WEX Inc (WEX) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the WEX Incorporated third-quarter 2013 financial results conference call.

(Operator Instructions)

Thank you. I will now turn the conference over to Mr. Steve Elder, CFO. Sir, you may begin.

Good morning. With me today is our CEO and Chairman, Mike Dubyak. We will also be joined by Melissa Smith, WEX President, who will participate in the Q&A portion of the call.

The press release we issued early this morning is posted in the Investor Relations section of our website at www.wexinc.com. A copy of the release has also been included in an 8-K we submitted to the SEC.

As a reminder we will be discussing a non-GAAP metric, specifically adjusted net income during our call. For the third quarter 2013 adjusted net income excludes unrealized losses on fuel price derivatives, amortization of acquired intangible assets, adjustments attributed to noncontrolling interests, non-cash adjustments related to our tax receivable agreement, other adjustments related to our Fleet One acquisition, and the tax impact of these items. Please see exhibit 1 included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income.

I'd 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; the risk factors identified in our annual report on form 10-K, which was filed with the SEC on March 1, 2013; our quarterly report on Form 10-Q filed on August 1, 2013; and in our subsequent 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 Mike Dubyak.

Good morning everyone and thanks for joining us.

Earlier today WEX reported strong results for the third quarter of 2013. Revenue came in towards the top end of our guidance range, while adjusted net income was above our expectations. Q3 revenue increased 19% over the prior year to $191.5 million. Adjusted net income per share increased 20% to $1.29 per diluted share as we continue to benefit from enhanced fleet volumes, other payments growth, favorable contributions from foreign exchange rates, and controlled expenses.

Throughout the quarter we continue to demonstrate our ability to drive meaningful financial performance while executing against our long-term strategic initiatives by expanding our Americas fleet business, broadening our international reach, and further diversifying our revenue streams. In our fleet payment segment we achieved another quarter of strong revenue growth of 16% year over year, driven by organic growth and the acquisition of Fleet One. This growth was achieved even though PPG was below our forecast. During the quarter we saw increased volumes as new customer wins continued to add vehicles.

Our momentum in the first half of 2013 is carried through to the third quarter as we progress with the CITGO conversion, albeit at a slower pace than expected; and continue to win new business on the private label side with the signing of a premier convenience store-branded retailer, RaceTrac, which operates over 600 high-volume locations in the Southeast and Southwest under the RaceTrac and RaceWay brands. We also extended our relationship with the GSA fleet by being awarded a substantial contract to provide telematics units. This win will give us the access and ability to sell our product into government agencies who lease vehicles through GSA's office of vehicle management, which represents more than 200,000 vehicles that currently use the WEX card for fuel and maintenance purchases. Both of these wins were competitive and they underscore the relative advantages of the quality of our fleet products.

Our product features and functionality, combined with our commitment to fostering long-term customer relationships, provides us a competitive advantage to manage and grow our portfolios. We believe these attributes distinguish WEX from other fuel card providers and serve as a point of differentiation in our go-to-market strategies. As a result, we continue to see significant interest in the marketplace for WEX and its capabilities.

The integration of the WEX Fleet One business continues to advance according to plan and our focused efforts are producing material results. From a financial perspective, synergies are materializing more quickly than we expected, and we remain confident in our ability to better align and expand WEX Fleet One's margins over the next several years.

We're also making progress moving up-market in the OTR space, seeing promising traction with leasing partners and having success in forging relationships with larger fleets. This has led to some recent large fleet wins. We are very pleased with the progress of the Fleet One integration as our investments support financial growth, and positively contributes strategically to our fleet business

Turning to our international fleet business, in Australia we continue to deliver solid performance and steady growth. In Brazil we are leveraging our alliance with UNIK to further promote our growing pipeline of opportunities in this region. To enhance penetration of the Brazilian market, UNIK recently acquired Fastcred, an OTR business that provides electronic freight management payment services. This marks an exciting opportunity for us to expand into the international OTR market. Fastcred has recently extended an agreement to service one of the largest freight shipping companies in Brazil, which will immediately contribute volume. Fastcred's proprietary network allows us to launch an over-the-road card in Brazil.

Europe, Asia-Pacific, and Brazil remain key geographies for expansion in our fleet business. We are developing the infrastructure necessary to enhance our capabilities in these regions and our strong balance sheet provides us the flexibility to invest in both organic and inorganic growth.

Turning now to our virtual business, we continue to see solid progress both domestically and internationally. In our other payment segment we posted revenue growth of 27% during the quarter, demonstrating our continued success and proven ability to diversify our revenue streams. We continue to advance our WEX travel products internationally and see great opportunity for global expansion. As we have noted we are deploying capital to build the foundation to successfully operate in multiple countries. We are processing transactions in local currencies, allowing us to better serve international OTAs, and establishing issuing capabilities in Hong Kong, Singapore, and Thailand, among others. Issuing and settling capabilities will allow us to reduce cross-border fees, which gives us the benefit of both, a compelling economic advantage, and competitive differentiation in these markets.

We continue to make substantial progress in Europe, with two major wins in the European OTA market. Our acquisition of CorporatePay again played a significant role in reinforcing our strategic directive to bolster our competitive positioning in Europe. Having both credit and prepaid virtual products in the European travel market provides WEX with product differentiation. Year to date, we have signed 14 customers using our virtual products in Europe. CorporatePay has won numerous innovation accolades and awards, most recently the best prepay innovation UK. In Brazil we are pleased with the strides we have made, and on strengthening our foothold in the region through our WEX travel offering and processing system capabilities. We secured our approval to issue with UNIK and are finalizing our technical implementation.

Our virtual card allows us to access growth opportunities not only in different geographies but also in different verticals, such as the healthcare industry through WEX health. In spite of the longer time horizon than we originally anticipated, we continue to believe this is a potential area of considerable opportunity for WEX. As we work to establish ourselves in the healthcare market, we continue to add channel partners who value our offering in the marketplace. We have signed multiple channel partners in the healthcare market, which will feed our pipeline for future success.

In summary, we're pleased with our performance in the third quarter, as we capitalize on the momentum WEX's business generated in the first half of 2013. Our third-quarter results were strengthened by our investments that drive organic growth, and are seeing the benefits more recent acquisitions including Fleet One, UNIK, and CorporatePay. As we continue to execute against our multi-prong growth strategy to grow our fleet business, expand internationally, and diversify our revenue streams, we have been able to maintain the core tenet of our strategy and value proposition -- invest in leading products and develop strong customer satisfaction that provides the ability to create, foster, and maintain long-term relationships, both with customers and channel partners.

Our strong third quarter speaks to the growth we have achieved on this foundation, and we plan to continue on this path to achieve solid fundamentals and growth as we move into the fourth quarter of 2013.

And now I'll turn the call over to Steve to discuss our financials and guidance. Steve?

Thank you, Mike.

For the third quarter of 2013 we reported total revenue of $191.5 million, an increase of $30.6 million from the prior-year period and toward the high end of our guidance range for $186 million to $193 million. As Mike mentioned, this performance versus the prior year was driven primarily by the acquisition of Fleet One and solid volume increases in both our fleet and other payments segments.

Net income to common shareholders on a GAAP basis for the third quarter was $43.8 million or $1.12 per diluted share. Our non-GAAP adjusted net income increased to $50.4 million or $1.29 per diluted share. This compares to our guidance of $1.16 to $1.23 per diluted share, and $1.08 per diluted share reported in Q3 last year on an adjusted net income basis. Taking a look at some key performance metrics which include Fleet One, consolidated fuel transactions increased 13% over the prior year. Consolidated payment processing transactions increased 16% over the prior year. Approximately half of the growth in payment processing transactions was due to the Fleet One acquisition and the other half represented organic growth.

The consolidated net payment processing rate for Q3 2013 was 1.4%, which was down 22 basis points from Q3 2012 and flat versus the second quarter of 2013. Similar to last quarter, this reduction versus the prior year was primarily due to the lower rate charged by Fleet One on their diesel transactions, which are larger volume transactions in the nature of the vehicles serviced.

Finance fee revenue in the fleet segment increased $3.1 million compared to Q3 last year. This increase was driven by a change in the rate we charge late-paying customers and by growth in our factoring business. In the other payment segment, revenue for the third quarter increased 27% or $11.6 million year over year to $54.7 million as a result of the strength in our virtual card purchase volumes, which increased 24% over last year to $3.9 billion for the quarter. The net interchange rate for our virtual card in Q3 was 95 basis points, up 5 basis points year over year and down 4 basis points sequentially. This increase over the prior year was primarily due to customer-specific incentives received from MasterCard, which will continue through 2013. The sequential decline was due to the impact of the MasterCard and Visa merchant litigation settlement, which reduced the interchange rate we earned on domestic transactions by 10 basis points during August and September.

Moving down the income statement, for the third quarter, total operating expenses on a GAAP basis were $113.6 million, a $3.9 million increase versus last year. The majority of this increase is due to the Fleet One acquisition completed in 2012 and was partially offset by the goodwill impairment for the WEX Australia prepaid business last year. Salary and other personnel costs for Q3 were $41.5 million compared with $28.8 million in Q3 last year. The increase was predominantly due to the acquisition of Fleet One, and additional headcount in sales and support personnel.

Service fees were essentially flat over the prior year at $29.4 million. Looking ahead, we anticipate benefits from contract renegotiations in our service fees beginning in Q4. During the third quarter we again saw excellent performance in our credit losses, which on a consolidated basis totaled $5 million in Q3. This compares to $5.6 million in Q3 last year. Consolidated fleet credit loss was 7.6 basis points in Q3 compared to 11.1 in the third quarter of last year, reflecting the strong condition of our portfolio.

Our operating interest expense was $1 million in Q3 as we continued to benefit from low interest rates. The average interest rate on our operating debt balances this quarter was 25 basis points.

During the third quarter we recognized a $3 million nonoperating gain on foreign currency translation adjustments. The majority of this gain comes from our WEX travel product. We are now settling transactions in 11 currencies as we expand globally, with 4 more in testing phases. As a result, we're holding cash balances in these currencies, which must be marked to market at the end of each quarter. As we increase the volume of these local currency settlements, the potential foreign exchange fluctuations reported at the close of any given quarter could become larger in the future.

The effective tax rate on a GAAP basis for Q3 was 37.5% compared to 59.3% in the third quarter of 2012. Our adjusted net income tax rate this quarter was 36.8% compared to 39.5% for Q3 a year ago. The decrease in the A&I tax rate is due to a charge of approximately $2.4 million last year for the impact of tax legislation in Australia. For the full year we expect our A&I tax rate to be approximately 36.8%, which is consistent with our prior guidance.

Turning to our derivatives program, for the third quarter of 2013 we recognized a realized cash loss of $900,000 before taxes on these instruments, and an unrealized loss of $2.7 million. We concluded the quarter with a net derivative liability of $500,000. For the fourth quarter of 2013 we've locked in at a price range of $3.36 to $3.42 per gallon. For the first quarter of 2014 the average price locked in is $3.38 to $3.44 per gallon.

Moving over to the balance sheet, we ended the quarter with $391 million of cash, up from $300 million at the end of the second quarter. The increase in cash was primarily driven by a seasonal increase in deposits at our bank. In terms of capital expenditures, CapEx for the third quarter was $17.1 million. We continue to expect our CapEx for the full year to be in the range of $40 million to $45 million, which includes approximately $14 million related to the consolidation of data centers, a significant portion of which was spent in Q3. Our financing debt balance decreased $3.8 million in Q3, reflecting a quarterly payment required by our term note. We ended the quarter with a total balance of $689 million on our revolving line of credit, term loan, and notes.

As of September 30 our leverage ratio was 2.14 times our 12 month trailing EBITDA, compared to 1.1 times at the end of Q3 last year, with the increase driven by our acquisitions. Regarding our capital allocation strategy, our primary objectives remain -- to reinvest in our core fleet business, to expand our international reach, and to establish our presence in a diversified set of revenue streams. At the same time we are focused on M&A and joint ventures abroad to increase our international exposure and develop our foothold in new verticals that provide diversified revenue sources. In addition, in the third quarter our Board of Directors authorized a new $150 million share repurchase program.

Now for our guidance for the fourth quarter of 2013 and the full year, which reflects our views as of today, and are made on a non-GAAP basis. Overall, we expect to finish out 2013 by continuing at the strong pace we have set in the first three quarters of the year, and we are updating our guidance to reflect this. For the fourth quarter 2013 we expect to report revenue in the range of $173 million to $178 million and adjusted net income in the range of $41 million to $44 million, or $1.04 to $1.11 per diluted share. These figures assume normal seasonality trends in the virtual card and prepaid businesses, as well as credit losses.

Our fourth quarter guidance assumes that fleet credit loss will be between 9 and 14 basis points and that domestic fuel prices will be $3.47 per gallon. For the full year 2013 we expect revenue in the range of $708 million to $713 million and adjusted net income in the range of $171 million to $174 million, or $4.37 to $4.44 per diluted share. Beginning with our initial 2014 guidance, we will exclude stock compensation expense from our adjusted net income in order to make this measure more comparable with our peers. For 2013 this would have resulted in an increase to our adjusted net income of $0.15 per share.

Our guidance continues to assume a significant investment related to our virtual card product to expand into new geographies. As part of the strategy, we have started to move existing customer volume over to our new issuing and settling capabilities in several currencies. This will benefit our OTA customers by minimizing their fees related to cross-border transactions. Additionally, this will reduce our cross-border fee revenue but will not have any impact on earnings.

Our full-year guidance also assumes that fleet credit loss will be between 7 and 9 basis points and assumes that domestic fuel prices will now be $3.66 per gallon versus our prior expectation of $3.69 per gallon. The fuel price assumptions for the US are based on the applicable NYMEX futures price.

Given our success to date on our international expansion efforts, a portion of our business sensitive to changes in foreign exchange rates has grown. Our initial guidance also assumes that exchange rates will remain in the range of the current spot rates and therefore does not account for the impact of potential fluctuations in foreign exchange rates and what they may have on results. In addition, we are not including any gain or loss for cash balances held in foreign currencies related to our virtual card product.

We continue to include the negative impact to our business as a result of the pending MasterCard and Visa merchant litigation settlement, into our guidance. The impact is 10 basis points over an 8 month period which began July 29. Finally, our guidance does not reflect the impact of any further stock repurchases that may occur in 2013.

Now we'll be happy to take your questions. Raquel, please proceed with the Q&A session now.

(Operator Instructions) First question comes from the line of Bob Napoli

Thank you, nice quarter a lot going on there. Nice organic trends as well, I was just wondering the acceleration, if you could give a little more color on the acceleration in the virtual card business? And is most of that -- you talked about 14 new customers added in Europe is that mostly Europe? I know some of that is the Australia signings that you made that maybe give a little color on that? And what you expect the 24% growth in the third quarter, is that sustainable or do you expect higher numbers even in the fourth quarter?

Yes if you look at the segment in total. We've seen year-to-date revenue growth at 26%. And we've talked about anticipating growth of over 20% for the year. So we're very much on track for that. We've had strong growth both here domestically in the US but also we talked about the contract signings that we've had. And we talked about originally making the investments to go global, what we've seen as a benefit of doing that both through the acquisition of CorporatePay and having their physical presence there, their expertise in the area and their ability to sell into that marketplace, and then we're broadly taking that product into other regions like Australia as well as other parts of southeast Asia. So it's accumulation of all of those things that you're seeing compounded into that growth rate.

Okay. Now your acquisition in Brazil, that, how -- it sounds like a relatively small acquisition but it's a platform into the fuel card business, what is the strategy in that market?

It gave us an entry into the over-the-road market which they'll call the freight market there locally. What we are able to do is take their network they have 500 sites where they have a network and they also have processing capability within that freight marketplace so we're able to combine that background with our electronic capability in the cards that unique packages. So you take those two things and put them in the marketplace together. And it gave us an ability to have a much more robust offering into the over-the-road market.

Okay. Last question. For now your organic growth in the payments, fuel card payments was 8%; that's a pretty strong number I think. I think that's up a little bit from last quarter. And again a very strong number but on the other hand you say you had delayed implementations. You reduced your revenue guidance somewhat not a surprise because I thought your high-end was too high. But you had a strong organic growth, stronger than I expected, but you also talk about delayed implementation, so maybe tell me where that growth is coming from? And then what's delayed? What pieces of business that you were looking to be implemented sooner have not yet been implemented?

Yes we have seen organic growth it's accumulation of the wins that we've talked about for the last year, and it takes a while typically to roll in some of those larger fleets into our numbers. And so there's not anything in there that I would say you'd point to individually, it's a series of singles that have accumulated to that number. But more broadly if you talk about the latter part of the year, some of the larger portfolios that we had anticipated rolling in like CITGO, we do these portfolio conversions very routinely and one of the things that we need to get is the data for that portfolio so that we can convert that over onto our systems. And there have been delays in getting that data from their current provider which are just elongating the process.

And so that's true with CITGO. We see anticipate seeing volume this year but it will be very late in the year and so we'll see the benefit of that primarily in 2014. Also with contracts like with the USDA, we have had request for more product features that they would like added into their portfolio before we do rollout, so it's just pushing it out a little bit. Which happens within that large part of the marketplace.

Okay. So FleetCor doesn't want to give up the CITGO portfolio it sounds like, but anyway thank you very much. Appreciate it.

Next question is from Sanjay Sakhrani

So I guess you guys talked about healthcare being a little on the virtual card business being somewhat underwhelming. I was just wondering how it's gone relative to target? And kind of whether or not you guys are still pretty excited about that segment?

We're excited about the segment because if you look at just the size of the market -- even if you split out the parts that we say we're not going to play in, it's a $800 billion marketplace and it has similar dynamics to what we've seen in both fleet and travel markets that we've been very successful in. The complicated market it's ripe with inefficiencies so we still believe that we have long-term play there. We we're still in that testing phase. It's taking longer than what we had originally anticipated in entering the marketplace. But frankly if you compare it to how long it has taken off in some of those other marketplaces, they have been longer-term plays as well.

So we've had success this year signing new partners, the partners are out there selling the product on our behalf. And that is taking a little bit longer than we had anticipated but just the fact that we've had numerous signings, it's not just one partner that we're working with it's several, we think is validation of the product set and we still believe in the overall marketplace although we're learning as we go.

Understood. I guess second question, just on the M&A pipeline. Obviously you guys talked extensively about it earlier in the year raising the debt, kind of looking ahead. How has that panned out relative to what you guys anticipated for the year? And what's in the pipeline today?

Yes. I kind of talk about it broadly, we've talked about the fact we're going to continue to look at fleet opportunities in the US, in Europe, in Asia Pac and even Brazil with this little tuck in so that's clearly a focus. We are also looking at opportunities in the other payment solution primarily virtual cards, just there aren't that many assets around the globe in that area. So fleet seems like it has the best opportunity for us. I would say, overall if I look at key partnerships, potential JVs or acquisitions, I think we'll have more to announce in the next 90 days in that area. I guess I'll just have to wait until we can make those announcements over the next 90 days but I think you'll start to see some of those come to fruition for us.

Fair enough. Final question. Today's Wall Street Journal had this article about over-the-road trucks tapping into natural gas. I was just wondering what your thoughts were in terms of that and what the risk it poses to gas prices or to demand in the future? Thanks.

Yes there's no doubt that the, I'd say the first area of focus is with heavy trucks. Clearly, as you know bus companies, inner city bus companies in particular, use natural gas because they've got their own little kind of in-house supply if you will. So we do know it's going to be an area that we will watch closely. We today probably have, I don't know the exact number, but it's well over 50%, I think it's closer to 70% of all the natural gas fueling locations accepting our card, so we're agnostic to some extent. Our goal would be that over time to try to make the economics somewhat neutral to what we're doing on our fuel gasoline and diesel products. So if it's electric or natural gas or LPG, we're going to make sure our card's accepted and then we'll just work hard on the economics to try to make that as little impactful as possible.

Understood. Thank you very much.

Your next question comes from the line of Phil Stiller

Hi guys thanks for taking my question. I just wanted to dig in a bit more on the fourth quarter revenue guidance. It seems like you've brought down the range for the full year $10 million to $15 million, I was wondering if you could parse out what the impact was from fuel? And then the contract delays and if all of that was in the fleet segment?

Yes Phil this is Steve, the fuel price impact the $0.04, $0.03 for the full-year impact, that was in the neighborhood of $3 million in total, which is kind of in line with all the metrics we have given you in the past to how you calculate that. The federal government shutdown had a minor impact on our results -- well will have a minor impact on our results this quarter. For the first 3 weeks of the month of October we saw their volumes down about 30%. But all in it doesn't really translate into a whole lot of dollars.

We saw slower implementations as Melissa talked about with people like CITGO and the US Department of Agriculture, so those kind of volume impacts were another $1 million or so and then we just had some slower implementations on our virtual card side as well. So all in, those are the primary factors I guess I'd call it.

Okay. Is it fair to say that the delays are a bit more weighted towards the fleet segment versus the virtual card business?

Maybe a bit more but I wouldn't it's much different.

Okay. And then on Fleet One you guys have had that acquisition for about a year now. Can you provide an update on how that business is doing? I think when you did the acquisition you -- they talked about double-digit type growth rates for that business. Seems like you're winning some deals there, is that still a good growth outlook for that business? And I know you've been executing on the synergies more quickly than you have -- had expected, are you guys ready to quantify the synergy benefit from that deal? And has that number changed?

What I would say is that we're really pleased with the deal. If you look at the original model and where we thought we'd be, we're ahead of schedule. We've just reorganized the sale forces and we've consolidated the product offerings and we've actually won our first large account doing business as Fleet One, WEX Fleet One. And we believe that is taking our expertise in sales and marketing and their product set, and combining those two things are pretty powerful in the marketplace. Mike talked about momentum that we're having from a sales pipeline perspective. And so overall, we feel good from a growth perspective about that business. And really good where we are in terms of the synergies that we've recognized. And then we talked about one of the original goals was to move the margin of that business closer to our fleet business and we are on track with that.

Okay. Then last question for me, the service fee benefit I guess from renegotiations-- can you guys quantify that? Is that something that will stand out in the fourth quarter and next year?

Yes, you'll see it starting in the fourth quarter this year. Service fees for the most part, well I shouldn't say for the most part, but about 60% of that total in the third quarter was tied to purchase volumes in our virtual card product. And so that's where we are going to hopefully -- hopefully see some savings in the fourth quarter from these renegotiated contracts and that will carry through next year. As a percentage of revenue you won't see a change dramatically, but that is clearly an area that you'll see next quarter and continuing into next year.

Okay. Great. Thank you.

Your next question comes from the line of Tien-tsin Huang

Hi, thanks. Sorry if I missed this, did you guys give the same-store sales -- by the way the results were great, much better than we expected. So good performance on a lot of these trends here. Did you give the same-store trends in the fleet side? I'm just trying to better understand how that is tracking.

Hi Tien-tsin, we did not give the same-stores number, and you know really, when we think about that as one piece of what effects the business and it's become actually a fairly small impact to the business, it was a slight headwind to us within the quarter. We also had a little bit of positive in the fact there were more business days this quarter than there were in the prior year, so we net those two things out.

Understood. Yes, it hurt the government side, that's helpful commentary. Can you just remind us you state, local, just your government exposure in general in the US?

Yes. So you know that we have a contract with the GSA and that's really the place where we did see a little bit of a slowdown impact in that business within the quarter. You know, relatively small. But there was an impact on that if that's what you're asking?

Yes, and I was just curious if it's, talking about 1% or 2% of revenues or even lower than that, just trying to get a better sense for future reference.

No, We have about 250,000 cards with the federal government, so it's definitely a large part of our card base. But they tend to spend less per card than you would see with an average fleet, so it had a little bit of as impact but not a significant number.

They're probably less than 1% of our revenue overall, and for a couple of weeks period of time we saw their volume down but as of last week it was pretty much back in line with normal trends.

Excellent. Good to know, two more quick ones, just by becoming and issuer, sorry, on the virtual card side, and you can save on the cross-border fees I'd imagine that's going to be pretty compelling to other clients. So, is it just those three countries that you named where you're becoming a issuer? What's the plan to expand on that? I'm just trying to better understand that.

Yes, we're working throughout Southeast Asia, so we actually have gotten approval in Thailand, Hong Kong, we're extending our use with MasterCard in Singapore and Malaysia. We're working in Australia, New Zealand, there's a number of countries that we're working on issuance in. In most of them we're issuing in some form or another right now. The places that we're still working on technology, we've talked before, there are three pieces for us to enter a new country. One is regulatory approval, with whatever their central bank is, the second one is approval with the scheme, MasterCard or Visa, and the third piece is technology. And we're focused right now on the technology pieces with Hong Kong and with Brazil. But from a issuing standpoint we're actually made really good progress against the countries that we had identified starting into the year.

And we're now looking at the next list of countries that we want to enter based on feedback that we're getting both from our existing customers and market research we've done in terms of growth opportunities. And then Steve talked about settling, we're settling in 11 countries right now. We're rapidly moving into others, we've got four in test phases, so both pieces of that equation's important to the customer base.

So at this stage in the game it is the virtual card expansion and investment? I know you guys were pretty bullish -- is it moving a little bit faster than expected? Is there a way to characterize it?

We are -- actually I would say that in general the investment's tracking pretty comparable to what we had anticipated. We're spending a little bit less money than we expected. We're getting results in terms of contract signings, implementations are taking a little bit longer that we had thought. So all those things you net them together and it looks about the same in total as what we'd expected.

All right, Great, thanks, I think that's all I've got. Then Mike I think this might be your last earnings call if I remember correctly, so if that's the case thanks again and hopefully we'll stay in touch.

It is, but thank you.

Your next question comes from the line of Thomas McCrohan

Good quarter, I just had a question regarding the investment spending is anything changed in your outlook in regarding containing the investment spending for this year?

No, I'd say we're on track with what we thought we were going to spend, we're on track with the projects that they relate to, so the data center consolidation is right in line -- we spent the money in the third quarter just as we expected in getting that up and running. The expansion of the virtual card again, you know is mostly just outlined making good progress in all the countries that we've targeted. The integration of Fleet One again going well and in line with what we expected on the expense side.

In terms of the OTA opportunity, can you help us understand the growth in meta travel sites like Kayak, what the implications are to you folks long term as more consumers use that? Some of those sites which I guess is not a use case of the virtual card, but if you can just confirm that and just give us your thoughts around that, that would be helpful.

Yes. We think that the market we are targeting online travel agencies primarily, but we're starting to move into other parts of the travel market, depending on what regions we're offering the product in. Mike talked about a few earlier. We think that the market in general, if you look at that narrow strip of the market, is about $72 billion worth of spend. And that we have about 13% market share in that part of the market. So we're getting benefit of growth with existing OTAs and we're getting benefit of signing new accounts. You're talking about one trend that we're seeing in the marketplace, and in general that may not be a place that we're going to play. But we're seeing benefit in lots of other parts of the market

That make sense. Thanks Melissa and just one last question on the funding, Steve I think you said 25 basis points average for the quarter. Are you hesitant in any way to lock in your funding costs if interest rates do rise?

There's a couple of pieces to that. If you look at what we call our financing debt balance which would be the senior credit facility and the bonds, obviously the bonds are a fixed rate for the next 10 years and that was part of the thinking in doing those. On what we call the operating interest side or the funding of receivable balances, that was the 25 basis points that I mentioned. There's pieces of that deposit base where there's essentially no interest rate now with the low rates and that could potentially change as rates rise in the future but for some time now we won't be paying any interest on that deposit base.

And then with the certificate of deposit marketplace there's a -- the duration to those instruments, so as we anticipate rates to go up in the future we can lock in longer-term certificates of deposit and essentially hedge in that way. We don't have, to answer your question directly, we don't have any direct financial instruments to hedge the interest rates in place right now, but structurally in our debt balances we have a number of them.

Thank you.

(Operator Instructions) Your next question comes from the line of Mike Grondahl.

Thanks for taking my questions. The first one, did I hear you correctly in that same-store sales trends in the quarter were just a slight headwind?

That's correct, yes

Okay, and then secondly, with some of the slower rollout for customers, do you believe you can catch up on that in the fourth quarter? Or are you anticipating any impact in 2014 now?

I'd say there would be a minor impact into 2014 to the extent we expected something to be implemented in November or December and it's going to turn into January or February. You lose a few weeks or something but that shouldn't have any material impact next year.

Okay. Nothing material. Okay. Thank you.

Your next question comes in the line from David Togut.

As you prepare to take over as CEO on January 1, Melissa, what major changes should we expect to see in the terms of the way you run WEX?

I think that there are a lot of great things about WEX, primarily it's making sure that we're preserving the things that are good. Culturally it's a great place to work. Our customers and partners have done business with us for a long time because we value partnership and we want to make sure that those things continue. In the business, in terms of change I think that -- well I've been very involved in strategic planning for a number of years now, working with Mike. So I don't think you're going to see huge changes. I think there will be changes in things like -- as we're targeting acquisitions, the size of the acquisitions, we'll probably be targeting something slightly larger than we have in the past.

And in terms of focus, taking the focus that we've had in industries, and making sure that we're moving that across new industry verticals, is something that we've been talking a lot about internally. So minor changes along the way, but I don't think you'll externally see the company look dramatically different January 1 than it does right now.

What are the major new industry verticals you're considering?

Yes, so we talked about healthcare, I think that healthcare, again it's, we're very early, we're learning a lot about that. But very large market, similar dynamics to places that we've been successful. If you think of the industry dynamics that we think that WEX has a play in, it would be an industry that's large, an industry that's got inefficiencies included in that, often fraud is one of those inefficiencies, but a place that we can go in and create efficiency. And then an industry where there is a recognized version of a payment, so depending on which products that we go into the market with, so if you think of a virtual card product we've been most successful where there's card adoption already in place. But we think of those are the dynamics of what we're looking for within a marketplace. We've had some success in insurance is another area that we'd want to continue to test to learn from where we've been successful, why we've been successful to see if there's a way that we can actually extract that.

And another area for us that we've been talking about and we're working on, is the whole concept of data. We believe that the fleet product set longer-term, that the elements that you're collecting around the transaction is important to our ability to add value long-term. And so that's another area that we are going to be expanding. Part of our business. So use an example of that would be the GSA,. They came to us primarily for the fuel card to start with, but we've been able to then sell into them a telematics device, and one of the things we can do with a telematics device now is geofence the vehicles so that you can tell if the transaction's occurring at the same location of the vehicle, and that enables you to differ and detect fraud that's occurring. And so that's something an application that we can take in to other countries where that's their primary concern which is certainly what we're hearing out into the marketplace. So that would be an example of taking what we've got, merging it into more of a data element and then changing and altering the way that the business looks over time.

Do some of your goals imply a change in capital allocation priorities especially as you look for larger deals?

When we think about capital allocation it's been really fundamentally based on where's the highest return for capital and so that's something that I would envision us to continue to practice. So, not necessarily capital allocation of how we think about where we're placing the capital -- it's more around the size of where we think we're going to have the most impact. As opposed to having a bunch of smaller plays, making a few larger ones. Is one of the outcomes I think you can see.

Final question for me, as you become more of a global company, what changes do you intend to make in the management infrastructure at WEX?

Yes, from a global perspective, this is -- we've been creating infrastructure along the way to support our global growth and that's something we're going to continue to do. So if you think about centralizing our data centers that's a great example. We are deploying capital, that's something that we're focusing on as a business. And the whole structure of the Company is moving that way as well. So people are in more global rolls of products are being thought of on a more global basis, while market research product specifications are still being localized.

And so the Company's structures is really moving more into this concept of how do I create more of a globalized view from a product set perspective? But in picking up local functionality needs and on distribution needs from a local perspective? And so that's the part that will translate from what we want to do strategically into what the business is going to look like structurally, and then ultimately into the people that's doing that work.

Thank you very much. Congratulations.

Thank you.

Your next question comes the line of Tim Willi.

Thanks, good morning. I apologize, I hopped on a couple minutes late, but I wanted to ask you to maybe repeat a couple things. I caught a comment from Mike about JVs and possible announcements in the next 90 days or something like that. Could you go back to those comments and that conversation to make sure I heard that correctly?

Yes the comments were just -- you know -- around both our appetite and our capabilities for acquisitions. And I guess my point was that -- a couple of things. One is we see more opportunities on the fleet side and I talked about that could be in the US, that could be in Europe, that could be in Asia-Pacific, that could be in Brazil. We'd love to see more opportunities on the virtual travel side, just there aren't a lot of opportunities there. But there are some in the pipeline that we're looking at. And then I said over the next 90 days we're very optimistic but I was broad in terms of major partnerships, potential JVs and potential acquisitions. And I just said there'd be more to come in that area of looking at those three opportunities.

Okay. And then the second question following up from a couple questions back around product and data, Melissa you were just asked -- when you look at the revenue model with your customers. And sort of what they get, the basic product set and then how you make your money. Do you see anything to clearly be customer friendly and not forced down their throats, but a way that would maybe improve your profitability per customer? Whether it's unbundling products and services that now may just be part of an overall package, or new product development where you think people definitely would be willing to pay for some stuff, I think you references with the GSA? And sort of thinking about how you monetize some of what you built around the network and the connectivity and the data over all these years?

Yes, I think that that comes from a combination of rolling out new products that they're creating value in different ways that you can monetize. So it's a combination of that and just making sure that our fee structure's modernized. That it makes sense compared to our competitors in the marketplace. So those are both things that we would be looking at on a regular basis.

Okay. Great. That's all I have. Thanks very much.

Your next question is a follow-up from Bob Napoli.

Two things, one I think Mike, that you had said that you had signed multiple channel partners in the healthcare space? Is that in addition to PaySpan and Alegeus or is that through PaySpan and Alegeus?

It's in addition to them

What kinds of channel partners are these? Maybe -- these were not announced right? Or press released? (Laughter)

No, we didn't announce them. They're smaller in size which is in part why we didn't announce them. But they're -- in similar type of capacity in they're intermediaries in the marketplace some of which have existing spend, some of which want to create that opportunity in the future. So it's a combination of all of the above.

Okay. Can you give any feel for -- give us -- I know you're, it doesn't sound like you're doing a lot yet in healthcare but it is growing. Any feel for what the volume trends are in that business?

Well it's growing at a very rapid pace, but it's -- ( Laughter ).

Right, is it 1% of the payments of the virtual volume? Or --?

It's incredibly small.

Okay. And then you had mentioned that you had renegotiated service fee contracts? And it sounds like something that would move the needle a little bit. I wasn't sure if it was just -- it sounds like that would be a benefit in the fourth quarter but an ongoing benefit. Can you give any color around that statement?

You're correct, what I was saying before was that about 60% of the service fee is tied to our virtual card volumes. And it's a lot of the processing cost around those transactions. And there's a number of players involved in there, but we've been able to renegotiate some of those contracts and you're right, we will see a benefit in the fourth quarter this year. That will continue through next year.

Great. Thank you very much Mike, good luck I'm sure that we'll be in touch at least over the next year. (Laughter ) Take care.

Okay thank you, Bob.

This concludes the question and answer session Mr. Elder the floor if yours any closing remarks.

No further remarks, but Raquel thank you very much and thank you everyone for joining us once again this time and we'll look forward to talking to you in February.

Ladies and gentlemen, this concludes the WEX Incorporated third quarter 2013 financial results conference call. You may now disconnect.