WEX Inc. (WEX) Earnings Call Transcript
June 1, 2021
Earnings Call Speaker Segments
Great. Good afternoon, everybody. My name is Bob Napoli. I'm the analyst at William Blair that covers the fintech space. For a complete list of disclosures, please go to williamblair.com. We are very excited to have with us again this year, WEX CEO, Melissa Smith; and Steve Elder, Head of Investor Relations, known both of you a very, very long time. So really appreciate you attending our conference again this year. And we were just talking before this, how it's very exciting times in fintech, it just continues to build and grow. And when I think when we first started covering you, fintech was not yet quite a word, I don't think.
Thanks for having us.
Yes, you're welcome. But thank you for being here. So coming out of the pandemic, it's been very interesting last 1.5 years. How is WEX positioned coming out of the pandemic, maybe compared to the positioning of the company prior to the pandemic?
Yes. We feel like we've come out of this and are coming out of it stronger than ever. And our first quarter results, excluding travel revenue, was ahead of the year ago. And I think probably, more importantly, it's just the momentum that we are seeing across our sales channels. We did a lot of work on our digital marketing capabilities before the pandemic, and I think we've really seen the benefit of that. And with our travel business, we've done a lot of work around bringing in eNett, Optal. We eliminated that uncertainty, and we have a really great path forward. So we feel very bullish on the future for WEX.
I mean, we're in an unusual time. I don't think any of us have come out of a pandemic before, and the world seems to be changing day-to-day. And I was hoping you can give maybe an update on business trends. I mean, as you -- I mean, I know you reported earnings a little over a month ago or about a month ago, but anything you can give on -- any updates in business trends, continuation of trends, acceleration in trends? And then we can dig deeper into travel, but...
Yes. Sure. Yes, one of the benefits of being -- doing businesses -- so many different businesses across the portfolio, we do actually have quite a bit of insight. And if I start with fleet, which is really great cross section because the customers there are people who haven't have vehicles. And so they represent construction trades and states and big businesses, small businesses. And if you look across that category, we just continue to see very slow sequential improvement. And trend that we talked about at the beginning of the year where we expected to see these gradual improvements as mobility opens up is really just continuing to play out. We haven't seen any drastic changes in trend lines, they've just continued to be slightly positive. And if we look across over-the-road business, in that we had actually positivity on same-store sales year-over-year, and we continue to see great trends in that business. And really, like if you look across the different categories in the over-the-road marketplace, we've seen these large over-the-road customers that have been particularly strong and dominant through the pandemic. And in the smaller fleet categories, so think of this as small businesses, they've just been more mobile, which makes sense. When you think about a lot of large companies shut down, a lot of the smaller businesses continue to operate. So as other businesses come online, we're just starting to see a little bit of improvement. We do think that will get better in the second half of the year.
You've won a lot of new business in the fleet business, in the fleet segment, if you would, what is driving those significant wins? I mean you've had a pretty steady stream, really, over the last couple of years now, I would say.
Yes. If you look across any of our portfolios, we focus a lot on unique value that we can build on the product and technology that we have. And a lot of what we've been doing over the last probably 5 years, really, it's just extending product capability, and as a result, we continue to win new business. And it depends a little bit on the segment where they're interested in, but the really large customers are interested in high technology. They want a very integrated offering, integrated through APIs that really touch into the operations of that end customer. And smaller fleets want a really simplified offering, but they still care about having a lot of convenience, a lot of control. It really plays right up our alley. And then if you kind of go into the private label portfolios as we build that business out, it's making sure that we can really leverage our marketing and sales capability and build those portfolios. We've really great history of showing pre-WEX performance and then post when we take over portfolio growth. And I think it just speaks to the strength of our sales and marketing capabilities.
I mean you can't -- I get asked more and more about electronic vehicles. And I think I've been asked about the electronic vehicles for the last decade relating to WEX, and it's getting louder, I guess. And just any thoughts that you have on that market, the ability for WEX to monetize the EV market? And what that market could look like over the next 5 to 10 years versus your business today in the fuel card space?
Yes. So it's interesting. I think one of the things that get lost is the fact that we've had an offering out into the marketplace. We just haven't had a lot of take. So we built an acceptance network a while ago. So our fleets that have mixed fleets are using that in order to really meet their needs, and those needs right now are acceptance and reporting associated with those transactions. We have, the best we can tell, about 1,000 vehicles out of the 16 million that are EV. But I do think that we've kind of hit this point where a lot of in the past we've had these kind of hypothetical conversations with people around how you can use the product. We are starting to get enough like active usage that we're able to build out and really listen to what our customers want, working with the different partners we have. Across the mix, we have great relationships with oil companies, some of which are in EV with ChargePoint, with a number of different parties along with the leasing companies. And as we're surrounding those customer needs, we're just continuing to build upon our capabilities. So from our perspective, there's been a long migration period of time. And our ability to service mixed fleets is really important to us, but it's also important to the other players that are out there that are really focused on just the EV side of things.
If you had one EV versus one gas-powered vehicle, what's the economics?
That's a great question. I don't -- and we say, that's really evolving because the way that we had set this program up before was just to establish acceptance. It really wasn't to build an economic model. These conversations we're having right now is really to evolve into something we're really going to understand what the economics are going to look like.
Great. And WEX clients on the webcast, there is a place to ask questions if you like and we'll try to ask your questions as we go along. Digging into the travel business, and as we -- maybe as we think, before I hit that is, the estimates are all over the place for WEX as you look out into 2022. Pre-COVID, the company was generating, I think, adjusted operating margins of close to 40%, high 30s. Is that -- should we be thinking that you should be able to at least once, say, 2022, the world is back to normal, back to that level or higher? Is it -- is there anything that would affect the ability to generate returns that you've had in the past?
So if you look at the margins that we posted in the first quarter, we showed a 6% improvement in our fleet margin and 1.5% improvement in our health margin. So really that the whole, if you will, has been in travel space. And the plan for us has been really moving on the synergies, I'm sure we'll talk a lot more about that, but we've done a lot of work bringing these businesses together. We had Optal and eNett, our 2 standalone businesses. And so just the synergies of bringing those together are actually pretty natural. And then on top of that, we've got volume extension. I think we've been kind of at the low point of volume with that customer base. It's a highly scalable part of our business. We've done a lot of work to make sure that, that was true. And so as revenue returns, you would expect to see that have the opposite impact when you start to see this margin expansion with that part of the business.
That customer base, is it intact with eNett's customer base and WEX' travel customer base? Are they intact -- at least intact from -- to where they -- at least on a relationship basis?
Yes. From a customer relationship perspective, we continue to have the same relationships across both eNett and WEX. And obviously, volume has been diminished, but the relationships are intact. And we continue to work with the online travel agencies to make sure that we're there for them. A lot of what we've heard from them during this period of time is they care about innovation. They are really interested -- when we first started the eNett and Optal transaction, we had thought that we might want to keep 2 separate platforms, but in having these conversations with our customers, really what they want is the best of both sets of functionality. And so we're bringing that together, and they have a strong desire to make sure that we can continue to innovate for them and with them in the marketplace and that's been a pretty keen focus item of ours.
Is the mix of that business, how much of it is cross border? And what is the mix between consumer and business?
Yes. Well, we don't have total visibility into whether it's a consumer business, but we know that largely it's consumer-related volume that's -- taking on these sites. And because the products that we have are geared to meet some high-level complexity, we tend to have more cross border volume as the OTAs have shared volume across multiple categories. We tend to have more of that because of our ability to issue and settle globally in multiple currencies and because of just our overall charge back capability.
Great. So as we're seeing travel rebound, it's not necessarily going to correlate one-for-one with WEX in the near-term until that cross border piece really comes back, which...
That's right. Yes, yes. We'll tail it a little bit. And also, I think the other thing just, we recognize revenue when people stay, if it's hotel-related spend. And so there is a little bit of lag on that from what you're seeing in some other parts of the market, what they're reporting.
Okay. And the -- from airlines versus hotels, what is the -- I mean, I think eNett was more weighted towards airlines and...
They still -- the predominant share of their business was hotels, but they did have more airlines. As part of what was interesting to us in the mix of products, they had just better product capability when it relates to airlines. And so it -- and through -- as you might imagine, through the pandemic, there's been very little activity in that category just because there wasn't a lot of volume going through. So you're going to see more of that pick up as well.
I know that you're ahead of your expectations for cost synergies. Are there revenue synergies to be had?
I always like to think of revenue synergies are our sweet spot. We do the cost synergy side because it's just kind of good hygiene with doing a transaction. It is not a primary focus of ours. When we're looking at this, it's been more around the clear cost synergies because, again, you're combining 3 businesses together. So when you look at just the amount of duplication, we want to make sure that we just don't have waste in the way that we're approaching the marketplace. We didn't need to have multiple categories of the exact, sitting across this business as you bring it together, and that's been true really as you kind of go deeper into the organization. And so we spend a lot of time on org structure going through work council approval and as we brought this in, and our focus with the customers has just been around making sure that we're listening to what they need and where -- as we build out the product capability that we're doing that with an eye to the future. But I don't categorize that as a revenue synergy like the other things we've done.
Okay. And then just on the, I guess, competitive environment in travel. There is obviously a lot of innovation in fintech. Are you seeing more competition in the travel segment going after your type of customer? And is that having any effect on pricing, I guess?
I wouldn't describe it as any different right now. And I guess, I'd start from a place of -- and a lot of the work that we started 3 years ago was the idea that we would see a different competitive set that we really thought that while we were winning in the marketplace based on technology, and we still do, we really want to make sure that we're thinking about the future, and that really is what sparked a lot of the transitional work that we've done. And right now, in this marketplace, I would say, you're seeing some of these fintech players in our space, but not as prevalently as I think people think. And when we do, they're typically competing on like a piece of the business, part of our offering. The benefit that we have is, we can talk to our customers and prospects about the full services of what we can do from an end-to-end solutions. And at the same time, we can do that at scale, and we find that to be a really compelling way to go in the marketplace. And honestly, part of what we have to be thoughtful about with fintech players is just the impact around making sure that we're sensitive to what's happening with pricing in the marketplace because if someone can come in and they can do one little piece of things, they might do that at a really discounted rate. And as we're looking at this, it's just making sure that when at the end of the day, the customer is receiving value for what we do if we're charging a premium for them.
Okay. From a technology perspective, what -- how do you continue to innovate at the same pace or a faster pace? Where are you investing? Are you hiring more engineers or different types of engineers? Or what -- as you look at your tech base, where do you -- where are you focusing your investment dollars?
Yes. Well, we're spending about $100 million in capital. Lots of that -- the bulk of that is capitalized development, so software. And we really are fluid in how we think about spending that money. We look across the business and look at where we think we've got real opportunity. We last year, started moving more money into our corporate payments group. So we were cutting back on some of our spending, but we're very targeted around moving money into that area. And it's a place, I would say, we continue to really focus. When we look at capital deployment, we've moved a lot of our M&A dollars into the health space because we're seeing attractive targets that really meet a lot of the strategic criteria that we've laid out over the last several years. And on corporate payments, just because of the pricing that we're seeing in that marketplace in terms of assets, we've had more of a bias to build. And so it's -- think of this as kind of fluid. In some years, we might be even more of a bias to buy, and other years, we'll have more of a bias to build. But I think just from my overall confidence in moving money back and forth, has a lot to do with all the work we've done on the technology so that we're just in a much better position to integrate as we bring new things in, but also to pivot and build.
Okay. The corporate payments business, I think if you look at that segment, it was about -- is it 80% of revenue, Steve, in that segment in the first quarter was corporate payments? Is it...
About 60%.
60%.
60%. What is the right -- what do you view as your core moat or asset within that business? What is the outlook? What's the long-term potential for that business?
Yes. So when we've looked at that, we've looked at it combined with travel. And so our long-term growth in that segment has been 10%, 15%, and clearly, we're growing faster than that in our corporate payments piece of that business. And when you talk about moat, it is a massive market so we start with that, right? So we've been really pretty hyper focused on the fintech category of having embedded payments associated with some partners in the space who are fulfilling the needs of customers in that fintech category. And I think, for us, part of why that has worked is because we can speak their language, and there is a connectivity around what we're doing and their needs. And we have cross-sold also the products into our fleet customer base. I would say that's been kind of the minor in the story and kind of the bigger story has been working through a partner channel.
Okay. What areas like virtual card, or AP, or AR, which -- kind of which segments of B2B are you most focused on?
So we've been focused on bill pay, AP and AP automation primarily. And -- but the way that we present the payment to be through a virtual card is think of any of the payment categories or payments we're going to play in. It's just what's going to be the payment mechanism that works best for our end-user. And virtual cards, we tend to use virtual cards with some frequency because it has real-time payment capability as data capture capability is good economics. And so it kind of hits a lot of categories. But depending on what the use case is, we might move into other forms of payment.
Does the bank -- is owning the bank an asset in -- how does owning the bank affect WEX? How do you benefit?
Yes, it may, clearly. And it's subtle, like you talk to someone like as we look at some of the recent wins we've had with Avid or other places. The idea that we have a full-service offering and full-service capability is important. Even frankly, when they don't utilize it, there is a credibility. I think that comes with having a part of our business that's in this space, where we have direct access, but they're also a regulated entity. And so when people do business with us, they're not doing business with us and a bunch of other providers, they're able to -- we can do the card issuance, we can do the kind of like end-to-end services. If you think about this, the ability to have card enablement, the ability to fulfill the payment through multiple categories of payment. And I think the bank, it's just -- it's an integrated part of that offering. It's also a way that we do business very affordably is to the extent that we need to extend credit, and we don't always in corporate payments. But to the extent we need to, we can do it at a very low cost of funds.
Then, I mean, the health care business, as you said, you've been active on the M&A front. And how should we think about the TAM? You just closed your Benefit Express acquisition today, how has the TAM grown for health care? How do you think about that? And maybe start there.
Yes. So we think of Benefit Express as doubling our TAM. And so adding in another $3 billion. And the way that we have thought about this and the reason why we've been interested in ben admin asset is because we think of that as the hub. If you're building an ecosystem and the ability to extend software services off from a central point, having that ben admin component is a really important part of that. And so what we're able to do for our partners and directly with our customers is to now have either a la carte offerings or an integrated offering. And we're able to get a lot more data and data rich information. And if you look at the customers and partners on the health side, they've been really eager and interested in a lot of the data analytics capabilities that we have because we can give them insights into behavior patterns in the aggregate just because of the sheer number of deposits or customers that we have on that end of the business. And so just being able to add to that, we think is an important part of the long-term strategy.
So what is the growth rate of the health care business over the medium to long-term now that you've expanded into different pieces and doubled your TAM, I guess?
Yes. We haven't backed away from the 15% to 20%. We think of that as the growth rate in that part of the business. Clearly, we're going to be below that this year because we're not seeing the normal lift we get from employees getting added to businesses. But in that part of our business, we don't see anything that we think has changed that long-term growth rate.
And then, I mean, the HSA, the consumer-directed health care benefits piece, you just -- you made an acquisition to I guess enable to a greater extent, earning income on the cash balances.
Yes.
I mean, that's a very profitable business, especially as interest rates go up, I guess, over time.
Yes. There is a couple of things that were interesting. And again, this is something we've had in our road map for a while. The acquisition of the deposits from HealthCare Bank, what it enabled us to do, as you just said, we're able to monetize now really the full value of the customer base, which is important to us financially, but also competitively. And it allowed us to create an integrated offering with much better we think long term just customer satisfaction capability. And so we like it for a couple of reasons, and then there is this ancillary benefit of when you talk about our bank, we can move some of those assets in the bank, and it can help offset some of the interest rate exposure that we have, and so we like that buffer. I'm sure Steve is like dying to bring in on this. Sorry, [ move ].
My dream for 7 years. So finally coming through.
So I mean, your balance sheet, your leverage is about 3.5x. You've made a number of -- I mean are you -- at this point, are you focused on for the next year? Should we think about deleveraging and integrating eNett and making sure Benefit Express goes well? Or are you still in the market?
So when we look at acquisitions, one of the last couple of filters that we have to go through is do we have the financial capability of doing it, which is important, right? And then do we have the -- just bandwidth to make sure that we can pull that off. We've got a pretty good track record. We want to make sure that we continue that. And right now, like if you look across the categories, you see that it is spanning lots of different parts of the business, which is intentional and gives us the ability to digest more. And so really, for us, it's more around we'll continue to be active in the marketplace. But our primary focus, we have a higher hurdle right now, would be paying down debt.
If you had your wish came through and you could get any asset you wanted in any sector, where would it be?
Our macro goals are to reduce the exposure that we have to fuel prices, and we've done a lot on that front. Even in 2014, I think we had 45% of our revenue was moving fuel prices and now down it's likely below the 20s. And so that's been a really important part of when we thought about how we're deploying capital. But the second part, which has been equally important in just increasing the TAM. And so look across the business, both corporate payments and health are categories where you have an ability to really do both of those things. And so when we go through this process, we set up our long-term acquisition road map through -- like probably, many companies, go through a pretty strategic process of looking at what we'd like. And then if you have to work through what's actually possible, and it's going to meet your financial criteria. And so right now, I'd say, well, we are interested in both categories. The B2B space is pretty expensive, and so we've had a bias towards building as a result of that. But it doesn't mean we're still active in the space, and we'll continue to look at assets. And we think that both of those markets are important to us as well as we have continue to do things in the fleet space where you do migrate away from the fuel price exposure. So building off that business, which has been a really great business for us is fine, too, as long as, again, we increase our overall addressable market as a result.
Are you seeing any noticeable improvement in same-store sales in fleet, ex the large trucks? I know the large truck segment has been blistering hot. But underneath that, are you seeing real signs? Obviously, the comps are easier year-over-year, but excluding that, like sequentially, are you feeling an improvement?
Well, we actually snap the data quarterly to like really do our deep dive. But I can say from -- like we've seen just kind of moderate like continuous improvement. So I would be surprised if I saw like big category changes based on kind of the overarching data that I'm seeing right now. And again, Steve, I don't know if you'd add any more to that.
I think those slides that we showed during our earnings call with the weekly trends, I think the trend lines are pretty well intact, right? The slow, steady improvement, but there is no like big spikes up right now. The opening of offices is kind of the last thing that's going to -- that's probably going to help us get back to where we were.
Okay. We're running out of time, but maybe last question. When you became CEO, you came out with some growth targets for the company. Now how do you feel in terms -- you've executed against those, set back by the pandemic, obviously, in the travel sector. But how do you feel about those targets, as we think long term? Are they still intact? Or is the company bigger, you can't really grow at that pace? Any thoughts around what the right growth rate is and the target operating model, if you would?
It's a challenge, Bob. Yes. So our long-term growth rates we came up with 10% to 15% topline, 15% to 20% bottom line in our history. And we think of that is excluding fuel prices. So kind of constant -- fuel price constant currency. And we've been really above that from a revenue perspective and in the range from an earnings perspective, excluding last year, obviously. And there is -- we would not change or back away from those. We feel really good about trajectory of the business, about -- at least to continue to build upon the base of customers we have and add new business, both directly through partners and add digitally. So we feel, I'd say, even more bullish than certainly a year ago, but probably even a few years ago, I just think that our technology capabilities are just much better, and they started from a good spot. And so I just feel like that enables us in the markets that we're in to do a lot more.
Great. Well, thank you. Thank you very much. Thank you, Melissa. Thank you, Steve.
Great, Bob.
Great to see you.
Thank you, Bob.
And always appreciate having you at the William Blair Growth Stock Conference. Much appreciated. Have a great day.
Thanks, Bob.
Thank you.
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