WEX Inc. common stock

Good morning. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Q2 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Again, press the star 1. Thank you. Steve Elder, Senior Vice President of Global Investor Relations. You may begin your conference.

Thank you, Operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO, and Jagtar Narula, our CFO. 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 has also been included in an 8K we filed with the SEC earlier this morning. 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, and adjusted operating income and related margin, and adjusted free cash flow during our call. Please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we'll 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, 2022, filed with the SEC on February 28, 2023, and in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2023, filed with the SEC on April 27, 2023, 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.

Thank you, Steve, and good morning, everyone. We appreciate your joining us today. I am pleased to share that WEX continued to deliver impressive results in Q2 and ended the first half of 2023 in a strong position. In this dynamic macro environment, we continue to execute against our strategic initiatives, which position us to drive long-term growth throughout the business. I'm proud to again report strong results for both revenue and adjusted net income per share. Revenue for the second quarter came in towards the high end of our guidance, $3 million above the midpoint, and adjusted net income per share exceeded our guidance, beating the midpoint by 13 cents. Now let me provide a bit more color on these financial results. Revenue for the quarter increased 4% year over year, reaching a record high for the second quarter of $621 million. This increase of $23 million year over year was driven by growth of 21% in our corporate payment segment and 34% in our benefit segment. Our revenue growth for the quarter was notable when you consider the 26% year-over-year decline in fuel prices. We saw an anticipated decline in mobility revenue of 10% as a result of the impact of lower fuel prices, which reduced revenue by $53 million. The company's overall growth for the current fuel price headwinds reflects the strong execution and resilient business model that I have discussed on previous earnings calls. This point deserves some emphasis. The year-over-year decline in fuel prices this quarter was one of the largest that we've seen in our history. Yet our diverse and resilient business model allowed us to grow top-line revenue despite that. In fact, on an organic basis, in excluding the impact of fluctuations in fuel prices and foreign exchange rates, revenue in the quarter grew 13%, a result that continues to underscore our strong momentum. Strong quarterly revenue paired with the scalability of our business model was offset by lower field prices versus the prior year highs and resulted in adjusted net income diluted share of $3.63. Total volume processed across the organization in the second quarter declined at 2.3% year-over-year to $55.3 billion, driven by strong performance in our corporate payments and benefits segments, and offset by lower fuel prices. I'll now turn to an update in each of our segments, starting with benefits. We've had an active couple of months in the benefits segment. On June 1st, we hosted an event to provide the investor community an in-depth understanding of the business. including its product set, opportunity, and financial profile. We continue to believe this segment is uniquely positioned for success due to its strong strategic fit in the WEX portfolio, its leading position in the large and fast-growing benefits market, its multiple product offerings and go-to-market channels, and its compelling financial profile. I am also pleased to announce that WEX signed a definitive agreement to acquire a Census Health and Benefits line of business, a leading tech-enabled provider of employee benefit accounts with a diversified portfolio including HSAs, FSAs, and other benefit accounts. We are excited about this deal as it will both increase our scale in the benefits segment and expand our benefits product offerings by including a census' complementary Affordable Care Act compliance and verification capabilities. Total consideration is expected to be approximately $180 million, subject to certain working capital and other adjustments. We expect the transaction to close before year end. We will not update guidance for this acquisition until it closes. but we would expect it to be roughly neutral to adjusted net income for the remainder of 2023. We have known the Ascensus team for many years and look forward to welcoming them to the WEX family. We believe our combination will only strengthen and deepen our offerings to employers, consumers, and partners alike. In corporate payments, we continue to benefit from a strong rebound in travel volume globally, with travel purchase volumes up 44% year-over-year. We are seeing strong growth in all regions, with the U.S. leading the way. We're at 149% of 2019 purchase volume for the quarter on a pro forma basis, including E-Net, which is better than the 130% we saw in Q1. Across our corporate payment segment, we were pleased to sign a number of renewals and expanded relationships with customers, including a large regional banking partner and European online travel agency on the beach. In mobility, we continue to sign new customers across the portfolio and see the benefit of increased marketing as we continue to add small fleets through digital channels. New signings this quarter include Merchant Leasing, a competitive leasing company win. Merchants is a major fleet management company. It will be using both our mobility and corporate payment solutions. Over-the-road trucking customers continue to work through a slow freight environment. In same-store sales, we're down 1%. We've seen an increase of about 2% compared to our normal attrition rates, relating to higher credit standards in our portfolio. We're seeing the benefit of this in our earnings overall. As you've heard, there's a lot to celebrate across each of our segments. Now I'd like to highlight the progress we've made against our strategic initiatives this quarter. I'll start with an update on our electric vehicles initiative. We're striving to meet our customers where they are on their EV journeys. Our strategy is to create a seamless transition for our customers as they transition to a mixed fleet environment. We continue to build and partner to deliver tools for the mixed fleet world. Our market-leading products can be used alongside and seamlessly with EV capabilities that create flexibility for our customers to charge at work or home, as well as fuel and charge while in transit. While it's still early days, pricing is playing out consistently with what we laid out at our investor day last year, and we continue to see a significant opportunity to expand our offering. We're also well-positioned to capture revenue when the adoption curve accelerates. Initially, this includes continued investments in our products and putting in place acceptance agreements with approximately 75% of the publicly available charging networks in the United States and approximately 85% in Europe. We're also in the testing phase of an at-home charging reimbursement product, and we expect to roll out a depot solution by early next year. We're feeling positive about our progress to date as we work towards replicating the ease, acceptance, and control that our closed-loop network provides to customers today. we continue to believe that we're well positioned to be our customers' advisor and partner in operating in a mixed-lead environment. Part of our ability to deliver winning solutions to the market will come from both within WEX and through unlocking the great innovation that is happening across the ecosystem. To that end, earlier this morning, we announced that our board of directors has authorized our recently formed WEX Venture Capital Team to invest up to $100 million through the end of 2025. There's an emphasis on minority investments in early and growth stage companies that are innovating on how the energy transition impacts corporate mobility, including areas such as fleet electrification, the EV charging ecosystem, energy management and optimization, and adjacent technology. We've already executed a set of minority investments with innovators that we believe have the potential to be great partners in providing solutions to our customers. Our experience thus far gives us confidence that our deep knowledge of the mobility industry and relationships with hundreds of thousands of customers makes us an attractive investor to the early stage companies we are targeting. These investments enable us to bring both internally developed and partnered solutions to the market as we aggressively build our capabilities in this dynamic space. We believe the years ahead are a crucial moment for businesses with mixed leads, and we're proud to lead and help them through the energy transition. The second strategic initiative I want to share an update on is our operational improvement efforts. As a reminder, we're on track to remove $100 million in run rate expenses exiting 2024, with approximately half of the improvements expected to be reinvested in the company. To date, much of the benefits we have seen have been offset by the cost involved in achieving them, but we expect to see margin improvements as we last those expenses. Before I wrap up, I'd like to talk about how we're applying machine learning and artificial intelligence tools to our processes. Let me give you a few examples. First, on credit adjudication and monitoring, we have significantly evolved our tools to provide us much more granularity to adjust credit decisioning based upon risk and profitability. We've invested in our credit adjudication and portfolio management capabilities, leveraging machine learning models. These enhanced capabilities have yielded strong initial results at the point of credit decision. while also providing improved insights on our portfolio, leading to proactive actions where appropriate. The investments in machine learning position us to manage our existing portfolios with increased precision and support future growth. Second, on software development, we began rolling out large language model AI tools for our software engineers earlier this year and implemented this more broadly in the beginning of the second quarter. These tools augment their day-to-day work in useful ways, and we've already seen meaningful productivity improvements, which we expect to continue into next year. This has the benefit of increasing our speed to market and reducing the cost of developing new products. With these successes and others in place and the returns they have generated, we've launched an AI center of excellence focused on hiring, educating and training data scientists and analysts on best practices of model development and advancement in AI technologies. The Center of Excellence increases the skill set of data science and data analysis teams across WEX through projects and rapid experimentation, ultimately bringing new products using technology tools to market faster. Finally, I want to share that next week, we plan to publish our third annual ESG report. This report provides an update on WEX's ESG efforts, and importantly, demonstrates how our initiatives, like supporting our customers transition to EVs and educating benefit customers at HSA Day, are driving business outcomes and making a positive impact. I remain confident in WEX's path forward and long-term growth opportunities as we continue to deliver strong financial results while managing the business through a dynamic economic environment. To that end, I'm pleased that we are raising our full-year guidance for both revenue and earnings despite a lower fuel price forecast, which Jagtar will discuss further in a moment. With that, I'll turn it over to Jagtar to walk you through this quarter's financial performance in more detail.