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spk06: Thank you for standing by. My name is Kayla and I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Q2 2024 earnings 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'd like to ask a question during this time, simply press star and the number one on your telephone keypad. If you'd like to withdraw your question, again, press star and one. I would now like to turn the call over to Steve Elder, Senior Vice President of Investor Relations. You may begin.
spk13: Thank you, Operator, and good morning, everyone.
spk09: 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, which we sometimes refer to as ANI, adjusted operating income and related margin, as well as 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 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, 2023, filed with the SEC on February 23, 2024, 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.
spk07: 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 fill prices and foreign exchange rates, Q2 revenue grew 9% year-over-year. Total volume processed 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 field prices and foreign exchange rates, adjusted EPS grew 10% year over year. Overall, our top line results fell short of our expectations. 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 margin 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 and visibility was 5.7% 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're 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 agreements with Snyder, Warner 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 towards seeing a little light at the end of the tunnel, results remain mixed in the freight market. While we weather 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 and small fleet. For them, access to discounts at truck stops remains a challenge. 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 PASER, which we acquired in Q4 last year to give us access to our near-adjacent market in field service management. PASER remains on track to contribute 2% to the mobility segment revenue this year. We remain focused on scaling the PASER 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 the second 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're particularly encouraged by the strong contributions we're seeing from our referral partners. Our pipelines 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 payment 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 companies Upgrade, Jack Henry, and Allied Payment Network this quarter. We believe this business is well positioned for 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. 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 on 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're making against our EV solutions focused on enabling mixed fleets 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're earning with our EV solutions is currently in line with our overall average revenue per vehicle, and we are confident 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 in 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 strengths 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 maintain our practice of embracing digital transformation and harnessing cutting edge technologies to revolutionize our operations through strategic investments in artificial intelligence. 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 first half of 2024 towards 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 balance and 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 Carriada is now head of America's Payments and Mobility. Jay Dearborn is now 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, with the 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. With that, I'll turn it over to Jaktar to walk you through this quarter's financial performance in more detail. Jaktar?
spk14: 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 benefit 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 defined recurring revenue as payment processing and account servicing revenue, revenue from our factoring business, income from custodial 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. 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 from 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 US 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 that 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 one 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 the mobility segment was 1.29%, which is up four basis points over our 2023 net interchange rate. The increase reflects continued benefits from 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 order. The mobility segment adjusted operating income margin for the quarter was 42.9%, down from 44.2% in Q2 2023. The decline in fuel prices here 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 spend 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 the 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. Turning 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 two basis points sequentially. Booking.com did begin testing their new process this quarter. Approximately $1 billion of volume was processed under their new insourcing 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 lower than the expected growth in airline-related spend. The interchange rate for the travel-related customers is up one basis point from Q1 due to the timing of incentive recognition. Our non-travel customer revenue was up 11% driven by a 13% increase in purchase volume and a 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 use 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. SAS 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 SAS account growth, excluding the declines in Medicare Advantage accounts, which was 7% year over year. Benefit 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 several 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 investments at higher rates as they mature. 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 movements 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 at end of the quarter with $683 million in 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, 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 levels puts us in an enviable 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. Melissa illustrated the solid revenue 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 up front, with final settlement expected to occur in the fourth quarter of 2024. At our present share price, this equates to approximately 4% of our outstanding shares, and when combined with the $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 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 to $2.72 billion. 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 represent a decrease of $50 million in revenue, including the Q2 shortfall and 17 cents 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 payment segment. Overall, we are pleased with the non-travel 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 impacts to our volume of business with these customers and remain confident in our ability to grow with 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.
spk13: With that, operator, please open the line for questions.
spk06: And at this time, I would like to remind everyone, in order to ask a question, simply press star then the number one on your telephone keypad. Our first question comes from the line of Tenjin Hong with J.P. Morgan. Your line is open.
spk05: Thanks so much. Good morning. I wanted to ask Melissa on the – just maybe if you can give a little bit more detail on your – on what you're seeing on the ground on the fleet side. I think you mentioned the market is mixed, but like at the end of the tunnel, what's driving that light at the end of the tunnel comment there? Thank you.
spk07: Yeah, short tension. A couple of things. When we are out talking to customers, they're starting to be a little bit more bullish. I'd say, you know, it's still mixed. We're also seeing within the portfolio itself, same store sales were flat in the quarter, which is a good sign for that segment of our business. And so some of it's data-driven, some of it's more anecdotal from commentary we're hearing from the field.
spk05: Got you. And then on the travel side, I heard the OTAs on the smaller side are driving some of the weakness. Any comments on geography? Because I think Asia was believed to be weaker coming out of Visa. And any updated thinking in general around booking and the impact and when that will show up starting in the fourth quarter?
spk07: Yeah. Why don't I start? And I think, Dr., you probably want to add on to this. If I look at the mix, you know, within our portfolio itself, what we saw was stronger growth in the U.S. And, you know, still actually decent growth in Europe, but more muted growth in Europe within our portfolio. We also saw that the average transaction sizes continue to go up. It was up 5% year over year. And so, you know, continued to see some pricing leverage that's happening across the portfolio.
spk14: Yeah, I'll talk about booking. So, Tianjin, we saw booking has started their transition to the new model. We saw about a billion dollars flow through the new model in Q2, which was kind of relatively immaterial. We expect that to accelerate in Q3 and Q4. We expect roughly 30% of their volumes to flow through the new model in Q3, growing to about 40% in Q4.
spk08: Great, thank you.
spk07: And just to reiterate from the impact next year, we've talked about it having an incremental 1% impact to total revenue for the company. We're just reiterating that.
spk11: That's still what we believe.
spk12: Very good, thank you.
spk06: And your next question comes from the line of Andrew Jeffrey with William Blair. Your line is open.
spk00: Hi, good morning. Appreciate you taking the question. Wilson Jagtar, I wonder if you could unpack the comment around travel or OTA customer wallet share a little bit, because I know one of the potential offsets longer term at booking is the thought around being able to capture additional wallet share, but it sounds like maybe in the near term as volume comes off, some customers are maybe spreading spend around. I just wanted to understand that dynamic a little bit.
spk07: There's a bunch of things that are happening within the portfolio, and I guess let me start probably just addressing that question, and Jack might want to add on to that. Within our travel customer portfolio, many of the online travel agencies use multiple providers, and they do that for business continuity purposes, and they will split volume across. What Jack mentioned in his comments is that we've got a little bit more lumpiness and how that volume is coming through right now. So we've got the advantage of that in the first half of this year, and then we think that we're going to see the disadvantage of that, which is going to affect comparability of year-over-year performance in the second half of the year. It's not something that's new. And then on top of that, we are seeing really great spend volume with the large OTAs. The growth has been really strong. We're getting the advantage still of this move into the merchant model. And so the growth that we're seeing with the larger European OTAs, we're certainly getting an advantage of that. And that's being offset by weaknesses that we're seeing with the smaller online travel agencies, which are really just returning to more normal growth patterns. And then Jagtar talks about the fact that we're also seeing softness with airline spend, which for us is in Europe. and it tends to be online travel agencies that are using our product for low-cost air carriers within the European market.
spk14: Andrew, the only thing I'd add to that, sorry, I was just going to say the only thing I'd add to that, so as Melissa mentioned, the share of wallet item, predominantly on some of our larger OTA customers, our expectations and with these customers that you know this is really a calendarization in 2024 we saw them spend more with us in the first half and maybe a little less with us in the back half but then right we expect volumes to return as we look out in the future so i'd really view that kind of share of wallet item as a timing item okay that's helpful color and uh i just wanted to get a little more color on on benefits
spk00: where it looks like HSA accounts are returning to growth. Should we expect a combination of new wins, onboarding, lapping the Medicare Advantage losses, and perhaps a better open enrollment season to reaccelerate HSA growth, especially as we look out into next year?
spk07: What we're seeing right now, because you're going to go through those drivers, we're seeing an increase. We talked about 8% growth in HSA accounts year over year. So far in the sales season, we're definitely seeing more momentum in close rates or higher pipelines look really strong. The majority of the sales happen in the second half of the year, so we still have more work to do. But we're feeling pretty good about what's happening across the portfolio and how that's going to line up for next year's growth.
spk14: Yeah, and I would say what we've closed so far this year at this point of the year versus where we were at this point of the year last year, we are ahead. So that's a good sign of validating our expectations.
spk12: Appreciate it. Thank you.
spk06: And your next question comes from the line of Nate Svensson with Doce Bank. Your line is open.
spk04: Hi, thanks for the question. I just wanted to ask on corporate payments and the outlook for the full year. So I think previously you had talked about both revenue growth and volume growth being in the high single digits. Obviously sounds like that's coming down. So just wanted to clarify The revenue guide's coming down by 50 million. Sounds like vast majority of that is in corporate payments. So just wanted to clarify the math there. And then any nuances or updates on the cadence through the year? I think Jagpar on the last call, you talked about year-over-year growth decelerating through the year. So I just wanted to see if there's any updates to the thinking there.
spk14: Yeah. So I would say, you know, beginning of the year, we got into high single digits growth. I'd say corporate payments Now we're expecting low single digits growth with this guidance change. I think in response to your question, it might be useful for me to dive into a little bit more detail in the guidance change. Let me start with what isn't changing in the guidance, right? So our benefits business continues to track to the growth rates we expected that we got to at the beginning of the year, that business is doing well. Mobility, as we expected, accelerated in Q2, and it's doing exactly what we expected, and we've got it too. Likewise, I would say in Q2, the non-travel portion of our corporate payments business, we also saw revenue acceleration, and so we're quite pleased with that business as well. So really where we're making the guidance change is called the 10% to 15% of the company revenue that's on the travel business. So I want to point out that the travel, the guidance change isn't related to any customer attrition. We continue to have good relationships with our customers and find value in our solutions. So really where the guidance change is, one, we saw a slight impact from the bookings announcement we made last quarter. The transition is going well, as I said earlier. But it's going a little bit faster than we expected. That's had some impact to our expectations for the year. I'd say that's about a $5 million impact in the overall guidance change. The next piece is the large customers that Melissa talked about. What we're really seeing there is the timing impacts. So we saw the benefit of that in the first half of the year and expect some deceleration from them in the second half of the year. And then it's the smaller OTAs where we're seeing softness. Part of the softness, I think Melissa mentioned, is related to the virtual card acceptance, especially among certain airlines, predominantly in Europe. But we're also seeing overall volume growth outside of the airlines with these smaller boutiques that come in lower than our expectations. So we expect that to continue for the balance of the year. And then finally, that flows into our incentive fee recognition program. So we're seeing some softness, but we remain confident in our relationships with the customers.
spk04: and so overall you know we're as i said earlier about two percent this year is what we're expecting for for uh for growth those single digits that is great color i appreciate all the detail there um another one kind of on the outlook for the rest of the year so it's nice to see another quarter of solid operating margin expansion and you talked about sort of the cost saving efficiencies that you've realized being sort of ahead to plan year to date so just wondering on your thoughts on your ability to continue expanding margins in the back half of this year, just particularly given that you're lapping some really strong margin expansion from the back half of 2020, sorry, 2023. So anything we should keep in mind for our models with regards to the cadence or the magnitude of margin expansion in the back half? Thank you.
spk14: Yeah, I would say we continue to focus on cost containment, I'd call it. So, you know, we are, we're at a roughly $106 million run rate on the cost savings initiative exiting Q2, we think we'll add, you know, on the order of another $10 million on that run rate as we go through the year. So that'll add incrementally to margins as we go through the year.
spk07: One of the things that we said in the last call is that we had front-loaded some of the reinvestment, and so that's why you're seeing more pickup in the second half of the year.
spk12: Thanks, appreciate the call.
spk06: And your next question comes from the line of Nick Cremo with UBS. Your line is open.
spk02: Good morning. Thank you for taking my questions. First, I just wanted to follow up on the benefit segment. Could you just provide what your expectations are for SAS account growth for the next two quarters that's embedded in the 10 to 15% 2024 Segment Revenue Guide, rates aside? And then does that give you line of sight for this business to reaccelerate back into the longer term target range of 15 to 20% in 2025? Thank you.
spk07: We talked about the fact that we had 8% HSA growth in the quarter. As you go through the course of the year, we will continue through our sales cycles. A lot of the implementations happen at the beginning of next year. Typically, the very end of this year is when you start to see more of a surge from a growth perspective. Right now, what we're doing is more lining up the business in order to get prepared for the enrollment season and next year. When we think about the business, what we want to make sure that we're doing is that we're signing more than our fair share in terms of customers. We will get a benefit of the custodial accounts, which is a relatively new source of revenue for us. We now also are getting the benefit of some of the compliance tools that we picked up with the census. You saw that that actually comes through more in the first quarter. It's a little bit lumpy when that comes through, so it accelerates growth in the first quarter in particular. And so we feel like we actually have a lot of tools right now. to continue to build upon this business and to make sure that we're outgrowing the market.
spk14: And in terms of SAS account growth, we're expecting a slight acceleration as we go through the year. We did about, before the Medicare Advantage item, we did about 3% SAS account growth in Q2. And we're expecting, call it, mid single digits in the second half.
spk02: Got it. Thanks for all the additional color. And then for my follow up on the corporate payment segment, focusing on the non travel portion, it was great to see the yield improve 11 basis points sequentially and much stronger than expected. You could just provide details on what drove the improvement. And if that should be kind of like the new baseline rate for this segment. And then also, we just noticed that the volume on the non travel side appear to be down about. high single digits quarter over quarter. So curious what was going on there. Thank you.
spk14: Yeah, so the rate and the volume is actually the same item, which was related to a little bit of mix. We have a particularly large customer that's at a low rate that processed a little bit less in the second half, expecting to do more later in the year. But that mix effect helped the rate in the second quarter. When we look at the back half of the year, overall, we're expecting our take rates to roughly match the first half of the year, be roughly flat. There'll be some timing. Q3 will be a little lower. Q4 will be a little higher. But overall, on average, we expect about the same second half that we did first half.
spk07: One of the things that were in that mix that we were particularly proud of is the direct segment. Jack Tarr talked about the fact that we've continued to build into that sales force and it has continued to deliver. We had 25% growth year over year in the quarter in that part of the business.
spk11: It's a place that we're going to continue to build into.
spk13: Great to see the continued progress on the direct side of the business. Thank you.
spk06: And your next question comes from the line of Andrew Bowell with Wells Fargo. Please go ahead.
spk03: Hey, thanks for taking the question. Nice to see the the cost savings plan get into place. And you talked about reinvesting half of that back in the business, things like commercial team tech upgrades. But maybe you could put a finer point on is this? Are these reinvestment segment directed? How do you kind of anticipate the commercial team starting to contribute to growth and anything else you can provide in that reinvestment strategy?
spk07: So when we look at those categories, as we're going through and thinking about where we want to allocate our reinvestment, we're looking across the company at places that we think are going to drive the highest return. Jack Tire and his team have done a great job working with the rest of the business. And so it's really spread throughout. It's not directed in any one particular area. We have been focused in marketing with the marketing engine with our mobility business. We've been ramping sales within corporate payments. And so it's kind of really spread across.
spk14: Likewise, at the tech side, it's really spread across all three lines of business as well in terms of investments we're making.
spk03: Got it. And then after this buyback, maybe we can just get a refresh on your capital allocation strategy. And how are you thinking about the longer-term structure, maybe a little bit more in detail?
spk07: I wouldn't say that anything has really changed. When we think about capital allocation, we care deeply about organic growth. And so that's the first place that we spend quite a bit of time and thought. And we have been ramping both our tech and product teams over the last couple of years. It's a place that we think is really important to the long-term growth of the company. We still have in our framework 2% to 3% growth from M&A. And then opportunistically, we're going to buy back stock. And we are very bullish on the long term of the company and feel like that is not represented in our stock price. And so we've been really aggressive about share buyback. We bought back $174 million at the first part of the year and then another $70 million in in July, and now on top of that, we're talking about this $300 billion accelerated repurchase program. And so it's just a place that we feel provides a good return for our shareholders and just shows the confidence we have in our ability to continue to grow the company.
spk05: Great. Thanks for the update, Melissa.
spk06: And your next question comes from the line of Ramsey Ellisall with Barclays. Your line is open.
spk01: Hi. Thanks for taking my question. I wanted to ask about a comment that you made, Melissa, in the prepared remarks around near adjacencies and mobility. And I know PACER sounds like you're executing on that very well. Maybe you could elaborate that a little bit for us. And are you seeing other similar opportunities? I know that's sort of field services. Are there other adjacencies that we could expect you to kind of move into?
spk07: Yeah, we're thinking about this in two different ways. First are the things that our customers very naturally need. So we've launched a product into the marketplace for our North American fleet customers that allows expanded acceptance so that they can buy other things that are generally maintenance-related for their vehicles, but just expanding their ability to purchase in a controlled manner. EV, I would put in that same category. We've got this migration that's going into a mixed fleet environment, and so we've extended products in that area. The 10-4 product that I talked about on the call, it's thinking about the over-the-road customer in a segment that we're not participating in now, which are owner-offers, the really small segment of the marketplace that have more credit constraints associated with that, but having offerings to that customer set that draws them in to start using our products. And as they get bigger, then they can advance into some of the existing products that we have now. And so we're looking across the portfolio at customer needs that we feel like are unmet and places that we feel like we can actually build out the offerings in order to provide even more value to our customers. And then I would say Pacer's kind of a step beyond that where we're looking at a place where we can even more deeply expand vertical capability within our customer segment. And so that, for me, is a little bit more of a test. And we continue to learn as we go through that process, whereas the real near adjacencies are clear customer-driven needs.
spk01: Okay. And my follow-up is on electric vehicles. And the 50,000 vehicle pipeline you mentioned, was a larger number than I anticipated. So I guess the question there is, what is the size of the pipeline relative to this number of electric vehicles that are in your fleet today? Sort of what's there today? How fast do you convert the 50? And are they incremental vehicles or do you see this more as like sort of a swap out, you know, fossil fuel for electric?
spk07: So we have hundreds now. It is significantly larger. than the existing customer segment that we have right now. They're using the products. The way that I think about this, I think that the news is people are hearing consumer demand dwindle. It has had very little impact of our experience here. From a commercial perspective, the places that we've seen demand are government fleets, very largest fleets that have ESG commitments that they've made into the marketplace. And then there's a bunch of others that are testing because they really want to understand the total cost of ownership. They believe that this is going to happen. It's just a question of timing. And so they want to get better educated across that. And with the government police in particular, we do business with the federal government, but also over half of the states in the United States. So we have a very close relationship and are in a position to help them through this migration. And they're going to be on the leading side of that. It is a pretty big ramp, and we've said all along that we don't know when this is going to happen, but we know that we need to be very well positioned for when it does, and we feel like that's where we are right now.
spk12: Perfect. Thank you.
spk06: And the next question comes from the line of Sanjay Sakrini. Your line is open.
spk15: Thank you. I want to drill down a little bit more on the weakness in travel and just the sensitivities. I guess this weakness on the smaller OTAs, what's the risk it trickles up? Is there any relation in that? And then what are you guys assuming for the second half? Where is there risk to whatever your assumption is?
spk07: Why don't I start? So two-thirds of the revenue in our travel segment, and again, Jack Torres said the travel part of our business is between, it was 12% in the second quarter. It's a relatively small part of the business. But two-thirds of that revenue is comprised of the smaller online travel agencies. And if you look in the mix of that customer base, what you're seeing is airline spend was negative 7%. in the second quarter. So you saw this really deceleration that's been happening specifically with airline, which is in part because of acceptance issues and in part because there just is more softness right now. It's normalizing. And then if you look across the rest of the portfolio, I would say it's growing at a normal market rate. And so when we think about the business long term, we think about the fact that we do business with hundreds of online travel agencies. We represent what's happening across the marketplace, and so we should return spend volumes on an annual basis to a normal market rate trend. And so we feel pretty confident in how this will play out over time. The anomalies that we're seeing with the small online travel agencies in air is not represented and it's not what we're doing with the larger travel agencies. Almost all hotels spend that we're doing with the larger travel agencies. So that airline issue, we don't think will bleed through. It actually shouldn't bleed through.
spk14: Sanjay, in terms of assumptions, you know, we've factored in kind of what we know today and we feel pretty good about, right? So if I look at what we've assumed for volumes in the second half, right, inclusive of kind of booking volumes as well that are transitioning to the new model, but total volumes of travel. We're expecting to be flat in the second half to last year because of the weakness we're seeing as well as kind of the timing considerations on the larger OTAs. So, you know, flat, you know, if you look at the same point last year, volumes were growing in the 40% range. So this is, you know, this is a, you know, a moderation in travel volume growth. So we feel like we've taken kind of a very, you know, realistic approach here. And then outside of travel, non-travel, you know, we're kind of expecting a continuation of the trends that we saw in the first half and the latest quarter. So we feel really good about that.
spk15: Okay. Follow-up question, Jaktar, on the interest. rate sensitivity. I mean, they're talking about lower rates. I'm just curious how that factors in for you guys on a go-forward basis. You talked about sort of stability or being well hedged in the health, on the healthcare side, just, you know, just broadly speaking. And then I think I heard you mention the interest rate escalators. How do those work when rates decline?
spk14: Yeah. So, you know, roughly the way I think about it is a hundred basis points changed in rates flows through our P&L at about $35 million on the revenue side. About half of that, call it $15 million-ish, would be on the mobility segment. So every 100 basis point change would be called a $15 million impact mobility.
spk12: Okay. Great. Thank you. Yep.
spk06: And the next question comes from the line of Mahir Bhatia with Bank of America. Your line is open.
spk10: Good morning. Thanks for taking my question. I wanted to start a little bit with the expense leverage in the business, obviously just executed on your $100 million cost-saving initiative. But I was curious, as you get a little bit slower, top line here this quarter with the corporate payments guide down, how should we think about expense reductions? Would you need to do additional ones to maintain margin, or is this just, you think, very temporary and nothing needs to be done?
spk11: So are you referring to the guides, what we actually have in the guide, or beyond that?
spk10: Well, both, I guess. I'm trying to understand, one, the expense leverage in the business, and secondly, are you assuming incremental expense actions in the back half?
spk07: So the way that we're thinking about cost structure is a couple ways. We have a long-term growth algorithm, and so because we grow, it's a little bit easier in a way to manage costs because you can actually just make sure that you're scaling up costs appropriately. And so we feel very confident long-term, our ability to continue to scale depending on what's happening from a growth perspective. We've also... I think of it as a flywheel. There's a couple of flywheels that are going right now. There's a flywheel around cost savings, which have been driven across the company, looking at places that we can use technology in order to create efficiencies. I don't see that that's going to stop. That level of discipline is something we want to continue to do. And then the second flywheel for us is AI, which we feel like we've seen meaningful results from that already. And it's a lever that we're continuing to lean into because we think that that has an ability to also continue to significantly alter cost structure. And so those are places that when I think about this at more of a strategic level that we are continuing to emphasize going forward.
spk14: I'll just add sort of specific to the guide on a very tactical level. We baked in cost savings in the second half of the year, just pulling levers on headcount growth, vendor spend, the like, to the tune of about $10 to $15 million. So that was a direct response to the weakness we saw in travel. We looked at what cost levers we could pull. But over the long term, I think our cost actions would be at the more strategic level than Melissa talked about.
spk10: Okay. No, that's helpful. Maybe just switching, I wanted to go back to the question around capital allocation, maybe specifically on M&A. What does the pipeline look like right now? Are there particular businesses or like in segments, I assume benefits, corporate payments, is that where we should be, where you're thinking about more for M&A? Or is it I guess maybe you tell us. How are you thinking about just M&A right now?
spk07: Yeah, the pipeline continues to be across the portfolio. We've been less likely to do scale plays, which we have done historically. And we've been using that money more for share buyback. But in terms of geographic expansion, product expansion, smaller scale plays, those are places that we you know, continue to be interested and, you know, continue to work through our pipelines as well. So I feel like we're in a maturing, you know, cycle right now where, you know, multiples are starting to make a little bit more sense in the marketplace. And we've been really, you know, pretty thoughtful about making sure that we're maintaining financial discipline too.
spk12: Okay. Thanks for taking my questions.
spk06: And I will now turn the call back over to Steve Elder.
spk09: Thank you, Kayla. Just wanted to thank everyone once again for joining us this quarter, and we'll look forward to speaking with you again at the end of the third quarter.
spk06: And this concludes today's conference call. You may now disconnect.
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