WEX Earningcall Transcript Of Q2 of 2024


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Melissa D. Smith -- Chair, President, and Chief Executive Officer

Thank you, Steve, and good morning, everyone. We appreciate you joining us today. This quarter,

we delivered record quarterly revenue of $673 million, representing an 8% year-over-year increase

for  the  same  period  last  year.  Excluding  the  impact  of  fluctuations  in  fuel  prices  and  foreign

exchange rates, Q2 revenue grew 9% year over year.

Total volume across the organization in the second quarter grew 9% year over year to $60 billion,

driven  by  the  growth  in  all  three  segments.  Our  Q2  adjusted  net  income  per  diluted  share  was

$3.91,  an  increase  of  8%  compared  to  the  same  quarter  last  year,  driven  by  quarterly  revenue

growth,  expanding  margins,  and  share  repurchases.  Excluding  the  impact  of  fluctuations  in  fuel

prices  and  foreign  exchange  rates,  adjusted  EPS  grew  10%  year  over  year.  Overall,  our  top-line

results fell short of our expectations.

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That  being  said,  we  delivered  another  quarter  of  record  revenue,  and  our  adjusted  EPS  came  in

above the top end of our guidance range. Given volume trends we are seeing primarily in the travel

business, we are reducing our outlook for the remainder of the year, which Jagtar will detail shortly.

We  have  strong  conviction  in  our  growth  strategy  and  are  continuing  to  deliver  against  our

operational  efficiency  targets  that  drive  commercial  reinvestment  and  expansion.  We  remain

well-positioned  to  deliver  strong  financial  results  over  the  long  term  across  a  variety  of  economic

conditions.

Now let's turn to our segment performance, beginning with mobility. The segment revenue growth in

visibility was 5.7% and including a headwind of 1.7% due to lower fuel prices. The addition of new

customers resulted in 3% growth in the number of vehicles on our platform versus the same quarter

last year. This, coupled with pricing actions, drove an increase in the quarterly revenue growth rate.

In  mobility,  we  continue  to  strengthen  our  leadership  position.  Beyond  our  intention  to  continue

growing  in  our  core  markets,  we  are  focusing  on  near  adjacencies  that  can  help  our  customers

simplify the business of running their business, which, in turn, further drives our growth. On the OTR

side  of  the  mobility  segment,  we're  pleased  by  important  renewals  and  business  expansion  with

Snyder,  Werner  Enterprises,  and  TransAm  trucking.  We  continue  to  closely  track  the  trucking

industry as it works its way through the macroeconomic cycle.

While customer sentiment is turning toward being a little light at the end of the tunnel, results remain

mixed in the freight market. While we weathered the cycle with the industry, WEX remains steadfast

in  its  service  to  the  trucking  industry  with  innovative  products.  We  understand  this  industry's

challenges, particularly those in the independent owner-operator segment in small fleets. For them,

access to discounts at truck stops remains a challenge.

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In  Q2,  we  launched  the  pilot  for  a  unique  solution  to  address  this  challenge.  Tailored  for  truckers,

10-4 BY WEX enables independent owner-operators and small businesses to save money on their

largest  expenses  and  brings  a  mobile-first  experience  that  provides  secure  transactions  at  the

pump.  We're  pleased  with  our  pilot  results  thus  far  and  expect  to  soon  make  this  app  widely

available. I want to briefly touch on PACER, which we acquired in Q4 last year to give us access to

our near-adjacent markets and field service management.

PACER  remains  on  track  to  contribute  2%  to  the  mobility  segment  revenue  this  year.  We  remain

focused  on  scaling  the  PACER  sales  efforts,  along  with  cross-selling  the  product  into  our  existing

customer  base.  Turning  now  to  our  benefits  segment.  We  continue  to  see  strong  growth  of  HSA

accounts on our platform.

As  of  this  quarter,  we  now  serve  8.2  million  HSA  accounts,  representing  8.3%  growth  versus  the

prior-year  quarter.  We  are  pleased  with  benefit  wins  and  renewals  across  American  Benefit

Administrators, Enterprise Group Planning, and Admin America. Compared to where we were at this

point  last  year,  we  are  particularly  encouraged  by  the  strong  contributions  we're  seeing  from  our

referral partners. Our pipeline and close rates are more robust than this time last year.

While there's still a lot to be done as we turn to the second half of the year, we're seeing good trends

that  bode  well  for  next  year's  performance.  Finally,  in  our  corporate  payments  segment,  purchase

volume increased 12% compared to the same quarter a year ago. We're pleased to have signed a

number of expansions and new relationships with customers, including fintech company, upgrades,

Jack Henry, and Allied Payment Network this quarter. We believe this business is well-positioned to

the  long  term  with  one  of  the  most  competitive  offerings  in  the  industry,  underpinned  by  a

best-in-class virtual card solution and strong, long-term client relationships.

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We are a preferred payment solution provider for our partners who trust WEX for our reliability and

our ability to simplify complex transactions on a global scale. Now let's review our progress in key

strategic  initiatives  through  the  first  half  of  2024.  As  I  mentioned  earlier,  we  are  expanding  our

position as a market leader by meeting our customers where they are with new innovative solutions.

I want to highlight the progress we are making against our EV solutions, focused on enabling mixed

fleet of the future, as well as the application of artificial intelligence to drive both customer value and

enhance WEX's business model.

On the commercial EV front, we're alive and in the market with our public charging solutions, as well

as our home charging solutions, focused on employee reimbursement. We also expect to roll out our

captive charging solution for depot or private infrastructure charging later this year. With these three

solutions released, we'll continue to develop further solutions with our customers that we believe will

resonate with the unique needs of commercial fleet operators. The revenue per vehicle that we are

earning with our EV solutions is currently in line with our overall average revenue per vehicle, and

we are confident that it will become greater as we introduce additional products and functionality.

We are seeing the largest interest in our mixed fleet solutions from our government and enterprise

customers,  and  we  are  on  track  with  our  current-year  EV  growth  goals.  In  addition  to  having  a

current pipeline of more than 50,000 potential EV vehicles. We believe the majority of our customers

will  operate  in  a  mixed  fleet  world  for  the  foreseeable  future.  Our  strength  in  both  fuel  and  EV

solutions, coupled with our seamless integration into customer systems, uniquely position us to help

them navigate this complexity and maximize their operational efficiency.

We  also  maintained  our  practice  of  embracing  digital  transformation  and  harnessing  cutting-edge

technologies  to  revolutionize  our  operations  through  strategic  investments  in  artificial  intelligence.

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Our efforts are already yielding results, helping us drive both model efficiency and unique customer

value.  On  the  efficiency  front,  we  attribute  our  trending  improvements  on  credit  losses,  in  part,  to

enhanced  AI  tooling,  allowing  us  to  better  adjudicate  credit,  review  credit  line  increases,  and  spot

abnormal behavior that can be indicative of a pending loss event. Looking ahead, we're excited to

keep leveraging AI capabilities in order to transform our customer experiences with specific focus on

enhancing our customer service operations and risk functions.

This  tech-forward  approach  continues  to  uncover  new  efficiencies  that  translate  directly  to  our

bottom line, supporting our profitability, both in the near and long term. Moving on to our operational

improvement initiatives. I am pleased to report significant progress through the path of 2024 toward

our $100 million annual cost-saving target that we announced last year. As of the end of the second

quarter,  we've  realized  approximately  $106  million  in  cost  savings  on  a  run-rate  basis,  exceeding

our full-year goal.

We expect to deliver more efficiency in the second half of the year. Consistent with our previously

stated  strategy,  about  half  of  these  savings  are  being  strategically  reinvested  to  drive  long-term

growth.  With  a  focus  on  our  commercial  teams,  differentiating  our  technical  infrastructure,  and

enhancing  our  risk  management  capabilities.  These  investments  are  yielding  positive  results,

improving  our  operational  efficiency,  and  positioning  us  for  sustained  growth  regardless  of  market

dynamics.

We  remain  committed  to  balancing  cost  optimization  with  strategic  reinvestment  to  ensure  WEX's

continued  success 

in 

innovation 

leadership.  During 

the  quarter,  we  also  realigned 

the

responsibilities  of  certain  executive  leadership  team  members  to  streamline  the  structure  of  our

business  and  best  position  us  to  achieve  our  long-term  strategic  objectives  and  growth  ambitions.

As a result, Carlos Carriedo is now head of Americas payments and mobility. Jay Dearborn is now

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head of international, and Robert Deshaies is now the head of benefits.

These  realigned  roles  will  ensure  our  customers  remain  at  the  center  of  everything  we  do  while

honing our focus and accelerating innovation to drive long-term success. As I conclude my prepared

remarks, I'd like to reiterate that, while we posted strong results, we are not satisfied with this level

of  growth.  That  said,  WEX's  strong  market  position  and  our  ability  to  deliver  consistently  strong

financial results, even in challenging economic conditions, gives me great confidence in the overall

resiliency of our business model and our ability to generate strong performance in any environment.

That  confidence  is  further  underlined  by  our  performance  over  the  past  decade,  where  we  have

grown revenue at a compounded annual growth rate of 13.5% despite effects of a global pandemic

or any passing fuel price volatility, more than tripled our earnings per share and generated nearly $4

billion in adjusted free cash flow.

In  this  market  environment,  we  believe  that  buying  back  our  own  shares  continues  to  represent  a

compelling  value.  To  that  end,  we  bought  approximately  $100  million  during  Q2  and  an  additional

$70 million during the month of July. In the near future, we expect to enter into an accelerated share

repurchase  agreement  to  purchase  an  additional  $300  million  in  WEX  common  stock.  Jagtar  will

discuss this more shortly.

This  decision  reflects  our  commitment  to  our  shareholders,  as  well  as  our  confidence  in  WEX's

intrinsic  value  and  growth  potential.  Furthermore,  our  solid  balance  sheet  strong  cash  generation,

and  low  leverage  ratio  afford  us  the  flexibility  to  pursue  strategic  growth  investments  while

accelerating  share  repurchases.  This  approach  allows  us  to  reinvest  in  our  future  growth  while

simultaneously  driving 

immediate  value 

to  our  shareholders 

through  opportunistic  share

repurchases.  I  remain  confident  that  our  strong  market  position,  strategic  growth  initiatives,  and

culture of innovation have positioned WEX for sustainable long-term success.

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With that, I'll turn it over to Jagtar to walk you through this quarter's financial performance in more

detail. Jagtar?

Jagtar Narula -- Chief Financial Officer

Thanks,  Melissa,  and  good  morning,  everyone.  Our  second  quarter  results  fell  a  bit  short  of  our

guidance for revenue, while adjusted EPS came in above the top end of our range. While we are not

satisfied with these results on revenue, they do represent a record high, and we are also seeing a

number of positive trends. As expected, mobility revenue growth accelerated from last quarter.

And  our  benefits  segment  revenue  growth  is  also  in  line  with  our  expectations.  These  strong

positives  were  offset  by  softness  in  travel-related  volumes,  which  we  expect  to  persist  for  the

remainder  of  the  year.  Our  adjusted  EPS  results  were  the  highest  we  have  ever  reported  for  the

second  quarter  of  the  year  and  show  continued  execution  against  our  strategic  initiatives,  even  in

the  face  of  a  year-over-year  decline  in  fuel  prices.  Now  let's  start  with  the  details  of  the  quarter

results.

For the second quarter, total revenue was $673.5 million, an 8% increase over Q2 2023 with more

than 80% of revenue for the quarter, recurring in nature. We had solid growth rates in each of the

segments.  As  a  reminder,  we  define  recurring  revenue  as  payment  processing  and  account

servicing  revenue,  revenue  from  our  factoring  business,  income  from  custodian  HSA  cash  assets,

transaction processing fees, and other smaller items. In total, adjusted operating income margin for

the company was 40.7%, which is up from 40.3% last year.

Segment  margins  increased  in  both  corporate  payments  and  benefits  compared  to  the  prior  year.

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From an earnings perspective, on a GAAP basis, we had net income of $77 million in Q2 or $1.83

per share. Non-GAAP adjusted net income was $164 million or $3.91 per diluted share, which is an

increase of 8% over last year. Now let's move on to segment results, starting with mobility.

Mobility revenue for the quarter was $359.6 million, a 6% increase in the prior year. Fuel prices are

strong but have retreated 2% compared to the last year with a domestic average fuel price in Q2 of

$3.62 versus $3.68 in 2023. The Q2 fuel price was slightly lower than our guidance but did not have

a significant impact on revenue versus our expectation. As we expected, normalizing for the change

in fuel prices, the revenue growth rate in Q2 accelerated compared to Q1.

We  remain  on  track  to  deliver  full-year  segment  revenue  growth  at  the  high  end  of  our  long-term

range when taking into account changes in fuel prices. Payment processing transactions increased

2% year over year, which was in line with our expectations. Local customers in the U.S. increased

1.5% compared to last year.

And  over-the-road  payment  processing  transactions  were  up  2.2%  versus  year-ago  levels.  This  is

the  first  quarter  since  Q1  of  2023,  the  payment  processing  transactions  have  increased,  reflecting

the anticipated stabilization following the credit policy changes we made a year ago. Next, let's turn

to late fees. The net late fee rate increased 1 basis point versus the prior year.

Finance fee revenue increased $1 million or 2%. As expected, the late fee rate and related revenue

have  stabilized  compared  to  last  year  as  we  lap  the  credit  policy  changes  made  a  year  ago.  The

slight  increase  in  revenue  is  primarily  due  to  the  amount  earned  on  each  late  fee.  The  net

interchange  rate  in  mobility  segment  was  1.29%,  which  is  up  4  basis  points  over  our  2023  net

interchange rate.

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The increase reflects continued benefits for the interest rate escalator clauses contained in various

merchant contracts, the rate benefit from lower domestic fuel prices, and higher rates earned from

merchant contract renewals at favorable terms. Compared to Q1, this rate is down slightly due to the

mix  of  diesel  gallons  and  a  one-time  item  reducing  the  current  quarter.  The  mobility  segment

adjusted  operating  income  margin  for  the  quarter  was  42.9%,  down  from  44.2%  in  Q2  2023.  The

decline in fuel price this year is the primary reason for the lower margins.

Moving  on,  credit  losses  decreased  $3  million  in  the  mobility  segment  versus  last  year  and  were

below the guidance range at 14 basis points of purchase volume, compared to 15 basis points last

year. Loss rates were significantly better than what was expected in our Q2 guidance. Charge-offs

during the quarter were also better than expected, particularly in OTR customer base, leading to the

lower  expense.  Compared  to  last  year,  loss  rates  are  similar  as  we  have  now  lapped  the  credit

policy changes made a year ago.

Moving now to corporate payments. Total segment revenue for the quarter increased 10% to $134.1

million. Purchase volume issued by WEX was $25.8 billion, which is an increase of 12% versus last

year. The net interchange rate in the segment was up 2 basis points sequentially.

Booking.com  did  begin  testing  their  new  process  this  quarter.  Approximately  $1  billion  of  volume

was processed under the new in-sourcing arrangement, but this did not have a material impact on

revenue and the interchange rate in Q2 compared to our guidance. Consumer travel demand was

softer  than  we  expected  in  the  quarter,  primarily  with  our  smaller  OTA  customers.  Travel-related

customer  purchase  volume  grew  12%  compared  to  last  year,  which  is  down  significantly  from  the

growth rates we have seen recently.

This  is  due  to  the  transition  of  Booking.com  volume,  softness  with  smaller  OTAs,  and

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lower-than-expected  growth  in  airline-related  spend.  The  interchange  rate  for  the  travel-related

customers  is  up  1  basis  point  from  Q1  due  to  the  timing  of  incentive  recognition.  Our  nontravel

customer revenue was up 11%, driven by a 13% increase in purchase volume, and net interchange

rate for non-travel customers was up 11 basis points sequentially. Direct sales in the U.S.

continued to perform above expectations in Q2. We continue to optimize the time it takes to onboard

a new customer, as well as the supplier enablement process we used to grow these programs. The

corporate  payments  segment  delivered  an  adjusted  operating  income  margin  of  55.5%,  up  from

54.4% in Q2 last year, driven by sustained acceleration in volume. Finally, let's look at the benefits

segment.

We  again  achieved  strong  results  in  this  segment  with  Q2  revenue  of  $179.8  million,  which  is  an

increase of $20.6 million or 13% over the prior year. SaaS accounts grew 3% in Q2 versus the prior

year  to  $20  million.  The  core  market  dynamics  of  this  business  are  strong,  as  exemplified  by

underlying  SaaS  account  growth,  excluding  the  declines  in  Medicare  Advantage  accounts,  which

was 7% year over year. Benefits segment purchase volume increased 9%, leading to a 6% increase

in payment processing revenue.

We  also  realized  approximately  $52  million  in  revenue  from  the  custodial  HSA  cash  deposits  that

were invested by WEX Bank and from funds held at third-party banks, compared to $42 million last

year.  The  average  interest  rate  earned  on  these  balances  increased  from  4.4%  last  year  to  4.9%

this  year.  We  believe  this  rate  will  be  relatively  stable  for  the  next  few  years  because  75%  of  our

HSA-related investments are deployed in laddered fixed-rate investments that protect future revenue

from interest rate changes. Interest rate impacts in the remaining portfolio which includes short-term

deposits held at third-party banks will be balanced by the reinvestment of lower-yielding, fixed-rate

invested at higher rates as they mature.

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To  summarize,  the  revenue  from  our  benefits  business  is  well  shielded  from  changes  in  interest

rates.  And  as  we've  discussed  previously,  our  overall  balance  sheet  hedge  protects  the  company

from macroeconomic interest rate movement is materially impacting overall earnings. Now turning to

margins. The benefits segment adjusted operating income margin was 39.6%, compared to 37.2%

in 2023.

The increase in margin versus last year is driven by the high flow-through of custodial income. 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 $683 million of cash. We have $804 million of available

borrowing  capacity  and  corporate  cash  of  $143  million,  as  defined  under  the  company's  credit

agreement at quarter end.

The  total  outstanding  balance  of  our  revolving  line  of  credit  and  term  loans  was  $3  billion.  The

leverage ratio as defined in the credit agreement stands at 2.5 times and which is at the low end of

our  long-term  target  of  2.5  to  3.5  times.  Our  ability  to  invest  in  the  business  and  return  capital  to

shareholders while also maintaining conservative debt level puts us in an end of the position. Next, I

would like to turn to cash flow.

WEX generates a significant amount of cash each year. Using our definition, quarterly adjusted free

cash flow was $161 million in Q2. Our primary discretionary use of cash so far this year has been to

repurchase  shares.  We  repurchased  $174  million  of  our  own  shares  in  the  first  half  of  the  year,

including $100 million during Q2.

In  addition,  we  have  purchased  an  additional  $70  million  of  our  common  stock  during  July.  We

believe in the long-term business momentum of WEX. Earlier, Melissa illustrated the solid revenue

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and  earnings  growth  the  company  has  seen  over  the  last  decade.  The  business  drivers  of  the

company  have  remained  sound,  and  we  believe  the  stock  price  is  a  compelling  value  at  recent

levels.

As  a  result,  we  also  expect  to  enter  into  an  accelerated  share  repurchase  agreement  in  the  near

future to repurchase at least an additional $300 million of our common stock. We expect to receive

approximately  80%  of  these  shares  upfront  with  final  settlement  expected  to  recur  in  the  fourth

quarter  of  2024.  At  our  present  share  price,  this  equates  to  approximately  4%  of  our  outstanding

shares  and  when  combined  with  a  $70  million  of  shares  already  repurchased  in  July  represents

almost 5% of shares outstanding. Since reinitiating our share repurchase in 2022, we have acquired

approximately 4.8 million shares at a cost of $830 million, which equates to an average cost of $173

per share.

Since April of 2022, we have reduced our share count by more than 7%. We believe our expected

continued  strong  revenue  and  adjusted  net  income  growth,  combined  with  a  prudent  capital

allocation  plan,  is  a  very  compelling  story  for  our  shareholders.  Looking  forward,  we  remain

committed to managing capital allocation between organic investment, M&A, and returning capital to

shareholders.  Finally,  let's  move  to  revenue  and  earnings  guidance  for  the  third  quarter  and  full

year.

We expect many of the trends from the second quarter to continue, and we are updating our 2024

guidance  primarily  to  reflect  trends  in  the  corporate  payments  segment.  Starting  with  the  third

quarter,  we  expect  to  report  revenue  in  the  range  of  $688  million  to  $698  million.  We  expect  ANI

EPS to be between $4.42 and $4.52 per diluted share. For the full year, we expect to report revenue

in the range of $2.68 billion to $2.72 billion.

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We  expect  ANI  EPS  to  be  between  $15.98  and  $16.38  per  diluted  share.  For  the  full  year,  the

midpoint of these updated ranges represents a decrease of $50 million in revenue, including the Q2

shortfall and $0.17 of EPS compared to the midpoint of our previous guidance. Although there are

small  moving  parts  in  the  mobility  and  benefits  segment,  the  decrease  in  revenue  guidance  is

primarily  related  to  the  corporate  payments  segment.  Overall,  we  are  pleased  with  the  nontravel

portion of the segment, which further accelerated in the second quarter.

However, we are reducing travel customer purchase volume expectations for the second half of the

year  as  we  anticipate  the  softness  we  saw  in  Q2  among  our  smaller  OTAs  will  continue  for  the

remainder of the year. In addition, we are seeing second-half purchase volume weakness in some

large customers with multiple payment options. Some of these customers gave us a high share of

wallet over the last 12 months but are balancing out their spend in the second half of the year. We

do not believe these short-term spending decisions reflect any longer-term impact to our volume of

business with these customers, and we remain confident in our ability to grow the market.

Note that these changes also have an impact on the amount of network incentives that we expect to

earn  this  year,  which  is  reflected  in  our  revised  guidance.  Much  of  the  decline  in  revenue

expectations  is  being  offset  by  lower  expected  credit  losses  in  the  mobility  segment,  a  variety  of

strategic  cost-cutting  measures,  and  the  share  buybacks  that  I  discussed.  Finally,  one  other  quick

modeling  note.  We  expect  Q3  revenue  in  mobility  to  be  relatively  strong  as  there  are  two  more

business days in the current year versus last year.

With that, operator, please open the line for questions.

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Questions & Answers:



Wex