WEX Inc. (WEX) Earnings Call Transcript

Perfect. So joining us again is Jagtar Narula, CFO of WEX. Jagtar joined WEX as CFO in 2022. Prior to that, he was CFO of 3D Systems and held senior finance strategy and business development roles at Blackbaud. His early experience also includes finance leadership positions at Xerox in General Electric. So very well seasoned executive here. So thank you for joining us. .

Thanks.

So it's been nearly 2 years since you reset the long-term growth targets stepped investment to reaccelerate growth. Where do you assess yourself in terms of your positioning in that broader effort? And what still needs to happen?

That's a good question. Thanks, Sanjay. So I think we've made a lot of progress on a number of fronts, right? We think about -- we've implemented pricing actions that have accelerated the growth of our mobility segment. We've talked about some of the sales and marketing investments we've made, which has helped us deliver greater new business generation. We invested in retention, and we're seeing progress there. So I think we've done a lot of things that set us up well. So the second part of your question is what really needs to happen next. I'd say what needs to happen next is really what I'm most excited about. So a lot of the actions that you've seen come through are the things that we could implement quickly and would result in improvements quickly. Some of the investments we've made that we started a couple of years ago, it was really on the product side. So -- and we're starting to see some green shoots there, right? So if I tick down through our business, if you start with corporate payments, right? We invested in this new product a few years ago, both on the product, sales and marketing around direct -- and that's our product that basically brings AP processing to enterprises. Seeing good progress there. You saw third quarter 24% volume growth in that business. We've talked about embedded AP or embedded payments, another solution we've built, seeing a good pipeline there. If we go through benefits, there's also been product investments there on both the customer experience side and how employers use the platform. We've gotten good customer feedback. So we're excited as those roll out and then on the mobility side, I've talked about on earnings calls, 10-4, which is a product we introduced to expand basically the market we serve in the trucking segment. We've talked about the size, the amount of data that we collect and our ability to create AI-driven solutions for customers. So not only are we just giving customers data, but we're decision-making for them and taking actions for them. So I think all these will be additional revenue opportunities for us in the future as we expand what we do for our customers. And so that is what I'm most excited about. I think we've made progress on the things I've talked about, I think we've made progress on margin expansion. So I think the setup is really good and we'd really like to accelerate on the product side.

That's great. And I guess, like as we think about sort of monitoring if these initiatives start adding value? Like what are the KPIs that we should look at? And over what period of time do you think that they start having an impact?

Yes. Good question. Yes. So fundamentally, the biggest KPI for us is revenue growth, right? We've said 5% to 10% revenue growth. We've said we expect to be, based on the guidance we've given, we've expected to be in that range in the fourth quarter. And so for management, that's the #1 KPI. If you drill down into the segments, we have a number of KPIs that we track in the mobility segment, it comes down to gallons, which is effectively how we do in a new business, retention and growth of the base and corporate payments. It's really about the total volume that we process. and in benefits, it's right what the number of SaaS accounts and the amount of assets under management. I think those are the key metrics. I would say, with the new products that we just talked about, I think we'll see those metrics potentially evolve over time as additional new products become incrementally more important to the business, And we'll talk about that at some point in the future as that happens. I would say the other thing critical for us is margin expansion, right? We've talked about this year, we're driving towards 75 basis margin expansion. And we've done that while rebalancing how we spend to do more investment in the business. So I think that for us is a critical KPI. And I think we've talked about 10% to 15% earnings growth and we talk a lot about the free cash flow we generate. And those are also, I think, critical. The free cash flow this year has allowed us to buy back roughly 5.5% of our outstanding stock. while at the same time, pushing leverage down to 2.7x at the end of the third quarter. So I think that's a long list of KPIs that we track, but I think it's indicative of the momentum of the business.

No, absolutely. I remember a year ago, we had the margin discussion, and I'm glad you guys got some nice operating leverage after that. Yes. And so maybe we just dig down into the various segments and start with mobility. the growth accelerated this quarter off of better local fleet performance, pricing and the BP contribution. I mean how much more room do we have for acceleration given fuel prices are this high? And like where is the most incremental opportunity for mobility? .

Yes. So if you look at the third quarter, we had some benefits come through. We had -- we talked about the finance fees being soft in the second quarter. We saw that start to normalize and that added growth in the third quarter. The pricing actions we've taken have helped. There was some softness primarily in the trucking segment, the North American fleet part of our business, what we call local fleets did well. We saw improvements in volume growth. in the trucking part of the business, we saw some softness as what we've seen from higher fuel prices have shifted volumes from trucking to rail. So if we talk about what sustained momentum and accelerates in the future, I think there's 2 key pieces. So 1 is the demand environment, right, both the trucking side, but the overall economic environment, housing starts and things like that, that's not been baked into any of our forward guide, I think that's an incremental opportunity. And then the same for the new product investments we've talked about, right? I think there is an opportunity for that to be a more and more meaningful part of the business going forward, and that should continue to help sustain growth in mobility segment.

Just 1 on demand. This over the road you trucking industry has been weak for quite some time. and like we've seen some green shoots hasn't necessarily manifested itself in a big way for you guys yet. Like do you think that, that continues and builds that creates momentum? And like why is that happening?

Well, I would start by saying we are a leader in the trucking space. And as trucking comes back as we're all optimistic that it eventually will, we expect to capture our fair share of that market, right? We -- we're a leader. We have a great solution. We've had a number of green shoots over the last couple of years, the trucking declines we first saw with -- as we came out of COVID, there was very high trucking demand. During COVID, we're all sitting home on Amazon ordering stuff to be delivered to our house as people move towards experiences in traveling, less purchasing of goods, you saw that softness come through in trucking. . And then I would say over the last few years, every time we expected kind of green shoots, there's been something that's hit the trucking segment externally right? If we would go last year, the trucking industry was quite optimistic and then we had tariffs set, right? And that dampened demand almost instantly. This year, right, we -- again, we're saying, okay, we're going to start lapping the tariffs, we're going to start to see some green shoots. And then we had diesel fuel prices at record highs. So I think over time, we will move past these items. And I think with that, as I said earlier, we will get our officer of that market opportunity.

And do you feel like the diesel price is escalating so high are having pretty meaningful negative impact or headwind because they've done reasonably well despite that. I'm curious.

Yes. So if I look at our trucking segment, same-store sales, so to give you a data point the Q3 2025 versus Q3 2026, Same-store sales were about 150 basis points worse, right? and I largely attribute that to the demand structure that's happening from fuel prices. We're still incredibly competitive in that market. We're still signing at high rates. this is really less volume on the trucking side. So the following question will be what happens when fuel price is lower right? I would expect -- I don't know what percentage of that 150%, but I would expect demand to return as fuel prices lower in the future, hopefully.

Great. I know pricing has been a key lever in that business in the mobility business. And as I mentioned, it added to this year. I guess I'm curious like how much pricing power is left and where is its strongest across mobility's economics? .

Sure. So we have done pricing pretty consistently for the last several years. So if you go back to 2024 and 2025, we implemented about $70 million of new pricing. Then if you go to this year, we've talked about $15 million in the second half. That will translate to about a $40 million run rate as you go into 2027. So the pricing actions have been kind of a number of different areas. We still think there can be considerable opportunity. We've done extensive studies across our different customer segments. I think you'll see it more in the local fleet side, but we think there's pricing across mobility segment. I would also add that in addition to the pricing level, if we go back to some of the product investments that we talked about at the beginning of our conversation. Those are investments that are enhancing whether it's a new product or even new features and new capabilities and existing platforms. Those are things that provide value to the customers and give us an opportunity to capture additional revenue, so I think that's part of the rest of the...

Great. And I guess when we think about the margin, right, you mentioned delivered to margin expansion this year as we think about the opportunities to improve the margin on a go-forward basis, where are those opportunities?

So just to remind the audience, this year, if I take the last quarter, right, we saw about 90 basis points of margin expansion year-over-year. So we've seen really good progress. And if you sort of look at kind of what underlies that, clearly, the pricing actions we took helped. We've also been focused very heavily on improving expenses and especially through the use of AI. We've seen progress. I think Melissa has talked about product development. We've seen progress in customer support and services. We've seen product progress in credit decisioning right? In all of those areas, you've seen improvement in the expense rate. As I think going forward, obviously, we talked about pricing continuing to be a lever for us. But I also think AI will continue to be a lever for us in managing expenses beyond the areas we talked about, right? So if I think of collections, if I think of fraud, if I think of sales, marketing, account management, right, those are all areas where I think AI will provide significant value, and we'll have opportunities in the future.

Is there a way to think about like the incremental margins of the business versus the margin you have today? I mean it will give us some direction outside of investments you're making on the path to where margins can go? Like is there a way to think about that?

Yes. I would say the incremental margins of our business are generally very high, right? Mobility drop through an incremental dollar of revenue typically falls through at very high margins. And you can see that from the fuel price got weak, right? We can see exactly how much revenue kind of drops through. Same thing with corporate payments. We manage that business. It's a platform we've built. It's got a fixed cost to maintain, but the incremental is pretty high. . In the Benefits segment, I'd say you have 2 parts of the business. The part of the business is the fold income, very high drop-through margins. The part of the business that's servicing accounts there's an incremental servicing cost that comes with that. So less high drop-through, but also an area that we're trying to tackle through AI. So that drop-through should improve. So 1 of our challenges have been as we've been -- as we see the number of opportunities for us going forward. It's how do you balance the incremental drop-through of revenue against additional investment opportunities to grow the business in the future. So I think if you look at this year as an example, we've been committed to doing both. We've both invested in our business while expanding margin, and that's the mentality we take going forward.

Got it. So let's move over to travel and corporate. A lot of moving pieces here, and it's obviously been 1 of the areas where you felt some pressure Middle East being 1 of them. Maybe you could just walk us through the trajectory from here in terms of the growth algorithm...

Yes, sure. So where we've been investing. So we've built a very long-standing, very successful business in the travel segment right? We've been investing, as we talked about at the beginning of the conversation outside of travel and 2 big areas that I've highlighted. So first is that direct AP business that we talked about. Just a reminder, I said earlier that we saw in the third quarter, 24% volume growth out of that business. That business has now grown to about 20% of the segment. This is a business that we started investing in a few years ago. We enhanced the product. It operates off the same platform, essentially the same leading payments platform that we've built on the travel side, but an enhanced front end, something that makes it usable by enterprises. We hired sales teams to go sell it, and now we're seeing the benefits of that. And so the objective now is how do we sustain and accelerate that momentum. Then you get to the embedded payment side. So again, that's taking essentially what we do in travel and now moving into payment processes outside of travel. And we have seen there a really, really good pipeline. We've signed great customers. The start has been a little slower than I like. We've seen longer implementation cycles than I'd like to say. -- that we'd like to see, but we're addressing that, and we're very optimistic because that area has a high opportunity so I think those 2 areas will add incrementally to the growth algorithm of the business, while we continue to sustain good momentum in travel. That continues to be a good business. There's still customers to go out and sign from a volume perspective, travel, I still consider to be a GDP+ area. So I think that continues to be part of the mix, but you will see us -- if we execute well on our plans, you will see us move shift a bit more to the nontravel side.

Got it. And I guess, like specific to travel, if this war persists, like do you think the pressure gets greater? Or do you think like we've kind of found an equilibrium on how people are traveling cross-border today?

I think we found equilibrium today. We've seen -- you didn't generally see a couple of effects within our customer base. Some customers, large global footprint, what you tend to see is shifts away from the Middle East and people travel elsewhere. And we can see that across our portfolio. So that won't change. And then where it impacts us is where we have customers that are more heavily weighted to the Middle East. and there's where you see volumes decline. Right now, I don't envision that changing. It seems like it has stabilized based on the data we see today.

And I guess, corporate payments is 1 of the fastest-growing segments that you guys have. Maybe you could walk us through what's driving the growth there? I mean it would seem like an area that's primed for better growth prospects given there's a lot more happening in that space. There's a secular tailwind. So maybe just talk about that and sort of the investments you've made and where you feel comfortable that growth is going.

Sure. So we've talked a bit about embedded payments and travel. I think it's worthwhile to hit on what we really have here and why we've got a leading solution. So we have built the leading virtual card platform, the payments platform, obviously, it's the leading platform in the travel industry, and we hope to make it a leading platform outside of travel. And it really brings a robust set of features and capabilities. And I think 1 of the things that's underappreciated when people look at WEX is we own the technology stack. right? We also own WEX Bank, which is essentially the issuer. So when we're working with a customer on a solution, we are the 1 service provider. right? It is us. And that gives us a couple of capabilities. So number one, we're the 1 answerable to the customer, which allows us to get a lot done. Two, I think because of the combination of the bank and us selling the platform, we're able to innovate very quickly. So just to give you an example, in the last 12 to 18 months, we've introduced 60 new card products onto the platform. So think of a card product as a use case for a customer or set of customers, right? those 60 new products are already processing about $1 billion of volume run rate right now. So it's that fast innovation that really brings us an advantage then you go to, okay, like embedded payments, right? We've built a platform with a robust set of APIs, right? This allows us to integrate into our customer systems. That eliminates a whole set of manual workflows and can be fully automated end-to-end. It also creates a stickiness for us, right, because the work that's gone on in the integration. So I think there's a number of competitive advantages of the platform that will drive essentially the growth algorithm that we talked about earlier.

Got it. Maybe we move to the benefits area. Obviously, you've got some of the SaaS account closures that have been headwind. As we look ahead, what do you think this is -- like the run rate growth rate is there? And is the high single-digit custodial asset and HSA account growth more reflective of the run rate there.

Yes. So just to remind everyone, this year, so I talked earlier, SaaS metrics are important KPI for us. This year, the KPI has been a little lower than typical. The reason for that is, earlier this year, we closed a number of accounts that were essentially low dollar accounts. So they were number of accounts, but individually, they didn't translate to very much revenue. So for profitability reasons, we closed them. So if you adjust for those closures, which didn't impact revenue, account growth, the SaaS account growth would be in the mid-single digits like we've seen in the last couple of years. If you further drill down HSA accounts, which is an important subset of them, have been growing last -- this past quarter. We said 7.7%. Assets under management was 11.2%. So we continue to see good momentum in the business. I think account growth, asset management growth -- whereas this year, there's been kind of a divergence between the growth of the business and account growth. I think in future years, we'll see that kind of return to kind of more normalized.

Got it. And then when we think about just all of the different macro and secular headwinds affecting that space, you've got, obviously, AI and people thinking about what it does for job displacement, do you have obviously rates moving higher and that generally, like how do you think that affects the growth of that segment?