WEX Inc. (WEX) Earnings Call Transcript & Summary

Thanks, everyone, for joining the webcast. I'm Ashish Sabadra, senior analyst at DB, covering business and information services companies. We are excited to host Roberto, CFO of WEX at the conference. On the line, we also have Steve Elder, Head of IR. Roberto and Steve, thanks for giving us this opportunity.

We would like to kick off the conversation with a discussion of the COVID recovery. Obviously, we saw some significant improvement in July both in terms of fuel gallons as well as the corporate payment volume. Can you just talk about the recent trends? What have we seen there? Do we continue to see improvement on those fronts?

Absolutely. Good afternoon and thank you for having us today. As you heard from our Q2 earnings call, the July volume trends for both fleet and travel and corporate payments climbed steadily now compared to March 2020, in April, in May and June and in July. But we are still down year-over-year due to the pandemic. This steady increase in both of these segments continued through the third quarter-to-date as well, but at a slower rate and at a different pace from the different segments. So I will give you some color there. And as you can imagine, as a company, we continue to work to mitigate some of the macro headwinds caused by COVID. Specifically, if I give you some color in August -- for August, our fleet gallon volumes are right -- are almost flat year-over-year, which is positive and good size from a stabilization point of view. In the over-the-road trucking part of our business, we are seeing strength and we are up in the range of 7% to 8% in August when compared to last year. And we have seen particularly strength in the packaged-goods-related customers. So that's not a surprise, but that's something to highlight. At the same time, if we think about our local fleet volumes, so what we call the North American Fleet business, both in the U.S. and internationally, we continue to be down compared to prior year. And we are just about flat compared to what we were seeing in the month of July. If I switch now to travel and corporate spend volumes, following the July trends, there's still double-digit improvement in the payables, and we continue to be depressed in the travel side. And finally, to give you some color, which is also positive news on the health side. On the U.S. Health, the strong performance in the first half of the year has continued into the third quarter. We have added new accounts at a rate of 13% to 15% monthly increase year-over-year. And the volume expense in this part of the segment have come back as expected to 2019 levels. If you remember earlier, in April and May, we were down more than 40%; but the last few weeks, the numbers have come close to last year levels.

Those are very encouraging statistics. Good to see the health volume have already rebounded back. That's very positive and the strength that we continue to see in the monthly increase. Maybe if it helps, we can start off with the Health segment itself. Health, we saw some pretty strong growth there even with the COBRA business. You had mentioned 15% growth in the SaaS accounts in the second quarter driven by 33% growth in COBRA. Can you just talk about what have you seen in terms of the SaaS account? You talked about 13% to 15% growth. How do we think about that trend going forward?

Of course. So we have a lot of success in the past 5, 6 years with our U.S. Health Care business with the growth primarily in the HSA market. The trend of companies' transition in more and more their employees into high-deductible plans, health plans, obviously, still is an impact. And obviously, this allows employees to have HSAs, and that has continued. It is an easy way for companies to control health care costs, which now continue to go up. And we have seen lately also a strong demand for our COBRA product, particularly through the pandemic, as you mentioned.

Yes. Those are very encouraging trends. And then WEX currently serves 8 out of the top 20 HSA providers. Is there opportunity to add new partners? How are your conversations with other HSA providers?

Well, I can tell you that what we're seeing long term, pre-pandemic trends are still, as I said, in place, which means that we expect more employers to offer high-deductible plans for those to become more popular with employees. Obviously, that will lead to more HSA accounts, which have been fueling most of the growth in the segment for us in the past several years. For the time being, we do not see the pandemic changing any of those dynamics. Obviously, in the short term, we have seen the volumes slow down or being depressed, but they have come back quickly. We may see some of the partners' challenges in the short term, but the dynamics are still clearly in place. And in fact, the pandemic may accelerate the shift to high-deductible plans as employer try to control costs even more firmly than before. So we have consistently said that we expect the long-term growth targets of this part of the business to be in the mid to high teens, and we still believe that coming out of the pandemic. And there could be a period of some softness, as I've said, because of the higher unemployment, but nothing that we would consider as roadblock to the long-term growth rate.

Yes. Yes. Yes. Your -- as you said, the secular trends are clearly in your favor and the market leadership position is definitely helping drive some pretty solid growth there. Shifting to the corporate and travel payments business. Obviously, corporate payment continues to be pretty strong and then travel was depressed. I was just wondering if you can provide any color on the growth rate in August on how corporate payment was trending. I think it was up 6% in July. Any color on the August trends?

Yes. Let me give you some -- where we are on corporate payments. And if you want, we can also talk later about travel. So as we have been saying now for some time now, we have -- the first thing is the go-to-market strategy on the corporate payments product side. We go direct with our own salespeople and then indirectly through the partner channel. Both have successful-driven volumes in the first half of the year, though on the direct customer side, the spending volumes have declined slightly as businesses have been spending less money due to the pandemic. However, on the partner channel side, we continue to grow rapidly, and we have gotten a nice contribution from a new health care customer that we call out last year as a new signing. The one thing important here to take into consideration is the mix shift towards more channel partner volumes, which is causing the interchange rate to increase. And you saw that especially in the Q2 volumes for 2 reasons: number one, because we get higher interchange rate on the -- from the partner channel versus the direct sales model; and more importantly, also because in the second quarter, volumes overall in the segment were 2/3 in corporate payments and 1/3 on the travel side. One thing also that I think it's important that we mention while we are talking about these volumes that continue to be positive in the month of August as well in corporate payments is the fact that our interchange rate is going to be very volatile. I mean if you saw in Q1 versus Q2, there was a significant change on the rate. And this will continue in the next quarters to come as there are volume shift between corporate payments and travel and we think corporate payments, depending if the volume growth comes from the partner channel or from the direct sales model. Specifically on the travel side, if you recall, we talked about a new scheme fee agreement that we signed in April, which is going to bring significant benefits going forward. But in the particular second quarter, we got a benefit that was supposed to -- it came from the Q1 volumes, but because the contract was closed in April, we record the benefit in Q2. So obviously, this is not going to record going forward. And on the travel-related customers, obviously, they have much lower interchange than the corporate payments' customer-related. So if we talk about what we are seeing in the marketplace, I mean the pipeline, obviously, we talk about it, will remain strong. And we are not -- we are seeing that also in the August numbers, as I said. So July was on the 6%. And we -- in the corporate payments, we continue to be there now.

That's great. And then maybe just if you can talk a bit more about the corporate payment business. As you talked about a new health care win there on the partner side, you also have some really key marquee partners such as Divvy. Can you talk about just the -- and also, you mentioned on the call, the FIS win was mentioned. Can you just talk about the pipeline for corporate payment and then the time line for some of these implementations, the new wins that you've announced?

Yes. Obviously, as we have said, Melissa talked about it. I mean the pipeline is in very good shape, and we have seen a lot of movement in the past 3, 4 months. After the adjustment of the shock in March and April, really, the pipeline has increased significantly. What I would say to you is the time line around implementation. So from the moment you have a pipeline and from the time you sign an implementation, it depends on the size and the complexity of the customer. So when we establish a direct interest rate, there are APIs that the customer programs into. So it will depend on how quickly they can turn that on and how complex the business is. At worse, it probably can take a few months. But in many instances, that's done much faster than that.

Yes. That's good. That's good. Good to hear the strength in the pipeline. And then I was just wondering if you can provide any more color on the pipeline. What kind of opportunities do you continue to see? Are there more vertical solutions? Or is it more of the partners? Any color that you can provide.

Well, as I said, I mean we have seen it in all the parts of the businesses. I think what is also important that we have not talked about is the -- our FI part of the corporate payments. We have talked about the channel partner in this space for a long time and that there are a lot of companies, both large and some others that are small. But on the FI specifically, it is made of banks making a build or a buy decision on issuing virtual cards. And we can provide one of the best in the market solution, and they can choose to develop one internally, if they want to. But since we have been building an Asian platform that requires significant investment in technology, we are seeing large entities like we talk about American Express or U.S. Bank and other many regional banks like PNC, KeyBank and Regions increasingly choosing the WEX platform. So we benefit obviously from their virtual card growth as well. So that part of the business, it's also in a good position, and we are benefiting from their growth as well.

That's great. That's really good. Very helpful color. Roberto, if we can just quickly talk about the travel. It was down 81% I think in July. What trends have you seen lately in August? And if you can also talk about your exposure. I believe your exposure is more for hotel versus airlines and leisure versus corporate. So any color that you can provide also on that front?

Yes. Let's start with travel. So travel volumes continues to be depressed through the third quarter-to-date. And although they have improved from April, as you said, we went in July, call it, down 81%. We are better in August, around 70% markdown. But obviously, we are seeing the recovery being slow. And what is even more challenging is the expectation, what we should be expecting as we move forward. It's really difficult to predict the next few months. It's true that we have seen a steady improvement week after week. But as you know, we were on 90% down in Q2 at some point. July was 81%. We are on the 70s down in August. But what is going to be coming from here, that's the uncertainty. And what we know is the stabilization and the normalization will happen, but it will take some time. And then on how we -- you asked me how we have been managing the risk, whether it is to a travel company or a fleet, either if it's a big customer or a small customer, we manage our line of credit extensions in the same way, and we keep a very close eye on the trends and the performance, and we monitor all the accounts regularly. We use a bunch of external data sources like DMP or Experian as well as our internal collection experience to develop an overall risk profile for each of our customers that we update regularly. And if you think about what we have done since the pandemic started, and I said that in Q1 and then in Q2. I mean I recall we had up to $500 million of receivables just before the pandemic in the travel-related customer segment. And we are now down to probably $40 million, $50 million. And in Q2, we had some credit losses that were small compared to Q1. For now, we have been able to navigate really well the exposure, and we have been working at the same time with the customers. So we have to feel well on where we are from a risk point of view with -- on the cost -- on the travel customer -- on the travel customers.

That's very helpful color. So good to see that you've already lowered your exposure and monitoring it actively plus, as you also mentioned, the credit losses have been very manageable, so pretty low-risk there. I was just wondering if you could go deeper on to the travel exposure. Where are you more exposed, hotels versus airlines and then leisure versus corporate? And how does that help in a recovery scenario? Are you better positioned on the recovery side as well that some of the hotel and leisure travel starts coming back faster?

Well, as I said, the -- we expect the stabilization and normalization. What we don't know, and I don't think anybody knows, is what to expect. We are seeing -- that's why keeping the daily, weekly volume trends, talking with our customers to see the reservations that they get, when are they being reserved for, do they have cancellations. So all of those things are critical for our customers and for us, obviously. But whoever you ask today, nobody knows what the expectation is for the next few weeks or few months, obviously.

Yes. Yes.

And this is Steve. What I'd add is if you look at our travel book of business, it's nearly all hotel rooms and it's nearly all leisure travel. So there's not really any airline travel in there. There's not a lot of business travel in there. So in terms of like what people are expecting for recovery on whatever that time line is, we're probably about as well positioned as we can be because most people believe that hotels will come back before airlines, leisure before business. So it's about as good as it can be, but it's still not -- it's a tough market to be in right now.

Yes. Absolutely. But just having more of the hotel and leisure exposure, I think that just positions you pretty well for the recovery. That's very helpful color. Roberto, if you can just talk quickly about eNett. Can you just remind us when the trial is supposed to begin? And what are the next steps there?

Of course. So the trial is set for the week of September 21, and we expect the judge to reach a decision sometime in early October. And I think this is all about we can say at this point. We expect the judge to issue a ruling. We will provide updates on the status of the litigation as they become available. That's all I can say at this point.

Yes. That's completely understandable. So that's again very helpful color. If you can move on to the fleet payments, fleet section, looks like pretty good local fleet continues to improve, as you mentioned. I was just wondering what have you seen in states -- if there are states where they may have seen resurgence in virus, do you continue to see pretty -- what are the trends that you've seen either from a verticals perspective or geography perspective?

Yes. Let me give you some detailed color on the recovery. So as I said, the improvements in the July trend continued through August with August volumes flat versus last year and as I said, driven by strength in the OTR business. In July, specifically in July, we did see a converging state activity despite the resurgence of the virus in some states. What we have seen, though, in the month of August, we did see a very slight divergence in volume and activity between the states that were more heavily impacted by the virus and the ones that were not. So to give you some idea, California, Florida and New York volumes are all in line with the national average. And then if you look, for example, Arizona, Massachusetts are slightly better while Texas came in just below the average. So that's to give you, on the bigger state, some color on what we are seeing overall.

That's very helpful color. And then when you think about end markets or verticals, are there -- you talked about packaged goods' customers showing a lot of strength. Are there other areas of strength? And are the weakness, usual, the oil and gas and those kinds of verticals? So any color on the vertical front?