WEX Inc (WEX) 2013 Q4 法說會逐字稿

Good morning. My name is Dana and I will be your conference operator today.

At this time, I would like to welcome everyone to the WEX Incorporated fourth quarter 2013 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the conference over to Vice President Investor Relations and Treasurer, Micky Thomas. Please go ahead.

Thank you, Dana. Good morning.

With me today is our new CEO and President Melissa Smith and our CFO Steve Elder. The press release we issued earlier this morning is posted in the Investor Relations section of our website, at 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 last year's fourth quarter, adjusted net income excludes unrealized losses on fuel price derivatives, amortization of acquired intangible assets, the adjustments attributed to non-controlling interest, a non-cash adjustment related to the tax receivable agreement, and the tax impact of these items. Please see exhibit one included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income.

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 on our press release and the risk factors identified in our annual report filed on Form 10-K filed with the SEC on March 1, 2013 and 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 will turn the call over to Melissa Smith.

Good morning, everyone, and thanks for joining us. Before discussing our fourth quarter and fiscal 2013 achievements, I want to take a moment to thank Mike Dubyak for his years of dedication and leadership at WEX. I look forward to working with Mike in his new role as Executive Chairman of the Board.

Earlier today, WEX reported strong results for the fourth quarter and full-year 2013. For the fourth quarter, both revenue and adjusted net income came in ahead of our expectations, with revenue increasing 8% over the prior year, to $182.3 million, and adjusted net income per share increased 6%, to $1.13 per diluted share. Better than expected results were driven by acceleration in our fleet volumes, virtual card volumes and late fee revenues.

The fourth quarter represents the continuation of noteworthy momentum we experienced throughout the year. I'm pleased to report that for the full year 2013, revenue increased 15%, to $717.5 million, and adjusted net income increased 10%, to $173.9 million.

Our fleet payment segment performed well in 2013, continuing its track record of consistent growth. During 2013, we added approximately 700,000 new fleet cards globally. Additionally, we continue to benefit from revenue and cost synergies associated with the Fleet One acquisition. We hit all of our key integration milestones, and the integration will be completed by year-end, which is ahead of our original schedule.

We ended 2013 on a high note, announcing our intention to acquire ExxonMobil's Esso commercial card portfolio. Esso will be a key strategic addition that we anticipate will build out our fleet presence in Europe, which has been a critical element to our international expansion strategy. I will touch on this further in just a moment.

Our virtual business continues to generate strong growth, both domestically and internationally. In fact, our other payment solutions segment, which largely consists of our virtual business, grew spend volumes 22% for the year. Exciting customer wins, like Wotif, Globalia, and Grupo Transhotel contributed meaningful spend in the fourth quarter, and we will be able to ramp up activity further in 2014. We believe our efforts to expand our virtual card business globally, including these important wins, will contribute substantial purchase volume additions this year.

As we turn the page on a very successful 2013, I'm excited and energized to be in the role of CEO and lead WEX into this next stage of growth. I'm proud to have been part of the team that helped contribute to WEX's past growth and development, and I look forward to guiding our Company as we scale and globalize the business. So as we look ahead to 2014, I thought I'd spend a few moments discussing where I see WEX today and our top priorities for the upcoming year.

Today, WEX stands as a premier global payment solutions provider. Certainly, we are well-known for our success in the fleet space, but our business and opportunities in front of us extend well beyond this market, and in particular, to the travel space. We are globalizing our Company, building on a leading market position in our core fleet business.

Our strategic approach to entering new markets is focused on three steps, identify complicated markets facing complex challenges and inefficiencies, develop products and services that address these unmet market needs, and operate with systemic efficiency through scale and cost management.

We have a proven model in the fleet space, where we have developed a leading market position and strong margin profile. We've done the same in travel, where we continue to grow the business and begin to build scale on a global basis. WEX is the leader in global virtual payments in the travel space.

Layered on top of these established businesses, we will continue to evaluate other markets and apply this model within new verticals. For example, healthcare is a vertical that we have targeted as an area with considerable potential for revenue capture and market need. We have traditionally done well in complicated, large industries. The reason that we do so well is that our business is able to match the complexity of such intricate industries and our products adapt to the needs of the marketplace.

The healthcare vertical has the right dynamics for us to be successful; but we're still learning the nuances of this space and calibrating the optimal path that can lead us to operate in that space with systemic efficiency. Our progression in healthcare is very similar to the early stages of entering both the fleet and travel markets, which both took at least five years to effectively penetrate. While it's difficult and sometimes time-consuming to enter these complex markets, we believe these are often the areas that offer high-growth and high-margin opportunities over the long-term.

As we cultivate our Company's path forward, there are three key priorities for 2014. First, we will position the Company to accelerate growth organically and through M&A. Second, we will drive scale across the organization. And third, we will focus on further globalizing our business by making targeted investments.

These investments are core to achieving our growth objectives over the near- and long-term. The foundational work to achieve this goal has begun, and we believe this is necessary to establish a long-term path to accelerate growth and enhance scale.

We have a number of strategic initiatives that will underpin our longer term success including the following. In our fleet segment, let's first talk about our global expansion. As you know, building our on-the-ground presence in Europe has been a key element to our international growth strategy. And the recently announced Esso transaction represents a significant milestone for WEX.

With this acquisition, we will be providing operations, funding, pricing, sales and marketing in nine European countries. This deal is distinctive in the fleet card space, as Exxon will be fully outsourcing to WEX the ownership and management of the customer relationship upon closing of the transaction.

This is a new dimension in the fuel card industry, because traditionally oil companies outsource management of their portfolios but retain ownership of their customers. We look forward to growing the Esso portfolio in Europe by leveraging our expertise, managing private label portfolios, and capitalizing on our partner Radius' sales and marketing expertise in the Euro market. Not only will this provide significant customer benefits, but the transaction will provide us solid footing from which we can expand WEX's European presence with major oil companies in the future. Advancing the Esso transaction will be a key area of focus in 2014.

We have three phases with this program. The first phase is the successful completion of the employee information and consultation processes and customary regulatory approval. The information and consultation process across Europe with country employee counsel is progressing on schedule, and is completed in two countries.

The second phase focuses on the operational readiness to take on the business. In 2014, we are focused on building out our systems and infrastructure to support this program. Expenses during this phase include salaries related to our joint venture and expenses related to establishing a physical presence in European countries. These expenses include IT and communications infrastructure. Phase 2 is completed at the closing of this transaction, which is anticipated to be in the fourth quarter of 2014 or the first quarter of 2015.

The third phase marks the conversion of the Exxon Mobil portfolio to WEX systems. We began our technology build for this phase and expect conversion to our systems to be completed in 2015. Our expanded relationship with Exxon is expected to bring sizable revenue, generating over $35 million of revenue per year after the conversion is completed.

We'll also look to increase our capabilities in data analytics. We believe this is already a core strength of ours, with our data collection and telematics products known as WEX Smart. This is an area where we could see even more opportunity to further differentiate us from the competition moving forward. Our WEX Smart telematics products grew up 44% in 2013, and we see positive trends developing on this front.

In virtual, we continue to expand our issuing and settlement capabilities internationally. We have analyzed a list of countries and identified some specific targets which we believe will be advantageous to establish our ability to issue and settle. For our travel customers, WEX is currently settling transactions in 15 currencies. In addition to more favorable rates, settling in local currency provides increased precision around authorization controls and currency reconciliation. As we evaluate the payment needs of our existing virtual customers, combined with new opportunities in major travel markets, we'll continue to expand our global payments platform.

The WEX international travel product removes payment inefficiencies with realtime processing, transaction-specific controls, and reconciliation automation in the local currency, while driving cost and process improvement. While the Esso transaction provides us with a substantial presence in the European fleet space, we will continue to drive global expansion for the business. We're also are focusing on further expansion in the APAC region, where we will leverage our international work in virtual.

Our priorities and key initiatives will be supported by our capital allocation strategy. Broadly speaking, the factors that dictate when, where, and how we allocate capital revolve around identifying opportunities that provide the highest risk-adjusted returns. But also investments that provide us with the biggest bang for our buck. By that, I mean we think about the time and resource commitment as an opportunity cost by which to further evaluate investment opportunities.

While we may make smaller acquisitions in emerging markets or buy technology needed to accelerate products, we will mainly be focused on larger opportunities. We've revamped our pipelines at the end of 2013 to reflect this focus.

Secondly, our investment spending will be oriented toward opportunities that will help us either create or enhance scale, provide product differentiation, as we expand internationally and across different verticals. This includes the organic investments with respect to the Esso acquisition, where we are building out a fleet business in Europe to service a foundation that will lead to sizable revenue opportunities. In addition, our investment scope includes acquisition opportunities that provide supplemental products that improve our offerings, such as data analytics. In the near-term, we believe investments will be weighted towards our fleet business, as there are more sizable transaction opportunities in that market; but we are also continuing to identify travel expansion opportunities.

Lastly, our organizational structure continues to evolve to support more global enterprise. To this end, we've announced three new senior management hires.

First, Steve Crowley joined WEX in August as Senior Vice President, Shared Services and Chief Information Officer. He is responsible for WEX's global information technology, program management office, and client operations.

In December, Alison Vanderhoof joined WEX as Senior Vice President, General Manager for Emerging Markets. Alison will oversee the business performance of WEX's travel, healthcare and employee benefit businesses globally.

Nicola Morris is joining WEX as a Senior Vice President of Corporate Development and is responsible for strategy, early stage product development, directing market research and overseeing related communications. This group of additions supplements our talented team we have in place and will augment our core bench strength to support our global growth.

In summary, I'm very proud of the Company we have built and even more excited about our future. We exit 2013 in a position of strength and look forward to undertaking the foundational work in 2014 to further globalize our business and position WEX for accelerating growth. But fundamentally, it is our abilities to develop the right solutions, combined with our commitment to fostering long-term customer relationships, which provides us the competitive advantage to succeed and grow our business long-term. We believe these attributes distinguish WEX from other payment providers, and our differentiation in our go-to-market strategies will serve as a springboard to launch us into our next stages of growth as a company.

To this end, we've established long-term revenue and earnings growth targets. We expect annualized revenue growth of 10% to 15% and earnings growth of 15% to 20%, including acquisitions. These are the goals that I've asked the entire WEX team to deliver, and the parameters within which we focus on framing and dividing our growth initiatives over the near- and long-term. While it shouldn't be interpreted as guidance, it is how I am benchmarking our performance over the long-term.

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

Thank you, Melissa.

For the fourth quarter of 2013, we reported total revenue of $182.3 million, an increase of $13.3 million from the prior year period and above the high end of our guidance range of $173 million to $178 million. This performance, compared to our guidance, was driven primarily by volume growth, late fees and slightly favorable fuel prices.

Net income attributed to common shareholders on a GAAP basis for the fourth quarter was $34.5 million, or $0.88 per diluted share. Our non-GAAP adjusted net income increased to $44.1 million, or $1.13 per diluted share. This compares to our guidance of $1.04 to $1.12 per diluted share, and $1.07 per diluted share reported in Q4 last year on an adjusted net income basis.

For the full year 2013, revenue increased 15%, to $717.5 million from $623.2 million in 2012. On a GAAP basis, net income was $3.82 per diluted share in 2013, compared to $2.48 per diluted share in 2012. On an adjusted net income basis, earnings increased 10%, to $4.45 per share from $4.06 per share last year.

Taking a look at some key performance metrics for the quarter, consolidated payment processing transactions increased 4% quarter-over-quarter, which was ahead of our expectations. For the full year, consolidated payment processing transactions increased 12% over the prior year. About half of the total increase for the year was due to the acquisition of Fleet One, while the other half represented new fleet wins.

The consolidated net payment processing rate for Q4 2013 was 1.4%, which was flat compared to Q4 2012 and to the third quarter of 2013. However, a drop in fuel prices versus last year cost payment processing revenue in the fleet segment to come in flat to last year.

Finance fee revenue in the fleet segment increased $2.3 million compared to Q4 last year. This increase was driven by higher late fee rates charged to our fleet customers and by increases in factoring revenue at Fleet One.

In the other payment segment, revenue for the fourth quarter increased 22%, or $8.7 million year-over-year, to $48.8 million, primarily as a result of virtual card volumes. We also had solid growth from our employee benefit products.

Spend volume on our virtual products increased 32% over last year, to $3.3 billion for the quarter, driven by increased volume from our travel customers. The net interchange rate for our virtual card in Q4 was 96 basis points, up 2 basis points year-over-year and up 1 basis point sequentially. The increase over the prior year was primarily due to heightened customer-specific incentives received from MasterCard in 2013, offset by higher rebate levels caused by mix.

Moving down the income statement, for the fourth quarter, total operating expenses on a GAAP basis were $111 million, an $8 million decrease versus last year. Recall that last year, when we completed the acquisition of Fleet One, we had several deal-related costs. Normalizing for these deal-related costs, total operating expenses increased approximately $7 million.

Salary and other personnel costs for Q4 were $42.3 million, compared with $35.9 million in Q4 last year. The increase was predominantly due to increases in headcount and related benefits. Total headcount is up 7% over last year, with most of the new hires outside of the US.

Service fees were down $5.5 million from the prior year, at $23.7 million, driven by a decrease in professional service fees related to the Fleet One acquisition in Q4 2012. As I mentioned on the last call, we also had a significant decrease in our service fee expense in the other payment segment. Service fees in the segment are down $7.3 million from Q3 levels. As a percentage of total purchase volumes, these fees are down 20% sequentially, as a result of renegotiated contracts.

During the fourth quarter, we again saw solid performance in our credit losses, which on a consolidated basis totaled $6.5 million in Q4. This compares to $7.7 million in Q4 last year. Total charge-offs in the quarter were $6.6 million. Fleet credit loss was 9.9 basis points in Q4, compared to 11.4 basis points in Q4 2012, and was down compared to the prior year period, reflecting the strong condition of our portfolio. For the year, we experienced the lowest credit loss in recent history, at 7.9 basis points.

Our operating interest expense was $1.1 million in Q4, as we continued to benefit from low interest rates. During the fourth quarter, we recognized a $700,000 non-operating loss on foreign currency transactions, due mainly to the weakening of the Australian dollar. As we mentioned last quarter, we expect foreign exchange fluctuations to become more relevant in the future, as the cash that we will have on hand to settle in various currencies for our virtual product will be marked to market.

The effective tax rate on a GAAP basis for Q4 was 39.4%, compared to 33.7% in the fourth quarter of 2012. Our adjusted net income tax rate this quarter was 38.5%, compared to 36% for Q4 a year ago. The increase in the tax rate in the quarter was due primarily to foreign exchange rate impacts.

Turning to our derivatives program, for the fourth quarter of 2013 we recognized a realized cash loss of $200,000 before taxes on these instruments and an unrealized loss of $6.9 million. We concluded the quarter with a net derivative liability of $7.4 million. For the first quarter of 2014, we have locked in at a price range of $3.38 to $3.44 per gallon. For the full year, the average price locked in is $3.36 to $3.42 per gallon.

Moving over to the balance sheet, we ended the quarter with $361 million of cash, down from $391 million at the end of the third quarter. The decrease in cash was driven by the seasonal nature of certain deposits at our bank.

In terms of capital expenditures, CapEx for the fourth quarter was $9 million. Our total CapEx for the full year was $39 million, which included approximately $13 million related to the consolidation of data centers.

Our financing debt balance decreased $3.8 million in Q4, reflecting a quarterly payment required by our term note. We ended the quarter with a total balance of $685 million on our revolving line of credit, term loan and notes. As of December 31, our leverage ratio was 2.1 times our 12-month trailing EBITDA, compared to 2 times at the end of Q4 last year.

Throughout 2013, we effectively managed our business, delivering strong financial results while making strides in our path to long-term growth. We are actively investing in the future of our business to better position ourselves to leverage opportunities across all of the growth dynamics emerging in our business. We were able to drive these strong results, despite a relatively slow growth economy in 2013. We are confident that we will sustain our momentum moving into next year. We're looking forward to contributions from both our established businesses and growth initiatives to drive production in 2014.

Now for our guidance for the first quarter 2014 and the full year, which reflects our views as of today and are made on a non-GAAP basis. For the first quarter of 2014, we expect to report revenue in the range of $168 million to $175 million, and adjusted net income in the range of $39 million to $42 million, or $1.00 to $1.07 per diluted share. These figures assume normal seasonality trends in the virtual card and prepaid businesses, as well as credit losses. Our first quarter guidance assumes that free credit loss will be between 7 and 11 basis points and that domestic fuel prices will be $3.55 per gallon.

For the full year 2014, we expect revenue in the range of $751 million to $771 million, and adjusted net income in the range of $184 million to $191 million, or $4.70 to $4.90 per diluted share. Our guidance includes $10 million to $13 million of expenses after taxes related to our expected acquisition of ExxonMobil's European commercial fuel card program. This equates to an earnings impact of $0.26 to $0.33 per share, or a 6% to 7% headwind on our growth rate next year.

Integration costs associated with our Fleet One acquisition will be significantly lower in 2014, as our integration plan will be completed later this year, well ahead of schedule. Our full-year guidance also assumes that fleet credit loss will be between 7 and 11 basis points and assumes that domestic fuel prices will be $3.49 per gallon. The fuel price assumptions for the US are based on the applicable NYMEX futures price.

In our virtual business, our guidance continues to assume investment to expand our virtual card business into new geographies, although at lower levels than last year. As part of this strategy, we have started to move existing customer volume over to our new issuing and settling capabilities in a growing number of foreign currencies, as well as getting contributions from new customers. This will prove beneficial to our OTA customers by minimizing their fees related to cross-border transactions, and it will reduce our cross-border fee revenue and related service fee expense.

As we have discussed all year, during 2013, we benefited from elevated customer-specific incentives on our virtual card product. Our revenue guidance for 2014 assumes a lowering of the net interchange rate, primarily due to a reduction in these customer-specific incentives. Our guidance reflects a continuation of service fee savings, as we have previously discussed.

We continue to include the negative impact to our business as result of the merchant litigation settlement into our guidance. The impact will be 10 basis points on domestic virtual card spend in Q1, which will result in an approximate $0.03 per share impact on earnings. As we mentioned last quarter, in light of the success to date of our international expansion efforts, the proportion of our business sensitive to changes in foreign exchange rates has grown. Our guidance also assumes that exchange rates will remain in the range of current spot rates.

Additionally, we expect our A&I tax rate to be between 36% and 37% for 2014, total capital expenditures to be approximately $40 million to $45 million. And as we mentioned on our last call, we are excluding stock-based compensation expense from our adjusted net income guidance in order to make this measure more comparable with our peers. Our guidance does not reflect the impact of any further stock repurchases that may occur in 2014.

And now, we will be happy to take your questions. Dana, please proceed with the Q&A section.

(Operator Instructions)

Bob Napoli, William Blair.

Thank you, and good morning. Lots of information there on Melissa's first conference call.

A question on the -- both guidance, I guess the long-term -- not guidance, but targets, if you would. And what prompted putting out those targets? They're certainly very attractive and challenging. What prompted that, and maybe a little bit of thought behind what would be organic versus M&A-related?

Yes. I think that actually the whole thing fits together. When we were talking about the business, and as I laid out how I think about the business strategically, the financial element of that. And so we just wanted to make sure that we were tying all those pieces together.

Okay. Maybe some color on where organically -- is the organic revenue growth mid- to high-single digits, and then M&A on top of that, or --?

I'm intentionally trying to talk about this on a long-term basis.

Sure.

And they're intended to be long-term growth rates that I'm shooting for and using to drive the business. And I know that there's going to be some years we'll fall outside of those ranges. But it's intentionally including both organic and inorganic activity.

Okay. Then just on the virtual card business, the very strong growth that you saw this quarter following the acceleration, further acceleration from last quarter. What is embedded within your guidance for the volume growth and the take rate, or the interchange rate, the net interchange rate for 2014? How much of that acceleration is international versus your key US partners?

Bob, this is Steve. There's pieces of all the things that you mentioned in there. We are expecting another very strong year in the volume growth, both domestically and internationally.

The locally issued -- the investment that we made last year to go to the locally issued countries is paying off. We saw an acceleration in the fourth quarter of the total volumes that were issued locally. The customers that Melissa mentioned in her section, like Globalia and Grupo Transhotel, are ramping up. We have others that have signed and are ramping up, as well, that we haven't mentioned. And we will continue to benefit from just the domestic OTAs, as well.

I think the one thing that I do want to throw out there, so not everyone is surprised, is we've been saying all year long that we have benefited from these incentives that we've received that are customer-specific. And that will go away and it will drop our interchange rate next year. So when that comes in the first quarter, I don't want anyone to be surprised by that. But we are expecting another very strong year in that segment.

Okay. We expected that. Trying to find out how much it would drop.

This year, I'd say it benefited us somewhere in the range of 7 to 8 basis points.

Okay. So you have that 7 to 8 basis points, plus the interchange settlement on top of that, with the card settlement.

Yes.

Temporarily. Last question, just on Europe and strategy.

With Esso having decided, and obviously, selling their business to you and outsourcing to you. Is this, potentially, open up -- you obviously have been working on Europe for a long time. It's been a key strategy of yours, as you mentioned. Does this first major oil company going to an outsource model, has it accelerated conversations with other oil companies, either in Europe or in other markets?

Yes. I think that the marketplace itself is prime for change. And the announcement with Exxon is a great example of that.

There is definitely more interest in the marketplace. And I would say that those processes tend to be very formal and long-term in nature, with caveats around it. But yes, I do think it has stirred interest in the market.

Great. Thank you.

[Tim Jim Hong].

-- for all the details. Good quarter here. I guess just a macro question.

How does the environment feel? Maybe if you could just summarize the key countries, go into a little bit more detail what the expectations are for 2014 on the macro side?

You cut out at the very beginning of that.

Sorry, Melissa. I was just asking, just thinking about same-store growth and we saw the vehicle count growth. But I'm thinking about same-store macro, the key countries. Anything to call out or anything to consider?

For us, the level of business that we have in some of those countries is still relatively small. So it shouldn't affect the overall growth trajectory of the business, at this point in time. Anything we're adding is, for the most part, new, with the exception of the Australian marketplace.

Right.

And so that isn't something that we're as concerned with. In the US, we're seeing the market is relatively flat. It may be down 1%. But when we thought of our guidance, we're thinking about the market itself as generally flat, and any growth that we're projecting is coming from adding new business.

Okay. That's good to know.

And then on the payment processing metric, I think it was up 4%. Steve, I think you said that was in line. I know that Fleet One anniversaried. What should we be thinking of as a range for 2014?

And has the Citgo business cut over yet? And when would that happen? Thanks.

Sure. So the 4% growth in transactions, that is the reported number. I would point out that in the schedule in the press release, each transaction was a little bit bigger -- and this is probably my own personal theory -- but as fuel prices were dropping, we think people waited an extra day or two to buy their fuel. So each transaction got a little bit bigger. If you look at the number of gallons of fuel purchased, it actually was very much in line with what we saw in Q2, Q3.

So, going forward, and getting back to the rest of your question, we're looking at those mid-single digit kind of growth rates in that segment, in general, I'd say. As Melissa said, it's all organic and mostly in the US. But that's kind of where we're expecting it to be.

And you asked about Citgo. We actually have cut the cards for them. That would be included in the growth that we had in 2013. But we're actually just starting to see the migration of volume, and we expect that to be done by the end of the first quarter.

Okay. So that will roll in, and sort of fully ramp, be in market by end of Q1?

Yes.

Perfect. Just last one. I heard the comments on M&A and acquisitions, but just in general, capacity for M&A, both financially and from a resource standpoint? And are there any new rules we should consider for -- or criteria for deal accretion, dilution, size, things like that?

I'd say in terms of capacity, we've got about $300 million in cash on the balance sheet. A lot of that is at our bank subsidiary and not really available for acquisitions. But at the corporate level, there's well over $100 million in cash that's available.

And we have the revolving credit facility, which is $700 million, which is untapped at this point. So plenty of capacity to do more deals.

And in terms of how we're thinking about transactions, we're thinking about it in risk-adjusted return. I don't think that's necessarily new.

The part that I added on top of that is the concept that we're looking at the opportunity costs. So to the extent that we're spending time and effort on something, that it needs to have a big enough return, holistically. And that gets to your question on human capital.

Part of why we expanded the group and added people in from an external basis is to make sure that we had the capacity to do everything that we want to do. And so that's an element of it. But also, as we're looking at transactions, just thinking through how does that tie up our resources, which we consider to be very valuable, and is that the best use of our time allocation?

That is good. That's great. Thanks so much.

Phil Stiller, Citi.

Just wanted to round out the discussion on M&A. Seems like most of the focus is on the fleet side. Can you talk about the types of acquisitions there?

Should we expect something similar to the Esso deal that you guys recently signed? And does that lengthened conversion impact your ability to do deals in the meantime, before that deal is converted?

Yes. And I would think of the Esso deal as very unique, in the respect that it's a piece that's acquisition, but there's a piece that's also an investment. And so if it was a pure acquisition, the financial aspects would look different. You wouldn't see as much dilution as we have, because of the investment period.

So you've got to set that on the side and say, okay, that's kind of an unusual transaction. When we're looking at the rest of the marketplace, the reason why we said it's predominantly fleet is just because it's a more mature market. So when you do a global scan, there are more market opportunities, in terms of just the size of capital deployment, in the fleet industry.

We're also looking at other markets, specifically the travel market is something that we'd be interested in. The benefit to us is it's still a relatively new marketplace. And so that doesn't lead to lots of acquisition opportunities, it leads us more to organic growth. But it is an area that we'll continue to look at.

And so capital allocation will be largely slated towards fleet, just because of the dynamics in the marketplace. And in terms of the types of acquisitions, we've always said we'd be interested in things that consolidate the market, that give us scale, that we think are advantageous to the customer base, that we're interested in things that will extend our product offerings.

And we talked about the fleet telematics offerings as an area. Data analytics is something that we're looking at in the marketplace. And so those are two focuses of ours.

Okay. One question on sales pipeline. You guys had a lot of good signings in both segments in 2013. Can you characterize for us how the sales pipeline looks going into 2014, for both segments?

Sure. If you look across, I would say, all parts of our business, we spend quite a bit of time focusing on what's in the sales pipeline. And so we feel confident going into 2014 of what we've got for new business adds.

Some of that is just ramping of existing customer signings. So it's a piece of it where we have visibility where we know we've signed a customer, we just need to see the ramp. And then on top of that's what we intend to sign during the course of 2014, and we're feeling pretty good about that.

Okay. Last one for me, just a model question.

I think, Steve, you may have referenced higher late fee rates in the fleet segment. Was that something where you guys changed the structure of your contracts that occurred in the fourth quarter? I'm just wondering if that flows forward into 2014.

It is something where we changed the structure of the contract. We actually did it in the third quarter, I believe.

And typically, what happens when you do that is people get a notice that their rate is changing, and so they pay you very much on time for a few months; and then they kind of slip into old habits again. So we kind of got the benefit in the fourth quarter. But it will be continuing into 2014.

Okay. Great. Thank you.

Sanjay Sakhrani, KBW.

Thank you. Good morning, and congratulations, Melissa.

I guess my first question is on the targets you mentioned for 2014, and specific to some of the goals you mentioned on scale. I guess when we think about the progression of operating margins going forward, can you just dimensionalize how you are thinking about it going forward over the short-term and long-term?

Yes. Actually, I'd start over the long-term.

When I gave out the long-term targets, you would infer margin expansion, because you're seeing earnings growth faster than revenue growth. So that's an element of how we're thinking about the business on a longer-term basis, and recognizing the fact that 2014 is being affected pretty heavily by the investment in the ExxonMobil European business.

So I think we are doing a lot of work foundationally to make sure that we can reach those longer-term targets. We've factored that into the guidance that we gave out for 2014. But we know that it's affected by the investment with ExxonMobil Europe. But we do expect to see that occur over the next several years, and that's part of what we considered in the long-term targets.

Okay, great. And then, when we think about the payment solutions purchase volume growth trajectory, Steve, is it safe to assume that we're probably going to be above that 20% goal that you guys have, as we look out to 2014? Because it seems like there's some pretty decent momentum from all the stuff you talked about.

I think there's great momentum. I think we would say that the target is still around that 20% mark. We have been above that the last couple of years.

As you get bigger, it gets a little harder every year. So I think we'd stick with that 20% target, though.

Is that what's contemplated in your guidance?

It's pretty close to that, yes.

Okay, great. And then, the tax rate. How should we think about the move up this specific quarter? I know it was FX driven. But assuming FX impacts remain a little bit of a headwind, should we expect the tax rate to be higher, as well?

Yes. It can move it around a little bit. There was a quirky thing in our Australian business, where a change in the Australian dollar versus the Great British pound affected our tax rate. It's not something that typically happens to us.

But I'd stick with the -- 36% to 37% is what we're shooting for and what we expect. But you can get these little quirky things. Even last year, it was 37.2% for the full year; so not too far off, even with the little blip at the end of the year.

Okay. I guess my final question is on Expedia, because I know they're a big other payment solutions partner. I guess there's been some chatter that they might be moving towards the agency model. And I was just wondering if you guys had seen anything or heard anything about that, and whether or not you guys thought it was an impact at some point. Thanks.

Yes. I don't know that I would want to comment specifically on Expedia. I would say, in general, there is a move in the US marketplace for both.

I think people are looking at deploying both as options. And so when we've thought about the growth that we're going to have in the business, we've contemplated what that impact would be overall to the business and included that in our guidance.

Okay. Great. Thank you.

David Togut, Evercore.

Thank you. Question on ExxonMobil's Esso card portfolio that you're buying. Is that an EMV-enabled portfolio, or is that still mag stripe?

Still mag stripe, David.

And do you have any plans to convert that to EMV card portfolio?

It's something we'll be working with them on. It's still going to be their point-of-sale that you're doing the authorization on, so it will depend on their interest in adoption.

I see. And then, what would be the change in economics if you move that portfolio to EMV-enabled?

It typically doesn't have a significant change in the economics to us. The question really is the cost of conversion for them.

Got it. And just a quick final question. Do you have any plans to introduce a direct universal card in Europe for your fleets?

Actually, when we were contemplating entering the European market, the private-label offering is a piece of how we intended to enter the markets for these relationships. But longer-term, we would like to see a direct universal product there.

Do you have any timetable on introducing that product?

We don't. This is something that we've talked about in the marketplace for a number of years. And so it really depends on the degree of willingness for people to give level three data, within that marketplace. But we are definitely at the door asking the question and highly interested in it.

Got it. Thank you. Congrats again on your promotion.

Thank you.

Tom McCrohan, Janney.

Hello. Thanks for taking the question. I just have two questions. One's on the investment spending.

So given the $10 million to $13 million after-tax call out on the Esso European expansion. So the overall level of investment spending this year, is the way to think about it the OTA investment you made in 2013, whatever the level that was continues this year? And on top of that, you're adding the European investment?

I'd say we do still plan to invest in the OTA marketplace. And primarily, that's around expanding the geographies that we cover, the issuing and settling capabilities. It will probably be less than what we spent in 2013.

The other big lever in there is integration costs with the Fleet One acquisition, a little over a year ago now. So that will come down, as well. And then, as you said, as you pointed out, we'll add in the Exxon European costs.

So just a trajectory overall, Steve, like investment spending, all the puts and takes, are we in year two of a multi-year initiative to globalize the company? Just trying to get a sense for -- is next year there's going to be more investment spending, or about the same level? Just trying to understand where we are in the cycle.

The cycle is, obviously, it's higher in 2014 than 2013, without any question. What goes on beyond 2014 and 2015, 2016, whatever, we'll get through the conversion of the Exxon portfolio in Europe. That's going to come, again, with some costs in 2015.

I don't think we're ready to quantify those just yet. But we're going to be converting systems. We're going to be running those systems based on how we do things in the US and making the processes more efficient.

So there's a lot of time between now and then, and I don't think we're quite ready to quantify exactly what we'll be spending there. But there will be definitely some dollars spent.

Okay. It sounds like you're already getting some return on the money spent in 2013 on the OTA side.

Definitely some there. And definitely some on the integration side with Fleet One, as well.

Yes. Yes. And then the last question, just on Asia Pacific.

Melissa, you mentioned in your prepared remarks, further expansion in that territory. You talk about Hong Kong, Singapore and, I think, Thailand. Is there any other country that you're targeting now?

We are primarily targeting Southeast Asia in that marketplace. But we talked about entering that in the virtual card product offering last year, which we've done. We're continuing to expand that.

Hong Kong is another country, as an example, that we're expanding into. But then on top of that, since we've already established the ability to do business there on the virtual card products, we're looking at expanding into fleet, as well.

Great. Thanks very much.

Mike Grondahl, Piper Jaffray.

In the OTA international rollout, are there any countries to call out that have done a lot better than maybe what you anticipated, or been even a little bit slower?

I'd actually say, on the whole, we've been pretty consistent with what we had expected. We spent less money than we had expected, and the timing of the revenue has been a little bit later than what we expected. So those two things kind of have netted out.

But in general, Thailand was a pretty big area of focus of ours, because it's important to our existing customers, and so that's been pretty big. Australia, actually, has been very significant for us, in terms of getting a return for the amount of work that we've done there. So I would say those two regions stand out right now. Within Europe, though, we've had some pretty big signings toward the end of the year, which we are looking at as ramping into 2014.

Okay. And then the healthcare opportunity that you mentioned. Is that something you see beginning to have a little more traction in 2014 or 2015? What's the timing there?

We presumed very little traction in our guidance for 2014. We want to wait until we actually see more adoption before we factor that in. So I think of that as a longer-term play for us.

We are really testing our theories within the healthcare market right now, to make sure that we fully understand where we can ramp up the value prop, so you can increase adoption. But I think of that as a longer-term play for us.

And I said it took us 5 years in fleet, and it was probably more like 10, honestly, in fleet and 5 within travel. So it's an area that we are spending time and effort and making sure that we're looking at, because we think that there's a big enough market and there's similar enough dynamics that it could be significant for us. But we're not planning on that this year.

Okay. Thank you.

Sure.

(Operator Instructions)

Kim Willi, Wells Fargo.

Thank you. Good morning. A couple questions here.

Steve, just going back to guidance. I just want to clarify couple of things. Number one, is there any -- and if you said this, I apologize. Is there any assumption about headwinds from the Australian dollar, any other currencies we should think about in that guidance range around revenue or earnings?

Yes. We're presuming that FX rates basically stay in line with where they are.

Okay. Second, can you remind us what the incremental, the stock comp that you're adding back in 2014 versus 2013. Is that around $0.15, $0.16? Can you clarify that again?

Last year, it was about $0.15 of EPS.

And is that generally what you're approximating for this year, as well?

I think that's going to be dependent on what ends up happening at the Board level and what kind of stock grants are made, typically, towards the end of the first quarter. So we'll see.

Okay. And then just the last question I had around the business and some of the strategic stuff you talked about, Melissa.

Are there any other adjacent markets out? You talked a lot about virtual card, talked about fleet, and product or geographic expansion. Are there any other big markets, whether it be you've got a small pay card business, as an example, or other types of payment type products that in and of themselves would be a distinctive business unit? That you potentially see out there in terms of acquisitions and a part of those growth goals you laid out, or will it really all be on the back of fleet and virtual card?

Well, I think there's two pieces of that. But on the short-term, we do continue to grow the pay card offerings. We have both in the United States. And we actually have a business in Brazil, as well, where we have a 51% ownership stake.

And so when we classify those businesses in the benefits category, and we start to think of that as an industry, we think of it as employee benefits. So that's an area that we're continuing to expand.

It's had very significant growth, but off a low base. So that business has been growing over 50%. We expect that to continue to grow in 2014.

It hasn't been an area that we have put a lot of capital allocation, in terms of M&A activity. And it is a place we'll continue to explore. But it just hasn't been the place, so far, that we've put significant capital in. I think it's more geared, in the way that we think about it, in some of the emerging markets, potentially, which is why we've seen pretty good success in Brazil.

Great. And then just one more, if I could, in terms of same customer fueling. I think you got into this maybe, a little bit, Steve, earlier in the Q&A.

But I guess that metric has sort of been bouncing around, give or take flat year-over-year, in terms of same customer activity. Was there anything that you noticed in 4Q relative to the prior quarter's experience with customer fueling and same customer growth?

It was relatively flat. You saw a little bit up in construction, year-over-year. And then a lot of other things that were down that were offsetting it. But in our mind, it really hasn't had much of an impact in terms of our performance, not helping us, but I don't think it's really hurting us, either.

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

And you have a follow-up question from Bob Napoli with William Blair.

Question on your telematics product. You mentioned growth of 45% last quarter. You announced that you signed the GSA, a big contract with telematics.

Is your telematics strategy adjusting? I think you've kind of worked on an outsource model with a number of different telematics providers. Has that changed? Or is that an area you would look to acquire?

Yes. So to date, we've actually operated largely as a reseller. And longer-term, our ability to integrate those data elements and really aggregate all the information together is something that's important to us. So yes, we would be interested in something that really rounds out that product offering on a longer-term basis.

And the growth rate of that business, is that something -- can you give any feel -- where are those revenues? What line item?

There's -- mostly in the account servicing line. It's a monthly fee where we make most of the revenue. And then depending on how it's split out, either the hardware or the other revenue is where the cost of the actual device shows up in revenue.

Any feel for -- can you give us a feel for how much revenue you're generating there?

About $15 million last year.

Okay. And that doesn't include the TSA, I would assume?

Correct.

Okay. And then just on Brazil, it seems like you have some good momentum in Brazil. But I don't know if you can give an update on your strategy there?

I know you were close to being able to issue -- I know you're able to issue, I think, cards out there with the various pieces of your business, with the fleet business, the pay card business, and the travel business. What's the outlook for Brazil over the next few years?

The company that we're working with in Brazil has done a number of things. It's called Unique. And they've expanded their product offerings to include a series of prepaid offerings. And that came in association with their MasterCard issuing essence, locally.

So they've developed and ran it as a product set. They're actually having early success in selling those products within the marketplace. They did a small acquisition at the end of last year to pick up ability to operate in the freight marketplace down there, which gives us an over-the-road offering.

So we've really been focused on rounding out the products, and 2014 will be a year of selling those enhanced products, as well as growing the existing base of the business. I'd say yes, it's been a good acquisition for us.

Great. Thanks. And just last question.

I'm looking out at the Polar Vortex in Chicago, and just wondered -- I didn't normally hate weather as an excuse for anything. But are you seeing effects on your business this year, January and into February, from the weather? I'd imagine you must be seeing some effects. And is that built into your guidance?

Yes. Obviously, we're pretty confident in our January volumes, given that we know them. So it's all built into the guidance, yes.

But you haven't seen much of an effect from the weather? You don't feel like you've been much affected?

No, not really much at all. Usually, it's just the very, very big storms, like a Hurricane Sandy or something like that, that really impact us.

Great. Thank you.

I would now like to turn the call over to Vice President Relations and Treasurer, Micky Thomas for closing remarks.

Thank you all for joining us. That concludes our call. Thanks again. Thank you, Operator, as well.

This concludes today's conference call. You may now disconnect.