Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing boy and welcome to know WEX fourth quarter 2019 earnings call. At this time, all participants are in listen only mode.
Third the speakers presentation, there will be a question and answer session.
So lots of Washington during the section you will need to press star one on your telephone.
I would know like behind the conference over to your speaker today Mr., Steve older you may begin.
Thank you operator, good morning, everyone.
With me today as most of Smith, our president and CEO and our CFO Roberta Simone.
The press release, we issued earlier today and a slide deck to walk through our prepared remarks had been posted to the Investor Relations section of our website at <unk> Dot com.
A copy the relief and the slide deck I've also been included in eight case, we submitted to the FCC.
As a reminder, we'll be discussing a non-GAAP metric specifically adjusted net income attributable to shareholders, which we referred to with adjusted net income or a in a.
Adjusting for this years fourth quarter and full year to arrive at this metric include unrealized gains and losses on financial instrument.
Net foreign currency remeasurement gains and losses.
Acquisition related intangible amortization.
Other acquisition and divestiture related item.
Stock based compensation restructuring and other cost debt restructuring and debt issuance cost amortization.
Noncash adjustment related to our tax receivable agreement and similar adjustments attributable to non controlling interests in certain tax related items as applicable.
The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis as we are unable to predict certain elements that are included in reported GAAP results.
Please see exhibit one of the press release for an explanation and reconciliation of adjusted net income attributable to shareholders to GAAP net income attributable to shareholders.
I would also like to remind you that we will discuss forward looking statements under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from most forward looking statements.
As a result of various factors, including those discussed in our press release.
And the risk factors identified in our annual report on form 10-K filed with the FCC on March 18th 2019, and subsequent SEC filings.
While we may update forward looking statements in the future, we disclaim any obligations to do so.
You should not place undue reliance on these forward looking statements all of which speak only as of today.
With that I'll turn the call over to Melissa Smith, Good morning, everyone and thank you for joining us today.
I'm pleased to report that we had a very strong in the year and our performance this quarter tap another record year for wet.
We finished 2019 with strong momentum highlighted based growth and effective execution in each of our business segment.
Solid organic growth combined with our recent strategic acquisition has further strengthened our foundation for sustainable growth and sets us up nicely as we enter 2020.
Turning first to a quarterly performance on slide three.
We delivered earning results at the top end of our guidance range for Q4.
Revenue grew 15% to $440 million compared to last year, driven by another quarter of very strong growth in our travel and corporate solutions and health segment.
I've revenue adjustment in the sleep segment that did not impact earnings which were Berta will discuss later led to a 5% reduction and revenue growth.
This adjustment reflects the difference between reported revenue in the top end of our previous guidance range.
From a segment perspective fleets solutions grew 3%, which included an 8% reduction in gross caused by the revenue adjustment.
Driven by volume growth.
Increasingly see an incremental revenue from EG fuel, partially offset by lower fuel prices.
Unfavorable FX headwind in a softer market environment.
Payment processing transactions were up 9%.
Turning to travel and corporate solution, we closed out the year with an impressive 23% increase in revenue during Q4.
With purchase volume up more than $1.4 billion to $9.6 billion.
We continued the strong momentum in our corporate payments segment.
[laughter] boosted by meaningful contributions from an event though.
Finally in our health and employee benefit solutions segment revenue was up an impressive 69% in fourth quarter.
This was driven by double digit growth and our U.S. health care business.
With 18% organic growth and better than expected contributions from discovery benefits.
Strong topline growth continues to drive operating leverage in the fourth quarter.
On a per diluted share basis, GAAP net income attributable to shareholders, but the dollar 24 per diluted share an adjusted net income was $2.61 up 24% over the prior year.
Now looking at the full year 2019 with another record year for whack as noted on slide four.
Revenue increased 15% to $1.72 billion.
Other than expected performance from a recent acquisitions, including the Ventas discovery benefits and Easyfuel contributed just over half of our growth this past year.
When compared to our long term revenue guidance range, which assumes that fuel prices and FX rates.
We outperformed the top end of our 10% to 15% range when including acquisition.
And we performed well within our 8% to 12% range excluding them.
I listen to your includes solid revenue growth across all of our businesses, particularly in our U.S. health business, which grew an incredible 62% year over year.
We also achieved notable results from the integration and ramp up of the shell and Chevron portfolios.
Which for a major focus during the year and from the acquisitions that we completed.
From a profitability standpoint, GAAP net income per diluted share was $2.26 per diluted share.
Well adjusted net income per diluted share increased 11% to $9.20.
Similar to the revenue growth, we had solid organic growth rapid business.
The graph of shell and Chevron and a nice contribution from the businesses we acquired during the year.
In addition, our adjusted net income growth in 2019 was solidly within our long term target range, which assumes flat fuel prices and foreign exchange rate.
Turning to slide five.
Our from performance in 2019 aligns with the strategic pillars that years ago with its still serve as the guidepost for our business.
We remain committed to building upon our best in class loan growth engine.
Leading through superior technology.
Driving scale execution, and leveraging our culture to attract and retain the best employees.
Executing against these pillars has allowed us to post another outstanding year underscored by double digit revenue and profitability growth.
Achieving technology milestone.
And successful integration of strategic M&A across all of our business segments.
As part of our best in class growth engine, a significant growth driver for off in 2019 was our ability to win in the marketplace.
As you can see on slide six we've highlighted some of the most significant wins in contract renewals of 2019, most notably the shell and Chevron portfolios.
And the number of accounts across all of our segment.
These wins are made possible by the superior execution of the West team are best in class product and market leading technology.
On the technology front.
2019, with a landmark year for us as we migrated our north American sleep platform to the cloud.
Marking our third significant technology platform migration.
Recall this is one of our main goals outlined during our 2018 Investor day with the objective of gaining increased speed to market driving more efficient scalability and enhancing our stability and functionality.
This is one is the largest and most complex platform migrations wexs ever done it was completed with very little customer disruption.
Remained focused on the migration and development of cloud technology, including building new capability and continue to migrate existing technology platform in 2020 and beyond.
One of our platforms. The focus is the internal transaction processing system for our travel and corporate payments customers.
In addition to cloud migration our other achievements. This year included consolidating OTI our platform.
Implemented one of the largest product releases for health care business ever including more than 135, new features and deploying a host of tools internally to help us scale.
Our commitment to innovation remains one of the cornerstones of our business and we will continue to drive industry, leading technological advancements on all fronts in 2020.
As we look ahead to 2020, we expect our momentum to continue.
Building off a tremendously successful 2019.
Once again, we expect our business will achieve result in alignment with our long term target of 10% to 15% topline growth and.
And 15% to 20% adjusted net income growth in 2020.
We're burden will take you through the details of our guidance this year.
But I'd like to provide some color on the key assumptions, we have underpinning our expected performance.
First similar to last year.
Our fleet business is expected to generate solid growth in line with a longer term growth targets, we outlined at our Investor day last year.
However, unlike last year in which our performance progressively ramp throughout the year due to shell and Chevron 2020, we'll likely see the inverse trajectory as we begin the anniversary the migration of these large portfolios.
We're also assuming the softer market environment discussed last quarter will continue into 2020.
Second we expect robust double digit growth from our north American travel and corporate payments businesses.
Contributions from our recently announced acquisitions, the net and opto have not been factored into our guidance.
But we'll provide meaningful lift in growth and profitability with these acquisitions closed, which we expect to be mid 2020.
As a reminder, these acquisitions advance our long term global growth strategy provides geographic diversification and reduced wexs exposure to macroeconomic fluctuations as well as complement Lexus technology and product portfolio.
We're excited about the new OTI a opportunities that this combination will bring which is key to driving our next phase of growth.
And lastly, we expect another record performance from our U.S. health business.
As I look back at 2019, I am pleased with extraordinary progress we've made this year and the steps taken towards achieving sustainable growth as we continued to gag execute against our strategic pillars.
We have established a strong platform that is more resilient in more diversified than ever before which is reflected in our performance this past year.
We will continue to leverage the strength of our customer and partner relationships.
Our market leading positions across core markets as well as the underlying technology that serves as the bedrock of our business.
Lastly, I want to take a moment to thanks, all of the employees, who make flexes success possible.
And our truly the backbone of our business.
I'd now like to turn the call over to our CFO for Bert Us among Roberta.
Thank you Melissa on good morning, everyone.
Strong results for the fourth quarter on the full year profiles on a nice team highlight the momentum into business.
I will just thought of my remarks, we thought to review of their full year at the high level.
Moving to the detail so a few for.
Finally on foot Twentytwenty guidance.
Starting with our results for the full year.
WEX outperform the long term revenue targets I was solidly in the range on adjusted net income.
When compared to 2018 revenue grew 15%.
On adjusted net income grew 12%.
Field prices on FX rates.
How about 35 million negative impact on revenue.
On approximately 90 million embark on adjusted net income.
We got some music on revenue growth in each of the segments.
For the year flu revenue grew 6%.
Travel Encore 40 solutions grew 21%.
On health on employee benefit grew 48%.
Each of these growth rates met or exceeded the long term organic growth target outlined at Investor day.
We're very satisfied with these results.
Now, let's move onto Q4 on those results on slide nine until then.
We got a strong revenue on adjusted net income growth.
Even by another quarter of double digit top line growth into trouble on healthcare segments.
The 3% fleet segment revenue what all.
Reflects our 20.9 million per req jumped revenue.
As maybe some previously mentioned.
Doug review revenue will grow by 8%.
There was no impact to earnings.
Due to one equal or reduction in the sales and marketing expenses.
From an earnings point of view, we continue to benefit from revenue growth.
The acquisitions made during the year.
Overall, we are pleased with the fourth quarter, but four months on both top and bottom line results.
For the fourth quarter of 2019 total revenue was.
Total commented on 40 million.
A 15% increase over prior year.
Non-GAAP adjusted net income was accommodate them 14.7 million.
Two dollar from 61 cents sort of a little bit chair.
Up 24% I'm a bit high end of guidance.
Breaking down the 15% of revenue would show up.
Approximately 11% came from acquisitions.
6% from organic.
On a 2% decline due to headwinds from microeconomic factors.
The 6% organic revenue growth was negatively impacted by 5% from the revenue correction I mentioned earlier.
Moving to segment results.
Beginning with slide 11.
Compared to prior year.
These solutions are cheap so prominent on 60.9 million in revenue an increase of 3%.
The gains were led by the North American fleet business, which grew 17%.
On another solid quarter from over the road.
Additionally, we continue to benefit from the goal fuel card transaction.
We seem to fleet segment, we continue to see solid organic payment processing transaction growth of 9.3% driven by new sales.
At the same time, we continued to maintain very low attrition rates.
Finally same store sales were 3.1 person magazine.
Due to a slowdown in the industrial economy.
We anticipate this trend to continue into Twentytwenty.
Finance fee revenue increased 42%.
The net layfield rates continue to increase this quarter to 65 basis points.
In comparison to the 44 basis points in Q4 2018.
The 58 basis points last quarter.
The increase was inline with expectations on was due to seasonality.
As shown on Chevron portfolios.
A mix of new business wins.
On the small rate increases.
The net payment processing rate in Q4 was accommodate from 10 basis points.
Which was down 28 basis points over the last year.
The decrease was due primarily to the revenue what Josh men, we review the rate by 22 basis points.
You know these Sean it's also decline due to the shell and Chevron portfolios.
Im Mega TV box from spreads in Europe.
So finishing fleet the advertisement must be fuel price in Q4 was $2 on 80 cents.
First was $2 on 94 cents in 2018.
Turning to travel Encore 40 solutions segment on slide number 12.
We finished 2001 nice thing with the same strong momentum that we stopped all here.
Total revenue for the quarter was 95.7 million.
An increase of 23%.
Approximately 11 million relates to the acquisition of November.
In North America, the corporate impairment revenue grew 38%.
Outside of the U.S. travel grew 48% in Latin America, and we saw double digit increases in Europe.
Total purchase volume issues by WEX reached 9.6 billion.
These represent 17% growth versus prior year.
To conclude the segment the net interchange rate during the fourth quarter was 84 basis points.
Which was 20 basis points Collier down Q4 last year.
Like in past quarters.
The increase was due to our contract change we the sizable traveled customer.
Then event these equity Sean.
On the continued strong performance in the U.S. corporate payments.
Moving on to slide 13.
So on employee benefits solutions, we surpassed expectations again.
Revenue for the quarter, but was up an impressive 69% compared to last year.
The USLV revenue, which includes the legacy business philosophy is comedy benefits grew 75%.
To break these zone the legacy WEX health grew our substantial 18% on.
On the acquisition of these comedy benefits Hobbit 26 million.
Do you have enough number of Suffolk County was up 17%.
Continuing to try and we sustained throughout the year.
We are well positioned to capture additional growth in the U.S. Gulf markets I'm continue to expect.
Middle to high teens growth in the long run.
From an integration point of view, we successfully the lever modem on 5 million synergies from the discovery benefits acquisition.
I'm not on track to de lever on another five nearly all by the end of Twentytwenty.
Now, let's move to expensive on is like 14.
For the quarter total cost of fed is expensive what I commented on May 2.1 million.
Up from our comment on 37.6 million in Q4 last year.
Total ex GMI depreciation and amortization expenses.
What are common to come 56.1 million.
Which is up 6.3, mainly on versus 2018.
Breaking down the line items within these categories.
Processing costs increased 33.9 million, primarily due to acquisitions.
Service fees on opening for us what a flat compared to the prior year.
Credit losses during the quarter was 18.2 million.
From 16.1, mainly on a year ago.
In the fleet segment revenue loss was 18.5 basis points over spine volume we've seen guidance.
Consistent with prior quarters than North America fleet business performed well and we continued to see challenges into trucking market.
With fire losses in the small fleet over the road business.
Gee I expenses would up 14.6 million due to the recently announced the acquisition of unit on off though on how your performance based compensation.
Finally sales on market inexpensive was down 11.2 million.
Largely due to the previously mentioned revenue adjustment.
This was offset by the reason acquisitions on the shell and Chevron on costs.
Changing gears onto slide 15 to discuss DOCSIS.
On a GAAP basis, the effective tax rate this quarter was 26.9%.
On a non-GAAP basis, the on ice actuate was 24.7% down 30 basis points from a year ago.
Looking now to the balance sheet honors like 16.
We ended the quarter with Ace commented on the 11 million in gosh up from five prominent them 41 merely on at the end of last year.
From a liquidity perspective, the corporate cash balance was approximately three comedy from 70 million.
These volumes increased approximately a prominent I'm 50 million from Q3 due to a strong cash flow generation.
Additionally, there were several prominent from 69 million of available borrowings under the company's credit agreement.
Also at year end, we kept our total balance of 2.8 billion on the revolving line of credit term loans a note.
The leverage ratio as defined in our country 30 men sums up approximately 3.5 times at the end of 2000, a night Dean.
Up from 3.1 time, Sadia and of last year.
As expected they increase reflects the acquisitions, we completed during 2019.
Looking forward I'm, assuming that July 1st closing date for Enett on up though.
We expect love it looks to be less than 4.5 times.
After closing, we expect to de lever, how hotter to a full term per year.
Finally as of today, we have approximately two thirds of their financing that essentially a fixed rates.
Now, let's look to guide on stone is like 17.
We thought unexceptional here with notable revenue on an earnings growth rates.
As we continue to benefit from organic growth.
The shell and Chevron portfolios on the integration of their viscardi benefits no van fees on the go field got acquisitions.
We anticipate this growth will continue through twentytwenty.
Before we got into the numbers I want to give you some puts and takes that should be considered when modeling twentytwenty.
First our most important on the guidance is inline with our long term target of 10% to 15% growth in revenue.
15% to 20% growth in earnings.
These targets include acquisitions, I don't assume gone from fuel prices on FX rates.
Starting with a fleet segment, our Twentytwenty blonde autumn, we've seen the long term targets or 4% to 8%.
Driven by consistent transaction and grow rates.
On the continued outperformance of the shell and Chevron portfolios.
However, due to macroeconomic factors in the over the road tracking business, we expect to see a slowdown in growth when compared to 2019.
Moving into the travel Encore 40 solutions segment.
<unk> revenue is expected to grow in the middle of the long term target range of 10% to 15%.
We expect volume would have to be in the mid themes.
On a small decrease in the interest rate.
To clarify.
This does not include the impact of the he met our knocked out transaction.
Regarding the health and employee benefit segment, we expect that what are you ESCO business to continue their momentum we have seen over the past several years.
I'm grow revenue in the low 20% range.
This will be driven by new customers.
How successful open enrollment season, a meaningful contributions from these comedy benefits.
Now for guidance, which is made on a non-GAAP basis on reflects our business off to date.
The expectations for the full year.
Our revenue in the range of 1.86 to 1.9 billion.
On adjusted net income in the range of 400 at them 47 to four comedy from 64 million.
On an EPS basis, we expect adjusted net income to be between $10 on 15 on $10 I'm 55 cents spread of allude to chair.
For the first quarter revenue expectations hiding the range of for comedy from 45.
Two for common at them 55 million on adjusted net income expectations are in the range of 95 to 99 million.
Well I need to be as basis. Adjusted net income is expected to be between $2 on 15 on $2 I'm 25 cents for reload the chair.
Now, let me walk you through a few more assumptions.
Exchange rates are based on sort of mid February twentytwenty.
Domestic fuel prices, we love it at $2 I'm 69 cents in the first quarter.
I'm $2 on 70 cents for a full year.
These assumption for the U.S. is based on the applicable Nymex futures price from the week of February Threerd.
The fleet credit loss will be between 15, and 20 basis points for the first quarter.
On 13 to wait Dean for the full year.
The company expects its twentytwenty adjusted net income tax rate for the full year.
To be between 24.5%.
25.5%.
Finally, there will be approximately 44 million shares outstanding for the year.
To conclude.
We're very confident about 2020 guidance on our looking forward to our successful year.
No.
We will open the lines for questions.
Ladies and gentleman that this time I would like to remind everyone in order to answer questions. CP Press Star then the number one on your telephone keypad.
And our do you start agenda number one on your telephone keypad.
Your first question comes from the line of some Joyce Connie from KBW. Your line is so open.
Thanks, Good morning, I wanted to dig in a little bit more into the fuel segment and I. Appreciate it's a challenging macro backdrop. However, when we look at the deceleration in same store sales versus the d. So in some of the transaction growth numbers. It seemed like the latter was a little bit more than than the same store sales.
I'm wondering if you could just help us think about that relationship going forward.
So such as Melissa you talking about the growth of 9% growth we saw in the quarter.
Right like year over year like that year over year growth rate decelerated a decent amount.
Yeah. So we've talked about the last couple of quarters as we've seen.
A slight deceleration in same store sales and so you can see that coming through so about a half a percentage point from Q3 to Q4. So yes. It is incremental right, yes, so so a little bit over 3%.
And same store sales degradation in in Q4 compared the prior year feel like the rest of what's happening across the business. There were changes in business days sequentially. So you look at number of a business days were in Q3 in every business days in Q4, we get a little bit of a benefit that in Q3 were getting hit a little bit and that in Q4, but if you normalize.
That there really isn't anything new to talk about that sitting in the base the business growth rates look similar excluding what's happening for a macro and what's happening with business days that are happening within the two quarters.
Okay.
I guess, when we think about that macro weakness how much of visit a bit as it related to some of the trade stuff that we saw ahead of the virus news and I guess specific to the virus I'm just wondering when we look at the net accretion numbers do you feel like Theres any risk to those given they have a little bit more Asia impact.
Or exposure, sorry, yeah, and actually let me clarify that's good question on same store sales were talking about North American fleet. So those are numbers are specific to the fleet portfolio in and what we've seen for changes sequentially. You did it led to the biggest impact is what's happening in the transportation segment.
So that's got the biggest drag to us if you look.
In Q4 sequentially everything's a little bit worse.
But you know slightly worse.
From period to period in the only thing that looks positive is public administration.
Compared to all the other I'd say, so that's what's happening with same store sales North Rankin fleet in remember if you look at the type of customers that we haven't or North American plea business there across many different industries, there they're sitting and.
Add NAND in mining and manufacturing said from many different now say season in its an indicator really what's happening rather businesses, because they are fueling where they need to fuel and they don't need to they don't have deliveries to make or if they don't have service calls to make and then we don't see that coming through in our spend volume and put that aside and.
Hey, we've seen that I would say stabilizes and slightly negative in Q3, a little bit worse in Q4, but but in the ballpark there looking pretty similar and that's what we assumed would continue into 2020.
Yeah, but then sign talked about the krona viruses, just a totally different thing that is on in our fleet in our travel business. This recall and our travel business most of our spend volume is in the United States. The second for US is Europe Weve, a very little amount that's happening in Asia and Jan.
Where we didnt see an impact to our business because of krona virus, we did see slight softness.
In Hong Kong in Australia, but you're talking about since Asia is a relatively small part of business you're talking about a couple of regions that sit within that it had no impact on our business.
And because we have such little business in Asia, we're really not seeing much meant impact.
Within blacks and if we looked at what we assumed in our guidance on a go forward in 2020, when you contemplated that when we set of our guidance range, but if you look at our mid point, we're assuming minimal impact again, because as the dynamics of who we have a worse than volume happens in our portfolio.
And then you ask third question in there, which was around the impact to he met an optimal their business is 40% of their volume is in Asia 60 percentage in Europe would we've looked at market research and that Theres, a couple of things that I.
I want to call out Wall Street Journal. This put out an article this week and where they had travel economists looking into impact. If you look at hotels that they're saying is they're predicting a 0.3% impact to hotel volume.
And globally.
If you look at some of the research that has been done by Morgan Stanley on this front they looked at previous krona virus.
Like event, so pandemic issues, but they showed is regional impact which was relatively brief.
And I think any if you step back in a macro level.
We feel for those that are impacted by the virus.
And we know that this is very focused.
We would situation, but to what we've looked at that helps us boxes leaves us to believes that the impact should be relatively minor.
To access core business and relatively short term to the extent that would impact in that Nob Hill and remember we're assuming at this point in time that we would have a midyear close.
Okay. Thank you and maybe Sanjay what I will add this you know to put some numbers for you on what Melissa said, if you think our travel business overall onto we do a bit more than 30 billion of spend.
So for 70% that's falling on a full year basis, you are talking a couple of million dollars in revenue on our full year basis. So it gives you also off label not on on what would be the impact, but as Melissa set now what I would have it volume today most of it is in North America.
Got it thanks.
Okay.
Your next question comes from the lineup Ramsey El Assal from Barclays. Your line is now open.
Hi, Thanks for taking my question today and forgive me if you addressed this already in the prepared marks I've been hopping between a couple of calls.
Can you give a little more color on the adjustment you made in that Sweet solutions segments, what is it exactly.
And.
That would be helpful.
Yes of course, the silhouette, though so let me explain it to you.
Did you see seek so seeks revenues thunder. The we have opted in January 2018.
While certain agreements with customers to be presented on a gross basis in the piano.
What are you recorded the revenue on the top line and into the related Commission jewelry was recorded on the sales and marketing line.
And then that at all that arrangements that you only report another net amount and we keep all in the revenue side with no amounts in sales and marketing.
So as we were closed in Q4, and where do we know what internal reviews way then defied set at the bottom at arrangement, where do they account can do them properly reflect economics.
And as a result, we fix that BNS classification or with the deals the revenue on the sales and marketing costs by approximately 21 million relative to the Q4 guidance.
And then of this 21 million approximately 14 million relate to the prior three quarters of 2000 on nitrogen.
On what I want to clarify this well is that there was no impact to operating income or a net income on a GAAP basis or on an anti basis.
Okay. Thank you that's that's helpful and.
Lastly, and this is a quick two parter. The first is any impact to call out from all the recent press reports about an outage in DSS it seem pretty minor in transitory, but I thought it asks about it and then and then the second part of the question is just on the EMV liability shift later in the year can you just help us think through the impacts on your business, you're most updated thinking in terms.
Where are your fraud loss rates would go after the this which occurred with presumably is down or whether you could.
With that permit you to do anything like loosening credit lines are there any any general impacts on the business would be would be helpful, but I'll get back into queue.
Sure I'll answer the first one Ted Yes, fastened fleet one card did experience it really short outage earlier this month.
And then we obviously took immediate steps to minimize the disruption we were actively communicating the other customers, which actually is like a picked up in a in the press.
We want to make sure that clear that the outage was due to a glitch with our third party database vendor soon and something that rectified and.
Just further for us reinforces the moves that we're going into the cloud. This is a platform that is scheduled to go into the cloud this year.
Mitch it's important to us for all the reasons, we talked about on the call is that with the migration that we've had we've had three so far. This is one of the ones. We had scheduled to move in 2020, we had very.
Very minimal impact.
Transaction volume these looking over the period time this was very similar.
What we've seen in other periods.
In regard it was going to answer your second question. Yeah. So if you recall a couple three years ago, We've got a significant capital losses on the we implemented a couple of systems on a we invested significant amount of money. So different all office today, our meanly mouthed, even I mean as you know, we don't report them any longer but.
They are within the.
The fleet credit loss, the yellow less see at approximately 20% of this autocad LT losses, and as Youre seeing on their migration in Nam in Q4 of these yet we do not expect a meaningfully but not on on our financials.
The other things on top of a you know doing this system and the investments that we have dawn. We're also working on doing more investments on developing some artificial intelligence tools.
Data, you know, what helping us to that that the fraudulent transactions.
And you know to perform better not on on this on these area. So although we do not expect not to see acute benefit because the numbers are already low.
Okay got it and that's why the sense. Thank you.
Your next question comes from the line of Steve in the World from Morgan Stanley. Your line is now open.
Good morning, Thanks, a shout out to Morgan Stanley, Although I wish it were on a better topic.
Maybe just going back to the fleet for you I think you guys are just talking about how the fraud is kind of not really the moving pieces here, but if I look at the trajectory or sort of talking about in terms of the credit losses looks like you're expecting that to sort of crescendo into this this upcoming quarter, and then sort of improve over the back half of the year, but with the comments about.
Our being weak intervening into 2020 could you just talk about how you think you see that progressing I think last time, we talked about it sounded like it was sort of progress for better part of a year and then like a year over year improvement just because of the lower base, but could you just give us updated thoughts there.
Yes, absolutely. So the first thing I would say that 2019, we closed at 15.1 basis points on earlier in the year. We gave a range. So we were due within the range. If you compare that to priority. After 2018 did what a couple of their percentage points increases, but I'd be portion of that relates to the shell and chevron.
Portfolios as you know the out is more fleets and those small fleets carry more to could have you lost you make more money on late fees, but at the same time know your credit losses will be caught yet on also recall that we thought on the shelf side. There is notable that portfolio.
And then what is different enough from what we thought that earlier in the year is that in the past two quarters on the over the road we have seen some deterioration on the economy and he was also in Q3.
And that's why you have seen nonsmall spike compare to what we were in 2018, when we model Twentytwenty on a copy of the numbers in front of me. We are modeling our full year similar to what we have a night team around the Steve on the midpoint around the 15 16 basis points.
And obviously, we got more than on the first half of the year I beat salutary losses on last year because of the normalization of the over the road segments.
Yes.
Got it Okay. That's helpful. And then maybe just shifting gears just talking about M&A, putting even at an optimal to side as a reference point, obviously you guys give a lot of commentary the other week there fleetcor was out the other do other we talking about moving towards channels like software on the front end of corporate payments could you just remind us in terms of your.
Stacking of priorities.
Where are you thinking of in terms of M&A, and where you would use that remaining dry powder. I know you said, you're going to be below the four and a half leverage rooms, a leverage ratio. So you could have some room either way even as you closing at an awful.
So when we think about capital and how we allocate capital.
We go across each of our core verticals and when I think about the quarter verticals, it's travel its corporate payment.
Fleet in health.
And we're looking for geographic expansions scale players or product extensions that we can add in in you can look pack. This last year now 2019 into we did a little bit of each of those.
In in the acquisition so that we made.
And so if they fit where were going strategically and then we really run the mix of of those different options.
And then there is a combination between you know what becomes available in anyone in from a timing perspective. So we've got a strategic roadmap of what we want to acquire we're working on relationships on an ongoing basis. Some of these things take years to come to fruition.
And when we execute them when they meet all of those criteria. So when they fit we want to do strategically they are on our roadmap. They hit one of those three areas scale products extension or geographic expansion they hit financial criteria and we have any ability to absorb it so that we have a whole host and put filter.
That we go through.
So as we're looking into the future and we're going to continue to do that seem process that we've done over the past five years and so we will be a mix that you will continue to see that come through in its going to be combination of.
What we want to do strategically and what's happening in the marketplace at prices that we think makes sense for us.
Awesome. Thank you very much.
Your next question comes from the line Bob Nepali from William Blair. Your line is now open.
Thank you for taking my question like to dig a little bit more into corporate payments in health care business with two separate questions first on the mid teens growth in payment volume.
In the travel and corporate payments business.
For 2020, what does that.
How would you break that down between the travel portion and the corporate payments portion and you did have a nice increase in the net interchange rate, which you attributed to quoted payments is there.
More upside on that.
So Bob good morning.
So they way with.
Our to our corporate travel incorporate payments segment not so we guided on the within our our lump them range in this segment over 10% to 15% a midpoint, we expect volumes to be slightly higher than that so when the 15 colleagues known the on the mid teens.
Slightly is similar to this yet is slightly down that way I will look at it if you remember at Investor Day, we break down. The this segment between throttle where do you know the market is growing around 9% over at all.
On the core prepayments that is growing on the 15% to 20%. So you could think directionally that the volume growth are going to be a split that similar to what the two markets now out of good only not.
And then from a net interchange point of view this year there was a big change.
Because of the reasons that I've been saying every quarter. So we got Nova indeed.
We got the our customer contract change when we move adjusted dollars from other revenue in two payment processing.
We've got some customer mix impact as well.
Gives you modeling tools Twentytwenty, we probably will see I mentioned that that small decrease on the rate because of the mix of the spent more than any other exceed okay. So there's nothing that we had expected to be different but I think you probably will see ASML decrease on the rate, but similar to what we are.
2019.
Okay. Thank you and then on the health care business, Oh, you're lapping the acquisition discovery denim has benefits, but you still seeing very confident about I guess mid to high teens.
Revenue growth that industry is not growing that fast so you're taking a fair amount of market share.
So maybe just an update it sounds like that acquisition integration is going well with how are you gaining the amount of market share. This is a much bigger business now they have.
Confidence in those types of growth rates.
Over the medium to long term.
Yeah, if you look at the performance and our health business. This year, it's been just outstanding net across the board to <unk>.
Correct wins.
What we're bringing in signing the integration of DVR eyes, the ramp of business in Dbi in all across the board. It's been really very very strong in if you look at that business a lot of those trends you can see happening through enrollment season. So we've had a really strong enrollment season.
We feel good about the combined business that we have the into the two channels that we've established in the health business. The pipelines that we have and that's leading to our confidence in the growth rates. We've got in the in our guidance for 2020.
Where's the market share coming from I guess she said.
You know what it is coming from a lots of places I Wouldnt describe it is coming from any one place. Some of that continues to be internal systems that are migrating. Some it's the market is growing as we've seen growth.
Within the HFSA market.
Specifically, but even FSC market continues to grow sue.
You see more adoption growth rates health care costs keep going off all all of those things which were the reasons why we entered the space. They really have come true and then for.
Taking market way I wouldn't say is coming from any one place I'd say, it's coming from a you know a bunch different places and we have the benefit of working through some really great partner channels that are in the marketplace with their brand every day.
And they're bringing in market share as well so it's been a combination of adding new partners. Those partners continue to grow health care costs go up.
And there's more adoption to these programs and all of those things have been creating some really good tailwinds for us.
Okay. Thank you appreciate it.
Your next question comes from the line of Darrin Peller from Wolfe Research. Your line is now open.
Thanks, guys. When you look at the fourth quarter suite trends you know when you adjust for the $21 million and you just for just look at macro wasn't really bad different of a trend as I think you alluded to earlier.
So when we consider going forward you know I guess I'd be curious to hear number one is there any updates what you're seeing in the sub verticals.
Called out like transportation and wholesale and construction I think last quarter, I guess any other signs of strengthening or weakening on some of those areas or others.
And I'd be curious to hear if you're seeing any market share impacts associated with some of the reviews going on the regulatory reviews at one of your competitors.
If you could just comment on market share updates there if you're seeing any evidence of the name any changes.
Yes, we continue to win in the marketplace and we feel very good about our competitive positioning on the pipeline that we have the businesses that we have implemented and that's been true new for years. The addition of PFS into the rest of our North American fleet business, it's been really strong.
In combination in the marketplace and so that I wouldn't describe that heads as changing I think thats been strong new for us for for years and and we do feel good about the technology. We have the loans that were investing so a bit ability to continuing to win in the marketplace is in part because.
We start from a product that that superior and we continue to invest in it.
In terms of what we're seeing in mix in a change from an economic perspective and same store sales you really is.
Slightly worse across most essay sees but from sequentially from Q3, Q4, but when I say slightly it's.
A little bit more than half a point.
I don't know that Theres any one thing that I would call out there I talked about transportation because it.
In his having.
Bigger impact, but if I look through the portfolio.
Equally big or things like mining, which is not a very big part of the businesses mining oil and extraction. That's that's actually.
Quite negative year over year.
But most of these there's you know.
A few points negative with a few being.
Higher single digit negative from an efficacy perspective, and so we just are seeing.
It's continued softness in the industrial segment.
In that portfolio nothing that you know for US is nothing alarming it's just.
It's just soft compared to what.
Thanks.
Yes continuation of as embedded in your guidance range, yes, yeah, and when it and you know in theoretically that we'll have better comps and you get into the second half of next year, but we are.
We're going in assuming that it continues throughout all of 2020.
Okay understood exactly I was going to fit exactly that and say you know as we get along into the year. If we see you know this MSR sales improving obviously, we will have no an update on the guidance as we move into Twentytwenty.
Okay. Just a quick follow up on the corporate payment side. Given you know continues to be one of your jams and her business. You know just talk a little more about the blocking and tackling you're doing there and what you think is differentiating you guys right now in the marketplace, that's allowing for the growth rate.
Yes, the growth for us is coming in a couple of ways, it's coming through partner channels. A in so we've said is the technology behind a bunch of both financial institutions and Fintech companies within just as it think of US is is that the payment tech that sits behind that.
That's been the highest growth rate for US. We've also had a in a good growth, which is cross selling within our existing fleet portfolio.
And we think of that is more of a direct salesforce. So both of those have been working well for us in the marketplace I think from a competitive differentiation standpoint.
We've got some pretty good tech chops and so when we're talking to other companies both from a just a pure technology perspective, the ability to integration into the systems that we have.
But also from just a security perspective, as we're doing business with with banks and it's something that we take very seriously and and we have.
A lot of of compliance and security reviews that are happening on ongoing basis, which creates a little bit of overhead, but actually helps us a lot competitively in the marketplace, because we do well on that front.
Make sense guys. Thank you.
Your next question comes from the line of Ashish Sabadra from Deutsche Bank. Your line is now open.
Thanks for taking my question. So question on margins margins for pretty strong in the quarter. We obviously saw some benefit from the accounting change but.
Even in the segment margins were pretty good how should we think about margins going into 2020 any color on the segment level. Thanks.
Hi.
Obviously, the Q4 is a is that Vietnam twisted because of the revenue recognition on an adjustment on the revenue side, but over at all you know what I can tell you is that if I look from 17 to 18 18 to 19.
If you exclude the field prices on FX fluctuations, we have been improving the margins in both the years.
If you look at Twentytwenty, if you take the midpoint aim revenue.
Excluding again fuel prices NFX fluctuation the revenues growing 7%.
On a EPS is growing 15%. Therefore, you should expect now I know that a year of improvement over at all on the margin.
That's an all what a week upset the always we want to focus on both grow into business I'm accelerating the growth.
But at the same time know, how we can improve margins overtime as we continue our investments on any of it and as I said no. If you look back to the past two years on the guidance. We've got four Twentytwenty. We continue Uno improving the margins are from an adjusted operating income point of view.
That's very helpful and maybe just a quick follow up on the accounting change as you mentioned there was 14 million dollar adjustment for the past three quarters. I was just wondering if you can give us what the 40 adjustments war and.
Should we expect that then now going forward as well thanks.
So yes, it's 21 million is the full year number on as they said 40 million approximately 14 relate to the prior three quarters.
They had a product similarly, as we go on Q1 Q2 on Q3, the yachting slowly increasing.
But I would twentytwenty guidance already in close now that the.
Data revenue adjustment I see if we were doing net revenue. So we contemplate that on our guidance for Twentytwenty that we won't comp not the adjustment going forward.
That's helpful. Thanks.
There are no question at this time, you mean continue.
Thank you everyone. Thanks for joining us today, and we'll look forward to speaking with you and a couple of months from updating you on our progress some idle conclude our call today.
Yeah.
This concludes todays conference call you may now disconnect. Thank you for your participation.
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