WEX Inc (WEX) 2014 Q1 法說會逐字稿

Good morning. My name is Holly and I will be your conference operator today. At this time I would like to welcome everyone to the WEX, Incorporated first quarter 2014 financial results conference call.

(Operator Instructions). After a the speaker's remarks there will be a question-and-answer session. (Operator Instructions). I would like to turn the call over to turn today's conference over to Mickey Thomas, Vice President of Investor Relations and Treasurer. Please go ahead, Mr. Thomas.

Thank you, Operator. Good morning. With me today is Melissa Smith, our President and CEO and our CFO, Steve Elder. The press release we issued earlier this morning is posted in the Investor Relation 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. Adjusted net income for this year's first quarter excludes unrealized gains on fuel price derivatives, amortization of acquired intangible assets, the adjustments attributed to non controlling interests and the tax impact of these items.

In addition, beginning this quarter, adjusted net income excludes the expense of stock based compensation. Please see exhibit one included in the press release for an explanation and reconciliation of adjusted net income to GAAP and income.

Also, please note that for comparative purposes, adjusted net income for prior periods also reflects the exclusion of stock based compensation. 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 statement as a result of various factors, including those discussed in our press releaseand the risk factors identified in our annual report on Form 10-K filed with the SEC on February 27th, 2014 in subsequent filings.

While we may update forward-looking statements in the future we disclaim any obligations to do so. You should not place undo reliance on these forwards 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. Earlier today WEX reported strong results for the first quarter of 2014 asboth revenue and adjusted net income came in at the high end of our expectations with revenue increasing 10% over the prior year to $182.1 million and adjusted net income per share increasing 4% to $1.06 per diluted share.

Revenue growth in the quarter was organic and in line with our long-term growth targets while adjusted net income was adversely impacted by credit losses and a significant investments to further globalize our business. Most notably through the acquisition of Esso's European fleet card operations. To date I am pleased to report that we are making progress on our strategic and financial objectives.

Specifically we are focused on increasing the growth of our business, enhancing scale and globalizing by making targeted international investments to expand our footprint. As we enter 2014 we saw continued momentum as we gained traction with our first strategic objective to accelerate growth.

Our results in our domestic fleet business benefited from improving trends in fleet volumes and fee income coupled with benefits associated with new portfolios coming online. Our virtual cards continue to penetrate the travel market with higher global spend volumes contributing to our first quarter growth despite the head winds we called out last quarter on net interchange rates.

Let us spend a few minutes on our fleet payment segment. [We treat] strong revenue growth to 7% year-over-year driven by increased volumes, which includes vehicles beginning to come online through new customer wins over the past 12 plus months such as Citgo and USDA as well as efforts to increase fees on domestic fleet customers.

Additionally we are continuing to see the benefits of our acquisition of Fleet One. As we come together as one team we have had several new customer signings highlighting the attractiveness of this transaction in the enrichment of our offering.

Most recently Sinclair Oil extended their existing fleet private label relationship with us to include an over the [road] program, and we have signed Chesapeake Energy, which is a large mixed fleet. In addition to our domestic wins we continue make headway on globalization efforts.

As you know in November 2013 we announced our intention to acquire ExxonMobil's European commercial card portfolio. Esso will be a key strategic addition that we anticipate will build out our fleet presence in Europe, a critical element to our international strategy.

Let me take a few moments to provide an update on our progress. As a reminder, the transaction consists of three phases. First, the completion of the employee information and consultation processes and merger clearance approval.

Second, operational readiness, which consists of setting up key systems and infrastructure for the closing of the transaction. And third, the conversion of the ExxonMobil portfolio to WEX's systems. Taking these one at a time we continue to make considerable progress as planned on the employee and regulatory fronts.

The European Commission has given merger clearance approval for the transaction and the information and consultation process with country employee councils is continuing to go well. The second phase focuses on our operational readiness to take ownership of the business .

Our team has been focused on developing and executing against a detailed project plant, which includes building out our systems and infrastructure to support this program. To date, we have successfully established a European presence and the team continues to undertake and achieve important milestones in the roll out program.

Specifically, we have renegotiated with key strategic vendors who have the ability to process on their systems and have hired a significant number of resources in Europe. We've moved into our new headquarters building in the UKand are in the process of securing physical space in a number of other countries.

We are on track to establish complete and fully functioning European operations on our time line. The third phase marks the conversion of the ExxonMobil portfolio to WEX systems. We began our technology build for this phase in the first quarter and expect the conversion to our systems to begin in 2015 and to be completed in 2016, which is also in line with our original expectations.

Overall, we are very pleased with the progress of the transaction a and the strength of the team working on this effort. As we've noted previously the first half of 2014 will be comprised to preparing for the conversion and finalization of the transaction.

Many of the more tangible milestones are expected to occur in the second half of the year such as completing the [works] council consultation process and Exxon signing. As a reminder, a majority of the spending associated with this transaction is expected to take place in the second half of the year as WEX Europe services continue to take ownership of the portfolio.

Separately, we are also pleased to announce that we are expanding our efforts more broadly into Europe, Asia and Canada through partner relationships. In April we signed an agreement with ExxonMobil to manage the customer service collections and transaction processing of their commercial fuel cards to a select number of countries in Asia PAC, including Singapore, Hong Kong and Taipan.

This new business agreement built upon our existing relationships with ExxonMobil in the US, Canada and Europe while also expanding our international footprint and product suite in the Asia Pacific region. This new agreement is a nice agreement to our long-term growth strategy and we are delighted to be working with ExxonMobil on this new business.

In addition to this agreement, we also signed a contract with another private label customer to develop a pre paid [fleet] card in select international countries. This is a new product offering for WEX so we do not expect any material revenue from this relationship in the short-term.

Lastly, we are seeing some momentum in Canada as Imperial Oil has recently outsourced its sales and marketing function to WEX. Turning to other regions, Latin America had tremendous growth with revenues increasing substantially year-over-year.

This growth was the direct result of our on going investments, specifically through [Unique] and its recent acquisition of [Fast Cred]. Our (technical difficulty) business also continues to be a steady and solid performer. We are very pleased with their performance to date globally and we are encouraged by the progress we continue to make with our key investments.

Turning to our virtual business we continue to see strong momentum both domestically and internationally. Our other payment solution segment, which largely consists of our virtual business, specifically WEX Travel Solutions, grew spend volumes 39% year-over-year.

This segment continues to benefit from recent customer wins such as [Whatef], Globalia and a major European OTA customer that are now all producing meaningful contributions. We believe expand our efforts to expand our virtual card globally in compatible markets, including these important wins, will continue to contribute appreciable purchase volumes in 2014.

We continue to see nice momentum domestically as well, as our U.S. based travel customers saw considerable growth of approximately 27%. We are maintaining our strategic investments to build our operational capabilities in additional targeted countries.

Specifically, we are expanding our issuing and settlement capabilities internationally, which will allow us to reduce our cross border fees giving us the benefit of a compelling economic advantage as well as increased precision around authorization controls and currency reconciliation.

Specifically, we are focused on expanding our issuing and settling presence into countries that address both our customer needs and market demands. While both Europe and Asia are [key] targets initially, we are currently targeting Mexico and Brazil. We are settling transactions in 15 currencies and look forward to further expanding these capabilities.

Looking ahead, our strategic priorities remain consistent,positioning the company to accelerate growth organically and through M and A, driving scale across the organization and focusing on further globalizing our business by making targeted investments and driving scale across the organization.

This includes investments to enhance our infrastructure to support global growth, as well as investments associated with the Esso transaction. While we continue to make strategic investments aligned with these objectives, we continue to analyze potential M and A opportunities.

As a reminder we remain a disciplined strategic acquisition program focused on attractive businesses that can do one of two things. Either create or enhance scale in our existing business and or add product differentiation and functionality that improves our offering. We are interested in transactions that provide high risk adjusted returns and meet our specific investment criteria.

While we may make smaller acquisitions in emerging markets or buy technology needed to accelerate products, we will mainly be focused on larger businesses in the fleet space, as there are more sizable opportunities in this market.

Our investment scope includes acquisition opportunities that provides supplemental products to improve our offerings such as data analytics. We are also working to identify travel expansion opportunities. While M and A activity is always subject to uncertainty, we believe our pipeline offers a number of interesting opportunities.

In summary, we are pleased with the financial and operating performance achieved during the first quarter. We are progressing toward our long-term growth targets of annualized revenue growth of 10% to 15% and earnings of 15% to 20%.

As a reminder these are the goals that I have asked the WEX team to deliver and the parameter within which we focus on framing and defining our growth initiatives over the near and long-term.

We start 2014 with continued momentum and marked progress against our strategic investments. 2014 should be a year of noteworthy execution and enhancements to our business as we work towards the completion of the Esso transaction, continued steady growth of our fleet business and the ongoing evolution and expansion of our virtual products.

And now I will turn the call over to Steve to discuss our financials and guidance. Thanks, Steve.

Thank you, Melissa. For the first quarter of 2014 we reported total revenue of $182.1 million, an increase of $16.7 million from the prior year period and above the high end of our guidance range of $168 million to $175 million.

This performance was driven primarily by accelerated fleet volumes, higher [wait] fees and virtual card spend. Net income attributed to common shareholders on a GAAP basis for the first quarter was $36.5 million or $0.93 cents per diluted share.

Our non-GAAP adjusted income increased to $41.6 million or $1.06 per diluted share. This compares to our (technical difficulty) of $1.00 to $1.07 per diluted share and $1.02 per diluted share in Q1 last year.

I would add that for comparative purposes the expense of stock based compensation was excluded from the prior period, as well as the current period, and, therefore, is different from what was reported last year. Taking a look at some key performance metrics for the quarter, consolidated payment processing transactions increased 7% quarter over quarter, which was in line with our expectations.

We continued to see solid execution from our sales force bringing in new accounts as well as a small contribution from [Fast Cred] in Brazil. The consolidated net payment processing [rates] for Q1 2014 was 1.36%,which was a two basis point decrease as compared to Q1 2013 and a four basis point decrease versus the fourth quarter of 2013.

These rates decreases are a result of specific, long term contract renewals as well as a sequential increase in fuel prices. [Financing] in the fleet segment increased $4.1 million compared to Q1 last year.

This increase was driven by higher minimum [wait] fees charged to our fleet customers and increases in factoring revenue at Fleet One. In the (technical difficulty) payment segment, revenue for the first quarter increased 19% or $7.3 million year-over-year to $46.6 million, primarily as a result of higher virtual card volume.

Spend volume increased 39% over last year to $3.7 billion for the quarter driven by increased volume in our travel product. The interchange rate for our virtual card in Q1 was 82 basis points, down 14 basis points year-over-year and sequentially versus Q4.

This decrease compared to the prior year is due to a couple of factors. As we discussed last quarter, we received an elevated level of customer specific incentives in 2013 which is not repeating this year and increase last year's rate by approximately eight basis points.

This was also the final quarter we felt the impact of the MasterCard litigation settlement, which is now over and reduced the rate approximately six basis points in the first quarter. Moving down the income statement for the first quarter, total operating expenses on a GAAP basis were $121 million, a $16 million increase versus last year.

Salary and other personnel costs for Q1 were $43.9 million compared with $40.1 million from Q1 last year. The increase was predominantly due to increases in head count and related benefits.

Total head count is up 7% over last year with most of the new hires in New Zealand and the UK related to the work necessary for the Esso portfolio and in Brazil related to the [Fast Cred] acquisition. We continue to tightly control head count throughout the Company.

Service fees up $2.5 million from the prior year at $26.3 million, primarily driven by higher virtual card volumes.

During the first quarter credit loss expense totaled $9.1 million. This compares to $3.8 million in Q1 last year. In the fleet segment , Q1 credit losses were 14 basis points [a spend] versus seven basis points last year.

This is well above our guidance range of seven to 11 basis points for the quarter and the primary reason that earnings for the quarter did not reflect the strong revenues we reported. There are two main contributors to the performance in Q1.

First, last year we tested less restrictive credit standards to the approval of certain new customer applications based on the success we were having in controlling overall loss rates. It became clear, based on the Q1 delinquency rates, that this is not a good additional risk to take and we have, therefore, returned to our prior, stricter credit standards.

Additionally, we experienced an increase in the number of accounts that were in early stage delinquency. Because it was generally limited to low risk accounts and early stage delinquencies we do not expect there to be a significant impact on the remainder of the year.

Moving on, our operating interest expense was $1.3 million in Q1 which was essentially flat compared to last year as we continued to benefit from low interest rates. During the first quarter we recognized a $1 million non operating gain on foreign currency transactions compared to a $232,000 loss in the prior year.

As a reminder, this gain relates mainly to cash and net receivable balances we hold in foreign currencies in order to settle virtual card transactions. Beginning in Q2 , we are hedging the majority of this FXexposure. The effective tax rate on a GAAP basis for Q1 was 36.8% compared to 39.4% in the fourth quarter of 2013.

Our adjusted net income tax rate this quarter was 36.2% compared to 36.4% for Q1 a year ago. For the full year we expect our adjusted net income tax rate to be between 36% and 37%.

Turning to our fuel derivatives program, for the first quarter of 2014 we recognized a realized cash loss of $1 million before taxes on these instruments and an unrealized gain of $2.8 million. We concluded the quarter with a net derivative liability of $4.5 million.

For the second quarter of 2014 we have locked in at a price range of $3.36 to $3.42 per gallon. For the remainder of the year the average praise locked in is also $3.36 to $3.42 per gallon.

Moving over to the balance sheet, we ended the quarter with $355 million of cash down from $361 million at the end of the fourth quarter of 2013. In terms of capital expenditures, CapEx for the first quarter was $11.4 million.

We expect our CapEx for the full year to be in the range of $45 million to $50 million. We have increased the range for the year based on some of the new customer wins signed during the first quarter. Our financing debt balance decreased $3.8 million in Q1, reflecting a quarterly payment required by our term note.

We ended the quarter with a total balance of $681 million on our revolving line of credit, term loans and notes. As of March 31st our leverage ratio was two times our 12 month trailing EBITDA compared to [two point two] times at the end of Q1 last year. During the first quarter we purchased approximately 180,000 shares of our common stock at a total cost of $17 million.

This purchase was consistent with our policy of offsetting dilutions from stock based compensation. Regarding our capital allocation strategy our primary objectives remain to accelerate growth organically and through M and A to further globalize our business and to drive scale across the organization.

We are focused on M and A and organic investments to increase our global presence and develop our foothold in new verticals that drive scale across our organization. In the first quarter of 2014 we sustained our momentum from 2013 by pursuing growth opportunities while effectively managing our established businesses.

This approach allowed us to deliver strong financial results while making progress against our long-term growth strategy. We continue to proactively cultivate our business to better position ourselves to leverage opportunity across all of the growth opportunities emerging in our space.

Now for our guidance to the second quarter of 2014 and the full year, which reflects our views as of today and is made on a non-GAAP basis. For the second quarter of 2014 we expect to report revenue in the range of $190 million to $197 million and adjusted net income in the range of $47 million to $50 million or $1.20 to $1.27 per diluted share.

These figures assume normal seasonality trends in the virtual card and prepaid businesses. Our second quarter guidance assumes that fleet credit loss will be between nine and 14 basis points and that domestic fuel prices will $3.71 per gallon.

For the full year 2014, we expect revenue in the range of $767 million to $787 million and adjusted net income in the range of $185 million to $193 million or $4.75 to $4.95 per diluted share.

Our guidance continues to assume that we will move existing customer volume over to our new issuing and settling capabilities and a growing number of foreign currencies. This will reduce our net interchange rate since the U.S. tends to have higher interchange rates, and it will reduce our cross border fee revenue and related service fee expense.

Our guidance includes an income statement impact of $10 million to $13 million or about $0.26 to $0.33 per share after tax related to our planned acquisition of ExxonMobil's European commercial fuel card program. Our full year guidance also assumes that fleet card loss will be between ten and 15 basis points and assumes that domestic fuel prices will be $3.57 per gallon.

Fuel price assumptions for the U.S. are based on the applicable NYMEX futures price. As we have addressed in the past, in light of the success, to date, of our international expansion efforts the proportion of our business, sensitive to changes and foreign exchange rates, has grown. Our guidance also assumes that exchange rates will remain in the range of the current spot rates.

Additionally, we will continue to exclude [soft talk] expense from our adjusted net income guidance in order to make this more measure more comparable with our peers. Our guidance does not reflect the impact of any further stock repurchases other than the activity that has occurred to date in 2014.

Now we will be happy to take your questions. Holly, please proceed with the Q and A session.

Thank you. (Operator Instructions). And your first question will come from the line of Phil Stiller with city.

Hi, guys. Thanks for taking my questions. I guess I wanted to focus on the transaction growth in both segments, starting with fleet. You obviously saw a nice acceleration sequentially.

Was there anything unusual from either a business [day or weather] impact in the first quarter? And then maybe you could talk about when Citgo and USDA -- if they fully ramped during the first quarter or if we should see something incrementally for the rest of the year?

Phil, I will start and then Melissa can chime in a little bit. In terms of the sequential comparison of the growth rates, if you recall the fourth quarter last year had the government shutdown included in it, which didn't have a major impact on us, but it was a bit of a head wind.

And this was also the first quarter that Citgo came on, not fully ramped for the full quarter but a decent amount of volume that came through. So there was a little bit of noise in there, I guess I would call it, for the first quarter.

All to our benefit and all good. But those two things added a little bit more than 1% to our transaction volume when you look at the growth rate sequentially.

Yes. I would just add to that the USDA also came on. It is smaller and you will see more of an impact of that in the latter of the year. But we were starting to see the benefit from the largest portfolio wins that we had through the latter part of last year.

Okay, great. So it sounds like you guys are comfortable sustaining this type of transaction growth through the course of the year?

When we thought about revenue guidance we were looking at, really, across the business where we are seeing accelerated growth trends. And to the extent that we're seeing portfolio conversions where customers are coming on live, we want to make sure that that is getting reflected in our future guidance.

Okay. And then similarly on the virtual card business, the growth accelerated sequentially. I know you guys have been in the process of ramping international wins you have had . Is the first quarter fully reflective of all the wins that you have had or -- any updated thoughts on the purchase volume growth guidance for the year?

It significantly reflects the wins we have had that we announced. Now, this is where we are continuing to add business to the portfolio.

I think it's probably what made the first quarter look so strong, is the compounded effect that saw significant growth in our domestic purchase volume. And then on top of that we had this accelerated growth on the international side where we started to see the benefit of some of those findings that we had last year.

I think you said previously that you had expected kind of low 20% growth. Is that still the expectation built into guidance or is that now higher?

It is still the expectation built into guidance for the full year.

Okay. Great. And then last one. I guess you reiterated the Esso expenses for the year. Can you quantify how much was spent in the first quarter and how we should expect their progression through the course of the year?

Yes. The expenses are very clearly back end loaded, right. As you -- if you think about it as we continue to hire people we continue to open offices, eventually, upon conversion, whether that is this year or next year, they will come with a number of new employees and all kinds of processing costs associated with the transaction.

So they will continue to build through the year and they are building pretty rapidly. We spent nearly as much in the first quarter this year as we spent all of last year on this particular project. So it's [a couple million dollars] in the quarter. And, again, that will continue to build as we go through the year.

Okay, great. Thank you.

And our next question will come from the line of Bob Napoli with William Blair.

Thank you and good morning. Question. You signed a lot of new customers and you also talked about ramping up some CapEx, Imperial Oil, Esso and new markets. This private label customer for prepaid,is that another -- I was wondering if you could give a little more color to Chesapeake Energy, Sinclair on the CapEx.

What is -- which of these new customers are most significant? And is this private label customer a -- is that a big oil in Europe? What is that? For the prepaid.

I think of that relationship as a good example of us showing a couple of core values, partnership and innovation. It is bringing us a new product into a new market with a partner that is new as well. So it's a combination of all of those things. It is a start up, which is part of why, when we were talking about expectations, we don't expect to see material revenue from that this year.

We looked across all of these things, we [talked about] Chesapeake coming on, Sinclair Oil. Some of those are customers that will ramp fairly rapidly, others -- our portfolio conversions will take a period of time. And then something like this new private label relationship that we have, that is going to be in a building phase, initially, and then it will have to build revenue organically.

We are excited about the offerings. We think it was unique within that market and it also expands our international footprint. But we are not considering that to be material. When you try to tie that into CapEx, some of these larger portfolio conversions lead to an initial up front investment, which is what we have seen historically over time.

And so, we will make the investment, we'll do the conversion and then we see the benefit of revenue. [But it is] a process that we go through. So we thought of all of those different things when we put together our guidance expectations.

That private label -- is that a fuel card? And is that with a major oil company, a start up program or is it not fuel?

It is fuel . It is a prepaid fuel card and it is with a company that has significant presence in that region.

Okay. So that is a second potential major customer in Europe. The Esso expansion into -- why those three markets? And when does that kick off and does that have the potential to grow into -- and I'm not sure, I'm not that familiar with Exxon and Esso and their presence in Asia. But it that -- why those markets and does it have the opportunity to grow and become full outsource program? And when does it kick off?

Those markets -- those are the markets that they are in, and so we are assisting with the business they already have set up. In terms of how it works, we will pick up the transaction processing as well as the other things that they have out sourced to us in those particular markets.

I would say it's just a great extension of the relationship that we've -- we started in the United States, we moved into Canada and then went into Europe and now moving it into the Asia PAC region.

Okay. And then last question on credit. Can you give a little more color on where you [extended] --I would imagine small businesses in the U.S. is where that was [extended], where you loosened credit criteria. And what kind of an effect will that have in retightening on your volumes? How confident are you that your -- this is a brief bubble in credit losses?

You are right, Bob. It was in the U.S., it was essentially small businesses. And depending on the sales channel that we see the customer come in through, we see different credit behaviors historically.

We took the one small channel and just basically ran a test internally to say can we approve some more applications, get some more volume in without taking on much risk. After about six months or so it was pretty clear that we were taking on more risk than we wanted. So we reverted back to our older standards.

You are talking about approving a couple -- 300, 400 applications per month. So maybe a couple thousand cards per month. So it's really not a major -- there hasn't been a major benefit over the last six months andI don't expect that you're going to see much of an impact going forward.

At the same time, in the quarter, we also did see uptick in our early stage delinquencies, which was also a contributing factor to this. There is no particular geography that it related to, there's no particular industry. It was pretty well broad based.

So far what we have seen in April and, obviously, we are at the last day but -- we haven't seen all of the activity come in yet but the trends we have seen around payments have been improving. It gives us some optimism for the quarter and the rest of the year.

I would also say that those trends are not always necessarily reflective of what happens. We are optimistic. We haven't built a significant increase into our credit loss guidance. It is a small uptick plus the impact of what we got from Q1.

Great, thank you.

Okay. And your next question will come from the line of Sanjay Sakhrani of KBW.

Thank you. Good morning. I just had a couple of questions. First, when I look at that net payment processing rate, it came down pretty decently . And I assume it's because of mix.

I'm just trying to think about how should we consider the trajectory going forward? Similarly, with the interchange rate I know you had some one-time impacts and you talked about mixed, Steve. But as far as the trajectory going forward, would it be around the 88 basis points or something higher? Thanks.

Start with the fleet side, we came down, depending on your comparison point, four basis points or two versus last year. Sequentially, we did see a change in fuel prices that went higher and, as you guys know with our fee structure, that has an inverse impact on our interchange rate there. So that certainly play a part in it. And the rest is mixed.

We talked about -- we renewed some big customer contracts in there during the quarter and that had a small impact on the rate as well. If you flip over to the virtual side, it was down pretty significantly and for reasons that we've been talking about for the better part of six or nine months now, the MasterCard litigation settlement that was six or seven basis points.

The elevated customer incentives, customer specific incentives that we got last year, that was about eight basis points. We are also moving volume from U.S. issuing with a cross border fee international -- and being used internationally to a local issuance strategy. And that is having a mixed impact on the rates.

Just following up on that, with the proposed interchange changes that might occur in Europe, how do you guys respond to that in terms of your strategy?

Yes. First of all, it is not finalized yet. And it's going to take some time even if does become final. So it [will not] impact us. So we are, at this point, making sure that we are involved in the process.

But if you (inaudible) fast forward and say that it does, ultimately, get adopted it would, again, take some time to roll through our portfolio. It would effect some of the decisions where we decide where we want to be issuing, in terms of local issuance.

It may make sense to do it in other (inaudible) relationships and then to, ultimately, looking at the overall fee structure, which is what you have seen in markets where interchange -- when it changes you see more of a fee structure (inaudible) to a customer.

And so I'd say where -- the moment we are participating in the process, we are assessing it and it is a lot of time between now and when it actually would have a financial impact on us and others.

Got it. And in terms of those rates we were talking about, Steve, just looking ahead, should we expect them to stabilize around here? I think your fuel price assumption is up a little bit more from the first quarter . So does that mean there is a little bit of a downward bias in the payment processing rate?

Yes. That's right. I would say that we are not predicting any kind of major contract impacts to the rate. Mix changes a little every month, every day . And the fuel price impact will matter as well.

Okay. And the same thing with the interchange rate? It would probably be stabilized here given the mix has changed a bit?

It will stabilize where it is. The caveat, I'd say, is that the litigation settlement that impacted us by the six or seven basis points is over now. So beginning basically -- I think it was March 31st or April 1st, the rate will go back up.

And you said that was six basis points?

Yes.

[Was it four?]

It's between six and seven basis points becauseit was only on domestic volume so it depended on our mix versus international volume.

Got it. And I just want to make sure I understood the hedging implications going forward. As far as movement and currencies because you are hedging, does that basically lock you in for the remainder of this year? Or do you still -- are you still exposed to movement in currency?

No. I'd say we are still exposed. We've got -- because we are settling now in 15 currencies and with our virtual card products, we basically have to carry cash balances to settle in each of those currencies as well as we have a net receivable exposure typically with our customers.

Order magnitude, you are talking about somewhere in the range of $100 million U.S. equivalent overall between the cash and the receivables. So we've -- we've basically just started entering into a series of forward contracts.

So this quarter we had about a $1 million dollar gain from FX. But it can swing pretty dramatically month to month, and we are just trying to take the volatility out. We are just going to enter into a series of contracts. First day of each quarter we will [walk in the race]. It'll expire monthly.

So there will be a monthly cash settlement and that will offset the income statement impacts that we're seeing. You shouldn't see any kind of balance impacts. We are not planning on carrying anything over quarter ends.

Okay, great. Final question. Just on -- I wanted a clarification on the Esso, the new deal you guys announced. As far as the cost to roll out this new initiative, is there a significant cost outlay ahead of actually recognizing those revenues? And when would that occur if there are?

I would say, Sanjay, it is a pretty typical pattern, as Melissa was saying. Any one of these major private label relationships comes with its own level of customization and features and functionality that they want. And so we are going to be in the process of building that out.

There is an impact, mostly to our capital side. There is some small expense impact, but it is usually not really incremental. It is usually just absorbed by the business. We will start seeing the revenue and the profits from the contract . Again, it is going to be pretty modestbut towards the end of this year or next year.

And we are talking this most recent in Singapore, Hong Kong?

Yes. I could give you the same commentary for the European one. It is on a bigger scale. But it is essentially the same commentary.

Got it. Well, thank you very much.

And your next question comes from the line of Ramsey El-Assal, Jefferies.

Hi, guys. How would you describe the kind of competitive dynamic in the sales process with virtual cards and global markets? Is there a general bidding process? Are there a lot of players competing? Do you bump into the same folks frequently? And this is primarily, again, on the stuff that you are getting outside the U.S.

Yes. I would say it depends on the market. One of the things, when we look at what markets we wanted to enter, we looked at what is our existing customer need within that marketplace,what is the competitive environment like,and what is the regulatory environment like?

And so those are things that we thought ofbefore we decided where to enter. In some markets it is highly competitive . And we would be competing against people like you would see here in the United States , American Express, Chase. And in some markets there would be local players that you're competing with.

So it really depends . In most cases, there are competitive winds that we were -- where we're going against other people. Not always but I would say in most cases that's true.

Okay. On the global M and A environment, are you bumping into -- now that you are focused more globally than perhaps you were in the past, are you bumping into your competitors, specifically Fleetcor, more when you are kicking the tires on deals?

I guess a follow up there is, is there a risk that you guys all go after the same assets? Or is it more like there is just plenty of room out there and plenty of assets to go around?

I think in the fleet space in particular that it's typically the same cast of peoplethat are involved in looking at transactions. So I think you're going to be in a competitive environment in most cases, not all cases.

But I'd say in a lot of them, when you get beyond fleet in some of these either ancillary markets or other industries that we are in, it becomes less so. So it is one of the things that we are thoughtful of as we are going through a process, making sure, again, that it is hitting both our strategic and our financial criteria, particularly if are you in a competitive environment.

Okay. And I think I may know the answer to this but I just wanted to triple check. Is there -- in your virtual card business, now that you have European providers there, is there any -- I'm sure it is not meaningful but any material revenue exposure in Russia in terms of just travel related stuff that you are doing in that part of the world?

Certainly nothing material in Russia on the virtual part.

Okay. Alright. That's what I thought. Alright. Thanks a lot, guys.

Thank you.

And your next question comes from the line of Tim Willi with Wells Fargo.

Thank you. Good morning. I just had one question about product. In the U.S. you mentioned, I think as part of your M and A comments, things about data, et cetera would be of interest to you.

Could you talk a little about the you impact of product and additional revenue sources from your customers in the context of the 10% to 15% revenue growth you articulated as the framework for the company? Just to get a gauge on how you think about that and its impact over time.

Yes. Well I think of it in terms of organic growth and inorganic growth. But in terms of product and our thoughts around data analytics, we've actually had great growth in our WEX smart product offering. It is still a relatively small scale but it has been consistently a pretty big grower.

One of the things that -- if you look at that combined with the conversations that we have with the fleet around the data analytics we are already providing, it is something that is, particularly with a larger fleet, it is an important part of the package that we are offering now.

And there is an elevated level of interest of getting even more information. And I would say more information that is very pinpointed so they can then effect their behavior. So when we think about data analytics we think about it is something that we've have been doing for are a long time.

It is something that we want to continue to invest in and making sure we are being innovative in that space. Telematics is a mechanism in order to capture more data. We are doing that now through a bunch of different partnerships.

But when we think about data analytics and how to look at that, holistically, going forward. We are thinking of both of those elements . What does telematics play and what is, ultimately, the information that we are capturing back to the fleet and how do you think of each of those from a monetization standpoint.

I wouldn't say that there's a definitive number that's included in that -- in my growth goals but it is certainly a factor that is in our thoughts of how we are going to continue to grow the Company.

Okay. I appreciate it. The other thing I had going just maybe going back to the virtual card and the net take rate, Steve, I apologize. But in terms of the profitability relative to the lower net take rate is there any offset -- optically where should we think about that and the expenses?

I just want to make sure we have the model looking correct relative to changes around the service fees, et cetera to help mitigate some of the discount rate compression that you talked about.

Yes. We have -- probably six months ago now we renegotiated with two of our major providers around the product. And we have seen some benefits from those new contracts that we've put in place. It has also caused us to reexamine exactly which line items, revenue streams and expense streams, hit.

A minor part of the regions for the reduction of the interchange is just geography, we're just moving things around a little bit. But we saw that -- we saw the reductions in rates coming and we took some action around our cost structure, is really what it comes down to.

So we don't have, yet, the P and L for that division until the [Q] comes out. Would we see any kind of real step down in the profit margin of the other payments business that would be attributable to the net interchange reduction or has a lot of that, essentially, been absorbed by the vendor renegotiations, et cetera?

I think you would see some impact. I still would go back to this is an extraordinarily profitable business. It is still in the -- well into the 20% plus net income kind of profitability. You also get some benefits going forward, that MasterCard litigation settlement, that six basis points that will come back and help as well.

Okay. Great. Thanks very much.

And Your next question comes from the line of Tien-Tsin Huang with JPMorgan.

Just a couple of clarifications on the credit losses. I think Steve said it was broad based. Does that include [that one] in the longer haul stuff? I just wanted to clarify.

Actually if we look at our over the road portfolio of [heavy trucks], there was a smaller impact there, which was maybe a little bit counter to what you would expect.

Yes.

We typically think of those over the road trucks as the first to see everything in the economy, and we didn't see it in the loss rates.

Interesting. Okay, good. And then on the ExxonMobil, the extension here. I think Sanjay asked it but just how did -- how did that deal come about? Was it sourced after the European deal was done? And it looks like it is just a few regions or countries within Asia PAC.

Why those countries? And that last thing. Sorry to ramble here. It seems like it's a little bit more [BPO] work than usual. Is that right? I'm just curious about it as in the margin implication.

A few things. It's -- I would say most of these contracts are things we have been talking about for a longtime.

Okay.

This has been a discussion we have had for quite a while. I think, in terms of timing, Europe has been first their priority in order to get that locked in. That's why this is following.

In terms of the markets, [those] are the markets that they are in. And [you] asked about the type of relationship here. We end up doing a whole host of services, depending on what's needed . From basic transaction processing and then we will add on to there up to fully managed. And so this is somewhere in between.

And it's something that we've done in other markets before. If just may stand out a little bit because we were being probably more descriptive than we are at times. [But it's about] what we are doing for the customer.

Okay. But it seems like there is more to do here, both from a scope of service as well as from a country standpoint. Is that reasonable to think?

The countries we mentioned are the countries that we intend to roll out with them. And in terms of scope of services I would say that, again, it's kind of in-between. It's the transaction processing relationship, which is what we would be doing. As an example, for BP within Australia and New Zealand --

Yes.

And something that's fully managed. So I would say it's kind of in-between those two. Where we're doing more than just transaction processing. They are out sourcing some other things to us but it is not fully managed, fully funded.

Okay. Good. Last one from me. A lot of good wins here in Q1 that you talked about but any common -- where are you talking this share from? Any common theme there?

The portfolio wins that we've had are really, I would say, across the board. It's been -- [it went] from most of --every competitor you could list. On the global side, in some of those wins that we're having, the Exxon relationship is not a take away from somebody else. Those are things that were being done in-house.

On the virtual card side,often those are -- they are being converted from another portfolio. But I wouldn't say that there's trends in any one that you would pick from and say, specifically, we are winning [from here]. We're just winning across the board.

Okay. No, that's good stuff. Good results here, guys. Thank you.

Thank you.

And your next question will come from the line of Tom McCrohan with Janney.

Hi, everyone. Just three questions. The first just on the provisions for the quarter. Were there any net recoveries this quarter?

Yes, there were, Tom. They will be in the [queue]. That should come out in the next day or so. I can't remember the number off the top of my head but it was in the millions of dollars.

Okay.

Pretty normal level of recoveries, I guess I'd call it.

Pretty normal? Okay. Okay. Is there any update you can provide on health care and the initiatives going on there?

On the health care side, I'd say that we are continuing to get traction in our virtual card payments albeit slower than what we had originally anticipated but consistent with what we had anticipated this year. And I think, in part, we have been pretty focused on some of these other areas that we've talked about. We are seeing growth.

We are seeing ramp and we still put that in the category of, we are looking at that as a longer term progression where we are working with a number of potential partners in the health care industry to make sure that we are creating solutions that we think are unique for their complex needs.

They are facing rising costs and they are looking for solutions that are increasing their level efficiency. We think this is actually an area for us but something, again, very long-term in nature as we said earlier in the year.

Okay. And I'm just trying to get a sense for the level and trajectory of investment spending. The last couple years it all made sense. The globalized OTA [and so now] make some investments as you expand into the European marketplace.

Should we expect the level of investment spending after the Esso acquisition (inaudible), [standard operations], do what you need to do to get that converted? That out year 2015, 2016 are the level of investment spending is going to trend lower, stay at the same level? Just trying to get a sense on how that's going to trend over the next couple years.

I guess, Tom, I would say it's going to depend -- be very dependent on the opportunities we have in front of us and the contracts we are able to sign and win. If we are unable to do that then I think you will see investment spending drop off pretty significantly.

I would hope and assume that we are going to be able to continue signing additional contracts with folks for -- to provide newer services even in the prepaid contracts that we mentioned today . All of those kinds of things, if we see the opportunity, I think we will continue to take advantage.

If that means we need to make some upfront investments for a long term relationship with a customer then I think we've shownand we will continue to do that.

And the other thing I'd add to that is the relationship that we're putting together with Esso and Europe is a little unique. So in terms of size of investments, (inaudible) think Steve said that we're -- we intend to look at things in terms of ROI and what'sthe return on the investment that we're going to get.

And so as long as we get an appropriate risk-adjusted return, we're not afraid of making the investment. The relationship that we have with Esso, and the size of that investment is a little bit different in the respect that it's a little bit like doing a transactionbut you're -- you've got costs associated that you're going to be accounting for differently within that -- a traditional acquisition.

Yes. It makes sense. And thank you, Melissa, for that color. Can I just end it with just a question, Melissa? Just in the long term target -- so [kind of tie] into the -- how you're thinking about the investment spending to achieve your long term targets. Can you achieve those targets just with the spending that you've done the last couple of years?

Or does it assume, Melissa, some incremental spending? And, if so, how should we be thinking about that? Thanks.

Sure. I would say that (inaudible) our presumption is that the targets include both organic and inorganic growth. So there would be capital that is contemplated in terms of hitting those growth rates.

And then I'd say, in addition to that, it -- again, if you take out the Esso European portfolio, and the size of that transaction, we [do] consider ourselves to continue to invest in new products,invest in innovation.

And so those are areas that -- [you've seen] our historical run rate that I would expect that you'd see continue. And now we think of what we're doing with Exxon and Europe is kind of an unusual type of transaction.

Yes. Thanks very much.

And your next question will come from the line of David Togut with Evercore.

Thank you. In your prepared remarks, you highlighted Mexico and Brazil as two countries targeted for expansion. And you touched on the Fast Cred acquisition. Could you give a little more context for your goals in Mexico and Brazil?

In particular I'm thinking about Brazil, which is a huge market for payments and where there are a couple of entrenched competitors already.

Yes. Within Brazil, actually, the Fast Cred transaction, we liked it. Though [they're] incredibly small. In the grand scheme of things, it locked us into about 5% of the over the road market,just by that one transaction. So it was a nice contributor in terms of a fairly minimal investment and getting something back out of that.

And it terms of the broader market in Brazil, we are continuing to work on getting our virtual card more broadly accepted there,meaning the ability to settle in local currencies, which as been more working through the technology there. We've gone through the regulatory approvals and all the appropriate approvals from MasterCard.

So now it's just getting the technology in place. So we do see that as a growth market for us and it's a market that we're spending time in. We've had success, so far, with the majority interest that we have within the company [Unique] that we did a couple of years ago,and that's continued to grow nicely. So it's definitely one of the markets.

And when I talked about Mexico, it was, again, an extension of our [social] card settlement and capabilities within that marketplace. And so that's popping up as a market. Not only just because of the pure size of it and the travel market but also because of the interest with their existing customers of having us have that capability in that market. So it hit on a couple of criteria, which is why we prioritize that.

Do you intend, in Brazil, to expand into a broader array of products, like, for example, food cards or toll cards? I know that a number of companies, like [Fleet] and [Edenred] are doing a lot of work in that area now.

Yes. Our primary focus has been to take the products that we have and make sure that they're customized to the local region. And so I'd say that's kind of -- our primary emphasis would be more on fleet side, what we're doing on [employee], which, at this point,has more to do with payroll cards.

There's a little bit of food card business there but I'd say pretty small. And as well as what we're doing in the travel with the virtual card side. And so that's been our primary focus but as we learn more in each of those markets,we make customizations that fit the market need.

Understood. Thank you very much.

Thank you.

And this does conclude the question and answer portion of today's call. I'd like to turn the conference call over to Mickey Thomas for closing remarks.

Yes. That closes the call. I just want to thank everybody for their time and attention. Have a nice day. Thank you.

And once again, we'd like to thank you for your participation on today's conference call. You may now disconnect.