Q4 2022 WEX Inc Earnings Call

Speaker 2: 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.

Speaker 3: 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.

Speaker 4: Thank you, operator, and good morning, everyone.

Speaker 5: With me today is Melissa Smith, our Chair, CEO , and President, and Jagdarn Narula, our CFO .

Speaker 6: 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 Wexthink.com.

Speaker 7: A copy of the release has also been included in an AK we submitted to the FCC earlier this morning.

Speaker 8: As a reminder, we will be discussing non-GAAP metrics.

Speaker 9: specifically adjusted net income attributable to shareholders, which we refer to as adjusted net income for A and I.

Speaker 10: adjusted operating income and related margin and adjusted free cash flow during our call.

Speaker 11: 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.

Speaker 12: and explanation and reconciliation of adjusted operating income to GAAP operating income.

Speaker 13: and a reconciliation of adjusted free cash flow to gap operating cash flow.

Speaker 14: The company provides revenue guidance on a gap basis and earnings guidance on a non-gap basis.

Speaker 15: The non-Gabby guidance cannot be reconciled without unreasonable efforts due to the uncertainty and the indeterminate amount of certain elements that are included in reported gap earnings.

Speaker 16: See our most recent earnings release and slide deck for more detail about the company's non-GAAP message.

Speaker 17: I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Speaker 18: Actual results made different materially from those Florida statements as a result of various factors.

Speaker 19: including most discussed in our press release and the risk factors identified in our most recent annual report on Form 10K in subsequent SEC filing.

Speaker 20: While we may update fold-working statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these fold-working statements, all which state only as of today.

Speaker 21: With that, I'll turn the call over to Melissa.

Speaker 22: Thank you, Steve, and good morning everyone. We appreciate you joining us today.

Speaker 23: 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.

Speaker 24: So let me start with a very quick overview of the full year numbers.

Speaker 25: 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 at 45% compared to 2021.

Speaker 26: Full year adjusted income per share grew 48%.

Speaker 27: Our success through market cycles is enabled through our reoccurring revenue models, our diverse earnings engine, and our reliable cash flow model.

Speaker 28: As previously shared, more than 80% of WEX's revenue is reoccurring in nature.

Speaker 29: Over 20% of our revenue now comes from our health segment.

Speaker 30: In this year exceeding a half a billion dollars in revenue for the first time.

Speaker 31: This provides a fast-growing, profitable, and predictable revenue and earnings frame.

Speaker 32: Our health business further trinkets the stability of WACS with its revenue from custodian assets, acting as a natural hedge for interest expense.

WEX remains well positioned to invest for growth while opportunistically returning capital to shareholders as valuations and market conditions warrant.

Our combination of growth, scale, and cap 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 JAGPIR will provide more detail on later, before diving into our priorities for 2023.

I'm pleased to share that revenue in a quarter was $619 million, a year-over-year increase of 24%.

This growth is primarily driven by volume growth across the business.

Normalization of late B increased revenue from custodial assets and the benefit of higher full prices.

On an organic basis, which excludes the impact of fluctuations in field prices and foreign exchange rates, revenue in a 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 percent.

Strong quarterly revenue paired with the scalability of our business model and its superior funding model resulted in adjusted ending company deluge share of $3.44 in the interest of 33% compared to the same quarter last year.

Total volume processed across the organization in the fourth quarter through 31% eurovere 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 help 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 engines, year in and year out.

We closed the year posting a 73% increase in travel and corporate payments purchase volume, added 1.7 million new vehicles, and saw our total health SaaS accounts grow 14%.

We feel very positive about the progress towards the five-year, 10-15% 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, we'll have to remain 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 wallet.

maintaining our market-leading positions by driving customer-focused innovations through our strong sales engines.

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 cast generation of WECC 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 segment.

We're unique in this 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 leads 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.

As part 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 its craft and retain employees, which creates a specular resilient tailwind.

Our market-leading products allow employers to have simplified secured experience utilizing our payment platform which also offers their employees an integrated benefit experience.

whether they are choosing an HSA account paired with a high detectable plan, an EPIS-A traditional PPO plan,

Taking advantage of lifestyle benefits are utilizing products like Medicare Advantage for 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.

It expects 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 years into years ago and is now the sixth largest custodian according to Devaneer mid-year update.

Finally, in our global fleet business, organizations need to control costs, and as a result, there are ongoing opportunities to further engage in the Center for Innovation 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 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 more than in the next decade.

The transition to EV introduces a new tab 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 have made great strides in EV in 2022.

launching products allowing for the payment of charging at public locations in both the US and Europe . And they're building functionality to allow for home charging, reimbursing and energy management at default locations.

All designed to be integrated into mixed fleet offerings with our industry leading mobility product.

Looking across the enterprise, we have multiple levers to drive growth and importantly in this macroeconomic environment, Gale.

From a growth standpoint, we'll continue to enhance our global commerce platform by adding new offerings from exweats 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 wallets 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 a hundred customers in the second half of the year.

We're working with the sales teams 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.

If I wrap up my comments, we're confident in our ability to deliver on our financial targets, including our long-term revenue tagger of 10 to 15 percent, and adjusted then income EPS growth of 15 to 20 percent 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 nemfully 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, we'll 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 , Jagdkar Narula, to walk you through WEX's financial performance this quarter. Jagdkar. 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 competitive dis 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 later.

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 gap basis, we had a net income attributable to share holders of $88.7 million in Q4.

DownGap adjusted net income was $152.8 million or $3.44 per deluge 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 a prior year powered by volume growth, higher fuel prices, and an increase in finance fee revenue, including the contribution for the new Exxon level portfolio so onboarded at the end of Q3.

Payment processing transactions were up

The growth was led by local US leads while we saw an expected slowdown in over the road trucking fleet 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, price yield prices, and the number of late fee instances.

All of these include the impact of the new Exxon Mobile 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 statement was 1.11%, which is down on five basis points for the prior year. The higher fuel prices compared to last year is the primary reasons for declining 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 6 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 in legacies, 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 were appropriate and reducing payment terms.

appropriate and reducing payment terms.

We have seen both our application fraud rates and transactional fraud rates improve sequentially.

The actions we have taken today 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 skimming 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. Purchased 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 bases coincidentally, predominantly due to favorable customer products product mix, as well as a year end through a for incentives based on full year performance.

Breaking the segment down further, travel-related customer volume represented approximately 68% of the total spend and grossed 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 US and Europe .

We believe that there is more room for the 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

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 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 their for major 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 plays which contributed to the volume growth.

Costodial 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 Wex Bank.

We realize 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 slow-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 in 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 of the revolver, in corporate cash of $171 million as defined under the company's credit agreement

As you'd expect, we saw a size of a $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 a revolving line of credit, term loans and convertible notes was $2.6 billion.

The leverage ratio is defined in the credit agreement so that 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, do primarily to strong clinics.

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. As Melissa mentioned earlier, we are committed to driving strong cash generation and deploying

We purchased 1.9 million shares at a total cost of $291 million last year and a digital $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 in the four-year.

Start 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 Adjustment Net Income EPS to be between $13.55 and $14.5 per diluted share.

Let me spend a couple of minutes going through the larger assumptions that are guided.

First, a couple of high-level macro assumptions.

We are basing our guidance on a slow growth environment in the US.

Market surveys suggest a slowing economy and consensus US 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 hundred basis point increase in interest rates presents a modest $10 million headwind to adjusted then income for this year.

Excluding the impact of fuel prices.

Fleet statement revenue growth is expected to be toward the lower end of our long-term growth target, which is 4 to 8 percent because of the expected low economic growth in the US.

We are assuming an ad price deal 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 payments segment is expected to grow between 7 and 11 percent.

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 a significant increase in the custodial balances invested as well as higher interest rates. We have completed a successful open enrollment season and expect benefits from 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 outline less quarter.

We expect adjusted operating income margins to trend up through the year as we get the benefit of these cost saving measures and reduced 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 completely prepared the VARs, I would like to emphasize again how pleased we are with our Q4 results.

Finally, we have great concerns that 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 in the number one 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 pass your mom to compile the Q&A roster.

We'll take our first question from Mahir Latia with Bank of America. Your line is now open.

Good morning and thank you for taking my questions. I wanted to maybe just talk with the health care segment. You had a nice step up in SAS accounts on revenue work on 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...

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 wasn't in line with expectations better or worse and what we can expect from here. Well, good morning. So a lot in there to unpack on healthcare and civic 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 that a really strong growth here.

In addition to that, when we went into the enrollment season, we saw more strengths 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...

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 rates within our fleet business.

So kind of across the board, it's a 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 venomous 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 are really bringing some really great revenue numbers.

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

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 to $50 million revenue run rate.

Hey, Nick, this is Jack Tara. Thanks for the question. Yeah, we are on track with that cost reduction program. As a reminder, we're expecting about $100 million of operating expense run rate reduction exiting 2024. And as I've previously talked about, we expect to exit the year at about, you know,

have to choose those 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.

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 exposed to our customers. We think we have this great opportunity to create a tufer. We have the ability to actually create an even better customer experience, but to do that in a lower cost structure. our original manager advantage, that is $11 million for someone to fill in with your????.

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.

So, you know, really we're forecasting higher growth than the early part of the year. And some moderation as we go through the back half of the year. And as I talked about, I prepared remarks, so many were expecting kind of the lower end of our long-term range for the fuel segment, but it really will be higher in the first part of the year than slow as we get to.

are seeing continued strengths 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

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 you know really strong sales pipelines and you know anticipate to continue to deliver strong growth across that portfolio. Next we'll go to Ramsey El-Afal with Barclays. Your line is now...

I've economized on in order to get there.

Yes, let me start with it and most of the time if needed. So the cost reduction is primarily coming in several areas. So first, we've looked at our organizational structure and we've looked at the number of management layers and how we better optimize this.

operating infrastructure, call centers, processing centers, et cetera. And we're making technology enhancements that are 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, you know, to to economize where we do development.

that will really, really to cost savings. And in the last area is better purchasing, right? We've, we've invested in our procurement function. We expect to get better, better, better, better span out of our existing vendors. And so those four items are really where we're expecting the bulk of what we're, what we're tackling this year. And through, through 24.

Yeah, and the thing is I would add is the the head conchages he's talked about we we announced those a while ago who 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 would call a super modern robotics automation up to machine learning to AI. And so as we deploy those tools into our machine learning system, we're going to be able to deploy those tools into our machine learning system.

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 were talking about.

That's very helpful. One quick follow-up for me. I was wondering if you could comment on your credit loss expectations in 2023. It looks like you're guiding for a decrease relative to the 4Q22 exit rate, but at the same time it seems like your guidance implies that sort of a deteriorating macro.

situation, even though that is not what you are seeing today. I'm just trying to square that in terms of whether you are maybe more aggressively underwriting or you are laying in some additional strategies to control for credit losses. Does that make sense?

Yeah, let me let me dress up so we've got some puts and takes in our guides one from what we're doing with our current book and you know a Judication of new customers in a second from what we're just projecting from an economic standpoint right so starting with what we're doing in our with our current book of customers

We've been taking action. You've heard me talk about the elevated cred 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 you know 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 to credit losses. So that's where you see the.

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 fleet margin. 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. Thank you.

Okay, got it. Thanks. And then for health within, 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 custodial assets.

Yeah, we're expecting that to be roughly 50 to 60 percent 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 SAS to Congro.

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 Estolial Business.

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

Thank you.

Question on, you said you added about 100,000 customers in 2022, mainly SMBs. Just thoughts around the SMB environment and there's some slowing in the smaller truckers, but what are you seeing in SMB broadly and is any of this related to flume?

And some others are seeing deceleration in SMB. Doesn't sound like you've seen that outside of trucking.

Well, good morning. We have not seen a deceleration in the small business marketplace, and there's continued to be strengths within our customer segment and certainly within the additions we've had to our portfolio.

You know, talk 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, will they gear towards smaller businesses? Like for Latta, 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 geared towards mid-market in 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, you know, 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 value for shareholders in that business, does spending off apart or I don't know, you certainly highlight it. But just any thoughts around that healthcare business and,

maybe getting more attention for it with investors. You know, one way to do that is to spin off a piece or other, do you have just any thoughts around healthcare monetization?

Yeah, yeah. If you look across the business, the way that we think about what we've developed is the platform, the payments 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 labor that we have and part of the energy that we're talking about.

So we like the business and how it actually balances the rest of the portfolio and I think it's an important part of the growth of the company.

Next we'll go to Dave Cunning with Bear. Your line is now open.

Yeah, hey guys, great job. And maybe just to ask about travel and corporate a little bit, we often think of corporate being 15, 20%, sometimes better growth, and then travel being in, we would think of it still in 23 being in a recovery year with some of the Asia recovery. But you're only guiding to 7 to 11, and I would have just kind of thought maybe 20%.

good pent up into ban and travel. So things continue to go well in that business. But like I said, my prepared remarks, we are factoring economic slowness throughout the portfolio there. We also had some true ups in 2022, related to semester cardinets, such as that we're not currently forecast to fully repeat in 2023.

So when we combine those two items, that led to our 7 to 11% growth for 2023. Gotcha. And that would show up. Would that show up in the yield in travel or in the yield in corporate? That would be quite 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.

It's just a noise effect!

XPPG, I'm expecting fleet 10 to 15 percent. Travel, I'd expect, to travel 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 no open.

Hi, good morning. I appreciate you taking the question. Very nice quarter, congratulations.

Melissa, in health care in particular, the custodial revenue is sort of a nice maybe.

I don't want to say surprised, but maybe it feels like a little bit of surprise to the market.

SAS account growth looked a bit above trend. Can you just elaborate a little bit? Are we seeing, is that a function of signing more employers, or is it a function of more employees adopting to self-directed healthcare, or is it a combination? I'm just wondering how much of it.

of a 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. So we brought into the marketplace.

And as I said, you know, at the end of the year, we actually did a little bit better than we had anticipated going into into 2023, which is part of what we're reflecting in the Ford Guide.

So we ???led with this project on Facebook and YouTube local Hot Law,

Each of the channels that we have when we go into marketplace, we've got our direct channel, which we go through brokers, and then our partner channel. If you 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 co-opro products also. And so what we have seen historically, 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 Szakoski with Autonomous Research. Your line is 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?

how you're positioning the sales force for that. Thank you. Yes, sure. So we've got growth in our long-term model of 4 to 5% that comes from our existing customer base. We had 14% and 22, so we had a really strong number in 22. A piece of that we think will come from just market growth, these are markets that are growing, and then on top of that.

both pricing actions and cross-selling. Some front-cross health perspective, it's really early, and they're focused, and as I said in the last call, has been setting up the right infrastructure across the business so that we can make that much more seamless. Right now, we're doing it based on inherent relationships, and luckily, 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 were segmenting the marketplace and thinking those larger customers will be in-hands off 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 we're having 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, et cetera. You know, I built.com saw some weakness with Divin, it's most recent earnings, and I know you work with them on payments. So can you remind us what percentage of your mix they make up? And.

If any other partners are seeing similar issues that we should be aware of. They'd be less than 1% in the small percentage of the mix that we have. And if you look at, like, if you go through each of our segments, fleet as a pretty heavy concentration in small businesses, the only area that we're seeing weakness is the over the road customer. So one micro segment.

any deviation in trends, you know, based on segment size, anywhere but the over-the-road small fleet customer. Yeah, and James, I would just add in that over-the-road customer, I want to remind you that it's kind of the smaller end of those that over-the-road so, and kind of newer.

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

Thanks. You know, when we look at what you've built and put together in assets, whether it's Enid or OpTil or some of the other deals, you've obviously done some great acquisitions. So Melissa, when you think about strategically what you have now, you've done some great

Specifically, incorporate being incorporated in travel, but really cross the board.

I'd love to hear a little bit more about what you see as the next big step for you guys, you know, probably in organically as when I'm looking at, but maybe both. And then just a quick follow up on the travel side. I know Enet brought you a lot more, or Enet out the volume a lot more Asia. Maybe just remind us that the geographic mix of the segment, obviously just important now with real thing China and travel and travel.

Yeah, let me answer that one first and I'll go back to BAM&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, but eventually from quarter to quarter, so we did see a little bit of benefit in Q4 of that...

Product capability for us, we look at build versus buy, capability, and then geographic expansion. And so, you know, you have the ENAT and also, we like about that, is it hit really across all three of those categories, but we continue to be active in the marketplace.

Identifying assets, working those through, that the multiples of continues to be a little bit elevated. And so we've been displaying our capital opportunities to be through our Share Bad Mac, 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 me in. I just wanted to ask you...

If you don't mind giving us an update on Flume. 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, I'm just curious to kind of walk us through, you know, 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?

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 excel if it's a digital wallet technology. I'm also excited about the process that we used to create it and set this before, but we created a Ventress Board internally where we're moving ideas across the company into the marketplace and...

Flume, we started with alpha beta and then full launch and said when you're talking about that you're going through the life cycle of the alpha launch our beta launch and then and then going into the marketplace. It's a chassis that allows us to deliver products and services so we're not just excited about that but we're excited about the potential of what it can do in that small business segment.

that it's still early and still small relative to the whole size. But I think when I think about this, it's in aggregate the product offerings that we're moving into the marketplace where we're making investments, yielding that 1 to 2 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 that 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 disconnect.