Q3 2022 WEX Inc Earnings Call
[music].
Good day my name is shantou and I'll be your conference operator today at this time I would like to welcome everyone to the works Q3 2022 earnings Conference call. As a reminder, today's conference call is being recorded all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question. Please press star one again thank you.
Steve Elder you May begin your conference.
Thank you operator, and good morning, everyone with me today.
Smith, our chairman and CEO and our CFO Jack Hartung.
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 <unk> Dot Com a.
A copy of the release and the slide deck 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 <unk>.
Adjusted operating income and related margin.
As well as adjusted free cash flow during our call.
Please see exhibit one of the press release for an explanation and reconciliation of adjusted net income attributable to shareholders to GAAP net loss attributable to shareholders and explanation and reconciliation of adjusted operating income to GAAP operating income and a reconciliation of adjusted free cash flow to GAAP operating cash flow.
Yeah.
The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and indeterminate amount of certain elements that are included in reported GAAP earnings.
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 annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March one 2022.
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.
Thanks, Steve Good morning, everyone and thank you for joining us today.
I'll open up the call with a worried that most embodies our company.
Billions day.
This past year has witnessed significant economic and geopolitical events for more in Ukraine to inflation and rising interest rates at home.
Through it all works it continues to grow its business and perform well for our customers our employees and our shareholders.
I will focus my comments this morning on three areas Q.
Q3 financial results.
Highlights from the quarter across each of our segments and update on several initiatives.
Let me start with Q3 financial results, which we released earlier this morning.
I'm pleased to report that <unk> had record quarterly revenue that exceeded our expectations.
Revenue in the quarter with $616 million a year over year increase of 28%.
This strong Q3 growth an increase of $133 million year over year was primarily driven by continued volume growth across the business the impact of higher fuel prices and normalization of late fees.
The majority of revenue growth was due to volume and fee growth, but the benefit of higher fuel prices represented approximately $56 million of the increase.
On an organic basis.
Excluding the impact of fuel prices foreign exchange rates and an accounting presentation change revenue grew 22% compared to the prior year's period.
This performance reflects the power of our growth engine and the reoccurring nature of our business.
Total volume processed across the organization in the third quarter grew 41% year over year to $57 5 billion driven by strong performance in each of our segments.
Record quarterly revenue paired with the scalability of our business model resulted in adjusted net income per diluted share of $3 51.
An increase of 43% compared to the same quarter last year.
I'm really pleased with our results this quarter.
Let me add some color to this success by touching on a few highlights where we continued to gain momentum in the markets we serve.
And our health and employee benefit segment, we continued to see strong account growth, including signing the American arm of a leading global consumer electronics company.
I'm also pleased with our investment over the past few years to be able to serve as the custodian of our HSA accounts for.
For an offering that we did not provide in 2020, we're now the sixth largest HSA custodian according to Devin ear.
Our customers continue to choose our health offering for a customer focused innovation the rich data insight and the service we provide our customers employees along with the breadth of our health ecosystem.
Our capabilities span HSA, FSA and Cobra benefit administration data exchange and billing all delivered with a strong focus on security fraud control and compliance.
And the global Fleet segment, we continue to build on our recent momentum.
Last quarter, we won new merchant acceptance at Walmart and Sam's club as well as establish new partnerships with Macpherson and AEG.
Also pleased to have extended our contract with <unk>, a leading third party logistics firm and Bimbo bakeries, one of the largest commercial bakeries in the U S.
We continue to implement and onboard new customers to our electric vehicle and mixed fleet solutions, both in the United States and Europe .
Customers seek out wax and our fleet segment for the unique benefit and controls of the works proprietary payment network and our specialized expertise applied to the rich data we capture.
Turning to the travel and corporate solutions segment, we saw strong volume performance in our corporate payments portfolio as well as post pandemic rebounds in the busy Q3 summer travel season.
That volume growth has translated into strong revenue growth 25%.
And even greater scale benefits realized in our operating margins for this segment.
Over the past year, we have built a direct sales team, which is selling to mid market corporate payments customers. It's still in the early stages, but we are pleased with the results. Today. We're also pleased to announce the first National Bank of Omaha is our next financial institution partner White labeling our corporate payment solutions.
<unk> will join our portfolio of other top commercial card issuers that leverage our payment solutions and the corporate payments market.
Now, let me turn to a few updates on topics that affect our enterprise more broadly.
Our purpose at wax is to simplify the business of running a business.
Each of our solutions, where they're helping with accounts payable employee health care are managing vehicles from the field.
<unk> the running of the business, we share with solutions for any size business that are customized to their industry.
We're focused on deepening our wallet share of our current customers that by enabling them to use our full suite of products.
We're seeing encouraging results from our over the road truck customers OTR customers have been our initial focus because of the common customer characteristics of trucking fleet and the lack of payment digitization in this sector.
We focused on selling our corporate payment solutions to these customers, allowing them to achieve the benefits of digital payments.
Today, we have hundreds of OTR customers using corporate payments products, which contributed $7 million of revenue to our quarterly results.
Hundreds of thousands of customers, we see our ability to enable them to easily gain access to a full suite of products is a key enabler of future growth.
Let me switch gears to next touch on customer focused innovation.
I want to update you on flu, which is a new venture we've launched over the past 12 months with a mission to help our small business customers pay and get paid.
The primary insight for US was at our smaller customers are demanding more consumer like user experiences, we have an opportunity to meet them, where they want to be met.
Our approach is not just an easy UI.
But powering it with a digital wallet technology and being able to participate in the funds flow.
Recently promoted flu from beta testing to a full launch and are focusing on bringing this solution to access more than 450000.
This thing small business customers.
One of our phone customers as a general contractor.
Realizing in the preservation of landmark buildings and local communities.
This customer has used <unk> sleep products for years to power their small fleet of vehicles.
With the launch of Bloom, they were delighted to find a new avenue to expand their relationship with wax.
Before flume, keeping track of payments documents invoices for their more than 20 sub contractors with an entirely manual process powered by color coded binders and filing cabinets.
In particular, relying on checks for payments was a constant source of friction with subcontractors.
There were drawn to flu.
<unk> and transparency there.
Their subcontractors can now receive payment immediately with full visibility into the process.
They have the need to chase their money.
Additionally for our business moving from paper to digital fluent felt accessible and easy to use.
Linda is a chassis on which we can provide incremental value to our small business customers.
As we look to the future this product and its modern architecture will help us unlock new revenue opportunities.
Now, let me take a moment to update you on our capital allocation priorities and further thoughts on resiliency.
<unk> generates a significant amount of adjusted free cash flow.
Our move to providing an HSA custodial offering created a buffer against interest rate movements.
During times of increasing inflation or fleet travel and corporate payments and health care businesses.
An increase in purchase volume due to rising prices, which also benefits wax.
These items at the resiliency of our model.
At the same time, we're focused on continuing to squeeze out cost to create an even more profitable and nimble organization with an eye on the use of technology to further automate the business.
We expect to deliver $100 million and run rate operating improvement by the end of 2024.
And to reinvest roughly half of the savings and further growth and optimization opportunities across the business.
To support the achievement of our long term growth targets.
As we move forward our ability to generate strong cash flows combined with the flexibility and diversity of our business model gives us confidence in our capacity to invest in the business and return capital to shareholders.
As a reminder, our capital allocation priorities, which we outlined on Investor day are.
To invest internally for organic growth and scale.
Execute strategic M&A that expand our customer reach and capabilities.
With a focus on EV and energy innovation.
And corporate payments.
And returned capital to shareholders when conditions are appropriate.
All while maintaining a healthy and flexible balance sheet.
Earlier today, we announced an amended share repurchase program.
Under which up to $650 million worth of waxes common stock may be repurchased.
This amended authorization reflects our board and management team's confidence in <unk> ability to generate strong earnings and free cash flow.
To date this year <unk> purchased approximately $225 million of common stock.
<unk> approximately $75 million under the now amended plan in Q4.
Dr <unk> will share more about our fourth quarter.
Our resilient cash flow model and some 2023 insights, but overall I remain incredibly excited about our path forward, we're leveraging our powerful growth engine to win new customers expand on our relationships with existing customers and diversify our offerings with compelling new solutions.
That extend our addressable market.
Chapter.
Thank you Melissa and good morning, everyone.
As you just heard from Melissa we delivered a solid third quarter in which we achieved strong topline growth while continuing to make good 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 on slide six.
For the third quarter total revenue exceeded the high end of our guidance by $26 million.
Due to a combination of record high travel and corporate payments purchase volume fuel price impacts and the normalization of late fees.
Total revenue came in at $616 1 million.
A 28% increase over Q3 2021 with more than 80% of revenue for the quarter reoccurring 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.
Total adjusted operating income margin for the company was 39, 1%, which was up from 37% last year, largely driven by the travel and corporate solutions segment.
From an earnings perspective.
GAAP basis, we had a net loss attributable to shareholders of $44 1 million.
Q3.
I would like to note that our GAAP earnings included a $136 million non cash charge due to a goodwill impairment predominantly related to our European fleet business.
non-GAAP adjusted net income was $157 8 million.
There are $3 51 per diluted share this represents a 43% increase over the prior year.
Now, let's move on to segment results, starting with fleet on slide seven.
Fleet revenue for the quarter was $378 1 million.
A 32% increase over prior year powered by strong volumes from new customer wins, and renewals higher fuel prices and increasingly fees.
Recovery in the existing customer base.
Payment processing.
<unk> were up 8% year over year, which is in line with our historical growth rates.
As you've seen our metrics the net late fee rate normalized following the rapid increase in fuel prices.
Overall finance fee revenue was up 43% due to increases in volume fuel prices and an increase in the number of late fee instances.
The domestic fuel price in Q3, 2022 was $4 54 versus $3 23 in Q3 2021.
We estimate the year over year impact of higher fuel prices increased fleet revenue by approximately $56 million, including.
Including a benefit of approximately $8 million for European fuel price spreads.
The net interchange rate in the fleet segment was 110%, which is up slightly from the prior year, even with higher fuel prices.
We continue to see a transaction mix towards slightly smaller but more frequent transactions.
As fleet owners cope with higher fuel prices, especially in the over the road space.
This transaction shifts as a slight benefit to our net interchange rate.
The segment adjusted operating income margin for the quarter was 46, 2% down.
Down from 56% in 2021.
Let me briefly address increased credit losses, we saw in Q3 that were the primary cause of the decline in margin.
Fleet credit losses were above the high end of our range at 39 basis points of spend volume.
Including approximately 11 basis points of fraud losses.
Let me start with credit losses.
While we have a healthy portfolio overall and the over the road trucking business, we are seeing slower payments from numerous small customers likely due to declining spot shipping rates after large increases during the pandemic.
As a result, we increased our reserves for these customers, including our qualitative reserve based on our economic outlook.
This was the primary reason for higher credit losses in Q3 versus the prior quarter.
We are very focused on actively managing the portfolio, including hiring additional collections personnel adjusting our credit models and reducing credit terms where warranted.
Next onto fraud losses.
We have seen our application fraud rates improved sequentially transaction fraud rates remained elevated.
We are not satisfied with this outcome and we will continue to aggressively attack. This problem until it is resolved.
Our point of compromise model has determined that the transactional fraud.
Concentrated in our over the road business and a specific set of geographies with a limited number of merchants.
Our actions include continuing to enhance our monitoring tools and account policies and updating our product offering with additional fraud controls while working closely with our merchant partners.
Turning now to travel and corporate solutions.
Total segment revenue for the quarter increased 25% to $114 million.
Purchase volume issued by works was $20 7 billion, which is an increase of 61% versus last year.
The net interchange rate in the segment was down three basis points sequentially predominantly due to travel customers contributing a larger percentage of total purchase volume.
Breaking this segment down further travel related customer volume represented approximately 74% of the total spend and grew 70% compared to last year <unk>.
Revenue from travel related customers was up 107% versus Q3 2021.
This reflects continued strength in consumer travel demand we are very pleased with these results.
Corporate payments customer volume grew 41% versus last year and revenue was down 14% as reported.
9% after adjusting for the accounting presentation change.
This growth was led by continued strength in the partner channel.
The segment delivered an adjusted operating income margin of 52, 9%.
Up from 34, 1% in Q3 last year.
There has been significant improvement in these margins as travel related volume accelerated.
Our business model here is very strong in revenue dropped through for this segment is high given our relatively fixed cost base.
Finally.
Let's take a look at the health segment.
Continue to drive strong growth, resulting in Q3 revenue of $124 1 million.
This represents an 18% increase over the prior year.
SAS account growth was 8% in Q3 versus the prior year.
Adjusting for approximately $1 million temporary corporate accounts last year.
<unk> growth was 13% in Q3.
Health segment purchase volume increased 15%, leading to a 16% increase in payment processing revenue.
We also realized approximately $16 million in revenue from the HSA deposits. There were invested by West Bank starting late last year in funds held at third party banks.
The health segment adjusted operating income margin was 24, 4% compared to 22, 6% in 2021.
The revenue from the invested HSA deposits as 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 $759 million in cash.
We have $811 million of available borrowing capacity and corporate cash of $129 million as defined under the company's credit agreement at quarter end.
As you'd expect we saw a sizable $615 million decrease.
Our accounts receivable versus last quarter.
Fuel prices moderated.
At the ended the quarter.
Total outstanding balance on our revolving line of credit term loans and convertible notes was $2 7 billion.
The leverage ratio.
Find in the credit agreement stands at two seven times, which is nearing the bottom end of our long term target of two and half to three five times and down from the end of 2021 due primarily to the strong earnings.
Next I would like to turn to cash flow.
What's generates a significant amount of cash.
We have included the graph on slide eight with a summary of adjusted free cash flow, which is how we view the cash generation performance of the company.
Using our destination.
Adjusted free cash flow is $407 million through Q3.
As Melissa discussed our primary use of free cash flow. This year has been to repurchase shares.
We will continue to manage capital allocation between organic investment M&A and returning capital to shareholders.
Finally, let's move to revenue and earnings guidance for the fourth quarter and full year on slide nine.
The third quarter was a very good quarter for us and I'm pleased to share that we are again, increasing our guidance for 2022.
Starting with the fourth quarter, we expect to report revenue in the range of $570 million to $580 million.
We expect an EPS.
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 230.
231 billion.
We expect.
EPS to be between $13 24.
$13 34 per diluted share.
For the full year. These updated ranges represent an increase of $42 million in revenue.
12 cents of EPS compared to the midpoint of our previous guidance.
You can find additional assumptions for guidance on slide 10.
As I complete my prepared remarks, I would like to emphasize how pleased we were with our Q3 results.
Take a moment to reflect on our 2023 expectations.
At the top of everyone's mind is the macro economy.
Let me start with fuel prices, which have been volatile we may continue to see movement heading into next year.
As of last week.
<unk> futures curve is showing an average fuel price of $3 87 for next year.
We will obviously update our fuel price assumptions when we give formal guidance in February .
Next I will turn to interest rates, which have increased significantly over the past year.
We think the impact of higher interest rates on works is more balanced than is generally understood.
Obviously, we have some floating rate debt today and $750 million of interest rate hedges that will expire between Q4 and Q1 next year.
Increasingly effective amount of floating debt that we have unless we add to our hedges.
We also have an income stream from $1 $4 billion of HSA deposits that are invested another $1 billion of HSA assets held at third party banks, including $500 million monetized at floating rates.
Interest rates have also risen to the point, where we will see some benefit from interest rate escalator clauses and our fuel nuc merchant interchange rates.
And the low rate environment that we've been in for the last few years, we have not talked much about this lever but.
But we have the contractual ability to raise interchange rates as interest rates go higher once we hit a negotiated floor level and rates.
Given all of this over the long term, we see the impacts of interest rate changes is more balanced.
Finally, we have great confidence in our ability to win new customers.
Expand with existing customers and bring new products to market, leading to long term growth targets of the company.
With that operator, please open the line for questions.
At this time I would like to remind everyone to ask a question. Please press star one to allow time for everyone to ask a question. Please limit yourself to one question and one follow up.
Our first question comes from Ramsey El <unk> with Barclays. Your line is open hi.
Hi, Thanks for taking my question and nice to see Super strong numbers this quarter.
Could you give us any any read that you have on whether youre seeing sort of macro stress in the portfolio. It sounded like the credit deterioration fleet was a little more due to changes in and shipping spot rates are you seeing any broader macro impacts and I guess, how the same store sales look in that context.
Yes, Hey, Ramsey thanks.
<unk> in the quarter. This is Chuck So let me let me address the.
What we're seeing on the macro side.
Obviously, we talked about credit and fraud losses being up this quarter.
I'll break that down into two parts.
On the credit loss side that was 20 points.
Phil unemployment the 31 point movement that I talked about what we're seeing there really came down to a judgmental reserve that we took what we saw limited to our.
Over the road part of our business, where we're seeing spot rates declining.
As a result of putting some pressure on sort of smaller customers, mostly owner operators, we havent seen specifically an increase in losses, but we did see some delayed payments as I talked about and as a result, we took we took a judgmental reserve on that.
Just accounting for the higher the higher rates of delinquent payments.
So we're seeing overall things pre balance the overall quality of the fleet portfolio the depth of our complete portfolio is still good so.
So we feel generally good about things but.
We saw some parts in certain areas that we address.
And then can you expand on that you asked about same store sales its Melissa.
And fleet business in the quarter, we saw up 5% and same store sales.
Real strength the over the road business was flat.
Same store sales so what we're seeing within the portfolios Jack talked about the smaller over the road customers.
Yet our Lucy.
Losing some share because of what's happened with spot rates, so far for us that volumes picked up with some of the larger guys.
And you can see that continuing through it and what we're seeing for our results in October as well.
So if you look across the portfolio of wax overall, you've seen really strong trends, which factored through to the volumes that you saw us post in Q3.
Great.
One last one in here in the slide deck, I think you talked about expanding product set usage in the OTR segment and a $7 million of contribution I think that is cross sell.
If that's the case can you give us more color on what is working there where you're seeing success and should we expect that number to grow.
As we move forward.
Yeah Yeah.
We've done actually a lot over the last quarter. So we talked about the $7 million of revenue that we had specifically an increase in wallet share.
The over the road customers and our corporate payments products.
We have over the last quarter segmented the portfolios have gone across and built a qualified sales lead list.
So if you think about the portfolio the smaller customers we attend to.
It really go after more digitally the larger customers is where we've created this qualify bleed lift, but we are working our way through so we feel really bullish about the ability to extend the wallet share that we have with our customers.
The way that we think about that at Investor day, we had framed in our long term growth framework, 4% to 5% growth that should come from existing customers and this is one of the mechanisms we intend to hit that.
Terrific. Thank you very much.
Our next question comes from Nick <unk> with Credit Suisse. Your line is open.
Hey, good morning, and thanks for taking my question.
First I just wanted to.
Get more color on the $100 million and run rate efficiency improvements by the end of 2024.
Yes, how much of those benefits could wax realize next year in 2023.
And also related.
Operating expenses in 'twenty, three I know that there was more one time investments in the back half of this year. So I did on the last call and I was just curious if you could ballpark the size of those investments.
Yeah, why don't I start.
Art and science of recovery will settle in a little bit here, but.
When we were looking last quarter, we started talking about the fact that we were making investments.
We've been focused on is where we can use technology to create automation that increases the customer experience and think of that as a twofer you have the ability to actually have a better customer experience at a lower cost and more scalability. We first started down this path, we were really thinking about how to de risk.
Growth.
Because of just what we're seeing where labor shortages in the marketplace. So that was really our primary focus but as it got into this we think it just builds into the resiliency of the model and a lot of this work has pretty quick payback periods.
Again, we're looking at is that end to end experience you've heard us talk a lot about how we've transformed our technology stack and moved into the cloud how we've increased the digital marketing capability that we have and so this is just taking that spread and pulling it all the way through that customer experience.
Yes.
Jump in and just answer a couple of questions on how we expect it to ramp.
What we're seeing from the investment side this quarter. So on the ramping as we said in the prepared remarks, we expect a 100 million of run rate savings by the end of 'twenty 'twenty four.
And we're still working through our 2023 budget, so I'm not going to kind of get into a guidance discussion, but but we do expect that to kind of ramp through 'twenty three.
So we'll exit 'twenty three.
<unk>.
Two thirds of that from a run rate basis and then.
The investments that we're seeing as we talked I think last call about $5 million to $10 million a quarter that we expected to see in the back half of the year from the investments, we're making and you can see that in the sequential results. If you look at Q2 versus Q3, you can see the five.
$5 million to $10 million it was roughly $6 million later again.
Q3 results.
Got it thanks, so much for all the incremental color.
I can just sneak in a quick follow up on the corporate payments yield I know it was expected.
Taper down in the back half of this year related to a large customer it looks like it came in in the low to mid seventies 73, and how should we think about that yielded a Q4 in 2023.
Good run rate to use or if it should come down a little more thank you.
I think it is.
New.
[laughter] alright.
Let me start and then Jack I think it's really important when you actually look at that segment to parse it into two pieces.
So I would think about it.
We've actually been disclosing for probably four quarters now the split between the two so you can see with our travel business. There's been a lot of stability in the rate in the course of this year, we said that going into the year and that's what we've experienced.
And then with the corporate payments business. It has been really about mix shifted to the extent that we are seeing more of a mix into our embedded payments products that mixes that rate down. We said, we expected that to happen during the course of this year and it has.
And so there's a lot of mix. It plays out you can see from a profitability perspective.
That we've seen in a significant drop through of revenue, which has increased our margin profile. So while some of the take rates in some of the products may be lower their loss costs associated with those as well.
And that all factors into how we think about it from a pricing perspective, so going forward.
Yes Jack.
<unk>, we're still working through the budget and some of this will depend on mix of what we expect to see next year.
But we've seen a lot of stability in the overall travel rates.
And again, when you get to the corporate payments business it really depends on mix.
<unk> had great success with our embedded payment products in the marketplace, which again has that lower take rate. So we would expect to see that continue to factor into that rate declining.
A little bit going into 'twenty three.
Understood. Thanks, so much for explaining that.
Okay.
Our next question comes from Mihir Bhatia with Bank of America. Your line is open.
Good morning. Thank you for taking my question I wanted to start with travel volumes, they're up nicely this quarter and a little better than we expected, but just can you talk about where the improvement came from quarter over quarter in <unk> in any geographies worth calling out and then just staying with travel and default Q is there.
Recovery tailwind to come just thinking between holidays in the U S summer in Australia that can maybe contribute some outsized growth again in <unk>.
Yes, it's probably what we've been doing this company back to 2019 for pre pandemic and then pro forma in as if we owned <unk>.
In Q3 was about 107% of Q3 volume in 2019, the thing I would say that stands out and it was true last quarter, even more so this quarter is that.
Our.
Price increases that are coming through and that's when we talk about.
Some of the resilience that we have against inflation. This is a great example of that even sequentially from Q2 to Q3. The average ticket that we saw went up 8%.
So there is.
That volume is still below the 2019 levels, but spend volume is above and that has a lot to do with pricing increases or mix change that's happening within the portfolio, but it's an higher average ticket price.
From a geo perspective.
I would say similar trends that we saw in the last quarter.
Great growth in Europe .
It's still we're still down in Asia, which is a smaller part of the portfolio.
Got it.
And then maybe just on flu I appreciate some of those.
Anecdotal or other.
A little bit of detail that you provided in the prepared remarks, but after 450000 customers that you're targeting what's a realistic target for how many you can sign up and let's say the next year or so are there any mile markers you can share for us.
You'll be using to judge if flu is performing in line with expectations and the growth is coming through thank you.
Yes, it's an interesting question that when we think of our existing small customer base net 450000 customers.
Is it opportunity for us to increase market share and we've had some evidence of that with the products that we've rolled out and specifically with flu so far.
I think that we're still early we went from beta launch to this quarter. We had told you last quarter is that we would go into full launch in.
In the third quarter, which we did and that we were going to learn from this fall launch.
What that looks like from an actual take rate across the portfolio. So I think you need to give us a little bit more time to get more experience behind us, but we feel really bullish around.
A bunch of things here first of all is it just the ability to bring product into the marketplace and I talked earlier about all the work we've done on the technology side over many years. This is that you can see the benefit of that as well.
Moving product into the market.
It's part of why we added in our whole digital teams at the beginning of the year is that ability to actually take advantages of the technology.
The ability to move the product the ability to rapidly introduce new features into the product the ability to integrate through API across our portfolio. So that you can share technologies and just.
And a totally different place.
So I think we're going to learn a lot.
Not just how we sell this into the marketplace, but how we use in our talk about using this as the chassis for us.
In small business because there are a lot of pieces that we've developed that we will deploy in other parts of the company.
Got it thank you and if I could just squeeze one last one in.
Just on the impairment charge what happened this quarter or did something change in the quarter that made you take it this quarter just trying to understand like if it's fairly large amount. So thank you.
Yes, I'll address that one so the impairment charge was largely macro related so we're seeing rising.
Rising interest rates, which impacts the discount rate, we use in our impaired impairment analysis market valuations of change, which also impact.
The number the impairment analysis, and then and then.
The economic environment in Europe .
Impacted kind of the cash flow of the business.
In the near term so we gotcha that altogether, it's largely macro related and we determine that.
Turbocharge as warranted.
Thank you.
Our next question comes from Bob Napoli with William Blair. Your line is open.
Alright, Thank you and good morning.
Having watched works through a number of macroeconomic cycles your payment processing transactions or had been.
Pretty good leading indicator.
We're getting a lot of mixed.
It means that out of the trucking space, but your transactions held up pretty well this quarter.
Thoughts as you look in Melissa as you look into next year.
On the macro are you seeing I mean, how are those transactions holding up so far in the fourth quarter.
Then.
Surprised by this.
Stability there.
Well, if you look across the portfolio and obviously, we're looking at volume when we give guidance for the fourth quarter.
In October .
Continue to see volume growth.
Cross the fleet business.
Really strong volume growth of our travel and corporate payments.
And really strong volume growth in our health business, so, but I think about macro and I'll talk a little bit about resiliency for a moment because I'm going to hit on the point that we.
We said in our prepared remarks.
The business when I think about how much more diversified than we are and we've done a lot of buffer our interest rate sensitivity. The HSA deposits that we've added into the mix.
<unk> is really helping and we look forward that.
Many different scenarios of what could happen in the future. We're benefiting right now from a inflation because youre seeing that coming through not just higher energy cost, but higher cost related to getting charged across the portfolio.
Going into open enrollment season.
We're trending positive.
Some that <unk> got 80% of our revenue.
It's reoccurring in nature, and we're much more diversified across the business and across the Geos. So we feel good about all of that when we when we talk about.
No. We've seen is part of why we felt really comfortable.
Around increasing our share buyback program with looking at many of the different scenarios that could play out and just the cash flow generation that we have from a macro perspective, when we talk to our customers across the different segments. The number one thing we continue to hear from them is still about labor and access to labor.
The over the road marketplace.
Hit on earlier this smaller over the road customers, which is.
Micro segmented by micro segment for us.
It is being impacted by spot rates.
Again, so far a lot of that volume has been picked up.
By the larger customers. We do think this is more cyclical part of the business.
If you go back to even 2019, there was softness in that part of the business same store sales were down two 3% in 2019 was flat again this last quarter. So.
That's one segment that I think we are hearing a little bit of distress again with a micro segment of that but then across the broader portfolio, we're seeing actually really positive trends.
Great. Thank you interesting.
A follow up just on.
Your your M&A in your historical M&A I guess.
You have been active but between should we see more M&A again going into 2023 and as you look at like some of your acquisitions in the past.
How have you how would you how would you say you've done overall with grade would you give yourself a which.
Acquisitions have outperformed.
Which have underperformed, obviously Europe has been tough in fleet, but some of your U S fleet acquisitions, So just any thoughts around M&A.
Oracle M&A in performance versus expectations.
Yeah, one of the things we do.
Look back across the portfolio of M&A in <unk>.
We feel really good about the way that we've delivered against the original deal model.
How we've reached synergy targets across the portfolio in the most recent with Ethernet.
Being folded in and you can see that in how we've delivered really strong earnings growth.
You can see that from for this segment in there related to that transaction, which again is the most recent one so when we think about M&A in <unk>.
More broadly about capital allocation, we still start with how we're going to invest money internally.
Which is a key focus of ours as we also think about building capability as opposed to just fine.
And then when we look at M&A, we've got a pipeline that we have had active and as long as I can remember, we're moving assets through that pipeline.
In the market so far over the last post <unk>.
Nine months, we've seen still continue to have elevated multiples.
And or assets that.
Either or we think complicating and what we're trying to do strategically are therefore, a distracting.
And so we haven't executed on something recently, but we are very active in the marketplace. We think it's an important part of our growth.
It's part of the team, we say, 2% to 3% of our long term growth framework is going to come from M&A.
We really spend time is if you look at.
The current market environment, we see the purchase of our own shares is a very compelling value.
And we think we can do both we can generate a lot of cash.
We have an ability to continue to be active in the marketplace from an M&A perspective and to buy back shares.
Thank you I appreciate it.
Okay.
Our next question comes from Sanjay <unk> with <unk>. Your line is open.
Thanks, Good morning.
I wanted to start where you just discussed Melissa just it was nice to see the large increase in the repurchase authorization I'm just curious like how aggressive do you expect to be with that.
$575 million or so remaining in and are there any limitations on how much you goodbye.
So I think jack-tar, it's probably going to put another piece of this.
You can see and then the course of this year, we've been pretty ratable about how we've used.
In opportunistic about how we've used our share buyback authorizations so far.
Keep that in the backdrop of how we're thinking about that and in fact are in and can you talk any more about limitations.
Yes, we have.
Some limitations on our debt covenants on Germany.
I'm doing this off the top of my head I think it's $350 million once.
The EBITDA goes up above.
I want to say too.
Two eight times.
A few times. So we've got we've got some room, there and should we should we end up with those levels and have no limitations. We can obviously go back to our vendors.
I feel I feel pretty good about our ability to continue to execute our share repurchase program along the lines of course.
Okay, Great and then I have just two quick follow ups on a couple of points that were discussed before on the interest rate sensitivity.
I just want to make sure I understand like the HSA deposits are ahead and the assets that you have against them.
Against the floating rate.
That that you have as well as the hedges right and the discount rate ladders, I mean do you expect to use.
If you need to but those other factors are the hedge I'm just trying to think through how machination of those and then.
One more sorry.
Yes, sure. So why don't I walk you through the math I think it would be helpful.
So we have about $2 $7 million of financing that we're this is our term loans or convert our revolver.
We have another.
<unk> three 6 billion.
What I would call the operational beds. So these are the bank deposits funding market deposits.
HSA deposits.
When I look at.
Within that group of liabilities.
The interest rate swaps that we had to fix some of that.
And things like the converts that are essentially fixed we ended up roughly with about $2 billion of liabilities with interest rates.
On the asset side of the equation, we have the items that you talked about the.
HSA assets.
HSA deposits are invested in.
As well as the escalator clauses in some of our contracts with merchants.
Net those two together I end up with roughly about $1 billion net.
Net liabilities that would move with interest rates, so think of it as 100 basis point movements.
The net result is a.
Million dollar interested there.
So our next.
A bit lower than you would look at if you were just to kind of look at our balance sheet.
Okay, Alright wonderful and then just final point on the impairment charge.
How should we think about any further necessary charges I understand like this was related to macro you maintenance change but.
Should we see more of these going forward.
This is pretty much it yes.
Yes.
I'm not expecting any further charges.
There is no remaining goodwill on our European fleet business and I would say the rest of our portfolio has got a lot of headroom.
I'm not expecting any further charges.
Great. Thank you very much.
Our next question comes from Darrin Peller with Wolfe Research Your line is open.
Hey, Thanks, guys I just wanted to start off going back to the fleet side for a minute when I look at the macro adjusted growth I think mid teens type levels.
Comps got a little bit easier this quarter, but I mean, where are we in terms of recovery back in terms of normalized trends.
It just seems a little stronger than one would have expected even with that and so I guess I wonder if there's something some nuances or drivers that you see as sustainable that can drive it a little bit more of an elevated growth rate or is it really just the comps and recoveries.
If you could just touch on that for a moment.
I think the part that's important is that we continue to win business.
We have high retention rates.
A very strong sales capability and so what youre seeing is the combination of those two things coming together said that rebound in some areas, we're continuing to see rebound.
Hum.
The pandemic levels and.
And then on top of that you are seeing our execution of things that we sold last year that we're adding into the portfolio of things that we're selling this year that are adding to the portfolio is an example, if you look at vehicle growth in the quarter.
<unk> is we added we talked about the Exxon portfolios that we were going to add into the mix and we did in the course of the quarter. So you can see the benefit of that coming through which will realize through the next four quarters.
It's part of why we keep talking about names of customers that we're bringing on because it is an important part of our ability to grow.
In the business so.
The fourth quarter, you start to see it normalize a little bit more so.
So the growth in the company.
It's more about just organic sales growth, that's coming through and again customer retention and increased penetration with existing customers. The long term model that we put out there just as a reminder, we said that we will grow 4% to 5% with existing customers, 3% to 5% net new 1% to two from products.
Recent M&A long term.
We clearly over delivered on that and of course of this year.
Okay.
Thanks, Paul So the other question I have is really more about expense management now just kind of through a cycle and essentially kind of economy next year and just it's really a combination of a willingness and a capability in terms of what you want to do to protect the bottom line on that front and then maybe just if you could remind us the levers you think you have to be flexed.
Paul.
Let me start and then Jack and he can add to this.
I think.
We have so much opportunity.
But we wanted to make sure that we are being thoughtful about investing through cycles.
And that we continue to invest to make sure of that.
The enterprise can reach its potential and.
And to hit our long term growth targets and I think that's an important aspect of that we manage the business as if its fuel price neutral and that being said, we talked about some of the ways that we're focusing on squeezing out efficiencies. We're trying to do that thinking about ways that we can create a better customer experience and create inefficiency. So.
A very big focus of ours of simplifying the way that we do business with our customers for their benefit and and we think that that is way of he created and investments to relatively short term investment you actually get quite a bit of benefit from that.
And really that Jack.
Yes, I would.
I think Joe would concur with what most of the cell phone.
For the next year it will be on the cost savings with Melissa identified.
Well, we have some levers to.
Work on costs I think our focus next year will be about $100 million number.
Given those much of that enter into next year as we go and I think thats what takes a look forward okay.
Thanks to the economic environment.
Got it.
Alright, thanks, guys.
Our next question comes from Sherry <unk> with Evercore ISI. Your line is open.
Hey, Thanks, a lot for taking my question.
The health benefits.
Benefits accounts.
That's all I have a nice.
The company average.
<unk> I believe you said over in Colombia medical insight.
But just to kind of sort of what our understanding as to what's the strength out there in terms of bottlenecks as offering versus the competitor does.
And how should we think about that trend going forward from here.
Yes, so we talked about the fact that we saw 8% our.
Congrats but that we had some temporary accounts last year.
Normalized side, it was up 13%, which attract more consistently with spend on what we saw in the health and employee benefit segment.
Really the big things for us.
We're really uniquely positioned.
And health and benefit ecosystem because of just the sheer size of customer base that we have both directly with our partners. We have 18 million SaaS accounts over 50%. Unfortunately.
They do business with us and that enables us to collect data they can do things like help a consumer determine.
Is the best place how much money should they be putting a way in an HSA or an FSA account helping them determine.
Benefit options and all of that did it create wisdom for our customers and create.
A nice cycle.
Also.
And and capability with our partners and our customers because we are able to do FSA and HSA in Ben admin and a whole host of account type and.
And capability that sits across our portfolio they like that that ease of use of being able to do that all with one partner.
And just to highlight again, we're going into open enrollment season, which is a really important time and trending positively right. Now I know is a testament to the fact that.
That offering is resonating in the marketplace.
Got it that's helpful and if I can disclose one in can you provide an update on awareness for loan stands and what's the cross selling opportunity out there.
It's a slim we moved from a beta launch into a full product launch this quarter.
And they.
Really early.
The offering that we have in the marketplace, we're seeing with customers that are both outside of our business and customers where were increasing wallet share with their existing customers for us.
And so we think that this creates a unique opportunity for us to deepen wallet share that we have within the small business portfolio. The 450000 customers that we have.
It is a model that SaaS path.
<unk> SaaS fees.
Other transaction related fees and so it also gives us an opportunity to broaden into.
And diversify our revenue stream.
But it is early and we will talk more about it.
For next year.
Yeah.
Thank you so much thanks a lot.
Our next question comes from Jeff Cantwell with Wells Fargo. Your line is open.
Okay. Thanks, so much and.
Most of my question Debbie to answer, but I wanted to ask a follow up question on Bloom based on a prior question.
And you highlighted now it's in full production so obviously.
We understand the start bringing early days, but we've been hearing a lot of good things about <unk>. So just a couple of questions here first.
The way that we're understanding the underlying point in the commentary.
Youre thinking occupancy will be into 2023 and 2024.
So this business is accretive.
The last question and then second.
Have you thought at all about what type of growth do you expect revenue and what are the impacts directionally on for my margins will help us kind of think about the potential for further remarks, Pat Youre thinking about it any color there would be great. Thanks very much.
Sure sure.
When the kind of impact that a little bit, but the way that we're thinking about room is.
It gives us an ability to increase varlet share with our existing customers the way that we designed it.
Working with very small customers. So think of this as kind of like a micro segment.
And then.
When we started segmenting our.
Small business customer base.
We were targeting the customers that we're seeing within our existing portfolio.
So through the product.
<unk>.
Brought in people, who are not using our existing products as well. So it was very customer informed.
Yes.
The places that we have been focusing on.
It was pretty clear that.
Getting paid as an important part of the small business offering.
And.
The other thing that became clear is that this customer base want something that is digital in nature, but move them into the digital age. These are often customers and not highly digitally enabled.
And instead the way that look in the field. The way that was designed with that in mind Appeals to people who are digitally enabled but that is really thoughtful about the fact that.
Many of these customers and I gave an example in our prepared remarks are using very manual processes now.
And so as we thought about this we are able to move it into the marketplace rapidly we have an ability to cross sell it into our existing customer base.
And.
And potentially use that more directly in the marketplace outside of our existing customer base I would say the kind of the primary focus as we were thinking about this was meeting a need that we have for their existing customers.
And then maybe opportunistically being able to pick up customers outside of that.
But again, we're early we're going to learn a lot and then I think we'll be better able to size what the opportunity is.
Okay, Great I appreciate all the color thanks very much.
We have run out of time for the question and answer session I will now turn the call back over to Steve for closing remarks.
Thank you everyone. I know, we went a few minutes over but I appreciate everyone's attention.
Time for the call today, and we'll look forward to.
Meeting with you again for our fourth quarter earnings.
This concludes today's conference call you may now disconnect.
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Okay.
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