Welcome back, everybody, to the final panel that we have today. We are welcoming Steve Elder, SVP of Global Investor Relations at WEX. Steve, thanks so much for being here. I always appreciate it.
Thank you, Ramsey. Appreciate it.
That's great to see you. Let's dive right in here with your largest segment, Mobility. Last year, there was some knock-on effects of the freight recession, and I think you guys tightened the Credit Box around the smaller fleets. Where are we at in terms of sort of cycling those impacts? That's the first question. I have another follow-up, but where are we at?
Yeah. I mean, the over-the-road trucking market, the freight market, certainly has had a lot of ups and downs in the last few years, starting with all the goods that you and I were buying during the pandemic, and that led to a massive increase in shipping demand that, as the world opened back up, inevitably led to a massive decline in shipping demand, right? And so we kind of went through that boom and bust cycle. I think right now, the freight market is pretty steady, I'd say. You can see it in the spot rates that people charge. We can see it in our activity. I think this is the first quarter in 5, I think it was, that we actually were positive in terms of the gallons that our over-the-road trucking customers purchased.
It wasn't a lot, but it's certainly on the right side of zero, so that's good. So we think we're kind of stabilized at fairly low levels, but stable being kind of the key word, and no real insight versus anybody else as to when that's going to pick up. I mean, we can read the same commentary from trucking from our customers that anyone else can read. But they're optimistic, but it hasn't seemed to kind of happen yet, so we're waiting for that day as well.
Sometimes I get questions from investors about WEX trying to understand the relationship between freight prices and the freight pricing environment and the performance of public freight haulers and your volumes. I always sort of think the freight's got a role no matter what the price is, but how should we think about that correlation or the relationship between those two things?
I would say it's not a perfect correlation, right? I mean, there's a spot market out there for trucking rates, and that spot rate will kind of imply supply and demand in the marketplace, right? So during the pandemic, when there's this huge demand, the rate went up, and then it came back down. Those rates don't really have any direct impact on us. You could maybe potentially read through them as an overall supply and demand balance, but I don't want to sound callous about it or anything. But if a trucking company moves goods, driving those miles is what we care about, right? That's what's going to drive our volume and our revenue. And it doesn't matter whether they make $1 on that or $100 on that mileage that they drive.
So as long as they can pay their bill, we all want to help the healthcare industry, but the rate itself doesn't have any direct impact on us. There's a little bit in our trucking customer base, we do a little bit of factoring, so that spot rate would have a little bit of impact on our factoring business because we get a percentage of that, but that's a small part of the overall, so really no direct impacts from that.
Contrast your Mobility customer base today versus, let's just say, pre-pandemic. How has it changed or has it changed?
I would say it's almost like the more things change, the more they stay the same. If I think back to post the EFS acquisition in 2016, so call it 2017, 2018, we've been running at around 30% of segment revenue has been over-the-road trucking related. I think we're at 28 or 29 in Q1, right? I mean, during the pandemic, that went up into the low 30s, I'll say, but it actually hasn't really moved that much. We're bigger. We're doing more volumes, but it hasn't really translated into a much different mix. It's all kind of grown at roughly the same kind of rates.
Yeah. Interesting.
It is. It is interesting, right?
The more things change, yeah.
Yeah, exactly.
Rates have also changed quite a bit over the last couple of years, and you guys have kind of messaged that there's essentially some built-in hedges in the model now that kind of helped to neutralize that impact. Maybe in broad strokes, what are the puts and takes in your business when it comes to the impact of rates?
Yeah. Interest rates are a fairly complex topic for us, honestly, right? So I'll say there's four areas of kind of puts and takes. So I'll say on the positive side or on the positive revenue side, at least, higher rates means we got more from our HSA cash deposits that we've invested, so that's positive for revenue. We got higher interchange rates, right? We have these interest rate escalator clauses in a number of our mobility contracts with merchants that say there's kind of a floor and a ceiling level, and we're well above the floor levels now with all the interest rate increases we've had.
So as rates go up, once they reach that floor level, as rates have gone up, we've been able to increase the interchange rate that we charge, which eventually, someday, rates will come back down, and those rates will come back down a little bit, but it's kind of designed to offset the operating interest costs, which is kind of the third component or the first on the downside. We have carrying costs, working capital costs on our mobility customers mostly, but also a little bit on our corporate payment side. And so that's a negative as rates rise. And then we've got our corporate structure debt, which is floating rate.
When you take all four of those pieces and throw them into the mix, and we kind of do the analysis on a monthly basis, but when you look at absolute interest rate levels, what's in the HSA portfolio and what's fixed versus floating, what's in the brokered deposits at WEX Bank, how much of that is maturing or being renewed, how much of the corporate structure debt is offloading, right? So that's a pretty easy one. But when you put it all together, there's segment impacts at a revenue side, which can lead to margin impacts, but at the net income level, it's actually pretty immaterial, and that's by design, right?
Well, if we get to a point where one side outweighs the other, we'll make some more fixed or make some more floating to kind of balance it out, but that's the long-term idea, is we want to be fairly neutral to changes in interest rates.
Let me ask you a couple of questions on the credit side of things. I think you guys signaled in Q2 there was a little bit of a tickup in Mobility credit losses. Maybe talk a little bit more about the trends you saw in early Q2 that led to this guide and sort of give it some context for us.
Yeah. So if I back up for almost all, I mean, 99% of our mobility customer transactions, from the day the transaction occurs, we either collect the balance or we charge it off in six months. So there's nothing in our portfolio that is more than six months past due. And so when we set our reserve levels, the reserve on our balance sheet is intended to cover those charge-offs in that AR base on that day, so that's basically six months of charge-offs. And so that's what we try and project when we do our models for forecasting. What we're seeing right now is we've got this little bubble, I'll say, of charge-offs coming through. It's not alarming. It's not unusual. And just a little bubble that's going to add a couple of basis points to kind of the more, I'll say, the normalized rate, if you will.
And then we expect it to be right back in our normalized ranges if you look at our full-year guidance. So it's something that we knew about, and we saw it coming. We didn't have a big panic moment in late March or April or something like that that said, "Oh no, we got to adjust things in Q2." We knew it was coming. We didn't change our guidance for the year for credit losses, and I don't expect it's going to have much of an impact. Just a little bubble coming through.
I guess more broadly speaking on the credit box , I guess how frequently how nimble are you guys in terms of opening and closing the credit box ? And I think there's also a question that's a little more longer duration in terms of is there this sort of a—I mean, evidently, there probably would be a longer sort of cyclical overlay to the credit box when times are good. Maybe the box starts to creep open a little more. Maybe two slightly separate questions there, but I guess.
Yeah. We try not to make frequent changes. I mean, obviously, we have our own proprietary scoring models, and those spit out a number, and above that number, you get approved, and below that number, you don't, right? And we can move that number quite easily, but I think, generally speaking, don't move it intentionally. We clearly did a year ago, right? If you rewind the clock, ending with Q1 of last year, those 12 months were, I think, the highest loss rate 12-month period of time we've ever had. Part of that was a little bit of fraud, but part of that was just over-the-road trucks were in really bad shape, and we took a lot of losses. So we tightened up things quite a bit. We did everything you can imagine, right? We tightened the standards for who we would underwrite going forward. We reduced credit lines.
We increased the frequency of payment terms. We asked for cash security. We did all kinds of stuff. And we haven't reversed necessarily any of those things at this point. We've left those policies in place. But what I will say is we're using more data tools like machine learning , essentially, to say, "This customer scored whatever X on our credit profile.
If you look at all the people in that kind of box, who performed well and who didn't perform well, and what are the characteristics of those people that did perform well versus not, and can you approve more of those guys? So we didn't actually change any kind of cutoff levels, but if you go a layer deeper and get a little more granular, which we're looking at tens of thousands of applications in a month and 600,000 customers in our customer base in the U.S. today in Mobility, it's hard for an individual to get a lot deeper, right? But with the machine learning , you can actually do that and get to a much more granular level. So we're using that to try and improve things, but like I said, we haven't rolled back any of the policies that we put in place.
That's interesting. There's still this sort of always-ongoing work to kind of tune the models and get in.
Yeah. They're tuned frequently. I mean, every customer in our portfolio is rescored every month, and that may or may not make or necessitate any changes, but we'll make changes fairly frequently to people's credit lines. If fuel prices go up, we'll likely look and see who's a good credit risk and add to their credit lines proactively so they don't have to contact us and vice versa. If fuel prices go down, we'll do the same thing, and we'll just ratchet it down a little bit to kind of manage the risk.
Changing channels entirely. Electric vehicles, that's something the narrative there was quite a bit of discussion about it. I think it's kind of settled down. You guys have made great progress. I think convincing people that you can be a part of evolving electric vehicle payments value chain, I remember a moment in time when people thought that it was going to be a free transaction somehow because you could plug your Tesla into your garage. That meant that an 18-wheeler could charge up as well. Give us some color on where you are in this sort of EV journey, what types of things you're doing to make sure that you stay in the mix as the world evolves?
The first thing I'd say is if I think about the investor interest, it has clearly waned as Tesla stock prices come down or deliveries of EVs have come down. But from our customers' perspective, it's been pretty steady, right? It was never maybe quite as high as investor interest was, call it a year ago, and it's not as low as investor interest is now, right? There's mandates out there. There's companies who have made promises, right? Most of the interest in our customer base is coming from larger organizations that have made promises, let's say, around their carbon neutrality or a government organization where they just want to do those things. And not to mention individual states that have said, "By X date, we'll have to transition," or things like that. And those can always change, but our customers are wanting to be prepared.
So when you think about EVs, right, I think the narrative initially was charging is cheaper than gasoline, so less revenue is going to go away. And we actually see it very, very differently from that, right? This is introducing a lot of complexity into the fleet operator's daily life, right? So oftentimes, they'll ask, "Does anyone have an EV? And what do you do when you go on a long trip?" And generally, the answer is, "I take my other car," right? And if you start thinking about that in terms of what's the complexity in a fleet that has hundreds of vehicles, and how do you manage that, right? That fleet manager's job is a lot harder. There's three different ways that we've imagined, at least, to charge a fleet.
You can go to the public locations, kind of like a gas station, and today, you can use a WEX app to do that, to effectively we have 80-ish, 80, 85% of all the charging locations in the US. You can use a WEX product there. You can have your employee bring it home and plug it into your garage, and hopefully, you got a level two charger there. But we can calculate how much electricity is used and reimburse the employee for that amount, take all the data from that transaction, and bring it back into your systems. So that's a really powerful tool so that the fleet manager still knows what's the efficiency of this. The employee doesn't have to pay for it, right?
Then later this year, we'll roll out what we call more of a depot functionality, but a company building out their own infrastructure. They build out whatever it is, 20 lots to charge vehicles. And there, it's much more about power management and the data integration and things like that. There's no kind of money movement. But all of this is added complexity for that fleet manager. And at least in this medium term here, that's opportunity for us, right? We see this as potentially higher revenue per vehicle compared to what we earn today from all this complexity. And then once you get beyond charging, there's this massive pipeline of adjacent opportunities or kind of near-term products that you can imagine. You can do ESG reporting. You can build out a reservation system so that when you pull into this public charging location, there's actually one available.
You can calculate what's the range going to be on that vehicle and kind of consult with people to say, "For this vehicle and the route it drives and the function it performs, it's a good candidate for an EV or not," and kind of help people through that transition. So all of this is kind of in play. WEX has made a lot of investments in the area. We haven't slowed down much or at all at this point. So it's an area that we think is going to come, but it is a long transition, very long transition. We're still very, very early. As early as it feels from a consumer perspective, it is far earlier from a commercial perspective.
On the public side, the public kind of recharging side, do you think and this is one of these kind of crystal ball questions, just your own view. Do you think it's the same kind of oil major type players, big brands that will come to be the dominant players there, or is this a vector of an opening for a different kind of this?
I mean, it's clearly an opening, right? I mean, we've got ChargePoint. We've got Electrify America. We've got Tesla, all kinds of people that don't own gas stations. And that is the majority of the locations today. I'm not particularly close with the oil companies, but I do know from conversations that they each have, I'll say, different thoughts around how much they want to transition over to charging. Some are a little bit more aggressive than others, but they all are thinking about it. And in the end, if somebody's out there at a location for half an hour, it's going to be, "What are you doing to attract them to come to your location with the stuff around it so that you charge there," right?
Today, you go to the gas station, and maybe you go there because of the convenience store and you like the coffee or you just need a drink or it's convenient. In the future, it may be, "What is the entertainment option around that location, and who does that?" Maybe it is just the location, whatever it is. But there's going to have to be something that you're doing with that time while you're there that'll probably play a big role.
Moving on to Corporate Payments . I wanted to ask about the Booking.com agreement a little bit more, an important renewal with an important partner. I think Melissa also mentioned that there may be some short-term adjustments that occur and match with sort of long-term opportunity. Can you kind of help us, again, sort of think through the sort of puts and takes with the contract?
Yeah. I mean, we're thrilled to have Booking re-sign a contract to start with, right? I mean, one of the clearly, I think, the largest premier OTA out there, growing quite rapidly, and we've had a great relationship with them for a long period of time. They've started talking to us about how they wanted to operate their business and how they wanted to structure things, and that's a little bit different from where we are today. So where we are today is and what we'll do tomorrow is WEX is the issuer of all of these virtual cards to pay for their hotel rooms.
And once that virtual card number is created, right, when there's a lot of controls around it in terms of where and when and how it can be used, how many times it can be used, all that kind of stuff, once it's created, then from that point forward, Booking's going to take some pieces in-house. And it's a little bit different, and it's going to affect the line items, where we recognize revenue, and therefore, the volume indicators that we report on and all that kind of stuff. Actual issuing of the card and the creation of the card and all that, that's going to happen the same way going forward as it has in the past. They're a really sophisticated payments company. That is probably one of the most sophisticated payments companies out there, including the fact that they own a bank in Ireland.
And so that plays a key role in this whole thing, right, in terms of what they're doing. So we haven't obviously been extraordinarily clear about exactly what pieces they're taking in, but that bank plays a key role, I'll say.
Okay.
Just before you go on, from a long-term opportunity, right, they did the merchant model is kind of what we service. They did $82 billion worth of merchant volumes last year, and we did well less than half of that came through us. So that just means there's huge chunks of opportunity out there. And without this contract in place, you don't get the opportunity to have the conversations around the other pieces. And by fostering a good relationship with them, working with them the way they want to work with us, that's the long-term opportunity is to bring more and more of that over to WEX.
Yeah. On the non-travel part of Corporate Payments , comment a little bit on that part of the business. Is there any kind of code you can provide in terms of vertical concentration or partners, partnerships, direct and direct, anything that you could share would be helpful?
Yeah. If you look at the segment, depending on the quarter, 55%-60% of the revenue is travel-related and a little bit more on that on the volume side. If you strip the travel out, we basically have three kinds of three things going on. One is we have a partner channel where there's a lot of AP automation providers out there, and they do all kinds of great work around matching invoices and purchase orders and getting approvals and all that kind of stuff. And where we come in is it's time to make the payment, and the third-party API calls over to WEX. We create the virtual card number, and it's the exact same process as the hotel rooms. You just insert the word invoice for hotel room, and same thing happens.
So that partner channel is the biggest piece of what we do. We have a number of customers in there, some bigger and more recognizable, I'll say, but also a lot of non-publicly traded companies in there too that make a difference. The second piece is we take our technology platform. We actually let other banks use it to do their issuing from. They do everything. We just provide the technology. So it's mostly, I'll say, mid-tier regional banks that want to have that kind of world-class virtual card capability. And we earn some basis points on that. It's not a lot, but there's actually not a lot of cost to service it or provide it. The technology was structured to service banks. That was how it was originally created. So it's actually designed for that, and it works pretty well.
And then more recently, in the last couple of years, we've hired a direct sales force to just basically knock on doors of more, I'll say, more midsize companies, but use our AP Automation software. We'll take over your AP file, essentially. That's growing nicely. I'll say we made the investment a couple of years ago in the salespeople, and I wouldn't say it was a major investment. We have about 20 or 25 sales reps, somewhere in that range. And they're doing what they're supposed to do. They're meeting the milestones of what we thought they would do, but it's still a fairly small part of the overall segment.
What is your view? You described three different sort of sleeves, but what is the overall value proposition that WEX brings to the table in terms of the differentiation?
I think one is the platform is scaled and stable.
Strength.
Yeah, exactly. It's 99.99% uptime. From a travel company perspective, we have a global issuance strategy, meaning we actually issue in 23 or 24 different currencies. So if you travel to Italy, WEX is going to issue that card in euros and settle it in euros, and everything happens in euros. And that avoids cross-border fees. It avoids foreign exchange rate fluctuations, and it just makes it a much more efficient transaction. And to our knowledge, we're really the only ones that kind of do that. So that's one of the big key differentiators with us and our competitors in the travel side of things. If you take that kind of global issuing out of the equation because it's not necessary for a customer, let's say, then it's much more about just the flexibility of the platform and the APIs and the scale.
And similarly, moving over to the benefits side of the business, I mean, that's another kind of scaled platform that you guys have built and/or bought over time. Talk about what's your view on HSA and the sort of longer-term trend there? Is it still quite supportive? Do you anticipate long-term kind of secular tailwinds to continue powering that business?
Yeah. I mean, the HSA has been around for about 20 years, and there's now, according to Devenir, about 37 million of them at the end of last year. 20% of them are on WEX's platform. So again, like other parts of our business, we go to market directly with our own salespeople and talking to corporates directly, use our platform, don't use somebody else's. And we also take that same technology, and we sell it to banks and insurance companies, third-party administrators, and others who want to offer these products out there. And I always say it's like a record-keeping system, just like most of the buy-side investors, right? Somewhere in their firm, there's a software platform that says, "This is who owns the account. This is the balance at the end of the period. This is the activity.
Here's a portal that you can go look at all this activity, make changes to it, maybe, whatever, but kind of monitor things." And that's exactly what we have for these types of accounts. When we first bought it, it was only an indirect sales model, and it was only HSAs, FSAs, and a couple other kind of really clear consumer healthcare accounts. And over time, we've added on pieces to it. We added on COBRA. We added on benefits administration with open enrollment platforms. We added the custodial capabilities. We added a direct salesforce. So lots of pieces have been added on, and it's been a really great success. The company that we bought, and this was 10 years ago, had about $85 million-$90 million in revenue that year, and now it'll be $600 million or maybe $700 million this year up in that range, right?
So it's been a huge success for us. I think the secular trend of more HSAs is going to continue, right? It's a great way for employers to control their healthcare costs and the rising cost of healthcare. Somewhat shifts that burden over into employees, but you can kind of offset a lot of that with the HSA account and by making contributions directly to their HSA account. So it's been a great secular trend, and like I said, it's been a great business for us for a long time now.
Maybe talk a bit about balance sheet deployment and capital priorities. I guess first, on the M&A side, what is the appetite for M&A, and also sort of what is the pipeline? How does the pipeline feel?
I mean, over the long term, we've built in 2%-3% in our revenue growth for M&A. We've been active. It's been successful. There's plenty of opportunity still out there in the three businesses we're in. We're not necessarily looking to add another segment. That said, right, in the near term, we're also looking at the valuation of our own stock, and most of our capital deployment has gone to buying back our own shares over the last couple of years. We've made a couple of smaller, more strategic or more product-oriented kinds of things. But those big scale plays, like when we bought EFS, like when we bought eNett, those are I don't want to say they're off the table by any means, but when you judge them against what's it look like to buy back your own shares, it does get a little harder.
The bar is a little higher for those things. Clearly, an appetite over the long term, and I think a pretty decent track record of some success there.
One of the themes we've been hearing at the conference today from some of the folks on the private company side and on the private equity side is just that there seems to be a little bit of a thaw finally in terms of bid-ask spreads and realistic sellers. Is that something that you're perceiving out there in the marketplace as well, or is it?
Certainly getting better. Absolutely. Certainly getting better. Exactly. It was pretty different for a while, but definitely better.
Yeah. And then on OpEx and the $100 million in reductions that you guys have called out, kind of walk us through your latest thinking on where are the main levers in the business now? Where are the main buckets of opportunity when it comes to OpEx disciplining?
Yeah. Some of it was just a couple of easy things, right? A little bit of pinching back a little bit on how many headcounts, how much headcount you're adding in the company, squeezing vendors a little bit and getting better prices out of our vendors, just like it happens to us, right? Do the same thing. But a lot of it is actually investing in the back office and infrastructure and how we service customers to automate a lot more things. We're very comfortable with the $100 million. We have been pretty much since the day we set out the target. In the last year, we said we've already got $75 million of run rate done. So just a little bit to go this year and a pretty clear path to get there. We said also that we would reinvest about half of it.
I think on the reinvestment side, we've done really well. I think we've actually done the reinvestment at this point, right? We haven't necessarily gotten quite all of the savings yet, so we maybe reinvested a little bit ahead of that. So what you actually see being saved through the last part of this year will probably fall a little bit faster to operating income and net income than it had before, just because we kind of front-loaded the investments a little bit.
Got it. I think we're about out of time. Thank you so much, though.
Thank you.
I appreciate it. Yeah. Thanks.