WEX Inc. common stock

ladies and gentlemen thank you for standing by my name is krista and i will be your conference operator today at this time i would like to welcome everyone to wex incorporated third quarter 2024 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 during this time simply press star followed by the number one on your telephone keypad And if you would like to withdraw that question, again, press star 1. Thank you. I will now like to turn the conference over to Steve Adler, Senior Vice President, Investor Relations. You may begin.

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, 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.

Thank you, Steve, and good morning, everyone. We appreciate you joining us today. I'd like to start with a quick financial overview of results, which Jack Tarver will discuss in more detail, and then I will turn to our approach to growing the business and progressing against our ambitions. We continue to deliver growth and strong profitability in the third quarter, driven by healthy sales, high customer retention, and expanding margins. We've also leveraged our strong cash flow generation to deliver on our disciplined capital allocation strategy, including $544 million spent on share repurchases through the end of the third quarter. For the third quarter, revenue came in at $665 million, a 2% increase compared to the same period last year, An adjusted net income per diluted share was $4.35, a 7% increase compared to the prior year quarter. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, Q3 revenue and adjusted EPS growth would have been 5% and 14% respectively. While we maintained a momentum in delivering revenue growth, strong profitability, and thoughtful capital allocations, our results did fall short of our expectations, primarily driven by two factors that occurred within our mobility segment. The largest impact was macro-related. The substantial decline in fuel prices this quarter paired with some broader softness in same-store sales. In addition, isolated operational issues were identified while optimizing our pricing structure, resulting in an unplanned charge that impacted this quarter. Even with some headwinds this quarter, the mobility segment delivered underlying revenue growth of 8% compared to last year, excluding the impact of lower fuel prices and foreign exchange rates. This is higher than the growth rate in Q2. While confident in our growth over the long term, we are reducing our outlook for the remainder of 2024 to reflect our Q3 results and the anticipation of an ongoing impact from lower fuel prices and softness in same-store sales, all of which Jagtar will discuss during his remarks. Let me turn now to the four things we focus on to drive growth in the business. The first three are the core pieces that drive top-line growth, new business sales, customer retention and management, and growth of our base business. The final piece is cost management and capital allocation, which allows us to turn incremental revenue dollars into higher earnings while also investing in the business. I will start by reviewing the top-line growth initiatives for each of our segments and then turn to cost management and capital allocation. From a new business perspective, I'm pleased that we've continued to generate new signings in the core business in line with our expectations. At the same time, we're investing in and driving a number of new initiatives that we expect will further enhance our growth profile going forward. Let me hit on some of these. In our mobility segment, we are focused on incremental investments in sales and marketing, especially digital marketing, to drive new signings. Through infrastructure investments that include enhanced analytics, we've improved our capabilities to allocate our sales and marketing investments to the highest yielding channels, which we expect will continue to drive results over time. In addition to these go-to-market investments, we're also investing to expand the book of offerings to our customers to increase share of wallet. That includes the acquisition of Pacer, but also new product offerings. To that end, I'd like to update you on our new mobile app, 10-4 by WEX. This offering is designed to serve independent over-the-road truckers who have historically been an untapped segment of the market for WEX. Because of our scale and expertise, we've long been able to negotiate and pass along significant fuel discounts to our customers. However, independent truckers who are traditionally unable to unlock these discounts because they could not qualify for credit. With 10-4 by WEX, we're excited to provide independent owner-operators in small companies with access to these discounts using their current debit or credit cards through the app. We're proud this will expand WEX's core offerings to this new segment. Additionally, we're making strong progress in EV and hybrid solutions as we address the needs of our mobility customers by supporting their transitions to mixed fleets. We believe that the transition to electric vehicles will take many years to play out and that we are well positioned to capitalize on it. During the quarter, we commissioned a report completed by Frost and Sullivan, which concluded that 80% of fleet managers interviewed globally intend for EVs to make up at least a quarter of their fleet by 2030. EVs are inherently more complex to operate today so we view this as a significant opportunity for WEX as the transition occurs. The public sector shows significant interest in adopting EV solutions, and we have more than two-thirds of U.S. states on our platform today using our traditional fleet card products. Since we spoke last quarter, we continue to see our solutions resonate in the market, and we are on track to hit our 2024 growth goals. I'd also be remiss if I didn't mention PASER. which we acquired late last year to gain access to our near adjacent markets and field service management. We're focused on scaling the pay-through sales efforts, along with cross-selling the product into our existing customer base. It remains on track to contribute 2% to the mobility segment revenue growth rate this year. Turning to our corporate payment segment, strategic investments have enabled us to offer scalable and efficient solutions that meet the complex demands of global businesses. To that end, we've signed several new and expanded relationships with customers during the quarter, including Artsel, who offers an accounts payable automation technology platform, among other products. We've also renewed our contracts with Webjet and WebBeds in Australia. We empower our customers with leading card product options, helping them unlock growth potential. In Q3, We expanded our offerings in the APAC region. We continue to add new product types globally, further building on what we believe is the widest range and variety of virtual cards. We believe this business is built for long-term growth, supported by industry-leading offerings and strong client relationships that open new opportunities and enhance our market position. In benefits, growth rates in the number of new accounts were consistent with past quarter and we are pleased with our line of sight into what we expect to be a healthy open enrollment season. Next, I'll discuss customer retention. For WEX, the customer is the center of everything we do, and we have enviable customer retention rates. To maintain and enhance this strength, we built a sophisticated approach to tracking and managing customer sentiment through a consistent quarterly NPS survey that incorporates customer feedback. The feedback we've received from customers from these surveys reflects the strength of our products and people, including remarks on our smooth onboarding process, fraud controls, easy to use platforms, and strong customer relationship management. The feedback also further informs our future product roadmaps and allows us to identify opportunities to improve the customer experience going forward. For example, as a result of customer input, we were able to enhance claims processing in our benefits business. We modernized the solution to reduce processing time while increasing information clarity and minimizing errors. Now turning to management and growth of our customer base, we look at this through the lens of both pricing and volume growth. Our goal is not only to retain our customer base, but also to focus on growing with our existing customers through both pricing and volume initiatives. This year, our results have been a bit mixed. In our mobility segment, we've seen a very positive impact from pricing initiatives we rolled out this year. While we were affected in the quarter by macro headwinds for sales, as I mentioned earlier, our strategy is working. We're retaining these customers, and as their mobility needs increase, we'll grow with them. For example, during Q3, the over-the-road industry continued to experience a lower volume of goods moved compared to last year, as reported by the Cask Freight Index. Even with this backdrop, we saw modest growth in payment processing gallon volumes in our over-the-road business year over year. We view our positive results as a bright spot relative to the overall over-the-road market. In our corporate payment segment, this was the first full quarter impacted by the transition of a large online travel agency customer to a new model, which has progressed largely in line with our expectations. This change is creating some short-term noise in this segment. The total transaction volumes processed on our platform, including those generating fees rather than interchange revenue, increased by 6% year over year. This volume growth highlights the strength of our offerings and reinforces our expectations for future growth once the transition period passes. As a reminder, we expect to continue seeing the impact of this transition over the next three to four quarters. Finally, in our benefits segment, according to the 2024 Devonier Mid-Year Report, WEX is the fifth largest HSA custodian in the market, and is a technology partner to seven of the list's top ten. We're encouraged by the strong contributions we're seeing from our referral partners to giving us further confidence in the upcoming open enrollment season. Longer term, we are actively involved in industry-wide efforts to educate consumers about the benefits of HSAs, including participation in National HSA Awareness Day on October 15th. Now I'd like to wrap up with cost management and capital allocation. As you know, last quarter we shared that we had realized annual run rate cost savings that exceeded our $100 million target. As of the end of the third quarter, we've now realized approximately $110 million in annual savings on a run rate basis. We've utilized about half of the realized savings to strategically reinvest in initiatives that drive long-term growth while simultaneously delivering enhanced profitability for our business. Disciplined capital allocation that includes investments in our business remains an important driver in achieving our long-term targets and is evaluated alongside accretive M&A and share repurchases. We're encouraged by the progress we've made against our artificial intelligence initiatives, which have started to positively impact key areas of our operations. enhancing efficiency and security across our platforms. AI is not just a tool for operational excellence, but a strategic opportunity that we believe will increasingly become a differentiator for us in the market. We are particularly excited about the application of AI to enhance the end user experience in our benefit segment. We recently began piloting our benefit assistance offering, an AI-powered resource that we believe will dramatically improve employees' understanding, selection, and use of their benefits. The ability of AI to process vast amounts of data means that benefit assistance will be able to provide easy to access, accurate, and personalized support to employees navigating the often complex process of choosing and assessing benefits. AI is positively impacting both productivity and scale, and ultimately reduces our cost to serve customers and employees. In addition, future product development around AI will enable us to retain and expand with existing customers as well as win new customers. Efforts like our benefit assistance and employee self-service AI tools are just two of many examples. Finally, to underscore our commitment to driving shareholder value, Our board recently increased its share repurchase program authorization by $1 billion, and we have brought our share count to the lowest level in nearly a decade. Since our share count was last below 40 million in 2016, revenue has grown more than 200%, and adjusted net income has increased nearly 450%. Together, this reflects our proactive capital management strategy It demonstrates our growth and profitability in a dynamic market. Our focus on share repurchases has reduced outstanding shares by 12% since the first quarter of 2022, further highlighting our commitment to enhancing returns and creating value for our stockholders. In closing, before I turn the call over to Jagtar, I want to reemphasize my confidence in the future trajectory of WEX. While we revised our guidance for the full year 2024, I believe we have the right initiatives in place throughout the organization to drive strong performance over the long term. Across the enterprise, we're focused on winning new business, retaining and growing our existing customers, and driving productivity in our cost structure. Underpinned by our solid balance sheet with low leverage, we will make the necessary investments in the business to position us for sustained growth while remaining committed to creating value to our shareholders. With that, I'll turn it over to Jagtar to walk you through this quarter's financial performance in more detail. Jagtar?