My name is Daniel Krebs again, on Darrin Peller's team. Joined this afternoon with Jagtar Narula, WEX's CFO, and Steve Elder, Head Investor Relations. Thank you both for joining us today.
How you doing?
Jagtar, if you could take a brief moment to introduce yourself and your background. I know you've been at WEX for almost a year now. Maybe take us back to that. What brought you to WEX in the first place?
Yeah, sure. As Daniel said, I've been at WEX since late May of last year, so about nine months now. I was CFO of another public New York Stock Exchange traded company in Charlotte prior to joining WEX. Before that, had spent almost a decade, seven years, with a company that did software and payments. Fielded the call from WEX. I'd known about the company for quite a bit of time. I was excited for several fronts. One, you know, having come out of a company that was software and payments related, I viewed WEX as kind of almost the inverse, right? Payments and software. It was an area that I felt I had some experience in, understood, could add some value to the company.
Two, was excited about the growth opportunity of the company. The company's had a strong track record over many years of growth, still has a very large market opportunity in front of it. I felt that, you know, the company had got good momentum, and I could be part of, right, helping to continue the success of the company. Third was, you know, the kind of softer stuff of the culture of the company. I'd come in, met the management team, met our CEO, Melissa, several times. In each case, I was thoroughly impressed by the culture that the company drove and that she drove. I, in large part, attributed, you know, that culture to the success of the business.
It was nice to see the kind of the sustainable culture that was created 'cause I view that as indicative of, you know, long-term growth and long-term potential. I think those three pieces came together, got me really excited about the opportunity.
Great. After those first nine months reviewing the business, getting settled, you know, what do you see as your highest priorities? What's your focus right now?
Yeah. We've had a number of initiatives that we've been working on over the nine months that I've been here. I'd say, again, three areas. I'd say, first and foremost, it's been putting into place a lot of the operational cadence that I was used to for prior companies. You know, I think, you know, WEX had its own operational cadence, but it's moved over the last year towards this One WEX structure, a kind of more matrix-driven organization. That's an environment that I'd spent virtually my entire career at. Putting in some of the operational cadence that allows us to move faster as an organization, that allows us to really bring the One WEX and ensure that we're solving problems or reacting to the business environment dynamically as one team.
That's the first area. The second area... That work, I think, helps us deliver on our commitments, right? Directly impacts the next area. The next area is we've talked, you know, in the last couple of earnings calls about our, you know, ambitions of a $100 million cost reduction on a run rate basis exiting 2024. Obviously, that requires a lot of work to do. A lot of time has been spent ensuring that we deliver on that and we're successful at that. The third area is some of the newer growth opportunities that I think we're excited about. Things like, you know, electric vehicle transition, things like, you know, we've got a new business that's growing nicely in healthcare and our non-bank custodian business. It's ensuring success of the, you know, Flume in these other areas, these nascent areas of the business.
Sure. That's great. I guess before we dig into some of those details that you just alluded to, if we could briefly recap, you know, our transition from fourth quarter trends into, you know, your guidance for 2023. You exited the year, you know, growing organically around 19% in the quarter, over 20% for the year, I believe. You know, guiding for a bit of a slowdown throughout 2023. Could you just talk about some of the factors driving this assumption versus what we see as relative strength across segments right now?
Yep. I would say a couple things. first, 19% growth in 2022, that's a percentage that's like excluding fuel.
Macro adjusted.
FX, right? Macro adjusted. When we think about growth in 2023, again, we've got to factor in let's say macro adjustments. Clearly, gas prices, which have an impact on our revenue, are lower this year than they were last year. You know, gotta think about that in terms of what's our growth rate. You know, if you, if you adjust for that, you know, we still have, you know, pretty healthy growth rates.
Mm-hmm.
Although I will grant you that it's lower than we had last year from how we've guided. You know, when we came into guidance this year, we, you know, we really spent a bit of time looking at what kind of economic expectations are for 2023. You know, we were sitting in an environment where the Fed was aggressively increasing interest rates, trying to slow the economy down and trying to project what that might do for our business. We, you know, we reviewed kind of a variety of economic forecasts. I think it was something like 20 economists. We went out and looked at what forecasts were. You know, saw the GDP growth estimates were significantly lower in 2023 than they were for 2022.
You know, we have parts of our business that are impacted by the macro environment. We adjusted our forecast and our guide for that. I would say that, you know, if I think about our kinda long-term, you know, the kind of growth rates that we've put out there publicly.
Mm-hmm.
I'd say, you know, even with some of the macroeconomic headwinds that we put into our, into our guide, we're still within the range that we've said we wanna be for the growth perspective.
Great. Just to be clear, that would be no change to the five-year CAGR of 10%-15%.
Correct. Correct. We're still feeling good about that.
Got it. You already mentioned, some of your cost reduction efforts and the $100 million run rate by year-end 2024. You know, where can investors expect to see some of this show up?
Yeah, we've been focusing on, I'd say, three areas. The first area that we looked at was what I'd call Spans and layers of management, right? You know, especially with the reorganization that went through our company, you know, last year, and the new operating model. We looked at, you know, and I think a lot of companies do this, right? How many managers do you have? How many reports for managers? How many managers versus doers, right? Took some actions there to more streamline the organization and frankly, make it more effective, right? We started doing that, you know, late last year. You know, some of you pay attention to our financial statements might've seen a restructuring charge last year as we started to implement those actions.
The second area that we've been looking at is in our operations. We have a, you know, a pretty, you know, a pretty large footprint in kind of what I'd call the operating part of our business. Think about, right, call centers that support our fleet business, operations and call centers that support our healthcare business, right? From, you know, consumers calling in for information about their accounts, processing claims, things like that. We consolidated all those operations last year into one organization and think there's a lot of opportunity to drive kind of process efficiency, whether it be through use of technology, call deflection, knowledge bases, chat, things like that. Streamlining kind of processes within it.
We think that, you know, both has a benefit to kind of improving costs within that part of the business, but also has the benefit to the employee experience as well. That's the second area. The third area is what I'd call procurement spend, right. We spend $100 millions with vendors externally, and we think we have a opportunity to better manage that spend, whether that is, right, you know, negotiating savings with vendors, consolidating spend amongst a diverse group of vendors down to a single vendor where we can get some cost opportunity. Even if it's frankly just looking at, are we getting effective, right, outcomes from the money that we're spending with vendors?
In some cases, we're saying, "Well, maybe we just should stop the spend." It's looking at all those above items. I wanna reiterate that, you know, we feel pretty good. We've said publicly that we expect to be, right, one half to two-thirds of the way through that $100 million on a run rate basis as we exit 2023, and we still feel really good about that.
Yeah. Great. That obviously gives you an opportunity to reinvest some of that.
Correct.
You know, there's a lot of change coming out of a reorganization, a lot of change happening within each of your major segments, whether it's the EV transition, you know, investments in Flume or, you know, continued health and benefit success. How do you prioritize between that? Maybe there's some sort of delineation between near term versus long-term impacts on in each of those.
Let me answer that in piecemeal. One, how do we prioritize? One of the things that we did last year, when you asked me about things that I'm focused on, is we implemented a new capital planning process for the company, which we basically look at, you know, the opportunities for the company to make investments across the business. That's in the areas that you talk about EV and other areas. You know, we don't, you know, we don't have unlimited dollars. We take the dollars that we have and look at, you know, to reach some of our strategic ambitions, to reach, you know, the business cases that have been put forward for some of these initiatives. What kind of investment is it gonna take, and what are the highest areas of opportunity?
We've implemented that from a process standpoint. I'd say that has gone extraordinarily well. We'll, you know, we'll continue to refine that going forward, but I think that has been a good process addition to the company. Then in terms of balancing near term and long-term investments, you know, some of the areas that you mentioned, right? EV obviously has been an area of strong focus for us and an area of strong investment. You know, we view that as kind of a multiyear or even longer transition period. I don't think you'll see kind of as much of the near-term side, although we will start to see kind of proof points of adoption of some of the products that we're putting out there.
You know, more, more near term, I would say, you know, we guided to pretty strong growth in our healthcare business. A big portion of that is a new product that we, that we rolled out over the last couple of years, a Non-Bank Custodian business, where we're managing HSA assets and investing them. That's been a very strong growth. It's accounting for about half of the expected healthcare growth over this year. That's been an area of significant investment and I think significant opportunity in the near term.
Sure. You know, you touched on the custodial business. Why don't we just tackle that one right now? To be clear, what WEX is earning essentially floating come on are strictly cash balances. Is there any risk for customers to, you know, sort that to higher yielding vehicles for themselves?
I think what we've seen is those cash balances are pretty stable.
Mm-hmm.
Right? Customers, you know, as we sell HSA business and customers bring HSA assets over to accounts with us, and we have custodial rights before. We do see, you know, a lot of stability within that, within those balances, a lot of stability as customers grow with us.
Mm-hmm.
You know, there's always, you know, we also manage kind of non-cash balances, more investments accounts for our customers. You know, you will see that as balances grow, some customers might move. You know, they have an option to move cash balances over to investments accounts as well. What we've generally seen is those cash balances are very, very stable and tend to grow over time.
Okay. Got it. Interesting. Then could you discuss a little bit if there's lag time between onboarding a customer and, you know, seeing them, A, load funds into the account, invest funds into the account or, you know, actually see a benefit from the payment volume flows?
Yeah, you know, just as a reminder, the payment kind of volume-related revenue that we get in our healthcare business is actually a small part of the business, right? 70%-75% of the business is what I call account servicing revenue.
More of a subscription model.
... SaaS subscription model. You know, 10%-15% would be more of those, the payment transaction volume.
Mm-hmm.
We typically don't see a huge lag. I mean, once co-accounts come on, once people put money into the account, they can start transacting fairly quickly. The onboarding is fairly quick. You know, it may take some time for new customers or consumers to kind of understand the HSA account, understand how to use it, understand the processes required, but the actual time from account opening to being able to use it is pretty quick.
Is that one of the biggest barriers to growth in this business is education of the end client?
I'd say I wouldn't call it the biggest barrier, but it is a big opportunity, right? Educating customers on HSA accounts, opening an account, funding an account. We've done a lot around that as a business, right? We've acquired a benefits administration capability to help customers, or end users, consumers sign up for benefits with their employer. We've been building, you know, a lot of kind of data capability, assistive capability into that platform so that we can educate consumers. We also work with our employer clients in messaging to their employees, encouraging the use of HSA accounts and the benefits for them, the tax advantages for them, to help them kind of grow their accounts over time.
Mm-hmm.
I would just add, we've done an HSA Day for the last few years as well. It's all designed around just educating consumers around the benefits of it. I mean, you have a lot of people who put, you know, they know exactly what they're gonna spend on a prescription every month, and that's exactly how much they put in. You have the other extreme of, you know, people who have the means, just put money in and leave it there.
Mm-hmm.
The vast majority of people, it's kind of, you know, a little bit up, a little bit down year to year. The whole idea is just to educate people around, you know, the tax benefits in particular. It's a really powerful account.
Got it. This is mostly an opportunity unique to the U.S., or are there other similar markets where this is possible to expand into over time?
Our healthcare business today is largely U.S. focused.
Mm-hmm.
you know, we tend to focus in the U.S. There may be opportunities to expand it over time, but largely today, it's for the U.S. Focused business.
Got it. Okay, great. Let's transition over to travel and corporate payments. Could you just give us a backdrop on, you know, where we are within the travel recovery, you know, relative to pro forma 2019 in terms of maybe both volume and transactions?
Yeah, sure. We talked a bit about this in a couple of last earnings calls. You know, like you said, we tend to look at 2019 volumes, and we tend to look at it adjusted. You know, obviously, we acquired a business in that post-2019, our eNett Optal acquisition. When we look at volumes, we tend to adjust for that in the 2019 numbers. We're looking at an apples to apples basis adjusted for eNett Optal. What we saw through, you know, the last three quarters of 2022 was that by and large, transaction volume dollars were kind of in line with 2019 levels. What we generally saw was that kind of transactions were below 2019 levels, but dollars per transaction were higher than 2019.
You know, I think somewhat reflecting the high demand of travel last year and the inflationary environment that it created. We did see a little lower than that in the fourth quarter of 2022, so it was a little bit below 2019 levels, but not materially below, so kind of continuing the same trend.
Okay, great. You know, we mentioned eNett Optal. Just as a reminder, I think around 20% of the normalized travel volumes would be coming from Asia because of those businesses. You know, how do you think that mix will evolve over time? Essentially, is the growth rate in Asia-Pacific different from, you know, where it is in, you know, Europe or the U.S.?
Yeah. You know, if I go back to 2019, you know, the rough split of our business, adjusted for eNett Optal again, was roughly, you know, 40% U.S., Or 40% North America, 40% Europe, 20% Asia. If I look at 2022, you know, the last three quarters, you know, we've skewed a bit more to Europe. Europe is definitely overperforming those historical numbers. Asia is underperforming those historical numbers. You know, we've not yet seen a significant opening in China, especially on a cross-border basis, where we tend to earn revenue on Asia. You know, there may be stuff going on, more travel inside of China, but we've not seen kind of that impact of cross-border. That's definitely been reflected in our numbers. You know, we'll see over time. We think there's opportunity there.
Got it. Sure. I think recently noted success in the partner channel as a method for the go-to-market within the travel and corporate payments business. You know, I guess first, if we could take a step back and identify, you know, how that segment is split between partner and direct sales in terms of a go-to-market strategy. What was driving success within, you know, that partner channel that you called out. Is it the embedded payment side or the AP spend management side?
Yeah. I almost view kind of partner versus AP as kind of that same split of embedded versus direct.
Partner meaning the embedded?
The embedded.
Okay.
Yeah. When I think of that business, right, the vast majority of our volume today is really that embedded payments business. you know, the embedded payments business for us has been fantastic for the last few years, couple years. We've, you know, grown very well. You know, the travel business is essentially an embedded payments business. We've signed some fantastic customers on the corporate payment side of the embedded payment business. Just to remind everyone what that embedded payments is, right? We have, we have a terrific back end where we've got technology, we've got issuing capability, we've got funding capability. We are really in, you know, bring everything a customer needs to connect into our API so they can deliver kind of their front-end user experience to our back end.
That business has grown terrifically in volumes, as a result, we've seen great growth and great margin profile in that over the last year. If I think of where we are in the direct side, I'd call that a little bit more nascent.
Mm-hmm.
Right? We've, you know, we've rolled out Flume, which is a new kind of lower-end, lower market, down-market opportunity for us. That's in early stages. We've hired a direct sales team. We'll see how that goes. In kind of our more mid-market, you know, to lower end of enterprise...
Mm-hmm.
we also have a direct sales team that we've staffed up. That direct sales team is now, you know, generating pipeline, generating new deals, and we'll see, you know, we'll see how that goes over the course of the year. I'm very kind of optimistic of the outcome of that. We really think we have a good offering there. That's kind of how the split is.
Sure. On that spend management side, what is the split between a WEX branded solution and a white label solution? Because you do both in that?
Yeah. the white label is what I'd call an embedded payment side.
Okay.
Again, that's the vast majority of it today.
Everything on the spend management is-.
Yeah.
WEX branded.
Is that white label where we might do that with a partner today?
Mm-hmm.
We've begun selling direct.
Got it.
That's relatively nascent for us now.
Okay, awesome. I guess that leaves fleet.
Okay.
If we can move on to the fleet and fuel segment. I guess we touched on this earlier, but, you know, some expectations based on many macro forecasts of slower growth in the back half of the year. I guess we don't need to cover that again. In particular, if you could talk about what you've seen in terms of SMB spend and the resilience or lack of resilience in SMB spend that you've seen. Maybe there are certain industries to call out or regions.
Yeah. we split our fleet business between what we call local fleets-
Mm-hmm.
What we call our freight business. The local fleets have, right, 100 thousands of clients in there. A lot of them would be SMB. What we've been seeing is a lot of resiliency in our fleet business overall. Our freight business has been impacted by macro factors. We've seen kind of a slowdown in freight. You know, spot rates declined. I think a lot of us probably have personal experience with this, right? Covid happened, sitting at home, all ordering a lot of stuff online. Freight volumes increased. That was a benefit to that business two years ago. Now we go two years later, we saw last year that impact was unwinding. More people traveling helped our travel business. Not as good for the freight business.
What we saw was from a, what we call same store sales, which is how we measure kind of momentum of that business. That was a 2% decline last year in terms of gallon volume, which is how we measure the business. On the local fleet, that's been very resilient, right? We saw same store sales in the fourth quarter about 3%. Continued to be strong momentum, and that's part of the business. Again, that's, you know, a lot of SMBs in that business, so we're seeing continued resiliency.
Mm-hmm. On the micro OTR side of things, where there is that weakness, could you explain some of the dynamic? A lot of it is driver migration, in between, you know, an enterprise versus an owner-operator.
Correct.
Could you explain kind of what drives that?
Yeah. what we...
Is that cyclical? Or does it-
There is some cyclicality to that. I think what we saw, you know, when spot rates increased, especially like they did during the pandemic.
Mm.
you know, drivers look at it and say, "You know, I can go buy a truck and be my own boss," right? They'll go out, they'll buy a truck, become an owner operator, maybe have one or two trucks. We saw a big shift to that, to the... during the pandemic when fleet volumes were high. Then as fleet volumes, freight volumes softened, we saw kind of the reverse of that take hold.
Mm-hmm.
Spot rates declined, so now you had customers, in some cases, bought, you know, a truck at peak prices during the pandemic, but now rates are going down, so that impacts the economics. They basically have said, "You know what? I'm gonna go back to work for a fleet operator.
Sure.
Right? That volume will shift back towards larger fleets.
Mm-hmm.
which, you know, fortunately in many cases will still be our customers.
Right. Exactly. I guess the one piece and variability that, you know, has also happened because of the strain on the smaller customers and because of the high gas prices, is credit loss rates.
Yeah.
If you could give us an update on where that is and maybe split the discussion between, you know, credit losses and fraud losses, please.
Yeah, sure. You know, coming through last year, we saw elevated increase in both credit and fraud losses. Let me start with credit losses first. The primary impacts that we've seen are exactly with what we talked about, which is that freight segment, predominantly the smaller owner-operators that have been impacted by the environment that the freight business is in. Just to kind of size it, right? When we look at our total book of accounts receivables, 85% of accounts receivables sit in our local fleet business, which has been kind of very, very stable, right? 15% of it sits in that freight part of the business, what we call TR. Of that, roughly 20% has been related to these smaller owner-operators. It's a pretty contained problem.
We've been, you know, pretty aggressive on the credit front. We increased credit requirements for new applicants. We've been looking at our portfolio, reducing credit lines where it made sense, increasing, in some cases, payment terms. As an owner, truck owner that had to pay us once a week may have to pay us twice a week now, which is another way of reducing-
Mm-hmm.
Credit. That all has helped to stabilize the business. We, you know, we're looking at it, believing we're seeing some stabilization. One of the things that we track is, you know, accounts that go into past due or delinquency. Within that freight segment, we've started to see stabilization.
Okay.
Of things kind of entering the top of the delinquency funnel before that turns into a charge-off. We started seeing that, you know, late in Q4, and that's been kind of holding. We feel pretty good about that. Things feel like they're stabilizing on the credit side. On the fraud side, again, we saw large impacts of fraud last year. A lot of it, we believe, was related to that spike in gas prices we saw, where suddenly, right, being a fraudster, trying to attack us was suddenly more profitable because gas prices were so much higher. We took a lot of actions last year. We, you know, we have a set of fraud monitoring tools that we, you know, very quickly reacted to updating those monitoring tools. We worked pretty hard with our merchant partners.
We've got something that we call a point of compromise model that tells us when it's transactional fraud, exactly where that fraud's occurring, so we can work with merchant partners to identify...
Mm-hmm.
Where there might be a skimming device or something on a pump to address the fraud there. We've worked in some cases with merchant partners to shift financial responsibility, you know, basically help get their involvement in helping to reduce the fraud. We had application fraud going on separate from the transactional fraud that was actually, you know, pretty easy to... Not easy, but we addressed pretty quickly by updating some needed improvements in our applications. All that, you know, we saw from Q1 to, sorry, Q3 to Q4, that fraud rates declined 50%, and we're expecting going into this year, continuing improvements in fraud rates.
Mm-hmm.
We feel pretty good about that.
Great. Much better momentum on that looking into 2023.
Yeah. Exactly.
That's great. I'd like to open it up to the floor if anyone has any questions for the last few minutes. No? Why don't we, I'll let you guys think about it. You know, why don't you give us, kind of a status update, and maybe if we could split this between the U.S. and Europe on where we are in WEX's preparations for the EV transition.
Yeah. We've, you know, we've, as I mentioned earlier, been investing a lot in EV. We've, we've signed partnerships that allow us to, you know, offer to our customers the ability to charge devices on the road, right? Kind of similar to what we do today with gasoline powered vehicles. That on the road charging is some of the functionality we've been rolling out initially, and we've got some partners that are Charge Point Operators that we're working with. You know, earlier, a little bit more in Europe. We're now transitioning kind of that to the U.S. as well. At the same time, we are also rolling out and building and rolling out functionality within our platform that will address the other areas that a fleet manager would care about, right?
Folks are not gonna just charge their cars on the road. They're gonna potentially charge them at home. They're potentially gonna charge them at a depot at their employer site. We need to provide the capability for those operators of vehicles and the fleet managers to manage that kind of more complex environment. We've been developing that functionality and also working with partners as well. We believe that one of the things that fleet managers will wanna understand is kind of the total cost of ownership of an electric vehicle. There's a consultative aspect to that as well, which we've been building capabilities around. Lastly, we do believe that, you know, fleet owners will operate in a mixed fleet environment for some period of time.
Mm-hmm.
What I tend to see today is that, you know, the early adoption is occurring predominantly in kinda larger enterprises, government organizations. Organizations with, you know, a large number of vehicles where they might have, you know, 100 of vehicles or thousands and they've started to adopt, you know, 30 fleet EV vehicles that they may have or they may have ordered and they're waiting for.
Mm-hmm.
We see this as a environment where organizations are gonna be operating both internal combustion and EV vehicles for a period of time. We think that gives us kind of a natural foothold in the market because we are a leader in, right, traditional vehicles. Most fleet managers are not gonna wanna operate in one system for internal combustion and a separate system for electric vehicles and try to reconcile and understand, right, what their cost of ownership is, where their vehicles are. They're gonna wanna work in one system and one platform.
Mm-hmm.
Because we're the current platform, we think that gives us a natural opportunity to help them manage that transition. That's the function of it that we're building.
Mm-hmm.
That's going well. We're going to continue to see updates to our platform and offerings over time.
Yeah. That's great. Much more, honestly, stable, resilient, subscription-based, you know, recurring revenues rather than-
Right. Right.
Yeah.
That's the other piece of it.
Is another benefit of it.
is how do you charge for it, right?
Mm-hmm.
The way we think about it is that's gonna be a bit more SaaS-like in the business model, meaning it's gonna be subscription-based for some of the reasons I talked about, right?
Mm-hmm.
There's a managing your fleet, managing the cost of that fleet. Where, you know, where should I have my drivers charge? Where is it lowest cost? What times of day? All that leads to a much more subscription-oriented offering, which we think provides some, you know, some resiliency.
Yeah
...in the business.
That's fantastic. Last call if anyone has one final question. Jagtar, Steve, thank you so much.
All right. Daniel, thanks a lot.
Thank you.
Appreciate it.