WEX Inc. (WEX) Earnings Call Transcript & Summary

Good morning, and welcome to the second day of our 45th Annual Institutional Investors Conference. My name is John Davis, I'm the lead payments and fintech analyst. We're excited to have WEX CEO, Melissa Smith, with us this morning. This will be a presentation followed by some audience Q&A. So with that, I'll kick it over to Melissa.

Thank you, JD. So we defined our purpose last year to simplify the business of running business. So we think about this in the backdrop of everything we do as a company. We're making sure that we're applying it internally and that we're applying it to our objectives for our customers. I'm going to spend a minute on this slide. So we look at what we do. We want to make sure that we're solving the right problem. So we're looking at areas that -- where there's complexity that we can remove and it starts with having an underlying payments platform. So if you look across the company, about 1/3 of our company are technologists. And those technologists are directed at making sure that they can create underlying technology solutions that can be applied to many different markets. And I'll talk about the markets in a moment. We're also really focused around where we can create specific use cases for our customers and our partners that are enabled based on the feedback we're getting from the customers and partners. So when we go through our product processes, we spend a lot of time around what creates toil for our end customers and where can we remove that, that enables them to do whatever they do best, whether that's to remove a barrier that's going to bring on an additional customer or to remove the threat of misuse in the underlying products that they have. We also are very focused around how we can deploy data. We had $225 billion worth of volume runs through our platform last year. And attached to that is a tremendous amount of data, and the data is an important part of not just the solutions that we have today, but it's a really huge important part of the solutions that we're going to offer in the future. And so this idea of insights that power success for our customers is on the back of a data and data architecture that we're exposing to our customers in different ways across the different segments that we're in. So if you look at our business, I'll get out of the way of this. The places that we're really focused on are large growing markets. And so we've said we've got this payments platform. We want to expose it into markets that are big, that are complicated and they are growing. And the 3 primary markets that we've picked are benefits, mobility and travel/corporate payments. There are different problems that we're solving in each of them. So in the benefits arena, we are doing business with 20 million consumers, over 50% of the Fortune 1000 that are using our technology. They're using our technology for 2 primary purposes. The first one is they want their employers at the end of the day to be incredibly informed around the decisions that they're making when they're deploying the benefits or they're deciding how much money to put into a tax-deferred account, what type of an account should I choose? And the second component of that is the recordkeeping that goes behind the account types. So think of this as in your businesses, you're tracking different assets and have record keeping associated with that. We're doing the same thing in an HSA account or an FSA account, where people are making investment decisions, we're packaging all that up so that you can understand what's happening from a recordkeeping perspective. So the pretty big moat that sits around that with the data that we're collecting associated with those customers because that data can be used to make even better, more informed choices. The underlying technology is also set up in a way that it enables someone to have if you're an employer like WEX, where we have a high deductible plan for our employees and we also have a more traditional plan, you can actually offer many different account types sitting on the same technology stack at that same level of one integration point. If you move over into the [ stream online in ] making, receiving payments, the problem that we're trying to sell to those customers and if you look at a travel customer, they want to be able to process a payment on a global basis, they want to do it in a highly integrated way because there's a huge velocity of payments that are happening across that portfolio. And they want to make sure that we're providing data in a way that their recordkeeping allows them to reconcile their accounts so that they can close their moats timely. And they want to be able to do that around the world in many different currencies. And so the moats that we have there, and we do business with 8 of the 10 largest online travel agencies in the world is to make sure that is happening in a highly reliable way and that we have the compliance structure on a global basis in order to facilitate a payment across many different currencies in many different geographies. It's also highly, highly integrated. And so if you look at that part of the business, very little incremental costs associated with adding new volume into that account. It's highly scalable. And then on the mobility side, the problems that we're trying to solve with those customers, they are typically companies that are moving goods as a byproduct of what they do. So they could be a local business, which anywhere from federal government to a local landscaper, all the way to a long-haul truck that's moving goods. And the problems that we're trying to solve is to use the data that we have to make sure that there isn't misuse, that people aren't buying things that they shouldn't buy, whether that smokes and cokes or whether that's filling up their family vehicle. And so it's a lot about control and they want to make sure that with a certain driver type, they want to make sure the drivers spending as much time as they can on the road. With a long-haul driver, they want to make sure that drivers actually going to get the goods from point A to point B. And so depending on what the situation is, we've designed use cases around that to make sure that they have the continue to control using our data to facilitate those transactions. In that case, we do business with 9 of the 10 largest oil companies in the world. So if you look across the business, and you can see this on the bottom part of this slide. We're going into the marketplace. We're big believers in a multichannel approach. We think that we have many roads lead to WEX. And those many roads include directly where we're going into the marketplace and marketing directly as if we're WEX and then through many different partner channels, whether that's an oil company or a financial institution or a third-party administrator or a broker or a travel intermediary. Across all of those categories, what we care about is they're going to use our online technology. They're going to use our online products that they might add something on top of that to create a different user experience in the marketplace. But what we want is to make sure that all those roads that are leading to us and that we're collecting the data associated with that, so that we can create a better experience in the next loop. If you look across the company, we've had a really strong history of financial performance. One of the things that to keep in mind when I put these numbers up here, WEX has about a little over 20% of our revenue is exposed to fuel prices because of the way that we're earning revenue in our mobility segment. So last year, we grew 8%. We grew 8% in the declining fuel market where interest rates were increasing and there was a freight recession going on. And so if you strip out the impact just of fuel prices and FX alone, we grew 13% last year. So really, really reliable, stable growth model. And the way that we think about that is our growth objectives long term are to grow the business 8% to 10% top line and 15% to 20% bottom line. And as you go into each of these areas, the way that we're doing that, we want to make sure that we have an organic growth engine, we'd start with that. The business is geared to making sure that we're bringing in new business on a repeatable basis. And then we're supplementing that through M&A activity to get to our 10% to 15%. Each of our segments have different growth profiles. And so we've got segments long-term targets. So we've got out there mobility segment, 4% to 8%. We're highly focused in that segment around really 3 things. The first, we want to make sure that we're bringing in new customers. And so we have a very strong, proven sales engine that is bringing in new customers on a regular basis. We've been highly geared, number 2, to making sure that we're positioned well for this migration that will eventually happen into the EV world. And so a lot of focus around creating subscription-based models that we've introduced into the marketplace so that when people are using an EV vehicle, they are able to pick up that data set and integrate it with their ICE powered vehicles. So that's the second place that we've been focused on our long-term growth targets. And the third thing has been continue to expand the product sets that we're offering in the marketplace. And we started with kind of a narrow sliver, and we've continued to add to that over time. On the Corporate Payments growth segment, we've been focused on, again, how can we make sure that we're outgrowing the marketplace. The travel marketplace historically has had a high single-digit grower. Want to outgrow that by continuing to find pockets of spend with those customers that you increased your adoption rates. We'll grow with those customers. And then on top of that, outside of travel, continuing to bring in new customers and prospects. And then if you go into the benefits business, that business is growing organically, it's growing at 10%, meaning that the market itself is growing about 10%. And then on top of that, we want to make sure that we're winning new accounts and bringing those into the business and that we're offering other products into that customer base. We've become a custodian over the last few years, and you can see this wonderful shift that's happened as we've introduced a new source of revenue associated with that. We've added in capability and corporate capability and benefit administration capability and compliance capability and so the ability to actually cross-sell into those customers, leads us into that 15% to 20%. I like this chart because it shows that in every year that I've been at WEX, which has been a long time, we've grown with the exception of 1 year, you can see that first year of the pandemic. But even including the pandemic in that period of time, we've grown 14%. So in that 10% to 15% long-term guidance range. If you look at us, these are the places when we step back and say, why WEX? We're a market leader in each one of the markets that we've picked. It's really important to us that we picked the big markets and markets that are going to continue to grow. So we think about opportunity for us in the future. Our opportunity is to continue to lead the markets we're in, make sure that we're growing beyond the growth rates of the individual markets and then continue to add to the addressable marketplace for new products. 80% of our revenue is reoccurring in nature. So it's a very predictable model. You could see that coming through for that revenue chart that we just showed. This network effect is really important to us because the -- when we're out there adding a new customer, not only do we get high incremental drop-through for that customer, but we are aggregating the data associated with that customer. And for us, we've spent the last several years moving into the cloud. We finished our cloud migration at the end of last year. And I talked about 1/3 of our company are being our technologist. We're highly focused at the moment of leveraging that migration that has happened and the data that we have and we have 80 experiments that are live at this moment. We just continue to expand in AI. So we have an ability to go from moving into the cloud, making things much more reliable to now increasing the speed of innovation and using new tools and technology to both reduce costs, increase the customer experience, but also rolling that out from a product perspective. So that network effect, which has always been really important to us. It's exponentially important to us and the world that we're in right now and their ability to compete in the future. And then we -- whenever I talk to a customer anywhere in the world, the first thing they talk about is the WEX sort of that they are associated with that is really important to us that the person that they're connecting with is somebody that they feel is vested in the success of their business and that comes through in spades.

All right. So we'll hop into a little fireside Q&A here. If there's any questions in the audience are required to raise your hand. But Melissa, obviously, especially for those that are newer to the story, EV strategy for you guys, you've been really kind of front-footed in talking about it. Maybe just double click on that a little bit. M&A also, how the unit economics look?

So I talked about the fact that we have 19 million commercial vehicles that do business with across the world. And those are all different sizes and different points of this adoption. So you've got the very largest of the fleets that have some ESG pressure have had and now actually have pressure on the fact they've made commitments and they have to follow through them. We've got government businesses who actually have mandated are making a migration through. And then you've got a bunch of people that I would describe as toe dipping that are saying, I want to try it. And like I think it might be part of the future, and I'm going to order an EV, and I'm going to understand what it's all about, but I'm really trying to really understand doesn't make sense for me economically to make that shift. On average, our ICE powered vehicles, we charge $6 per vehicle per month. What we've said in the EV world, we will charge between $5 and $20, and we're already in that range. And I would say, with pretty limited product. Our -- we've been hyper focused around the thing that we've heard from our customers is they're going to go through a migration. That migration is going to take quite some time because they're going to -- want to add in e-vehicles at the end of the life of an ICE vehicle. And so what they're interested in doing is having all of the data associated with the mixed fleet bundled together so that they understand the total cost of ownership of their fleet. So they want to understand all bundled together, one invoice, one data set on both of those. And so the products that we've been geared towards immediately have been, making sure that people have access to -- is they're charging, we've created a network of EV charging locations and made that easier for them to actually charge on the fly. We've created a home reimbursement model so that as our employees are at home and charging, we can reimbursement from that. And the next thing we'll do this year is depot charging, and that will cover like the universe of all of the kind of natural products. So I would say we've got a relatively small amount of product that's in the marketplace, meeting people's immediate needs and we're already in that $5 to $20 per month range. And so we feel really good about the fact that we're able to go from a traditional model, which was much more dependent upon interchange, a model that is much more subscription-based and do it in a way that actually is accretive economically.

Great. And then you touched on the freight recession last year being a headwind. Just remind us the mix of mobility between OTR and SMB, and you have called for an acceleration in the segment this year. So how much of that's dependent on freight getting better? And just kind of what are the drivers to try the acceleration share?

Sure. So if you look at our mobility business, about 60% are U.S.-based customers that return home at night, we call them local fleets, about 30% are long haul. So those are out on road in the U.S., and then about 10% set internationally. And if you go across that we had this little freight recession that was happening last year, I would say, as we've gone through the year, the migration that we think from our growth last year to our growth this year, there's 2 things that are predominantly different. We changed our credit terms, both who are over-the-road customers, we expected quicker payment terms last year. And then we instituted new AI-based risk models that we're sitting at the front end, the credit decisions we're making across all, but more impactful from the local fleets. That caused a 1% to 2% increase in attrition, which should annualize as you go through the course of the year. So we need to make sure that we revert back to normal, which so far we feel really good about that. And the second thing is it changed the economics of the fleet where our model is really based acute of profitability. And so what you saw in the course of last year's this drop in credit losses, but also drop in late fees and that drop in late fees had a 3% negative hit to the segment from a mobility perspective, which should annualize also this year. And so what we also need to do is just make sure our sales entrant, which has been strong through all of this, but that continues to be strong. But assuming that, that happens, that's how we lift from -- actually remove some of the things that were holding us back this year in '23 to no longer being headwinds in '24.

Great. I also wanted to touch on the recent acquisition of Payzer. Maybe talk a little bit about the strategic rationale and kind of the cross-sell opportunity there?

So we have 600,000 -- a little over 600,000 customers sits in a mobility business, great customers, sticky customers, about 150,000 of those are in field service management. And so one of our thesis has been that we believe that we can do more with that customer base. Payzer is a test of that. And so with Payzer we bought a company that provides workflow management for field service management categories. And we are in the process right now of cross-selling 2 ways, whereas we gave leads to Payzer and said, let's go through your normal model just to expose our customers to that and then vice versa, where we're actually marketing directly to them to determine what's the best outcome and they said, we're early in that process. But like our thesis is to extend the capability. So with that customer segment, we would be providing right now to that customer the ability to make sure that people are purchasing the right thing for that vehicle, whether that be fuel or fuel maintenance. And what we would be doing with Payzer is -- if you're a Payzer customer, what you're enabling is if you're an office manager, you can see scheduling activity or you can schedule through their software. If you're a driver, what you're able to see is I'm on my way to a customer to tell me where I need to go. It's telling me information on the next job at hand. It's going to enable me to charge the customer on-site, it's going to enable me to collect from that customer on-site. It's going to enable me to directly order through an OEM, the parts that they need to fulfill the job. It's going to enable me to build "for restore services." And so it's extending what we're doing into more of the workflow and that specific customer of ours. And again, like it's a test for us to see, can we actually extend that capability. And if we can, then we would want to do more of that.

Maybe moving over to Corporate Payments segment. Obviously, travel has been strong would be an understatement. But just talk a little bit about the sustainability of the rebound. It's pretty clear that you're taking material market share within travel. So just touch on what's going well, where you're winning? Why you're winning?

Yes. So travel -- our travel volume grew about 50% in '23 from '22. So huge growth. And so clearly, more than the market was growing. We're benefiting for 2 things. One is a migration that's happening in Europe where European OTAs are pushing more to receiving payment directly with -- it's called the merchant model where they're actually taking money and then paying the hotels in which case we're inserted in that transaction. And the second part it's been what you're talking about is the fact that we're actually pulling and finding new pockets of share with our existing customers. And really, that's just been working those relationships. We feel good about the product and the product capability and about the idea that you can actually move payments through seamlessly to the end customers. And I think we've been a benefactor of that. When we gave guidance in '24, we assumed that the travel market will move back to more of a normal state. So we'll still get some benefit of the trends we're talking about, but that you're not going to see this kind of massive migration that you saw in 2023.

And if you think longer term, you've guided 10% to 15% revenue growth in that segment. Non-travel corporate payments is a little bit weaker last year. We did accelerate in the fourth quarter to mid-single digits. So how should we think about what kind of travel needs to grow and kind of ex travel, corporate payments to blend to that segment, 10%, 15% growth?

Our goal is to have it not actually matter. Like honestly, if you look at our travel marketplace, long-term growth, this tends to be high single digit. And if we can outpace that, then you actually give that up into the 10% to 15% growth rate and then outside of travel. There's 2 products we have in our corporate payments tool set. One is an AP Direct product where we're selling into the marketplace, both directly and through financial institutions. That has been part of where you saw an acceleration in growth in the quarter as that's becoming more meaningful. We actually built that sales force over the last year. You're starting to see the benefit of that becoming a bigger part of our revenue number going into 2024. And then the second part is that same embedded payments capability that we're offering to online travel agencies, we're taking that same capability, and we're selling it to other fintech companies. And you can see that we've continued to build on the spend that we have there, but we also have a really good pipeline there as well. And so we feel like you're going to exit 2024, we're going to have a higher number than we did from a growth perspective in '24 because of those 2 things really largely from the sales perspective.

Maybe we'll move over to benefits, your kind of fastest-growing segment there, some exciting stuff going on. But maybe talk a little bit about what underpins that 15% to 20% growth? What do you need from an account growth perspective? Is how do we think about it? Obviously, you're benefiting from rates now, but still even ex rates growing kind of in that range?

And I will have a caveat because we want to make sure people [ move ] this way. We had said in the call last time that we have -- we're losing one customer in the benefits space, which is a Medicare Advantage customer, which has been a product that we've opportunistically been involved in, but it's not been a place that we've had a significant amount of investment. So that will affect our growth rates in 2024. That being said, outside of that, we're seeing growth. The market itself continues to grow. And so account growth for us has historically been really strong in its place. We continue to think outside of this one customer. And then on top of that, we have become a custodian over the last few years, which allows us to then take deposits and invest them, and it gives us a new source of revenue. So as we continue to build that asset base, typically what happens to those customers is that over time, those deposits actually grow. And so the growth of the deposit base is higher than the growth of the account base. Spend volume is also typically higher than the growth of the account base because healthcare costs keep going up. And then on top of that, we have added other fund capabilities as we continue to cross-sell and so you kind of end your way up into the range.

And maybe if we just pull it together from a margin perspective, obviously, lots of new pieces by segment. You've benefited from interest income and the benefit segment. But just talk a little bit about the cost optimization that you guys did. And how would you think about kind of normalized margin expansion to kind of get to that 15% to 20% EPS growth?

Yes. The midpoint of our guidance actually had for '24, it was 15% EPS growth, excluding FX and fuel prices. And so we feel good about the fact that you can see that the benefit of that going through in our guide in '24, and you could see it certainly in our numbers '23. So one of the things we've been really focused on over the last 18 months is taking technology and deploying it internally and we're looking for areas that we can create savings. We started with AI -- adding AI-based tools into our risk functions. And you can see like clearly, we've had a benefit of that rippling through in terms of really not just reducing the credit losses we had associated with that being much more focused around where is that optimal point of profitability. We've taken that same methodology and applied it in many different ways across the company. And so you can see the benefit of that from our operation centers. Call centers been really focused around things that can reflect a call in there, but also using technology that enables that call center rep to answer a customer in a much more intuitive way using AI that sits in the background of that. So think of their call center rep, they're toggling through a bunch of screens. AI is going to sit in the background of that helping them navigate that so that the answers are much more consistent. So instead of being individually driven that's based on that tool. And it also gives us data that we [ can mine ] is that, allows us to then go to the front end of that and say, okay, these are the reasons why customers are calling us in a much more summarized way, and so we can actually deflect some of those calls. And so if you look across the enterprise, even one of the examples we gave in the last call is -- was claims automation, where people are sending an explanation of benefits. And if all of you have seen your explanation of benefits, they all look same data displayed in many different ways. And so there is an AI in the background to read those. And so that instead of having someone manually process that an AI tool is looking at that and actually able to collect the data in a way that just moves it through our systems much more effectively. And so it is a place that I get super excited because I think that you get all these tubers, lower cost, better customer experience across the categories. And so it's been a huge focus and it's creating this flywheel of cost savings that we're using them to reinvest to do more.

Great. Any questions in the audience? We got a couple of minutes left. All right. Maybe, Melissa, I'll turn to the balance sheet and kind of capital allocation. Very healthy leverage kind of around 2.5x. Just talk about priorities, buybacks, M&A. Obviously, you're aggressive in buybacks recently. But how do you guys think about it? And kind of where are you comfortable taking leverage to for either the right bill or just a larger buyback?

Yes. So WEX we spend -- the first thing we think about is we want to make sure that we're hitting our organic growth targets. And so are we actually using the right amount of money internally, first. Second, we have that 2% to 3% in our long-term framework for M&A. And so we've been really focused around and continue to be looking at targets that are going to help us there. And then there's 3 categories we've historically looked at. We look at product extensions, geographic expansion, and [ scale plays ]. And I would say in the moment that we've been in where our multiples trading at a lower multiple than it has historically, we've been much more aggressive in share buyback instead of doing scale M&A plays. And I would say that's still true in the moment that we're in when we decide where do we want to deploy our money. We're looking at M&A, what's the return from a shareholder perspective, and we're comparing that to share buyback. And so we've been leaning in those last couple of years, much more heavily on share buyback or if you look historically over time, it's been -- we would go do an M&A scale play, which has got a really high return and much lower level of risk.

Okay. I think we're out of time. So we'll wrap it there. Thanks, Melissa.

Thank you.