WEX Inc. common stock

Ladies and gentlemen, thank you for standing by and welcome to the WEX Q3 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require further assistance, please press star 0. I would now like to hand the conference over to your speaker today.

Thank you, operator, and 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 AKs we submitted to the FTC. 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 third quarter to arrive at these metrics include unrealized gains on financial instruments, net foreign currency remeasurement losses, acquisition-related intangible amortization, other acquisition and divestiture-related items, lost on the sale of a subsidiary, stock-based compensation, other costs, debt restructuring and debt issuance cost amortization, ANI 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 reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 filed with the SEC on May 11, 2020 and August 5, 2020, respectively, 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. I hope everyone is doing well and staying safe and healthy. I will start today's call with an overview of our Q3 performance highlights and business updates, segment trends, progress against our strategic initiative, and additional color around what we're seeing as we move into the fourth quarter. Then, Roberta will provide more detail on our financial results as well as some balance sheet highlights before we open it up for questions. Before I dive in, I'd like to provide some perspective on how we've been navigating through this global pandemic. First and foremost, we focus on protecting the health and safety of our employees, customers, and communities, which continues to be paramount to everything we do. We ramped up our risk mitigation efforts to ensure WEX is prepared for anything and everything during this period of uncertainty. Third, we proactively executed a number of cost containment and CapEx savings initiatives earlier this year to rescale parts of our business. Finally, we're very focused on returning the business to our long-term growth targets. and plan to build upon the strong near-to-date sales momentum by resuming our full sales and marketing efforts that had been paused by the pandemic at full tilt in the fourth quarter. In addition, we will continue our current rate of R&D spending to further improve our leading product and technology position. We believe that these two efforts combined will position us for sustained growth and market share gains in the future. I'm pleased with the hard work our team has done to control what we could during these unprecedented times and deliver against these four key priorities this quarter. Let's turn to our third quarter performance highlights on slide three. As expected, the COVID-19 pandemic continues to impact business activity within our customer base. Revenue for the quarter was $382.1 million, which is up 10% compared to the second quarter as previously discussed trends continue to improve as we progress through the year. We're down 17% compared to the prior year quarter, primarily due to compressed volumes and lower fuel prices. Specifically, lower fuel prices reduced revenue by $16.7 million, or about 3.5% compared to the prior year quarter. From a profitability standpoint, GAAP net loss was $1.49 per diluted share and adjusted net income was $1.59 per diluted share, down 39% year-over-year. This was again driven by the factors I just mentioned, partially offset by the cost containment initiatives we introduced earlier this year. Although profitability remains down due to the impacts of COVID, we continue to execute well on the items we can control and drove better than expected results for the quarter. Moving on to the segment results, I am encouraged by the steady sequential improvement in our fleet business with segment revenue down 18% year-over-year compared to a decline of 24% last quarter. While the year-over-year decrease was due to unfavorable fuel prices and lower volumes as a result of the pandemic, we had a number of bright spots in the quarter. Notably, we continued to generate above-market growth with over-the-road customers as over-the-road payment processing transactions grew 8% this quarter. We also continued to gain market share with a number of new wins this quarter and customer implementations year-to-date. Recently, we've also seen stronger new customer applications submitted for approval. In North American Fleet, approved applications in September were up 15% compared to last year, and in the over-the-road, the number was 21%. These wins will roll into the future and are an important part of our growth story. We believe they will also be complemented over time with a rebound in our existing customer volume. Even though outsized gross contributions from Shell and Chevron ended last quarter, the two portfolios remained solid in the third quarter. Before I move on to other segment performance, I want to provide some additional color around how we think about our fleet customer mix. Our customers represent a cross-section of many different industries and use vehicles to fulfill a variety of needs. Over the road customers move in goods, Contractor trades go into work sites, government agencies traveling to locations, and sales fleets making customer calls. While overall customer retention rates remain high, we're seeing continued latent demand among some customers. And though we noted a moderate rebound in existing customer behavior within Q3, we've seen a flattening of that curve and returning to pre-COVID levels, which continues to present a revenue headwind. It's also worth noting that as our customer mix has shifted towards over-the-road and larger fleet customers, the customer credit quality profile has also improved. At the same time, we've seen small fleet customers pay their bills in a more timely manner than in the past, which also improves our overall credit quality profile. These trends are reflected in the 10 basis point decline in late fee rate this quarter compared to the prior year. resulting in a year-over-year revenue decline of approximately $8 million. Nevertheless, we're encouraged by these trends as they set the stage for a stronger customer base for the future. Turning to our travel and corporate payment segment, this continues to be the area of our business most severely impacted by the pandemic. Segment revenue decreased by 35% year-over-year, with travel-related revenues down 68%. Offset by growth in corporate payment customers and better pricing from a new scheme contract, which we signed in the second quarter. Segment purchase volumes were down 59% year-over-year in the third quarter. Although up from April lows, we continue to see the impact on travel as the majority of would-be travelers chose to stay at home during the pandemic in the normally travel-heavy summer vacation months. Where the travel has occurred, trends are clear. and many more. As a bright spot, corporate payments revenue and volumes contributed positively this quarter, up 10% as the economy continued to open and B2B payment volumes started to recover. While corporate T&E spend in this segment continues to be depressed, account growth remains strong with many of our partners. We saw improvements in spend from our media partners in association with the election cycle, and we benefited from the maturation of implementations completed this year. This is also an area where we'll see a lot of strength in the pipeline of new business. Finally, our health and employee benefits segment posted another quarter of year-over-year top-line growth, up 7% from the prior quarter, driven again by strong performance in our U.S. health business, which was up 11%. Importantly, our average number of staff accounts in the U.S. grew 12% year-over-year, underscoring continuing strong demand for our products. We're in the early stages of the open enrollment season for benefits that will begin next year and so far we're encouraged by the trends that we see. Our COBRA offering also continues to see significantly higher demand given the high unemployment levels with associated revenue up 26%. Additionally, we experienced the highest level of healthcare spend this quarter since the beginning of the pandemic. That said, continued deferment of non-essential medical treatments kept health purchase volumes flat compared to the prior year quarter. Most recently, we held our second annual HSA Day virtually on October 15th, bringing the general public and healthcare benefits industry together to discuss the importance of HSAs and their role in managing health expenses and saving for retirement, all topics that are top of mind for Americans today. Now I'd like to take a moment to provide an update on our strategic priorities and cost containment program we began implementing earlier this year. As you can see on slide 4, we remain on track and aligned with their previously announced priorities and initiatives. From an employee standpoint, WEX's work from home program will remain in place at least until the end of 2020, with the majority of our workforce still working remotely. Productivity remains high as employees continue to leverage WEX's comprehensive remote technology capabilities to collaborate and stay connected. In the third quarter, we continue to execute on our cost containment plan while protecting business investments. All of the plan reductions for the year are coming through as expected. Importantly, all employees furloughed earlier in the year return to work during the third quarter. We also remain on track to achieve our previously outlined $20 million reduction in capital expenditures. We'll continue to evaluate these cost levers on an ongoing basis to best position WEX for the long term. Additionally, we have focused on risk mitigation in a number of ways, most notably across our credit and collection practices. We reduced available credit lines for thousands of fleet and travel customers without impacting their spending with us. and revamped our collections operations. We've also exited our Brazil commercial operations at the end of the quarter. The benefits business in Brazil is no longer core to our long-term strategy and this decision allows us to redirect future investments to faster growing parts of the company. And that brings us to our final priority, returning the business to growth. As you can see from the recent wins and renewals on slide 5, WEX continues to win business this quarter, signing Red Bull and the U.S. Ecology as two new large fleet customers, adding Diligent Delivery Systems, a premier nationwide transport and logistics services company, and signing Doxo and WidePoint in the corporate payment space. On the health and employee benefits side, we signed Hormel Foods Corporation and Powerflex and Compensation Consultants who will all use the WEX Health Cloud for their HSA needs. Additionally, we also renewed contracts with a number of large customers including the State of Michigan, State of Georgia, BP, and On the Beach. Our continued wins are driven by four factors. Our technology, our focus on continuous improvement to meet and exceed dynamic customer needs, our integration, and our people. These factors tie into the customer-focused culture of WEX. It can't be replicated, copied, or bought, and is the reason why we continue to take market share. To support these new customers and as we continue to capture market share even in this challenging environment, we're focusing on continuous improvement and innovation to meet dynamic customer needs through regular releases of new features, additional new products, and honing of our technology. Before I get into the details of our technology wins this quarter, I'd like to take a step back and give a high-level overview of our technology strategy that we've been progressing at LAX over the past several years and why we feel this is giving us a distinct competitive advantage in the marketplace. We've taken a multi-pronged approach in transforming our technology to be based in part on the continually growing platform of services. We first targeted our legacy technologies. simplifying, updating, and reducing their complexity while moving them to the cloud, and simultaneously developing new cloud-native and service-oriented technologies. This benefits us by having a technology platform that allows for building out a common set of shared services that they can be used across the company via RESTful API gateways rather than having to rebuild everything on a per-product basis. These services interoperate seamlessly with a legacy system, continuing to push products and services to market quickly with improved scale and reliability. Core to this strategy was the early recognition that data is a central part of our digital transformation and subsequently building out both a new data organization and the data platform itself. This platform allows us to view our data holistically across the enterprise and introduces modern tools and processes, including AI, everywhere the data is used. Looking forward, this platform-as-a-service concept will allow us to have a common set of loosely coupled shared services while still enhancing our value-added services to customers, which is key to our differentiation in the marketplace. Specifically this quarter, we focused on customers, particularly as they use our tools outside of the office. In Fleet, we relaunched our customer portal for North American fleets and modernized the digital interface to provide a more intuitive, user-centric experience. We also updated our mobile application for over-the-road fleet managers, making it easier for them to run their business. New mobile functionality includes enabling fleet managers to generate money codes when using a field card as an option, pay their bills online, flow cash to cards, manage cards, transfer funds, and view statements. From a fleet technology perspective, we'll be transitioning the EFS platform to the cloud in the next few weeks. This will mark the major milestone of larger completing our global fleet cloud migrations. In corporate payments, we're focused on helping our customers and partners deliver payments in whatever form is necessary, including new bank transfer capabilities in-market by the end of the year, direct debit capabilities fast-tracked this year to help our customers manage constrained credit better, and in-house check fulfillment technology now in production. We continue our cloud migration of platforms across the corporate payments technology. On the health front, We introduced Let's Chat, an AI-driven chat bar that enhances the personalized benefits account experience. Let's Chat expands on the powerful analytics capabilities the health division offers partners. Other Q3 product updates focus on features and functionality to help partners maximize HSA enrollments and deposits and deliver a personalized, consistent consumer experience. As always, Work continues to enable partner growth with new product offerings, increased efficiency, and reduced costs through new technology and processes, and ensure industry-leading fraud protection and security. Apart from new products for our customers, we've also been able to transform our operations. For example, our internal business intelligence and AI experts have been focused on improving collections and credit monitoring technologies to give us the ability to react faster and with greater accuracy during this uncertain time. Now let's look ahead at the fourth quarter. We expect third quarter top line trends to hold steady and level off as we progress through the end of the year. This is driven by continued uncertainty around the virus and a slow economic recovery. As a reminder, the fourth quarter also has fewer business days due to Thanksgiving and Christmas holidays, which has a slight drag on our numbers every year. On the expense side, we're ramping up investments as part of the broader strategy I just discussed. In the fourth quarter specifically, we expect to incur higher sales and marketing spend in the fleet segment as we invest in growing our pipeline following solid performance. On the health side, expenses typically increase in Q4 as we gear up for the open enrollment season and resulting implementations, and this year will be no different. While this means we may see sequential impact to profitability, I am confident that these investments are key to driving sustained growth going forward. Turning to slide 6, we provided a weekly look at volume trends in fleet gallon volume and travel and corporate payment spend volume. Overall, while volumes are still down compared to the prior year period, all segments trended upwards as we progressed through the year. Month-to-date gallon volumes are up approximately 0.6% in October from that year-ago period. Breaking this down further, the North American fleet business trended relatively flat in the third quarter compared to the second quarter, with month-to-date October volume down 6.6% year-over-year. Our over-the-road business remains solid, with month-to-date October volumes up 15.4%. The timing of Labor Day distorted year-over-year comparability for the first two weeks of September. Our international business remains challenged with October volume down 11.4% year-over-year. In our travel and corporate payment segment, purchase volumes were down 50% most of the day in October from the year-previous period. Global travel-related spend volumes continued to trend slightly upwards with volumes down 74.6% year-over-year, month-to-date in October. However, the recovery in volume slowed during the quarter. Our corporate payment spend volume increased 32.1% so far in October. Finally, turning to our U.S. health business on slide 7, we saw spend volumes begin to stabilize from April lows as we progressed through the quarter. September had the highest cardholder spend since the beginning of the pandemic. Months of date in October, spend volumes were up 5.6% and we expect spend going forward to trend similarly to the third quarter. Before I conclude, I'd like to make a few brief comments on the ongoing litigation surrounding the ENET and OPTEL acquisition. Earlier this month, we were very pleased with the English court's decision in the preliminary issues trial. As you will have seen, the decision upholds our position that in the context of the material adverse effect clause, Enet and Opto operate in the B2B payments industry. We believe this ruling supports our determination that they have been disproportionately impacted by the pandemic, and as such, we believe WEX is not required to close the transaction. The claimants are seeking permission to appeal that decision along with another part of the ruling concerning which party bears the burden of proof. We are also seeking permission to appeal parts of the decision on a couple of secondary issues, including on how the material adverse effect clause works in respect of events that are reasonably expected to have a material adverse effect. and the Court's conclusion that the impacts caused by changes in law arising from the pandemic may not be taken into account in determining whether these have been a material adverse effect. We remain confident that ENET and OPTL have been and continue to be disproportionately impacted by the pandemic and that an MAE has occurred, which is something that will be decided conclusively at a subsequent trial. As I look back on the year, we have made significant strides over the past six months in response to these extraordinary times. Our business model is diverse and resilient, and while the environment remains challenged, we continue to perform well. Looking ahead as we close out 2020, we will continue to invest in high-growth areas of our business and in technology and innovation, which are key to our success in limiting the market. We believe these investments will position WEX well as the market recovers. Our focus has always been and continues to be on sustainable long-term growth. While our outlook remains optimistic, there is still more work to be done. I am proud of our market-leading innovation and solid execution against our strategic initiatives during this quarter, and remain confident in WEX's future. We remain committed to driving long-term shareholder value while supporting our employees, partners, customers, and communities around the world. With that, I'll turn it over to Roberto.