Good morning. My name is David, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the WEX Q4 2022 Earnings Call. Todays conference is being recrded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Steve Elder, Senior Vice President, Global Investor Relations, you may begin your conference.

Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO and President; and Jagtar Narula, our CFO. The press release we issued earlier this morning and a slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release have also been included in an 8-K we submitted to the SEC earlier this morning. As a reminder, we will be discussing non-GAAP metrics, specifically, adjusted net income attributable to shareholders, which we refer to as adjusted net income, or ANI, and adjusted operating income and related margins and adjusted free cash flow during our call. Please see Exhibit 1 of our most recent earnings press release, and it’s on deck available on our Investor Relations website for an explanation and reconciliation of adjusted net income attributable to shareholders to GAAP net income attributable to shareholders, an explanation and reconciliation of adjusted operating income to GAAP operating income and a reconciliation of adjusted free cash flow to GAAP operating cash flow. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis. The non-GAAP guidance cannot be reconciled without unreasonable efforts due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. We have most recent earnings release and slide deck for more detail about the Company’s non-GAAP measure. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our most recent annual report on Form 10-K and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa.

Thank you, Steve. And good morning, everyone. We appreciate you joining us today. WEX finished 2022 in a strong position with another impressive quarter, beating our guidance for revenue and adjusted net income per share and increasing revenue for the 10th straight quarter. But let me start with a very quick overview of the full year numbers. Revenue increased 27% over 2021 to a record revenue for WEX of $2.4 billion. This is driven by full year total volume process of $212 billion, which was up 45% compared to 2021. Full year adjusted net income per share grew 48%. Our success through market cycles is enabled through our reoccurring revenue model, our diverse earnings engine and our reliable cash flow model. As previously shared more than 80% of WEX’s revenue is reoccurring in nature. Over 20% of our revenue now comes from our health segments, in this year exceeding $1.5 in revenue for the first time. This provides a fast growing profitable and predictable revenue and earnings stream. Our health business further strengthens the stability of WEX, but its revenue from custodian assets, acting as a natural hedge for interest expense. WEX remains well positioned to invest for growth, while opportunistically returning capital to shareholders, as valuations and market conditions warrant. Our combination of growth, scale and cash generation puts us in the enviable position of both returning capital to shareholders, while also investing for the long term future as a business. Now I'd like to give a quick recap of our quarterly financial results released this morning, which Jagtar will provide more detail on later, before diving into our priorities for 2023. I'm pleased to share that revenue in the quarter was $690 million a year-over-year increase of 24%. This growth is primarily driven by volume growth across the…

Thank you, Melissa, and good morning, everyone. As you just heard, we again delivered strong financial results while continuing to make progress on our strategic objectives. As with prior quarters, this quarter showed the strength of our global commerce platform, the competitiveness of our offerings and the power of our business model. Now let's start with the quarter results. For the fourth quarter, total revenue exceeded the midpoint of our guidance by $44 million, primarily due to a combination of earnings of custodial assets, fuel price impacts and the normalization of rate fees. Total revenue came in at $618.6 million, a 24.3% increase over Q4 2021 with more than 80% of revenue for the quarter recurring in nature. As a reminder, we define recurring revenue as payment processing and account servicing revenue, revenue from our factoring business, transaction processing fees and other smaller items. In total, adjusted operating income margin for the company was 38.2%, which is up from 37.1% last year. From an earnings perspective, on a GAAP basis, we had a net income attributable to shareholders of $88.7 million in Q4. Non-GAAP adjusted net income was $152.8 million or $3.44 per diluted share. This represents a 33% increase over the prior year. Now let's move to segment results, starting with fleet. Fleet revenue for the quarter was $367.2 million, a 20% increase over prior year, powered by volume growth, higher fuel prices and an increase in finance fee revenue, including the contribution of the new ExxonMobil portfolio on-boarded at the end of Q3. Payment processing transactions were up 5% year-over-year. The growth was led by local U.S. fleets while we saw an expected slowdown in over-the-road trucking fleets due to a recessionary environment in the freight business. As you see in our metrics, the net late fee rate…

[Operator Instructions] We'll take our first question from Mihir Bhatia with Bank of America. Your line is open.

Good morning. And thank you for taking my question. I want to do it he just stocked with the healthcare segment. You had a nice step up and saxophones and revenue growth comes in the fourth quarter. And it sounds like you expect that to continue into 2023. Can you just talk about some of the drivers of that? And just remind us the enrollment the current enrollment season numbers, those are not showing up in Q4, right? So we should see that benefit in Q1, is that right? And then just also relatedly, I wanted to ask about just the Benefits Express acquisition. I think this is the first enrollment season where you were going to see some of the benefits. Just an update on that, how that went? Was it in line with expectations, better or worse? And what we can expect from here?

A lot in there to unpack on health care. And so, if I take -- I'm going to parse that out in pieces. The account growth that we saw we added 2.3 million SaaS accounts in 2022. So had a really strong growth year. In addition to that, when we went into the enrollment season, we saw more strength than we had anticipated, which is what you're seeing reflected in the fourth quarter and part of what we're picking up in our guidance for next year. So some of the enrollment season numbers, some of our customers who are already started through that enrollment. So that growth that you're seeing in the fourth quarter is really what's going to drive through into 2023. So we feel really good. It gives us a lot of visibility into the numbers for 2023. And then on top of that, we've been able to supplement the account growth, which is about 3/4 of the revenue stream with custodian asset revenue with the investments that we have. And so, we've been able to really maximize the revenue opportunities that we have with the combination of those two things. You also asked about the benefit administration components. We are continuing to sell that into the marketplace. We sell it both on a stand-alone basis and we sell it integrated into the offerings that we have. We've had success also -- I talked a little bit about cross-selling and we've had success with the ability to sell that into some of our existing customer bases within our fleet business. So kind of across the board, I'd say really strong momentum. One of the things that distinguishes us in the marketplace is that we're selling directly. We're also selling through a bunch of different partner channels, which is what we do across the business. But within the health and benefit segment, it's a little bit more unique to what you're seeing competitively happen in the marketplace. And we think that model really works well because we can go through our broker channel directly into the marketplace and meet the needs of that customer segment, but also offer the technology to our partners where they can use that to supplement their offering into the marketplace. And all of those things combined really bringing some really great revenue numbers.

Next, we'll go to Nik Cremo with Credit Suisse. Your line is open.

Good morning. Thank you for taking my question. First, I just wanted to touch on the cost savings program. Thanks for the update. I was just curious what's embedded in the 2023 outlook? I know that previously, it was said that you thought you could exit the year at, like $65 million, $50 million revenue run rate.

Nik, this is Jagtar. Thanks for the question. Yes, we are on track with our cost reduction program. As a reminder, we're expecting about $100 million of operating expense run rate reduction exiting 2024. And as I've previously talked about, we expect to exit the year at about half to 2/3 of that on a run rate basis. So we're continuing to project that in our forward guidance that we've -- that's embedded into our guidance.

And just to add a little bit to that, the type of projects that we're working on are really focused around streamlining what we're doing operationally within the company, but also the items that we expose to our customers we think we have this great opportunity to create a twofer. We have the ability to actually create an even better customer experience but to do that at a lower cost structure.

And then for my follow-up. Could you guys just provide what you're seeing for trends in the fuel segment, the quarter-to-date and also just expectations for the cadence of growth throughout the year? Because it looks like you should have continued strong organic revenue growth in Q1 based upon the guidance. Any color on that would be helpful? Thank you.

Yes, Nik. Sure. So we are seeing good strong growth in the fuel segment, the fleet segment. As I noted in my prepared remarks, we are projecting in our guidance some slowing of the economy as we go through the year. So really, we're forecasting a higher growth in the early part of the year and some moderation as we go through the back half of the year. And as I talked about in my prepared remarks, I mean, we're expecting kind of the lower end of our long-term range for the fuel segment, but really will be higher in the first part of the year and then slow as we get to the back part of the year.

In the slowing in the back part of the year, we talked about the fact we're expecting a slow growth environment is a macro environment, which we use when we put together our guidance assumptions. In terms of what we're seeing in the marketplace today, we're seeing continued strength across the -- our fleet portfolio, with the exception of the over-the-road business. So we continue to have really strong sales momentum but same-store sales are down 2% in that segment. So that segment, as we've talked about, is going through a tougher times, particularly with the smaller fleets within the over-the-road marketplace. It is a piece of what we do business with across all the fleet. If you look at the rest of what we have in our portfolio, specifically in North America that had same-store sales growth in the fourth quarter of 3%. So you've got this dichotomy of one particular sliver within the fleet segment is having a harder time but the rest of the portfolio continues to grow nicely. And then on top of that, we have really strong sales pipelines and anticipate to continue to deliver strong growth across that portfolio.

Next, we'll go to Ramsey El-Assal with Barclays. Your line is now open.

Good morning and thank you so much for taking my question. Could you flesh out a little bit the $100 million of operating cost reduction, I think, by the end of '24 is what you said? Just curious, where do you see -- where are you going to get those savings? What types of sort of lower-hanging fruit is now in the organization that you can kind of economize on in order to get there?

Yes. So let me start with it and Melissa will chime in if needed. So the cost reduction is primarily coming in several areas. So first, we've looked at our organizational structure and we've looked at the number of management layers and how we better optimize the structure. So we see some of that coming out of that. And you may have seen in our release, some restructuring charges related to that. That reflects what we're doing there. The second piece of it is operating efficiencies. We have a large operating infrastructure, call centers, processing centers, et cetera. And we're making technology enhancements, better optimizing efficiency of those centers that we expect to reduce the cost to be able to process more in those centers. We're doing some areas in our technology development, where we expect to economize where we do development that will lead to cost savings. And then the last area, is better purchasing, right? We've invested in our procurement function. We expect to get better spend out of our existing vendors. And so, those four items are really where we're expecting the bulk of what will happen this year into '24.

Yes. And the thing I would add is the headcount changes he's talked about, we announced those a while ago. So we wanted to get ahead of this and did this really proactively. And then the second part I'd say is a lot of the changes that we're making are using more modern technology. So anything from what we would call it super robotics, automation, up to machine learning to AI. And so, as we deploy those tools into our infrastructure, that's creating synergies. And again, it's allowing us to create a more intuitive customer experience. So the combination of the data that we're sitting on, which is just a massive amount of data, with that technology combined is leading to the savings that we're talking about.

That's very helpful. One quick follow-up for me. I was wondering if you could comment on your credit loss expectations in 2023. It looks like you're guiding for a decrease relative to the 4Q '22 exit rate. But at the same time, it seems like your guidance implies that sort of a deteriorating macro situation, even though that's not what you're seeing today. I'm just trying to square that in terms of whether you're maybe more aggressively underwriting or you're lying in some additional strategies to control for credit losses. Does that make sense?

Yes, Ramsey, let me address those. So we've got some puts and takes there in our guidance. One, from what we're doing with our current book and adjudication of new customers, and the second from what we're just projecting from an economic standpoint, right? So starting with what we're doing in our -- with our current book of customers. We've been taking action. You heard me talk about the elevated credit losses we saw in Q4. As I've said, it's predominantly a small segment of our customers. It's our over-the-road segment, which is a smaller subset of our total loan balances. And within that, it's really the smaller trucking fleets, I think that is like one to two truck fleets that were largely the customers that are new on book for the last couple of years. So it's a small segment of the portfolio. So we've been focused on credit tightening, reducing payment terms, getting paid more often and better adjudication of new customers coming in to control those credit losses. We expect to see the benefits of that over that -- over the course of the year. But on the other side of that is we do see a slowing economic environment in the back half of the year. And so, we've factored in some impact to credit losses. So that's where you see the puts and takes in our guide.

Next, we'll go to Trevor Williams with Jefferies. Your line is now open.

Great. Thanks. Good morning. Yes, I wanted to ask on margins in the fleet segment. Obviously, there's some moving pieces there just with fuel prices and the provision, but just thinking if we back out the impact of the provision in 2023, how you're thinking about decremental margins in that segment with the puts and takes of lower fuel, but then some offset from the cost savings? Just any help there would be great. Thanks.

Yes. I would say there's two primary things that we've been looking at with -- related to the fleet margins. So one is the lower fuel prices that we expect next year. Then on top of that will also be higher operating interest that we expect. As interest rates rise, that impacts fuel margins. So both of those we expect to bring margins down in the fuel segment and as you mentioned, the higher credit and fraud losses as well.

Okay. Got it. Thanks. And then for health, within the -- I think you said 25% to 30% growth for the segment for 2023. Any way you can parse out what you have embedded in that number for the interest income on the custodial assets?

Yes, we're expecting that to be roughly 50% to 60% of the growth next year. When you look at it, we ended the year with about $3.5 billion of custodial assets that we're investing. And if you factor in kind of normal growth in that, some SaaS account growth, combined with higher interest rates that we're investing those assets in into this year, we see about half the growth coming from the nonbank custodial business.

Next, we'll go to Bob Napoli with William Blair. Your line is now open.

Thank you. Good morning. Nice results. Question on -- you said you added about 100,000 customers in 2022, mainly SMBs. Just thoughts around the SMB environment, and there's some slowing in, like the smaller truckers. But what are you seeing in SMB broadly? And is any of this related to Flume, and some others are seeing deceleration in the SMB. Doesn't sound like you've seen that outside of trucking.

Bob, good morning. We have not seen a deceleration in the small business marketplace and there continue to be strength within our customer segment and certainly within the additions we've had to our portfolio. And we talked about 100,000 new customers that we've added. In total, we added 4% net growth and really strong growth across each of the portfolio. So really geared towards smaller businesses, like Freda, we added new business across each of our segments. And equally, actually, equally small across the segments with the exception of our corporate payments and travel segment. That tends to be geared towards mid-market and larger accounts. But if you look at both our health and our fleet segment, we're adding both large customers but also a pretty large concentration of smaller businesses.

Great. I mean your health care business has grown a lot over the years from nothing when you first got into it. You have a pretty good comp in the public markets that has a pretty healthy valuation. Are there any thoughts to that health care segment and finding other ways to get value for shareholders in that business? Does spinning off a part, or I don't know, you certainly highlighted? But just any thoughts around that health care business and maybe getting more attention for it with investors. One way to do that is the spin off a piece or rather just any thoughts around health care monetization?

Yes. If you look across the business, the way that we think about what we've developed is the platform -- entertainment platform that sits -- integrated across the different segments that we do business in and we're creating services that are very specialized to many different industries. Health care is one of them. So the connection point to the rest of the business is the underlying technology and increasingly the service levers that we have as part of the synergies that we're talking about. So we like the business and how it actually balances the rest of the portfolio and we think it's an important part of the growth of the company.

Next we'll Dave Koning with Baird. Your line is now open.

Great job. And maybe just to ask about travel and corporate a little bit. We often think of corporate being 15%, 20%, sometimes better growth. And then travel being in -- we would think of it still in '23 being in a recovery year with some of the Asia recovery. But you're only guiding to 7% to 11%. And I would have just kind of thought maybe 20% growth. Maybe what's the disconnect? Is there something or yield some part of the business, maybe not growing quite as fast as we would expect?

Dave, this is Jagtar. So I would say there's a couple of impacts on the travel and corporate payments business. So we do continue to expect good pent-up demand in travel. So things continue to go well in that business. But like I said in my prepared remarks, we are factoring economic slowness throughout the portfolio there. We also had some true-ups in 2022 related to MasterCard incentives that we're not currently forecast to fully repeat in 2023. So when we combine those two items, that's led to our 7% to 11% growth for 2023.

Got you. And that would show up -- would that open the yield in travel or in the yield in -- that was probably corporate, right?

It's a little bit more skewed to corporate, but it shows up a little bit in both.

Okay. And then just as a follow-up. Segment growth, you gave full year growth, but maybe Q1 growth by segment, kind of what you're expecting?

Q1 growth by segment, roughly I would expect, give me a second here, ex-PPG, I'm expecting fleet 10% to 15%. Travel, I'd expect -- the Travel and Corporate Solutions, I'd expect healthy double-digit growth. And health and employee benefits also I think healthy double-digit growth as well.

Next, we'll go to Andrew Jeffrey with Truist Securities. Your line is open.

Good morning and thanks for taking my question. Very nice quarter. Congratulations. Melissa, in health care, in particular, the custodial revenue is sort of a nice maybe -- I don't want to say surprise, but maybe it feels like a little bit of a surprise a market. SaaS account growth looked a bit above trend. Can you just elaborate a little bit? Are we seeing -- is that a function of signing more employers? Or is it a function of more employees adopting to self-directed health care? Or is it a combination? I'm just wondering how much of a sort of secular tailwind you might be seeing in that business today?

Yes. We do think that the market has a secular tailwind. But in 2022, the growth actually largely came from new accounts. So just really strong sales, so we brought into the marketplace. And as I said, at the end of the year, we actually did a little bit better than we had anticipated going into 2023, which is part of what we're reflecting in the forward guide. So each of the channels that we have when we go into the marketplace, we've got our direct channel, which we go through brokers and then our partner channel. If you take a look across the business in 2023, we really had strengths in each of those, and that really led to the strong account growth.

And is there anything to think about if indeed we get a significant change in the employment environment. If unemployment were to go up in a meaningful way, does that sort of inform your growth expectations in that business?

If you have a good counterbalance in the fact that we provide COBRA products also and so, what we have seen historically is you might have a migration from one account type to another, which gives us a bit of a buffer even if you did see something happen in the marketplace. It's not what we're seeing in our data. But again, we think we actually have a pretty good buffer if that does happen.

And next, we'll go to Ken Suchoski with Autonomous Research. Your line is open.

Good morning everyone. Thanks for taking my question. Melissa, you mentioned the two percentage points of growth from new products and cross-selling taking a more prominent role in 2023. Can you just talk about where you see the low-hanging fruit? And can you provide a little more detail on how that cross-sell works? And how you're positioning the sales force for that? Thank you.

Yes, sure. So we've got growth in our long-term model of 4% to 5% that comes from our existing customer base. We had 14% in '22. So we had a really strong number in '22. A piece of that, we think, will come from just market growth, different markets that are growing. And then on top of that, both pricing actions and cross-selling. From a cross-sell perspective, I'd say it's really early. And our focus, and as I said in the last call, has been setting up the right infrastructure across the business so that we can make that much more seamless. Right now, we're doing it based on inherent relationships and luckily have really strong relationships across the portfolio. So we're bringing those relationships from one segment to another to offer different products. We're focused primarily on the mid and larger customers within our product set right now. And we've had some success so far. We had just under 100 new customers come in from that effort. And we are formalizing that by creating the right infrastructure in place so that can happen more fluidly over time. And also, we're focused around the digital aspects of the offers that we have so that when we think about smaller businesses, we can offer the products much more organically digitally. And so, we're segmenting the marketplace and thinking those larger customers will be an inherent handoff from one sales person to another. And then the far end of the market will happen more digitally. And again, we'd expect us to build into this that we're going to continue to do this handoff now which are happening much more manually. And as we build out that infrastructure have that happen more fluidly and see this pace of cross-selling increase over time.

Next, we'll go to James Faucette with Morgan Stanley. Your line is now open.

Thank you, so much. I want to dig in a little bit more on kind of some of the weakness you called out, especially in your smallest customers, et cetera. Build out comp, saw some weakness with Divi's most recent earnings. And I know you work with them on payments. So can you remind us what percentage of your mix they make up? And if any other partners are seeing similar issues that we should be aware of?

Yes, they'd be less than 1%, a small percentage of the mix that we have. And if you look at like -- if you go through each of our segments, fleet has a pretty heavy concentration in small businesses. The only area that we're seeing weakness is the over-the-road customer. So one micro segment within that segment. The rest of the business actually across the board has actually been quite strong. In corporate payments, there's very little small business that sits in that portfolio. And then in health, there are small businesses that are mixed into that -- into the overall segment. Again, we're not seeing any deviation in trend based on segment size anywhere, but over-the-road small fleet customer.

And James, I would just add in that over-the-road customer, I want to remind you that it's at kind of the smaller end of that over-the-road, so -- and kind of newer customers that are at the smaller end of those over-the-road customers. So it's a micro segment of a subsegment of our business. Our overall kind of customers within over-the-road, especially ones that have been with us for a while are actually performing well and stable. It's kind of a subsegment to subsegment.

Next, we'll go to Darrin Peller with Wolfe Research. Your line is now open.

Thanks. When we look at what you've built and put together an assets, whether it's -- some of the other deals, you've obviously done some great acquisitions. So Melissa, when you think about strategically what you have now, specifically in corporate being in corporate and travel, but really across the board, love to hear a little bit more about what you see as the next big step for you guys? Probably inorganically is what I'm looking at, but -- both. And then just a quick follow-up on the travel side. I know eNett brought you a lot more -- a lot more Asia. Maybe just remind us the mix -- the geographic mix of the segment. Obviously, it's important now if reopening China and travel term?

Yes. Let me answer that one first, and I'll go back to the M&A question. Asia is only about 10% of the portfolio right now. It was 20% pre-pandemic. So there's still some ability to continue to see rebound there. It did go up a little bit sequentially from quarter-to-quarter. So we did see a little bit of benefit in Q4 of that reopening. And related to M&A, it's clearly something that's important to the long-term growth framework of the company. And the focuses that we've had have been around scale plays around areas that increase product capability for us. We look at build versus buy capability. And then geographic expansion. And so, you have the eNett, we'd like but that is it hit really across all three of those categories, but we continue to be active in the marketplace in identifying assets, working those through the multiples have continued to be a little bit elevated. And so we then deploy our capital opportunistically through share buyback, but we continue to be active in the marketplace and looking for the right assets for us, both strategically and financially.

And our final question comes from Jeffrey Cantwell with Wells Fargo. Your line is open.

Okay. Great. Thank you. I just wanted to ask you, if you don't mind, giving us an update on Flume? Curious what is the latest there? And I'm realizing that next time we speak, it will be a little bit over a year since the launch. I was just curious if you can kind of walk us through what is happening there? And is there any chance you can give us a little bit of a framework on how to think about revenue and so forth, understanding that you're over $2 billion annual revenue company run out China trying to think through what type of contribution we might have going forward? Thank you so much.

All right. I put Flume in the category of our 1% to 2% growth we have in our long-term framework. So we have -- the idea that we want to make sure that we're continuing to introduce new products into the marketplace and that they will be accretive from a revenue perspective. Part of what I'm excited about Flume is the product itself. It's a digital wallet technology. I'm also going to do that the process that we used to create it, and I said this before, but we created a debentures board internally, where we're moving ideas across the company into the marketplace. And Flume, we started with alpha beta and this full launch and said, when you're talking about that, you're going through the life cycle of the alpha, beta launch and then going into the marketplace. It's a chassis that allows us to deliver products and services. So we're not just excited about that, but we're excited about the potential of what it can do in that small business segment. But it's still early and still small relative to the whole size. I think -- when I think about this, it's, in aggregate, the product offerings that we're moving into the marketplace where we're making investments, yielding that 1% to 2% growth that we have in our framework. And this is just going to be one piece of that.

So David, I think it's all the time we have right now. I just wanted to make one quick note before we wrap it up. We have a small correction to prior year custodial HSA cash asset KPI that we mentioned in our prepared remarks. The correct number is $2.8 billion, and we'll update that in the slide deck on our website. So with that, we'll wrap it up on our end, and thank everyone for joining us today, and we look forward to sharing our progress again next quarter.

This concludes today's conference call. You may now disconnect.