Ladies and gentlemen, thank you for standing by and welcome to the WEX first quarter 2020 earnings call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. And please be advised that today's conference is being recorded. [Operator Instructions]. And now, I would like to hand the conference over to your speaker today, Mr. Steven Elder. Thank you. Please go ahead, sir.

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 these metrics include unrealized losses on financial instruments, net foreign currency remeasurement losses, acquisition-related intangible amortization, other acquisition-related items, stock-based compensation, other costs, debt restructuring and debt issuance cost amortization, ANI adjustments attributable to non-controlling interest 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, 2019, filed with the SEC on February 28, 2020 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 will turn the call over to Melissa Smith.

Good morning everyone and thank you for joining us today. I will open the call with a brief overview of our Q1 performance before jumping into how we are navigating the current unprecedented environment due to the COVID-19 pandemic, including what we are seeing as we progress further into the second quarter. Then Roberto will provide more details on the first quarter results as well as some balance sheet and liquidity highlights before we take your questions. I want to start by saying that our thoughts and prayers are with the individuals and communities directly impacted by COVID-19, including the healthcare workers on the frontline and all essential workers who are keeping the world running. Many of these people are our customers, first responders, police officers and ambulance drivers, federal agencies and truckers who are keeping the supply chain moving as well as people who are using HSA, FSA and COBRA products to pay for their healthcare needs. It's been incredible to watch the country and the world come together during these extraordinary times. Understanding that our customers and partners are relying even more heavily on WEX in order to continue their day-to-day operations, we remain committed to providing the best-in-class products and services that they have come to expect without compromising the well-being and safety of our employees, which remains our top priority. I am proud of the entire company's efforts over these past difficult months to come together and support each other as well as communities we serve throughout the world. Turning quickly to some first quarter performance highlights on slide three. Revenue grew 13% versus the prior year quarter to $432 million. The quarter started off very strong as we expected but like many other businesses slowed significantly toward the end as the effects of stay at…

Thank you Melissa and good morning everyone. While we continue to maneuver a difficult environment, in the first quarter we delivered solid results by continuing to execute on the strategic pillars and building up on 2019 tailwinds. Revenue grew 13%, about 8% came from acquisitions and 5% from organic growth. The net impact from fuel prices and FX rates was negligible. Now let's take a look at the results on slide number nine. For the first quarter, total revenue was $431.7 million, a 13% increase year-over-year. GAAP net income attributable to shareholders was a loss of $16.3 million. Non-GAAP adjusted net income was $79.7 million or $1.81 per diluted share. Slide 10 shows the overall revenue performance by segment. Breaking down the revenue growth, health and employee benefit solutions grew 45%. The fleet segment had a 7% growth rate. And finally, travel and corporate solutions posted a 3% increase. Moving to segment results, starting with fleet on slide number 11. Fleet solutions achieved $249.8 million in revenue, a 7% growth versus prior year driven by an increase in payment processing revenue of 6% and finance fee revenue of 21%. Segment results were boosted by new customer wins and renewals. Fleet volumes remained largely on track through mid to late February, at which point the impact of COVID-19 started to accelerate. Shipping activity slowed down, followed by the stay at home orders in all of the countries where we have operations. Despite these headwinds, payment processing transactions were up 5% when compared to the prior year, with North American fleet up 5% and over-the-road up 3%. We also had some benefits from the Go Fuel Card acquisition, which was completed in July 2019. The net payment processing rate was up eight basis points from Q1 2019 to 135 basis points. The…

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

Good morning and I am glad you guys are doing well. Melissa, can you elaborate a little bit on your decision to exercise the MAC on eNett and Optal, your level of confidence that on the move and that it will sustain itself? And then maybe just outline the process going forward because I know eNett and Optal are out suggesting they don't believe that it's appropriate. Thanks.

Yes. Sure. So good morning. I don't have a lot more to say about that. But what I would say is that we determined that an ME exists and we went through, obviously, a whole lot of work to get to that point. We wanted to be absolutely sure of our position before we took the step of notification. So we have been scrutinizing matters very critically and closely with our advisors and with the Board and we reached the conclusion based on our contract that's in place. And in terms of next steps, we provided notification to the seller to make sure that we are fulfilling our obligation.

And does it typically go through like a litigation process? How long does that process take?

Well, our obligation right now is to make sure that we were providing notification around the ME. And so we fulfilled our part of that obligation. And in terms of next steps, I think that that is yet to play out. I don't really want to talk about hypotheticals right now.

Okay. Great. I have got a follow-up question on travel and corporate. Roberto, maybe you can help us think about the go-forward here. And I know you guys aren't providing guidance but when I think about that net interest rate, that actually went up nicely or has held in quite strong. And then when we think about mix, you mentioned 50-50 travel corporate in the first quarter. But when we think about the update you provided on that slide six, should we apportion those growth rates to the previous percentage contributions from each of those. Could you just help us think about what the trends would be if you looked at it based on the April trends? Thanks.

Good morning. I think you asked several questions in one. So let me give you a bit of the breakdown on the percent volume for the quarter and then we can go through the interchange rate and hopefully, I answer everything that you wanted to get. So in the quarter, the corporate payments business was over $2 billion of spend and the total volume for the quarter was $8 billion. So we are talking around approximately 25% of the volume. Obviously, it grew double digit while the travel volume was down. We cannot predict what is going to happen in the future. That's why we withdraw our guidance. But we wanted not to provide and Melissa mentioned that we wanted to provide visibility through the last six weeks of the year, just to give you some color on where the things are trending. On the interchange side, Sanjay, if you recall, last year, we make an amendment to one of the OTA's contract and this is why the rate has been increasing since Q1 2019. And obviously as we move into Q1, if the mix between travel and corporate payments is changing into the corporate payments side, obviously the rate overall is going to also increase. But again going forward, we cannot predict now what the rate is going to be.

Okay. Thank you.

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

Hi. Good morning. This is Damian, on for Ramsey. Thanks for taking the question. I wanted to ask maybe about the end market in that fleet solutions segment. Maybe you can just break down by vertical. I know you called out construction being the only vertical that was positive in the quarter. But can you just discuss any of the other end markets for your customers in that fleet solutions segment and just kind of what you are seeing there?

Yes. Sure. We saw a lot of disparity based on geographic regions and I am talking specifically right now about our North American fleet volume. So when we saw changes happen where volume was starting to move down the East and West Coast, which were shut down sooner, it had a deeper impact than the Midwest and the Gulf Coast, which were on the lesser end. All being impacted, but the East and West Coast being much more heavily impacted with the Gulf Coast and Midwest lesser so. That was also, if you got into geographies, Washington and New York were harder hit, Texas and Georgia were less so. And when you get into industries, actually, there wasn't as much variation based on industries you might expect with the exception that construction had positive trends. And if you combine those two things together, if you looked at the construction in like the Gulf Coast region looked really strong. And construction in East and West Coast still looked better than other industries. But when you started to look across the other areas of the business, they were down pretty comparably.

Okay. That's helpful. And I think maybe related to that and also including the travel business, I am shifting now to the credit losses. Obviously, a lot of the increase in the quarter related to CECL. But maybe you can talk about any sort of stress that you may be seeing in your book, either on the fleet or on the travel side and any sort of expectation that you have for increased credit losses for the rest of the year?

All right. Let me give you some more color on the adoption of CECL and on the quarter trend on the credit loss. So CECL had two impacts. On one hand, we changed slightly the methodology on how we calculate the regular credit losses. And that impact was almost was immaterial, I would say. Then on the other side, due to the CECL and the qualitative reserves when you look on the macroeconomic indicators, as I said on the call, we took an additional $9 million credit loss that was broken down between $3 million in North American fleet and $6 million in the travel business. I also want to share with you, correlated to that, the movement of our account receivable balance. So from year-end, the receivable balance has gone down almost $500 million at the end of the quarter. But if we look at the end of April, that number is another $400 million-plus down. So overall from December 2019 to the end of April, we have reduced the account receivable balance almost $1 billion. So obviously, we feel good about that. And the credit loss, from a credit loss point of view, we have been able to work with our customers and manage now the challenging times, especially on the travel industry. If you get a bit more specific in the fleet segment, the credit losses were just slightly higher than last year in Q1, excluding CECL North American fleet was almost flat to Q4 2019 and to Q1 2019. And on the other side, our over-the-road business was slightly higher, continue the trend we had last year in Q3 and Q4.

Helpful. Thank you, very much.

And your next question comes from the line of Steven Wald. Your line is now open.

Thank you. Good morning and I hope you guys are all safe and well. Thanks for providing what you could around the eNett and Optal deal. But maybe just a follow-up to it. Sanjay was sort of getting out around the segments. It seems like if you are approaching this from a material adverse side of things, that it would seem to have a similar impact on your legacy travel business. So I guess I was wondering if you could talk about how you are thinking about the strategy for growth in the legacy travel business? And has this shifted your thinking around where you would like to grow and diversify long term?

Yes. Sure. So our legacy travel business, we showed you volume trends over the last several weeks. So you get a pretty good snapshot of what's happening in terms of spend. And in terms of our customer base, we continue to work with our customers, when we are there to support them and make sure that we are positioned for when you see a rebound in that market. We do think that, that market will be slower to move back compared to if you look across WEX, we are a financial services technology provider, we are doing business in many different verticals. And so travel compared to anything else that we are doing is having a longer tail, we think, in terms of recovery. It doesn't change. Like if you are asking about travel, the market over a long term basis is something that --

Exactly.

Yes. We are continuing to be interested in and we want to make sure that we are there supporting our customers and meeting their needs as they get through this challenging time.

Okay. And then maybe just switching gears toward the cost-cutting initiatives and the CapEx tail down that you guys mentioned. If we were to take the deal off to the side and just put it over here and say, okay, thinking about the cost cutting, would you say that is going to get you to a place where you have a significant level of extra comfort around your standalone leverage? Or I think you guys alluded to potentially more actions to come, is that sort of you are weighing it every step as you go. Can you maybe talk to how you are thinking about that?

Hi. So you asked several things on one. So on the cost actions that we have taken, Melissa has explained the rationale and what we have done. Obviously, our business is expected and you saw the numbers for April, so obviously we are managing a maneuver in all this challenging environment. What I would say to you is, if you look at our leverage position today. So we closed the year in 2019 at 3.5 times, we are unchanged in Q1 this year. I think I want to make sure that you get one thing that is very important compared to where we were in the past, especially when we did the EFS transaction and higher leverage ratio. And that is that today, we have more than $500 million of corporate cash on hand. And obviously that gives us a lot of comfort and we have a solid position now from a liquidity point of view. And additionally, we have the $750 million access on the revolver. So when you look at the leverage ratio, although it's 3.5 times, but the fact that we have the corporate cash on hand of over $500 million, we could use we can only utilize $125 million of that corporate cash was our gross debt. And to give you an idea, for every $125 million of corporate cash, it's approximately a quarter of a turn on leverage ratio. So when you put in perspective the cash that we have on hand, I mean, our leverage ratio from a net basis point of view is below three times today. So we feel good where we are. And as Melissa said too, the cost containment is to protect the short term, but also to make sure that when the things come back, we are ready to grow again and to serve our customers.

And I would just add to that, that what I had mentioned about further actions, we were internationally, we were going through very methodically understanding the rule changes that were happening on a global basis and being thoughtful about those changes as we were making changes within our cost structure. And so that's just been a process for us. But it's not something that -- we had made the decision what we are going to do and we are actually just going through methodically and making those changes throughout the world.

That's very much appreciated. Thanks for the color there.

And your next question comes from the line of Bob Napoli. Your line is now open.

Thank you. Good morning. Good to talk to you guys. A quick question on the Mastercard deal that you guys did and I was just trying to understand the potential benefits why you made that change. I mean, Mastercard, their rebates and incentives line is going up quite a bit and I am wondering if you guys are benefiting from that as part of this deal. So just generally, strategically, why did you shift so much more of your business towards Mastercard? And what benefit do you get?

So it's Melissa. I will make sure I clarify. So with Mastercard, what we did is extend a contract with them. And it takes advantage of the size that we are relative to Mastercard. Over a number of years, we have grown our business and portfolio with them and so it's just representative of the position that we are in now. We have had a long-standing relationship with them. We continue to have also a contract in place with Visa. And so my mention of it is the idea that we are extending the relationship with Mastercard. We have had a really good relationship with them and we want to make sure that we continue to build upon that. And it was timely for that to happen and kind of the life that we have had in evolutions that we have had in growth.

Okay. And maybe a follow-up then on just on page six of the volume trends. Looking at the gallon volume, first of all, are you seeing any significant differences in markets that are and areas that are of the country that are starting to open up a little bit. And would it be fair to assume that the transaction trends are right in line with those gallon volume growth trends?

So if you look at the graph on page six, you can see that we are having what appears to be a little bit of an increase in volume that's coming through. That's primarily from North American fleet business. So I see a little bit internationally too, a little bit better as it kind of seemed to have bottomed out. I think if you are an optimist, you would say you are starting to see the benefit as some of the states are moving out of lockdown. But it's a pretty small lift that we have seen over the last few weeks. You can tell, if you look at our data, again, that the states that have been locked down have been harder hit. So I think that there's an argument around the fact that you are going to see some of that getting a little bit better as they move out of these full locked down states. For example, yes, like New York and Washington, I said before, they were down over 30% each.

Okay. The corporate payments business declined, payment volume declined 5% or was a run rate of a decline of 5%, I think you were saying. Just what was the shift in the trend on the corporate payments volume? And are you seeing any benefits from customers on the top of the funnel and adding new customers because of the need to electronify B2B payments?

We actually, yes. No, it's a really good point. We have seen an increase in implementation from our partners. So we are seeing more demand, more pushing through in the pipeline for our AP products, particularly through our partners. What we also saw in April was a pretty dramatic shift in spend from a business spend perspective, from the first quarter into what we saw in April. So we are feeling good about the pipeline. We are feeling good about the prospects we have and what we are seeing coming through the front end of the funnel and aware of the fact that we saw a difference in business spend, at least in the month of April.

Okay. And how much of a shift in business spend, if you could, in April?

Well, you can see that we were up 18% in the first quarter and down 5% in April. So it's pretty dramatic.

Yes. Bob, the other thing I would say that when you look just on a particular month, you put capital last year, we implement, somebody, as Melissa was saying, we are doing a lot of implementation so you could count one customer or two customers that brought more volume last year and then now they are on a run rate basis. So it's I wouldn't call it like a trend where we went from 18% to minus 5%. But obviously, we wanted to be transparent with all the information that we have as of today to make sure you get the best picture possible.

Thank you. Appreciate it.

And your next question comes from the line of Darrin Peller. Your line is now open.

All right. Hi. Thanks guys. Glad to hear you are doing okay. If you can give us a little bit more color on the volume trends that you are seeing in fleet today versus perhaps what you would see in kind of a more "normal recession"? But what's really discretionary versus nondiscretionary in your business? And Melissa, any thoughts on the survival rates you would expect to see through some of your client base, maybe thinking about SMBs versus not and the types of businesses you are servicing would be helpful.

Yes. Let me talk a little bit about the types of businesses that's in each of these portfolios and I think that might give a little bit of color. On the over-the-road marketplace, we talked about being down less there. There's been obviously a need to make sure that products were getting moved across the country. And so we have continued to see some stability there, even though there've been periods of weakness, particularly in some versions of retail transport. And then when you look at the North American fleet business, those type of customers, they are filled with people that are continuing to work in this environment, which have first responders. We have got state governance. We have in there ambulance drivers and police officers. And you kind of hit the spectrum and you also have construction trades across many different trades, lots of small businesses that sit in there as well as some of the really large companies that just happen to have vehicles that they are moving as a byproduct of their business. And so we have seen, well, it is down and more than what we saw in 2008, it is really being driven based on industry, individual state rules and the combination of those factors is what we are seeing with volume trends. If you are in oil and gas as an example, you are going to see that that volume is down in some of our retail industries that they are down, construction still continue to be up. And then it really depends on the geo. So as we are seeing some of the states lift those restrictions, we think you are going to see at least a little bit of benefit of that. But I think that's, for us, still unknown how much and how quickly we are going to see that. And then internationally, we believe that what's happening in Europe, because Europe has been the hardest hit. And remember, the international part is only a little over 10%, the international part of fleet is only just a little bit over 10% of total revenue. And that's been hardest hit in the fleet segment, we think because your borders are closed across a lot of Europe. So the ability to move from region to region has been even more restrictive in Europe than it has been in the United States. It's really less though. Now trade is looking a little bit more what we are seeing in trends in the U.S.

All right. But I mean, in a typical recession, you would expect what type of transaction trends on the fleet side versus obviously these kinds of lockdown loans?

Yes. So in the 2008, 2009 recession, we saw almost like a check where people stopped traveling quite as much because they just didn't have as many deliveries to make or service calls to make. It was down around 10%. And then from that point forward, you started to actually see kind of steady improvement. So it's almost like a restart of the base.

Okay. All right. That's helpful. Look, just a bigger picture question is, when we think about the valuation you guys should be trading at longer term, we are also trying to figure out structurally who's coming out of this pandemic with different with changes in the model. And so look the B2B in the corporate side could clearly benefit to some degree as I think businesses realize they need to be more electronic in payments. What about Europe? What do you think about the other segments? I mean, I think health, you probably have some of that element where there's more of a need. But maybe even on the fleet side, what are your thoughts across the business on structural changes? Thanks guys.

Yes. I am going to put travel aside for a minute. But if you talk about the rest of the verticals that we service, I could say that we had a little bit of an adjustment of how to sell into the marketplace virtually, really small. We have seen a continuation of interest in the products. And in some cases, we have got larger pipelines than we had a year ago. So the products still resonate in the marketplace that the needs that we fill continue to be there. And what we are leaning into are, as we see changes in needs of customers, like I talked about the fact that DriverDash is being much more utilized. That's a product we have in that marketplace. It's something that we can put our weight behind. So I don't expect to see large shifts in the base of what we are doing in our fleet business. To your point, B2B, we are seeing actually a pickup in interest. And when you get into our healthcare business, same thing. We are seeing a lift in demand. Right now, a lot of interest in with our prospects and customers or employers are looking for ways that they can help support employees. So the interest in SpeedLift products that we have but also COBRA-related products that we have in the marketplace. So you are not seeing large shifts in terms of either demand or interest in the products. In some cases, interest is increasing in the product set. I put travel side because I think that's different. The type of customers that we have there are ultimately leisure travelers and we do expect that they are going to see behavior changes in that marketplace.

Okay. All right. Thanks guys.

And the next question comes from the line of Tien-tsin Huang. Your line is now open.

Yes. Thanks. I was asking, a lot of good questions are asked already. The travel and the fleet business and maybe corporate payments as well. Can you help us think about incremental or decremental margins? And how much of the change in revenue here flows through to the bottomline? I know there's some offsets with rebates and some other variable costs to consider. So anything interesting there?

So Tien-tsin, this is Roberto. Let me give you some color on what we have seen in the corporate payment business. If you split the travel and corporate payment business segment into two, our travel business, obviously, the margin profile is much higher than the corporate payment one, especially as we are growing on the corporate payments through the partner channel. And that's because if you recall, when we adopted a couple of years ago the new revenue recognition standard, you report all the revenue as a net revenue and then you have a rebate commission on the sales and marketing. So if I put the two business aside, if the business of corporate payments, especially through the partner channel, continues to grow faster than the rest of the travel and the other pieces of the corporate payments, your margin, although incrementally dollar-wise is going to continue improving from a margin point of view, you may see a reduction. However at the same time, as you know, we have been doing a lot of different things to improve our cost base. And obviously, when you look at the past two years, even though we have been growing significantly in the corporate payments segment of business, including the partner channel, the margin of the overall segment has been improving too.

Got you. That's good to know. And then on the credit losses, as my follow-up, similar to what Darrin was asking about comparing it to the financial crisis. What indicators should we be tracking here, more on the fleet side, whereby we might see a little bit of a step-up in your reserve provisions here? Didn't know timing-wise when we might start to see some bankruptcies or delinquencies pick up.

So let me give you some color on the quarter and the credit losses and then we can go from there and give you also as well what happened in the 2008, 2009 where Steve always reminds me what happened. So I will start with the latter. In 2008, 2009, the peak of the credit losses in the fleet segment was in Q4 2008, where we had 45 basis points of credit losses. But for the full year, on average, we were at 25 basis points. The business is different than it was, obviously, years ago. We have grown on the small fleet business tests. We shared on our other wins. But at the same time, we also incorporated EFS from an over-the-road point of view. So the business is fundamentally different. But at least I gave you know what happened at the time. If you look at what are the different indicators that could trigger a credit loss increase or bankruptcy, obviously we model our agings. If you look at the end of the quarter and into April, although we took through CECL a quality reserve of $3 million on the fleet side, we have not seen a significant deterioration on our aging. And even another indicator is the late fee. So in the quarter late fees were as we were expecting and in line with just below what we had in the last two quarters. So for now, we have not seen any other indicator. And we feel that the position we had at the end of the quarter is adequate.

That's great. Thank you.

And we are running out of time. There will be no more questions. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.