Q2 2022 WEX Inc Earnings Call
Thank you for standing by my name is Cheryl and I will be your conference operator today at this time I would like to welcome everyone to the wax Q2, 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Seth.
If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Press Star one. Thank you Steve Elder Senior Vice President of Global Investor Relations You May begin your conference.
Yeah.
Thank you operator, and good morning, everyone with me today as Melissa Smith, our chairman and CEO and our CFO Jack Hartung Aruba.
The press release, we issued earlier this morning, and a slide deck to walk through our prepared remarks.
<unk> posted to the Investor Relations section of our website at <unk> Dot com.
The release and the slide deck.
Also been included in an 8-K, we submitted to the SEC earlier this morning.
As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income attributable to shareholders, which we refer to as adjusted net income or Eni and adjusted operating income during our call adjust.
Adjustments for this year's second quarter GAAP result 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 other costs debt restructuring and debt issuance cost amortization and certain tax related items as applicable.
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 and an explanation and reconciliation of adjusted operating income.
Operating income.
The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and indeterminate amount of certain elements that are included in reported GAAP earnings.
I would also like to remind you that we will discuss forward looking statements under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those forward looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March one 2022, 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.
Thanks, Steve and good morning, everyone. We appreciate you joining us today.
I'm pleased to report that in the second quarter, we once again delivered record revenue and adjusted net income per share for the organic revenue growth of 22% driven by strong volume trends across the business.
Revenue in the quarter was $598 million a year over year increase of 30%.
To put our growth in perspective, Q2 revenue increased approximately $139 million year over year.
The benefit of higher fuel prices, partially offset by foreign exchange rate was less than half of the increase or $56 million.
And our trailing four quarters, we have surpassed $2 billion in revenue, which is a testament to our team's focused execution leveraging our global commerce platform and our large addressable market, where we continue to benefit from digital tailwind.
Total purchase volume process across the organization in the second quarter grew 77% year over year to $37 billion.
Each of our segments posted record purchase volume numbers, demonstrating the power of our growth engine, coupled with our solutions designed to simplify benefits re imagined mobility and pay and get paid.
Quarterly revenue paired with scale efficiencies in our business model resulted in adjusted net income per diluted share of $3 71.
An increase of 61% compared to the same quarter last year.
The scalability of the business model is reflected in our earnings growth rate.
The second quarter of 2022 with another record setting quarter as we continued to execute well on all fronts.
Now, let me take a step back to discuss the continued progress we're making against our growth strategy to win new customers grow share of wallet.
Band and diversify our offerings.
Let me begin with new customers.
Our products and offerings resonate in the market and we continue to win new customers across the ecosystem.
First in the health and employee benefit segment, we won a major American auto parts distributor as a benefit administration customer are.
Breadth of solutions and customer orientation were the key reasons as to why we won the business.
We continue to see strong execution across the pipelines of our direct partner in benefits administration distribution channels with success seen in expanded partner referral.
And mobility, we won a large new fleet deal with speedy delivery services, our Midwest differ with 1800 employees delivering over 70000 packages per day.
Speedy with utilizing eight different fuel card programs with competitors' mobile alerts and card box.
It seemed to wax they will now be able to improve operational efficiencies with a single universal solution and consolidate their fueling towards single bill to ease the administrative burden there.
They were also able to take advantage of the works edge film discount network for increased savings.
In addition to our continued sales execution with large fleet.
Also improving the reach and efficiency of our customer acquisition efforts the investments in our digital marketing channel, which reaches small fleet customers in the U S.
During Q2, we saw a significant increase in new fleet accounts that were acquired via digital channels.
We're also constantly leveraging our technology tools and customer knowledge to enhance the sales funnel using AI capabilities to optimize search engine marketing result.
And create a more personalized customer journey to improve conversion.
This has resulted in decreased cost to acquire new accounts and the ability to go further down market.
We will continue to learn as we go.
Within the travel and corporate payments segment, our outlook continues to be bright.
In addition to the rebound in travel corporate payments volume grew 29% compared to the second quarter 2021.
We're pleased with this growth and we've been expanding our direct sales team over the past several quarters.
Turning now to our efforts to grow share of wallet.
We're seeing cross channel sales momentum across the <unk> ecosystem with new virtual card and health product sales to some of our existing fleet customers, including a leading provider of global automotive wholesale financial software and media services and one of the largest truckload carriers in the U S.
We're building out our cross sell infrastructure, including leveraging our data platform that allows sales habits single view of the customer as well as cross sell training programs for our account executives.
We expect these investments and programs to yield accelerating growth of share of wallet and further enhance our relationships with our customers.
In addition, we're excited to announce that we've agreed to acquire a portfolio associated with one of our major oil company partners, which is comprised primarily of small businesses.
Under this expanded relationship works will become the owner and issuer of accounts it will be working to transition. These accounts to our platform by the fourth quarter of this year.
This expansion with our customer is evidence of the strength of our execution that makes us a preferred partner for a leading oil companies, but also for travel corporate payments and health partners.
As we outlined at Investor Day, we're also expanding and diversifying our offerings to ensure we remain at the forefront across our ecosystem of solutions, providing our customers with best in class simplified experiences.
This played out in our travel and corporate payments segment.
Our vision is to enable our customers to pay and get paid in the most efficient way possible.
<unk> friction streamlining experiences and giving them precious time back to spend on their core business we.
We address customer needs through three solution stacks.
Embedded payments accounts payable solutions and expanded offerings for small businesses.
Let's start first with the progress on the embedded payments offering where we believe our virtual card capabilities, our market, leading allowing global online travel agencies and technology companies to build payments into their workflows.
As you know, we built our own cloud data transaction processing system, resulting in a more resilient and scalable offering to our customers.
Our travel customers that are experiencing rapid volume increases as travel rebounds, our products and technology is scaling with our customers, allowing us to successfully capture the rebound and travel happening in North America, and Europe seamlessly integrated into their operations.
Next let's turn to accounts payable solutions, which continues to evolve significantly at the core of this solution. We are helping businesses streamline their accounts payable processes, our customers demand intuitive software and they need help ensuring that they can complete payments across all modalities, while maximizing the use of <unk>.
Virtual cards.
Following our in depth user testing process, we will begin rolling out a new user experience and interface in Q4, we.
We see our accounts payable solutions as an important contributor to growth in the years to come now.
Now I'd like to take a moment to give you an update on flume.
As a reminder, in consultation with our small business customers. We have built a new financial platform that enables any U S business to send door and received funds and in works digital wallet transacting via digital check physical check.
<unk> or instant fluid transfer.
All of this is delivered through a streamlined and intuitive mobile first interface after 100% digital Onboarding process. We've just started to sign an onboard initial customers envelope.
While it is still very early days, we have a customer informed product feedback loop and initial results are positive.
We're rolling out additional updates based on customer feedback to ensure that they are getting the most added platform.
Turning now to our progress supporting our customers' energy innovation.
Optimizing fleet fuel consumption is one of our businesses foundational strength.
We provide a range of products and resources to help improve our customer's fuel economy and give them access to controls business insight and data. In addition to tools such as freight management route optimization and idle time monitoring the transportation sector contributes nearly a quarter of global CEO .
<unk> emissions, we are uniquely positioned to help fleet operators make the transition to evs or other forms of efficient transport.
We are focused on developing and launching solutions necessary to help fleet operators simplify the complex transition.
In Europe , we are currently piloting an integrated on route and at home EV charging and payment solution with select fleet customers.
This offering which helps to bridge the management that mixed EV fleet is significant for our European customers.
This pilot, which leverages our significant customer relationship.
To understand and address customer needs puts us in a position to rapidly refine our offering and continued to be a trusted partner to our customers.
In the U S. We continue to build upon the offering we have in the market.
I am pleased to see the rapid learning oriented and innovative approach that we're taking in this highly dynamic and fast evolving space.
Supporting our commercial fleet transition to electric vehicles is a great business opportunity and one component of our broader commitment to energy innovation inefficiency.
We encourage you to read more about our initiatives and the comprehensive updated ESG report, we published this week.
As you can tell we're excited about the many opportunities ahead for wax and we're moving quickly towards realizing them.
I'm pleased to be raising our full year 2022 revenue guidance by $90 million at the midpoint and our adjusted net income guidance by <unk> 57 per diluted share at the midpoint.
The midpoint of our guidance represents revenue and eni per share growth of 22% and 44% versus last year respectively.
Looking ahead, the current macroeconomic environment is top of mind to all of us.
Through July we continued to see strong customer volume activity across our products, including our mobility and travel customer portfolio. In fact, most trends seem to have reverted back to pre pandemic behavior pattern.
We continue to see tremendous runway ahead, and we are taking advantage of favorable fuel prices to accelerate strategic investments, which are designed to increase our agility and automation further building out the scalability of the organization.
We've learned over the past few years that we must remain nimble to address unanticipated issues that demand our action.
With that I am pleased to turn things over to Jack-tar Nulab, who as you know joined us as our new CFO , just a couple of months ago.
<unk> background is well aligned with <unk> strategic path forward and I'm excited to tap his unique experience.
That's fully executing and integrating acquisitions as well as bringing process discipline to previous organizations, which will benefit wax as we continue to scale.
<unk>.
Thank you Melissa and good morning, everyone.
As you just heard from Melissa we delivered a strong second quarter building on the momentum we had after first quarter results.
We delivered yet another record breaking quarter in terms of both revenue and adjusted earnings and by a wide margin.
Solid quarter that shows both the strength and the resiliency of our business model.
So let's start with the quarter results on slide six.
For the second quarter total revenue exceeded the high end of our guidance by more than $30 million.
Due to a combination of record high travel and corporate payments purchase volume and higher fuel prices total.
Total revenue came in at $598 2 million.
30% increase over Q2, 2021 with more than 80% of revenue for the quarter reoccurring in nature.
As a reminder, we define recurring revenue.
Payments processing and account servicing revenue revenue from our factoring business transaction processing fees and other smaller items.
From an earnings perspective on a GAAP basis, we had net income attributable to shareholders of $34 1 million in Q2.
non-GAAP adjusted net income was $169 4 million.
Or $3 71 per diluted share.
This represents a 61% increase over the prior year as we saw the power of our business model and the benefit of higher revenue dropped through to our margins turning to slide seven and breaking down the revenue by segment.
Fleet grew year over year, but 38%.
Travel and corporate solutions posted a 23% increase in.
Finally health was up 15%.
You will recall that for the last three quarters. We've discussed the change in revenue presentation for a specific customer contract and the travel and corporate solutions segment that will impact the comparisons in this segment through Q3, you will see the details of the change in the appendix of the presentation. We filed this morning on a comparable base.
After adjusting for the accounting change revenue growth in this segment was 64% and revenue growth for the total company was 36% now let's move to segment results starting with fleet on slide eight.
Fleet revenue for the quarter was $379 2 million.
38% increase over prior year powered by strong volumes from new customer wins and renewals.
Record high fuel prices and a continued recovery in the existing customer base payment processing transactions were up 10% year over year, which was in line with our historical growth rate.
As expected growth in the over the road transactions moderated some at 19%, while North American fleet was up 11%.
As you saw in our metrics. The net late fee rate stayed relatively flat to the prior year, which is still lower than historical rates due to the rapid increase in fuel prices overall finance fee revenue was up 44% due to significant increases in volume fuel prices and an increase in the number of fleet.
The increases we saw record high fuel prices in the quarter with an average domestic fuel price in Q2 2022 of $4 98.
Versus $3 <unk> in Q2 2021.
We estimate the year over year impact of higher fuel prices increased fleet revenue by approximately $64 million.
<unk> a benefit of approximately $2 $4 million for European fuel price spreads the net interchange rate in the fleet segment was one 9%, which is down slightly from the prior year.
The decline is due to the increase in fuel prices this quarter offset by a one time benefit in Europe related to an amendment of a large customer contract.
We are seeing our transaction mix move towards slightly smaller, but more frequent transactions as fleet owners cope with the higher prices, especially in the OTR space.
This transaction is shift as a slight benefit toward net interchange rates.
Turning now to travel and corporate solutions on slide nine.
Total segment revenue for the quarter increased 23% to $100 4 million.
Purchase volume issued by <unk> was $17 1 billion, which is an increase of 96% versus last year.
The net interchange rate in this segment was down three basis points sequentially as travel customers were a larger percentage of total purchase volume.
<unk> done this segment further travel related customer volume represented approximately 70% of the total spin and grew 150% compared to last year.
Revenue from travel related customers was up a 174% versus Q2 2021.
This reflects a strong rebound in customer travel demand.
We are very pleased with these results and are well positioned to capture future growth as we expect with travel industry to continue its recovery.
Corporate payments customer volume grew 29% versus last year and revenue was down 18% as reported but up 21%. After adjusting for the previously mentioned accounting presentation change led by continued strength in the partner channel.
Finally, let's look at the health segment on Slide 10, we continued to drive strong growth, resulting in Q2 revenue of $118 6 million.
This represents a 15% increase over the prior year.
I would also like to remind you that we had approximately $7 million of revenue and $1 billion SaaS accounts last year that were associated with our Cobra offerings that were onetime in nature SaaS account growth was 7% in Q2 versus the prior year building off a strong open enrollment season and <unk>.
The charges related to benefit express.
Adjusting for the temporary Cobra accounts last year the growth rate was in line with what we reported in Q1.
Health segment purchase volume increased 15%, leading to a 14% increase in payment processing revenue. We also realized approximately $5 billion in revenue from the HSA deposits that were invested by blacks bank, starting with last year.
Now, let's move on to adjusted operating income margins on slide 11.
And fleet adjusted operating income margin for the quarter was 59% up from 52% in 2021.
This is the fifth consecutive quarter that these margins exceeded 50%.
Before I continue with the other segments, let me briefly address the increased credit losses, we saw in Q2.
Fleet credit losses were above the high end of our ratings at 23 six basis points of spend volume that included approximately 11 basis points of fraud losses.
Saw a significant increase in both application and transactional fraud that we believe is related to higher fuel prices.
We have invested heavily in our fraud monitoring infrastructure, which enabled us to respond quickly to increasing fraud attempts and expect fraud losses will decline over the next one to two quarters.
On the credit loss side, we've continued to see a very healthy portfolio overall.
Now moving on to travel and corporate solutions.
The segment delivered an adjusted operating income margin of 58% up from 21% in Q2 last year.
Been a significant improvement at least March as travel volume accelerated and drove much of the margin improvement we saw on a total company basis.
Our business model here is very strong and revenue drop through for this segment is high given our relatively fixed cost base.
Adjusted operating income margin was 23, 9% compared to 28, 1% in 2021.
The revenue and associated income from the temporary corporate comps last year are the primary driver of the decline in March.
In total.
Adjusted operating income margin for the company was 42, 3%, which is up from 36, 3% last year, largely driven by the fleet and travel and corporate solutions segment.
Shifting gears now to slide 12, I'll provide an update on the balance sheet.
We remain in a healthy financial position and ended the quarter with $439 million in cash.
Had over $718 million of available borrowing capacity and corporate cash of $143 million.
Both as defined under the company's credit agreement.
As you'd expect we saw a sizeable one $6 billion increase in our accounts receivable versus year end from higher fuel prices and more volume.
Invested HSA deposits at West Bank ended the quarter at $1 4 billion.
There isn't an additional $530 million of HSA deposits held at web space that we're currently using his replacement funds for certificates of deposits.
We continue to evaluate opportunities to optimize earnings from the remaining roughly $1 billion.
Of HSA deposit assets that we have custody over but are not held at <unk> bank.
As of quarter end, the total outstanding balance on our revolving line of credit term loans and convertible notes was $2 8 billion.
The leverage ratio as defined in the credit agreement stands at three eight times, which is well within our long term target of two five times to three five times and down for the end of 2020 was due to strong earnings benefits of higher fuel prices and our strong cash flow generation positions.
As well and gives us flexibility through a broad range of economic scenarios, finishing off the balance sheet, you will see that we repurchased approximately $81 million of.
<unk> shares during Q2.
520000 shares finally, let's move over to revenue and earnings guidance for the third quarter and full year on slide 13.
The second quarter was a very good quarter for us and I'm pleased to share that we are significantly increasing our guidance for 2022.
Starting with the third quarter, we expect to report revenue in the range of $580 million to $590 million and.
Adjusted net income in the range of $152 million to $156 million.
We expect an EPS.
EPS to be between $3 35, and $3 45 per diluted share.
For the full year, we expect to report revenue in the range of 225 to $2 two 8 billion.
And adjusted net income in the range of $592 million to $603 million.
We expect EPS to be between $13 and <unk>.
And $13 30 per diluted share.
For the full year. These updated ranges represent an increase of $90 million of revenue and 57 cents of EPS at the midpoint from our previous guidance.
As Melissa alluded to earlier.
I'd also like to deploy that are embedded in our full year guidance or some modest incremental investments in the back half of the year, which will allow us to accelerate specifics areas of strategic focus including cross sell.
Additional enhancements to our technology.
Innovation, including Evs and process simplification it's.
It is important to emphasize that we are making these investments from a position of strength.
Taking advantage of the current favorable fuel price environment to ensure we maintain our market leadership across our ecosystem and positioning works for a bright future.
Now, let me talk to you through a few more assumptions.
Exchange rates are as of the end of June 2022.
Estimate domestic fuel prices will average $4 50 per gallon for the third quarter and.
$4 36 per gallon for the full year.
Both are based on the Nymex futures price from last week.
The adjusted net income tax rate is expected to be between 25% and 26% for the third quarter and the full year.
And finally, we are assuming approximately 46 5 million shares outstanding include.
Including the assumption of share Count will continue to include one 6 million shares associated with the convertible notes.
As a result of including this year is approximately $3 $8 million of interest expense each quarter net of tax will be added back to net income to calculate EPS.
I complete my prepared remarks, I would like to emphasize how pleased we were with our Q2 results.
Our business has performed well and benefited from higher processing volumes and the fleet travel and corporate payments and health spaces.
Our strong business model resulted in solid margin expansion from the higher revenue.
As we continue to integrate our business, we are well positioned to capture more revenue and the benefits of scale in our model.
With that operator, please open the line for questions.
To ask a question. Please press star one please limit yourself to one question and one follow up. The first question is from Sanjay <unk> of <unk>. Your line is open. Please go ahead.
Thanks, Good morning.
Just first question is on the higher fraud losses.
Can you just maybe flesh that out a little bit more for us in terms of what happened where the blind spots, where and why you don't expect it to reoccur.
Sure.
Sure Sanjay it's Melissa.
There is a couple of areas, where we saw increased fraud in the second quarter bolt on transactional fraud in an application fraud.
As you know, we've got an infrastructure in place where at the Authorizers, which really limits. The exposure that we have but we saw a lot more volume of activity coming through.
So over the last couple of months, we've been working with law enforcement in our merchants on the transactional side.
We've been able to help identify where I'd card skimming is happening and that ultimately leads to arrest.
And as a result of that activity you can actually see a drop in that volume of activity that's been happening in July .
On the application fraud side again.
Again, it's just more of a volume thing is fill prices escalated.
<unk> had application fraud that youre seeing that just the volume of that coming through bot.
And so we've made also changes in the way that we're doing our digital.
Processes to account for the fact that you are seeing that really emerging environment and all of that activity together gives us confidence around what we're providing from a guidance perspective, and you can see real time and as I said on the on transaction fraud.
How the actions that we've taken has reduced the amount of inbound activity that we're receiving.
Okay, and just to be clear you have not seen any signs of credit stress. This is all everything that escalated with fraud related.
Yes Jack.
<unk> said in his prepared remarks.
For our portfolio really looks strong continue to be pleased with both the volumes that we're seeing with our customers and what's happening within our accounts receivable.
Portfolio.
Okay, and just one quick follow up on the Exxon portfolio congratulations on that win.
Maybe you could just talk about the size and scope of that portfolio and strategic.
Strategically if we think about it it's a little bit different right because more of our commercial card portfolio I believe so.
Does that factor into the mix of the cards that you do like how much of your portfolio is now commercial cards.
Yeah, and if you look across the portfolio as we have with the major oil companies. There is a mix in there so it got cut.
Customer portfolios that are revolving in nature, which are primarily really focused on really small businesses. Like this portfolio. We're excited about the fact, we're just continuing to expand the relationships that we have with these oil merchant.
And as you might imagine go through a competitive process in order to win the business and so we're excited about this expansion. We are excited about the fact that we're bringing on it's going to be about 1% of the total fleet business that we have now.
But these customers don't fuel as frequently as it leads in the base portfolio. So, it's a little bit less than 1% of revenue.
Okay, great. Thank you.
Your next question is from Ramsey El <unk> of Barclays. Please go ahead. Your line is open.
Thanks, so much for taking.
I guess I wanted to ask you first about your view on the surface.
Sustainability of the travel recovery kind of what inning are we at what parts of your portfolio are kind of at that 2019 level beyond that 20 travel maybe what did you get bottom line I am thinking maybe that Asia piece from.
After the acquisition.
Just curious yes.
Yes.
Sure I'll give you.
A lot more insight into what we're seeing in that part of the business.
Obviously, we were really pleased in the travel recovery that we've seen so far.
We had them in the second quarter was beyond the 2019 pro forma numbers.
<unk> owned <unk> knockdown. There is actually has been some portfolio shifts I would say this in total when you look across the business right now for us about 70% of the volumes happening in EMEA.
<unk> and <unk>.
APAC is only about 10% of the.
Volume right now historically that would've been 20%. So we just haven't seen the APAC region recover at the same level that we have with the rest of the world.
We're also seeing transaction volume if you look across the portfolio.
Transaction volume is about 85% of what we saw in 2019, that's being made up with rate. So it's about 20% higher rates on average.
So we are seeing.
Last transaction volume at a little bit higher rates and that's blending together said that were over 100% of 2019 spend volume.
Okay.
And a follow up from me on M&A.
Maybe update us on your thinking there in terms of the opportunities Youre seeing obviously, it's been a real reset valuations out there. So are you seeing any incremental opportunities and maybe more specifically.
You see.
Opportunity to accelerate.
Cross sell strategy.
Bye.
Mike may be tucking in more assets.
Helpful.
Question.
Hi.
Sure.
Yes in terms of M&A I'll hit on both of those things on cross selling I talked about building up the infrastructure.
We do believe that we have an opportunity on cross selling across the portfolio.
If you look across our customer base. Additionally, we've got nine customers that are not using our products in across the ecosystem and one that is and so that just crossed.
Speaks of the opportunity and <unk> talked about the fact that we're going to leverage the ability to build out infrastructure to make that more automated.
And the way that we're doing it right now.
I think we've got some really good evidence of where that has worked where.
We've extended and added products within existing customer side, it's like benefit express as we've added that into the business through an acquisition, we have an ability to.
<unk> been able to cross sell that product to our existing customers.
From an M&A perspective, when we've done product extensions, we have been able to cross sell so.
So we do believe that there is an opportunity to do that and at the same time when I think about M&A. We're looking for scale players geographic distribution or product extensions and so I would I would isolate that to in areas, where we're adding in from a product perspective, that's a place where we think we have cross sell capability.
And in terms of its hit on multiples now obviously as we think about the marketplace as multiples come down that does create opportunity for us and so we will continue to evaluate like we have over the years opportunities and.
Rigorous about those that we think that we're going to be able to actually see both strategic and financial benefits for them.
Got it thanks, so much appreciate it.
Your next question is from Darrin Peller of Wolfe Research. Please go ahead. Your line is open.
Hey, guys. Thanks.
Wanted to touch on investments in the business, where you are making there you talked about accelerated investments and just whether number one if you could just give us a little more color on where you are really putting most of that towards right now what you're most excited about but more importantly, cyclically. If we were to see some changes macroeconomically that.
Requires flexibility does it give you room to manage expenses, if we were to see a bit more material downturn.
If you could just touch on what kind of flexibility in what willingness you'd have to really protect the bottom line to some degree.
I think actually I think this is a twofer we have the ability to make investments now those investments are designed to either bring forward revenue opportunities that we have or to create more scalability of the enterprise, which makes us.
Able to actually handle whatever is coming even better and so and then I will give you. The example, I gave on the call was related to <unk>.
Infrastructure on cross selling but beyond that if you look across the enterprise and we're looking for areas that we can use technology to create automation.
And in doing so we believe that you create a better experience both for employees and from customers that you can do it at a lower cost and so we're really gearing our investments towards looking at things that have.
Either very clear path to revenue or a very clear path to <unk>.
Cost savings and to the extent has the cost savings impact when it make sure that also creates a better experience from a customer perspective.
Darrin This is Jack I'll just add into that.
Much of what we're considering I mentioned for the back half of the year were really considering as onetime in nature. So it does give us some flexibility.
From a from a cost perspective as well.
To deal with market dynamics.
Right, Okay, alright, and so.
Yes to follow on to that I mean in terms of your willingness to really pull levers where necessary and what you would consider somewhat somewhat discretionary in terms of where you can pull back on if you can just give us a sense of what kind of potential there and then just.
Had one quick follow up on your fuel segment I mean, when I look at the transaction growth in the underlying macro adjusted normalized growth backing out fuel prices.
Turning pretty well low double digit type growth from what we can calculate and if I, if I think about normalized or as concerns of our trucking recession and other variables.
It doesn't seem like we're seeing that so I'm curious if you think the current trends underneath the hood and that business is really representative of what you would expect longer term.
Yes, why don't I start with the latter part of that and you can pile on to the first part of that in the latter part of your question from a trend perspective.
Over the road business, what we're seeing is that it is really reverted back to behavior patterns and growth rates. We saw pre pandemic. They had an accelerated growth rate period within that business is kind of reverted back.
Within that mix of customer base, the larger customers right now are faring better than smaller some of the smaller ones in there.
Marketplace.
But overall they are still seeing a need to move products.
And theyre seeing backlog.
And doing so and so it remains actually quite healthy.
On the North American fleet customer base, we saw actually a pretty nice pop in the second quarter from same store sales, where I think we've really benefited from the economy contained reopened in mobility specifically.
We're really continuing to reopen.
And so the growth rates that we assumed in the second half of the year is a more normalized environment than what we've seen.
Last couple of quarters, but still really strong.
And then Darrin I think the first part of your question was around.
How do we think about protecting EPS should the economic environment change.
And.
I think to the extent, we have discretionary investments in the back half of the year like we've talked about and other discretionary items that a couple of the.
As you know we would absolutely continue to focus on the profitability of the company.
Obviously, we have a very scalable business model here and you get you get the benefit of the goods the good times.
I have to watch out of a downturn, but I think we've got a number of levers to pull to ensure that we maintain profitability.
And then can you just across the model too if you look at the business, 20% now of our revenues from health.
Which is a SaaS based model it has been incredibly resilient for us and.
When I think about where the business is now much more diversified which gives us.
A lot of confidence.
We go into many different markets and you can look back over the last several years and actually have evidenced that our last five years, we've grown revenue, 13% and EPS, 20% and our.
Really difficult market.
Understood. Thanks, guys.
Yes, Sir.
Your next question is from Mihir Bhatia of Bank of America. Please go ahead. Your line is open.
Hi, Good morning, and thank you for taking my question I actually wanted to just continue to just follow up the same.
Team, where we ended the last one maybe just talk about the recession resiliency of your business you know how has that changed over the last two years.
Understand you probably can't give guidance.
Hands on how depot recession. It is but just in general when we think of the various businesses in the segment.
Businesses within each of the segments.
Are there particular areas, which are maybe more one ruble like them they can travel.
Travel and maybe it's a low market.
Just talk about that.
As shown resiliency of the business. Thank you.
Yeah sure Yeah, if you look across the business, we do we do business with over 800000 customers globally and they are in many different S. Ics, So think of that and I can start with foundational late it's an incredibly diverse customer base.
And the model if you look at waxes become.
Really quite resilient over many different economic cycles, so as I said before about 20% of our revenue comes from.
<unk> customer base, which has been resilient even through the pandemic know through in pretty much any environment.
Part of the attraction for us in that part of the business is the fact that.
It is resilient to many different markets, but it's also really complicated market that we think that we can continue to play well in complicated and growing.
And then if you look at other parts of the business.
Both our fleet business the over the road customers.
It would be a place that you could see some some slowdown if something happened from an economic perspective, our north American fleet customers tend to be more resilient.
Because again they run across many different businesses.
<unk>.
Travel and corporate payments and part of the interesting thing about travel for US is that it is global and so.
That in itself gives us some.
Resiliency, because even if you had an issue with one particular marketplace.
It typically doesn't happen.
The world all at once.
And so we really feel pretty good about the ability of the company to be nimble and to react to in a different economic cycles, and we think we've actually shown that we can do that historically.
And then on top of that we've really been focused around our balance sheet.
As Jack said as we've reduced our leverage ratio, we think that positions us well also.
With what's happening from a multiple perspective in the marketplace to be an acquirer.
Alright. Thank you and then just a question on the health business.
Sure.
Tier one time things last quarter that kind of dropped off.
DSO in the SaaS account growth this quarter, how are you thinking about that SaaS account growth for the full year.
If you could also just comment on the benefits Express acquisition integration and just like how is that going to help the Seo I think last year timing wise. The acquisition was made an offset you really didn't get benefits from synergy benefits. If you will from it are you expecting some of that to come through this year, let's talk about those two topics. Thank you.
Sure. So we had about 1 million SaaS accounts last year that remember were related to some legislation that allowed us to support our Cobra customer base.
So they came in in the second quarter of last year. So if you if you normalize that our growth rate on SaaS accounts in Q2 look very similar to what we had in Q1.
We really didn't see it.
Deceleration you do see.
Normal.
Thing that happens each year is that you see a ramp and customers in the first quarter EC some of that trade off a little bit in the second quarter and we saw a very normal cycle happen this year related to that with.
With benefit express and we have.
Continue to accelerate their sales pipeline and bringing that into our customer base allowed us to provide that.
The strength of our sales channels to help support that business and so that was really the primary focus of that acquisition, we didn't actually intend to have.
Cost synergies it was more of a revenue synergy play, where we're able to actually accelerate the growth that they had seen historically.
That's.
What we've realized so far.
Thank you.
Your next question is from Nick <unk> of Credit Suisse. Please go ahead. Your line is open.
Okay.
Thanks for taking my question.
Wanted to ask about the cross sell plans for <unk> 450000, SMB fleet customers.
Is there like a particular cohort or a particular customer segment that <unk> going.
Going to be targeting for the next year or is that going to be more broad based and then what does the incremental revenue opportunity look like for your average fuel customer just in terms of capturing a greater portion of their non payroll <unk> spend.
Sure.
We're excited about flume and I'm excited about slim because of the product capability that we've created an output of the way that we've done it in a rapid customer informed way and our first focus has been very much on our initial customers, making sure that they are really happy that we're listening to what they are.
<unk> we've been.
Rolling out and continue to rollout new features and functionality based on that customer feedback post labor day, we intend to actually do much more of a full launch of the product set and.
So to your point, where we're actually going into our broader customer base with a product offering and we will test many different ways of doing that.
So we're excited about this from an economic perspective, I think again, it's really early.
And so we're excited about it that we're excited about rapid learning.
Got it. Thank you and then just for a brief follow up.
Key moving pieces in the payment processing rate.
Based upon your guide until prices coming down in the next two quarters.
How should that move sequentially relative to like 190 basis points in Q2.
Yes, Hey, this is Jeff Tarr, so the 109 basis points.
Was higher than we typically would have expected with the higher fuel prices and that was helped by a few items in the quarter.
As I mentioned in my prepared remarks, we had a.
A one time.
The revenue impact from a.
From a.
Amended fuel contract in Europe that was probably worth about four basis points on the rate.
We're seeing higher transactions.
Especially on the OTR side, I think I mentioned that in my prepared remarks as well.
That we think is really related to higher fuel prices and people filling up sort of more often at smaller gallons per time in the OTR space.
That helps.
The rate as well about four basis points and then.
We also had a benefit from the market movement rate in Europe in Q and Q2 that was worth probably about a basis point.
File at all.
All of that.
It's probably nine basis points.
Fuel prices are expected to come down in Q3, So we'll get a little bit of that.
<unk>.
So.
Net that out to between the <unk>.
To nine basis point impact from going from Q2 to Q3.
Thank you.
Yes.
Your next question is from Jeff Cantwell of Wells Fargo. Please go ahead. Your line is open.
Thanks, and nice results.
And then 2022 guidance range I was hoping you can answer more about that outlook and fleet.
What are the assumptions that reflect their going forward any updated guide is there any sort of color you can give us there and maybe tell us what youre seeing.
Go ahead of yourselves in terms of macro it is clear that.
I think that's worth commenting on just the.
The amount of activity Youre expecting for the rest of this year.
Can you just remind us about the seasonal trends typically just wanted to calibrate expectations appropriately thanks very much.
Alright.
Starting with Jack Henry we want to add on here.
If I look across the business. So we assumed in the second half of the year from our fleet volume perspective that.
We would return to more normalized.
Both rates, we did assume that in.
In the over the road business that that would trail off a little bit from what we've seen historically in the fourth quarter.
But so I'd say, we were cautious, but if you look overall at our growth rates Halo, So pretty strong on travel we assumed similar to the same volume trends that we had in the second quarter. So.
Over 100% of 2019 levels, we assume that in the back half of the year.
And so a similar economic environment there.
So across the business are really just looking at what are we seeing right now and the end just to kind of add on to what you were asking about from a macro perspective. It is interesting because as we talk to our customers and we have across the portfolio.
They are.
Really continuing to do well in the marketplace there are biggest.
Pension points.
There are around labor and labor shortage.
Which is causing some ability.
Capping under their ability to grow in some cases or.
I'm pleased that Phil overburdened across the business and so there is intention created with with labor workforce. There is some tension that's created because of elevated fuel prices within our fleet customer base.
But overall, they continue to perform really well and and see a continued opportunity within their respective markets.
So I'd say that kind of the short term.
<unk>, we're having with them is really quite positive and it's a place that we continue to play and really well because in this environment. The products that we have the tools that we have a really valuable in the marketplace and so we're seeing a really increased demand deferred different reasons across to <unk>.
Each of the product set but.
Some of that is the desire to have more automation some of its cost control.
Related to what's happening in the marketplace. Some of it is.
Desire for working capital and so Youre really seeing all that we offer plays really well into the environment. We have right now which is coming across many of our sales pipeline.
Okay great.
I would say the only other fleet.
I would add to that on the fleet side is.
Thank you.
Most with.
Expectations going forward that we're.
Kind of a normalized volume growth rates et cetera, I would say that we saw I'd say fairly low late fee rates in Q2.
Mostly because of higher gas prices in the denominator effect I think going forward, we would expect that to grow.
To more in line with what we saw last year.
Okay, great great color I appreciate it and congrats on the results.
Your next question is from Shrieks Kumar of Evercore ISI. Please go ahead. Your line is open.
Hey, Thank you so much on the buybacks just wanted to get your philosophy.
How should we think about for the full year 2022, and given given the choppiness of the market.
So if we're looking at there are no big acquisition that you would want to pursue.
Okay.
The share repurchases to materially pick up hardwood expansion.
So when we think about capital allocation, we start with first organic growth, we want to make sure that the companys tuned.
And that's the first lever we head.
We've had a bias towards moving money towards growth and we will continue to have.
M&A pipeline that supports that growth and our long term framework, we assume we're going to have 2% to 3% growth from M&A.
And then Opportunistically, we have $150 million share repurchase program and plans that we talked about the fact, we bought $81 million.
So we have more to go.
Understood. Thanks.
And my follow up is on the interchange rate.
Okay.
Rick.
Pick up on the corporate side.
This quarter can you help us understand as to what drove that and how should we think about <unk> for the full.
Yes.
Yes, when we started the year we talked about.
And we've actually added disclosure. So you can see the split between travel and corporate payment rates.
On the travel side, we said we expected the rate in the course of the year to look similar to the full year rate from last year.
And this quarter was pretty close to that number so stability across the year.
And on the corporate payment side, we said that we expected the rate to blend down in the course of the year as we add more embedded payment customers.
In Q2, but we actually saw was a nice growth also not just from our embedded payment customers that from our direct customers.
Which has a higher rate than sweet actually blended up in the quarter. We do think that as you go through the course of the year that as we continue to add more on the embedded side that that should blended down net youll note that from a profitability perspective.
It was highly profitable and so the.
Margin went from 21% last year to 51%. This year. So we saw really great scalability.
Which is part of what we're looking at is the.
If embedded payments product goes up then the rate may go down, but it's highly profitable if the AP direct product goes up then.
And the AMC revenue and rate going up associated with that but actually has a little bit more cost associated with that and.
Both.
Quite positive for us.
Our anticipation for the year is that the corporate payments rate will drop a little.
If you go through the year because of mix.
Thank you.
Your last question is from James Fawcett of Morgan Stanley . Please go ahead. Your line is open.
Great. Thank you very much I appreciate all the insights et cetera, just a couple of.
Follow ups travel.
Travel and corporate margins were really strong in the quarter and now seem to be outpacing where they had been pre pandemic, you're obviously benefiting from the travel recovery right now and I know you've talked about some near term investments, but how should we think about the trajectory over the longer term.
Absent a recession have we taken a structural step change higher or is this trend yet.
Wondering how to think about that.
A number of years ago, one of the things that we thought was important competitively was to bring in house processing capability and so we built cloud native.
Processor, which has really created a tremendous amount of scale.
For the business, we saw the downside of that during the pandemic, but we saw it and continue to see the upside of that now so I think of this as and I run those two first we created a better experience for our customers because.
The processor that we created is highly reliable.
From a.
Simplification standpoint, and the way that we interface with our customers allowed us to create a better experience.
And created scalability from a financial perspective, and so we feel really good about that capability and it's a product that we're selling not just in the travel space that we sell it.
Into other fintech companies, where they embed this payment within their workflow so.
So we feel like that model is great and we will continue to build upon that and what we're looking at is where can we continue to sell that but also we are building out our AP capability and the capability we have across small business.
Towards the investments, we'll make will be continuing to look at other areas, where we can expand the market that we're addressing.
And as a result.
Really blends into the overall growth rate that we have for that segment.
But but the infrastructure, we built out we feel really good about and the scalability of that right now.
That's great to hear and then separately how should we think about the pipeline on health and employee benefits I think last quarter you mentioned.
That you had signed up one of the country's largest rehab programs in this quarter, you mentioned, a major auto parts distributor, but how what's.
What's your line of sight right now on adding additional clients to the business over the medium term and what is the sales cycle look like especially.
Given the kind of the economic uncertainty right now.
Yes, we found actually in.
During the pandemic.
Had a little bit less bias to make changes.
Now I would say that in it.
But as we've kind of moved past that.
<unk> had a really strong sales pipeline, we feel good about how we're going to enter 2023, so a lot of the implementations would occur.
In the end of this year, leading into the first quarter of next year and so what we're seeing right now we're really quite bullish about next year.
That's great to hear thanks for all the input and color today.
Thank you. Thank you.
We have completed the allotted time for questions I will now turn the call over to Steve elder for closing remarks.
Thank you Cheryl again, just wanted to say thank you to everyone for listening in and we'll look forward to speaking with you again.
In about three months. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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