WEX Earningcall Transcript Of Q2 of 2024
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. Page 2 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. Page 3 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. Page 4 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. Page 5 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 Page 6 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. Page 7 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. Page 8 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. Page 9 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 Page 10 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. Page 11 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 Page 12 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. Page 13 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. Page 14 Questions & Answers: |
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