WEX Inc. (WEX) Earnings Call Transcript

Welcome, everyone, to another session at our today SMidCap virtual event. Very happy to be joined by almost corporates during our 2-day event hosted by our analysts who have really great both of coverage of mid-caps. -- our analyst here at BofA cover about 1,000 small and mid-caps in the U.S. So the size segment that's definitely seen more interest the last 2 years. So thank you so much for joining needs the schedule or still wants to sign up for any additional sessions. It's not too late. I've set up some investors today. So feel free to reach out to me, Jill Hall or to my colleagues, medicine or actually in corporate access and we can make to get you on that as well as if you need help connecting with any of our analysts after or to get signed up for any research. So thank you so much for joining, and I'll turn it over to Sami here.

Thanks, Joe. Thanks, everyone, for joining and special thank you to the WEX team, Jack Car and Pedro. I really appreciate you all taking the time and joining we will go ahead and get started. I know there's a few folks here who are a little bit newer to the story, Jucar. -- maybe for those who are newer to the story, WEX often gets described as simply a fuel card company. But I think that undersells it a little bit quite a bit maybe. So maybe just give us the 2-minute version of what WEX actually is today. what the segments are, how the revenue splits, just get investors up to speed and how -- and also help us understand how everything fits together.

Sure, Maher. Thank you. So yes, I think calling us a fuel card company does undersell it. So first of all, thank you for having us and having me here today, and thank you for the other folks on the call that are joining us -- if we turn to the next slide, I think this is a good way to think about the business and the statement on the top, I think, resonates with me, and hopefully, it resonates with others that follow the company. Every day, we're managing payments on behalf of our corporate clients that are not just any payments, but they tend to all have characteristics that are pretty similar. We manage payments that are complex, regulated, generally pretty mission-critical for our customers. And what we do is we bring together sort of proprietary data, technology controls around those payments, compliance capabilities, vertical knowledge and the infrastructure of our wholly owned industrial bank to basically become very deeply embedded in how customer customers operate and simplify their ability to manage these payments and provide controls around them. So if we go to the next slide, let me talk about where we do it. So last year, we were about $2.7 billion in revenue. On the right here shows the mix of our business. So the first segment, roughly half of our business is our mobility segment. And that's where -- where people may be when they think of us as a fuel card company, that is our fleet business, right? We're a leader in managing fleet payments on behalf of businesses, fleet companies have large fleets, fuel-related spend, vehicle movements. They need to manage and track this very closely. We have tools, payments capabilities, fraud management capabilities that allow them to do that, and we do this very, very efficiently and effectively. Our second business comprising about 30% of our revenue is our benefits business. Here again, we're also managing effectively mission-critical payments at massive scale. In this particular case, it's payments that are -- it benefits for employees. So think of health savings accounts, flexible spending accounts, lifestyle accounts, COBRA, right? These are all payments that are going to insurers, providers, beneficiaries -- they require -- they're regulators, they acquire controls around it, again, mission-critical, massive scale. And then the last business, about 20% of our revenue is our corporate payments business. And here, we're really helping companies automate business-to-business payments. We've done this in the travel industry. We are doing it outside of travel and increasingly more and more outside of travel. So this is where we're using our virtual card platform and managing things like embedded payments. So this is high-volume payments from a provider of business that needs to make a lot of payments as well as kind of our direct accounts payable service. So this is going to an organization that is an AP file that need a process and we're processing on their behalf. I think the common theme through all of this is our shared infrastructure within all 3 of our segments. We have deep relationships. We have technology. We have strong vertical expertise, regulatory capability, the bank, we bring that all to bear to address these segments. We go to the next slide. It's a little bit about our strategy. We think about it in 3 buckets: amplifying our core, expanding our reach and accelerating innovation. So when we think about what we're doing. So if you think about things like amplifying our core, this is looking at pricing on a regular basis, signing up new business, customer retention working on margin expansion, things like that, that continues to expand our core business but we're also taking that core business and continuing to expand it. So and expand our reach, I would think of things like what we're doing in corporate payments to take that platform into new markets beyond travel. We've got a long-standing history of being the leader in the travel space. We've been moving it to B2B payments outside of travel. Likewise, in our Benefits franchise, we've been expanding our benefits offering, and I would also consider that part of expand our reach. And then accelerate innovation is where we bring true innovation to bear. So a lot of things we talk about are AI, how do we embed AI in our products how do we use it to drive more margin enhancement, what are new markets that we can go after, that would all fit under kind of accelerate innovation. If we go to the next slide, -- let's talk about a little bit about WEX from a capital allocation standpoint. So it's worthwhile noticing noting that we are kind of a very high margin, high cash relative business. So -- our adjusted operating margin in the last quarter was close to 40%, 39.6%. We generated close to $700 million of adjusted free cash flow over the last 12 months. And 1 of the things we've done recently is get leverage down below our 3x target to 2.9x. So we're within our target range -- and as a result, we are now -- and we highlighted this in our last earnings call, we're now deviating the vast majority of our free cash flow toward stock buybacks. And that we will continue to look at M&A. It will be part of the strategic mix. But at this particular point in time, we think our share price is a great buy, and we continue to develop the vast majority of our free cash flow to that. So if we turn to the next page, if we think over the medium term, we're aiming for 5% to 10% organic revenue growth, 10% to 15% earnings growth, we do believe we have a business with accelerating organic revenue growth, improving margins and a high degree of cash generation. that creates -- we're disciplined about the capital allocation. So we think these are all compounding effects to what is a great business model. And I'd be remiss if I didn't say something about artificial intelligence since I know a lot of people's mind these days. We think of our AI is a big opportunity for us. We think about it in 2 fronts. So First is the obvious margin enhancement that we have as a company. We spend a lot of money in technology development. We should spend a lot of money in customer care, whether that's processing claims or handling calls from employees in our benefits business, for example, depositors in their benefits business. So -- we think AI is very well proven now from an ROI standpoint, both in customer care and product development, and we think that we will continue to see value add from that. But we also see opportunities in the product side. We essentially operate the infrastructure at the layer of payments, right? We are crossing those payments and all the regulatory and compliance needs to come with that. But in that, we are collecting a lot of data. We know how businesses use their vehicles. We know how consumers travel. We know how enterprises what they're spending money on, we know how employees use their benefits. That is a tremendous amount of data that we can use to help organizations make better decisions and automate those decisions as they're being made. So we see that as power of AI that will be increasingly embedded in our products. So with that, here, hopefully, that was going to and hopefully people see us as more than a fuel card company.

Yes. No, absolutely. And I think that's a good level set of folks. Now you just reported Q2 results recently, and I think part of your guidance has been to come back within that 5% to 10% revenue range for Q2, I believe you were at 4% revenue growth on a macro-neutral living. -- bridge that for us, what's going to change in the back half of the year to get you from that 4% to the 5% to 10% guidance? .

Yes. So Q2, 4.2% excluding the impacts of fuel and foreign exchange. So just for folks that are new to the story, right, obviously, fuel prices will impact revenue fuel prices are very high in Q2 because of the Iran war. So we saw very high revenue growth result of fuel prices, but we look at our business ex fuel to really think about how management is performing. -- ex fuel, we were at 4.2%. One of the things that we talked about in the earnings call was the drag that we're seeing on late fees in our fuel card as fuel prices went up, somewhat counterintuitively. We saw people make faster payments on their fuel cards and reduce the instances of late fees that we typically generate. -- that had about a 1 point drag from what we would have typically expected. So had late fees been somewhat normalized, we would have been into that 5% range. So we took some actions we are always looking at price optimization in our business. We had some pricing plans that we intended to implement. We accelerated those to start implementing in the back half of the year. And those are basically replacing the drag that we're seeing from late fees. So those will start to kick in over the third and the fourth quarter and bring us back into that growth range of 5% to 10%.

Got it. And maybe on that in terms of the longer-term guide of 5% to 10%, what gives you confidence that you can consistently deliver 5% to 10% growth rather than, hey, we're going to touch it here in the fourth quarter, maybe keep it at that level for a couple of quarters and then drop back below. So like where is the confidence in the long term coming from?

Yes. So we aim to have that 5% to 10% growth in each of our businesses, right? And in each of our businesses, I think there's a number of levers. I mean, we look at the 5% to 10% holistically across our across the company, but we have a number of levers in each of our businesses. So if I think of mobility, right? We've talked about just now pricing. Our new sales generation has been terrific. We continue to work on retention of new customers we've expanded the markets that we addressed. We've worked a lot on our direct marketing capabilities so we can effectively target smaller fleets. We are rolling out capabilities to move beyond just fuel so enhanced monetization opportunities. And so we see a number of levers there, and that's even without demand recovery that we also expect to see in the mobility segment over time. If I go to the Benefits segment, we have a very robust partner channel and a direct channel. So we have broad market coverage of our full suite of benefit offerings. -- right? That's a market that's benefited from a very strong tailwind over a number of years of employers moving more and more invoices to a deductible -- high deductible health plans, which has driven HSA adoption, but we have a number of offerings outside of HSA. And so we've been driving that through our multiple channels, and we continue to see a good opportunity there. And then corporate payments, I talked earlier about how we've been a leader in the travel segment. That's been a great growth engine for us for a while. But we've invested heavily outside of travel now we see in our embedded payments business, nontravel, a really sizable market opportunity. We see that in the direct side. In fact, in the last quarter, we saw a 20% volume growth in our direct AP business. We expect that to continue at double-digit rates, mid-teens rates because of the size of the market opportunity. So we've made a lot of the investments that we needed to make to drive this growth. And now it's a matter of execution that we get the scale.

Got it. So maybe we'll dig in for a little while on individual segments. I'm going to start with the largest one, mobility. And before we get to the demand drivers and what's going on there, let's talk a little bit about just fuel prices and level set for us to fuel price sensitivity. I believe you've said 0.10 move in fuel prices is about $0.35 of EPS. I think for the full year this year, you're assuming 3.91 per gallon for fuel prices versus it was 31 in February. So obviously, a big benefit fuel added, what, 25 points of EPS growth, right? So I guess, really, the big question is, as you think about 2027 and fuel prices maybe normalize from here, touch word -- how should we think about that give back into 27? What are the offsets in place that is going to keep fuel growing nicely?

Yes, sure. So I'll preface this by we're not giving out 2017 guidance here -- and this war has created uncertainty. So if you would ask me a month ago, I would have thought, right, we're getting to a resolution price. I mean I think all the market thought prices were going to come back down and -- in fact, we're still at a standstill and some who knows where prices are going to head and who knows where the straight of Hermes is going to head. So We, as a company, focus on the things we can control, right? We can't control fuel prices, which is why we often talk about the organic growth rate outside the field because that's what we can control, especially in this a period of high volatility. So we will continue to focus signing up new customers. We will continue to focus on retention. We will continue to focus on expanding the addressable market beyond just fuel to kind of nonfuel-related spend. We think those are all drivers to continued expansion of the business. I will also say we are implementing the pricing actions that we -- that I talked about earlier. -- about $15 million in the second half, and that's roughly breaking down to 1/3 in Q3 and 2/3 in Q4. So call it $10 million that will annualize to a $40 million run rate heading into 27 million. So that will add additional momentum in the 27. And I will say we're not dealing pricing, right? This is something that we continuously analyze. I think we've got kind of a road map that will stay in a couple of years of pricing opportunities as a company. So we feel really good about the opportunity in the mobility business despite what happens to field.

Got it. I think the other big question on fuel that we get a lot is just got to do with the current backdrop. And if I think about what you reported a couple of weeks ago, you talked about, I think, processing transactions were flat year-over-year, same-store gallons are still running a little bit I think they're down 1%-ish, 0.8% year-over-year. And I think what investors are really struggling with a little bit is what's happening under the hood? Like is demand truly that soft because obviously, all of us see a lot about trucking recovery, right? So is demand really soft? Like, I guess, really, the core question is, is WEX gaining share, holding share, losing share. what statistics or what metrics do you have that can help us answer that question. .

Yes, sure. So let me address both pieces of that. The data that says a little bit about what demand is doing and the data that says how is what share doing, which I feel really good about. So let me start with demand, right? A lot of folks come to me, and we've talked a lot about the cash trucking index and folks are looking at and say, well, the index is increasing like wax, why aren't you seeing the corresponding increase in volume. And when you look at the cash trucking index, I think people have to keep in mind there's 2 components to the trucking index. -- there's what's called the expenditure index, which is essentially what the invoices are of the truckers and there's a shipment index, which is the volume of the truckers. -- that invoice has had. The expenditure index has increased, right, because invoice has gone up because small truckers have been taken out of the market from some of the moves the Trump administration has made -- so that has been a reduction in supply of trucks, which has increased spot rates invoice has gone up. That's been good for us, right? It helps credit losses to have store bridge truckers helps our factoring business, have larger invoices to factor. So that has been good. But then a big chunk of our business is driven by actual volume miles driven. -- and the shipment index in cash has still been declining. So there's still evidence that we -- it's better, but it's not on the upswing yet. That's supported by the same-store sales numbers that we talk about, right? When we look at same-store sales is a customer that we had last year, corresponding customer this year, how much more or less are they pumping and kind of we've seen them pumping less or it kind of aligns to what we've been seeing with the volumes out of the cast and Dex. So then let's turn to, well, what evidence do we have of what's continuing to maintain its market share right? We continue to sign new business at good rates, like we look at it how much do we develop to sales and marketing, how much new business we signed. We continue to be kind of very, very competitive there. I will even say from an anecdotal standpoint, we just held a summit last year here -- or last week here in Portland. -- set of customers, a set of partners, and I hosted a session and heard really resoundingly good feedback from our customers saying, look, you continue to have a leading product in this space. WEX, you promised us a certain set of enhancements last year. And you've delivered on those enhancements. We're really pleased by that. We went to a lot of vendors that say they're going to do something, they don't do it. you did what you said you were at to do. So we, by and large, heard that our products continue to be very competitive. So I still feel like we are continuing to hold our market share.

Got it. I do see a hand raised. So why don't I turn it over to Conor, you want to ask a question? .

Yes. Sure. Thanks, Maher. Thanks for hosting us today. Just had a question on the I guess, the shipment index -- and why is that actually declining? And I guess what would we as investors need to see to have some confidence that you could see that inflection in same-store sales?

Yes. SP999 So the shipment index, it's been declining for a few years now for a couple of different reasons. So during the covered years, everybody -- people were sitting at home, ordering lots of goods off of Amazon with the free money the government was heading out, right? I mean I say that a little tongue in cheek, but that's effectively what happened. And we saw a lot of volume growth in shipments. COVID opened up, right? People spent a lot less time buying goods and a lot more time on services, right? So you saw, for example, travel come back significantly, and you saw the benefit coming to our travel business as a result. -- will, as a result, you saw volume weakness in our -- in the movement of goods. That started to stabilize, call it, late '24, I think we're feeling fairly positive going into 25 and then we had kind of liberation day in the tariffs, which further impacted shipments and kind of further weakness. So I think you're starting to see -- we're hearing signs of improvement like the ITSM indexes improvement. -- improving. I think we want to start to see GDP continue to grow. The good side of the economy continue to grow. New construction increase, those things that actually drive goods to be moved. -- start to increase. So the good side of the economy rather than the services side, and that will drive improvement of volume.

Go ahead. Just 1 follow-up. I guess, is it -- I would have thought maybe like with the hyperscaler CapEx build-out and the demand for all this data center capacity you would have potentially seen that start to trickle down into the Freight segment? Or is that potentially too early?

We may be seeing a little bit. It's hard for me to say. If you look at what the vast majority of goods that are shipped in the U.S. from a volume standpoint, it is actually not going to be things like whatever semiconductors or servers are being used for those data centers. Those tend to be large dollar value goods. But from a volume standpoint, they're not actually huge volumes. When we look at what actually drives volumes. It's things like agricultural goods and monies, things like that. That is what that drives the bulk of the volume. So I'll give you an example, right? Like last year with all the tariff whiplash, we saw a decrease in things like I think was sheer with all the tariff whiplash we saw a decrease in things like I think was soybean shipments to China, which actually is more volume than high-value mechanical goods being shipped around.

So maybe switching gears to benefits for a couple of minutes. I think in benefits, SaaS account growth slowed to 2% in Q2. Now there is a couple of callouts, I think, there with the UAW, I think it was 150 bps. And then you also said there was some look closing of low-value accounts, which is another couple of hundred bps maybe just given all the moving parts, what's the true underlying account growth rate? And where does it settle out for the full -- on a full year basis?

We had those 2 items that you mentioned here. So for everyone's benefit. Earlier this year, we closed some accounts that essentially were unprofitable for us. These were low dollar value count. So there's a lot of accounts, but low dollars associated with them. So that was about a 2-point drag to our SaaS account growth rate. Again, not much of a drag in revenue but a drag on reported SaaS accounts. Then we had UAW Trust, which was a large customer that we signed last year that we lapped that. So that was another right, 100 basis point drag. So you add those 2 together, we're essentially a 5% account growth we feel really good about that. I think you should generally expect our account growth range to be in that 5 to mid-single-digit percent range we've generally grown ahead of the market year after year. We see a good pipeline this year. So we continue to be pretty optimistic about next year. So I think the rates that you've seen like for Q2 will be essentially, I think, with the rates we're paying for the rest of the year, plus or minus. But really, we're now in the selling cycle. So what happens is we'll get most of the sales Q3, Q4, with the onboarding in Q1. So the percentages will roughly stay where they are that we saw in Q2 and the next uptick in Q1 of next year.

And are you seeing any impact from the Optum oligos deal from a competition standpoint? Any change in partner renewal behavior pricing competition? .

No, we've not seen any negative impacts. I mean our partner at relationships tend to be very, very sticky. -- right in a number of cases, we've got partners that have done heavy integrations with us. So it's difficult for them to move to begin with. So we typically don't see a lot of impact there. I -- we have heard kind of on the inbound side, some incremental opportunities because of that deal. So I'm hoping we see some positive news outside of that. It's still early days, but it's been pretty it's been pretty status quo with potentially some upside.