WEX Inc. (WEX) Earnings Call Transcript & Summary

Let's get started. First, I'd just like to thank Melissa Smith, CEO of WEX for making it out here to Arizona for our conference. So thanks for making out here, Melissa.

Beautiful place to be. Thanks for having me.

Great. Well, I guess, it would be great to start with an update on recent trends in the business. I know that you guys saw some trend change in the mobility segment intra-quarter in Q3. So maybe we start there.

Yes. If you look across the business, you talked about mobility. In the third quarter, we saw good growth in mobility. So we saw 6% growth adjusted for fuel price, just organic growth, which has accelerated in the course of the year, and we saw some softness in same-store sales, specifically in our North American fleet business. So it was down about 3% to 5% year-over-year. And when we looked across the portfolio, it was either pervasive across the portfolios. We got the data in many different ways, type of portfolio, geography, fleet size and so it's consistent across all, and when we gave the guide out for the fourth quarter, we assume that, that trend would continue. That's the same trend we have seen. And I'd say so far in the fourth quarter, we're seeing pretty similar trends as what we had expected from a volume perspective across the business, including the mobility in new business. And one of the things we had done prior to our call was reach out to customers and talk to them about what they were being within their portfolios, and they were seeing just a little bit less business. Again, 3% to 5% is not like a huge number, but to them, a little bit less in the business. And so that's the primary trend. The other part, the new sales that we're bringing in from a bookings perspective looks really good as well as customer retention rates continue to be strong. So those are things when we think about the business, we think about these levers that we have, we have to bring in new customers, retain the customers we have. We're very good at that. We feel like if you look at our mobility business, if anything, those 2 things combined are better than they were the year before. And then what happens in the back book will play out over time and so seeing softness now. But as long as we retain the customers, we feel like that's something that we'll cure.

Got it. No, that makes sense. And good to hear that things are in line with expectations there. But yes, maybe just kind of going back to the performance of the mobility segment, it's been accelerating throughout the year and especially relative to some of your competitors looking very strong. So maybe we just touch on what's driving that relative strength? I know that you guys have been making incremental investments in sales, some new products. You got Payzer, which has just lapped now, and I think some pricing as well. But maybe if we could just kind of run through what's driving the strength?

Yes. I'll start from the -- your back point for -- so Payzer itself, we said at the beginning of the year, that would be about 2% of the segment growth for mobility, and we reaffirmed that in their last call that's coming in about 2% so that's performing as what we had provided in our guidance in the beginning of the year. If you look across the other pieces, again, like sales and marketing, those motions have gone well for us. We continue to bring in new customers. You can see that with vehicle growth continuing to go up. Customer retention rates have been really high. And what we've seen also is a benefit in our mobility segment this year is a number of pricing actions that we have been taking. The majority of those are coming through with merchant renegotiations that we're having with our merchants. And so the lasting benefit is we bring volume to those merchants that they're willing to pay more for that. And that is coming through, we continue to expect that to be a benefit as you go into next year. You talked about sales and marketing. I've been really focused when we started the last couple of years, we spent a lot of time and effort around our AI credit tools. We feel like we've made some really upscale changes around something that we -- was a core competency, but we have really built upon that. We took that same expertise and moved it into our marketing group. And so we've been spending a lot more time around lifetime value of accounts and really perfecting where we're spending money to make sure that we're getting -- or optimizing the returns associated with that. And so in a level of detail that -- is that team is really reaching into. And as a result, it has had us increase the investments we're making in sales and marketing. We talked about the fact we've had some cost savings in the course of the year. We've been taking some of that money and putting it back into our marketing group. We expect we're going to do more of that as you go into '25 is to add in additional marketing dollars as you go into the year because of the returns that we're seeing from our LTV model.

Got it. Now it would be good to see those marketing dollars going to '25 as well. And just while on that topic, I mean, sort of like providing any 2025 guidance, do you think that '25 should be a year in the 4% to 8% long-term range for mobility just from what you see today?

Without providing guidance for next year, what I could say is, again, when we build up our budget, we're in the process of doing right now, we think a lot about these levers that we have, how we're doing and bring in new customers. We expect that -- how we do expect that to look next year customer retention rates. And if you look at those 2 things, we expect those to look similar, if not better, next year because, again, we're -- we do intend to continue to increase our sales and marketing investments as long as that makes sense financially. On top of that, when we think about pricing, a lot of the work that we've done so far will continue to see a benefit in the next year. And so we think we'll get some lift associated with that. And it's really the biggest unknown at this point in time is what happens with the back book, that kind of same-store sales number. Based on today, I would continue the trend that we're seeing right now and assume that, that's going to have an effect into next year. But we give out guidance in February, we'll be much better informed at that point in time what is happening.

Got it. All that makes sense. Before moving on to the other segments, I just wanted to touch on Payzer because it's been a year now, and I know that there was some interesting cross-sell potential there just given the overlap in your base. So maybe we could just get a brief update there.

Yes. We've learned a lot in the year. So again, it has done what we said it would do at the beginning of the year. And so we -- and that growth has come largely from the existing -- the existing mechanism that was in place, largely through distributor sales. They're cross-selling, I would say we've had some success in cross-selling, but not enough that we'd say, okay, we want to do a lot. We want to double down on this model at this point in time. I think that we're still learning a lot. If I look across the enterprise, we've been very good at selling in our over-the-road business, additional products and offerings in our benefits business. We've been very effective at that in corporate payments and then across -- the place that we have continued to be working on is our North American fleet business. We feel like those customers, they come on largely digitally, and we don't have as many touch points for those customers. And so what we're finding with the Payzer cross-sell is that there isn't that familiarity where you can say, okay, I'm going to sell another product, particularly a product that is more of an operating system and see a huge uptick on that. So I would say, again, the model we had said that if we grow the model, then that's good. If we can actually then prove the cross-sell model into our North American fleet business, that's a home run that we have not hit the home run, but we're learning a lot as we go. And in the meantime, we have delivered on what we said we would do at the beginning of the year.

Got it. Great to hear that, that's coming in line and definitely an interesting acquisition for you guys. But okay, I guess just pivoting to the Benefits segment. This has been a very high-growth segment for WEX over the last few years. I think you grew over 20% and 30% in '22 and '23. And now '24 is, I guess, maybe a little bit of a transition year, just like lapping -- going through a large customer loss. But maybe just kind of walk us through what you're seeing in that business today? And kind of walk us through the building blocks of the longer-term growth algorithm that you see.

Yes. Benefits segment is great. It's a great model. And kind of step back what we're doing with that customer segment similarly, we're making sure that people are spending money on what they should spend money on. So these are tax deferred accounts, HSA accounts, FSA accounts, COBRA accounts. And we're doing the record-keeping associated with that, but also making sure that they're meeting the IRS regulations what they can spend money on. If you look at the market of that when we first got into this market, HSA accounts were growing in the teens, I'd say, now the last Devenir report, I think, had it growing at 5% -- somewhere between 5% and 7%. So they're definitely -- but if you look at kind of the account base, we are outgrowing the marketplace. We feel like we're doing well competitively in this space, and that's our main objective. But the growth profile in that part of the business has shifted over time. Where we're focused on is making sure that we bring in accounts, and we're in the open rolling season right now. So that's -- it's an important time of the year for us. So [ brings on ] accounts, retain accounts, and then selling these additional products that we've had have talked about the fact that we've done a good job selling our COBRA product across the business. We still have opportunity to sell and benefit administration. We have opportunity to do sell and compliance products [ across ] the portfolio. So we think that's an incremental revenue lift for us. And then on top of that, we became a custodian a few years ago. And so there's a benefit and the fact that we get the full economics with those accounts as they come on board. And so again, we feel like this is a wonderful part of the business. Our goal is to outgrow the marketplace and you will see us lap the Medicare Advantage account we've lost, which was about 5% of the accounts, and it was a much smaller part of revenue, but it had more of an optics issue from an account perspective.

Okay. Got it. That makes sense there. And I mean we're in open enrollment season now, I know you guys had some positive early reads there on the last earnings call. Is it too early to give any updates there on how open enrollment is going or...?

We are right in the middle of it. So we feel good about the findings that we've had going into the marketplace and now it's just going through the implementation process, but so far so good.

Got it. And just while on this segment, I mean, you guys have been doing a phenomenal job of outgrowing the market. So maybe can you just touch on for the audience who are less familiar with this business, just what WEX's competitive advantages are relative to the field.

Sure. So when you think about this part of the business, 1 of the things that makes us unique is that we're going into the marketplace and using our technology both directly as we bring on new customers but also is a private label platform. So a number of financial institutions, they're interested in the deposits use our underlying technology. TBAs use our technology, insurance companies use our technology, and then again, we go in directly. So there are different benefits across. It's that the biggest benefit is that you have multi-account types that sit within the same technology stack. So if you're an employer like we are, I know at cn, we offer high deductible plans and traditional PPO plans. So we have both HSA and FSA accounts in our mix. As we provide an offering out into the marketplace, the ability to do that multi-account type which makes it a simplified experience for an employer. We also have the benefit of bringing in a huge amount of data associated with that. And if you look across all our products, it's one of the places where we differentiate is taking that data and presenting it in a way that helps people make more informed choices. In this case, it's helping a consumer decide how what type of an account they want to set up, how much money they should be putting in. If you're an employer, helping them decide how much you want to contribute to someone's HSA accounts. We can provide a lot of information that helps make it a more informed decision. And over time, as we continue to build upon that, we think that, that data across everything we do, but certainly in the Benefits business and is an important part of the product. So that's a differentiation point. When we're with a partner, the amount of oversight you get when you do business with an FI is really important. So from a compliance and a regulatory perspective, all of the things we do across the company put us in a very good spot from being able to meet their needs, which are typically even at a higher level of making sure that their regulators are happy with the performance at the end of that.

Right. And just on the data that you're collecting. I know that you guys recently launched some AI tools for this segment for the end employers. Maybe we could just touch on those because we recently rebranded this to an AI conference as well.

You sit next to someone who's a big advocate of AI. It's like if you look at our cost savings, a lot of that has come from AI. And on the product side, we're starting to roll out products that have AI capability associated with the Benefit Assist is one. What we know from talking to the people that are using our Benefits programs is that employees want to actually roll and benefits outside of normal work hours. They actually don't want to ask their HR people questions. They want to have a lot of autonomy. And so the Benefit Assist product that enables people to do is to ask those questions at their leisure, whatever they want to and be much more informed about their enrollment process as a result.

Got it. That makes sense. I can relate to that. But okay, just wrapping it up here on the Benefits business. I mean you guys have a pretty strong pipeline here. So how do we think about the trajectory of this business heading into 2025? I know that you guys had really tough comps the last kind of 2 years really compounding on each other, but we've kind of been in the mid-high single-digit range on an organic basis this year? Do we kind of see that trajectory moving upwards from here if you kind of lap Medicare Advantage?

Yes. So the big things that are -- will affect our growth rates, again, new accounts coming in. And I think the latest estimate of account growth are in the single digits. And so again, our goal is to outpace what we see from market growth. And then mix matters actually quite a bit for us now that we're custodians. So depending on what channel that comes in, that has an impact from a revenue perspective. We do expect that you'll see potentially some headwinds in rates depending on what happens with interest rates. But remember, it doesn't affect us from a profitability perspective. So you might see a negative revenue perspective, but we're buffered from a profitability perspective. And then, again, the kind of cross-selling motion. So we're going in feeling like we're going to have a good open enrollment season, we need to then sell additional products into that customer base and make sure that we're benefiting from being a custodian.

Got it. All that makes sense, okay. So shifting to the travel component of the Corporate Payments segment. There's been a lot going on here with another large customer making some changes here and some noise from some discount European airlines. But just to start out, if we look at the business, excluding some of the larger OTAs kind of what have you guys been seeing from a volume growth perspective if you just pull that out of the Q3.

Yes. So in Q3, and I'd say, again, in this part of the business, volume is looking so far in the quarter is the way that we had expected it to. In Q3, what we saw -- well, if you go back, in Q2, what we saw was this kind of drastic kind of check and growth in travel, still growing. So like -- but I think that the normalization from the pandemic happened much more abruptly than we had expected it to in the second quarter. And so again, that's another high single-digit grower from a growth typically, from a volume growth perspective. And from that point on, it has looked much more predictable as is gone through the end of the year. The biggest change that happened in Q2 was that air travel really kind of went back to much more of a normal level than it had been historically. So I think you had this kind of huge swing up, and then there's kind of the sudden normalization that happened. What we saw in the third quarter also was that most of the growth, and we had about I think about 7% volume growth in this segment. Most of the growth would -- came from pricing. The transactions were actually relatively flat year-over-year. And most of the benefit that came through in additional spend was from price. And so you continue to see some pretty big pricing increases in that part of the portfolio. So going forward, these 2 things that are happening. We do think now we're planning for a normal growth rate environment. And we have the insourcing of a piece of our relationship with one of our accounts that we should think will play out for the next couple of quarters of the year. I think being as transparent about that. And so far, it's operating largely as how we expected it to. And then post that, the 2 of us are very focused on what additional sources of spend can we actually move through the platform.

That makes sense. And we got a handful of questions on just some of the discount European airlines maybe like having some pushback on virtual card. Maybe you could kind of just contextualize what you've seen there from virtual card pushback. It's kind of like normal course, it pops up a little bit and goes away or...

Yes. Yes. I think we've had more questions around acceptance. And I think -- so I think if I kind of pull back and think about acceptance over many years, we've had, like fringe issues with acceptance over the years, I'd say it's very much on the fringe this year with some of the discount airline carriers in Europe. And my understanding is that they have now largely negotiated the -- between the OTAs. They're still working through the payment component of it, but I think we're moving our way through this. I'd say, generally speaking, when we've had that issue, it tends to be more about finding rate that worked for both parties. And you see that much more prevalent across the consumer side of the portfolio. You see it a little bit in the B2B side. But again, I would describe that as it happens, but it happens on the fringe as opposed to something that's happening in mainstream.

Got it. And just following up on that, is there a potential? I know that there are some other players in this space that offer custom interchange rates on virtual cards to help kind of meet buyers and sellers in the middle. Is that something that could kind of help here or...

I think that's eventually what Mastercard and Visa tend to do is then create new product codes. When they create new product codes, it's with the intention of finding something that actually works and again, like if you look at our technology stack, we feel really good about our embedded payments technology stack. One of our competitive strengths is the ability to process a huge number of product codes and I think that, that will only become more complicated over time.

Right. And just all like the data attached, like the value is still there over the other payment rails. That hasn't changed?

Yes. So a virtual card itself, part of what made it so magical is that a: it's seamless; and b, the data that gets attached allows reconciliation to happen much more seamlessly. And so part of the value proposition to someone like an online travel agency is the fact that you've got a huge amount of volume that's happening and a lot of complexity that sits behind it because they're making payments to franchises. And there's a lot of chargeback activity that's happening. So the tools that we have create a one-for-one relationship between that original consumer and the payment that gets made that allows the data to move back and forth so that when they go to close their books, reconciliation is so much easier.

Absolutely. And just taking a step back here on the travel portion of the business. I know you guys acquired eNett a few years back, and I know they had more Europe than Asia Pacific. But maybe just take a step back, like remind us what the geographic composition is in the business today and which geographies or segments of the market where you see most opportunity.

Yes. It's about 25% to 30% in the U.S. and the rest -- outside the U.S., largely in Europe. And so when I think about the business, part of what was attractive about the eNett acquisition was -- which has been a phenomenal acquisition actually is then when you combine those two businesses together, we had different geographies. We also had different product types. They had a product that enabled cash flow to move very seamlessly across their portfolio because they were doing business with a lot of smaller online travel agencies. We had technology tool that has this ability to have lots of different product codes that sit amongst them. And so over time, what we've been able to do is create the best of all. The geographic diversity, which is helpful because you typically see spend patterns that evolve in different ways around the world. And we have the best of both products.

Got it. Thanks for the recap on eNett. Okay. So switching to the non-travel part of the Corporate Payments business. Can you just start off by providing an overview of the strategy on the direct and channel partner side of the business? And just what the relative sizes are of each today?

Yes. So when I think about the business, there we think of it in 2 products. We have an AP direct product, where we have a direct sales force and then we go to market with -- again, a bunch of FIs are using our technology in that space as well. The direct product, we have added salespeople or than a really strong return associated with that. The FIs that are using our product is much lower growth in a model that I'd say, in that case, they're distributing the sales, and it's been like a low grower where our AP Direct, where we're doing it ourselves is the same actually some really strong growth. And then the other part is our embedded payments product. And our embedded payments product, which includes travel, but we're also selling out such trap. It's a place we're really bullish. We feel like the technology is really strong. So we've been ramping up sales motions associated with that in the marketplace because we feel -- if you look at the underlying reliability of the product, the fact that we have an integrated offering, which includes the bank that we own the technology itself has the nimbleness to add in a tremendous amount of complexity and we can do this at scale. So we have a lot to offer in that space. And so it's a place that we're building sales capability beyond travel.

Got it. That makes sense. And just more on this. I mean, how would you characterize the competitive environment today on the, I guess, direct and indirect side? There never seems to be a shortage of companies looking to kind of break into this market. But here at WEX is putting up, you guys like mid-teens volume growth year-to-date, so a very impressive number.

Yes. It is a competitive marketplace. And again, like I think -- when I think about our moats, first of all, just the sheer scale of the volume that we have going through our platform and we've created a model because we owned all of the technology ourselves and because we're doing it with our bank that every dollar has a very high drop-through rate. And so our objective function is to find more spend volume to push through that. And if you kind of zoom back out, you can see how much margin accretes when we actually add more business into that part of the business. So we, again, start to scale as we have an ability to play at a level that very few people can in this space. We have a great technology stack. And so couple that with the reliability of the system and the breadth of the offering that we have in this space, it's a place that we're super excited.

You got the global scale, which is definitely hard to replicate. Maybe just shifting to trends in this business. I know that volume quarter-to-quarter, it can be choppy sometimes, but it did kind of shift back, I think, like 7% last quarter. I think you cited like a pullback in spend. So maybe just remind us kind of like what drove that and kind of how that's looking today?

Yes. The AP direct products grew -- well, it was [indiscernible] in the teens growth. The revenue that we're getting through our partners was pretty flat. So that diluted the growth for sure within the quarter. And then we have customers largely that we've cross-sold to our mobility space that are using their products for AP direct that we also saw softness in that, so similar to the trends that we were seeing in the mobility business with that customer segment, we saw some softness in there. So we saw kind of -- I would say like it's not a very big part when you start to take a segment and then take a slice of the segment, you see more volatility that sits within it. But I would say we saw some of that same-store sales softness, which relates to the mobility customers coming through in the Corporate Payments segment, too.

Okay. Got it. That makes sense. It looks like we got just like few minutes left here. I mean capital allocation is always an important question for WEX. You guys generate a lot of free cash flow. I guess, recently expanded the share repurchase authorization, but M&A is an important part of your growth algorithm. So maybe just -- looking ahead to 2025, where are the capital allocation priorities today? Is the M&A environment may be a little more rational today versus like a few years back?

Yes. So our target leverage is 2.5 to 3.5x. And what we've been doing is staying on kind of the low end of that and using our cash proceeds to buy back stock. And the idea behind that is that, that gives us the continued ability to do M&A, but at the same time, recognizing the fact that we think our stock is a tremendous buy right now. And so it's been the primary use of cash flow and as -- at the multiple that we're trading at, would be continued to be a primary use of capital. And at the same time, we continue to look in the marketplace and stay active, but let's say we've had much more of an orientation to buy back stock.

That makes sense. And I guess if you had to pick one of the 3 segments and just maybe just checking like the M&A pipeline kind of out there today, where do you kind of see those M&A dollars going in the next 1 to 2, 3 years?

At 3 kids, it's like picking a favorite. I think that there's something that's unique about each of them. And so some of that comes down to -- there's always -- there's a strategic element to M&A but also like what can you get in their price that makes sense. So if they go across the business, near-adjacencies and mobility will continue to be interesting to us to the extent we can prove the fact that you have the ability to cross-sell specifically in that part of the business that you decide to keep that open for longer term. The Corporate Payments segment, if you can find assets that make sense financially, would be a place that we would continue to build upon. We've have not found a lot that it made sense at this point, but it's definitely a place of focus. And then benefits, we've been a pretty consistent acquirer in that space. And so I think that there's something beneficial about each of them. And so some of it tends really more on the asset and the price point by which we can actually negotiate.

Got it. That makes sense. Well, thanks so much for coming out to Arizona. We really appreciate it.

Thanks for having me. Thanks, everybody.