Good day, and thank you for standing by. Welcome to the WEX Q1 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Steve Elder, Vice President of Investor Relations. Please go ahead.

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 8-Ks we submitted to the SEC. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income attributable to shareholders, which we refer to as adjusted net income, or ANI, during our call. Adjustments for this year's first quarter to arrive at this metric include unrealized gains on financial instruments, net foreign currency remeasurement losses, acquisition-related intangible amortization, other acquisition and divestiture-related items, stock-based compensation, other costs, debt restructuring and debt issuance cost amortization, ANI adjustments attributable to noncontrolling 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, 2020, and filed with the SEC on March 1, 2021, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligation 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. Today, we reported first quarter 2021 results. We continue to drive strong momentum sequentially across both revenue and earnings due to the continued hard work and diligent execution of our team members, underpinned by strengthening volumes and new customer wins and renewals across the business and the scale of our model. Revenue for the quarter came in at $411 million and adjusted net income was $1.79 per diluted share. Overall, we processed $16.8 billion of purchase volume across the organization during the quarter, driven by notable sequential improvement across all business areas. These strong volumes reflect a number of exciting new wins and renewals as well as a robust pipeline of opportunities that give me confidence in our ability to continue to drive market share gains throughout the year. As you know, this quarter marks a full year since the onset of the global COVID-19 pandemic. Though 2020 was full of unprecedented challenges and headwinds, some of which we are still navigating today, it was also an opportunity for WEX to prove our resilience and unwavering commitment to our customers, partners and innovation. On top of this, we took the opportunity to refresh our strategy last year in order to better position WEX for the opportunities we see emerging. In the first quarter of 2021, we cultivated and grew our dynamic customer base across our various segments. As a reminder, our revenue is largely recurring in nature. And as we add new volume and our existing customer base recovers, we expect to capture the related growth. This is illustrated in the robust sequential performance in fleet, corporate payments and health. In our travel business, we remain focused on the integration of Optal and eNett and effectively positioning the business for…

Thank you, Melissa, and good morning, everyone. We entered 2021 well positioned and we continue to execute the refined strategic pillars. Although the pandemic remains present, we believe we are taking the right steps as the markets continue to recover. This will set up WEX for long-term sustainable growth. We signed new business across all segments, drove innovation across WEX technology platforms, expanded the U.S. Health business with 2 acquisitions and purchased the remaining 25% ownership of the European ExxonMobil joint venture. The results this quarter speak for themselves in the context of the new environment we are in, which reflects the strength and diversification of our business. Let's start with a look at the quarter results on Slide number 10. For the first quarter, total revenue exceeded the high end of our expectations. mainly due to higher fuel prices in the U.S. market. Total revenue came in at $410.8 million, a 5% decrease versus Q1 2020. Sequentially though, revenue was up 3%, primarily driven by the Fleet and Health segment. From an earnings perspective, GAAP net loss attributable to shareholders was $2.6 million. Non-GAAP adjusted net income was $81.3 million or $1.79 per diluted share. On a positive note, adjusted net income was up 25% versus Q4 2020, driven by higher revenue and fuel prices, partially offset by the results of eNett and Optal. Turning to Slide number 11. I'm breaking down the revenue by segment. Fleet declined 2%, Travel and Corporate Solutions posted a 16% decrease and, finally, the Health and Employee Benefit Solutions was down 1%. Now let's move to segment results, starting with Fleet on Slide number 12. Total Fleet Solutions revenue for the quarter was $243.8 million, a 2% decline versus prior year. We saw good momentum with new customers and renewals that were offset…

[Operator Instructions] Your first question comes from the line of Tim Willi with Wells Fargo.

Two questions. I apologize if this was addressed earlier, I was jumping between calls. But could you talk a little bit, I guess, about the transportation market? We hear a lot about supply chains and labor issues, and I know that things are improving. I'm just curious if your gut feel is that if those types of issues can get solved, that there's even sort of another sort of step-up, I guess, around activity and the velocity around fueling transactions in transportation in the commercial sector.

I can, [indiscernible]. So did you have another question?

Well, no, I'll get you the other one after that, but let's just go with that one first.

Okay. I mean there definitely has been a lot of change in our customer behaviors in that part of the marketplace with the over-the-road customers. I talked a little bit about on the call some of the products that we've developed as a result of those changes. Spend this movement more around delivering for the last mile. There's been concerns around staffing and certainly, all of that have played out in the marketplace. And one other thing I'd say is if you look across that portfolio through the pandemic, the larger-sized over-the-road fleets have outperformed the smaller businesses. And so there's been quite a bit of change in behavior with that customer set. I think like lots of parts of the economy right now, they are struggling with labor. Not hearing that is something that they're concerned about in terms of ability to have less ability right now to meet customer demand in aggregate. It just kind of shifts the volume around from one customer to another. So I wouldn't say that that's a trend that we think is going to play into a change in overall volume. It just changes between the customers that are fueling.

Okay. And then my follow-up is around B2B and the partnership with Avid, who I think most people recognize is also working with your competitor. And I guess, just sort of thinking about that partnership and anything that points to about how that came about and winning that business and sort of the go-to-market and just how you're sort of feeling competitively about sort of being that preferred partner, I guess, around helping other people sort of accomplish their stand-alone business goals, if you will.

Yes. We feel great about it. It's one of the hallmarks of WEX and our go-to-market approach in the past has been the fact that we do business with some really great partners and we also go into the marketplace directly. And the relationship with Avid are, obviously, we're really excited about that. They're great brand, will be a great partner. We're going to work as the issuer, the processor and virtual card provider. And part of the -- what we feel is compelling that we've brought into the marketplace is the ability to bridge all of the pieces together and to do it with modern technology. The process and capability that we have that we developed -- we really developed primarily first in-house, and we did it to make sure that we were scaling the cost structure across our Corporate Payments and Travel business. But what we developed, which was cloud-based, highly reliable, is an important part of the proposition that we have in the marketplace right now. But it's just one component. And so as we are in the market talking to prospective customers and partners, it's really the breadth that we can combine the different pieces of what we're doing for maybe for one fintech or doing one individual component, but when you bring it all together, it's pretty compelling. And again, we're super excited about that. We -- I should mention that we expect revenue to ramp towards the second half of the year, so more in Q4. And it's going to take a little bit of time because you go through the implementation process.

Excellent.

Sorry, I was going to give you 2 additional data points on what Melissa was talking about on the over-the-road, which I think are important. Number one is our customer -- existing customer base or same-store sales were up 4%, 5%. And our volumes overall in the quarter were almost 16%. So I think those 2 data points are important for you to consider on the over-the-road.

Your next question comes from Rob Napoli with William Blair.

Thank you for the question. I guess, Melissa, I'd like to hear a little bit more about your tech investments and how -- it seems like -- I mean, obviously, there's a lot of going on in the fintech market with -- I mean, AvidXchange, but It almost seems like hundreds and sometimes new players. And those new players start out with fresh tech stacks. And I think it's sometimes harder for incumbents to adjust their technology to have the same -- to be able to compete on technology. But WEX has been investing. So I'd just like to hear a little color on how you feel about the tech stack at WEX versus some of the newer start-ups that maybe have fresher tech stacks and how much -- what investment you need to continue to make competitively. And I'll leave it there.

Sure. Thanks, Rob. I talk about technology a lot because it's an important part of why we're winning in the marketplace. And to your point, if we hadn't started our migration years ago, I would feel differently. I feel really good about where we are because several years ago, we really looked at ourselves and said, even though we're competing and winning now on technology, the environment around us is going to change. We want to make sure that we can play in the new evolving environment. And we started the cloud migration. I've talked a lot about that. That was foundational for us and our ability to grow faster. And then on top of that, what we've been doing is building cloud first. And as we are adding new components into the business, we're doing it in a modular way. And now as we're looking across WEX for combining functionality and exposing it through APIs, which allows us to really take again the breadth of the offerings we have and presented it in a very modern way into the marketplace. And so I feel really good about the path on technology advancements we've made, the ones that we'll make going forward. I talked last quarter about -- adding into that, the work that we're doing on artificial intelligence going forward the data lake, just the data sets that we have across WEX, we believe is also a competitive advantage. So just a lot on our tech strategy and I feel really strongly about how far we've come and how much opportunity that creates for us in the future. I'm filing a number of examples of that in my prepared remarks.

And then just on the pipeline, you talked about a strong pipeline. Where are you seeing the strength? And can you give any -- like the sales year-over-year new business that you've added? So maybe some commentary on sales and the pipeline and where you're seeing strength in particular?

Yes. If you look at the activities we've had since the pandemic began, it's been really remarkable. We've seen an increase in application volume and throughput in our fleet business. You can see that presenting in the over-the-road business, and Roberto talked as an example about volume being up 15%, same-store sales are up 4%. So the rest of that is coming through organic growth that we're seeing in the business. So on Fleet, across all of Fleet, our pipelines are looking really good, specifically over-the-road, particularly strong, but strong across the entire Fleet business. And Health, I had said on the last call that we expected our Health business to show growth that would be back ended this year. And right now, we're seeing some of the headwinds of employers not adding as many employees. But as you progress through the year, what we have in our pipelines and what we're seeing for implementations, we feel very strong about that part of the business. And in corporate payments now that we -- I talked about AvidXchange, but we feel good about the pipeline development and what we brought into the market already this year.

Your next question comes from the line of Sanjay Sakhrani with KBW.

I wanted to drill down a little bit on the Health and Employee Benefit Solutions segment. Just looking at the volumes, they were weaker. Maybe Roberto, you could just speak to that. I know you're expecting pretty strong growth for the rest of the year. But could you maybe just bridge that for us?

The first thing is what Melissa just said, and we talked about that in the previous call a quarter ago that we were expecting the second half of the year to be stronger than the first half. But overall, our 8% to 12% growth for the full year remains intact. And we feel better now than we felt a quarter ago. The reality is the business is growing well. Our SaaS account growth was 7%. But on the purchase volume side, we were 7% down, which is going to start recovering as we get into Q2 because the comps, number one, are going to be better versus last year. But number two, we are seeing an improvement on the health care spending as we go into Q2. So those 2 pieces are going to help. And on top of that, we will have -- once we close the Benefit Express transaction, we should see also a boost on the revenue growth.

Yes. One thing I'd add to that as well is we do anticipate to see some pickup in our COBRA offering. And that is the reimbursement, federal reimbursement changes, which we've just announced start to play out. We think we're going to get a benefit on that as well.

Okay. And mostly, you talked about a number of -- obviously, you guys have done deals and a number of market share gains. Maybe you could just speak to how to think about the progression into the numbers as we move through this year and into next year? Like how material they will be as we move forward?

Sure. I mean I think actually, if you kind of step back and look, and I want to talk a little in a moment about just sequential improvement because I think that's important because there's 2 things that are playing out for us. One is what happens with our existing customer base. And then the second is what we're seeing for new sales. Since I've talked a lot about new sales is one of the things that we control the most, and we feel really strongly about that. But if you look at what's happened sequentially In Q2 last year, we were down 21%. We were down 17% in Q3, 9% in Q4 and then 5% this quarter. So we've seen some really nice sequential improvement. Some of that is based on customer mobility patterns returning. And if you look at each of the segments, I'll talk about them for a minute, but on Fleet as an example, we've seen improvement sequentially. Over-the-road has certainly seen some benefit over the last year. But our North American fleet business, which is a larger part of the business, continues each quarter to look a little bit better this quarter. We saw a little bit more improvement with the construction trades. We saw a little bit more activity and education. And we expect that that's going to continue to play out gradually is what we've said. And that's because you've got activity, in that case, the smaller fleets -- smaller fleets, meaning smaller in size, have been really leading the activity. And I think that's because some of the larger companies were more quick to move to work-from-home environment and then limit the mobility where some of the smaller businesses continued. And so as you see larger businesses opening back up, we believe…

Sanjay, I will add one more thing to Melissa's numbers on the sequential improvement, which is we have not provided formal guidance, but we have given some numbers for the second quarter, and we just put out there 5% to 7% revenue sequential improvement growth. So we had 4 good quarters already of sequential improvement, we're expecting a quarter coming also with a very good growth.

Next question comes from the line of Ramsey El-Assal with Barclays.

Melissa and Roberto, there are a handful of factors that you called out driving your Fleet Solutions revenue yield down this quarter, which I get. But how should we think about that kind of going forward trending into the second quarter and then through the year?

So I will start and Melissa will chime in for sure. What I would say to you is, as I just said, we expect sequential improvement to continue, both in volume and growth on the fleet side. I think we are going to continue seeing better credit losses than we had last year. But at the same time, remember that on the late fee side, there's always a correlation between late fees and credit losses. And the third thing I would say to you is what Melissa just mentioned, I mean, we are having a lot of new customer wins and all of that is being reflected on the sequential growth that we have gone for the last 4 quarters and that we are expecting to have in Q2, too. Other than -- or going forward not from the second quarter is difficult to predict. But if things continue the pace that we are seeing, we're going to continue seeing that beyond the second quarter this year.

Yes. And actually just to put a finer point on that. Roberto talked about the correlation between late fees and credit loss. Year-over-year, if you look in terms of basis points, we're down $10 million in revenue specifically for late fees.

Yes. In Q1, late fees are down $10 million. And obviously, we get the offset non-free credit losses that are in Q1, $15 million down. But it was a material impact in Q1 for us. So total fleet revenue was down 2%. But $5 million, $10 million on late fees is approximately 4 points of growth.

And as that plays out, you're seeing this mix change in the over-the-road business, you're mixing to these larger over-the-road fleet, which has less credit loss associated with that. More timely payment, less late fees. And across the portfolio, it's because of the stimulus money, we believe, you're seeing this more timely payment. So again, we've talked about the credit loss favorability. But just to point out, there's an impact on late fees as well.

Okay. Thanks for the comprehensive answer. I have a -- the next question I have is on the travel payments business. And you mentioned a couple of things in your prepared remarks. One was that you -- in the context of integrating [indiscernible] you retired some noncore offerings. And then the second thing was that you -- there was a little bit of a headwind on that take rate from rate changes for your travel-related customers. I guess from the first of those items, is there any reason for us to think about modeling differently in terms of having retired some parts of the business? And then second, is there any -- how should we think going forward about the permanence of the rate changes you've made for travel-related customers, is that something that would have an impact on the translation of volumes of revenues -- volumes to revenues going forward?

Yes. Let me start on this one. And I actually, I think, just to take a step back for a moment. The reason why we liked the combination of eNett, Optal and WEX was the fact that we saw a really compelling joint product offering in the marketplace and the ability to scale on a global basis. We like the footprint that the assets had that they brought together. The noncore offerings were immaterial to revenue, but part of how we increased the synergy number associated with the integration. So I don't think that's going to have an impact on how you model that. If we look at the whole -- that whole part of our business, over the last several years, we've been really focused on in-sourcing the technology. And so when we brought in -- a number of years ago, we bought a company called ANC [ph] that allowed us to in-source and upgrade the technology. We wanted to take control over it for a couple of reasons. One, we wanted to make sure that it had the performance standards that we were looking for. But then secondly, we wanted the scale of that. And we really thought about that in the context of travel marketplace. There's a lot of concentration within that customer base, but it's also the platform that we're using within our broader corporate payments group. So we did work on that front. We created this in-house system, migrated all of our volume onto our internal processing system, which again increased scalability for us but also increased performance capability and our overall capability, which has been -- what we've been looking at is doing both. And then we've done and continue to do a lot of work with the networks. So all of those things are playing out as well into the marketplace. And Roberto can talk, I guess, as we look at this business, it's been with an eye towards it. That's hurt us. So you can see that in the margin that we reported during the quarter as volume is lower. But as revenue returns, that's something that we think is going to benefit us. We also have identified an increase in the number of synergy in eNett and Optal acquisition, and that's different environment than what we had intended when we first put an offer on this business and we've been really focused on the best of the products to our customer set, but also increase the scalability of this business.

Melissa said a lot, I will just summarize. Number 1 are the synergies, as Melissa just mentioned, and we have been very clear. I mean, we are in a very good position. We are, I would say, ahead of our plan with over $20 million expected for the year on run rate synergies. So this is really good. The second thing I would say to you is on the rate. As Melissa said, we have been working with the customers through the pandemic, and this has happened now since [indiscernible] But at the same time, we have been working with the network. So as we go into the future, you should see The rates probably will stay very stable. But obviously, it will depend on when you get the customer impact and when you get the network benefit. So -- but overall, we feel positive on the rate going forward within the travel customers. And the final thing I would say to you, and Melissa mentioned that as well, as the volumes recover, we are going to see a significant improvement on the margin because of everything we have done to move everything in-house. We have fixed cost, which obviously as the volume recovers, is going to fall not to the bottom line very nicely.

Your next question comes from the line of James Basset [ph] with Morgan Stanley.

Just a couple of quick questions from me, and I'll put them to you both upfront. First, I guess from a strategic perspective, you -- WEX has always been an active acquirer of assets. And clearly, that's continued. But I'm wondering how you're feeling about the current environment, just, a, given valuations and, b, just the total amount of capital that is available to a lot of private companies, et cetera? And how, if at all, that's impacting your acquisition strategy, types of assets you're looking at, what you're willing to pay, et cetera? And then my second question is just on this point around, I guess, people being able to pay their bills better, et cetera, because of availability of stimulus and the like. How are you thinking about how that may evolve going forward? Are you seeing any early indications that we may be returning to a more normalized environment or not yet? Just digging a little bit about that for planning purposes.

Sure. So on the first one, on the valuations, I'll talk about that and Robert, eager to talk about your second question. On valuations, the way that we think about M&A is we have a very disciplined process that we go through. We go into the marketplace based on a strategic set of assets that we've identified and we're pretty patient. Some of these processes take a long period of time for them to come to fruition. But it has to meet our financial criteria as well as our strategic criteria. And so with an example like Benefit Express, we've been interested in [indiscernible], but we've been really quite patient around waiting for the one that fits the criteria for us. And I'd add to that, we've also increased our capacity and our capability for building in-house. And we've done that really as we've advanced our technology capability, but also intentionally because in some markets, as you're mentioning, the multiples are at a price that we think it's going to be better for us to build than to buy. And we're open to doing both, and we have a history bell. So aware of the fact that in some places specifically, you've got higher multiples, I think that, that's going to stay for a period of time. And we just handled that by being really diligent and thoughtful around what acquisitions we ultimately acquire. And then more recently, ramping up our ability to build. And Roberto, do you want to talk about credit?

On the credit loss side and on the late fees, what we can tell you is it's difficult and challenging to predict what is going to happen in the next few quarters, but I can give you a couple of data points. So what we are seeing even in April is a continuation of what we have been seeing in -- very low credit losses and lower late fees. The second thing I can tell you is that when the stimulus money came back in Q3 last year and what happened recently, they have had a similar pattern. So a couple of months, 3 months after the stimulus money, we saw a small tick on late fees and a small increase on credit losses. So I would say to you that most probably for the next 3 to 6 months, we are going to be in the same dynamics. But eventually, as things get back to normal, we should see late fees increasing and credit losses getting more to normal levels. But for the short term, I would say that probably they will stay in a similar pattern downward, what they have been in the last 3 quarters

George, your line is open.

Great. Just a couple of questions, guys. I guess, firstly, going back to the rate as it relates to travel. Just want to make sure I'm thinking about that correctly. How much of that really is mix, maybe domestic rooms, for example, versus more international travel and the like? Is that something that has more of global travel starts to come back that we should see a bit of a move in the rate, or is that not the case?

So I will start and Melissa may chime in. The rating travel, so our travel and corporate payments, net interchange rate, obviously, has 2 components, the travel side and the corporate payments. The travel rate is lower than the overall by quite a lot. But if you think about the rate within travel on domestic or international, the rate is quite similar. So when we work with our customers, we work with them on an overall rate. And I don't think that you are going to see a big difference between rate coming from one place or coming from another. It's most on how the volume in the travel is coming back.

One thing I would add, a lot of our volume is cross-border, and that's really a product of the complexity that we can handle. We can settle and issue in many different currencies. And that's a competitive advantage for us, but it leads us to get the volume that tends to be more cross-border and a little bit more complicated by nature. And as I say that, there aren't cross-border fees though that we charge our customers embedded in that product set. So it doesn't really matter from a monetary perspective like you might see in some other industries.

Got you. Okay. And then just shifting gears a little bit to Fleet. I'm not sure if I missed it, but did you guys gave sort of the same first sales metric for North American fleet? And maybe you can just kind of update us as to what the revenue percent breakdown is now from North American -- North American fleet versus over-the-road. I know over the road has come up, but North America is obviously still overwhelmingly the majority.

Yes. You had two questions. One was the split between North American fleet to the total fleet. And secondly, same-store sales. And same-store sales was -- North American fleet was down about 13%, over-the-road was up 4%. And sequentially, that was an improvement in the biggest categories that improved, although they're still negative, is construction, education and finance and insurance.

Yes. And the breakdown on the fleet revenue. So over-the-road, it's just over 30% and North American fleet is around 55% of the overall quarter revenue in fleet.

Ladies and gentlemen, we've reached the allotted time for Q&A today. And with that being said, I'll turn the call back over to management for closing remarks.

Just real quick. This is Steve. Thank you all for joining us this morning, and we look forward to chatting with you over the next few months.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.