WEX Inc. common stock

Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the WEX Q4 2022 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 once again. 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, CEO, and President, and Jagtan 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 blackthings.com. A copy of the release has also been included in an 8K 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 a slide deck available on our Investor Relations website for an explanation and reconciliation of adjusted net income attributable to shareholders to gap net income attributable to shareholders, an explanation and reconciliation of adjusted operating income to gap operating income, and a reconciliation of adjusted free cash flow to gap operating cash flow. The company provides revenue guidance on a gap basis and earnings guidance on a non-gap 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. See our most recent earnings release and slide deck for more detail about the company's non-GAAP measures. I would also like to remind you that we'll 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 a 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 segment, and this year, exceeding a half a billion dollars in revenue for the first time. This provides a fast-growing, profitable, and predictable revenue and earnings frame. Our health business further strengthens the stability of WEX with its revenue from custodian assets, acting as a natural hedge for our 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 of the business. Now I'd like to give a quick recap of our quarterly financial results released this morning, which Jag Power will provide more detail on later before diving into our priorities for 2023. I'm pleased to share that revenue in the quarter was $619 million, a year-over-year increase of 24%. This growth was primarily driven by volume growth across the business, normalization of late fees, increased revenue from custodial assets, and the benefit of higher fill prices. On an organic basis, which excludes the impact of fluctuations in fill prices and foreign exchange rates, revenue in the quarter grew 19% compared to the prior year's period. This continues the spring of quarters where we have exceeded our long-term growth targets of 10 to 15%. Strong quarterly revenue, paired with the scalability of our business model and a superior funding model resulted in adjusted N.A. income for diluted share of $3.44, an increase of 33% compared to the same quarter last year. Total volume processed across the organization in the fourth quarter grew 31% year-over-year to $53 billion, driven by strong performance in each of our segments and reflecting the power of our model. Now I'd like to turn to a recap of our business highlights in 2022. We've had several exciting new product launches and customer wins throughout the year that helped drive our outstanding results. In addition to our large enterprise-level wins, we've added more than 100,000 new customers in 2022, the majority of which are small businesses. This speaks to the continued strength of our sales and marketing engine year in and year out. we closed the year posting a 73% increase in travel and corporate payments purchase volume, adding 1.7 million new vehicles, and saw our total health staff accounts grow 14%. We feel very positive about the progress towards the five-year, 10% to 15% revenue growth plan we outlined at our investor day last March. In 2022, We posted an impressive 14% from existing customers, 4% from net new customers, 2% from new products, and 1% from M&A. I am incredibly proud of our performance in 2022 and grateful to our team members who helped us achieve such spectacular financial results. When I look back on the year, it was a year characterized by significant economic and geopolitical events. Through it all, WEX remained a resilient and well-structured company, thanks to our diverse earnings engine and $782 million generated in adjusted pre-cash flow, setting us up for a strong 2023. I'll conclude my remarks this morning by outlining our strategy as we head into 2023. As we talked about in our investor day last spring, our strategy continues to focus on deepening share of wallets, maintaining our market-leading positions by driving customer-focused innovation through our strong sales engine, and further building out the scalability of our platform that hosts our specialized vertical services. We're doing this by thoughtfully allocating capital across the business to manage through a dynamic economic environment with a balance between reinvestment in the business and shareholder return. The growth, scale, and cash generation of WEX uniquely situates us to capitalize on our momentum. Our business is characterized by large total addressable markets with structural tailwinds that provide significant opportunities for continued growth. Let me translate this to the segments we operate in and highlight a few priorities for the enterprise. First, let's look at our travel and corporate payment solution segments. We're unique in the space as we couple wholly owned market-leading technology with a global issuing and funding capability. The combination of these two gives us the ability to scale quickly, be more agile responding to customer needs, and lead to strong margins in the segment. In the travel portion of our portfolio, we are the clear market leader. We're pleased with the rebound in travel and are excited about growth as travel volumes continue to normalize around the globe. Outside of travel, we increased investment in sales and marketing, yielding positive results in 2022 and will give us momentum through 2023. Next, in health and benefit solutions, employers are looking for tools to simultaneously manage rising health care costs and provide benefits to attract and retain employees, which creates a secular and resilient tailwind. Our market-leading products allow employers to have a simplified, secure experience, utilizing our payments platform, which also offers their employees an integrated benefit experience, whether they are choosing an HSA account paired with a high-deductible plan, an FSA, a traditional PPO plan, taking advantage of lifestyle benefits, or utilizing products like Medicare Advantage or COBRA. As we look to 2023 in the health and employee benefits segment, we'll continue to benefit from our large, diverse distribution network and industry experience and expect to deliver another year of strong account growth. Our ability to distribute broadly, both direct to employer and wholesale partners enhances our ability to penetrate the market. Additionally, our revenue from custodial assets is becoming an increasingly important driver of growth. Rex became an HSA custodian fewer than two years ago and is now the sixth largest custodian, according to Devonier's mid-year update. Finally, in our global fleet business, organizations need to control costs, and as a result, there are ongoing opportunities to further increase penetration with our proven sales engine. Growing market share with our leading fleet solutions and capturing greenfield customers represents a significant opportunity. We're also making good progress with our fleet solutions and yet simplifying the transition to a mixed fleet environment with the addition of electric vehicles. While the timing of the transition is uncertain, we believe it is becoming increasingly apparent that we will compete in the mixed fleet world for more than the next decade. The transition to EV introduces a new TAM that we believe will be valued at $1.5 to $2 billion in revenue and continues to grow reoccurring revenue for the company through subscription-based revenue streams. We've made great strides in EV in 2022, launching products allowing for the payment of charging at public locations in both the U.S. and Europe, and are building functionality to allow for home charging reimbursement and energy management at default locations, all designed to be integrated into mixed fleet offerings with our industry-leading mobility products. Looking across the enterprise, we have multiple levers to drive growth, and importantly, in this macroeconomic environment, scale. From a growth standpoint, we'll continue to enhance our global commerce platform by adding new offerings for mixed fleets and electric vehicles, further integrate platforms, streamline and add efficiencies to our contact centers, and enable speed in our business through the enhanced use of data and analytics across the company. We're also focused on deepening our share of wallet and believe the compelling value of our solutions allows for increased cross-selling, which will take on an even more prominent role in 2023. We have some early success signing up customers for additional services throughout 2022. by adding nearly 100 customers in the second half of the year. We're working with the sales team to apply these learnings to other customers in each segment. From a scale standpoint, we continue to make good progress in capturing $100 million in operating efficiencies by the end of 2024. As I wrap up my comments, we're confident in our ability to deliver on our financial targets, including our long-term revenue of 10% to 15%, and adjusted net income EPS growth of 15% to 20%, as we outlined at our last Investor Day. Regardless of the economic environment, WEX is positioned to benefit from the flexibility and diversity of our business, as well as our reoccurring revenue model. We continue to monitor the macroeconomic environment and are staying close to our customers to understand the impact of a potential downturn on their businesses. We will nimbly respond to challenges or capture opportunities for our plan as they materialize. While some companies may struggle with the impact of rising interest rates or limited capital availability in the current macro environment, WEX will take advantage of its low leverage, strong cash flow, and superior funding model to invest for the future. I continue to be confident in our path forward in the future of WEX as we remain focused on managing the business through a dynamic economic environment. With that, I'm pleased to turn things over to our CFO, Jagtar Noorullah, to walk you through WEX's financial performance this quarter. Jagtar?

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 and custodial assets, fuel price impacts, and a normalization of late 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, worth $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 for the new ExxonMobil portfolio onboarded at the end of Q3. Payment processing transactions were up 5% year-over-year. The growth was led by local US 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 continued to normalize to pre-pandemic rates. Overall, finance fee revenue was up 32% due to increases in volume prices, and the number of late fee instances. All of these include the impact of the new ExxonMobil portfolio, which is primarily revolving balanced portfolio. The domestic fuel price in Q4 2022 was $4.34 versus $3.42 in Q4 2021. We estimate the year-over-year impact of higher fuel prices increased fleet revenue by approximately $34 million, including a benefit of approximately $6 million for European fuel price spreads. The net interchange rate in the fleet segment was 1.11%, which is down five basis points for the prior year. The higher fuel prices compared to last year is the primary reason for the decline in the net rate. The segment-adjusted operating income margin for the quarter was 45.2%, down from 50.9% in 2021, primarily due to elevated credit and fraud losses, which I will speak about next. Fleet credit losses were above our expectations at 33 basis points of spend volume, including approximately six basis points of fraud losses. Let me first discuss credit losses. While loss rates improved each month through the quarter, they were above expected levels. As I've stated in previous calls, we have a healthy portfolio overall, but we have continued to experience increased delinquencies, predominantly in our smaller over-the-road trucking customers. As I mentioned earlier, the freight business has experienced a recessionary downturn, and this has had a more pronounced impact with our smaller customers. We continue to focus on actively managing the portfolio, including adjusting our credit models to tighten underwriting standards, reducing credit lines where appropriate, and reducing payment terms. Next, on to fraud losses. We have seen both our application fraud rates and transactional fraud rates improve sequentially. The actions we have taken to date have slowed the rate of fraudulent activity by more than 50%. We are launching product enhancements and further improving monitoring tools to help us combat scamming activity. We are also in ongoing conversations with our merchant partners to address the sources of fraud and, in some cases, shift the financial responsibility. Turning now to travel and corporate solutions. Total segment revenue for the quarter increased 36% to $110.7 million. Purchase volume issued by WEX was $17.1 billion, which is an increase of 57% versus the prior year. The net interchange rate in this segment was up nine basis points sequentially, predominantly due to favorable customer and product mix, as well as a year-end rule for incentives based on full-year performance. Breaking the segment down further, Travel-related customer volume represented approximately 68% of the total spend and grew 69% compared to last year. Revenue from travel-related customers was up 75% versus Q4 2021. This reflects continued strength in consumer travel demand in the U.S. and Europe. We believe that there is more room for recovery as pent-up demand appears strong and Asia begins to open up its borders. Corporate payments customer volume grew 36% versus last year, and revenue was up 12%. This growth was led by continued strength in the partner channel. The segment delivered an adjusted operating income margin of 47.9%, up from 38.8% in Q4 last year. There has been significant improvement in these margins during the year as volume accelerated. We have designed the cost base to be relatively fixed, allowing for a high drop through of new revenue to margins. Finally, let's take a look at the health segment. We continue to drive strong growth in Q4 with revenue of $140.7 million. This represents a 29% increase over the prior year. Approximately half of the growth is due to earnings from custodial assets, and the remainder is from the increases in the account base and purchase volume. SAS account growth was 14% in Q4 versus the prior year. Health segment purchase volume increased 20%, leading to a 20% increase in payment processing revenue. We had a significant amount of success in 2022 with Medicare Advantage accounts sold through large health plans, which contributed to the volume growth. Custodial assets which generated interest income or were used for working capital were $3.5 billion on average in Q4 versus $2.5 billion last year, representing an increase of 41%. Of the $3.5 billion total, approximately $1.4 billion was held at third-party banks with the remainder held at West Bank. We realized approximately $25.6 million in revenue in total from these deposits in Q4 versus $8.1 million last year. This represents a blended yield of 3.4% on the funds that were invested during Q4 this year. The health segment adjusted operating income margin was 28.1% compared to 19.2% in 2021. The high flow through on the revenue from the invested HSA deposits is the primary driver of the increase in margin. Shifting gears now, I will provide an update on the balance sheet and our liquidity position. We remain in a healthy financial position and ended the quarter with $922 million in cash. We have $899 million of available borrowing capacity on the revolver and corporate cash of $171 million as defined under the company's credit agreement at quarter end. As you'd expect, we saw a sizable $555 million decrease in our accounts receivable versus last quarter as fuel prices moderated and travel volumes declined seasonally. At the end of the quarter, the total outstanding balance on our revolving line of credit, term loans, and convertible notes was $2.6 billion. The leverage ratio is defined in the credit agreement to the 2.5 times, which is the bottom end of our long-term target of 2.5 to 3.5 times and down from the end of 2021 due primarily to strong earnings. Next, I would like to turn to cash flow. WEX generates a significant amount of cash. Using our definition, adjusted free cash flow is $782 million for 2022. Note that due to the rapid decline in fuel prices at the end of the year compared to the end of Q3, our deposit balances and, as a result, our reported adjusted free cash flow was about $150 to $175 million more than we would normally expect. This excess will likely reverse during 2023. As Melissa mentioned earlier, we are committed to driving strong cash generation and deploying it by both opportunistically repurchasing our own shares and investing in our business with an overall goal of growing as well as continuing to build further resiliency into the business model. We purchased 1.9 million shares at a total cost of $291 million last year and an additional 103,500 shares so far in 2023. We still have nearly $500 million remaining in our authorization. Finally, let's move to 2023 revenue and earnings guidance for the first quarter and the full year. Starting with the first quarter, we expect to report revenue in the range of $600 million to $610 million. We expect adjusted net income EPS to be between $3.15 and $3.25 per diluted share. For the full year, We expect to report revenue in the range of $2.43 to $2.47 billion. We expect adjusted net income, EPS, to be between $13.55 and $14.05 per diluted share. Let me spend a couple of minutes going through the larger assumptions in our guidance. First, a couple of high-level macro assumptions. We are basing our guidance on a slow growth environment in the U.S. Market surveys suggest a slowing economy and consensus U.S. GDP growth of around a half a percent for the year, which we have taken into account in our growth expectations. We are expecting continued interest rate increases early this year, adding another 25 to 50 basis points to the current Fed funds rates target. As a rule of thumb, A 100 basis point increase in interest rates presents a modest $10 million headwind to adjusted debt income for this year. Excluding the impact of fuel prices, fleet segment revenue growth is expected to be toward the lower end of our long-term growth target, which is 4% to 8% because of the expected slow economic growth in the U.S. We are assuming an average fuel price of $3.83 for the year, which compares to $4.46 last year. This change is expected to reduce revenue by approximately $95 million. The travel and corporate payment segment is expected to grow between 7% and 11%. Similar to 2022, we continue to expect the net interchange rate for travel customers to remain fairly steady and for corporate payment customers to continue to come down slightly due to customer mix. We see significant pent-up demand and continued strength in the demand for travel despite indications of a potentially slowing economy. Finally, the health and employee benefit solution segment is expected to have another strong year with growth of 25% to 30%. We have completed a successful open enrollment season and expect benefits from both a significant increase in the custodial balances invested as well as higher interest rates. We are on track to remove $100 million of operating costs on a run rate basis by the end of 2024 as we outlined last quarter. We expect adjusted operating income margins to trend up through the year. as we get the benefit of these cost savings measures and reduce credit losses. All of this leads to EPS growth in the range of 0 to 4% due to the significant drop in fuel prices expected. Isolating out fuel price degradation and FX, we would expect adjusted EPS growth to be in the range of 11% to 15%. As I complete my prepared remarks, I would like to emphasize again how pleased we are with our Q4 results. Finally, we have great confidence in our ability to win new customers, expand with existing customers, and bring new products to market, leading to the long-term growth targets of the company. With that, operator, please open the line for questions.

Thank you. At this time, I'd like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. To allow everyone an opportunity, we ask that you please limit yourselves to one question with one follow-up. We'll pause for a moment to compile the Q&A roster. We'll take our first question from Mahir Bhatia with Bank of America. Your line is now open.

Good morning, and thank you for taking the question. I wanted to maybe just start with the healthcare segment. You had a nice step up in SaaS accounts and revenue 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 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 was 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.

Sure. Well, good morning. There's a lot in there to unpack on health care. And so if I take, and I'm going to parse that out in pieces, the account growth that we saw is we added 2.3 million staff accounts in 2022. So we 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 would have 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 three quarters 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 standalone 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 base 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 benefits 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 bring some really great revenue numbers.

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

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

Hey, Nick, this is Jack. Thanks for the question. Yeah, we are on track with that cost reduction program. As a reminder, you know, we're expecting about $100 million of operating expense run rate reduction exiting 2024. And as I previously talked about, we expect to exit the year at about, you know, half to two-thirds of that on a run rate basis. So we're continuing to project that in our forward guidance, and 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 in a lower-cost structure.

That's great. Thanks for all the extra color.

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.

Yeah, Nick, 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, you know, really we're forecasting 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 we'll be higher in the first part of the year and then slow as we get to the back part of the year.

In the slow and the backfire of the year, we talked about the fact we're expecting a slow growth environment as a macro environment, which we used when we put together our guidance assumptions. In terms of what we're seeing in the marketplace right today, we're seeing continued strength across 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 time, particularly with the smaller fleets within the over-the-roads marketplace. It's a piece of what we do business with across all the fleets. 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 first 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 Ramzi El-Afal with Barclays. Your line is now open.

Hi, good morning, and thank you so much for taking my questions. 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 there in the organization that you can kind of economize on in order to get there?

Yeah, sure. Let me start with it and most of the time it's needed. So, you know, 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 just 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. 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 we're tapping this year through 24.

Yeah, and the things 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, you know, 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 call a super modern 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 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 we're talking about.

That's very helpful. One quick follow-up from 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 4Q22 exit rate. But at the same time, it seems like your guidance implies that sort of a deteriorating macro, you know, 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 laying in some additional strategies to control, you know, for credit losses. Does that make sense?

Yeah, 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. So starting with what we're doing 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 mentioned, 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. Think of it as like one to two truck fleets that were largely the customers that are new on book 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 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 of 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. Yeah, 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.

Yeah, 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?

Yeah, 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 from that, from 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 non-backed 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 I know there's some slowing in the smaller truckers, but what are you seeing in SMBs

broadly and is that is any of this related to flume uh and you know some others are seeing deceleration in smb doesn't sound like you've seen that outside of trucking well good morning um we have not seen a deceleration in the small business marketplace and this continues to be strengths within our customer segment and certainly within the additions we've had to our portfolio We talked about the 100,000 new customers that we've added. In total, we added 4% net growth and really strong growth across each of the portfolios. So while they geared towards smaller businesses, let's say like Proata, 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 segments. that tends to gear towards mid-market and larger accounts. But if you look at both our health and our fleet segments, we're adding both large customers but also a pretty large concentration of smaller businesses.

Great. Thank you. Bigger picture question. I mean, your healthcare business has grown a lot over the years from nothing when you first got into it. You have a you know, a pretty good comp in the public markets that has a, you know, pretty healthy valuation. Are there any thoughts to, you know, that healthcare segment and finding other ways to get, you know, 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 healthcare business and, you know, you know, maybe getting more attention for it with investors, you know, one way to do that is the spin-off a piece or other. Do you have any thoughts around healthcare monetization?

Yeah, yeah. If you look across the business, the way that we think about what we've developed is a platform, it's a payment platform that sits integrated across the different segments that we do businesses, and we're creating services that are very specialized to many different industries. Healthcare 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 go to Dave Conning with Baird. Your line is now open.

Yeah. Hey, guys. Great job. And, you know, maybe just to ask about travel and corporate a little bit. You know, we often think of corporate being, you know, 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 events. 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, you know, some part of the business maybe not growing quite as fast as we would expect?

Hey, Dave. Yeah, this is Jagtar. So I would say there's a couple of impacts on the travel and corporate payments business. So, you know, we do continue to expect good pent-up and abandoned 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 some MasterCard incentives that were not, you know, 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.

Gotcha. And that would show up in the yield in – in travel or in the yield in corporate? 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. XPPG, I'm expecting fleet 10% to 15%. Travel, I expect travel and corporate solutions, I'd expect healthy double-digit growth. And health and employee benefits, I'm also expecting healthy double-digit growth as well. All right. Thanks, guys.

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

Hi, good morning. I appreciate you taking the question. Very nice quarter. Congratulations. Melissa, in healthcare 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 to the 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 sort of self-directed healthcare 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.

Yeah, 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 that 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, you know, that's really led to really strong account growth.

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

We do 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 so far. But again, we think we actually have a pretty good buffer if that does happen.

And next we'll go to Ken Sikorsky with Autonomous Research. Your line's open.

Hi, good morning, everyone. Thanks for taking the questions. 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.

Yeah, 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, because we're in markets that are growing. And then on top of that, both pricing actions and cross-selling. So from a cross-sell perspective, I would say it's really early. And our focus, 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 we have really strong relationships across the portfolio. So we're bridging 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've 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 offerings 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 salesperson to another. And then the smaller 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 Fawcett with Morgan Stanley. Your line is now open.

Thank you so much. I want to dig in a little bit more on some of the weakness you called out, especially in your smallest customers, etc. Bill.com saw some weakness with Divi in its 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?

Yeah, they'd be less than 1%, small, you know, 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 of small businesses. The only area that we're seeing weakness is the over-the-road customers, the one micro-segment within that segment. The rest of the business actually across the board is actually looking 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 the overall segment. Again, we're not seeing any deviation in trends based on segment size anywhere but the 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, and kind of newer customers are at the smaller end of those over-the-road customers. So it's a micro-segment of a sub-segment 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 sub-segment of a sub-segment.

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

Hey, guys. Thanks.

You know, when we look at what you've built and put together in assets, whether it's E-Net or Opto or 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 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. You know, probably inorganically is what I'm looking at, but maybe both. And then just a quick follow up on the travel side. I know Enid brought you a lot more. Enid also brought you a lot more Asia. Maybe just remind us the mix, the geographic mix of the segment. Obviously, just important now with reopening China and travel in general.

Yeah, let me answer that one first and then 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 know, you have the ENET nozzle. What we like about that is it hit really across all three of those categories, but we continue to be active in the marketplace. And identifying assets, working those through, the multiples have continued to be a little bit elevated, and so we've been deploying our capital opportunistically through ShareBadMap, but we continue to be active in the marketplace and looking for the right assets for us, both strategically and financially.

Okay, and our final question comes from Jarrett Catwell with Wells Fargo. Your line is now open.

Hey, great. Thank you. Congrats on the results and thanks for squeezing in. I just wanted to ask you if you don't mind giving us an update on flu. I'm curious, you know, what is the latest there? And I'm realizing that, you know, next time we speak, it'll be, you know, a little bit over a year since the launch. So, we're just curious to kind of walk us through, you know, what what is happening there. And is there any chance that you can give us a little bit of a framework on how to think about, you know, revenue and so forth, understanding that you're, you know, over a $2 billion annual revenue company right now, just trying to think through, you know, what type of contributions we might have going forward. Thanks very much.

Sure. So I put SMOOM in the category of our 1% to 2% growth that 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 accreted 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 excited that that's a process that we used to create it. I've said this before, but we created a ventures board internally where we're moving ideas across the company into the marketplace and and flume we started with alpha beta and this whole launch and said when you're talking about that you're you're going through the life cycle of the alpha launch our beta launch and then and then going into the marketplace um 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 um but it's still early and still small relative to the whole size. But I think when I think about this, it's these in aggregate, the product offerings that we're moving into the marketplace where we're making investments, yielding that one to two percent growth that we have in our framework.

And this is just going to be one piece of that.

So, David, I think that'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 corrected 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'll look forward to sharing our progress again next quarter.

This includes today's conference call. You may now.

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