Okay, great! Let's get started. Welcome everyone to day two of the UBS Global Technology Conference. My name is Nik Cremo, and I help lead the Payments and FinTech research team here at UBS. I'm excited to have the WEX team with us today. We have Jagtar Narula, CFO, and Steve Elder, Head of Investor Relations. So, yeah, thanks for making it out. So Jagtar, you've been at WEX for about 18 months now and have been quite busy more recently with two acquisitions, executing on a $100 million cost savings program. Just reflecting back over the last 18 months or so, what's exceeded your expectations since joining WEX, and what have been some of the unanticipated challenges as well?
Well, thanks, Nik. First, let me say, it's a pleasure to be here. I really appreciate you inviting us, the team, inviting us to the conference. It's an excellent conference, and I've enjoyed meeting a number of investors this morning and hopefully, you know, group of folks in the room today, more this afternoon. Yes, it's been a fun 18 months. You know, let me start off with the challenges, right? So joined a year and a half ago, Fed funds rate was, I think, you know, target was 75-100 basis points. Clearly, we're much higher than that. We've just gone through the most aggressive tightening cycle in a generation. Typically, not something that CFOs are super excited about.
And on top of that, you'll recall that, you know, shortly after I joined, we, we entered into this rate recession that, you know, resulted in significant credit losses that we saw in the portfolio last year. So another challenge. And I say that 'cause it's a good way to transition to what exceeded expectations. You know, the word that, Melissa and I use a lot, we use in our earnings calls, is about resiliency. And I think, you know, how we've handled these couple of headwinds, really points to the resiliency of the company, right? We have, we've consistently outperformed our performance targets. You know, we've, we've consistently beat and raised and posted some really impressive numbers. And, you know, I, I, I just look at how the company's responded.
I look at, right, how we've managed the natural hedges in our portfolio to deal with the interest rate rise. I look at how we jumped on the credit loss issues and, right, the great results we had in Q3. So I view it as, you know, a great company with great, you know, cash dividend yields, great investment momentum, and a lot that we're accomplishing.
Yeah, I definitely agree. You've been executing quite well, and yet the credit losses have come in, I think, 7 basis points last quarter, so quite strong. So while on the Mobility segment, I think we can start there. So that business has generally been tracking in line with your expectations. You guys are forecasting the business to be at the lower end of the 4%-8% long-term growth target after, you know, comping like low mid-teens growth last year. So not too surprising there. But in the back half of the year, you're a little bit below the 4%-8% target. So if we just walk through some of the drivers that have led to the deceleration there?
Yeah, absolutely. So, you know, let me start by saying that Mobility is a terrific segment for us. It's something, you know, Melissa talked about in the last earnings call, in that, you know, we really do see an opportunity to incrementally add to the growth rate in Mobility. It is really a terrific business for us and one of our strengths. Now, you know, we did see some revenue growth that was lower than our long-term guidance in the last quarter. And I'd say there's, you know, there's a couple reasons for that. So let me start with late fees, right? So we talked about the improvement in credit losses, the portfolio, right? So, you know, one of the things we focused on it was improving the quality of the portfolio.
We've done a lot of work in, right, improving our credit adjudication models, our portfolio modeling models, handling credit limits for customers, and all that has improved the quality of the portfolio. And we saw that in the results, right? The tremendous results in the third quarter. Now, the one impact of that is, right, late fees go down, right? So quality of the portfolio improves, less people pay late. In the third quarter, late fees was about 20% lower year-over-year. Part of that's fuel prices. So if you adjust for fuel prices, you call it 10% lower. That's worth about two percentage points of growth. Now, you know, we should lap that, right?
That's coming down because of what we've been doing on the credit performance, but, you know, that's not like a new normal in terms of growth for the business. You know, a couple of impacts we had was, you know, calendar was an issue. You know, this quarter, Q3, we had slightly fewer calendar days, fueling days, I'd call it, than last quarter, just timing of when, you know, weekends and holidays show up. So that was worth about a percentage point of growth. And then, you know, the other thing we've talked about is, right, the freight recession, right? That's been a drag, you know, over the last year. We've now seen stabilization in the freight business. Spot rates have stabilized, but that has been a drag year-over-year.
So, you know, I'd summarize it as, right, the late fees was a drag, but, you know, we should lap that. Obviously, calendar is just a calendar. Freight's a new low level, but, you know, we've seen stabilization there, so that's good. Should start to lap that. On the plus side, right, we still think there's a lot of unpenetrated business. We've got a lot of opportunity. We are one of the leaders in this sector with a strong portfolio, so we view it, you know, the long-term target's incidentally achievable.
... just wanted to ask a follow-up on, you know, the trends that you're seeing in the first two months of Q4, and how they're kind of tracking along. I know that this is the quarter where you start to lap some of that freight, freight recession, I believe. So, you know, maybe, you know, what are, what are the trends looking like? And without getting too specific, do you see a path to accelerating into that 4%-8% range at some point in 2024 as you lap those headwinds?
Yeah, you know, I'll say, you know, just, you know, we're a month or two, a couple months into the fourth quarter. You know, the volumes that we're seeing are in line with expectations, right? So, you know, we've talked about kind of the, you know, kind of the lower level of activity in freight, but it's stabilized. You know, what we're seeing across the business is pretty much in line with expectations. So, you know, with what I talked about earlier, us lapping some of the impacts that we've seen in the back half of the year, late fees, right? The freight recession, we should start to see, you know, the biggest pick up - the business pick up.
I would say I've been pleased with new business signings, and that's right alongside the expectations. So we should see things normalize in the future.
Oh, great. So one of the incremental takeaways from the last earnings call, as you and Melissa mentioned, that you see an opportunity to accelerate growth in that segment, you know, without putting a specific time on it, above the 4%-8% longer-term target. I know that the Payzer acquisition that you closed earlier this month is a part of that story. So maybe if you could just walk us through why you were attracted to Payzer to start.
Yeah. So, you know, you know, I'll reiterate that we are really excited about the Mobility segment, right? That we have such a large customer base there, 600,000 customers, a leading set of products. We are highly, highly efficient selling new business there. So it is a segment that we're really excited about. When we talk to our customers in that segment, what we hear from our customers is, you know, an opportunity to give them more solutions, right? We help them manage the efficiency of their vehicles and of their fleets.
But one of the things we heard, and we did this as part of the Payzer acquisition, was, you know, hearing from customers that it's not just, it's not just the managing the efficiency of the fleets, but it's managing the efficiency, essentially, of their workers, their drivers, their business processes. And so this was an acquisition to enable us to do that. It was a combination of software and payments. So much like our benefits segment, it's, it's, it's a model that we know well, bringing software and payments together. We have, we have a large customer base that we can go sell, right? Payzer today, when we acquired it, had roughly 3,000 customers.
In this kind of field service segment that they operate in, we have 150,000 customers, 25,000 customers, of which we think is immediately addressable with a solution right off the shelf. So, we just view that as a growth opportunity. Our customers have told us, right, they need our help there, and we think we bring, you know, incremental value add.
That's great color. And so on the WEX customers that are within those HVAC, plumbing, and roofing verticals that you plan to cross-sell to, can you provide maybe a finer point on any kind of timing or cadence as to when you expect to start that?
We're starting it right away, right? So... right, like I said, we've got 25,000 customers that we can sell to right away. So, you know, we've closed the Payzer acquisition. We closed it in the beginning of this month. So we've got teams on the marketing side of the WEX side of the business now geared up to start all the marketing campaigns to our customers. We've got people on the fleet side. The salespeople will actually help generate those leads. Those leads will go to the Payzer team. They've got a very, very good sales team. They know how to sell their solution, they know how to get customers excited about it. So we are ready to go.
You know, the last thing I would say about Payzer is that we just- we viewed it as a good kind of risk-reward for us, right? So, right, it was a manageable acquisition for us, and... But there's such kind of a tremendous upside opportunity and what it can do for our Mobility segment and our business in general, that we just- we were excited about the risk-reward trade-off.
Yeah, absolutely. So Payzer is about $25-$30 million in revenue today, growing at a healthy 30% clip. Can you provide a little more color as to the composition of that revenue between payments and subscription, and kind of how early is Payzer in this payments monetization journey?
Yeah. Their, their revenue today, it's roughly 50/50, I'd say 60/40, software being 60, and 40% being payments. So they've begun to monetize that. They've used, you know, third-party partners for that to do all the processing work. Obviously, that's an area where we think we could add incremental value add on them getting paid. But there's additional opportunities on top of that that we're just starting to scratch the surface on. So not only is there, you know, the getting paid, accepting payments for, you know, installing an air conditioner or doing service work, but also it's, you know, payments back to the small businesses, suppliers, the OEMs, et cetera, where we think we can offer, you know, the WEX virtual card to help facilitate those businesses to make payments.
We also think there's an opportunity to attach the WEX fuel card to customers that Payzer is selling, right? Again, those are field service organizations. So they have fleets of vehicles, they have drivers that make these service calls. So we think there's an opportunity to attach the WEX fuel card and process fuel payments as well. So, you know, early days, we think there's a lot of opportunity.
That sounds like a lot of opportunity on the revenue and, cost side. So, yeah, just last one on Payzer. You guys have a path to accretion in 2025, with some modest dilution in 2024. So any color you can provide on, you know, how we get to accretion in 2025, and what, where margins have to go?
Yeah. So, you know, what I'd say is, you know, Payzer, we acquired them, they've grown about 30% a year. They were, you know, EBITDA positive. But, you know, obviously, with the cost of financing the acquisition, what we talked about was that we were gonna be slightly dilutive in 2025, to the tune of about 1% so-- or 2024, to the tune of about 1%. So which we viewed as manageable, and I talked about the risk-reward trade-off earlier. You know, that business is growing at 30% a year. You know, with some of the synergies we bring in the sales front and leads, we know there, there's opportunities to potentially accelerate that, because that's the biggest thing that Payzer needs, is new sales leads.
We, you know, we have a lot of customers in that space we talked about. So as they, as they grow, right, doesn't drive additional investment in R&D. Their sales costs, the sales infrastructure is there. There won't be huge additional sales costs. So as they grow, that, that growth will be highly accretive. So, you know, as a result, we view that by 2025, we'll, we'll have moved over into the accretive bucket.
That sounds great. So just pivoting over to the Benefit s segment, which has, you know, had a tremendous year, growing in the mid-30s, driven by, you know, some interest income, as well as adding new accounts. I know we're in open enrollment season, so is there any early reads as to how that's going?
So, you know, what I'll say, if I, you know, step back from the benefits business, we've been extremely pleased this year, right? We had set expectations of 25%-30% growth the start of the year. Obviously, we've done north of that, so we've been very pleased. And, you know, a big part of that tremendous growth has been, you know, our entry into the non-bank custodial business a couple of years ago. We've seen terrific deposit growth from that, and, you know, that deposit growth has translated into robust revenue growth this year.
As we look forward, you know, we're right in the thick of open enrollment season now, so we'll have, you know, better visibility as we, you know, we'll talk more about as we get through to the Q4 earnings call, and give guidance next year. But, you know, it's going well. What I will say is, in addition to the open enrollment growth, you know, we do expect continued deposit growth, and we do expect, you know, some continued tailwinds from interest, right? So if I think about the initial, call it $1 billion, that we invested when we got into the business, that was invested at rates that were back then about 1.5 percentage points.
As we start to see that roll off over the next few years, you know, whatever you think about, you know, interest rate environment next year, I think we'll be well north of that, so we will see some, some tailwind from that as well.
Got it. So I guess you'll have a little more visibility into the interest income that you're generating in that business going into 2024. Yes, I mean, given the lag effect on yields, you guys are, I think, like 450 basis points last quarter. So just looking ahead to 2024, you would still expect that interest income to continue to grow and not really be a headwind to growth?
Yeah, absolutely. Absolutely. That's exactly what we expect.
Okay, great. So pivoting over to another strong part of the business, the travel component within your Corporate Payments segment. Can you just discuss, you know, what's leading to the outperformance relative to the overall OTA market?
Yeah. So obviously, you would expect that business to at least perform in line with overall OTA travel. You know, the economic reopening has been good for travel. As you pointed out, we've outpaced that growth. You know, in fact, if you look at, you know, our volumes, Q2, Q3 of this year, we're, you know, 50% higher than where we were in 2019. So, you know, clearly we've been outpacing market growth, and, you know, there's a couple reasons for that. So one is the merchant model that OTAs use, right? So we've got a tremendous footprint in that market. We've got, you know, eight of the 10 top ten OTAs.
Our solution is really robust, and those OTAs have been increasingly transitioning to what's called the merchant model, where they accept kind of the payment up front rather than waiting for you to pay the supplier. That model is predicated on having a solution like ours to process the payment. So as the OTAs have transitioned increasingly to that model, it's resulted in which then falls into our platform, it's resulted in us outpacing the market in terms of our growth. And that's something we expect to continue in the future. The OTAs have not transitioned 100% to the merchant model. It's still where they're trying to drive their growth, and so we've benefited from that. You know, we've picked up some share of wallet with for some customers.
And then also, I would say this is more on the revenue side rather than the volume side, but we are seeing in areas where, you know, we have multiple offerings that we offer to the customer, some of which are kind of more premium because they facilitate cross-border payments better and, you know, they help with back office reconciliation and processing. Comes with, you know, a higher take rate, and we've seen some adoption of that solution, so that's helped on the revenue side as well.
Understood. Thanks for the color there. So just pivoting over to the corporate payments component within the segment. Volume growth has been pretty strong there as well, you know, north of 10% in each quarter this year. But revenue growth has been closer to flattish, just kind of given some of the mix shift that you guys have been having in that business. So the main question we're getting from investors there is when would we expect revenue growth to be more in line with volume growth?
Yeah, you know, what I will say is, you know, we manage the corporate payments business holistically, right? This, this all falls into the bucket of what we call embedded payments, which is where we offer, you know, our processing platform, our virtual card platform, through an API to a customer that's got a front end. Whether that's a travel, online travel agency or whether that's another type of customer that's right, processing payments for a corporate account, for example. You know, obviously, over the last year, we've benefited handsomely on the travel side, but, you know, our goal in that business is to grow corporate payments at a 10%-15% rate.
And so, what we've, you know, what we've seen is that we have, you know, a very robust pipeline on both, on both the travel and the non-travel side. And so we're seeing that volume growth across embedded payments, and as a result, you know, we should continue to see the, you know, revenue in line with kind of overall volume growth. And our costs in that business are relatively fixed, so it drops really well to the bottom line. So, you know, we're quite pleased with that performance, and we expect that to continue.
Understood. And last one there, for the broader segment. How should investors think about the yield true-up in Q4 from the network incentives?
Yeah. Travel volume's been terrific this year, right? So last year, we had about a $10 million true-up in the fourth quarter. I would say travel volumes are very good this year, so we should see a true-up, you know, in that range of that or a little better.
Got it. So, have to touch on EVs, you know, very topical-
Yeah
... for WEX. So I guess for those a little less familiar, can you just provide, like, a brief overview of WEX's EV strategy?
Yeah
An update on your current initiatives?
Yeah, sure. You know, so we are excited about the EV because we do think it brings incremental opportunity to us as a company. You know, we have been busy developing a robust set of solutions that handles the complexity of EV for a fleet manager, right? So we're used to a gas-powered environment that, you know, a lot of us don't think about the range of our vehicles and how that's impacted by the load, how that's impacted by the weather, right? If you think about it, right, you fill up your gas tank, you get 300 miles of range. Whether it's 100 degrees outside or negative 10 degrees outside, right, the efficiency of the engine doesn't vary that much. You're going to get 300 miles, right? In EV, there's a tremendous variation, right?
I've heard, you know, ±30%, depending on weather, load, et cetera. That creates an incredible amount of complexity to a fleet manager. On top of that complexity, they've got to worry about: Where do I charge the vehicle, right? Is it at home? Is it on the road? Is it at a depot? I need the data on those vehicles from wherever that's charged. I need to handle the payment and reimbursement for wherever that's charged. So that is a tremendous amount of complexity. That complexity yields a couple things. First, we think, you know, the transition—we're going to live in a mixed fleet environment for a while, right? Because of, like, those range issues and the like that I just talked about, everything's not going to transition to EV. We'll, we'll live in this for a while.
If you live in this for a while, you need a solution that can handle a mixed fleet environment, and that's where we come in, right? We've got the internal combustion engine. We can now help you with understanding the range of the vehicle, planning the routes, handling the charging, right, handling the reimbursements, et cetera. We've done quite a bit of analysis on pricing on our, you know, on the solution. We, you know, we've talked in the past about, you know, our average internal combustion vehicle gets about $6 per vehicle per month, and our expectation is that an EV will be in the $5-$20 range. I will say that today we are in that range. We're at the low end of that range, but the solutions are still... Like, we're still introducing solutions, right?
We've introduced the on-the-route charging. We will be introducing the at-home charging and the depot charging, so we expect that to help us to improve pricing over time. Last thing I'll say about this is, we actually commissioned a study with a third party to help us assess the pricing that we plan to offer the market. And the feedback that we've got, you know, working with this third party, speaking to customers, looking at competitors and competitive offerings and price points, has gotten us increasingly comfortable that we can, we can be at the high end of that range. I think what we've heard through this third party from these customers, with the value that we'll be bringing to the table, absolutely the high end of that range should be within our expectations.
... Yeah, that, that's very exciting. Last one on EV. I know it, it's de minimis at this point, but how many vehicles of your, like, 19 million or so are EV today?
Yeah. So we've got, you know, roughly 19 million vehicles in total, internal combustion. EV adoption in commercial fleets is kind of very early stage today, right? We've got about 1,000 vehicles. It's pretty good, but, you know, relative to the size of the opportunity in the future, it's still small. You know, you try to assess how quickly EV is getting adopted in commercial fleets. You know, we've seen a lot of adoption on the consumer side. There hasn't been as much of adoption on the commercial fleet side for the reasons I talked about earlier, right? Charging, range, load, all those factors. But, you know, we will presumably see more in the future, and it should be an interesting opportunity for us.
Yeah, absolutely. And, yeah, very early, but you guys are ready for it. Okay, so just shifting gears to, you know, priorities for 2024, and maybe just starting on capital allocation, just 'cause you've been pretty active there. Also, you've retired the converts last quarter as well. So yeah, you're sitting just below the low end of your target range exiting last quarter, and you just did two acquisitions. So what should we expect, WEX to do with free cash flow next year?
Yeah, sure. So, you know, I would say, you know, we've bought two acquisitions this year, two companies this year. We will be busy, right, integrating those, delivering on the business cases that we've committed ourselves to, and that will be a focus for us for next year, as well as executing on the cost savings initiatives, the other things that we've talked about. So, from a capital allocation standpoint, I don't expect as much on M&A, right? I always say, like, you know, should something show up that's... So, you know, that is such a synergy opportunity, you know, you never say never, but it's not the priority for us, right?
The priority for us is executing on what we've done, and as a result, you know, I think you'd expect to see us use capital, you know, increasingly for other uses, like stock buybacks. That's, you know, that's something we've accelerated recently. You know, for example, in the fourth quarter, you know, we're north of $125 million of stock buybacks to date in the fourth quarter. So, you know, we view that as a good allocation of capital. And, you know, we're excited that we have the resources to invest in the business as well as drive return of capital to shareholders.
Absolutely. Another follow-up here is, you know, on your $100 million cost reduction efforts. You guys are, you know, tracking ahead of your initial guidance and on track to exit the year at $75 million savings run rate. So two questions there: Like, which expense lines, like, which segments are you seeing the majority of that $75 million? And then, looking into 2024, you know, any color as to how you plan to reinvest? I think you said you initially planned to reinvest about half. Is that still the right way to think about it?
Yeah, that's still the case. So, you know, we are—we're seeing terrific progress on the cost reduction front. I think. You know, I talked about in the last earnings call that we expect to exit the year at about a $75 million run rate. The places the savings have come from, I've talked about in the past. We've, you know, we've gone after kind of procurement, vendor-related savings, consolidating vendors, right? Streamlining, making sure we're getting the best pricing. We've looked at our operations and streamlining our operations, more automation, more cost-effective operations, and we've had really good success there. And then we've just looked at staffing levels and, you know, do we have the right organizational structure? So I'd say that's all going well.
In terms of where we see it, right, if you think about where spend and processing manual labor is, tends to be on the Mobility side and the Benefits side. So I think that's where you'll see a lot of the savings. And then in terms of reinvestment, you know, we've got a number of initiatives going. We're looking at enhancing our digital marketing spend. We've looked at, you know, we've accelerated the pace of innovation, some of our organic build and products. So we've been invested in a number of areas, all with the intention of driving revenue growth.
Got it. Understood. Well, I think we touched on most things. We can poll the audience if there's any Q&A. If not, I think a good question to end on is just, you know, looking ahead to 2024, you know, what parts of the business are you most excited about?
Oh, it's like asking me which of my children I like the best. You know, I'm excited about all the business, the entire business. You know, I'm excited about all of them. If you ask me to pick one, I'm really excited about what we're doing in Mobility, right? We have such a solid footprint there, such tremendous potential. And, you know, I'm excited to execute on this Payzer acquisition and really show the potential for even more incremental growth in Mobility. So I think it's gonna be a terrific 2024 for the company.
Fantastic. Well, it looks like we are just right out of time, but-
All right. Perfect.
Thanks, thanks again for coming.
Nik, thanks for having me.
Appreciate your input.
Yeah, appreciate it.
Absolutely. All right. Thanks, everyone.
Thank you.