Ladies and gentlemen, thank you for standing by, and welcome to the WEX Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Mr. Elder, please go ahead.

Thank you, operator. 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 second 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 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, 2019, filed with the SEC on February 28, 2020; our quarterly report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 11, 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'll turn the call over to Melissa Smith.

Good morning, everyone, and thank you for joining us today. Importantly, I hope all of you and your families are safe and healthy. Like last quarter, I will start today's call with an overview of our Q2 performance highlights before providing an update on some of the key metrics in the current environment. This will include what we're seeing as we progress into the back half of the year as well as some color around key announcements we made this quarter. I will close with talking about how we're progressing with our long-term strategic objective. Then Roberto will provide more detail about our financial results for the quarter as well as some balance sheet highlights before we open it up for questions. As we begin this morning, let me express my continued appreciation for our employees, who have been working hard to continue to build upon our outstanding technology and products, while providing the quality service that our customers and partners expect. The work they are doing will not only help us navigate through this unusual period, but equally important, will ensure that WEX emerges stronger as operating conditions improve. Turning to our second quarter performance highlights on Slide 3. Q2 saw the full quarter impact of COVID-19 on our business. The quarter played out broadly along the lines of what we had outlined in May, with revenue declining 21% versus the prior year quarter to $347.1 million due to compressed volumes across all of our business segments and significantly lower fuel prices. With that being said, I'm pleased to report that we've seen volumes improve across all segments from the Q2 lows. And of note, we continue to see year-over-year revenue growth in our U.S. health business. From a profitability standpoint, GAAP net income was $1.66 per diluted share,…

Thank you, Melissa, and good morning, everyone. As we expected, the second quarter was unprecedented for us as we maneuver through COVID-19. Despite the challenging economic conditions, we continue to execute on the strategic pillars, drive efficiency through operations, deliver on the cost containment initiatives and improve the balance sheet position by increasing liquidity and financial flexibility. Just as important, as you heard from Melissa, we continue to focus on our customers, partners and prospects. Now let's take a look at the quarter results on Slide No. 9. For the second quarter, total revenue was $347.1 million, a 21% decrease year over year. GAAP net income attributable to shareholders was $72.7 million. Non-GAAP adjusted net income was $53 million or $1.21 per diluted share. Turning to Slide 10. We can see the overall revenue performance by segment. Breaking down the revenue, Health and Employee Benefit Solutions grew 6%; Fleet segment revenue declined 24%; and finally, Travel and Corporate Solutions posted a 40% decrease. Moving to segment results, starting with Fleet on Slide No. 11. Total Fleet Solutions revenue for the quarter was $204.4 million, a 24% decline versus prior year. The primary impacts were lower volumes due to the government staying-at-home orders and lower domestic fuel prices. These declines were partially offset by new customer wins, renewals as well as the benefit from the EG Fuel Card acquisition that we completed in July 2019. Payment processing transactions declined 19% when compared to last year with North American fleet down 21% and over-the-road down 7%. As Melissa noted earlier, fleet volumes progressively improved through the quarter. The net payment processing rate was up 23 basis points from Q2 2019 to 1.47%. The year-over-year increase was mainly due to the EG Fuel Card acquisition, the significant decline in U.S. fuel prices and…

[Operator instructions] Your first question comes from the line of Ashish Sabadra with Deutsche Bank.

Hi. Thanks for taking my question. Good to see the improvement in the Fleet volume in July. I was just wondering, if you can talk about the verticals within the North American local market? And if you could also comment on any potential sensitivity to potential slowdown in economy from the surge in pandemic? How should we think about that going forward? Thanks.

Yes, sure. Yes. Let me give you a little bit more color about what we're seeing when you look into the trends a little bit more deeply. As you said, we're pleased with the amount of improvement. You saw some pretty significant improvement in our fleet trends between April and July. And some of the trends started to change. In April, you saw a pretty big impact within the United States, depending on what state you were in, and those that were hardest hit by COVID started to really deviate and have worse of an impact than others. During the course of the quarter, the state activity started to converge. So you're not seeing large deviations depending on state. Now it's much more to do with the SIC that people are in. So the way we think about it is that a large amount of the customer base were providing services that were essential and continue to operate. And as the economy is continuing to improve, you're starting to see some of the nonessential components roll back in. The places that we still see an oversized amount of weakness, areas like retail and think of sales fleets that are driving vehicles that are using our products, some service-related financial and insurance related. So again, it's much more SIC specific. So on the positive side, construction has really come through pretty well. And a lot of the construction trades that sit within our portfolio are -- think of that as things that are related to road work and it could be state related or government-funded types of construction projects across other types of construction as well. And the only other thing I'd say is that when we've looked in the last couple of weeks at the impact to what's happening in the states, in the United States, they're more heavily impacted by COVID. They are looking similar to other states. We're not seeing at the moment any type of compounded impact based on COVID-related activity in the United States right now.

That's very helpful color. And then maybe just a quick question on the corporate payments. Pretty good volume growth, 6% growth in July. And you also talked about the FIS adoption of the bill payment solution. Can you just talk about the pipeline for that business and the demand for B2B payments in general?

Yes. We're really excited about the pipeline that we have in corporate payments. We also -- if you look at what's happened in the quarter and leading up until July, you also saw a lot of deviation. They're in the places where -- in corporate payments, the fintech-related customers we have in our portfolio grew over 20%. The channel that we have with FIs were growing single digits even in the quarter. The places that we're offsetting that in softness were in the really smaller accounts where we have a direct relationship with the customer and then in bill pay. And so we started to see a little bit more improvement in those trends in July. We're excited about the relationship that we have with FIS on Bill Pay. It's a great customer, a great relationship that we want to build on over time. And again, we remain excited about what we're seeing in the pipeline and corporate payments. It's a strong pipeline relative to what we've seen a year ago.

Thanks, Melissa. That was very helpful.

Your next question comes from the line of Tien-Tsin Huang with JP Morgan.

Thanks so much. Thanks for the slides as well. I think the biggest delta versus our model was the processing costs were up 1% in contrast to some of the declines you saw across the other businesses. I'm just trying to -- maybe I missed it, just trying to reconcile why that was the case. Anything unusual there?

Tien-Tsin, well, let me recap first on the cost containment, and then I can dig in a bit more on the processing cost. So as Melissa said on her remarks, we wanted to protect especially the U.S. health investments as well as the tech investments. And on the processing cost line, the majority of the expenses that we have are related to tech ops, IT, and then obviously, call center and everything related with credit and collections. So as you think about what we have been doing in the quarter, there's two things. We have kept investing in the areas where we wanted to continue investing, and we have also moved some resources from the sales and marketing line into the processing cost to help on the cash collection initiatives that we put in place. So when you put everything together, this is why you see it being flat. But if you look compared to Q1, we are approximately $4 million to $5 million down sequentially. So obviously, the volume has also a small impact on that area as well.

I see. That makes sense. Thanks for going through that. Just as my quick follow-up for Melissa then, you guys have a few fleet wins here. Any way to talk about your sales pipeline or quantify your bookings growth, that kind of idea? Just curious how you've adapted on the selling front and what demand looks like? Thanks.

Yes. I'm really proud of our sales and marketing teams because they have adapted really quickly to this environment. And if you look at the pipelines, we said last quarter, our over-the-road pipeline was stronger than year ago. I'd see that's still true. North American fleet has been a little bit lower than what we've seen historically. But if you combine the 2, they look pretty much on par. And then on top of that, if you kind of go across the business, our health pipeline looks stronger than it has in the past. Our corporate payments pipeline looks stronger than it has in the past. So across the business, we have learned how to migrate, how to sell differently. And we migrated our dollars and our time accordingly, based on the environment that we're in. And we feel really good about the wins that we were able to talk about. This quarter, really across every part of our business, we've got some really great names that we can talk about, that are going to get implemented in the course of this year or have already started to implement.

Terrific for you. Thanks for the update.

Our next question comes from the line of Steven Wald with Morgan Stanley.

Great. Thanks for taking my question. Hope you guys are staying safe and healthy. Maybe -- I know you guys can't really comment at the time on the eNett, Optal deal. Maybe just conceptually, just because your stance back in April was that you're not obligated to close the deal. I'm curious if you've given any thought since then to the broader global reopening and what's going on in other parts of the world as to whether there might be any rationale under which you'd consider closing the deal regardless of what are the court rules you have to.

I don't think it's really appropriate for us to discuss that transaction or the substance of the litigations at this time. And all I'm going to say is, I'll just reinforce that our confidence that we have in the position, that we've put forward. And if you look at what's happened over the course of the last quarter and say, if anything, we feel more confident than we did a quarter ago.

Completely understood. I had to try there. Maybe just switching gears toward the outlook and the trends you guys outlined since the end of the quarter. I understand that it's still a very influx environment, and so ascribing a guide at this point is still very difficult. But if you were to sort of plot the line, as you guys did, of the improvement in trends across the different businesses, if you were to improve at this rate without sort of major disruptions, it sort of looks like you'd be back in the positive territory on at least transaction volume growth by sometime in mid- or early fourth quarter. And I guess I'm curious, if that's your sense of things, even if you're not willing to describe as a formal guidance to that outlook, just given the uncertainty around it?

I don't think anyone really knows precisely what to expect and what's going to happen with volume trends. What we're trying to do is, be as transparent as we can to show you the trends we're seeing week over week. We certainly have seen some pretty substantial improvement over the course of the quarter. And what we would say right now, we're seeing it minimally. Minimally we're seeing stability. In some areas, it's certainly better than that. And in my other points that I've made is, two things I'd call out is, if you look at, again, the states that are being more impacted by COVID, we're not really seeing a big impact right now, which I think is important as we're thinking about what's going to happen over the next couple of months, anyway. And then some of the trends we're seeing, we've been asked a lot in the past between small and large customers. And we are seeing some divergence in small in customer behavior. With the over-the-road business, in particular, you're seeing larger over-the-road fleets recovering faster than some of the smaller of over-the-road fleet customers. In the North American fleet business, it's actually a little bit less clear. The smaller businesses have held up really well. And so, one of the things that we're just watching is, what happens with stimulus money and how is that going to impact some of that, ultimately, the customer behavior. But right now, again, we're providing transparency, so you can see what we see in terms of volume trends.

Of course. We definitely appreciate that transparency, and that's helpful color on the underlying pieces. Thank you.

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

Hey. Thanks for taking my question today. I wanted to ask you about the OMV private-label contract. And I know this is a question that used to get asked a little more than it has recently. But do you see COVID potentially opening up the pipeline in Europe for more kind of outsourcing deals like that? That used to be kind of a theme that folks thought was coming and it sort of ceased up for a while. Has there been any perceptible change in the kind of pipeline or sales activity in Europe on these outsourcing contracts?

Yes. I've always described that as -- and you think about the lengths of our pipelines and said the European fleet pipeline was the longer cycle that we've ever had. I don't think that it has anything to do with COVID. I mean I think it's right now, these cycles just are -- tend to be really quite long. And we have some great technology that's available to the customers. It's more of a question of the impetus of making a change and making a migration over. And when they get to a point where they are willing to make a change, we feel like we have a really good competitive offering in place.

In fact, the OMV transaction, I mean, we started the process much earlier than COVID started. So probably has nothing to do with that.

I see. I see it. OK. And another question for you about kind of the potential COVID impact on the business. It seems like there's been such a huge change at the front end, particularly on retail, but it's sort of the front end of the economy in terms of digital, more direct-to-consumer kind of digital type purchasing. Is there any corresponding change that you're seeing on the back-end of those purchases in terms of trucking patterns? Is there fewer goods to be shipped from warehouses to retail locations? Is there any other kind of infrastructure level changes that you're seeing to sort of match the changes that we're seeing at the front end of kind of the -- I guess, particularly, the consumer kind of experience. I know that's a tricky question, but I thought I'd give it a shot.

No. We definitely. I mean I say, yes, I don't know if yet, if these are long-standing changes or there changes because of the environment you're in. But you would definitely see within our portfolio base some customers that are up 180% over prior year and that while others are down and if you were to draw the line particularly in over-the-road arena, those that are doing business with online retailers are seeing much more volume. There's also a big demand on refrigerated diesel, which we think has to do with what's happening with grocery stores. And so there are some downstream effects or -- I don't know, if you call it downstream or upstream, but with what's happening with over-the-road customer base and what you're seeing in retail.

But net-net, it's a wash, effectively? You're picking up both sides of it, so it's not a headwind or a tailwind. It's just a shift, sort of?

Well, I think it's part of why the over-the-road business has been bit more resilient. If you look across the fleet markets that we're in, the over-the-road business has -- we talked about that being up year over year in July. And I think that's a part of it is because they're benefiting for some of the new areas of shipment. And again, it's -- but it's not a universal benefit. Some customers are disproportionately benefiting and then others are still down.

OK. Got it. Thanks so much I appreciate it.

Your next question comes from the line of Peter Christiansen with Citi.

Morning. Thanks for taking my question. I was hoping you could give us a little more color on what you're seeing in terms of your credit lines in the last quarter? I know there was some trimming earlier in the year. What kind of trends do we see in 2Q? And do you anticipate those further contraction along lines going forward? And then just a quick one. It would be helpful, if you could tell us the organic decline, excluding fuel and FX that would be helpful. Thank you.

Sure. I'll start on credit, and I'm sure Roberto will jump in here. But we're pretty active. And I'd say, kind of the theme for the quarter for us was to move fast across a number of fronts, and one of them was related to credit. And so we took down a number of different credit lines. It's about $2 billion worth of action that we took. And at the same time, we've been working with our customer base to make sure that we are thoughtful about how we're approaching those conversations with our customers. I think you can see that kind of the net-net of that with really strong customer retention rates. And at the same time, we've been able to reduce the overall credit exposure that we've had. The benefit of that we've seen roll through so far in our aging, and Roberto talked about that a little bit. If you want to talk about it more, Roberto?

Yes. I mean just starting on what Melissa said about the measures that we have taken. And as I said before, when we're talking about the processing cost, we also reallocate some resources from sales and marketing into the credit and collections. And what I can tell you is that, overall, the credit losses for the quarter and how the account receivable aging has been performing, we feel we are in a good position. And if you look also where we were in December with the receivables going down more than $700 million to date. So overall, if you look on where we are, we feel quite well. And a couple of other numbers, as we said, from Q1, we are around more than $40 million in credit losses from Q1 this year. So that's also good news. And even if you go through both segments, I mean, the credit losses in travel this quarter were $2 million, and our receivable balance is really very small. So the risk exposure is very -- has been materially reduced. And if you talk -- if you go to the fleet segment also quarter from Q1 to Q2, we are also down around $2.5 million on credit losses. So all these signs indicate that the measures that we have put in place, the resources that we have reallocated to that area, are paying off. And as I said and Melissa said, too, the aging buckets, which is a big indicator on how the receivable is performing, was in a very decent shape by the end of June.

And then your question around our growth. We talked about the impact of fuel prices were about $29 million in the quarter and you had a couple million dollar impact for foreign exchange rates. The growth rate, excluding FX and PPG, was negative 15%.

And the inorganic contribution from Go Fuel Card ...

Yes, it was very little. It was...

Very small. It's only the EG acquisition.

Maybe 1%.

It's negligible.

That's helpful. Thank you so much.

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

Thanks. Good morning. I'm glad you guys are doing well. I guess I wanted to follow-up on Tien-Tsin's question related to some of the wins that you have in fleet and sort of think about how we think the progression in fleet will unfold over the remainder of the year. So the expectation that things are stable to gradual, is that before those new relationships come on? And is there a positive impact related to those new relationships?

Yes, you can see actually even now, there's a positive to the accounts that we're winning. And I talked about same-store sales were down 21%, but our transactions were down 17%. So there's a big headwind with the macro that's there, but we're actually continuing to win new business and implement new business that fits into our portfolio. And we're able to talk about some of these accounts because they're a larger name. But in the background, there's also a number of smaller accounts that we're rolling into the portfolio in any given quarter.

But these are ones that you had on Slide 5, I guess, like, are those larger? And should we see a positive, a more positive noticeable impact?

Yes. If you're talking about fleet specifically, so OMV and J.B. Hunt, think of those as rolling in toward the end of the year. So you would see them having more of an impact into next year, a little bit at the end of the year, more of an impact later. Where FIS and Transamerica, you'll see them a little bit sooner.

Got it. And then Melissa, you mentioned some of the workforce reductions and the U.S. kind of relatively being unscathed. I guess as we look forward and should continue weakness persist, are there plans for further cost reductions, especially if we have another surge in cases?

When we actually came up with our plan, we wanted to move fast, we wanted to be decisive around making some really tough choices. And so we've made some choices on what to do with the workforce, both here in the U.S. and then internationally. We also made a lot of choices on where we want to spend our money, both in terms of our current spend and our capital investments going forward. It was with an eye of balancing, the desire to slow down some of the costs that we have within the company, but also making sure that we can maintain the long-term growth trajectory. And we feel good about the trade-off choices that we've made on that path. And that's a conversation we'll continue to have on a quarterly basis, where we just look and say, are there places we should reallocate money in order to make sure that we're taking advantage of future opportunities and or other places we should slow things down? But we feel pretty confident right now around the changes that we've made, that we've struck a pretty good balance of that.

OK. Great. And then just one final question on the liquidity that was raised over this quarter. Taking -- putting eNett aside, but just thinking about how you're positioned, whether or not that happens or not. I mean, should we consider that you're out of the market for deals? Or are you looking for other acquisition opportunities?

Well, it's hard for us to say we're ever out of the market. We're active in numbers and processes. It's a pretty slow market right now in general, because of the level of uncertainty. And we certainly want to see through the litigation and get more clarity around the outcome. With eNett and Optal, so that would affect the timing of whether or not in what we chose to do.

Yes. What I will add is, for us, what was important was to be in the position where we are today. And we have over $1.7 billion of liquidity. And as the eNett and Optal unwinds, we will be in a much better position to decide what other alternatives now we want to pursue as things start to improve.

Understood. All right. Thank you.

Your next question comes from the line of Bob Napoli with William Blair.

Thank you. And a couple on segment Travel and Corporate Solutions, the $54 million of revenue, how much of that was Corporate Solutions versus Travel?

About 30% was Travel and 70% was, I think AP-related.

OK. And so -- that's helpful. Are you seeing any pickup in Travel? I mean, it wasn't clear, I guess, in July, I mean, maybe with some of your partners, local travel in the U.S., you might see more activity with some of your online travel companies?

So global travel spend was down about 90% in April and down about 81% in July. So just a little bit of info.

OK. The healthcare sector, the $88 million of revenue, how much of that was from COBRA?

It's still a -- we haven't disclosed that historically. It's still a relatively small piece.

OK. All right. Then just I guess looking as -- if you had to close the eNett deal, you're confident on your capital. If you did, if worst-case situation happened, my guess, there could be other outcomes, restructuring of the deal or whatever. But if you had to close the deal under the terms that were struck prior to the pandemic, your capital with the Warburg capital, you're confident that you have the capital you need, if you had to close that deal. So what's the run rate?

Yes. As I said before, I think the position that we have today from a liquidity perspective is probably one of the best in the history of the company, over $1.7 billion. At the same time, the leverage ratio at 3.1%, I think, is the lowest of the last four years at least, so pre the EFS transaction. And everything that we have been doing and looking at alternative was to be in a position that whether or not, they may -- that we have declared on the transaction, either if we are forced to close, that we are in a good position to maneuver in any of the different alternatives. So what I can tell you and I can reinforce is that we feel really well on where we are today and with the position that we have, both from a cash position, from a liquidity. And I will reinforce, as you heard from the remarks, we also have the support of our banks. We amended the credit facility again, which reinforces how strong the bank's support of WEX. And if we are required to close, we have many, many different alternatives from using all the liquidity that we have on hand, to raise new debt or other alternatives. So we feel really good on where we are now.

Is that three point -- sure.

And just to add to that, yes, just to add to that, one of the things that were important to us was this concept of financial flexibility. There's a lot of uncertainty with COVID just on its own. I wanted to make sure that we felt really comfortable from a liquidity standpoint and from the ability to maneuver, kind of regardless of any of these different outcomes that could happen.

That 3.1, the Warburg deal closed after the quarter. Does that include the capital from Warburg?

It does not. But the transaction of Warburg, because of the new credit agreement, if you recall, the transaction of Warburg has two legs, a $90 million on common stock and a $310 million unsecured note. The unsecured note will be neutral to leverage, and the $90 million will be incremental corporate cash that will help us on the leverage ratio. So if you take that $90 million, we would be at 2.9 at the end of Q2, but it does not include -- no, it's not included on the balance sheet calculation at the quarter, at the second quarter, at the end of the second quarter.

Thank you. Just last quick one is, Melissa, do you see opportunities to accelerate growth coming out of this pandemic? I mean assuming that the world gets back to normal over the next 12 to 18 months, are you seeing opportunities to accelerate?

Yes. And that's a big part of our focus right now is making sure that we're well positioned. And if you look at some of the products that we have on one of the slide deck fits with the idea that, we want to make sure that we're continuing to build upon the technology that we have. We've been really leaning into the digital world, anyway, over the last several years. And so we're just doubling down in that arena and then extending the products that we have through new use cases where people can buy more. So we think the combination of the work that we've done over the last several years and then the product set with some of the new add-ons that we're developing right now, puts us in a really good position. You can see that in health, you can see the wins that we're having in the Momentum that we're having. We got some really great pipelines across the rest of the business, and you're seeing adoption of some of these new products we have out there. So yes, we feel good about our position.

Thank you. Appreciate it.

We have reached our allotted time for questions. I would now like to turn the call back to Mr. Elder for closing remarks.

Thank you, everyone, and thank you for hanging with us as we went a few minutes long. We had a lot to say apparently this quarter. So we look forward to catching up with you in a few months and reporting on our progress then. So thank you.

And this concludes today’s conference call. You may now disconnect.