Q2 2021 WEX Inc Earnings Call

Okay.

Ladies and gentlemen, thank you for standing by and welcome to the <unk> second quarter of 'twenty or 'twenty, 1 earnings conference call at.

And at this time, all participants lines are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star 1 on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

I would not to hand, the conference over to your Speaker today, Steve Elder Vice President of Investor Relations. Thank you. Please go ahead Sir.

Total 1 moment.

Adjusted net income or NII during our call.

Adjustments for this year's second quarter to arrive at these metrics.

Include unrealized gains on financial instruments, net foreign currency re measurement losses.

Change in fair value of contingent consideration.

Acquisition related intangible amortization.

Other acquisition and divestiture related items stock based compensation and other costs debt restructuring and debt issuance cost amortization.

And I adjustments attributable to Noncontrolling interest and certain tax related items.

Please see exhibit 1 of the press release for an explanation.

Innovation 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 1095 actual results may differ materially from those photos and statements as a result of various factors.

Factors, including those discussed in our press release and the risk factors identified and our annual report on form 10-K for the year ended December 31, 2020 filed with the SEC on March 1.2021, and subsequent SEC filings.

While we may update forward looking statements and 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.

Thanks, Steve and good morning, everyone. Thanks for joining us today.

And I hope all of you and your families are healthy and doing.

Well.

I am pleased to report for Q2 with a very strong quarter as a result of our laser focus on execution against our strategic pillars and continuous innovation across our technology platform.

For successfully building off the strong momentum from earlier this year supported.

Sorted by our financial and operating results this quarter, which continued to reflect very positive trends across the business and strong demand for our platform and services.

Our overall value proposition and the marketplace is to leverage our deep industry knowledge, while continuously developing.

<unk> upon a strong set of capabilities.

And this allows us to give our customers a broad range of bespoke services that meet requirements of easy integration into their systems and the ability to scale quickly and securely.

Because of this we're able to deliver significant benefits for.

Tumors, resulting in market share gains and strong customer retention rates.

The pandemic sparked and increased wave of digital engagement and <unk> products and services are uniquely positioned to not only benefit from but also enable the transition to an increasingly digital economy.

We're excited about the acceleration and digital payment adoption, we see this as a significant opportunity for wax and as a result, we have increased our focus and investments into accelerating digital transformation across the company.

Turning to our results this quarter, we delivered robust year over.

For growth with revenue, increasing 32% and adjusted net income up an impressive 91% per diluted share.

Total purchase volume process across the organization and the second quarter grew 104% year over year to $21 billion for for.

Further perspective revenue and adjusted earnings were ahead of Q2, 2019, and the best second quarter and <unk> history.

We have had strong momentum and organic growth this quarter, reflecting spend patterns, returning as mobility rebound coupled with new customer wins.

Solid.

Solid execution from the works team led the favorable margin expansion across the business.

Revenue was up 12% and adjusted net income per share was up 29% compared to Q1 of this year underscoring the gains we made during Q2 and making us feel very good about the quarter.

As we look at performance from multiple financial perspective.

We made progress integrating our recent acquisitions, including <unk>, which contributed to our sequential improvement and performance.

Finally, I'd like to point out that during the past 2 years, we have deepened our revenue capabilities.

<unk> and shifted more of our revenue into a high quality of SaaS revenue stream.

And the mix of our revenue has continued to shift towards account servicing revenue, which primarily represents our SaaS revenue stream going from 24% of total revenue in Q2, 2019% to 29%. This.

<unk> for <unk>.

Now I'd like to discuss a few highlights from the quarter and the innovative solutions, we are delivering for our customers.

The combination of our technology platform deep payment expertise and track record and configuring integrated solutions to meet the needs of industry verticals.

This court hinged to open the doors for new opportunities.

This along with our ability to seamlessly integrate into our customers' operations via API for.

And to meet them at their level of technical sophistication bolsters, our value proposition and remains core to our overall strategy.

This.

This also leads to very high customer retention rates as demonstrated by our 95% net revenue retention and the health business and Q2.

Our results demonstrate the strength of our many diverse offerings.

I'd like to highlight a few notable examples of how our differentiated products and services.

And multi channel go to market approach and resulted in new wins this quarter.

Our health business continues to drive differentiated growth.

Sat on past years ago to create an ecosystem within health and benefit.

We began with a focus on providing the payment technology behind tax deferred accounts such.

Such an HSA and FSA accounts expanded into Cobra benefits.

Standard into a broker channel with greater transit and service and capabilities and most recently acquired benefit Express and June which now gives us enrollment capabilities.

I am excited about this acquisition because it makes wax.

But first to form a full service health and benefits marketplace, bringing together benefit administration compliant services and consumer directed health and lifestyle spending account and 1 offering.

Additionally, this transaction meaningfully expands waxes total addressable market.

Benefit.

And another important piece and our capability to serve the needs of this dynamic and growing market.

Brexit is a proven ability to invest and extending our technology platform functionality, both for internal bills and through acquisitions.

And we look to offer our existing partners additional opportunities for growth.

Growth by leveraging technology and services that meet the full set of employee benefit needs at.

As we further develop our health and benefit service ecosystem, we expect to create new and exciting opportunities.

While we have strong new customer and partner growth and high retention rates with <unk>.

It is great to see a lag and employment growth, whether existing partners and customers, which is a trend that we believe will return to normal over time in the meantime, we are focused on innovating and outperforming competitively in the marketplace and we are reiterating our expected organic growth target this year of 8% to 12%.

Contained in our existing health business, we continue to see the power of the health ecosystem that we have developed for.

For example, together with 1 of our key partners, we were able to cross sell Colbert services saw a large benefit and payroll providers small business group.

This shows the strength of our expanded offerings for our partner.

<unk> base, the ease of integrating with wax our ability to successfully integrate new acquisitions on the tech platform and our ability to quickly scale our offerings through API.

I'm also excited to announce that we're continuing the strong momentum and corporate payments, including the recent renewal of our agreement with American.

For us for initial 5 years and.

American Express has grown at handfuls program into billions of annual spend and just a few years using our issuing technology.

With this agreement wax and Amex combined each partner's core strength to provide a best in class customizable accounts.

And of automation solutions for Amex corporate customers.

And by working with businesses existing accounting system to streamline the AP process works for technology allows amex business and corporate card customers to make supplier payments. This single and multi use virtual cards, increasing the ease inefficient.

And payroll and see for Amex clients pay their suppliers and we're excited about continuing our partnership with Amex and delivering best in class payment automation solutions to their corporate customer base.

For our largest customers are deep payment expertise allows us to develop bespoke solutions and expanded.

The global currency capabilities, all delivered with easy to integrate API and build upon enterprise grade cloud based solutions that allow us to win and retain key brands.

This is another piece of the large and growing <unk> payments market, we are committed to continuing to develop upon our capabilities.

Inefficient capture additional market share.

Before I conclude I'd like to talk about ESG, we published our inaugural ESG report at wax earlier, this year, which has set a baseline and we will continue to build upon.

Our goal is to further integrate our ESG program into our overall business strategy.

And I'd like to update you on some of our ESG related activities, which are part of our overall strategy.

A great example is the work we're doing around waxes electric vehicle or EV strategy, and how we're working with our customers and partners to meet their evolving needs.

Our customers and partners goals are expanding.

Pending and now often included sustainability targets and compliance with future government mandates.

We believe our expanded EV products will support west with future growth and benefit the environment.

We've been providing E D payment solutions, such as data capture simple.

This integration and secure.

Payment solutions to customers for several years, including the General services administration for GSI.

<unk> safely and as the largest public fleet and the United States and they've been using our integrated EV payment and reporting solutions for the past 2 years.

Looking forward, we're planning on helping our customers.

For us meet their needs for mixed fleet comprised of both internal combustion engine and easy.

Our product roadmap includes options for broader access to public charging locations on site for depot charging enhanced data capabilities.

<unk> tools for employees that charges.

Harvest homes and integrated reporting and insights.

Our customers transition to EV will progress over time and works will be ready to meet their needs.

We're also keeping in mind possibilities for future products as the industry evolves.

We've also made progress on the diversity equity and inclusion fronts.

And following the most recent election of our board of directors. Our belief is that our board and embody a diverse set of skills experiences and backgrounds, which provides us and informed approach to governance and strategy.

With the election of new directors at our annual meeting in June our gender diversity.

The day at <unk> Board of Directors is now 5 women and $7 million.

And 25% of our members come from ethnically diverse backgrounds.

These individuals bring decades of experience and leadership and errors that are critical for our future.

I'll continue to update you on our ESG journey.

Any along the way.

If I look back on the quarter I'm extremely proud of Brexit performance and this dynamic and fluid environment.

Keeping the customer at the center of all we do allows us to win and the marketplace.

Our customers and partners value the power of our differentiated products and services.

Serious wet spring and through the table to meet their needs and to provide seamless integration with their system or.

Our new customer signings and pipeline remains robust and we will continue to drive innovative solutions that meet the dynamic needs of our customers. These results are only possible due to the talent passion and.

Think of our employees I'd like to thank them for their hard work and dedication and delivering another excellent quarter.

As you've heard me talk about before we believe the works culture is a significant competitive differentiator and this is more relevant than ever as we navigate the ever changing effects of the pandemic.

Focus for example, as we began the transition back into the office, we're listening to the needs of our employees and fostering a flexible work environment, which allows our talent that's focused on customer needs.

This collaborative process and it allowed us to maintain our strong employee retention rates and add new talent.

For proactively positioning works for continuing to scale and capture additional profit as volume increases.

We're seeing strong momentum across our sales channel with significant new wins and renewals and we are successfully integrating acquired businesses.

Our combination of innovative technology.

And talented people with deep industry expertise differentiates us from the market and we remain well positioned for future growth.

With that I'll turn the call over to our CFO for Berta Simone.

For BARDA.

Thank you and good morning, everyone.

As Melissa talked about.

Full year operating and financial results in the second quarter were very impressive.

Building off a strong first quarter.

Overall results at our bulk the second quarter of 2019.

And as I look forward to the second half of the year.

We continue to pose.

From the company for long term sustainable growth.

As we execute against the customer pipeline M&A integration and drive innovation across the technology platform.

Starting with reported our results on slide number 11.

For the second.

About their best.

Total revenue exceeded the high end of expectations, but.

But I, mainly due to better than expected volume recovery in the fleet and.

Travel and corporate solutions segment.

Higher fuel prices.

On Cobra revenue stemming from reason large changes.

Total revenue came in up for comments on $59.5 million.

On 32% increase versus Q2, 2020.

Up 12% sequentially on up 4% compared to Q2.2019.

From an earnings perspective on a GAAP basis, we had a net loss attributable to shareholders of $33.9 million.

Non-GAAP adjusted net income was our cognitive and for $9 million.

For $2 from 31 cents per diluted share.

Yes.

Represents on 91% increase versus the prior year and.

The fourth consecutive quarter of adjusted earnings growth.

This was driven by higher revenue.

Well on robust adjusted operating income margin in each of the segments.

To put this.

And perspective, it represents the highest second quarter revenue on adjusted earnings and works to study.

Turning to slide number 12, and breaking down the revenue by segment flip.

Sleep solutions grew 34%.

Travel and.

And corporate solutions posted a 50% increase.

And finally health unemployed benefit solutions was up 17%.

Now, let's move to segment results, starting with fleet on slide number 13.

Total fleet solutions revenue for the quarter was $274.4 million.

A 34% increase versus prior year.

Primarily driven by new customer wins and renewals.

Fuel prices and.

And continued recovery in the existing customer.

<unk>.

This also reflects a strong sequential growth of 13% when compared to Q1 this year.

And 3% growth when compared to Q2.2019.

Payment processing transactions were up 26.

2% year over year.

Over the road transaction maintains a strong growth up 31%.

With the North American and International Fleet business is up for.

And <unk> on.

34% respectively.

The net.

Net late fee rate decreased to 41 basis points.

In comparison to the 57 in Q2.2020.

As customers continued to pay their bills on time.

On the other Con finance fee revenue was up 40% from the prior.

Year to year periods.

Due to the significant increases in volume and fuel prices.

To finish please.

<unk> domestic fuel price in Q2, 'twenty to 'twenty, 1 was $3 and <unk> <unk>.

Versus $2 on <unk> in Q2, 2020.

Increased revenue by approximately $37.8 million.

And was partially offset by fuel price spreads in Europe.

Turning to travel and corporate solutions on slide number 14.

Total segment revenue.

Revenue for the quarter increased 50% to $81.8 million.

Additionally, purchase volume issued by works was $8.7 billion.

With volume from travel related customers, representing the majority.

Breaking it down corporate payments customer revenue was up 49% led by continued strength in the partner channel.

Revenue from travel related customers was up 53%, including approximately 10 million and revenue from in ethanol.

Doug.

As a reminder, Inc. Q2, 2020, we recorded a revenue true up from the renewal of a scheme b contract.

Finally, let's take a look at the health and employee benefit solutions segment on slide.

On a per 15.

We continue to drive a strong growth, resulting in Q2 revenue of 103.3 million.

This represents 17% increase over prior year and 24% cash through 2019.

And now we are excited about the growth opportunities, we have seen and this business and.

And finding ways to expand our offering.

Supported by the recent acquisition of benefit Express, which closed this quarter.

In the U S health business revenue was up 19%.

On sales account growth was 13%.

These numbers include approximately $3 million and revenue on approximately 200000 accounts related to benefit express.

Of particular note this quarter, we were able to.

Payload and respond quickly on behalf of our partners to participate in the American rescue blend legislation.

This led to an unusually high number of Cobra participants in May and June.

Adding close to 1 million on temporary accounts on.

And approximately $7 million in revenue.

Looking forward.

We expect to transition back to employment related growth.

Now, let's move on to expenses on adjusted operating income margins on a slide number 16.

For the quarter total cost of salaries expense was a comment from $71.7 million.

From a commented on $61.9 million in Q2 last year.

Total SG&A and depreciation and amortization expenses were.

Emitted from $5.6 million, which is up $49.2 million versus 2020.

In the fleet segment adjusted operating income margin for the quarter was 52% comp.

Compared to 37, 8% in 'twenty.

<unk> thousand 20, and 45, 9% in 2019.

The increase reflects revenue growth very low credit losses.

Higher fuel prices and operating leverage and the expense baseline.

For revenue loss in this segment.

208 basis points of expense volume compared to 27 in Q2 per year here.

Travel and corporate payments delivered adjusted operating income margin of 21%.

Up from 21% and Q2.2000.

And worthy.

And a significant sequential increase from 9.9% last quarter.

As we expected we have seen additional benefits and the margin from the EBIT and upped our synergies and the increased volume.

Which led to a high drop.

<unk> 20 right.

So far we have implemented approximately $30 million of run rate synergies.

The remaining $10 million will take longer as it relates to platform consolidation and Bakken processing.

The health.

Through segments adjusted operating income margin was 28, 1% compared to 28, 6% Inc..2020.

This also compares to 25, 4% in 2019, showing clear progress overtime.

For the total company adjusted operating income margin was 36, 3%, which is up from 28, 7% last year.

Let's discuss doctors on slide 17.

On a GAAP basis, the effective tax rate was negative 7.

For 9%.

Compared to 3 <unk> and 10, 8% for the second quarter of 2020.

On an eni basis, the tax rate was 24, 8% for the quarter on.

On 25, 2% for Q2 prior year.

And Im changing gears now to slide number 18.

I will like to provide an update on the balance sheet.

We are remaining a healthy financial position and ended the quarter with for commented on $25.3 million and cash.

Down from 8 commented on 52 million on <unk>.

And for 'twenty.

From a liquidity perspective works cut over $630 million of available borrowing capacity on our corporate cash balance of 109 million Boe.

Both as defined under the company's credit agreement.

These numbers.

Flagged the acquisitions completed this year.

At the end of the quarter debt.

Total outstanding balance on the revolving line of credit term loans and convertible note was $3 billion.

The leverage ratio.

So as defined in the credit agreement.

Samsung just under 4 times.

Which is up from 3.7 times at the end of 2020.

To finish the balance sheet discussion in June we executed on $900 million of interest rate swaps.

And that's a rate of 67 basis points.

As of now the interest rate on debt financing debt is approximately 90% fixed through the end of the year.

To close on the call. We are extremely pleased by the results of the second quarter.

And the recovery, we have seen so far.

The first half for the year set a solid foundation and we believe we are entering a post pandemic business environment.

Therefore, we are resuming revenue and earnings guidance for the third quarter and the full year.

And as you can see on slide number 19.

Starting with the third quarter, we expect to report revenue and the range of for commented on $65 million to $480 million.

And adjusted net income and the range of 98 to 1.

$107 million.

On an EPS basis.

We expect adjusted net income to be between $2, 15, and $2 and 35 per diluted share.

For the full year, we expect to reported revenue and the range of 1.

And 8.1 to 184 billion.

And adjusted net income in the range of $377 million to $395 million.

On an EPS basis.

We expect adjusted net income to be between $8 on 30 <unk>.

And $8 on 70 cents per diluted share.

Now, let me walk you through a few more assumptions.

Exchange rates are based as of day end of June 2021.

We estimate domestic fuel prices will average $3 on 18.

Per gallon for the third quarter.

And $3 for the full year.

Both are based on the Nymex future price from last week.

The adjusted net income tax rate is expected to be between 24, 5% on and 25, 5%.

For the third quarter and for year.

And finally, we are assuming approximately $45.4 million shares outstanding.

And with that operator, please open the line for questions.

Yes.

Before we jump into questions and Steve and I just.

Just want to apologize for the technical issues, we had at the beginning of the call and I know that we got a little bit cut off and <unk>.

Just to note that some of the information that we discussed on the call was non-GAAP metrics as youll be accustomed to and so I'm sure. You can go ahead with for Q&A now.

Yeah.

Yes.

And as a reminder to ask a question you will need to press star 1 on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Your.

Your first question comes from Sanjay <unk> with K BW.

Thanks, Good morning all.

Obviously, you guys are seeing some constructive trends as we move through the second quarter.

Maybe you could just talk about these new forecast that you've provided and.

And how much continued improvement youre expecting as.

To the second half of this year. So when we think about some other macro factors like SME recovery. The travel volume growth could you just talk about contextually, how much improvement you're seeing assuming relative to <unk>.

Okay.

Hi, Good morning, Sanjay. This is this is a little better let.

As a little feel some color on how we have come with the guidance and I may.

No other Melissa early will also add some color as well. So the first thing I would say, we have been sharing and all along the weekly trends and as you can see the weekly trends have been improving especially from the month of May we saw a big jump on and on travel.

Travel and the trend has continued to improve.

From there what we have done is taken into account the seasonality for the third and the fourth quarter as you know normally on the third quarter, we have more travel and also the fleet volume improved from Q2. So we have also taken that into consider.

Consideration and then when you get to queue for what we have model also is the seasonality that we have always seen in the last for 5 years, where the travel volumes.

And down a bit the same with the with the fleet numbers now.

Now that can be the from this year. This is what we have model we will keep watching.

And every every week and other trends and if something changes studies that we defer and obviously, we will discuss that and then the other 2 things that we have other it on our projections for Q3 and 4 and.

And increase on both credit losses on late fees, so more or less day wash from on net earnings.

A point of view, but you should see as we go along into Q3 and for some increases on bolt on.

And finally on the revenue side with the closing of the transaction of a benefit express we have other between 20 and 25 million in revenue on a full year. So if you take the almost $3 million that we did.

In the second quarter. So you are talking just over $20 million and Robin.

Yes, and the only thing this is Melissa that I would add to that is we've seen obviously, some nice sequential improvement between Q1 and Q2 and.

And as we're looking through the latter half of the year. We're looking at the trends that we're showing you and these graphs on.

And that's how we're coming out for their estimates.

Okay, Great and then just.

Ill get.

Sanjay don't forget that we had already occurred and of 19 from a revenue point of view overall. So that's why we have consider another debt today appropriate way to go and other things that the patent and starting to become a REIT.

And more normal.

Understood and.

And just a follow up question on the travel yield and that obviously sequentially declined a decent amount.

Can you explain like how much of it and make versus other stuff that drove that decline.

Yes, so we talked about last quarter.

To you know the changes on a on the overall rate in the travel and corporate segment in this particular quarter Theres no surprises I mean sequentially is down 16 basis points, but you also need to consider debt. If you look at the mix between the volume from travel and the mix of.

About volume from corporate payment and seek has increased materially. So overall, we went from $6.1 billion on spend in Q1. This year to $8.7 billion. This year, but day increase on the travel side has been more than $2.3 billion. So the mix is the 1 that has impacted the most day.

The yield if you think about what we are projecting based on our guidance for the remainder of the year Sanjay is going to be very close to what we have reported in this quarter unless the mix changes dramatically.

Understood Okay, great. Thank you so much.

Yeah.

Your next question comes from.

Bob Napoli with William Blair.

Thank you good morning, and Melissa and Steve.

Nice to see the rebound.

And the business question.

On the corporate payments business.

Which is.

Shown obviously from some pretty strong growth can you give some color around.

The what is working and corporate payments and just.

Melissa some longer term thoughts on what you think the growth of that portion of your business can be over the next 3 to 5 years.

Sure and this is part.

For the vessels, obviously, we're excited about the growth trends that we're seeing.

Good day.

By being in the pioneer and virtual cards and virtual payments and we had already had a base and foundation to build upon for about $300 million worth of run rate revenue associated with this business that has.

And you know primarily digital you know from the beginning and so as we've continued to add customers and new partners and to that mix we benefited from.

And the rebound in the quarter from prior year spend patterns, but also the additional partners coming on and they're adding new customers within the base.

Battery and really the benefit of all of those things coming together.

We really believe that and the offerings that we have and the marketplace.

And our compelling you know, we're adding marquee names and to this part of the business because of the underlying technology and our capabilities and so we look at this as a growth Avenue for us here.

Since he's back.

So I wouldn't call out anything that was you know specifically different and Q2, it's just a continuation of some really positive trends that we've seen for the last.

Probably 6 quarters.

And the longer term growth outlook for that business, yeah, and it's it's a huge market and we see a tremendous amount of.

The opportunity for us and and we have continued to reinvest and this part of the business we've shifted through the pandemic a lot of our internal development towards this area because we see the capability that we have we see the momentum we have and the marketplace and so we build bullish about the long term track.

Trajectory.

For and growth opportunity would happen and this market.

And then lastly, the American express the expansion and renewal of that.

And it sounds like and expansion of the 2.

And to include AP automation, because I think that was primarily virtual cards is that right or and you know.

How is the amex relationship going if you can give any.

Color.

Got it.

Yep it unless it's been a great partner of ours, and we know we've continued to build upon the relationships that we have with them and we're providing issuing technology to them.

And through that and we've grown revenue as they've grown their spend volume.

So you know and primarily the growth that you've seen from us and what we're projecting for just that they're continuing to build their book of business and no as there.

And a provider of issuing technology, we will grow as well.

Is it an expansion on the AP automation.

And it's it's no it's not it's a continuous.

And what we've been doing for them. Okay. Great. Thank you very much really appreciate it.

Your next question comes from George from a Halo Smith Collyn.

Hey, good morning, everyone. Congrats on the congrats on the quarter.

Wanted to kick things off.

Anyway, it's just a question on on competition and yield and I'm I'm. Just curious if you guys could talk about the competitive landscape as it relates to just sort of the corporate and travel segment certainly there.

New entrance.

Our our are competing in the and the virtual card market just curious if there's anything different there and.

Is there an opportunity to improve.

That debt.

Yields and travel at some point going forward just curious how you guys are thinking about it.

Yes, and so what are the things I would I would actually add to that conversation is when we think about the business. It's also.

So now what is what happens ultimately from a profitability standpoint, so yield for US a lot of what we've been working on and for the last several years has been to make sure that we can create a cost structure that is highly competitive. So it's not just the technology, but the underlying cost both of those things are important to us and I would say, particularly so.

And also as part of the market.

And so you can see the really significant drop through that happens between Q1, and Q2 was and we saw increased revenue that dropping through to earnings and that's really as a result of the scalability that we've created and that model. We a few years ago brought in has the processing.

And the ability, which is something that we are now selling into the marketplace. We believe that what we have.

And as a product capability is and are better than what we were using prior.

And it is much more cost effective for us and the marketplace and so.

And do you have to look at both sides of that.

Assessing him not only our wood and bringing on for new spend and volume, but also how much of that is actually dropping through.

My first point.

And the second point relating to the competition I would argue that this has always been a competitive part of the marketplace I think that.

Over time, there's been.

It is an increased expectation of.

And as the networks are providing incentives and making sure that those incentives are pushed out into the marketplace.

And so that has increased I think some of the.

On the pressure around making sure that.

Incubator for being distributed.

But from a.

From a day to day perspective, and the way that we compete in this marketplace.

And I would argue that it's been competitive all along and the reason why we win is because of the strength of underlying technology. We have the product capabilities that we have the way that we were able to confirm.

Figure it to create specific use cases, and functionality and and specific interest rates all of those things together and it has given us a really strong competitive position and we just have a deep knowledge and and payments.

Backs up.

And the underlying technology and products and you know as a result, and we do keep bringing on new customers and making sure.

For that we're growing with them.

That's that's helpful. Melissa appreciate that color and then Roberto 1.1 quick 1 as it relates.

2 to EPS sort of sort of sequentially from Q2 to 3 Q, obviously, you've got revenue coming up.

Sequentially.

And and some of you know adjusted income.

And rather rather flattish.

Just want to make sure I understand what might be happening from an expense standpoint for Q3 Q. It sounds like increased provisioning, but is there anything else to kind of keep in mind.

So what I would say to you is.

And as you know starting after the pandemic.

No. We we took some cost out that we announced last year and then as we saw.

On Q4, 2020, we saw that things were starting to rebound. So we earnings due to debt some costs on some investments, especially in sales on and technology on <unk>.

During the first half of the year.

And through budget and process and adding some incremental investments we have been cautious obviously and we are feeling that as we said today I mean, we feel now that we are on a post pandemic environment. This is via U and we want to continue investing and grow and as Melissa just said so there are a few puts and takes what I can.

And tells us that the gearing as we go from Q2 to Q3 to Q4.

Talk about especially on the fleet, we believe and we are now on our guidance projecting that both late fees will improve as we go along the months the same with the credit losses.

You need to consider also the benefit.

Benefit Xpress acquisition within the health segment of the U S business and as you know the business sequentially is very strong on the first half of the year in revenue and on earnings and then on the second half of the year Theres, obviously, some investments and getting ready for the enrollment season.

And finally between the cost that.

I was taking before talking before per.

For the state in that and some incremental investments that we continue to do as Melissa said on technology on the cloud and.

And other areas, that's where do you see a bit of debt yield, but it's nothing different from for.

From where we would be on a net amount of course and it's all linked with.

And on thermal strategy and off at 10% to 15% growth and revenue and 15% to 20% growth on <unk>.

Yes.

Okay. Thank you.

Your next question comes from Dan <unk> with Mr. <unk>.

Oh, Hi, guys.

Thanks for taking my question nice results so 2 questions.

On the take rate so it looks like trouble is picking up and.

And can you maybe just reaffirmed it should we expect that the yield and travel and corporate.

Coming down as the year progresses as debt sort of your assumption.

And we have to make given the improvement in trouble and then I have a follow up please.

So the simple way to what I said is sequentially, we had 16 basis point decline and I.

I would say most of it was related to the mix between the volume on travel and the volume on corporate payments.

Assumption and Q1.

And as I said, it was almost 40% around 40% travel and 60% corporate payments in Q2.

The majority of the volume is travel as you go through Q3, and as we said and on our guidance. We expect travel to continue to rebound so we expect to be.

And as slightly higher probably 60 around 60% travel and 40% cut for repayment. So you should see as mall and Ocean, but then as we go through Q4, it should flip the other way around as the travel volume goes slightly down from a mix point of view and probably will be around 50.50 debt rate will improve.

And so if we look at what we are in Q2 and you compare our guidance I mean, we are talking 5 basis points or so difference up or down depending on the mix and nothing major.

Got it and then my quick follow up is on the fleet. It looks like at 16, 2 vehicles, you've had very nice improvement in.

Or.

And how much of it is share gains versus macro versus mix shift and we can you shed some more light on what is going on there because obviously the numbers and really strong. Thank you.

It's an interesting question and I'm trying to do a year over year comparisons get in a pretty challenging in a year like this.

And Europe, we know is that we're continuing to win new business and implement those lands and.

And we can see the results and that flowing through and earn.

Revenue and an earnings perspective, we know the same store sales and you know it.

Come back and.

If you look at total volume compared to Q2 of 2019.

Net.

We're down to 3% and <unk>.

So largely rebounded from the pre pandemic arena and I'd say a lot of that has been it's.

It's been a combination of.

On the rebound and volume from existing customers and you can look across categories like construction, which looks like it's really fully.

<unk> band It and then other parts of the North American Fleet business line.

And with our larger fleets, which still looks like it's lagging but in aggregate you can see that and it really largely to come back to where we were before the pandemic and then we're benefiting from.

The increased sales that we've had across.

And they bring portfolio.

And and really the strength, we've had and the other out business and so while there is still lagging a little debt and the North American fleet net.

Same store sales.

We've gotten the benefit of all of those things that you just talked about on some of that is new sales some of that is rebound and existing.

Processing volume.

And in the rebound is an equal and depending on the customer categories.

Very helpful. Thank you so much.

Your next question comes from Trevor Williams with Jefferies.

Hey, good morning, and thanks for taking the question.

Wanted.

Existing margins and fleet, which it looks like just relative to <unk> historically running at basically the highest level do you ever have and I'm. Just curious if for thinking kind of pre versus post COVID-19 any structural changes I mean is this a new normal level of margin that we can expect now going.

And forward or is it maybe the credit performance is still maybe skew and margins a bit higher.

And what might be sustainable over and maybe whether that's the back half of the year and then even further out in 'twenty, 2 and 'twenty 3.

So I will start saying that obviously the quarter was very strong and fleet was a big component.

So on and on a big driver of that so we haven't seen.

And over 50% margins on the fleet and in DSA I caught the numbers with me for even if I look to 18 or 17 net on a couple of things that I mentioned before when we were talking about guidance.

But just inc, with a lower late fees and lower.

And losses, obviously your margin is going to improve that's 1 thing that we need to take into consideration.

And the second thing is as I was talking before during the pandemic. We took some cost out. So we have been benefited from that and some of those cost as we continue to reinvest and we continued to grow volume says Melissa.

Your credit obviously, we're going to be other institute and Dr costs, but other than that the business is doing really well high margins.

And if I think about what we shall line on a full year basis. This year, it's probably going to be slightly better than in the past because of the late fee on the credit losses, because we have got.

Over $50 million lower credit losses, but the lithia rate is also very low.

And our other than that Theres, nothing major change and now the environment and then obviously fuel prices and fuel prices have increased from last year to this year in Q2 more than at all on now from.

From 2 I think it was.

$207 or 209 to $3.2 so obviously thats also a significant yield improvement on our margins, but if you put fuel prices aside the 2 drivers is what I said to you.

Okay, Perfect and then just a quick follow up on health.

The Cobra accounts that you guys added.

This quarter is there any expectation for how long those stay and the base or if there is any potential that you convert those to be more permanent just thinking kind of how and whether thats embedded in the rest of the year guide and can stay through part of 2020.2 just any help there would be great. Thanks.

Yeah, sure and so they arent programs and septum.

September 30, this year and so our expectation is that.

The large number of debt.

That we had in the quarter would step down by the end of Q3.

And so from a benefit perspective the work.

We did within the quarter the big part of the number that Roberta was talking about.

Was the work, we did and informing employers of the change and and there and our partners of the changed with that allowed US to then do as reactivate customers within the system, so that employees could opt to take.

Integer and the changes and.

Get the step up.

As a result, and again, we think most of that will step down at the end of Q3.

Got it okay. That's helpful. Thanks Melissa.

Okay.

Okay.

Your next question comes from Darrin Peller with Wolfe Research.

Hey, Thanks, guys listen when we look at the guide again quickly for the second half just to be clear I mean, you're assuming basically and that's equivalent to the run rate as of now right or last couple of weeks. So youre not really assuming were for <unk>.

For mental recovery relative to what we're seeing right now and I just want to make sure that's clear and then secondly when.

And when we can.

So the travel segment in particular, it's I think it's around 80% international versus 20 domestic pro forma for the for unit and auto and so what.

And what assumptions are you, making I guess on just cross border travel and embedded in that.

Let me I'm going to start on the second part and in server for will jump in the first part of your question.

We've actually seen a little bit of and unusual mix, so far and travel where.

And normally not is skewed towards North America, and I've said before that we do have other some more complicated cross border travel, but that is where we've seen.

Pickup and volume is there.

And then our North American.

Volume base.

And so.

And so a little less strength and Europe that we would normally see more and North America.

And then less and Asia that we would normally see and so from a trend perspective.

And what's happening right now in the World, We would expect those trends to continue that northern.

We are the place it would be stronger than other parts of the world.

Good for to be clear I mean, a pickup in cross border.

Probably would be a pretty big swing for the travel segment, just given those that mix I was talking about earlier.

That wouldn't be the case, yes, but.

Also let me give for you again the color on the.

<unk> on the travel guidance.

So.

We reported.

It'd be less on 5 billion on expense on travel and this quarter and as you can see from the weekly volume metrics. We have continued to improve during the month of July on.

We kept on obviously the rate chiefs on.

Most of our guidance is is it will be wider than it used to be before cash obviously.

Especially on the travel side, we are expecting debt would we have seen and July continues and at the same time debt the seasonality that happens during the summer time also.

<unk>.

And on part on the on the next 2 quarters for.

From there obviously, we expect on travel volume for a slightly come down because of the seasonality that we always see and all between the summit on them for some.

On the <unk> <unk> dividend on.

We see this year on increase.

Course.

From Q3 to Q4, obviously bts contemplated on the on the high end of the range, but I would say to you that I will stick with the seasonality that we have discussed and the comments on Melissa said, obviously, the cross border theres going to be more challenged.

For the for the next few months.

Yes, and just.

1 thing I'd add to that and is in order to give out guidance suggests decided to be in a transparent around the assumptions that we're making around this and there is still.

There is still uncertainty and what's going to happen.

And within travel specifically over the next couple of quarters because of what's happening with Covid.

On a debt, we're giving you the assumptions and then we're putting a range around it depending on how that plays out and to your point, if cross border picks up that would be and opportunity for us yes.

Sure Melissa.

And 1 quick follow up is just more structural.

When we think about the position and you have across your businesses, primarily in corporate and travel.

And there's been and I just came up a little bit earlier, but there's been a lot of discussion over incremental competition, but on the same tool and your.

You're obviously very well positioned and early innings. So.

And Youre digesting Union and optimal but are there other assets structurally that you think could make sense to be additive and just thinking about when you think of the portfolio of assets you have specifically on corporate and travel and anything else you feel like.

You want to do for the next couple of years.

Well clearly we're always active from an M&A perspective, we've got a pretty good history of being able to execute and deliver on.

On what we purchase.

And so.

That was a place that will continue to be active.

And this is my first.

Second point is that prices have been pretty high and when we've looked at assets.

Don't often get a lot right now and this marketplace for the purchase price we've had more of a bias towards building in this space of late so we have been increasing and ramping.

Our internal investment dollars.

And so we will continue to evaluate and look at assets like we would normally do and go through the rigorous process that we go through to make sure. It fits both what we wanted to do strategically but also though.

Our financial criteria.

Got it.

Thanks, guys.

Alright, and your last question.

And it comes from the line of Mihir Bhatia with Bank of America.

Hi, Thank you for taking my questions.

Maybe just on the health care side.

Wanted to go back to the.

And Cobra and.

And can you just talk a little bit about the timing of the roll off and ultra.

But do co broke on see higher fees broke up.

Yeah.

And so.

So, it's a and timing perspective, the way that this played out.

Is that we started adding account. So we went through a process obviously of working with our partners.

On determine.

Germany, how to inform people about the American Rescue Plan Act and.

We went through a process of working with them and employers to inform employees of the changes and that happened within the second quarter than the partner could elect to re implement.

<unk> or reactivate their customers.

So that they could choose to make an election themselves and that all happened.

Largely within.

The second quarter of this year.

What will then happen over the next.

Quarter is that.

People will choose to re up and.

Participate.

Further or they will roll off and so and based on what we're seeing so far is the expectation is that this is a backward view.

And the people that are electing or people that had.

On costs that flow to cover and so it's going to be the minority as opposed to the.

<unk>, that's going to continue on and so we expect that they will roll off within the second quarter. So we think we will get.

A little bit of benefit within the second and within the third quarter, but that.

But not nowhere near the same amount we saw on Q2.

And that was 7 million weighted Q2, I think that was called out.

Yes, approximately yes, yes.

Okay and.

And then just.

Sorry to go back to the <unk>.

<unk>.

But I just wanted to make sure I understand what is actually embedded in terms of the travel volume recovery in your guidance.

Maybe if you can give and relative to 2019 or something.

And a job geographically, but I guess I understand what youre, saying that volume trends have been improving and <unk>.

On July did you assume they keep their day.

And if they keep improving from Joe do you assume the.

Cross border questions that were just asked like I'm, just trying to understand that what is exactly.

And the embedded in terms of volumes in the travel.

Oh.

So yeah. So as I said on that so if you look at the weekly volume metrics up to 723, you'll see that in the month of July and we have gone from around 50% down from 19 levels. As you were asking and we are I.

Around 30% on so if you think about that we have built from obviously, we know what has come and in July from there we have built.

2 things 1 is the seasonality that I was talking about that is happening 19. So the comps are similar to that.

And at the same time with our model debt there is some continuing.

And would salesman debt, however, as Melissa because we're talking about on the cross border side on.

And with everything we're seeing we have not model incremental improvement or is on a material improvement from put on where we are today, but at the same time and Thats why theres a range. So it seems.

And Peru more than what we are seeing as of today and what we are seeing on the weekly volume metrics that would be and improvement on a benefit if things deteriorate a bit and they will go the other way around but that's why we have given a wider range because we.

And we feel good on where we are and we feel really good about debt recovery, especially.

<unk> seen since the month of May but.

But.

It's really hard not to predict day.

And what is happening in the next 6 months, obviously July was very good because we continue to see not only the improvement.

And the recovery from 19, but also the seasonality has been helping us and that's why we have taken that approach.

<unk> got it and my.

Last question on and I'll get off is just is there a particular geography, whether it's australia or something like that where it is.

We saw a sea change that that would be very material.

If you look across the volume right now it's about in the quarter.

It was about total risk third.

And the U S.

And with the majority of it.

And looking here, but 40.

Hi.

Percent and Europe.

And then the rest and.

The rest.

Asia, and the middle East and so.

And what I was calling on earlier as the <unk>.

U S.

And Q2.2019 was quarter.

And this event.

And the shift that's happening and in that period of time.

Got it and Thats why its.

Important to consider another cross border and on what Melissa said before about the different markets. So North America is performing much better.

And Europe, which is second.

And then Asia is way behind and now.

Where things were back in the past. So we have continue model improvements bladder considering the revenue.

And Asia, we are.

Hey, $75 to 80% down from 19, let us we have not considered the improvement we have seen in North America and Europe in the last few weeks, because the news and I'm not telling them.

And to ask to add to your point about 1 specific country the products of <unk> around the world.

And so.

And so.

That's fiber grouping them and regions.

Alright.

Thank you.

And there are no more questions at this time.

Okay.

Thanks, everyone for joining us this quarter and.

We look forward to China, and again next quarter and this will conclude the call.

Ladies and.

And this concludes today's conference call. Thank you for participating you may now disconnect.

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