WEX Inc (WEX) 2014 Q2 法說會逐字稿

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the WEX, Incorporated second quarter 2014 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. (Operator Instructions). Mr. Mickey Thomas, Vice President of Investor Relations and Treasurer, sir, you may begin.

Thank you, Brandy. Good morning, everyone. 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 Relations section of our website at www.wexinc.com. A copy of the release has also been included in a Form 8-K we submitted to the SEC.

As a reminder we will be discussing non-GAAP metrics, specifically adjusted to net income during our call. Adjusted net income for this year's second quarter excludes unrealized net losses on field price derivatives, amortization of acquired intangible assets, the adjustments attributed to non controlling interest, expense of stock-based compensation, certain acquisition-related expenses, and the tax impact of these items.

Please see Exhibit 1 included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K filed with the second on February 27, 2014.

While we may update forward-looking statements in the future, [we] disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa Smith.

Good morning, everyone and thanks for joining us. Today WEX reported very strong results for the second quarter of 2014, with revenue and adjusted net income exceeding our expectations. During the quarter revenue increased 13% over the prior year to $202 million, and adjusted net income per share increased 29% to $1.39 per diluted share. As a reminder, adjusted net income for the second quarter of both years reflects the exclusion of stock-based compensation, which we started to exclude in the first quarter of this year and certain acquisition-related expenses in 2014.

Our performance during the quarter was the direct result of our continued execution against the strategic objectives we outlined earlier this year. Our ongoing focus on growing and optimizing our fleet payments business, expanding our Other Payment segments, and accelerating that growth in attractive verticals has translated into significant momentum in our operations and will position WEX well for the future. To that end, the acquisition of Evolution1, which we closed on July 16th, significantly enhances our Other Payments business by increasing our [addressable] market and advancing our long-term position in the healthcare payment space.

In addition, the Esso transactions in Europe and Asia, and recently announced Shell agreements, further grow our fleet presence globally. We're encouraged by our progress to date and continue to win business across all of our products and geographies. I started 2014 talking about three specific objectives for the year. First, position the Company to accelerate growth organically and through M and A, second, focus on further globalizing our business by making targeted investments, and lastly, driving scale across the organization.

I'd like to comment on each of these objectives and give further color around my thoughts for the second half of the year. Let me first spend a few moments on our fleet payment segment. At a high level, we continue to see favorable trends domestically while the Esso transaction remains on track. We achieved very strong revenue growth of 11% year-over-year. Outside of revenue momentum we also saw strong transaction volume growth of 6% relative to the prior-year period.

These volumes were primarily driven by new vehicles coming online through customer wins. We also benefited from favorable fuel price dynamics and increasing fees on domestic fleet customers. Some examples of recent domestic wins this quarter include uShip, a new OTR customer, the expansion of our Sunoco relationship with a new private liable OTR program and a new co-brand program with Idealease.

Turning to our plans to globalize our business, we are pleased with our results from our efforts to grow the business domestically and globalize the fleet segment. A key component of our globalization initiative is our planned acquisition of ExxonMobil's European commercial card portfolio, the Esso Card. Let me provide an update on our progress on this transaction, which consists of three phases.

First phase is the completion of regulatory hurdles, such as the employee information and consultation processes in merger clearance approval as well as the signing of the agreement. We are pleased to report that this phase is complete. On July 17th we announced the signing of the definitive purchase and sale agreement, which gets us one step closer to the closing of the transaction. The signing is also a major milestone for this transaction and we're excited to turn our focus to the closing of the acquisition. The second phase, which has been ongoing, is focused on operational readiness.

This phase consists of setting up the key systems and infrastructure needed to close the transaction. Our team has been executing against a detailed project plan and we have made significant progress over the last several months. To date, we have secured additional office space in the UK and other countries. We've negotiated with critical vendors and significantly ramped up our resources in Europe.

We are on track to establish complete and fully functioning European operations on our original timeline. Our work for the balance of the year includes developing critical business systems, continued negotiation of vendor relationships, training and other preparations for the portfolio transition.

These activities represent the steps necessary to complete formal change and control of the portfolio. Our third and final phase is the conversion of the ExxonMobil portfolio to WEX's systems. We began our technology build for this phase in the first quarter and continue to expect the conversion to our systems to begin in 2015 and be completed in 2016, which is in line with our original timeline. Overall we're very pleased with the progress we've made to date, as well as the strength as a team working on this effort.

This has been, and continues to be, a very complicated effort that incorporates many areas of our Company and requires working very closely with our partner. However, we are excited about the products and technology we're bringing into the European market.

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 36% globally to $4.3 billion year-over-year. Additionally, we achieved very strong revenue growth of 18% year-over-year.

This segment continues to benefit from recent customer wins such as [what if], Globalia and most recently [Logictravel] that are now producing meaningful contributions. We continue to see nice momentum domestically as well, as our U.S. based travel customers saw considerable growth of approximately 28%. While we remain excited about the growth within the virtual business, we continue to evaluate other verticals with significant opportunity.

As we've stated, we have traditionally done well in industries with complex payment systems. 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 space is a perfect example of this, as it represents considerable potential for revenue capture and market need. Throughout the last few years we've built a present in the healthcare market organically, while also analyzing potential avenues to enhance our footprint.

We recently announced the close of our acquisition of Evolution1, the leading provider of cloud-based payment solutions within the healthcare industry. Evolution1 represents, in many ways, the future of payments, as it's built on a sophisticated cloud technology platform.

As a reminder, Evolution1 developed and operates a powerful all in one multi [tenant] technology platform, card products and mobile offering that supports a full range of healthcare account types. The companies B to B distribution model is based on partnerships with health plans, third-party administrators or TPAs, financial institutions, payroll companies, and software providers. Evolution1 currently has an addressable market of more than $1 billion in revenue, with a significant and growing share in a rapidly growing segment.

WEX has historically been focusing on virtual product solutions for (inaudible) to provider payments. Now we also see an opportunity to address other aspects of the healthcare system, including customer to provider payments. This acquisition represents an attractive opportunity to increase WEX's growth profile in the healthcare space by increasing our overall addressable market. With this transaction, we're enhancing WEX's leadership team, as the Evolution1 management team has considerable expertise and experience in the healthcare space.

Lastly, our efforts to enhance scale across our organization are beginning to bear fruit. Synergies from our integrate with Fleet One are making positive contributions to our business. Pricing-related initiatives, including increasing fleet-related fees in July of last year continue to [the] increase margins year-over-year. We're also seeing considerable traction with the virtual card product but we're seeing benefits from the contracts that we renegotiated for processing services in 2013.

Looking ahead, our strategic priorities to expand and grow the business remain consistent. We'll align our investments accordingly. We're optimizing our capital across our portfolios. As an example, after considering our core fleet business we determined that Pacific Pride did not align with our long-term strategy, as it is a franchise model. As a result, we've signed an agreement to sell Pacific Pride to Fleet Corporation for $50 million, which represents an approximate pre tax gain of $29 million.

While WEX's fleet business is a vibrant and growing business, this sale will allow us to redeploy this capital in areas where we believe we have high growth, high value opportunities to drive accelerated financial performance. In addition, our M and A pipeline offers a number of interesting opportunities. We'll continue to apply a disciplined, strategic process to our activities with a focus on creating or enhancing scale in our existing business and or adding product differentiation and functionality that improves our offering.

In closing, I'm very proud of the results during the first half of the year, and I'm even more excited about the continued opportunities. I look forward to finalizing the Esso transaction, the deployment of the Shell prepaid product, and working with the Evolution1 team to ensure smooth integration. And now I'll turn the call over to Steve to discuss our financials and guidance. Steve?

Thank you, Melissa. For the second quarter of 2014, we reported total revenue of $201.6 million, an increase of 13% or $23.3 million from the prior-year period and above the high end of our guidance range of $190 million to $197 million. This performance was driven primarily by solid growth in fleet volumes, higher fee revenue, and another very strong quarter of growth for our virtual card spend. Net income attributed to common shareholders on a GAAP basis for the second quarter was $43.3 million or $1.11 per diluted share. Our non-GAAP adjusted net income increased to $54 million or $1.39 per diluted share.

This compares to $43.3 million and $1.08 per diluted share in Q2 last year. As a reminder, stock-based compensation expense was excluded from both the current and prior period, and therefore adjusted net income for Q2 2013 is different from what was reported last year. We have also excluded certain acquisition-related expenses directly related to the closing of the Evolution1 deal. There were no comparable expenses in last year's quarter so this did not result in any additional change to the adjusted net income reported last year.

Taking a look at some key performance metrics for the quarter, consolidated payment processing transactions increased 6% year-over-year, which was in line with our expectations. The consolidated net payment processing rate for Q2 2014, was 1.36%, which was a decrease of 3 basis points compared to Q2 2013, and was flat to the first quarter of 2014.

The rate decrease is a result of specific long-term contract renewals. Financing fee revenue in the fleet segment increased $3.9 million to $17.7 million, compared to $13.7 million in Q2 last year, primarily as a result of increases to [late fee] rates we initiated last year. In the Other Payment segment, revenue for the second quarter increased 18% or $8.5 million year-over-year to $55.8 million, primarily as a result of higher virtual card volume.

Spend volume increased 36% over last year to $4.3 billion for the quarter, driven by organic growth in the travel vertical, including our international expansion efforts. The interchange rate for our virtual card in Q2 was 85 basis points, down 14 basis points year-over-year and up 3 basis points sequentially versus Q1. As we've discussed in prior calls, the decrease versus the prior year quarter is primarily due to elevated levels of customer-specific incentives in 2013, which are not repeating this year. Those incentives increased last year's Q2 rates by approximately 8 basis points.

As a reminder, the MasterCard litigation impact rolled off this quarter, which increased the rate approximately 6 basis points sequentially. Additionally, during the second quarter, we had a mixed shift in our European customers towards debit products, which lowered the rate by 2 basis points sequentially. Moving down the income statement for the second quarter, total operating expenses on a GAAP basis were $121.3 million, a $10 million increase versus last year.

Salary and other personnel costs for Q2 were $43.4 million, a 7% increase when compared with $40.6 million from Q2 last year. The increase was predominantly due to increases in headcount and related benefits. Total headcount is up 4% over last year, with most of the new hires related to the work necessary for the Esso portfolio and in Brazil related to a small acquisition during the third quarter of 2013. We continue to tightly control headcount throughout the Company.

Service fees are up $1.2 million from the prior year at $27.8 million, primarily driven by some diligence-related expenses for the Evolution1 acquisition, which are not excluded from adjusted net income. Although virtual card volumes were up 36% year-over-year, we did not see a significant increase in our related service fees due to the renegotiated contracts Melissa mentioned earlier. During the second quarter credit loss expense totaled $6.8 million.

This compares to $4.9 million in Q2 last year. In the fleet segment Q2 credit losses were 9.1 basis points, versus 7.6 basis points last year. We spoke last quarter about an increase in early stage delinquencies in some of our low-risk accounts. As we expected, the situation improved during the second quarter, and we saw delinquencies return to normal levels. Our operating interest expense was $1.6 million in Q2, which was a $500,000 increase compared to last year. The increase is due to the higher average balances funded from increases in our fleet and virtual card volumes.

The interest rates on our operating debt were essentially unchanged from last year. As we mentioned previously, we began hedging the majority of our foreign exchange exposure related to foreign cash and net receivable balances to settle our virtual card transactions. The remaining exposure that we did not hedge had a small positive impact during the quarter. The effective tax rate on a GAAP basis for Q2 was 35.8% compared to 37.5% in the second quarter of 2013.

Our adjusted net income tax rate this quarter was 35.5% compared to 37.2% for Q2 a year ago. For the full year, we expect our adjusted net income tax rate to be in the range of 35% to 36%. This is lower than our previous guidance as a result of the implementation of a strategic tax review we completed earlier this year. Turning to our fuel derivatives program, for the second quarter of 2014, we recognized a realized cash loss of $2.7 million before taxes on these instruments.

We concluded the quarter with a net derivative liability of $9.4 million. For the third quarter of 2014, we have locked in at a price range of $3.37 to $3.43 per gallon. For the fourth quarter the average price locked in at $3.34 to $3.40 per gallon.

Moving over to the balance sheet, we ended the quarter with $319 million of cash, down from $355 million at the end of the first quarter of 2014. The decrease is primarily seasonality associated with deposits at our bank subsidiary. In terms of capital expenditures, CapEx for the second quarter was $11 million. We are revising our CapEx projections for the full year to be in the range of $50 to $55 million, a $5 million increase, to the range we announced last quarter, which reflects the addition of Evolution1.

Our financing debt balance decreased $3.8 million in Q2, which reflects a quarterly payment required by our term note. We ended the quarter with a total balance of $677.5 million on our revolving line of credit, term loan, and notes.

As of June 30th our leverage ratio was 1.9 times our 12-month trailing EBITDA, compared to 2.2 times at the end of Q2 last year. Pro forma for the divestiture of Pacific Pride and the acquisition of Evolution1 our leverage would have been approximately 2.9 times EBITDA at the end of the quarter. To further enhance the Company's liquidity, we expect to close on an amendment to our bank credit facility, which will increase the size of the facility by approximately $220 million to $1.2 billion.

The amendment will increase the term note portion of our facility to $500 million and allow temporary increases in permitted leverage to provide us additional margin when the Esso deal is closed. The amendment, which is subject to final bank approval, is expected to be executed in August. Regarding our capital allocation strategy, our primary objectives remain to accelerate growth organically and through M and A and to further globalize our business in new verticals and drive scale across the organization.

Now for our guidance for the third quarter of 2014 and full year, which reflects our views as of today and is made on a non-GAAP basis. For the third quarter of 2014 we expect to report revenue in the range of $213 to $223 million and adjusted net income in the range of $51 to $53 million or $1.30 to $1.37 per diluted share. For the full year 2014, we expect revenue in the range of $813 million to $823 million, and adjusted net income in the range of $189 million to $195 million or $4.84 to $4.99 per diluted share. These figures assume normal seasonality trends in the virtual card and healthcare businesses.

Our third quarter guidance assumes that fleet credit loss will be between 8 basis points and 13 basis points and that domestic fuel prices will be $3.62 per gallon. Our full year guidance assumes that fleet credit loss will be between 10 basis points and 13 basis points and that domestic fuel prices will be $3.61 per gallon. The fuel price assumptions for the U.S. are based on the applicable NYMEX futures price. Our guidance includes the operations from the date of the acquisition of Evolution1 and related integration costs over the second half of this year.

The guidance excludes approximately $6 million of expenses directly related to closing the Evolution1 acquisition, such as investment banking fees and credit facility restructuring costs, among other things. It also reflects the pending sale of Pacific Pride, which will reduce revenue and earnings in the second half of the year. We are also excluding the pre tax gain of approximately $29 million on the sale of Pacific Pride. Our guidance also includes increased second half spending related to the implementation of the Esso portfolio and the recently-announced Shell transaction.

This includes approximately $0.03 per share of costs that were expected in Q2 that are now expected to be realized in the second half of the year. Our full year guidance includes an income statement impact of $10 million to $13 million of expense or about $0.26 to $0.33 per diluted share after tax related to our planned acquisition of ExxonMobil's European commercial fuel card program. As we have discussed in the past, in light of our success to date of our international expansion efforts, the proportion of our business sensitive to changes in foreign exchange rates has grown.

Our guidance assumes that exchange rates will remain in the range of the current spot rates. Our guidance does not reflect the impact of any further stock repurchases other than the activity that has occurred through June 30, 2014. Now I would be happy to take your questions. Brandy, please proceed with the Q and A session now.

Yes, sir. (Operator Instructions). Your first question comes from Bob Napoli with William Blair.

Thank you. Good morning. Guys, the call is getting longer and more complicated. I guess on Evolution1, if I just could get a -- you've owned it for a few weeks more. Maybe give a little more color on what your thoughts are on the growth of that business and the -- what attract you to it. And will it help your virtual card healthcare business?

Sure. Evolution1, I would say that, if anything, we're interested, as time has gone on, going there for the closing and spending time with the people in Fargo, you just walk away with a great sense of expertise that they have in this marketplace and momentum that they have with bringing on new business.

So, from a strategic perspective, it enabled us to increase our addressable market by about $1 billion dollars in revenue and so that was one of the primary focuses for us, was to take something that we believed to be our expertise into another industry that was growing. It would allow the business to grow on a go forward basis, and we feel strongly that this business is going to enable us to do that.

And the second part was what you mentioned, is that we were already in the space organically, and we felt like we needed more of healthcare expertise and brand in that marketplace to make sure that we're accelerating that part of the growth. And with the addition of Evolution1, our primary focus has been to make sure that we're continuing to grow the business and that we're taking care of the core business.

But in terms of revenue synergies, we still believe that there are synergies around both issuing, using our bank, and around vertical card -- virtual card adoption from the payer to the provider because they have those existing relationships that we can leverage.

That -- I guess the cost that you have in your guidance for the Evolution1 deal in the back half of the year, was that $6 million in the back half of the year, deal costs that are in your guidance?

The $6 million that were investment banking fees, credit restructuring fees and a few other smaller things, those have been excluded from our guidance. So when you see our reported earnings next quarter, you'll see a line for adjustments related to those acquisition-related costs.

Then are there other costs that you're not excluding that are tied to the integration?

Yes, there are, absolutely. So, I mean, in the second half of the year, the number of moving parts, we've included the operations as well as the integration costs from Evolution1 and we've included the impacts of the divestiture of Pacific Pride as well, which will, obviously, reduce revenue and earnings over the second half of the year.

Could you give us any feel for what those numbers are, I guess, that of the Pacific Pride and the Evolution1 integration costs?

I guess what I'd say is none of them are individual and material. They add up to a decent sized number but, all in, I think we're pretty happy with the guidance that we have out there and the results that we posted in this quarter.

Thanks. And last question, are you seeing some acceleration in the U.S. business? You didn't give a [same store] number. Your transaction growth was pretty good. Do you see signs -- are you seeing steady -- any signs of improvement in the U.S. business and what are your pipelines for new business like?

Yes, I would say that we've actually have seen acceleration in the U.S. business but it's not coming from same store sales. It continues to be a little bit negative year-over-year, and so that continues to be -- you know, I'd refer to it as flat to a slight headwind for us so the growth is really just coming from bringing on new business. And we have been very successful of that so far the first six months. Our pipelines continue to look strong going into the latter part of the year.

Okay. Thank you.

Your next question comes from Tien-Tsin Huang with JPMorgan.

Great. Good morning. Good results here. Just maybe if we can just get a little bit more detail on the revenue contribution or the changes in your outlook from -- as a result of Evolution1 plus some of the other changes in the model, like Pacific Pride. Can you give us some directional feel on change there?

I'd say with Evolution1, I would just kind of reiterate what we said when we announced the transaction. The Company's generating approximately $80 million a year in revenue. I'd say there is a little bit of seasonality in there, especially on the payment side. As people get into the new year, they have to meet deductibles and out of network kinds of things.

So you do see a little bit more revenue from the payment side in the first part of the year. So we appropriately reflected that in the second half of the year with our guidance there. For Pacific Pride, again, I'd say it's not particularly material to the company overall. Obviously it was generating some revenue and obviously it was a profitable business for us but, again, nothing overly material there.

Understood, Steve. So as we -- we have to layer in Evolution1 more specifically so have you given more thought on how you're going to break out some of the KPIs or the metrics, interchange income, of course, I think there's some custodial fees and other things, how that's going to look or change the face of the P and L.

I don't think you'll see the face of the P and L change. It'll roll up into the Other Payment Solutions segment. I think in terms of the metrics we provide, they'll likely be something around the [dollar] volumes of payments processed in the resulting interchange, which we probably will just fold into our existing disclosures. And then we may start looking at how many subscribers are on the system and things like that, which would be the other big chunk of revenue that they have.

Right. So -- sorry to -- I'll stop after this. Just the $5 billion, I think is what you said, in payment volume? I'm assuming the interchange rate is not that different from the rest of the virtual but is that what we're going to be layering in? Am I'm assuming that high teens growth is still appropriate?

Yes. I'd say all those things are relatively appropriate, yes.

Okay. I'll get back in the queue. Thank you, guys.

Right.

Your next question is from Phil Stiller with Citi.

Hi, guys. Congratulations on the strong results. I guess I wanted to follow up on the EPS guidance. So you -- it looks like you beat the mid point of your EPS range by about $0.16. You've raised the mid point of the guidance by about $0.07. And you said the Evolution1 deal would be accreted excluding deal costs, which seems like now you're excluding from the definition of the adjusted EPS.

So I'm just trying to understand what the offsets are. I know there's Pacific Pride but you said that's not material. So what are the offsets to EPS in the second half of the year? And then how should we think about the contributions of Evolution1 flowing into 2015?

So, Phil, I'd say that, first of all, there's no doubt that revenue and earnings in Q2 are really strong. Even with great execution, it's not often that you get to report at a 30% organic growth rate in earnings. So that feels pretty nice. We had great growth in the quarter from our fleet side in terms of the payment processing transactions, the purchase [lines] in the (inaudible) payment segment came in strong again. And as we continue down this path of advancing our growth strategy it's creating a bunch of moving parts in that second half guidance.

So, again, the things that are really moving in and out here are the operations and the integration costs for Evolution1, the operations that we have taken out for the divestiture of Pacific Pride. And there's also some timing in there related to the development work around the Esso transaction. So we moved a few pennies of expense that we expected to see in Q2 into the back half of the year. So those are the moving pieces in the guidance in the back half of the year. The fundamentals of the business in both the fleet and the Other Payments segment are strong and we feel good about how the second half is shaping up.

Okay. I guess can you help us -- it seems like you [reiterated] the full year investments for Esso after the quarter. Can you help us understand, I guess, what was spent in the first half of the year and then what's expected in the second half of the year? And then similarly for Evolution1? I guess you're not going to quantify the integration expenses but should we expect those to largely be complete by the end of this year?

So taking the first part of the question with Esso, I'd say the first -- the first part of the year was more about setting up the structure and the legal entities and the banking arrangements and all those kinds of things that you just have to do to get the physical infrastructure in place. As we're moving through the year, the expenses become more people-focused as we prepare for the transition of the portfolio. The expenses for Esso will continue to increase each quarter as we go through the transition date.

And that's just a reflection of we're continuing to build resources that we're going to need and it just keeps -- it keeps increasing. Obviously, once we have the transition of the portfolio that will alleviate some -- there will be a step function but it will be both revenue and expenses. As far as Evolution1, the integration costs, I think, will largely be in the second half of this year. I would say it's not a massive integration effort that we're undergoing. So it's -- but it-- so that should be pretty well completed by the end of this year.

Okay. And then last question from me and I'll turn it over. The revenue -- I guess the non payment processing revenue in fleet was up about 20%. I know you guys made some adjustments to some fee structures last summer. So I'm just wondering about the sustainability of that revenue increase as we move into the back half of this year and going forward.

Well, I think the revenue increase will sustain. I think it's the rate of growth, I think, is what you're getting at. And I would say that we're looking at a number of potential fees to our fleet customers, some of which were in the early stages of testing and implementing. And others, that will come later. So I wouldn't promise a 30% kind of number every quarter going forward but there should be some increases still to come.

One of the things we've been thinking about is just making sure that we're within a market norm in terms of what we're charging. And there's been this shift from what we'd call payment processing revenue into some more ancillary fees and we are looking at that and making sure that we're being competitive in the marketplace and that we're thinking about things from a customer perspective but also being thoughtful about what's happening to market trends.

Okay. So it sounds like the growth rate may bump around but it should still be nicely above the volume growth that you guys report in that segment.

Yes.

Okay. Thank you, guys.

Your next question comes from Ramsey El-Assal with Jefferies.

So given your (technical difficulty) occupied closing of Evolution1 and Esso, how should we think about possible timing of the future M and A activity? You mentioned that you kind of increased some of your capacity, your debt capacity. Should we rule out any incremental deals until you get these things squared away or how should we think about sort of timing?

I would sale that we're continuing to move things through our pipeline like we would normally do and, like most companies, it's a very disciplined process that we're going through that has to meet both strategic and financial criteria in order for us to execute. So in terms of timing it really depends on -- as those progress through the pipeline we end up killing a lot of them, and so we have to make it through and make sure that they meet those criteria, that we believe that we can execute on it with everything else we have going on. So I would say we're still active in the market, we're still being thoughtful about acquisition targets, and we'll continue to do so.

Okay. Keeping in mind that, obviously, there's a really large asset, I was just wondering if you had any views on, there's been some press recently about Fleet Corporation and some other private equity firms making a play for Comdata, another big player in the U.S. Do you have a view on how a change in ownership there might sort of alter the competitive dynamic in the U.S.? Or is sort of -- would it be business as usual if they were sort of taken out?

Yes, and I would -- as a rule, we don't speculate on what's happening in the marketplace. And what I've seen so far is highly speculative. But in theory, if Comdata ended up in some type of other structure, they have products in the marketplace and they're competing in Fleet One Over The Road and virtual payments, similar to the way that we are. And we feel very good about our position in the marketplace, the growth that we have, the products that we're offering. So I don't view that as necessarily having a large impact in terms of if there was some type of change in ownership.

Okay. Last one for me. I just wanted to get your thoughts on the kind of run way ahead on the virtual card side, I guess, specific to the travel segment. Are you bumping into any incremental competition? Should we still think about that as a high teens, 20% plus sort of revenue grower for the foreseeable future? How is that market sort of evolving?

I would say that that market has been highly competitive for a number of years. And when we're competing, we're competing in any geography amongst both [what] I would describe as banks and local technology players. And we've been able to win the business because of the, really, the value proposition that we can offer into the marketplace, the differentiation we have in the product set.

And that would be true on a go-forward basis. I don't see, really, any significant changes in the competitive environments. It's been that way all along. And in terms of future growth, we've had -- this year we've talked some of the comparability issues from a revenue perspective, and that we thought spend would continue to grow over 20% with revenue generally targeting in about that same range.

Great. That's all for me. Thanks.

Your next question from Smitti Srethapramote with Morgan Stanley.

(Inaudible) my question. Can you talk about the Shell prepaid (inaudible) in a little bit more details, and where you guys see the biggest opportunities for prepaid going forward?

Yes, we're really excited about the relationship with Shell. It's moving us into -- further into Asia as well as Europe, and it's with a new product offering. So we like the fact that it's with a partner. It has great reach globally as well as with a product set that will be new into those markets. We think about that as a roll out that's going to happen over a period of time. And Shell hasn't talked about which countries they want to go into so we'll be respectful to not talk about that as well, other than to say the roll out will start this year.

And in terms of prepaid in general, it's something that we have as part of our business model now. And as we look at different geographies, in some cases a prepaid product makes more sense, in some cases it would be debit, sometimes it's credit, it really depends on the geographies, the needs of the particular customer base and market trends in each of those regions.

Okay. Great. And can you talk a little bit more about your co-branded deal with Fleet One and maybe compare the opportunity in Over The Road co-brand versus traditional Fleet? Could be the first of many in the coming years?

Yes. I think part of why I get excited about that is when we bought Fleet One -- like any of these transactions, we don't really presume any type of revenue synergies -- but we knew that we had an expertise in the fleet side of the business [and] going to market through multiple channels, through partners directly, which included co-brand relationships. And in the fleet side of the business we have relationships with the six largest leasing companies here in the United States.

And on the private label side, that same idea we've been able to move into Over The Road. So we've had a couple of contract signings with private label relationships that we've been able to extend, either existing relationships we have into the Over The Road space. And on the co-brand side we're seeing the same thing, the ability to leverage some of the existing relationships [head way] that we have into the Over The Road space. And so this is the first. I hope that there are others that we can announce also.

Great. Thank you.

Your next question is from Jim Schneider with Goldman Sachs.

Good morning. Thanks for taking my question and congratulations on the good results. I was wondering if you could give us any kind of additional color on the timing of when, in 2015, the Esso conversion might start to take place, more toward the first half or the second half of the year?

So what we said is, the actual purchase of the portfolio is going to be either the fourth quarter of this year or the first quarter of 2015. So when we'll actually start processing as if we're Esso it will be on their existing systems and then we'll start migrating over onto our platforms in 2015, moving into 2016. So it will be a process to actually do that conversion. And we're not specific yet as to the time frame. We're still working that out as part of the longer term project plan.

Okay. Understand. And then as a follow-up to that, also sort of related to Esso, can you comment on how much of the cost and the development cost you're using to integrate Esso and put those capabilities in place for Europe, could [be] possibly cross-purposed if you were to do additional deals in Europe? For example, facilities, operations, management and things like that, that are not specific to Esso?

I would say that the majority of what we're putting in place can be used for other customers. Very basic things like legal entities and tax structures, obviously, can be reused. The platform -- for pretty much any of these large oil companies, you always have to do some customization. And whoever the next customer is would likely have the same kind of thing. But the basics, the real core of the processing platform would be able to be reused.

That's helpful. Thank you very much.

Your next question is from David towing it with Evercore.

Thank you. Quick question on European regulatory, I guess, focus on commercial cards. The European Parliament inserted commercial cards into the regulatory package back in April. And I'm just wondering does that have any impact on your Esso card business and or the way you think of expanding in Europe in the commercial card business if commercial card interchange is regulated?

Yes, on -- let me answer, there's a bunch of different pieces to this. The commercial cards were introduced as part of the change. That is still getting really [fought] within the European regulatory market so it's not a forgone conclusion that it's going to be included. There's still heavy [minded] debate over that. If it were to be included, it is -- it would affect the business that we have, which is still relatively small within the European market on our (inaudible) products.

And so that's something that we would have to plan around and make sure that we were making changes to the underlying business model. But we'd have a number of years to do that. And, again, it's still a very small part of our business, overall. On the fleet card side, our model with Esso is that we're actually buying fuel and reselling it, which is a traditional model in that marketplace over there. So the interchange rules wouldn't really be applicable in this case.

I see. So as you think about expansion, though, generally, in Europe, would you be able to modify your model to the extent you're looking at expansion generally into commercial cards? For example, could you charge on a different basis [ecs] interchange?

Yes. I think that that's what everyone is looking at in that marketplace. And there's enough of a lead time that you can make changes to that model. You're talking about implementation that would still be out a couple of years, in most likely scenarios. So the idea of trying to change the revenue stream, which is what we've seen in Australia, our business in Australia went through the same type of regulatory change.

And what they ended up doing there was transferring fees into more of a card based fee that goes to the end user as opposed to coming through interchange. And so they think that there are a lot of options still available but it's pretty early, still, because they haven't gone through the whole regulatory approval process yet.

Thank you. That's helpful. Just a segue [into] the virtual card. You were just mentioning some of the competitive advantages of the virtual card. Could you maybe just highlight the top two or three that you see? I'm just trying to understand the sustainability of the growth in that product over the next, let's say, one to three years.

Yes, and I would say it's kind of a proof point. We have often gone in with these businesses and we'll do a side by side comparison where they're actually doing a demo of our product with another competitive product. In the places where we differentiate ourselves, and, ultimately, we've been able to win, are largely around the amount of control and integration that we have back to the -- let's say the online travel agency. Meaning that we can lock things down within specific currencies locally, within limits that the individual OTA is looking for.

And we do it in a way that's highly integrated into their system so that they're able to reduce their overall administrative costs. So it's really ease of use of the product. And then the just overall service, responsiveness, it's something that we pride ourselves on across all of our products, that we are providing a superior level of service.

And just a final question on that. Is virtual card targeted exclusively to OTAs or will you also look at, let's say, large brick and mortar multinational travel agencies?

Yes. So, actually, we have customers outside of the OTA marketplace, particularly in Europe, and we've been successful in winning that business. With the same underlying value proposition, what you're really trying to create is efficiencies and controls back to the business. And so the places that we've -- if you just look at the sheer size of the volume that we have, it's being driven largely by the OTA just because of the size of their businesses. But there is a mix in the underlying base of our business that will continued to grow that's built on non OTA business that's further into the travel industry.

I understand. Thanks for taking my questions.

Sure.

Your next question is from Sanjay Sakhrani with KBW.

I guess most of my questions have been answered but I just had a couple. I guess mostly you talked the strength in the fleet business being driven by, I guess, share gains. I just wonder if you could disaggregate Fleet One's contribution versus [Other Payments]. Maybe you could start there.

Both of those businesses are growing well, I'd say in different ways. The Fleet business, we've clearly had some momentum with some of the large contract signings we had towards the end of last year as they've converted over. But then, in addition to that, a number of [winds] within that business. And on the OTR business, I'd say the same thing. They have typically gone after smaller fleets and so they're aggregating a bunch of smaller [winds].

And I'm calling out some of the larger ones because that is something that we've brought into that business model, where we're bringing the focus more up market into some of these partner relationships, which is new to their model. So both of the businesses are growing and I would say that the rates of growth are fairly similar.

And when we think about the OTR business, do you feel comfortable in your position there and you think growing it organically is probably the best route? Or you would consider acquisitions there as well?

I'll tell you [that] we feel very good about the growth that we've had in business and our prospects going forward. We're always going to be interested in looking at the broader marketplace. If it's appropriate, meaning the right size, right economics, right growth profile, it has to meet a bunch of criteria for us. But, in general, I'd say that we feel like we're pretty well positioned in that marketplace with Fleet One as is.

Okay. And I guess I have one on expenses. Maybe if we could just pull up a little bit and think through all of the spread expenses you guys are incurring for all the various initiatives and items. I was just wondering -- and I know we talked at length about Esso on this call but maybe you could just address some of the other items as well, like Evolution1, and when we could expect to see some kind of operating leverage or expense saves that you guys have talked about, Shell. I know you guys have been investing in OTA international. Are there still costs related to that? So maybe if you could just go through that, that'd be great. Thanks.

Picking up on some of the projects that you mentioned, I'd say for the Shell project you're going to see that coming through in salary, primarily, obviously, capital as we develop stuff internally. There's some service fees in there as well for some services that we buy related to the program. We've actually been working on that for the majority of this year so we weren't really talking about it much. Obviously, in the early part of the year but that's really been imbedded in our numbers kind of all along. The investments to globalize the virtual card business were a pretty big driver last year. I'd say that those [were] largely completed last year.

There are still some this year but they're a pretty small amount that are imbedded in the results this year. And then Evolution1, obviously, there's some diligence related things in here and we had one -- one deal-related expense that we excluded from our earnings. But, all in, diligence happens.

Sometimes we're able to announce a completed deal and sometimes we [do] diligence and don't announce a completed deal. So I would say that there's expenses clearly in the second quarter numbers. There's expenses in the first quarter numbers, as well, that we didn't announce. So not -- not a big driver, I would say, of any kind of the changes that you're seeing.

Okay. So then just as we look ahead to next year, it's really just Esso?

Yes. Yes. Esso and Shell. They kind of go a bit hand-in-hand, right? We're developing some common -- some common things for each of the portfolios and then there's customization for each of them as well.

But Esso is, by far, the larger piece.

Yes.

Alright. Great. Thank you very much.

And your final question is from the line of Tim Willi with Wells Fargo.

Yes, thanks, and good morning. Quick question. On Fleet One, I apologize if it came up, been bouncing around some calls here, but could you just talk about, I guess, in general, sort of the momentum around sales that you guys have seen now that you've owned that for a couple of years, I guess. And just if there's any thoughts around the size of the fleets that you're finding, more or less, success with, given Fleet One was historically, I guess, a little bit more focused on the smaller sized fleets and any efforts to go upstream?

Yes. So, in general, most of the business is still coming from smaller fleets. And so they are continuing to add business on a regular basis under that model. What we have done is really brought them more up market looking at some of these larger customers. And, yes, I've talked about that more because I think of those as revenue synergies, the things that we've brought to the table from our existing knowledge and the way that we go to market. And this last quarter we talked about a private label deal, we talked about a co-branded deal.

So we're starting to see the leverage of how we go to market being applied into Fleet One and creating new opportunities that they wouldn't have done prior to our ownership. So think of that as just a net positive. But the fundamentals of their business, the core customer that they're going after, I'd say the majority of the time they're still going after smaller fleets. We've just had success also going after some of these larger ones as well.

Okay. Great. And then a quick one on virtual. You also have focused -- I shouldn't say focused efforts but you also talk about education and insurance with that product. I'm just curious about any updates or developments around those two market verticals that would be of interest. I know healthcare and travel get a lot of attention but do you have efforts in those other areas as well?

Yes, and we've continued to win business on the insurance side. It just gets overshadowed by the size of what we're winning on the travel piece of our business. So I'd say it's continued to area of focus. We've also won business on the media side. There's a number of industries that we're having success in. But I haven't highlighted them because they're not big enough yet for us to really have a broader discussion but our salespeople are out there working across a large portfolio of customer types.

Is there any thought of -- I think years ago, before the housing crash, you were fairly far down the road with a card, I think, geared towards the contracting industry and construction industry. I think Comdata's got a product that's recently successful there. Any thoughts about bringing that product back or is it likely not on the drawing board right now?

I think right now we're really focused on making sure that we're successful in the industries that we're in. So a heavy focus on healthcare, a heavy focus on travel and on fleet, including the OTR business. And so those are where we're primarily focused. We'll continue to test in some of these other marketplaces. And to the extent that we see success, we'll let out over time. But I would say kind of in the immediate future, the places that we're spending time in are the places that we intend to really heavily focus.

Sounds great. Thanks very much.

Thank you.

Thank you. I'd like to turn the conference back over to our presenters for closing remarks.

Okay. That concludes our call. Thank you very much for joining us. Thank you for your time and attention. Bye now.