for the color there. So just pivoting over to the corporate payments component within the segment. Volume growth has been pretty strong there as well, north of 10% in each quarter this year. But revenue growth has been closer to flattish, just kind of given some of the mix shift that you guys have been having in that business. So the main question we're getting from investors there is when would we expect revenue growth to be more in line with volume growth?

Yes. What I will say is we merged the Corporate Payments business holistically, right? This all falls into the bucket of what we call embedded payments, which is where we offer our processing platform, our virtual card platform through an API to a customer that's got a front end, whether that's a travel -- online travel agency or whether that's another type of customer that's, right, processing payments for a corporate account, for example. Obviously, over the last year, we've benefited handsomely on the travel side, but our goal in that business is to grow corporate payments at the 10% to 15% rate. And so what we've seen is that we have a very robust pipeline on both the travel and the non-travel side. And so we're seeing that volume growth across embedded payments. And as a result, we should continue to see revenue in line with kind of overall volume growth. And our cost in that business are relatively fixed, so it drops really well to the bottom line. So we're quite pleased with that performance, and we expect that to continue.

Understood. And last one there for the broader segment. How should investors think about the yield true-up in Q4 from the network incentives?

Yes. Travel volumes has been terrific this year, right? So last year, we had about a $10 million true-up in the fourth quarter. I would say travel volumes are very good this year. So we should see it true-up in that range [ a little ] better.

Got it. So I have to touch on EVs, very topical for WEX. So I guess for those a little less familiar, can you just provide like a brief overview of WEX's EV strategy and update on your current initiatives?

Yes, sure. So we are excited about the EV because we do think it brings incremental opportunity to us as a company. We have been busy developing a robust set of solutions that handles the complexity of EV for a fleet manager, right? So we're used to a gas-powered environment that a lot of us don't think about the range of our vehicles and how that's impacted by the load, how that's impacted by the weather, right? If you think about it, right, you fill up your gas tank, you get 300 miles of range, whether it's 100 degrees outside or negative 10 degrees outside, right? The efficiency of the engine doesn't vary that much. You're going to get 300 miles, right? In EV, there's a tremendous variation, right? I've heard plus or minus 30%, depending on weather, load, et cetera. That creates an incredible amount of complexity to a fleet manager. On top of that complexity, they've got to worry about where do I charge the vehicle, right? Is it at home? Is it on the road? Is it at a depot? I need the data of those vehicles from wherever that's charged. I need to handle the payment and reimbursement for wherever that's charged. So that is a tremendous amount of complexity. That complexity yields a couple of things. First, we think the trick is because we're going to live in a mixed-fleet environment for a while, right? Because of like those ratings issues and the like that I just talked about, everything is not going to transition to EV. We'll live in this for a while. If you live in this for a while, you need a solution that can handle a mixed-fleet environment, and that's where we come in, right? We've got the internal combustion engine, we can now help you with understanding the range of the vehicle, planning the routes, handling the charging, right, handling the reimbursements, et cetera. We've done quite a bit of analysis on pricing on the solution. We've talked in the past about our average internal combustion vehicle gets about $6 per vehicle per month. And our expectation is that, in EV, we will be in the $5 to $20 range. I will say that, today, we are in that range, we're at the low end of that range. But the solutions are still -- like we're still introducing solutions, right? We've introduced the on-the-route charging. We will be introducing the at-home charging and the depot charging. So we expect that to help us to improve pricing over time. Last thing I'll say about this is we actually commissioned a study with a third-party to help us assess the pricing that we plan to offer the market. And the feedback that we've got working with this third party, speaking to customers, looking at competitors and competitive offerings and price points has gotten us increasingly comfortable that we can be at the high end of that range. I think what we've heard -- what -- through this third party from these customers are with the value that we'll be bringing to the table, absolutely the high end of that range is -- should be within our expectations.

Got it. That's very exciting. Last one on EV. I know it's de minimis at this point, but how many vehicles of your, like, 19 million or so are EV today?

Yes. So we've got roughly 19 million vehicles in total internal combustion. EV adoption in commercial fleet is kind of very early stage today, right? We've got about 1,000 vehicles. It's pretty good. But relative to the size of the opportunity in the future, it's still small if you try to assess how quickly EV is getting adopted in commercial fleets. We've seen a lot of adoption on the consumer side. There hasn't been as much of adoption on the commercial fleet side, for the reasons I talked about it earlier, right, charging, range, load, all those factors. But we'll presumably see more in the future, and it should be an interesting opportunity for us.

Yes, absolutely. And very early, but you guys are ready for it. Okay. So just shifting gears to priorities for 2024, and maybe just starting on capital allocations because you've been pretty active there also. You retired the converts last quarter as well. So you're sitting just below the low end of your target range exiting last quarter. You just did two acquisitions. So what should we expect WEX to do with free cash flow next year?

Yes, sure. So I would say we've bought two acquisitions this year, two companies this year. We will be busy, right, integrating those, delivering on the business cases that we've believe committed ourselves to. And that will be a focus for us for next year, as well as executing on the cost savings initiatives, the other things that we've talked about. So from a capital allocation standpoint, I don't expect as much on M&A, right? I always say, like, should something show up that -- so that is such a synergy opportunity. You never say never, but it's not the priority for us, right? The priority for us is executing on what we've done. And as a result, I think you'd expect to see us use capital increasingly for other uses like stock buybacks. That's something we've accelerated recently. For example, in the fourth quarter, we're north of $125 million of stock buybacks to date in the fourth quarter. So we view that as a good allocation of capital, and we're excited that we have the resources to invest in the business as well as drive a return of capital to shareholders.

Absolutely. Another follow-up here is on your $100 million cost reduction efforts, you guys are tracking ahead of your initial guidance and on track to exit the year at $75 million savings run rate. So two questions there. Which expense lines -- like which segments are you seeing the majority of that $75 million? And then looking into 2024, any color as to how you plan to reinvest? I think you said you initially plan to reinvest about half. Is that still the right way to think about it?

Yes. That's still the case. So we're seeing terrific progress on the cost reduction front. I think I talked about in the last earnings call that we expect to exit the year at about a $75 million run rate. The places the savings have come from, I've talked about in the past. We've gone after kind of procurement, vendor-related savings, consolidating vendors, right, streamlining, making sure we're getting the best pricing. We've looked at our operations and streamlining our operations, more automation, more cost-effective operations. And we've had really good success there. And then we've just looked at staffing levels and do we have the right organizational structure. So I'd say that's all going well in terms of where we see it, right? If you think about where spend and processing manual labor is, it tends to be on the mobility side and the benefits side. So I think that's where you'll see a lot of the savings. And then in terms of reinvestment, we are -- we've got a number of initiatives going. We've got -- we're looking at enhancing our digital marketing spend. We've looked at -- we've accelerated the pace of innovation, some of our organic build and products. So we've invested in a number of areas, all with the intention of driving revenue growth.

Got it. Understood. Well, I think we touched on most things. We can pull the audience if there's any Q&A. If not, I think a good question to end on and just looking ahead in 2024, what parts of the business are you most excited about?

It's like asking me which of my children I like the best. I'm excited about all the entire business. I'm excited on all of them. If you ask me to pick one, I'm really excited about what we're doing in mobility, right? We have such a solid footprint there, such tremendous potential, and I'm excited to execute on this Payzer acquisition and really show the potential for even more incremental growth in mobility. So I think it's going to be a terrific 2024 for the company.

Fantastic. Well, looks like we are just right out of time. But...

All right. Perfect.

Thanks Jagtar again for coming. Appreciate it.

Thanks for having us. Yes, I appreciate it.

Absolutely. All right. Thanks, everyone.

Thank you.