WEX Inc. (WEX) Earnings Call Transcript & Summary

Okay. Wonderful. Welcome back, everyone. Very pleased to welcome Jagtar Narula, CFO of WEX, here. Thanks for coming to the conference. I really appreciate it.

Thank you. And thank you for having us.

Why don't we jump right in on the Mobility segment and just give us kind of a state of the union, what you're seeing? I know on the Q1 call, you called out a little bit of demand push and pull related to the tariffs in the OTR segment. What are you seeing on that side of things?

Yes, sure. Just to recap, everyone, the whole tariff situation has been a very fluid dynamic. One of the things we talked about in our Q1 earnings call was that our over-the-road segment, which is about 1/3 of our Mobility business, we were seeing really strong volumes heading into the earnings call through Q1 and first couple of weeks of April. And then sort of the last 2 weeks of April, we saw softening as a lot of this conversation about tariffs and maybe less boats coming into the U.S. There were some Easter noise in that. So it's kind of hard to ascertain what was going on. But we decided there appears to be some softening, let's take that into our guidance for the rest of the year. I'd say post that period, we've seen things kind of continue with that, not quite as flat as it was in the last 2 weeks of April, but still not as robust as it was in the beginning of the quarter. So it feels like we may have had some demand pull forward in the early part of the quarter as people were getting ready for tariffs and now we're sort of seeing the after effects of that.

It's a fast-moving environment and it's difficult to track.

Yes, it is.

Maybe in the same kind of context of the last question. I think on the earnings call, you called out some interesting data about the amount of trucking in the U.S. that was sort of domestic versus import related, and the large majority of it was domestic. Is -- are you seeing any weakness in particular sort of slices of the business related to that import piece? Or is it more broad-based?

Yes. So let's start with what we talked about in the call. So we had pointed out that 90% of what moves on trucks in the U.S. is actually things that are produced domestically. So it's actually surprising when you hear that statistic because you sort of think about, right, all these imported goods of cars, electronics and manufactured goods, when you actually look at kind of what the top categories by value, like things I just mentioned, they don't actually make it to the top 10 categories by volume, right? Department of Transportation data, if you look at what moves by volume, it's minerals, gravel, agricultural goods, foodstuff, so things that we produce domestically, not by value, but by volume. And so it's really a smaller kind of box that is import related to that 10%. And if you think about China, maybe being 10% to -- 1/3 of that to 10% of it, it really constrains the box. So what we saw in Q1, we estimated about a 50% basis point increase in volumes from Q4 to Q1 from the pull forward just based upon what we saw kind of quarter-over-quarter sequentially. And it's hard for us to really say we don't measure what our customers are carrying. So it's hard for me to give sort of a perspective on it by vertical or anything. But we did see that distinct sort of sequential increase, and that's what we've been tracking currently.

Okay. Okay. One question that I get -- have gotten over the years about WEX and particularly the Mobility segment, the fleet business, is just the correlation between freight prices, freight volumes and your performance. Maybe just -- this is a little bit of a back office question, but just to educate us a little bit in terms of how we should think about a correlation or a lack of a correlation between those areas in your business?

Yes, I would say there is some correlation. I wouldn't call it R-squared of 9%. But what you see is when it comes to freight rates and pricing, there's 2 types of pricing, right? There's sort of contracted rates and spot rates. And spot rates are really what you would pay if you wanted to ship something now. And so spot rates tend to move up and down with demand because it kind of represents real-time needs of shipment. So we'll see some volume-related correlation with the spot rates, but it's a looser or what I'd call more directional correlation than I would say it's a hard and fast one.

Across the business, there's -- maybe still sticking with the Mobility segment, but across the business, there is some extension of credit embedded in the models. And I guess I'm curious, how big of a lever is that credit box? How flexible is it? Do you respond by opening and closing the credit box to what you perceive to be the macro environment? And I guess the ancillary question is today, on that credit box, sort of where are we sitting?

Yes. So I love this question because this is actually an area that we've invested quite a lot in the last few years. So we have what I would consider a pretty dynamic credit box, right? So we invested in the last few years, not only people and process, but sort of technical capabilities as well. We've invested in data analytics, machine learning models, sort of a set of capability that allow us to be more precise, more targeted and more proactive when it came to the credit box. So we are looking at credit statistics on -- I mean a near constant basis. We're looking weekly at what spending patterns are looking like, what delinquencies are trending towards, right, how is the profile of the customer. And we're doing this at a fairly granular level where we can increase or decrease the credit box and what we're seeing down to kind of particular segment levels. So if I think about the first quarter, right, we expanded credit in some of our accounts where we thought that there was pretty good credit capacity, increased the box to allow more volume to flow. We felt really good about the risk base of those customers. At the same time, we're reducing credit in segments where we think the signs are pointing to a little bit more challenge. So it's a pretty dynamic process. I'm glad what we accomplished there because just to remind everyone, right, we've made these investments, and you've seen kind of credit -- our credit losses improve, right? We were at 12 basis points of loss in Q1. That's down from 15 basis points last year first quarter and down quite a bit from when I first joined the company. So we've made really good progress here while becoming more dynamic. I'd say where we are in the credit box life cycle, I mean, I like where we are, right? We're in -- we're seeing kind of a manageable level of losses. We're being proactive to try to drive as much volume. We're kind of in this kind of uncertain macroeconomic time right now. So certainly not a place to suddenly open the taps, but we're just managing it closely.

And do those investments that you made in this improved credit performance, I mean, this might be a leading question, but does that position you better in terms of a hypothetical macro stress to basically weather the storm?

Yes. I think it does, right? If you look back through the company's history, when we've been through periods of stress, you have sort of seen the spike in credit losses. So the biggest one -- the biggest spike we ever had was probably back in the 2008 financial crisis, where we saw credit losses spike to 45 basis points of spend. But what you see -- because these are not revolver-based products, you tend to see those credit losses then decline pretty significantly, pretty fast. So that year in 2008, while one quarter was 45 basis points, the very next quarter dropped out to 17, right, pretty much where we are at today. And then for the year, it was like 25 or something. So we'll see an increase what we feel is manageable, right? And then it'll come back down. I think the things that we do, so we -- as we talked about investing heavily in our credit capabilities. So we haven't been through a recessionary cycle with our new capabilities, but I'm optimistic that we do better than we have historically. We also do a lot of scenario modeling. So we've -- as an organization, we will model recessions, we will model what is the impact to us to get very comfortable in a recessionary environment should credit statistics spike. We anticipate it. We've got our hands around it under a variety of scenarios. It doesn't put the company under any financial stress. And so we feel like we've really got a good handle on this.

One kind of theme that was a little bit louder even a couple of years ago was EV, and I know you guys have done a lot of great work kind of readying the business for that transition. But maybe we could take a step back and have you just give us kind of an industry update on what you're seeing out there. I know there's been some regulatory changes, both in U.S. and maybe in Europe in terms of how fast that transition may or may not occur. What does it look like from your -- diplomatically, where you are from your seat?

So I feel like this is a transition we're ready for, but it's slow to come.

You feel that they will come.

Yes, exactly. So we've built a number of solutions for the EV transition, right? And it was always our hypothesis that we were going to operate in a mix environment for quite a bit of time because even if you assume the fast transition, there are use cases where EV works great and there are use cases for a lot of commercial fleets where it just doesn't work. So we were going to live in this mix fleet environment, which is going to mean that fleet managers were going to want one solution that consolidated all their vehicles, which positioned WEX really well. So we invested in a number of solutions, right? We released one for what we call on-the-route charging, which is like filling up your gas, charging your vehicle while you stop at a station. We released a solution for at-home charging. So reimbursed someone at home. We just released one for depots, so if somebody wants to build their infrastructure. So all of these are designed to handle the payments and aggregate the data for the fleet owner. So the solutions are built. We sell them. We've got customers that have -- some customers that have bought vehicles that are using them, but I would say it's still in the thousands of vehicles. And that is not because the solutions aren't hunting. It's because commercial fleet adoption, both in the U.S. and in Europe, where even in Europe, where EV adoption is much bigger than the U.S., you still haven't seen the penetration in fleets because of the complexity, because of the different use cases and the challenges that it creates. So we have the solution ready. And now it's a matter of, right, the market move into EV, which is taking time.

Also on the Mobility segment, your business is primarily based in the U.S. I know you have got the Esso business in Europe, and there's a couple of other businesses here and there. Is there -- years ago, I thought maybe this U.S. model might migrate to other markets. Do you see an international opportunity outside of the markets that you operate in, in Mobility? Or is that not...

Well, I think we still see an international opportunity. We've got a nice-sized business in Europe. We've got one in Australia. Those businesses have done fine. I think for us, it always comes down to investment prioritization, right? We invest where we see kind of our highest return of opportunity. In the U.S., 600,000 customers, 9 of the 10 largest merchant brands. We've got a large sales force, large distribution capabilities. It gives us a lot of opportunity to grow the business, right? So with some of the initiatives that we have running now, whether it's expanding into smaller fleets, whether it's attaching additional products, whether it's some of the pricing initiatives we get, we get a lot of the bang for the buck out of the U.S. So it's not to say we don't focus international. I think, the U.S. because of the relative size of the business, just overshadows sometimes what we're doing internationally.

I see. Moving on to Corporate Payments, corporate and travel. Maybe you can kind of do the same thing, the same place that we started on the mobility side and just sort of give us a state of the union there of the business. What are the trends that you're seeing in the marketplace?

Yes, sure. So let's divide up the 2 businesses, travel and nontravel, okay? Travel, think of it as roughly 50% of the business, nontravel roughly 50%. Within the travel segment, obviously, we've been going through a large customer contract migration. That customer is still with us, and it's a very good customer of ours, but contractual terms have changed a little bit, which has created a near-term drag on revenue. But that is progressing as we expected, and we expect to be through that as we get through the tail end of the year. The underlying performance and volumes in that segment, that travel part of the business has held up relatively well, right? There was a lot of concern about what was going to happen to travel with the macroeconomic environment. A lot of our travel, 65% of it, 70% of it is really internationally based and travel volumes have held up really well. So that's a travel business. If I go to the nontravel business, we've got within that, some business -- some legacy business we do, especially on kind of AP payment side that has been a little slower growing this year. But there's a part of the business that we have been heavily investing in. So there's 2 pieces. There's what we call our embedded business, which is basically taking the infrastructure we do in travel and taking them more broadly. We've invested in that, added product capability, taking our existing infrastructure, putting more sales resources behind it, and we're seeing good traction in terms of the pipeline build. And so we're optimistic going into the latter part of this year and into '26, we're going to really see the fruits from that. And then we have our direct business, which is, again, taking that same infrastructure, but going directly to corporations to help process AP files and streamline that process for them. And that's a business that we have been investing in, and now we're sort of ramping up some of the investments. And what we saw of that is really good volume growth. So if you take kind of our legacy AP business, where because of corporate constraints was somewhat flatlined, but if you contrast that with the direct business we're investing in, we saw 25% volume growth in that business in the first quarter. We also saw 25% volume growth in the fourth quarter. So we see -- we think we're seeing the fruits of the investments that we're making, and it's given us more confidence to continue those investments and maybe put more focus on it. So we feel we're seeing really good trends across the business.

In those newer high-growth areas that you are investing in, where are you in the investment cycle? Are you -- meaning, is there more work to be done in order to get that where you need to get to? Or are you now -- we've made the investments, it's time to go out?

I think -- so there's 2 pieces to the investments. If I take the direct business -- let's talk about one by one, start with the direct. So product features and functionalities that we've been adding to things like ERP integrations, improvements and reconciliations, the ability to make payments kind of multichannel. These are all investments we're making, we continue to make. And we feel like we've made progress there, hence the 25% volume growth. So I don't -- I think we will continue to make those investments, but we feel that the product is in a pretty good place. And now we're -- we've been adding to the sales team. We had ramped up a sales team a couple of years ago, wanted to see progress. As we announced in the Q4 earnings call, we felt really good with the progress we made. Certainly, now we're adding additional sales resources, and we started that. That will layer in as we go through the course of the year, right, because you basically got to hire and train up to salespeople. On the embedded side, the sales teams are in place. You don't need a big team for that because you're basically going after, I call it, wholesale type deals, right, like going after larger, not super large, but larger kind of consolidators of volume. So you need kind of a fairly small train, a handful of people, but then you need the product. So we've been spending the last year or so, adding enhancements into what was our travel solution to basically go after these new segments. I think we're in a place where we felt comfortable that we start selling. But we're continuing to enhance the product because as we continue to enhance the product, I think the market there will continue to open more and more over the time. So that's one of -- we feel good where we are today, but there will continue to be incremental improvements as we go through the next couple of years.

And give us your thoughts on the kind of competitive environment in this -- maybe on the Corporate Payment side. There seems like there's a lot of players out there who are active. Who are you running into? How do you position WEX and your competitive advantage versus your competition?

Yes. So I think when we think about our competitive advantage here. So we built this infrastructure to service the travel business. And the travel business was an extremely complex multi-geography business that required us to not only handle complexity, but high availability and high resiliency, right? So we invested to process more than 20 different currencies. If you look at the permutations between currency and interchange rate, you're talking about 150-plus permutations. We can roll out new permutations of right, interchange pricing, what's offered by like the associations, we can roll that out to a new customer requirement within days, where some of our competitors would take weeks to roll that out. So you have that. You have the scale that we've built worldwide, the compliance infrastructure, et cetera. And then as I mentioned, we've built this high availability. These are mission-critical applications for these online travel agency customers, right? If we're down, they're down, right? They can't take a hotel booking. So high availability is really critical. So we've built all that. And now we're taking that to new markets. When you talk about our competitors that are starting in one of these markets, right, they're starting from ground zero, trying to build up all this capability when we already have it. And now we're just refining, right, maybe some reconciliations or some ancillary pieces to make it more applicable for a new market. So we feel like we're really competitively positioned.

And I also wanted to ask about -- so also on the travel side, I kind of want to ask a similar question on the competitive dynamic on the travel side. It sort of seems like you guys are the -- I mean I think people forget that you actually organically kind of founded this business in a sense decades ago. So what is it there that sort of cements you in place with some of these large customers? I know some of the contract terms have been changing, et cetera, but are you still kind of the only game in town? Or is it...

I think we are -- as I mentioned earlier, the scale and sophistication, we have years of working with these highly sophisticated customers, right? So -- and these customers have needs in multiple geographies. They want to expand geographies. They want to roll out new pricing options or new packages to their customers. They need the scalability, and we bring that, right? And I think that positions us very well. We have been capturing market share in the space. I think when you look at some of our competitors, a lot of them are tied to one particular geography, right? They don't have the global scale and reach that we do. And I think that is truly what sets us apart because we can handle the most complex needs of these very sophisticated clients.

I see. Benefits, you guys actually saw a nice step-up in a number of SaaS accounts in Q1. Maybe talk a little bit about the driver of that result. I think you mentioned stepping up sales investment. Maybe that was part of it, but...

Yes. So we saw very good results. We saw a 6% increase in SaaS accounts and it was broad based, like HSA accounts increased 7%. So it was pretty broad-based increase. It was a result of a very successful enrollment season, which had me feeling really good because that sets us up for a really positive year in the Benefits segment. I would say we've talked about increasing kind of the front-end sales effort in the Benefits segment. I would not say that this really was a reflection of that. That sales investment, we announced at the beginning of this year. And it takes time to get salespeople onboarded, train, build a pipeline. So that investment is really going to impact 2026 and beyond. This really reflects the focus we put last year on winning new business and having a successful onboarding season this year. We were pretty pleased with that.

Okay. And just on HSA in general, maybe give us an idea about how that market is evolving, trends in that business, the demand environment for that product over time.

It's still a very good market. I mean, from a regulatory standpoint, this is something that's advocated by politicians on both sides of the aisle. It's advocated by employers. It's good for the consumer for all the tax advantages they get. It's good for our employers because it helps them control health care costs. So there is a very strong rationale for continued growth of HSA. Now we've seen growth slowdown in the number of accounts in the last few years from double-digit growth maybe 3, 4, 5 years ago to more single digits now. But that's okay. I think we've guided that in our guide. We continue to put emphasis on how we continue to educate the consumer, expand adoption of HSA, expand them to use some of the other offerings that we have available. So we still feel very good about that market.

And you guys make some float income in that business. You also have some corporate debt. Talk about -- this is maybe dovetailing from a conversation about the Benefits segment maybe to some impacts on the broader business. But in this higher -- presumably this higher for longer rate environment that we're in, how should investors think about sort of the relationship between rates and your results?

Yes. So at the top line on revenue -- and by the way, we provide some disclosures on it. So we published a supplemental information,, pack part of our earnings. We started doing this last quarter. We did it again this quarter. It's on the Investor Relations of our website. And you can see what does 100 basis point change in interest rate due to both the revenue line and the EPS line of the company. So put in whatever interest rate assumption you'd like and you can see what you think would -- how it would impact our results. I will say, top line perspective, 100 basis point, if it kind of went in today, it would be about $40 million up or down. And that's really the result of -- there's 2 areas where interest rates impact the top line. It's in our Mobility business, where we have escalated clauses in our contract related to tighter rates, so that will impact the Mobility segment. And then there's the HSA accounts where our nonbank custodian business where we invest those HSA cash assets, 75% of that is in fixed instruments, but 25% of it does float. So there's some revenue impact on the top line. So higher for longer would presumably be a top line benefit for us relative to what we assumed at the end of April, which is we looked at, right, what the options market was basically saying for future rate cut expectations and use that as our basis for determining what the forecast looks like. I would say on the EPS line because of the corporate debt which you mentioned, the sensitivity flips, so lots of benefit on the revenue side if interest rates are higher, it's worse for us on the EPS side because of the corporate debt. And we always try to look to that, manage through that to see how much we should hedge. But we're really comfortable with what the sensitivities are right now.

And I want to compliment you on the disclosures. They're actually excellent, kind of best in class at this point.

Thank you. A great team at WEX has done the work. That's a lot of hard work, but it came out really nice.

We have a couple of minutes left. I want to ask a broader question about kind of industrial logic of the company. You have 3 different segments. There's -- and maybe you correct me here if I'm speaking out of term, but there's not a ton of revenue synergy between the different segments, but there's this bank basically that sort of is the thread that maybe connects the ecosystem. First of all, is that the right way to look at it?

Well, I think we've tried to thread a number of synergies through the business. So yes, clearly, there is a bank and each of our businesses leverage the bank in some regard, right, whether it's an issuer or cards or whether it's using the bank for deposits in the NBC business, all of the businesses use the bank. But we've also done work to focus on cross-selling across our different businesses. Some results were there. I mean, it's work we continue to do. We've done work on the back end of the business structure. So we've got -- when we serve the customer, we leverage our common infrastructure to do that under common leadership, so we can drive as much synergies as possible and efficiency when we look at the technology development in the technology side of the businesses, right? We also leverage common teams to try to use as much shared technology infrastructure as we can. So there has been some work to drive synergies across the business.

I see. So there's more connectivity underneath the hood as it were. And maybe lastly, just on capital allocation. You -- recently, you consummated the $750 million Dutch auction tender offer. Does that -- is that sort of a big card to play in terms of capital allocation? Do you have flexibility to pursue further M&A? Or...

Yes, I think -- so two questions there. Do we have flexibility and will we? I mean from a leverage standpoint, the company has been higher in the past. But at this point, right, our focus is on paying down -- getting the leverage back down to historical levels or more comfortably in the middle of our range. Not concerned about the leverage levels where they are, right? Like I said earlier, we've done a lot of scenario modeling. The company produces a large amount of cash even in a recession scenario because of the structure of our bank, like fuel prices dropping suddenly releases a lot of cash to the corporation. So the result of that is we're really resilient from a leverage standpoint in multiple economic environments. That being said, we still want to continue to produce leverage ratio. So in the near term, our focus is not M&A. Our focus is getting leveraged down.

Fantastic. We're out of time.

Ramsey, thanks a lot for the time. Appreciate the questions. Take care.

Appreciate the conversation. Thank you.