All right, good afternoon, everyone, and welcome to the seventh annual Evercore ISI Payments and FinTech Innovators Forum. I'm Shariq Zamar, and I work with David Togut in the payments processor and IT services team here at Evercore ISI. We welcome WEX's Chief Strategy Officer, Jay Dearborn, and Senior Vice President, Global Investor Relations, Steve Elder. Thank you both for joining us today.
Thanks for having us.
Thanks, Shariq.
Yeah. Thank you. Jay, to start off, do you mind just giving a brief background about yourself, what has been your responsibility so far?
Yeah.
What you did prior to this role, and.
Yeah.
You know, then we can take it off from there.
I'd be happy to, Shariq. Again, thanks for having us. My name is Jay Dearborn. I'm the Chief Strategy Officer of WEX. I've been in this role for about the past nine months. You know, in my portfolio, I run enterprise strategy, business unit strategy, M&A, and communications.
Prior to being Chief Strategy Officer here, I ran our corporate payments business, for the past four or five years. Joined WEX in 2016. I came from McKinsey. I was a partner at McKinsey. Prior to that was at American Express, so kind of have a deep background in payments and a good tenure here at WEX as we've grown the company from $1 billion to $2.4 billion this past year.
Yeah. Thanks a lot. That's super helpful. Yeah, just to start off, like, can you tell us what are the top three priorities for WEX in 2023, and where are you focused on for this year?
Yeah. Yeah. Very timely, given that we just did guidance a couple of weeks ago.
Look, we're razor-focused on three things for to execute the year. First and foremost is deepen our wallet share with our existing customers. We have been, you know, and up until the beginning of last year, really focused on how do we sell our point solutions in through our Global Fleet, our Benefits, and our Corporate Payments verticals.
Really last year, we started to breathe life into this idea of One WEX with one single customer, and we wrap that customer with our different products. You know, in a kind of crawl, walk, run framework, say last year we were crawling, kind of learning our cross-sell motion and we've been moving into walking and finding out what those cross-sell motions are. You know, the second one is around customer-centric innovation.
If I were to typify WEX, you know, over the my past seven years here, is we're really great at building, leading infrastructure. Think like closed loop networks, our virtual card infrastructure, all of that great stuff.
Our area of opportunity is how do we then pivot and focus on the customer and provide them the solutions they need and then pipe it into that infrastructure on the back end. Very much focused on front ends in building, products that delight our B2B customers. The final one, I mean, as everyone knows, there's just a huge amount of uncertainty in the macroeconomic environment today.
We're hyper-focused on capital allocation and monitoring what's going on, you know, in our own portfolio as well as the macro portfolio, making sure that we, you know, change the levers throughout the year to hit the obligations that we have, but also don't shortchange those obligations. Really hyper-focused on monitoring the portfolio, monitoring the macroeconomic environment, and determining whether to deploy or pull back, you know, as this year progresses.
Understood. Yeah. No, that's super helpful. Health and employee benefits saw strong SaaS account growth in the fourth quarter. Melissa mentioned that some of the pickup was due to the enrollment season in the fourth quarter. Thinking through your sales strategy for health and employee, can you help us understand what has worked and what hasn't, and how is WEX positioned differently from your peers in this market?
Yeah, sure. I mean, I think I'd start with, it's just a great business for us. You know, we got into the health business right before the benefits business right before I joined in 2014 through the acquisition of a company called Evolution1. At that point, that company was doing about $80 million in revenue, and we ended this past year north of a half billion dollars worth of revenue from the segment.
Yeah.
It's just been, you know, a tremendous growth story and built on the back of this secular tailwind of consumer-driven healthcare in the United States, HSAs, FSAs, and kind of all these tax-advantaged stored value accounts.
You know, what's unique about us in the marketplace is we have a single platform that administers these accounts, provides a privileged access into the account for the employee, the employer, the health plan, the provider, and we're able to white label that.
You know, I think of our commercial motion, not only are we going direct to corporates as, you know, one of the largest TPAs in the nation, but we multiply that effort and that exposure to the marketplace through serving many other TPAs, financial institutions, health plans in a white labeled way. You know, it just gives us more broader exposure to kind of the underlying tailwind that we have in consumer-driven healthcare here in the United States.
Great. Thank you.
Yeah.
Just to pile onto that a little bit, you know, a lot of the benefit that we're expecting in this calendar year is from the custodial piece of things that we added on a couple of years ago through another acquisition. We've today got about $3.5 billion of HSA cash that, you know, is that we're monetizing right now.
About a little over $2 billion of that is on our balance sheet and at our bank being invested in a bond portfolio, about $1.5 billion of it being invested. The rest, about $1.4 billion is held at third-party banks. And it's, you know, a mixture of fixed and floating, but that's yielding around 4% right now. That interest income piece has been a big driver of the revenue growth that you saw in the fourth quarter as well as, you know, some of the expectations for this year as well.
Great. That's super helpful. Within travel and corporate payments, can you help us understand how the competitive landscape has evolved and how are you partnering with some of your competitors? What's the edge that WEX provides to its client, which has helped it benefit grow so much?
Yeah. This one's near and dear to my heart. As I, as I mentioned, I've run the business for the past, you know, four or five years. If you zoom out from our corporate payments offering, I think it's, you know, corporate payments is quite a generic concept. Really, let's think about two different products that we have in our portfolio.
The first is an embedded payments product, and by far and away, that is a virtual card offering, API driven, where we own the card management system, the processor, and we own all of the funding and the regulatory and the compliance through our wholly owned bank and e-money licenses around the world. When people think of WEX, they often think of our travel portfolio.
That travel portfolio is in this embedded payments product suite, but so is everything that we do with FinTechs here in the United States. You know, we compete with a bunch of startups in that space. You know, some of the larger ones that have more established traction would be like an i2c or a Marqeta. Where we differentiate ourselves is we wholly own absolutely everything, including the banking provision.
Four nines of reliability, all the currencies that walk you around the world. The trust that we've been in this business for a very long period of time. We get great marginal economics that help our partners achieve what they desire. We have an AP automation and spend management suite. Think of AP automation as pay by invoice.
Think of spend management as pay by plastic or pay by card. You know, that very much is a direct to corporate solution where we are either selling it direct to corporates or the likes of American Express and Commerce Bank and PNC Bank, and, you know, a handful of others are white labeling our solution and going to market themselves.
There we compete with, you know, really a lot. There's a very, very large market. We compete with many of the FinTechs that we serve on the embedded payment side of the business. You know, we compete with established banks. We compete with other upstarts as well. I don't think anything has really changed over the past two years. There is a broad underlying secular trend towards the digitization of B2B payments, period. It's a very big market. You know, just like the health business, we choose to participate directly working with corporates as well as powering others, through the partner channel.
Great. Great. That's helpful. Sticking to corporate payments and moving to Flume. What's the feedback been so far since the launch of last year? I know you have been working on Flume for some time now, but are there still more functionalities or features that you need to be added or you think that you have everything that you need so far?
Flume. Flume, for those that don't know, this is a pay and get paid product offering in our corporate payments business. It's focused on small business, really small business. I think, you know, we've been working on it for some time. The time it's been, it's been about 15 months. It's been a very short period of time that we've been focused on this product.
The insight at the very beginning was we have a very large number of small businesses that exist in our current portfolio, and those businesses have a huge amount of friction managing their paying and getting paid beyond just the fuel card provision that we help them with. Our small business exposure is primarily in our North American fleet portfolio.
You know, based on that insight, we've created a product from scratch, ground up, launched Q3 of last year. We've been scaling it. We just added project functionality and invoicing functionality to it. We measured the customer count in the hundreds at this point, you know, and look to continue to scale that.
I think what's key for us as we add functionality to this, which there's a very long roadmap of developing functionality to this, is that we don't clutter it. This, and I think this is the big insight for us, is particularly in the far down market, the real small businesses. Think of if you map it to our fleet business, think of the residential construction company that has one, two or three vehicles.
How do you keep it as simple as possible and resist the largesse and the complexity and the bloat that others offer in the market space? It's really that simplicity that, you know, is driving the product market fit at this point.
Great. Within the fleet solutions, you have partnerships with many large brands. What in your view has been the biggest factor that has attracted these brands towards WEX? Is there scope for WEX to scale up or leverage these partnerships which could accelerate the top-line growth going forward?
Yeah, I think you're gonna hear a theme here in my answer, which is, you know, similar to health and corporate payments, we like the end market. We participate in the end market both through the partner channel and going direct. You referenced, you know, the strength of our partner channel in the fleet space. You know, we're lucky to work with nine of the top 10 oil cos.
We work with the 10 top convenience stores here in the United States. We work with the five largest leasing companies. You know, we've built the business on actually all three of our segments on being a trusted partner. We align our incentives with our partners and, you know, work very hard on their behalf to grow their bottom line. Participate in their growth, you know, equally ourselves.
We also on top of that, go to the market directly and, you know, have our own offering, often with a higher take rate. You know, there's a huge amount of trust that we've built with our customers, and the product is built to be scalable, to empower other partners to participate in the marketplace, and it seems to resonate quite well. Anything you'd add, Steve?
No. Well, I think, you know, when we go to market directly and through these partner channels, the whole key to it is making sure that the partners, you know, believe that and can trust in you, right? The only way to do that is kind of through the actions over a period of years, right? We've got a, you know, 30, 40 year track record now of doing the right things and, you know, that's led to all these relationships that we have, which are a really important, you know, channel into that small business marketplace. That's who they typically attract.
At the same time, you know, we have created the right, you know, incentive structure internally, I'll say, to make sure that we keep that trust and make sure that our employees do the right thing by them as well. You know, we're able to, you know, offer something directly into the marketplace, at the same time. We do that across the business, as Jay said.
Great. Now switching to EV. We know you have been working on building the EV capabilities, but unlike your peers who has been pretty active on, like, acquiring companies, WEX has been quiet on that front. Is there scope to grow through acquisitions? What is the near to medium term focus on EV for WEX for now?
Yeah, it's a great question. I'd say, you know, we've been focused on EV for the past couple of years. Our own thinking has evolved a massive amount as we've learned, actually partnered with our, you know, what is it? 600,000 customers in the fleet space, partnered with them around this EV choice that they have. I think, you know, one of the biggest learnings for us is the end state of this market that we are building towards in the kind of the medium and long term is a mixed fleet world. This isn't a transition to EV, this is a transition to mixed fleet.
That means what our job is as WEX is to provide all of the tools that we have on the fueling side of the business with traditional engine, combustion engines, but then add three use cases on EV. One is, how do you enable your employees to charge at home? The second is, how do you enable vehicles to be charged out in the wild?
The third is how do you enable a corporate to charge vehicles in a corporate location or a depot? You know, we've been hyper-focused over this past year and a half to build the functionality on that second use case, which is what we have found primarily the gaining factor for corporates as they consider how do I invest, particularly light-duty vehicles?
How do I invest in a light duty EV and just try it out? The second use case, which is around how do you charge on the go, it comes down to range anxiety. Is there enough power out there that I can get access to on the go? You know, we've partnered with ChargePoint, which is, you know, the largest ChargePoint operator here in the United States.
We've built what is, we call it our EV fabric that maps into all of our systems here, such that we can provide easy information through our, you know, our traditional front ends. We envision a world where we'll be adding on other ChargePoint operators both here and in Europe over the year to come.
We're also focused on building out software solutions that allow an employee to charge at home and allow a corporate to manage depot and corporate lot charging as well. For us, I mean, just one final thought. It's very early days in commercial mixed fleet. I mean, we measure our vehicle count for EVs at this point in the 100s.
We think it'll be in the 1,000s here over the course of the year, then it'll be in the 10,000s. I think it's very early days. We are very certain as to what it is that we're building for. I think there's a huge amount of complexity here to solve for a customer with something that's a new decision for them to make.
Our own internal estimates are, you know, we're looking at a $1.5 billion-$2 billion TAM expansion for us, by 2030. This is, you know, we're all about trying to figure out how do we unlock that with the products that we offer, given the entitlement we have to unlock that with the incumbent relationship.
Understood. I believe the initial focus would be in Europe and then because I think that's where things are much more advanced versus then going to U.S. If that's the case, then within Europe, is there any specific region or country that you've been focused on? Or is it broad-based?
Our exposure to Europe is quite small. You know, we probably have, you know, well less than 10% market share in Europe. EV is progressing faster, some of the dynamics are on a country-by-country basis there. We have been building all of the infrastructure on the back end to service our infrastructure around the world to enable a mixed fleet solution. We are not focused on just solving Europe. We're focused on building solutions that solve for Europe and the United States, those will be test cases for us along the way.
Got it. No, that's helpful. On the last earnings call, Melissa mentioned cross-selling playing a pretty important role in 2023. Which areas within WEX's entire portfolio could see the benefit from cross-selling this year?
I mentioned this kind of crawl, run or crawl, walk, run. Yeah, I think when we were crawling, the hypothesis was that we have the most amount of customers in our fleet segment, and the corporate payments offering, particularly spend management and AP automation, would be a natural cross-sell into it. We have found that that is a motion that will work.
I think surprisingly for us is we've also found all other motions work in one way or another. We have sold fleet products into corporate payments customers. We've sold health products into corporate payments customers, and we've sold corporate payments products into health customers. What we're now trying to do is say is refine that commercial motion.
I think keep in mind that cross-sell, when we talk about it, particularly in the short term, is focused on mid to large customers where it's very much a physical game. It's, you know, mono V mono, and how do you build relationships and have relationship managers pass off warm leads to salespeople who have domain expertise.
We're very much focused on how do we get the systems all connected the right way, get the incentive structure connected all the right way, get the pitch wired the right way, you know, to be able to deliver more and more revenue growth to our back book.
You know, in our long-term growth framework, which has us growing long-term revenue growth between 10% and 15% a year, we ascribe 4%-5% of that revenue growth to back book sales, so existing customer sales. I think of that as TAM, just TAM natural growth, and I think of that as cross-sell opportunities.
Got it. Okay. Yeah. Yeah. That's super helpful. Digitization of offerings has also been like a primary focus. Can you elaborate or provide specific use cases where this is helping or even increasing the pace of cross-selling for WEX?
Yeah. It's interesting you added cross-sell at the end. It's, you know, look, I think at the core of all of our offerings in the long, like the bet on WEX, and part of the reason that I'm here and I get excited about this business is this long-term convergence between B2B payments and B2B software. Period. That's digitization. You see it in all three of our business lines.
For cross-sell, I think there's tons of opportunity for us to do cross-sell for small business, and that will be a digital-first offering. Think about that as a customer. It could be, you know, Sharif's Plumbing and Heating in Darien, signs up for a fuel card, but then can opt in to a corporate payments product and a consumer-driven healthcare product for his three employees.
Yeah.
That's all digitally native. That's not our short-term cross-sell ambition right now. That's long-term with our product front ends. You'll start to see that, but that's, you know. I think that will be tremendous upside for us, kind of in that mid to long-term, you know, as well.
Got it, okay.
Even beyond the cross-sell or even maybe even before the cross-sell, right? We've already digitally enabled our, you know, application process. You know, in a couple of the quarters last year, more than half of our new fleet sales came in, you know, completely through digital channels.
They found us online, they applied online, we gave them a credit approval. They, you know, gave us the data around the vehicles that they had. We mailed them out the card. Like, the entire experience was digital and never had any, you know, intervention from a salesperson. We're already there in parts and obviously a lot more ambition to go.
Understood. On the M&A front, I mean, you have done some great acquisitions in the past, but 2022 was a relatively quiet year. Can you provide us some pipeline for M&A in 2023, 2024? Where do you see the scope for adding more capabilities?
A second part of this question is that your leverage stands at the lower end of the target range. Do you think that WEX has the opportunity to do large size acquisitions or would smaller acquisitions be the way for WEX to move forward?
There's so many thoughts there, Shariq. I think, you know, 2022 was a quiet year, but let's keep in mind 2021 was a very active year, right? Where you saw leverage go above what our long-term range is. Kind of for everyone's edification, you know, we think about cash flow and rev leverage.
You know, our long-term guidance on leverage is 2.5-3.5, you know, turns. We selectively may go above 3.5, you know, up into the fours, if we've got the right opportunity in front of us. We did that in 2021. Have paid that down, that leverage, as well as had an EBITDA expansion over the period of time.
From a cash flow standpoint, I mean, we generated on the $2.4 billion worth of revenue last year, we generated $700 million worth of free cash flow. You know, this is a very, very profitable business. We think, you know. Again, referring back to the long-term growth framework.
We grow, you know, on average over time, revenue at 10%-15% in our ANI EPS, so adjusted net income EPS at 15%-20%, which suggests increasing leverage over time, which then translates into cash flow that allows us to really invest in three things. It's the organic growth, it's M&A, and then, it's selectively and opportunistically, buying back shares.
On the M&A front, we've got a very active pipeline, and we have maintained a very active pipeline, but we just haven't found the right value, you know, against the hypotheses that we're chasing. You know, my hope is that the private markets, you know, privately held entities continue to kind of remark their valuations, and there'll be great opportunities for us to add on and welcome, you know, new products to the WEX family. That just hasn't been the case yet. Not to mean that we aren't trying. We've got very active pipelines, and hopefully we see some flying there over the coming months.
Got it. On share repurchases. Since last three quarters, you have been actively repurchasing shares. Can we expect this trend to continue where we could see a stable and a predictable approach to share buyback? In the absence of any material acquisition, can we expect buybacks to accelerate, or do you think it will be better to save the cash for any future acquisitions?
Steve, you wanna take a shot first?
I mean, I'd start, Shariq, with saying, you know, we don't think it's an either/or, right? I think we can do both. We have historically been, as Jay put it, very opportunistic with share repurchases, meaning, you know, we did quite a bit last year, but 1.9 million shares, I think it was last year. You know, prior to that, we hadn't really done much for a number of years. At this point, you know, we had $700 million of free cash flow this year. We think we can do both at some size.
I wouldn't say that we're gonna spend every dollar on share repurchases, but I do think it will become more common, more, you know, more routine, but still having that opportunistic, you know, piece to it, where we're a lot more interested when the share prices are low or the valuations are low, at least in our estimation, versus higher. That said, you know, then we'd probably save up a little bit for acquisitions. As Jay said, we've got a pretty robust pipeline, but, you know, you can't really always time those things the way you want to.
Got it. On the travel and the corporate payment side, for 2023, the guidance is around 7%-11% growth. I think there has been some pushback from the investors because obviously, you know, travel is continued to rebound.
There is still potential from Asia. I know you had pointed out to some macro slowness and also the true-ups from Mastercard. Can you help us understand as to why? Are there any other things involved in this which is kind of, you know, expecting such a slowdown? Like, do you expect corporate payments to be that soft that you would be at the 7%-11% range for 2023?
Yeah. I think there are a couple different moving pieces to it, Shariq. I think. Just for context here, you know, and again, I keep going back to the long-term growth framework. We're trying to grow revenue at 10%-15%, as you would start to back into how do you get, how do you get to that from the different business units.
We expect corporate payments and travel to be at 10%-15% revenue growth, health to be at 15%-20% growth, fleets to be at 4%-8% growth on average over time. You know, there are a couple different things that are happening.
First and foremost is we went into this budget cycle and the guidance cycle with not pretending to be economists ourselves, but taking, you know, what we saw on the street as what the forward guidance was on GDP growth, and then taking what we think is a very appropriately measured approach to what we're going to deliver over the course of the year.
As we map that to the corporate payment segment, and travel segment, it was softer than what our long-term growth is for this year. A couple things that are also happening is we had some true-ups, as you mentioned, that we'll have to lap in Q4 of this past year. We do expect Asia to recover a bit more this year than it has in the past.
When you kind of put all of that together, you know, we were comfortable in that 7%-11% point. Now, what I will say is, you know, through the first couple of months of this year and, you know, we've seen continued momentum in the business overall. You know, if we need to either adjust up or adjust down, we'll be doing that on our normal quarterly cycle.
Got it. Got it. On the quarter, how has things been tracking versus your expectations that you had provided on the earnings call? Are there any surprising weakness or strength that you're seeing in any of the segments, or are there any early signs on the macro front that you are starting to see now, and I think that would kind of create some risk to your to your guidance for the quarter?
Well, look, I think, you know, we just released guidance just a couple weeks ago, we only have the benefit of another couple weeks. I think maybe I just reiterate a couple of the themes that we talked about in the call. I think OTR continues to be a place of some softness.
As expected, it is a bit soft versus prior year. I think travel continues to be pretty robust, maybe surprisingly robust. I think the health business where we had guided for quite a bit of growth over the course of the year continues to meet that high expectation. You know, here we are kind of two-thirds of the way through the quarter and, you know, I think, you know, we're, a lot of the themes that we talked about in the, in the call are holding true. I don't know, Steve, is there anything you would add?
Yeah. I think largely I'd say the trends we kinda talked about are, as you just said, kinda holding true. The local fleets are continuing to do well, some of that is just, you know, continued benefit from kind of the office reopening cycle. You know, we were still kind of dealing with Omicron a year ago, I'll say the comps are a bit easier there. Travel, same thing, right? We were still dealing with Omicron a year ago.
Yeah.
The travel is gonna be quite strong in Q1. You know, as Jay alluded to earlier, you know, we kind of alluded to this, you know, or guided to this slow economic environment for the back half of the year. You know, we hope we're wrong, frankly, right? We hope that, we have a really robust economy, but, you know, it doesn't seem like that's gonna happen right now.
We'll, you know, we'll see how that plays out. You know, that did temper our expectations for the back half of the year, right? We, we built in some slowdowns in volume for, you know, not just our OTR folks who are already seeing it, but our local fleets, our travel customers, corporate payment spending volumes, all those things. Health is pretty resilient, so not a lot there. You know, so far, all those trends that we kind of talked about a couple weeks ago, you know, haven't been that long a period of time, but they do seem to be holding up okay.
Got it. Got it. Last question is on the margin front. Just in terms of the priority, in terms of like how important would it be to kind of preserve the margins like in 2023 and 2024, like in a macro downturn, I mean, suppose if things go worse than what was initially expected, do you have the flexibility to kind of, you know, maintain the margin or probably even increase the margin in 2023 and 2024?
Maybe I can give a couple thoughts then Steve, you can add a couple thoughts. I think, you know, first, like if you have a really severe downturn, so let's talk about recession. The things that are gonna impact coming through our P&L are going to be PPG, new sales, credit loss rates.
You know, PPG, you can't do a huge much about. We've seen PPG drop in the past. It recovers thereafter. We've geared the business to take advantage of when it goes up. You know, rising interest rates, we've hedged those really well, not with actual hedges, but more natural hedges with our custodial income that we have in the health business.
You know, we can tighten our adjudication, we can tighten our monitoring, we can tighten our collections work, you know, along the way. Those are levers that we have at our disposal. I think I mentioned at the very outset of this, Shariq, that when you asked me about the three priorities for the year, the third priority was around this very intense focus on our portfolio and how it's actually delivering over the course of the year.
We will adjust up or adjust down, you know, based on what we're seeing in the portfolio, in that portfolio's performance in the context of the macro. That's one of our top three priorities for the year. I'd say just, you know, one final thought for you, is we've mentioned this in a couple of the last calls.
In a very kind of surgical way, we've been focused on this $100 million expense improvement program over the past year, and the $100 million is on a run rate basis by the end of 2024. You know, that gives us more flexibility on the margin standpoint and buffers the business against margin pressure that we may see in a downturn economy.
That's it. yeah. Thanks.
One final thought on that.
Sorry, go ahead.
Sorry. One final thought on that is, you know, we expect about half to two-thirds of that on a run rate basis done in this calendar year with the remainder to come in the next calendar year. We'll get some benefit from that this year.
Thank you. Thanks a lot. I think that's all the time that we had. Thanks a lot, Jay. Thanks a lot, Steve.
Shariq, thank you.
This was super helpful. Yeah, thanks for joining us today.
Pleasure. Take care.
Bye.