WEX Inc. common stock

Ladies and gentlemen, thank you for standing by and welcome to the WEX 2002, excuse me, second quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your touchtone phone. Mr. Elder, please go ahead.

Thank you, operator. Good morning, everyone. With me today is Melissa Smith, our CEO, and our CFO, Roberto Simon. 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 wexinc.com. A copy of the release and the slide deck have also been included in 8Ks we submitted to the SEC. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income attributable to shareholders, which we refer to as adjusted net income, or ANI, during our call. Adjustments for this year's second quarter to arrive at these metrics include unrealized losses on financial instruments, net foreign currency remeasurement losses, acquisition-related intangible amortization, other acquisition-related items, stock-based compensation, other costs, debt restructuring and debt issuance cost amortization, A&I adjustments attributable to non-controlling interests, and certain tax-related items. Please see Exhibit 1 of the press release for an explanation and reconciliation of adjusted net income to GAAP net income attributable to shareholders. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020, our quarterly report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 11, 2020, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa Smith.

Good morning, everyone, and thank you for joining us today. Importantly, I hope all of you and your families are safe and healthy. Like last quarter, I will start today's call with an overview of our Q2 performance highlights before providing an update on some of the key metrics in the current environment. This will include what we're seeing as we progress into the back half of the year, as well as some color around key announcements we made this quarter. I will close with talking about how we're progressing with our long-term strategic objectives. Then Roberto will provide more detail about our financial results for the quarter, as well as some balance sheet highlights before we open it up for questions. As we begin this morning, let me express my continued appreciation for our employees who've been working hard to continue to build upon our outstanding technology and products while providing the quality service that our customers and partners expect. The work they are doing will not only help us navigate through this unusual period, but equally important, will ensure that WEX emerges stronger as operating conditions improve. Turning to our second quarter performance highlights on slide three. Q2 saw the full quarter impact of COVID-19 on our business. The quarter played out broadly along the lines of what we had outlined in May with revenue declining 21% versus the prior year quarter to $347.1 million due to compressed volumes across all of our business segments and significantly lower field prices. With that being said, I'm pleased to report that we've seen volumes improve across all segments from the Q2 lows and of note, we continued to see year-over-year revenue growth in our U.S. health business. From a profitability standpoint, GAAP net income was $1.66 per diluted share, and adjusted net income was $1.21 per diluted share, down 47% year-over-year. This was driven by lower year-over-year spend volumes across all of our business segments, as mentioned earlier, and lower year-over-year fuel prices. Disciplined execution of our cost containment initiatives that I discussed last quarter helped to partially offset some of the declines this quarter. Starting with the fleet segment, revenue was down 24% year-over-year, primarily driven by unfavorable fuel prices and lower volumes due to COVID-19. the lower volumes also led to softness in other ancillary revenue. Same-store sales in the North American fleet business were down 21% compared to last year as the impact of the pandemic permeated all of the verticals we measure. This was partially offset by contributions from the EG GoFuel card acquisition that we closed in July 2019 as well as new business signed in the quarter. This will be the final quarter where we will see outsized year-over-year contributions from the Shell and Chevron portfolios, which are performing as expected given overall business volume trends. Our travel and corporate payments segment was the most severely impacted by the pandemic and the resulting decline in travel activity. Segment revenues decreased by 40% year-over-year, while travel-related revenues in the segment were down 68%, and corporate payments-related revenue was flat. Travel purchase volumes were down 87% from the second quarter of 2019 as travel restrictions and work-from-home orders remained in place through much of the world, coupled with a decline in consumer and business activity. Corporate payment volumes were flat as the pandemic slowed economic activity and B2B payment volumes, especially for small and mid-sized businesses, partially offsetting these declines with a reduction in scheme fees, which were $10 million lower than last year. Our health and employee benefits segment, which posted another quarter of year-over-year top-line growth, was up 6% from the year-ago period, driven by the strength in the U.S. healthcare business. We're encouraged by the 15% year-over-year growth in the average number of SAS accounts on our WexHealth platform, as customer demand for our HSA, FSA, and COBRA products remains strong. This included a 33% revenue increase from our COBRA offering. However, health purchase volume was down 26% as compared to the prior quarter as customers deferred non-essential medical treatments as a result of the pandemic this year. I'd like to take a moment and provide you with some additional color on the current environment and how we're responding to the challenge. Beginning with employees, our work from home program remained in place this quarter. with nearly all of our workforce still currently working remotely. I'm pleased to report that we didn't miss a beat in terms of our remote technology capabilities, and importantly, our productivity and customer service. We also made good progress on our diversity and inclusion initiative, which is focused on building upon a culture of inclusion, embracing diversity in the workplace and our communities, and having diversity be part of our brand in the marketplace. WEX launched various programs and resources to support this initiative throughout the past several years, including our most recent group to support our African American colleagues. We've held open forums with employees to discuss the impact of racism. We'll use our corporate philanthropic dollars to reinforce our commitment. Additionally, we'll be rolling out unconscious bias training to all employees in the company, beginning with the board and the executive leadership team. Given where the world is today, these efforts are resonating with our employee base. While we don't have all the answers, we will continue to put people first and lead with our commitment to D&I. From a customer standpoint, we have innovated and adapted our technology and products and we continue to see customers taking advantage of both to conduct business during this new normal. In the fleet business, we have products that offer contactless and digital payments, both features that are resonating from a health and safety standpoint. Drivers are increasingly utilizing DriverDash to make contactless transactions while on the road. Our small business customers are also leveraging the WEX Edge Savings Network which was launched early this quarter, to access fuel, tire, hotel, and wireless discounts, among others. To date, we have saved small businesses nearly $500,000 through these discounts and rolling this product out to a wider group of customers. We've seen an increase in fleet prospect interest by bundling this offering. With our health customers, we're focused on ensuring The end consumer is top of mind. Our speed lift offering announced last quarter continues to gain momentum as employers and consumers rely on speed lift to counter challenges created by COVID-19 and offset unexpected costs. We extended our network of offerings to include easy digital offerings like eyeglass purchases so that commerce can continue to happen. Before I turn our view to the balance of the year, I want to provide an update around our strategic priorities and cost containment program. As you can see on slide four, we remain on track and aligned with the priorities and initiatives outlined in May. As part of our initial response to COVID-19 to better align our needs for the new operating environment, we implemented a handful of cost containment measures last quarter. This included cutting discretionary spend and eliminating most new hiring across the organization while protecting investments in each of the businesses. We continue to evaluate these levers, among others, on an ongoing basis to keep us on our front foot during these unprecedented times. Since our last call, we did reduce headcount in our international locations as we discussed but we have not made any further permanent reductions in our U.S. workforce. Furthermore, all furloughed employees who have not already returned to work will return next week. Turning to slide five. We're focusing on our technology investments in areas where we continue to grow, like the U.S. health business, and also deploying our CapEx where we see growth opportunities in the future. The investments in our products we're making are paying off as we look for ways to further build out our growth and diversification plans. During the quarter in fleet, we finished an important milestone on the WEX Europe fleet business by successfully completing the migration of the EG fuel business onto our own cloud-based platform. This is an important prerequisite to building out our European presence. In addition, in the US, we also completed the migration of the Valero portfolio onto our products and technology. We're also expanding the ways our customers can buy using our products. Edge is an example of creating a buying community, while we're also now offering local fueling functionality to our over the road customers. In the travel and corporate payment segment, we've migrated nearly 70% of the spend volume onto our own internal transaction processing platform. In doing so, we've increased reliability for our customers and reduced some of our variable cost base from using a third-party vendor, which will help to increase our scalability. Finally, in the US healthcare business, we're seeing tremendous support for the July 2020 product release. which includes additional enhancements to the features and functionality of our employer analytics. We also continue to build off the success of WEX Momentum, which is a series of virtual learning and networking events launched in May. In only a few short months, we've received thousands of views from individuals across the country. The investments we have made continue to build upon our differentiation in both our products and technology and been an important part in winning new business. Slide five illustrates some of our impressive recent wins and renewals. During the quarter, we signed OMV. OMV is a European-based oil company with 2,100 locations across 10 countries who will use us for their private label processing needs. We've also signed JB Hunt, one of the largest trucking companies in the country. FAS has signed up to use our bill pay technology as part of their software offerings to banks, and Onyx SenderSource will use our travel solutions in the travel and corporate payment segment. Finally, Transamerica will be using our technology platform for their consumer-directed healthcare accounts. I'm also proud to announce that we've recently renewed contracts with some of our fantastic customers and partners, including Enterprise Truck Rental, Snyder, Apple Leisure Group, Zurich Insurance, and Fifth Third Bank, among others. Our sales and marketing teams have continued to foster relationships and close new business despite the pandemic, which is an important part of our ongoing growth strategy. Now I want to spend a few minutes looking ahead for the back half of 2020. While parts of Europe are easing restrictions and regions of the US are starting to reopen, there's still a long road ahead to sustained recovery. Given the unpredictable nature of COVID-19, we expect the business activity and our customer base to continue to be impacted through the second half of the year. We also anticipate some additional noise as pandemic-related stimulus tapers off, and we can now note that smaller businesses and our fleet customer base are showing slower signs of recovery in business volume than larger businesses. Nevertheless, we're encouraged to see steady improvements across our key weekly metrics over the past month. Turning to slide six, we provided a weekly look at volume trends similar to what we did last quarter. In the fleet segment, month-to-date gallium volumes are down approximately 2.9% in July from the year-ago period compared to a decline of 20% in April. Our North American fleet business trended upwards through the second quarter with month-to-date July volume down 8.7% year-over-year compared to a 25% decline in April. Our OTR business continued to demonstrate resilience, with month-to-date July volumes up 8.5% compared to an 11% decline in April. International volumes remained the most challenged, down 9.9% year-over-year in July, but up from a nearly 50% decline in April. While fleet volumes remain down, we expect these trends and further stabilization to gradually continue into the third quarter. In our travel and corporate payments segment, spend volumes are down 65% months to date in July from the previous period, compared to a decline of about 70% in April. Global travel-related spend volumes improved slightly from April, with volumes down 81% year-over-year in the month-to-day July. Volume levels remain compressed due to continued declines in our travel-related revenues across the world. While it's still difficult to anticipate when purchase volumes will begin to normalize, we remain well-positioned to recapture volume once market recovery begins. Our corporate payment spend volumes increased 6% so far in July. Finally, turning to our U.S. health business on slide seven, we expect the trajectory of spend volumes that we saw in June and July to continue through the remainder of 2020, particularly as states reopen and customers begin to spend on elective healthcare procedures and resume a more normal cadence of doctor visits. Importantly, SASA account growth, which drives about two-thirds of the revenue, remains strong. and is anticipated to trend positively at a mid- to high-teens growth rate in the coming months. I'd like to turn quickly to the ongoing litigation surrounding the ENET and OPTAL acquisition. We continue to remain confident in our position, but we cannot predict the outcome of these proceedings. There's a trial of preliminary issues scheduled for the end of September where certain issues related to the case will be decided, so it would be impossible to predict the outcome at this point in time. We'll provide updates on the status of this litigation as they become available. Before I close out my comments, I want to briefly touch on the $400 million investment from Warburg Pincus that we closed a few weeks ago. This investment reaffirms our relationship with Warburg, who has demonstrated their strong commitment to the future growth of WEX. Coupled with the recent amendments to our credit agreement, this investment further strengthens our balance sheet and provides us with more certainty through increased financial flexibility, improved liquidity, and additional cash on hand. These allow us to remain focused on our long-term strategic initiatives to drive sustainable growth. In spite of the challenges we continue to face, the nimbleness with which we are executing and the resilience of the WEX platform give me confidence in our future. First and foremost, our employees remain healthy and safe. They are the cornerstone of our organization and a conduit to our customers and partners globally. They continue to go above and beyond in our WEX community to bring best-in-class technology solutions and unparalleled service to our customers and partners who depend on the WEX platform to keep their businesses up and running. From a customer and partner activity standpoint, recent data indicates that trends are significantly better than three months ago, ensuring gradual improvement, or at a minimum, some level of stability. We're encouraged by the July volumes across our business segments, and our hopeful steady progress will continue. Lastly, we've proven that we can quickly adapt our business under challenging operating conditions. We've made a number of strategic decisions this quarter to ensure that WEX is well positioned to succeed post-pandemic, including strengthening our balance sheet and liquidity position, and continuing to execute across our cost containment program while making targeted investments for future growth. WEX products continue to be integral to our customers' operations in the current environment, and we're confident the volumes will return as the economy begins to recover. In the meantime, we remain committed to our strategy and are focused on driving sustained long-term growth and value for our shareholders. With that, I will turn it over to Roberto.