Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to WEX Incorporated Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now like to turn the conference over to Steve Elder, Senior Vice President, Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO; and Jagtar Narula, our CFO. The press release we issued earlier this morning and a slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release has also been included in an 8-K we filed with the SEC earlier this morning. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, which we sometimes refer to as ANI, adjusted operating income and related margin as well as adjusted free cash flow during our call. Please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 23, 2024, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa.

Thank you, Steve, and good morning, everyone. We appreciate you joining us today. I'd like to start with a quick financial overview of results, which Jagtar will discuss in more detail, and then I will turn to our approach to growing the business and progressing against our ambition. We continue to deliver growth and strong profitability in the third quarter, driven by healthy sales, high customer retention and expanding margins. We've also leveraged our strong cash flow generation to deliver on our disciplined capital allocation strategy, including $544 million spend on share repurchases through the end of the third quarter. For the third quarter, revenue came in at $665 million, a 2% increase compared to the same period last year and adjusted net income per diluted share was $4.35, a 7% increase compared to the prior year quarter. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, Q3 revenue and adjusted EPS growth would have been 5% and 14%, respectively. While we maintained our momentum in delivering revenue growth strong profitability and thoughtful capital allocation, our results did fall short of our expectations, primarily driven by two factors that occurred within our Mobility segment. The largest impact was macro-related. The substantial decline in fuel prices this quarter paired with some broader softness in same-store sales. In addition, isolated operational issues were identified while optimizing our pricing structure, resulting in an unplanned charge that impacted this quarter. Even with some headwinds this quarter, the Mobility segment delivered underlying revenue growth of 8% compared to last year, excluding the impact of lower fuel prices and foreign exchange rates. This is higher than the growth rate in Q2. While confident in our growth over the long-term, we are reducing our outlook for the remainder of 2024 to reflect our Q3…

Thanks, Melissa, and good morning, everyone. As Melissa mentioned earlier, our third quarter results fell short of our prior guidance for revenue and adjusted EPS. I'll walk through the details shortly, but this was largely related to noise in the Mobility segment from macro trends, including decline in PPG and same-store sales, along with an isolated unplanned charge to finance fee revenue. On balance, it is important to note that we achieved record high Q3 revenue and adjusted EPS continued to show strong growth. We had solid underlying growth rates in both Mobility and Benefits segments. I was especially pleased with Mobility, which accelerated its growth rate from the prior quarter. Further, our cash generation remains quite strong, as evidenced by the significant allocation of capital to share buybacks this quarter, while maintaining leverage at the bottom end of our range. Now, let’s start with the details of the quarter results. For the third quarter, total revenue was $665.5 million, a 2% increase over Q3 2023, with more than 80% of revenue for the quarter recurring in nature. As I mentioned earlier, we had solid growth rates in both Mobility and Benefits segments. As a reminder, we define recurring revenue as payment processing and account servicing revenue, revenue from our factoring business, income from custodial HAS cash assets, transaction processing fees, and other smaller items. In total, adjusted operating income margin for the company was 44%, which is up from 41.8% last year. Segment margins increased in both Mobility and Benefits compared to the prior year. From an earnings perspective, on a GAAP basis, we had net income of $102.9 million in Q3, or $2.52 per diluted share. Non-GAAP adjusted net income was $177.5 million, or $4.35 per diluted share, which is an increase of 7% over last year and…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of David Koning with Baird. Please go ahead.

Yes. Hey guys, thanks for taking my question. And maybe first of all, on the Mobility segment, the processing rate – the interchange rate, was high, as you mentioned. Is that sustainable – sustainably high? And then also in this segment, how big in dollars was that reversal – the finance fee reversal? And does that come back basically in Q4?

Hey David, this is Jagtar. So on the interchange rate, we did have a nice pickup quarter, a couple of factors there. One was fuel prices helping the rate and then the other one was the pricing increases that we’ve implemented over the last year. So the pricing increases, obviously will be sustainable. The fuel prices will do, what fuel prices do, but if they stay where they’ve been recently, we should see the rates stay comparable. On the revenue item that you mentioned, it was about a $10 million impact to the Mobility segment.

Okay. Great.

You asked about whether or not we’d see a benefit of that going forward. And think of that as a reversal in the past of some of the late fees that we had calculated, so we had gone through – you might imagine the pricing optimization work that we’ve done over a long period of time creates a lot of complexity in some of the nuanced calculations that we had. We’ve gotten back and audited the changes that we’ve made, and we found some issues to some of those very nuanced calculations with a very isolated number of customers, and then corrected that. And so going forward, it should be at kind of just a normal rate going forward, and we’ll continue to use pricing optimization as one of the levers for us. So it’s one of the focus items for us.

Got you. No, thanks. And then, just as a follow-up on the Corporate segment, I know you’ve said before, the big client leaving, I think you said a 1% revenue headwind to next year. If I just look at this quarter, normally you grow high singles, and instead you declined high single. That gap is about a 3% to total revenue. So is the large client totally out already? And then what’s kind of that excess gap? Is that smaller OTAs and stuff like that?

Yes. There’s a number of things that are impacting us this year. Fuel prices, I’m not sure if you were talking about that fuel prices have been a pretty big macro headwind for us this year, and we’re anticipating it to be in the fourth quarter as well. And on top of that, we’ve had this one customer that’s made their migration. We’ve seen in the quarter, it came through materially as we expected, just a titch faster than we expected, but it was pretty much in line. And we do expect that we’ve seen that really go through the first full quarter. The third quarter has more seasonality associated with it, too, just because travel spends tends to be higher in that quarter. So there’ll be some lumpiness of how that comes through in each of the quarters. And then the last thing, as Jagtar talked about the same-store sales softness that has had an impact in this quarter, and our expectation is it will in the next quarter as well.

Got you. Thank you.

Your next question comes from the line of Nik Cremo with UBS. Please go ahead.

Good morning and thanks for taking my question. First just on the Benefits segment. Can you just discuss how the pipeline is looking as we head into open enrollment season and just some of the puts and takes as we head into 2025? I know that Jagtar just mentioned that there was some delays in expected revenue. Just kind of like what level of SaaS accounts is needed for this business to kind of accelerate closer to the longer-term range in 2025? Thank you.

Yes. So we feel actually really good about open enrollment season as we’ve gone through the course of the year. Bookings have been higher year-over-year. In 2023, at the end of the year, we talked a lot about the fact that we saw some non-decisions that seems to have reversed so far in 2024. So the impact that Jagtar was mentioning was the fact that we had some contracts that were actually rate on the finish line, and they ended up getting deferred in terms of timing of implementations. So we’re not getting some of the benefit in revenue this year that we had anticipated, but in terms of bookings and how we’re progressing into next year, we feel really good. Devenir has talked about HSA growth being around 5%, and we certainly expect that we’re going to beat that market growth rate.

Great. Thanks for all the color.

And Nik, I’d just point out that if you look at our SaaS account growth wallet, you see the 2% reported. If you remove the one Medicare Advantage customer that we’ve talked about previously, account growth is in the 7% range. So certainly ahead of that Devenir number.

Your next question comes from the line of Andrew Bauch with Wells Fargo. Please go ahead.

Hey guys, thanks for taking the question. Just wanted to look at the Corporate Payments business once again. I know, Melissa, you called out that 6% growth rate that would exclude the impact of the large customer transition. And then thinking about in the longer-term, we’ve always kind of thought this business was a mid-teens grower. And with the 6% out there and kind of pointing to that as a sign of growth, should we be rethinking the longer-term growth rates of that business?

Yes. When we think about the business, we’ve talked about it being a 10% to 15% grower longer-term, the Benefits business – I’m sorry, the travel customer base grew 7% in the quarter. So we saw a little bit more softness outside of travel. We talked about two things that are impacting that segment right now. Obviously, this migration of the large online travel agency has a pretty big impact on the segment and will over the next three or four quarters. We do expect that you would see that migrate back to a normal growth rate within the travel marketplace. And we have hundreds of customers in that space and feel really good about our ability to grow with them, as well as add new areas of spend into that customer segmentation. And then on the rest of our Corporate Payments business, we have seen some mix that happened within the third quarter and some pullback on spend. I’d say just kind of generally in the marketplace, it’s not a large number, but that’s impacting us a little bit. But in order for us to hit that 10% to 15% growth rate, we’re very focused on growing outside of travel as well, at a higher rate than the travel business will grow.

Understood. And then if I could follow-up on Mobility. For the last year, we’ve been going through this digestion period [Technical Difficulty] if you think about 2025, what inning [Technical Difficulty]

You’re cutting out. Can you just repeat the question, please?

Yes. When we think about Mobility, where do you think we are in kind of this cycle of the drawdown on excess capacity and when do we kind of stabilize as we think about 2025?

Yes. Within the over-the-road marketplace, which is when you’re talking about excess capacity, we’ve been in a freight recession for a very long period of time. As we are looking at that customer base, now talking to that customer base, I think there continues to be hope that that’s going to reverse at some point in time. And certainly if you look back in history that things do revert back to the mean. But we are not anticipating that that’s going to happen within the third quarter. And in fact, we saw a little bit more softness even in that customer base year-over-year in same-store sales. So I’d say, if anything, we’ve seen a little bit more weakness. It’s not as pronounced as what we saw within the local part of the marketplace, but certainly impacting that segment as well.

Understood. Thank you, Melissa.

Your next question comes from the line of Dan Dolev with Mizuho. Please go ahead.

Hey, guys, thanks for taking my question. Can we talk a little bit about pricing in Mobility in terms of, you think about sort of gallons? They’re basically, I’d say, flattish year-over-year in 2024. So an organic growth is about 5%. Can we talk about sort of the impact of pricing and what you think about that into the future? And then I have a quick follow-up. Thank you.

Yes. So, Dan, I think you hit it like pricing had a pretty significant impact this year on the order of $40 million to $50 million. Obviously, we are – obviously, constantly looking at how do we optimize pricing, which we’ve been doing for the last year. Some of what we implemented this year, we expect sort of roll forward into next year in kind of the $10 million to $20 million range, which you analyze this year’s impacts. And then we are continuing to look at pricing opportunities, but nothing that we’ve decided to implement at this point.

Got it. And then quick follow-up on the buybacks. Given where the stock is, like any change to the buyback cadence?

So just buybacks in general, we’re pleased to bring the share count down to the lowest point that it’s been in a decade. Now, outstanding shares are down 12% from Q1 2022. So right now, share repurchases are a really attractive use of capital. And our recent actions and activity in this space reflect our confidence around WEX’s long-term intrinsic value. So, we’re aware of the opportunity of buying back stock. We’ve been very aggressive about doing so. The Board just increased the authorization, supported that as well.

Got it. Thanks again, Melissa.

Your next question comes from the line of Mihir Bhatia with Bank of America. Please go ahead.

Hi. Good morning. Thanks for taking my questions. I wanted to go back to the Corporate Payments segment momentarily. Can you just walk through the impact from the large, I guess, booking the large customer in that segment? I guess the real question is, is the impact now in the numbers this quarter? Like should we expect that account services revenue to be around this level and like the decline in payment processing at this level? Or will the impact grow from here?

Yes. So Mihir at a high level the large OTA customer is sort of continuing to transition volume to the new model. So we expect this to grow further in the fourth quarter and then get to the kind of new levels next year. We’ve talked in the past that this transition will be about a 1% impact to 2025. So you’re going to see that kind of grow as you go into the fourth quarter and then hit that level as we get into next year.

The only thing that will offset that is seasonality. So Q3 has just got higher spend volume than the fourth quarter. So as Jagtar saying, the penetration should we expect to increase to this new model? But historically, there’s less spend volume in the fourth quarter.

Got it. And the full year guidance for the segment is unchanged. I think it was 2-ish percent you had said last time.

Yes, we’re still in that range, little softness in corporate payments, but still in that range.

Got it. And then switching to the Mobility segment. Just a two-part question there. Just on the – one is on just the fuel price impact. Did I hear you right? You said $0.34 of the EPS decline is coming from the fuel prices being lower?

Yes.

So I guess like also on that, it used to be $0.10 of EPS is $0.20 – or $0.10 of fuel prices is $0.20 of EPS. This seems much larger than that.

Yes. Let me clarify. The $0.30 is the fuel – average fuel price decline in the fourth quarter from our revised guidance versus where we were previously assuming. The EPS impact of that is about $0.23. So it’s in line with the rule of thumb we’ve given in the past.

Okay. And then the same-store sales softness, your assumption is just stability in pricing. From here, you’re like, you’re not assuming any more weakness or acceleration. Is that the right way to think about that?

Correct. We’re taking where we were in September and assuming that for the fourth quarter.

Okay. Thank you.

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

Thanks. Good morning. Maybe just to go back on the weakness in the spending habits in Mobility. It sounded like historically, that's been a leading indicator on the macro. Melissa, can you just give us a little bit more detail how you see that unfolding? Do you think it's a sign of broader things to come?

So if you look across the local business, just as a reminder, these are people that are using our products to make delivery calls and sales calls. And so it's business activity driven within our base. What we have seen is that if you look across the portfolio, seven of the eight top industry groups declined 3% to 5% year-over-year. Those declines were broad-based. And actually, I think the only thing that grew is the government industry code. This has happened very recently, so it started in August, as Jagtar said, and accelerated a little bit in September and then it has leveled off in October. But what we know when we cut the data based on geography, industry type, a fleet size, that it's very consistent across the portfolio. We've also reached out and talked to customers. We called hundreds of customers just to get a sense of what they're feeling. And their most prevalent answer was that just their needs were lower. So I think that what we're hearing from our customers is maybe more about uncertainty with elections coming up and not knowing what's going to happen with interest rates. And so we're not sure if it's just like a short-term pull back, and we've assumed the same level of activity would happen in the fourth quarter is just an assumption right now. So we're not trying to call it into some macro indicator for the future, but it is what we're seeing right now, and it's what we're anticipating happening in the fourth quarter.

Okay. Great. And then maybe just following up on Corporate Payments and the OTA stuff. Seems like that large OTA is progressing as planned, maybe a little bit quicker. But ultimately, that impact will stay with us until next year – most of next year. Is there anything else that we need to be concerned about? I know there's been like chatter of the other large OTA renewal. Any changes in strategy there? I'm just trying to think about what else we need to be prepared for, for the OTA segment going forward. Thanks.

We're really focused around making sure that we're continuing to work with our existing customer base, but also looking for new areas of spend within those customers. We've talked about the fact that we had seen weakness in airline spend. It's an area of focus. We continue to see that as an area of weakness within the portfolio. So I think we're looking at areas that can create some opportunity for us, both in terms of acceptance globally and new types of spend that occurred with those customers. And then we feel really good about the product roadmaps that we have within our beta payments product even outside of travel and what opportunities that's going to create for us in the future.

And just to clarify, like do we – is there another large renewal that we need to think about in 2025?

I would say we have customers that are renewing all the time. There's not anything that I would call out at this point in time.

Yes. We've talked in the last call about kind of the volume between the first half and the second half with some of our OTAs managing spend. But we're not expecting – at this point, we're not concerned about any renewals for next year.

Okay, great. Thank you.

Your next question comes from the line of Nate Svensson with Deutsche Bank. Please go ahead.

Hi, thanks for the question. So sorry to again ask about Corporate Payments. So I did want to clarify on the large travel clients. So I think previously, you had talked about 30% of the volumes being taken in-house in 3Q. It sounds like based on Melissa's comments that came in a pitch above. So any change to the prior outlook you had talked about, I think, sort of 40% of volumes going over in 4Q and kind of maintaining around that level for next year? And then the follow-up kind of outside that large OTA client. I think this quarter, we had talked about things like weakness in airlines, some larger customers splitting volumes across providers. And then I know you had lowered your outlook for the remainder of the year on volumes on the 2Q call. So just any update on those other things outside the large OTA impacted results.

Yes. So large OTA is happening materially as planned. It will increase penetration a little bit in the next quarter. But again, seasonality will buffer some of that. So I would say it's moving again a little bit faster than what we had projected, but we – frankly, it's the minor of this conversation. The second part of your question around – as we progress into next year, we're again working with them. But I would say the expectation right now is what happens in the fourth quarter that, that should largely move through next year and then you just more about anniversarizing – creating the anniversary of the transition.

Got it, got it.

And the rest of the spend volume. Yes, if you go through the rest of the portfolio, we said that two-thirds of our revenue comes from these smaller online travel agencies. We've seen very similar trends to what we had expected. So we continue to see some acceptance issues with low-cost air carriers in Europe. The merchants are talking to those low-cost air carriers. And so that could create an opportunity for us in the future. But we have an expectation right now that that's going to continue. The volume overall with those customers are a little bit lighter than the volume that we see with the larger customers and a large part of that is travel-related spend. So I'd say, generally, it's coming in really pretty much as what we had expected last quarter.

Got it. Thanks Melissa. And then I guess just for my follow-up, credit losses, I guess, came in better than expected in the quarter. You also had a really strong 2Q on sort of much lower charge-off rates. So I guess two quarters of outperformance despite some softness you talked about in your existing book of business there. Looking at the 4Q guide does imply a material step up sequentially in credit losses. So just wondering if there's anything specific, like I know you've talked about the macro factors, but anything you're seeing across your book of business that is driving that? Or maybe that's just prudence or conservatism, however you want to phrase it on your part?

Yes. I'd say we've had really good performance in charge-offs this quarter was kind of one of our sort of lowest charge-offs. I think as we look to next quarter, there wasn't a specific item. It was looking at where our receivable balances are as well as we got the benefit, say, this past quarter, of the reserve balances coming down, which we didn’t expect to repeat next quarter. So factoring that all in is where we ended up on the guide on credit losses.

Thanks, Jagtar. Appreciate the details.

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

Hi, thanks for taking my question. In the Benefits segment, I think Jagtar mentioned a delay of some new revenue because of like later client onboarding. Does that mean that, that revenue will kind of spool up and flow into Q1? Is it just sort of pushed back a bit? Or should I read it differently?

No, that's right. So if you look at the bookings number that we had anticipated for the year. So we still believe we're going to hit the same bookings number. It's just the timing of that. We had a couple of contracts that were just at the kind of final stages that we hadn’t expected to be implemented and that got deferred in terms of implementation, but we don't expect it has any impact in terms of total bookings.

Okay. And then lastly for me, I think there were some extra bill days in the quarter, and I'm just thinking through next quarter and/or any impact that those extra bill days might have had this quarter. Is that something that moved the needle a bit? Or am I overthinking it?

Yes. And Ramsey, I'm assuming you're talking about the Mobility segment. We did have a couple of extra fueling days this quarter – a couple of extra fueling days, so about 3% more fueling days this quarter versus last year, whereas next quarter, it's basically flat year-over-year.

Very helpful. Thank you so much.

Your next question comes from the line of Andrew Jeffrey with William Blair. Please go ahead.

Hi, good morning. Appreciate you taking the question. Jagtar, sorry, if I'm being a little remedial here. I'm just trying to understand the earnings guidance reduction. If roughly a third of it, give or take, is from fuel, what's the balance?

Yes. So if you look at the fourth quarter, it was about, call it, $45 million reduction versus the prior guidance. $15 million to $20 million of that was split between fuel being the majority of it in interest rate. And just a reminder that interest rate, while it impacts revenue, doesn't flow through EPS largely. But $15 million to $20 million is call it, macro fuel and fuel prices and rates. The next one is, call it, $10 million to $11 million was Mobility softness that we had talked about and what we were seeing on same-store sales and late fees. And the last piece of it is the Benefits item that we talked about, and that's in the $5 million to $10 million range.

Okay. And how does that all drop to the bottom line? Because it seems like there's various varying impacts. I guess that's what I'm trying to isolate is that...

Yes. Sure. So if you start at the top, where I talked about the $15 million to $20 million from fuel and rate, the rate part doesn't fall to the bottom line. So that $15 million to $20 million would fall predominantly from fuel at about $0.23 as I said earlier in the call, and then the remaining $25 million falls to EPS of about $0.50, right? And then the last item is what's happening in credit losses. And so we – you can look at what we've assumed for credit losses in the fourth quarter, and that's the last negative on the guide. We’ve assumed slightly higher credit losses.

And just to elaborate on the credit loss, what's causality there? Is it just purely macro? Or is it transitory? Or is this a higher level of credit losses?

I wouldn't say it's a higher level. It's really looking at we've generally been trending pretty positive in credit losses. We got some nice benefit in the third quarter, as I said earlier, from the bring down the reserve from the good charge-offs that we were seeing in the third quarter, not expecting – we're not going to get that repeat in the reserve balance in the fourth quarter. So as a result, charge-offs will be higher – sorry, the credit loss provision will be higher than we saw in the third quarter.

Okay. And if I can just follow up. I mean this is stuff that I would have expected you'd be able to see earlier in the year? I'm just a little surprised that it crops up here kind of right at the end. How do you think about that and sort of visibility in your business overall, I suppose?

Well, if you take individually, fuel prices is something we give out a metric. It did change almost immediately after we gave earnings last time. But I think that's a broadly known number. The softness really came out in August, accelerate in September and again it’s leveled off in October. So it is unusual. And if you look at our volume numbers, we're normally actually very accurate in terms of estimating what's happening with volume within our Mobility business. So this is an unusual movement that we've seen. And then in terms of the push in signings, those contracts were literally at the very end stage. And so we had anticipated that, that would move into onboarding, like it normally would, and it just didn't this time. So I think about our ability to understand the business in a normal environment, I feel like it's actually quite high. And if you look back at our history, we've been pretty accurate at this. But clearly, we've been off a lot this quarter.

Okay, I appreciate it. Thank you.

Ladies and gentlemen, that does conclude our question-and-answer session. And I will now turn the call back over to Steve Elder for closing remarks.

Yes. Just really briefly, just thanking everyone for your time this morning, and we'll look forward to speaking again with our year-end earnings.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.