WEX Inc. ($WEX)

My name is Dave Koning. I'm a senior research analyst at Baird covering payments and services. Thrilled to have WEX along with us, CFO, Jagtar Narula and a new IR, Pedro Alvarez, over here. You probably don't know Steve. Steve was at WEX for probably 15 years, and Pedro just got stepped in about, what, a month or 2 ago? Is that -- as new IR. So with that, I know Jagtar is going to give a little review of WEX, and then we'll jump into Q&A.

Yes. Great. Thanks, David. Appreciate you having me. Forward-looking statement. Going a little bit about WEX. So for those of you who don't know WEX, we are a payments company. And this slide, I love because it presents simply what we do. Right? We manage business-to-business payments. And not every type of business-to-business payment, but business-to-business payments that have certain characteristics. They tend to be payments that are highly complicated. That's true of every 1 of our businesses. They tend to be payments that are mission-critical, and they're often highly regulated. And that's where we bring our unique value add. And we do this really well. This slide shows a little bit about WEX. We are about $2.7 billion of revenue last year, $16.10 of adjusted EPS with operating margins of about 37.5% last year. We operate in 3 different segments, and I'll just go to those really quickly. Our largest segment is Mobility segment. It's about 45% of our revenue. And that segment, if you think about the core of that solution at the end of the day, it's a fuel card. We offer a fuel card that comes with a lot of controls, a lot of reporting. It helps whether you're running what we call local fleets. We just think of the electrician or the cable company. Or if you're an over-the-road truck or long-haul trucking, it helps you manage your business and understand how your fuel spend is occurring. Our Benefits segment is our second largest segment. It's about 30% to 35% of company revenues. And this is where we are providing -- we have a benefits platform, benefits administration as well as the actual provision of benefits. This is in things like health savings accounts, flexible spending accounts, lifestyle spending accounts. We offer those solutions. We also manage float income associated with it. We handle the payments that occur with that. We are 1 of the 5 largest HSA providers in the country, something like 60% of the Fortune 1000 use our solution. Our last segment, which is the remainder of the business is our Corporate Payments segment. And this is where our processing business-to-business payments for corporations. This could include what we call wholesale or embedded payment solution where we're processing high-volume transactions integrated heavily with our end customer or we're doing what we call our direct AP business, which is processing AP accounts for our corporate clients. This page is a little bit on our strategy, 3 core strategies. We've got amplify our core, which this, in my mind, is execute, right? We have the 3 segments that I just talked about earlier. We are leaders in those segments, and we continue to expand by doing what we've historically done well. We then have expand our reach, which is we take our solutions and move into new markets, right, provide our solutions to new customers. A perfect example of this is our embedded payment solution. We have historically sold these to travel customers. We've increasingly sold these to nontravel customers. That same platform is used in our direct AP business. It's a slightly different front end, but the back end is [ identically ] the same. So we are expanding our TAM, which provides a growth tailwind to the company. And the third piece is accelerating innovation. This is where we are developing new solutions for our clients, getting into new markets, but also within existing markets, providing solutions that are incremental value add. So we introduced a product fairly recently called 10-4, which is a solution that helps the low end of the trucking market. This is both a segment expansion for us as well as a new product solution, and that's core to our strategy. A lot of questions I get are about AI and what's the impact of AI to us. We think of AI as an opportunity, right? We operate at the core infrastructure layer in payments processing, right? So this is heavily regulated core payments processing. And with it, we generate a lot of data, right? We capture a lot of data. So whether it's in our Mobility segment, understanding how vehicles are being used by our clients, our Benefits segment, understanding how employees are actually spending the benefits dollars that are given to them, or in our Corporate Payments segment, which is understanding how companies are spending their money, right? That generates a lot of data. And that data allows us to enhance our value proposition. So we can use that data to provide insights for our clients, automate things like control so that we can help them with their spending. In addition, AI gives us an opportunity to enhance our margins as a company, right? We spend lots of money doing things like processing claims, developing technology. And so some of the things we've seen over the last year is using AI to make improvements in those areas. We've increased the pace of product innovation. We've cut down in claims processing times, all through the use of AI. We have a strong track record of growth. If you look over the last 10 years, we've grown about 10% -- north of 10% revenue CAGR, about 17% earnings CAGR. So we've got a strong track record of growth, and we're excited about the path forward. Last thing I will touch on is capital allocation. We generate a lot of cash annually, north of about $650 million of adjusted free cash flow. Two things I will point out on this slide. First thing is the balance sheet and leverage. So we've been on a march towards to be below 3x levered. And we are updating our near-term guidance to say that we will be between 2.5x to 3x levered. We think that gives us an optimal -- a very strong balance sheet with optimal flexibility. The other thing I'll mention is our Board recently authorized a $1 billion stock buyback program. We've said that once we got below 3x levered, we would start buying back stock. So we are now in that place. We are now below 3x levered, and we've begun stock buybacks. So this is an update that I want to provide to everyone.

That's good news.

Yes, exactly. And then just what we expect. We continue to expect long-term, 5% to 10% revenue growth, 10% to 15% earnings growth, and we've provided that guidance for some time. And then just to summarize it, we view ourselves as a differentiated company. We are highly innovative, and we will continue to bring new products to market. We feel really good about our growth prospects, and we feel good about the path forward for the company.

Yes. That's great. You did it in about 5 minutes.

Which is what I promised you.

Yes. And I guess let's just start off, since you just talked about -- you started the buyback again, that's good. We had expected that more to start in Q3, not Q2. So that's good to hear. You could buy back about 1 million shares a quarter just with your cash flow the next 6 quarters, and that would use up the $1 billion. If you did that, that's 3% every quarter. That's 12% buybacks in the year. So you could get to 10% to 15% EPS growth with a 0 revenue and 0 margin expansion. So it feels like there's a chance you could be a little outside the range if you do grow revenue and margins a little bit in the next couple of years. Is that a fair point, if at all?

It's a fair point. I'm not going to raise our guidance right now, but look, I think we will balance between -- we gave a 2.5 to 3 range on leverage. We will balance within that range. I think I'd like to continue to pay down the debt a bit, but not as aggressively as we have over the past year. So we'd like to be prudent. I think our approach to share buybacks will be highly methodical like I think you've seen over the past few years. We've bought $2 billion worth of stock buyback, but you saw some quarters where we bought more, some quarters where we bought less. I think we're taking a more methodical approach to this, so it's a bit more predictable. But I think you will see a reasonable amount of share buybacks.

Okay. Well, that's great to hear. And the 1 other 1 that just impacts things so much right now is fuel price. I know that guidance is kind of a constant fuel price guidance. But right now, fuel has been massively in your favor. How do you think about that? Like maybe just give us a little context on how fuel impacts the business and how you even think about it now that it stayed higher than you probably thought?

Yes. So we did take up guidance at the end of Q1 because of the impact of fuel prices. We've given out publicly, we provide supplemental materials under our Investor Relations site. So you can think about our rule of thumb for how fuel prices impact our business. And we -- if you go and look at it, you'd see a $0.10 increase in fuel prices at the pump on an annual basis would be about $20 million of revenue and $0.35 of earnings per share. So that's the top level, how fuel prices impact us. Now I know in the first quarter, we had a rapid increase in fuel prices, and some of what we showed, I don't think it matched what people might have expected. And the biggest impact to that to us was in our European business, where we have this dynamic of European fuel spreads. That -- it's a smaller part of our business, but it operates in a slightly different model than the bulk of our business in the Americas. So in Europe, we price fuel to the end user on a Friday and then we purchase from the retailers as you go through the week. And because you had such a rapid increase in fuel price, we were actually kind of underwater on the spread for part of the quarter that created a large negative revenue for us. That -- now that we are at this higher fuel price level and the volatility is not there, we don't expect to see that similar dynamic of the negative spreads. In fact, through Q2, it's been more in line with historical. I think there's been 2 periods in the company's history where we had that like sizable negative spread occurrence. I think what you're starting to see now is more normalized than what you would expect according to our rule of thumb.

Got you. All right. That's all helpful. Let's turn back to really the core business. So in Mobility, the backdrop seems to be getting better. About 1/3 of your revenue, I believe, is over-the-road trucking. And the [ CAS ] data and ISM data are both getting better or less bad. They were pretty bad for what they're getting better. How do you see that impacting the business?

So we've been cautiously optimistic, right? We've been in this environment for the last couple of years where every time that we think that freight recession is ending, it has not ended, but this one seems to be a little bit more real than the past couple of years false [ dawns ]. I'd say a couple of data points for us. So if I look at the first quarter, we did have a negative compare in over-the-road from sort of [ cooling ] transactions. But we also had a very tough compare. So in the first quarter of last year, right, we had what we call a pull forward. So last year, you all remember that we had tariffs that went into place at the beginning of April. And so a lot of shippers got ahead of that by moving goods really early to get ahead of tariffs. So we saw big volumes in the first quarter last year. So that made a really tough compare this year. On the bright side of what we've seen is same-store sales within the over-the-road trucking segment. That improved in the first quarter. It wasn't positive, but it was an improvement over what we've seen in prior quarters. So that gave some sense that things are improving. So we're watching it closely. We're cautiously optimistic, but the data from the external side does point to there may be some improvements come in the trucking segment.

Sounds good. And what about local and international -- does macro -- pretty stable? Or how do you see that -- those...

Yes. We've been operating in this sort of volatile macro environment. Higher rates have slowed down some segments like construction and the like. So we've seen some negative same-store sales drags. I think with high fuel prices, it's created some macro uncertainty. The good news is volumes have held up kind of to our expectations, in line with our expectations. So we feel good about that. And also good news, right, credit has held up. The big concern is high fuel prices, what's that mean for the economy, what's that mean for your AR and credit. And that is performed in line with expectations. So we feel really good about that.

Yes. And then ancillary products, Payzer, 10-4, some of those, should those be accretive to revenue growth next several quarters?

Yes. I mean that's the idea, right? So we're really excited about the 10-4 product. That's something we introduced I think, a couple of quarters ago. So this process intended to target the low end of the trucking market. So this is think about single owner operators, a market that we historically have shied away from because they just didn't qualify for a WEX fuel card. They didn't have a credit for it. With the WEX fuel card, you get access to our discount network. And this was a way to say, okay, come into the WEX fold, bring your own credit, but you can access our discount network. And that brings truckers into our fold. And then we have ancillary products that we can sell to them, ancillary solutions. And over time, as they build up credit, they can graduate to a WEX fuel card. So with these high fuel prices, what we've seen is a lot of interest in the product. We can see within our data, an acceleration of adoption by truckers of the solution after fuel prices increased because of the value proposition. So we feel really excited about that. And then on the Payzer side, which we now call field service management, we've had good growth of that in Q1. That was a little slower start than we would have liked, but we saw really good double-digit growth in the first quarter. And what I'd say is we have a product that is really well targeted kind of at that small to mid-market service organization. And we've seen -- when we've looked at kind of our data, we see not only a good greenfield opportunity there, but we've had some good competitive takeaways over the last quarter. So that gives us increasing optimism that there's a really good solution, that we've got a really good solution and customers are buying it.

That's great to hear. And then the BP contract comes out in the back half to kind of help accelerate growth to -- how much again, does that help year-over-year kind of the next 4 quarters starting in Q3?

Well, what we've said is on an annualized basis, it's about 50 basis points to 100 basis points on this side, but in terms of growth of volume or revenue for that segment. We started to see initial BP in Q1, so we'll see the BP impact here in Q2, and that will continue over the course of the year. We were really excited about that when we want it on the basis of new product innovation. We introduced this new dual loop card, the [ Logrono ], both the WEX rails, but also an open loop rail. And BP really liked that solution, which is one of the reasons they chose us, and we're really excited about it.

Nice. So I guess, wrapping up Mobility, can this be a mid-single-digit growth business going forward if you get a little better just the macro of the ISM data, et cetera, the BP contract, et cetera, Payzer?

Yes. That's our aspiration. I mean, we see market growth in kind of that low to mid-single-digit range. We feel we should be take share, be ahead of that market growth. We've got a great set of solutions that customers like, so we should do at or better than market. And then you add on top of that, that we continue to add new solutions to the market, whether it be field service management or 10-4 or other solutions that should help us continue to grow that mid-single range.

Yes. Okay. And if we move to Benefits, there's 3 revenue drivers here, the account fees, the interchange, the float revenue. How do you see the whole business and kind of each of those being impacted right now?

Sure. Benefits has been a great business for us. It's been a really, really steady grower. If I walk through each of those pieces. So account growth, we see steady account growth over time. HSA continues to get adopted. There continues to be good tailwinds to that adoption. Our benefit administration solution gets adopted. When folks adopt our solution, they tend to drag additional solutions along with it. If you're an HR manager, you don't want to go to 1 place for HSA, 1 place for FSA, 1 place for [ COBRA ], and et cetera. You want 1 provider. And since we have such a broad set of benefit offerings, we see like things like HSA will drag other parts of the portfolio. So we feel really good about that. We are, as I mentioned in my prepared remarks, 1 of the top 5 HSA providers in the country, 60% of the Fortune 1000. So we continue to see good momentum there. With that good momentum comes good momentum on the float income side, the [ nonbank Astellia ] income, right? That tends to grow faster than account servicing revenue for the simple fact that people put money into account, they don't completely [ sense spend ] at all. And the following year, they start the cycle again. So when you look at balances by age of account, they tend to be higher as the account ages. And so that just makes the growth of that segment faster than the overall. The maturities in that segment because we take the balances invested into investment securities, the maturities of that are very good. The bulk of our maturities are until 2033. So -- or beyond. So we sort of see a long runway towards good fold income. And even the stuff that we have maturing earlier, tends to -- we'll see an uptick. Assuming state rates stay around where they are today, we'll see an uptick as we roll over those maturities. So we feel really good there. And then the interchange revenue, that's been people spending money from their accounts. That tends to grow in line with the account growth. So overall, it's a really good business.

Yes. Anything coming up, either regulatory, like allowance to invest more in HSA? Any fear of like what if AI means there's 20% less employment in the U.S.? What are kind of those background factors?

Yes. So on the first side of it, so on the regulatory side, we're in a good position that I think there is consensus in Congress in Washington that HSAs are a good thing, right? More consumer control helps control health care spending. So there's been a desire to expand the use of HSAs. And we saw that earlier this year or last year with the One Big Beautiful Bill, which expanded eligibility to HSAs. We think that provides us incremental opportunity. We go to market through both a direct channel and a partner channel. Our partners are very good at sort of picking up that incremental opportunity that came through, things like One Big Beautiful Bill. So we view that as an additional tailwind to our business. On the AI side, we view it as an opportunity, right? We operate at kind of the core infrastructure layer across all of our businesses, including benefits. So as I mentioned earlier, we capture a lot of data in the Benefits segment. And we've been using AI with that data to provide information to employees to better utilize either the selection of their benefits or the utilization of their benefits. And that's good for the employee, which makes the employer happy, which helps us as an organization. And so we think -- we continue to think there's a good opportunity from AI there. There's -- and there's a good opportunity from AI on the cost side. Processing claims is a reasonable expense of ours. And as I mentioned in my prepared remarks, we've rolled out automated claims solutions into that organization, where we have seen a significant reduction in the amount of time and cost that it takes us to process a claim. So as we continue to expand that through our claims processing, customer support in a call center, we should continue to see benefits from AI there.

Yes. Okay. And you said 5% to 10% revenue growth, total company. Mobility sounds like close to mid-single digits. Benefits, what would that be mid- to high single digits?

Yes. We've guided kind of 5% to 10% across each of our segments. We think there's sort of significant opportunity. For this year, we've said Mobility is at the lower end of that. So the Mobility is 1% to 3%, Corporate Payments is 5% to 7%. But over time, we see each of our businesses as having the capability to grow in that 5% to 10% range.

Yes. Okay. And then moving to Corporate. Is -- that's travel and then just B2B, right? The travel segment of that, is there any impact right now from the Iran comp look that you see?

We've had some impacts, smaller than people may think. So we have a very low exposure to the Middle East, right? Our exposure was about $3 million of revenue a quarter. So that's relatively small. And as you can expect, nobody is really traveling to the Middle East right now. But overall, in our book of business, I think one thing that people don't appreciate is that our book of business is heavily skewed towards hotel bookings. So when we have environments like this where you have this rapid increase in energy prices, jet fuel goes up, people may start flying less, right? And that may impact airlines. But generally, people like if you had a vacation plan and you don't fly to your vacation, people will still drive, right? So hotel bookings tend to be more resilient than airline bookings. So that's what we see as we've looked at volume through the year. Things have held up. So we're pretty optimistic. Obviously, right now, we're entering that peak summer travel period. So right now, we've got a close eye on that. Things have so far held up well, but we're keeping a close eye.

Yes. Okay. And what about stablecoins? A lot of people think B2B payments, like big chunky payments, big payment files, stablecoins. What do you see -- could you use them? Is it a risk, et cetera?

So I think there's 2 or 3 pieces to this. So when you think about us, right, where people ask about stablecoins, for us, the most is in our travel business because you've got all these kind of international travelers and money going to your hotels around the world. One, I think you got to remember the value proposition of our offering, right? We help with controls. We help with fraud protection, with chargebacks, with reconciliation, with integrating to the OTA, online travel agencies, back-end systems. All something that just stablecoin by itself doesn't do. That's a big value proposition of our solution, which is critically important. The other thing you have to remember is that -- when we -- when you do a hotel booking and use our platform, we're issuing in local currency, we issue around the globe. So we're issuing local and processing local. So there isn't really an FX transaction going on there. That point of sale at the hotel isn't really designed today for stablecoin. It's designed for a solution like ours. So today, we haven't seen a lot of demand from stablecoin. I would say that if in the future, if hotels were suddenly able to accept stablecoin, you could add a new payment rail on top of what we do today. And so we could look at stablecoin as a solution. Where you do see sort of stablecoin opportunities, I think, in the areas that you talked about, which is there's -- it's kind of wholesale. It's like that high volume flow, which is more of a treasury operation than that point-of-sale operation of handling the hotel booking.

Got you. Yes. And then what about yields on volume in the Corporate business? A couple of years ago, it was down a little bit, people got nervous. But lately, it's been pretty stable. And yes, how do you see that over time?

Yes. I think it's kind of one of the misconceptions that a lot of people spend a lot of time looking at the yields. And it's not that yields are important. But we tend to think of it as driving as much volume as we can through the platform. As much revenue. That business is a high margin drop-through business, right? It doesn't cost us a lot incrementally to process additional volume. So our core mantra at the end of the day is drive more volumes for the platform. That volume drives incremental revenue, that incremental revenue drops through at a very high freight to operating income. So that's how we tend to kind of think about it. So when you think about the mix of the business, right, we've got this direct AP business, that tends to be a kind of very high take rates. Our, what we call our wholesale business, our bid and payments business. There, you're trying to go after a lot of volume, which means you're offering pricing incentives to drive the volume from the client over to our platform. And that mix overall impacts the overall take rates that you see. But we tend to manage it by trying to drive as much volume as we can.

Yes. Yes, I understand. Maybe one last question. The activists got involved, and now Dave Foss is Chairman of the Board. Many people know him from [ Jack Henry ]. Some people have kind of pushed for the segments to be broken up, the activists pushed for that. What's, I guess, your thought on the segments staying intact or being broken up and maybe where are we at now with the activists?

Yes. So we've settled with the activist. We've got some new Board members now, which is our first Board meeting, it was a great Board meeting. And what I'd say is we've looked at this in the past. As we've mentioned before, we had 2 banks look at it, Bank of America, JPMorgan. They came to a clear conclusion both of them separately that WEX is better as 1 company. There are dissynergies from breaking apart the businesses, things like the bank, where we are we earn, we fund at better rates in the mobility segment. We earn float income at a significantly higher rate in our Benefits segment. That could potentially go away if you were to break up the businesses. So we continue to see -- we continue to look at what JPMorgan and Bank of America have said. But as we've said, we always look at this, right? This is not a onetime, like we've looked at it every year since I've been at WEX, we will continue to look at it. So it's always something that's open for discussion, but the latest data I have is the latest analysis we were in.

Yes. Got you. Well, that's all...