Ladies and gentlemen, thank you for standing by and welcome to the WEX fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Steve Elder. You may begin.

Thank you, operator. Good morning, everyone. With me today is Melissa Smith, our President and CEO; and our CFO, Roberto Simon. The press release, we issued earlier today 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-K 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. Adjustments for this year’s fourth quarter and full year to arrive at these metrics, include unrealized gains and losses on financial instruments, net foreign currency remeasurement gains and losses, acquisition-related intangible amortization, other acquisition and divestiture-related items, stock-based compensation, restructuring and other costs, debt restructuring, and debt issuance cost amortization, non-cash adjustments related to our tax receivable agreement and similar adjustments attributable to non-controlling interests and certain tax-related items as applicable. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis, as we are unable to predict certain elements that are included in reported GAAP results. Please see Exhibit 1 of the press release for an explanation and reconciliation of adjusted net income attributable to shareholders 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 filed with the SEC on March 18, 2019, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I’ll turn the call over to Melissa Smith.

Good morning everyone and thank you for joining us today. I'm pleased to report that we had a very strong end to the year and our performance this quarter kept another record year for WEX. We finished 2019 with strong momentum, highlighted by growth and effective execution in each of our business segments. Solid organic growth, combined with our recent strategic acquisitions, has further strengthened our foundation for sustainable growth and sets us up nicely as we entered 2020. Turning first to our quarterly performance on slide three. We delivered earning results at the top end of our guidance range for Q4. Revenue grew 15% to $440 million compared to last year, driven by another quarter of very strong growth in our Travel and Corporate Solutions and Health segments. Our revenue adjustment in the Fleet segment that did not impact earnings, which Roberto will discuss later, led to a 5% reduction in revenue growth. This adjustment reflects the difference between reported revenue and the top end of our previous guidance range. From a segment perspective, Fleet Solutions grew 3%, which included an 8% reduction in growth caused by the revenue adjustments, driven by volume growth, increased late fees and incremental revenue from EG fuel, partially offset by lower fuel prices, unfavorable FX headwinds and a softer market environment. Payment processing transactions were up 9%. Turning to Travel and Corporate Solutions. We close out the year with an impressive 23% increase in revenue during Q4, with purchase volume up more than $1.4 billion to $9.6 billion. We continue the strong momentum in our Corporate Payments segment which was boosted by meaningful contributions from Noventis. Finally, in our Health and Employee Benefit Solution segments, revenue was up an impressive 69% in the fourth quarter. This was driven by double-digit growth in our…

Thank you, Melissa and good morning everyone. Strong results for the fourth quarter and the full year 2019 highlight the momentum in the business. I will start my remarks with a review of the full year at the high level, then moving to the details of Q4 and finally onto 2020 guidance. Starting with the results for the full year. WEX outperformed their long-term revenue target and was solidly in the range on adjusting net income. When compared to 2018, revenue grew 15% and adjusted net income grew 12%. Fuel prices and FX rate had a $35 million negative impact on revenue and approximately $19 million impact on adjusted net income, with our significant revenue growth in each of the segments. For the year, Fleet revenue grew 6%, Travel and Corporate Solutions grew 21%, and Health and Employee Benefits grew 48%. Each of these growth rates met or exceeded the long-term organic growth targets outlined at Investor Day. We are very satisfied with these results. Now, let's move onto Q4 and the results on slide nine and 10. We got a strong revenue and adjusted net income growth, driven by another quarter of double-digit top line growth in the Travel and Healthcare segment. The 3% Fleet segment revenue growth will reflect a $20.9 million correction to revenue as Melissa previously mentioned, that reduced revenue growth by 8%. There was no impact to earning due to an equal reduction in the sales and marketing expenses. From an earnings point of view, we continue to benefit from revenue growth and the acquisitions made during the year. Overall, we are pleased with the fourth quarter performance on both top and bottom line results. For the fourth quarter of 2019, total revenue was $440 million, a 15% increase over the prior year. Non-GAAP adjusted…

[Operator Instructions] Your first question comes from the line of Sanjay Sakhrani from KBW. Your line is now open.

Thanks. Good morning. I wanted to dig in a little bit more into the Fuel segment and I appreciate the challenging macro backdrop. However, when we look at the deceleration same-store sales versus the desal in some of the transaction growth numbers, it seemed like the latter was a little bit more than the same-store sales. So, I was wondering if you could just help us think about that relationship going forward.

So, Sanjay, this is Melissa. You are talking about the growth, the 9% growth we saw in the quarter?

Right. Like year-over-year. Like that year-over-year growth rate decelerated a decent amount?

Yeah. So, we've talked about the last couple of quarters we've seen a slight deceleration in same-store sales. And so you can see that coming through -- about a half a percentage point from Q3 to Q4. So, it's incremental.

Yeah.

Yeah. So, a little bit over 3%. And same-store sales, degradation in Q4 compared to the prior year. If you look at the rest of what's happening across the business, there were changes in business days sequentially. So, you look at number of business days were in Q3 and number of businesses in Q4, we get a little bit of a benefit that in Q3, we're getting hit a little bit in that in Q4. But if you normalize that, there really isn't anything new to talk about that sitting in the base the business. The growth rate look similar, excluding what's happening for macro and what's happening with business days that are happening within those two quarters.

Okay. And I guess, when we think about that macro weakness, how much of is it -- of is it related to some of the trade stuff that we saw ahead of the virus news? And I guess, specific to the virus, I'm just wondering when we look at the eNett accretion numbers, do you feel like there's any risk to those given they have a little bit more Asia impact -- or exposure, sorry?

Yeah. And let me clarify -- that's good question. On same-store sales we're talking about North American fleet so there's our numbers are specific to the fleet portfolio and what we've seen for changes sequentially, it's led to the biggest impact is what's happening in the transportation segment. So that's got the biggest drag to us. If you look in Q4 sequentially, everything's a little bit worse. But slightly worse from period to period and the only thing that looks positive is public administration compared to all the other administration, so that's what's happening with same-store sales North American Fleet. And remember, if you look at the type of customers that we have in our North American Fleet business, they're across many different industries. They're setting in admin and mining and manufacturing, so many different season and it's an indicator really of what's happening where the businesses, because they are fueling where they need to fuel and they don't need to -- if they don't have deliveries to make or if they don't have service calls to make them and we don't see that coming through in our spend volume. I'm going to put that aside and say we've seen that -- I would say stabilize it's been slightly negative in Q3, a little bit worse in Q4, but in the ballpark they're looking pretty similar. And that's what we assumed would continue into 2020. And put that aside and talk about the coronavirus, it's just a totally different thing that is in our Fleet -- in our Travel business. This -- recall in our Travel business, most of our spend volume is in the United States. The second for us is Europe with a very little amount that's happening in Asia. In January, we didn't see an impact to…

Okay. Thank you.

Maybe Sanjay, what I will add this, to put some numbers for you what Melissa said, if you take our Travel business overall, and we do a bit more than $30 billion of spend. So for every percentage point on a full year basis, you are talking a couple of million dollars in revenue on a full year basis. So, it gives you a flavor now on what would be the impact. But as Melissa said, our volume today most of it is in North America.

Got it. Thanks.

Your next question comes from the line of Ramsey El-Assal from Barclays. Your line is now open.

Hi. Thanks for taking my question today. And forgive me if you addressed in your prepared remarks. I've been hopping between a couple calls. Can you give a little more color on the adjustment you made in the Fleet Solutions segment? What is it exactly? And that'll be helpful.

Yes. Of course -- this is Roberto. Let me explain it to you. The ASC 606 revenue standard that we adopted in January 2018, allow certain agreements with customers to be presented on a gross basis in the P&L. When you record the revenue on the top line, and then you -- the related commission you record it on the sales and marketing line, and then there are other arrangements that you only report the net amount, and we keep all in the revenue side with no amount in sales and marketing. So, as we were closing Q4 and we're doing our internal reviews, we identified certain partner arrangements where the accounting didn't properly reflect the economics. And as a result with P&L classification will reviews the revenue and the sales and marketing costs by approximately $21 million relative to the Q4 guidance. And then of these $21 million, approximately $14 million relate to the prior three quarters of 2019. And what I want to clarify as well is that there was no impact to operating income or net income on a GAAP basis or on ANI basis.

Okay. Thank you. That's helpful. And lastly -- and this is a quick two parter. The first is, any impact to call out from the recent press reports about an outage in EFS. It seemed pretty minor and transitory. But I thought it asked about it. And then and then the second part of the question is just on the EMV liability shift later in the year, can you just help us think through the impacts on your business, your most updated thinking in terms of where your fraud loss rates would go after the switch occurred was presumably is down or whether you could, you know, would it permit you to do anything like -- loosening credit lines or any general impact on the business, would be helpful? And then I'll get back in the queue.

Sure. I'll answer the first one. EFS and Fleet One cards did experience a really short outage earlier this month. And we obviously took immediate steps to minimize the disruption. We were actively communicating with our customers, which actually is why it got picked up in the press. We want to make sure that's clear that the outage was due to a glitch with our third-party database vendor. So, it was something that we rectified. And just further for us reinforces the move that we're going into the cloud. This is a platform that is scheduled to go into the cloud this year, which is important to us for all the reasons that we talked about on the call and is with the migrations that we've had. We've had three so far. This is one of the ones we have scheduled to move in, in 2020. We had very minimal impact. Transaction volume, if you look at it over the period of time, it was very similar to what we've seen in other periods. And Roberto was going to answer your second question

Yeah, so, if you recall a couple -- three years ago, we had a significant fraud losses. And we implemented a couple of systems and we invested significant amount of money. So, the fraud losses today are minimal. If -- I mean, as you know, we don't report them any longer, but they are within the fleet credit loss. They are less -- they are approximately 20% of the total credit losses. And as you've seen in the migration in Q4 this year, we do not expect a meaningful impact not on our financials. And the other thing on top of doing the system and the investments that we have done, we are also working on doing more investments on developing some artificial intelligence tools that are helping us to detect fraudulent transactions and to perform better on this area. So, overall, we do not expect not to see a huge benefit, because the numbers are already low.

Okay. That makes sense. Thank you.

Your next question comes from the line of Steven Wald from Morgan Stanley. Your line is now open.

Yeah. Good morning. Thanks for the shout out to Morgan Stanley, although I wish you were on a better topic. Maybe just going back to the -- I think you guys were just talking about how the fraud is kind of not really the moving piece here. But if I look at the trajectory, you are sort of talking about in terms of the credit losses, looks like you're expecting that to sort of crescendo into this upcoming quarter and then sort of improve over the back half of the year. But with the comments about OTR being weak and remaining into 2020, could you just talk about how you think you see that progressing? I think the last time we talked about it, it sounded like it would sort of progress for a better part of the year and then like a year-over-year improvement just because of the lower base. But could you just give us updated thoughts there?

Yes. Absolutely. So, the first thing I would say is that 2019 we closed at 15.1 basis points. And earlier in the year, we gave a range. So, we were within the range. If you compare that to prior year to 2018, there were a couple of percentage points increases, but a big portion of that relates to the Shell and Chevron portfolios. As you know, they are small fleets. And those small fleets carry more credit loss. You make more money on late fees, but at the same time your credit losses are a bit higher. And also recall that we had on the Shell side, there's a revolver portfolio. And then what is different from what we thought earlier in the year is that in the past two quarters on the over-the-road, we have seen some deterioration on the economy and it was also in Q3. And that's why you have seen a small spike compared to where we were in 2018. When we model 2020, and I have here the numbers in front of me, we are modeling a full year similar to what we have in 2019 around the on midpoint, around the 15, 16 basis points. And obviously, we have modeled, on the first half of the year a bit higher credit losses than last year, because of the annualization of the over-the-road segment.

Got it. Okay. That's helpful. And then maybe just shifting gears towards talking about M&A. Putting eNett and Optal to the side as a reference point and obviously, you guys gave a lot of commentary the other week there. FleetCor was out the other week talking about moving towards channels like software on the front end of corporate payments. Could you just remind us in terms of your stacking of priorities where you're thinking of in terms of M&A and where you would use that remaining dry powder? I know you said you're going to be below the 4.5 leverage room -- leverage ratio, so you're going to have some room either way even as you close eNett and Optal.

When we think about capital and how we allocate capital, we go across each of our core verticals. And when I think about the core verticals, it's Travel, it's Corporate Payments, Fleet and Health. And we're looking for geographic expansion, scale plays or product extensions that we can add in. And you can look back this last year 2019, and so we did a little bit of each of those in the acquisitions that we made. And so if they fit where we're going strategically then we really run a mix of those different options. And then there's a combination between what becomes available from a timing perspective. So, we've got a strategic road map of what we want to acquire. We're working on relationships on an ongoing basis. Some of these things take years to come to fruition and we execute them when they meet all of those criteria. So, when they fit what we want to do strategically, they are on our roadmap, they hit one of those three areas, scale, product extension or geographic extension. They hit financial criteria, and we have the ability to absorb it. So, we have a whole host of filters that we go through. So, as we're looking into the future, we're going to continue to do that same process that we've done over the past five years. And so, it will be a mix that you will continue to see that come through, and it's going to be a combination of what we want to do strategically and what's happening in the marketplace at prices that we think makes sense for us.

Awesome. Thank you very much.

Your next question comes from the line of Bob Napoli from William Blair. Your line is now open.

Thank you for taking my question. I'd like to dig a little bit more into the Corporate Payments and Healthcare business with two separate questions. First, on the mid-teens growth in payment volume. In the Travel and Corporate Payments business for 2020, what does that -- how would you break that down between the Travel portion and the Corporate Payments portion? And you did have a nice increase in the net interchange rate which you attributed to Corporate Payments. Is there more upside on that?

So, Bob, good morning. So the way with our Corporate -- or Travel and Corporate Payment segment, so we guided on the -- within our long-term range in the segment of 10% to 15% at midpoint. We expect volumes to be slightly higher than that, so on the 15%, call it, on the mid-teens, slightly similar to this year, slightly down. The way I will look at it, if you remember at Investor Day, we breakdown the segment between Travel, where the market is growing around 9% overall and the Corporate Payment that is growing on the 15% to 20%. So, you could think directionally that the volume growth are going to be splitted similar to what the two markets are growing at. And then from a net interchange point of view, this year there was a big change because of the reasons that I've been saying every quarter. So, we got Noventis. We got a customer contract change where we moved just the dollars from other revenue into payment processing. And we had some customer mix impact as well. If you model into 2020, we probably will see -- and I mentioned that a small decrease on the rate, because of the mix of the spend more than any other thing. Okay? So there's nothing that we are expecting to be different. But I think you probably will see a small decrease on the rate, but similar to where we are in 2019.

Okay. Thank you. And then on the Healthcare business, you're lapping the acquisition Discovery Benefits, but you still seem very confident about I guess, mid to high-teens revenue growth. That industry is not growing that fast, so you're taking a fair amount of market share. So, maybe just an update. It sounds like that acquisition integration is going well. And how are you gaining the amount of market share? This is a much bigger business now to have confidence in those types of growth rates over the medium to long-term.

Yeah. If you look at the performance in our Health business this year, it's been just outstanding across the board. New contract wins, what we're bringing and signing, the integration of DBI, the ramp of business in DBI. And all across the board, it's been really very, very strong. And if you look at that business, a lot of those trends you can see happening through enrollment season. So, we've had a really strong enrollment season. We feel good about the combined business that we have, the channels that we've established in the Health business, the pipelines that we have and that's leading to our confidence in the growth rates that we've got in the in our guidance for 2020.

Where is the market share coming from, I guess, is I mean...?

It's coming from lots of places. I wouldn't describe it as coming from any one place. Some of it continues to be internal systems that are migrating, some as the market is growing. As we've seen growth within the HSA market specifically, but even the FSA market continues to grow. So, you see more adoption, growth rates, healthcare costs keep going up. All of those things which were the reasons why we entered the space, they really have come true. And then for taking market away, I wouldn't say it's coming from any one place. I'd say it's coming from a bunch of different places. And we have the benefit of working through some really great partner channels that are in the marketplace with their brands everyday and they're bringing in market share as well. So, it's been a combination of adding new partners. Those partners continue to grow. Healthcare costs go up and there's more adoption to these programs. And all of those things have been creating some really good tailwinds for us.

Okay. Thank you. Appreciate it.

Your next question comes from the line of Darrin Peller from Wolfe Research. Your line is now open.

Thanks, guys. When you look at the fourth quarter Fleet trends, when you adjust for the $21 million and you adjust for -- just look at macro, it wasn't really that different of a trend as I think you alluded to earlier. So, when we consider going forward, I guess, I'd be curious to hear; number one, is there any update to what you are seeing in the sub-verticals? You had called out like transportation and wholesale and construction, I think, last quarter. I guess any other signs of strengthening or weakening in some of those areas or others? And then I'd be curious to hear if you are seeing any market share impacts associated with some of the reviews going on, the regulatory reviews at one of your competitors. If you could just comment on market share updates there. If you're seeing any evidence of any changes.

Yeah. We continue to win in the marketplace. We feel very good about our competitive positioning, the pipeline that we have, the businesses that we have implemented. And that's been true for years. The addition of EFS into the rest of our North American Fleet business has been really strong combination in the marketplace. And so, that -- I wouldn't describe that as changing, I think that's been strong for us for years. And we do feel good about the technology that we have, the amount that we're investing. So, our ability to continuing to win in the marketplace is in part, because we start from a product that's superior and we continue to invest in it. In terms of what we're seeing in mix in change from an economic perspective and same-store sales, it really is slightly worse across most SICs, but from sequentially from Q3 to Q4. But when I say slightly, it's a little bit more than a half a point. I don't know that there's any one thing that I would call out. I talked about transportation, because it is having a bigger impact, but if I look through the portfolio equally big or things like mining, which is not a very big part of the business as mining oil and extraction. That's actually quite negative year-over-year. But most of these are a few points negative with a few being higher single-digits negative from an SIC perspective. And so, we just are seeing continued softness in the industrial segments in that portfolio. Nothing that's for us, there's nothing alarming. It's just soft compared to what we achieve currently.

Yeah. Continuation of that is embedded in your guidance, right?

Yes. Yeah. And theoretically, we'll have better comps when you get into the second half of next year, but we're going in assuming that it continues throughout all of 2020.

I was going to say exactly that. And as we get along into the year, if we see the same-store sales improving. Obviously, we will have an update on the guidance as we move into 2020.

Okay. Just a quick follow-up on the Corporate Payment side. Given -- it continues to be one of your gems in your business, just talk a little more about the blocking and tackling you're doing there and what you think is differentiating you guys right now in the marketplace that's allowing for the growth rate.

Yeah. The growth for us is coming in a couple of ways. It's coming through partner channels. And so, we've said is the technology behind a bunch of both financial institutions and Fintech companies where -- think of us as the payment tech that sits behind that. That's been the highest growth rate for us. We've also had good growth with cross-selling within our existing Fleet portfolio and we think of that as more of a direct sales force, so both of those have been working well for us in the marketplace. I think from a competitive differentiation standpoint, we've got some pretty good tech chops. And so, when we're talking to other companies, both from just a pure technology perspective, the ability to integration into the systems that we have, but also from just a security perspective as we're doing business with banks. That's something that we take very seriously and we have a lot of compliance and security reviews that are happening on an ongoing basis, which creates a little bit of overhead, but actually helps us a lot competitively in the marketplace, because we do well on that front.

Make sense, guys. Thank you.

Your next question comes from the line of Ashish Sabadra from Deutsche Bank. Your line is now open.

Thanks for taking my question. So, question on margins. Margins were pretty strong in the quarter. You obviously saw some benefit from the accounting change. But even in other segments the margins were pretty good. How should we think about margins going into 2020? Any color on the segment levels? Thanks.

So, hi. Obviously, the Q4 is a bit twisted because of the revenue recognition adjustment on the revenue side. But overall, what I can tell you is that if I look from 2017 to 2018, 2018 to 2019 and if you exclude fuel prices and FX fluctuations, we have been improving the margins in both years. And if you look at 2020, if you take the midpoint in revenue excluding again fuel prices and FX fluctuation, the revenue is growing 10% and EPS is growing 15%. Therefore, you should expect another year of improvement overall on the margins. And that's what we have said always we want to focus on both growing the business and accelerating the growth, but at the same time, how we can improve margins over time as we continue our investments. And as I said, if you look back to the past two years and the guidance we have for 2020, we continue improving the margins from an adjusted operating income point of view.

That's very helpful. And maybe just a quick follow-up on the accounting change. As you mentioned there was $14 million adjustment for the prior three quarters. I was just wondering if you can give us what the quarterly adjustments were. And should we expect that then going forward as well? Thanks.

So, yes. The $21 million is the full year number. And as I said $14 million -- approximately $14 million relate to the prior three quarters. They are approximately as we go on Q1, Q2 and Q3, they are slowly increasing. But our 2020 guidance already include that revenue adjustment as if we were doing net revenue. So, we have contemplated on our guidance for 2020 that we won't have the adjustment going forward.

That's very useful. Thanks.

There are no question at this time. You may continue.

Thank you everyone. Thanks for joining us today. And we look forward to speaking with you in a couple of months and updating you on our progress. And that will conclude our call for the day.

This concludes today’s conference call. You may now disconnect. Thank you for your participation.