WEX Inc (WEX) 2014 Q4 法說會逐字稿

Good morning, may name is Cashantra. I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Q4 quarter financial earnings call.

(Operator Instructions)

I will now turn the conference over to Mr. Micky Thomas, Vice President of Investor Relations and Treasurer. Please, go ahead.

Thank you, operator. Good morning, everybody.

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 an 8-K we submitted to the SEC.

As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, during our call. Adjusted net income for this year's fourth quarter excludes an unrealized gain on fuel price derivatives, amortization of acquired intangible assets, expense related to stock-based compensation, certain acquisition-related expenses, non-cash adjustments related to our tax receivable agreement, gain on divestitures, adjustments attributable to non-controlling interests 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 SEC 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 thank you for joining us today.

This morning, I'm pleased to report our results for the fourth-quarter and full-year 2014. Before we get into specifics, let me say that I am very pleased with our performance throughout the year, particularly the progress we made against our strategic objectives. This, in turn, led to excellent top-line growth and strong operating performance during the year.

We generated $212 million of revenue in the fourth quarter and $818 million for the full year, both of which were at the top end of our guidance range. This represents growth of 16% and 14% for the fourth quarter and full year respectively, as compared to the prior-year periods. Adjusted net income came in below our guidance range of $0.96 per share for the quarter and $4.96 per share for the full-year 2014.

While I am disappointed with missing our earnings guidance, the gap is driven entirely by a non-operating foreign exchange loss of approximately $0.18 of EPS including the tax impacts. We've identified the issues that led to the loss and are taking corrective measures to address them on a go-forward basis, which Steve will cover in detail during his prepared remarks.

That said, our underlying operating performance was strong during the quarter, in spite of what the headline number might suggest. If you back out the impact of the foreign exchange loss to ANI, we would have been at the high end of our guidance range for both the quarter and the year.

Let me now spend a few minutes on the specific progress that we?ve have made against our strategic objectives during the fourth quarter and full year. As you will recall, we've been focused on three key strategic objectives since I became CEO: first, to position the Company to accelerate growth; second, to advance the business through targeted investments, and third, to drive scale across the organization. I'll cover each of these in more detail.

In terms of accelerating growth, we had a very good year. Our top-line growth came in at the high end of our long-term target range, driven by broad-based execution across all of our product sets and geographies.

In our fleet business, we continued to see favorable trends. During the fourth quarter, we had payment processing transaction growth of 9% relative to the prior-year period. Domestic growth was fueled by a steady stream of wins, which will have a positive impact on our business going into 2015.

To give you some numbers here, our sales teams in the US and Australia added over 700,000 gross new vehicles organically in 2014. We've also made great strides by broadening the reach of our fleet payment products internationally into Brazil, Europe, and Asia-Pac opening up significant new markets. We now have established substantial presence throughout Europe, and we're in the process of opening up a physical presence in Asia with an office in Singapore. This leverages the strong demand in business that we now have in Southeast Asia, an important region for our long-term growth.

In the other payment segment, which includes our travel, health and employee businesses, we generated an impressive 37% year-over-year growth in volume globally, growing spend to $4.5 billion in Q4. The quarter saw several key customer wins in contract extensions in the travel business. We've also increased our distribution channels and Europe by establishing partnerships in 2014, most recently with the Voxel Group. Total revenue in the other payment segment grew 55% in the fourth quarter.

In terms of target investments, WEX Europe Services recently closed the acquisition of Exxon Mobil's European commercial card portfolio, which expands our international footprint and provides WEX with a foundation that is differentiating in the European market, a market that is approximately one and a half times the size of the US market. Consistent with our original announcement of the Exxon Mobil acquisition, 2015 is a continued year of investment as we utilize our skills in optimizing the portfolio and upgrading the underlying product.

Evolution1 was another notably transformative investment that we made in 2014. As I've said before, Evolution1 provides with us an entry into the consumer-directed healthcare market with an estimated $1 billion revenue opportunity. While we presently have roughly 7% market share, we have a lot of room to grow.

With Evolution1, we bring to partners the technology that simplifies the complexity of consumer healthcare payments and reimbursements. It is the proven cornerstone of our health business, and we'll continue building this business to capitalize on this growing market.

The fourth quarter was our first full quarter since the close of the transaction and our team has performed exceptionally well. We continue to expand our North American share of consumer-directed healthcare payments, driven by purchase volume increases and steady gains from our existing partners and new ones.

Let me turn, now, to our third objective, driving scale across the organization. We've been working across our business to identify opportunities to create and enhance scale and we?ve strengthen a number of areas of our business in several manners. Last year, we began efforts to update our pricing model in the US, and we've already seen the positive impact of this effort in the form of higher fleet fee revenue.

In Q4, we implemented a series of pricing and payment term initiatives that will add new sources of revenue in 2015. We've also continued to leverage the synergies from our Fleet One acquisition by consolidating fleet operations in the US and maintaining our office in Nashville as a center of excellence for our OTR products. The Fleet One business has afforded us the opportunity to enhance scale by cross-selling to customers, and we continue to see significant traction from this integrated offering along with other OTR wins.

Looking into 2015, our strategic priorities remain as important today as they were a year ago: to grow, scale, and make targeted investments. We will continue to expand our reach in existing verticals, which was where we see the greatest potential for near-term value creation.

Of course, we'll also continue to look at entering new markets that meet our established criteria. These big markets that are facing complex challenges and inefficiencies are where we think we can address an unmet need with our products and services.

In fleet, we're bullish on our prospects and expect to gain market share among small, large and mixed fleets. We're having a very strong pipeline of new customers domestically and internationally.

We're also continuing to expand internationally, extending our position into Asia-Pac with both Shell and Exxon Mobil. This growth will be compounded with a systematic approach to modernizing our pricing with an eye around value to our customers in our fleet segment, improving the economic profile.

As we said before, 2015 will be an investment year for the asset portfolio. We'll continue focus on transitioning the European operations by completing the conversion of the Esso portfolio to WEX systems, which will begin in the second half of the year. WEX Europe Services will also be making significant enhancements to the profitability of the underlying portfolio through a rigorous portfolio management approach.

In travel, we'll continue to focus on market share gains and global expansion, while laying the groundwork for accelerated growth in Asia. In North America, we'll be focused on capturing a greater share of overall travel spend, accomplished by leveraging our strong existing relationships to serve a broader set of customers and needs. We'll also continue to evaluate opportunities to move into other adjacencies outside of the OTA market.

In healthcare, we'll build on the success of Evolution1, while expanding the partner network, innovating through leading technology and leveraging our expertise with new offerings. As we pursue these objectives, we'll maintain our disciplined approach to capital allocation, considering strategic acquisition opportunities in organic growth initiatives that align with and help accelerate our plans.

Before I conclude my prepared remarks, let me share a few comments regarding fuel prices. First, as we have said before, for the 2015 hedges that have been completed, we've locked in at an average floor price of approximately $3.35, which will limit our exposures to price fluctuations this year. As you know, we have suspended purchasing under the program, as we believe the risk/reward trade-off is not balanced at this time. We will continue to evaluate our alternatives going forward.

That said, our strategy to broaden our business and expand into other high growth payment verticals has helped to lessen our exposure to commodity fuel prices. For example, when we first went public 10 years ago, our revenues were approximately 65% exposed to fuel prices.

Today, through our expansion into new verticals, like travel and healthcare, as well as structural changes in our fleet revenue streams, we've reduced our exposure to less than 40%. We expect this will continue to decline as non-fuel price sensitive areas of our business grow to comprise a greater proportion of our overall revenue base. However, it is currently having an estimated impact of about $0.65 of EPS compared to 2014, so it is headwind into 2015.

In summary, I'm pleased with our performance for the year and the foundation that we have built to accelerate our growth and improve our scale going forward. 2015 is shaping up to be a very good year for WEX, as we continue to penetrate our existing verticals, further globalize the business, and strategically invest in areas of the business that have the potential to drive even higher growth in years to come.

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

Thank you, Melissa.

For the fourth quarter of 2014, we reported total revenue of $212 million, a 16% increase from the prior-year period, and above the high end of our guidance range of $206 million to $211 million. Net income attributed to common shareholders on a GAAP basis for the fourth quarter was $47.9 million, or $1.23 per diluted share, compared with $34.5 million, or $0.88 per diluted share for the fourth quarter last year. Our non-GAAP adjusted net income came in at $37.2 million, or $0.96 per diluted share, down from $45.7 million, or $1.17 per diluted share for the same period last year.

For the full-year 2014, revenue increased 14% to $817.6 million from $717.5 million in 2013. On a GAAP basis, net income in 2014 was $5.18 per diluted share compared to $3.82 per diluted share in 2013. On an adjusted net basis, adjusted net income increased 8% to $4.96 per diluted share from $4.60 per diluted share in 2013. As a reminder, for the purposes of comparison, adjusted net income for prior periods reflects the exclusion of stock-based compensation expense to conform with the approach that we adopted in 2014.

As Melissa mentioned, our earnings in this quarter were impacted by a non operating $8.1 million pretax loss related to foreign exchange rates. I would like to take a moment to walk you through our foreign exchange exposure, and then more importantly, talk about how we are addressing this moving forward.

As you know, globalization is a key component of WEX's growth strategy and one that is allowing us to establish market leadership in high-demand regions across the world. Today, we have a presence in 10 countries and settle transactions in 17 currencies with our virtual card product. This global footprint serves as a competitive differentiator, but this also means we are increasingly influenced by fluctuations in foreign exchange rates.

In the past quarter and continuing into January, we saw sharp fluctuations in exchange rates. This resulted in significant devaluation of major currencies to which our business is exposed, including the Australian dollar, the Euro, and the British pound. These devaluations ranged from 4% to 7% during the fourth quarter.

Let me explain how this impacted our results. Unlike many companies, our foreign exchange exposure is primarily related to our balance sheet and the remeasurement of our assets and liabilities. This is a natural by-product of our business strategy to provide our customers with the flexibility to transact in currencies other than our functional currency. As an example, WEX Bank is settling in many currencies other than the US dollar.

For each of the assets and liabilities we hold in foreign currencies, the accounting rules require that we record the change in market value of these assets and liabilities on our income statement. It is also worth noting that the recent addition of the Esso portfolio has increased this type of exposure.

We've taken immediate steps to mitigate the impact of FX fluctuations moving forward. First, we will now hold FX hedges outstanding over the quarter-end periods beginning with the first quarter of 2015. In the past, we managed our foreign exchange exposure on an intra-quarter basis.

Second, we are more tightly monitoring our exposures overseas and working to minimize the balances. Lastly, we have expanded the scope of our hedging program for currency risk. We have increased the number of currencies we hedge, and we are increasing the estimated percentage of our exposure on balances that fluctuate due to customer activity. To aid us in these efforts, we are also bringing in some outside consultants.

We are excited to continue building our strong international presence and are committed to executing a plan to prudently resolve this issue as quickly as possible. While we do not expect to completely eliminate our currency risk, we do expect these measures will reduce our exposure to foreign exchange movements. However, given the movement in exchange rates and the timing of when these adjustments were implemented, we already know about a foreign exchange loss in January, which has been included in our guidance.

Outside of this impact, we are very pleased with our performance across the business. For the quarter, payment processing transactions increased to $79.2 million, 9% higher than the prior-year period. For the full year, consolidated payment processing transactions increased to $311 million, 7% higher than 2013. The increase in transactions was the result of solid execution from our sales and marketing teams combined with a small contribution coming in December from the Esso portfolio.

Although we hedge against domestic fuel price fluctuations on an earnings basis, our revenue is still impacted by the recent price decline. As a result, even with our solid transaction growth, our payment processing revenue in the fleet segment came in 2% below the prior-year period.

We were very pleased with the performance of the Esso portfolio in the first month we owned it. We know there is a significant amount of work to do to transfer it to our systems and operate it more efficiently. Given our experience, we are confident that we can accomplish this over the next year.

Transaction processing revenue was down 16% in the fleet segment, primarily due to the divestiture of Pacific Pride earlier in the year. Finance fee revenue in the fleet segment increased $5 million compared to Q4 last year. This increase was driven by fee increases, as well as shortening payment terms for certain customers.

In the other payment segment, revenue for the fourth quarter increased 55%, or $26.6 million year over year, to $75.5 million, primarily as a result of the acquisition of Evolution1 and continued strong growth in our virtual card purchase volumes. Spend volume on our virtual products increased 37% over last year to $4.5 billion for the quarter, driven by these two factors. The net interchange rate for our virtual card in Q4 was 89 basis points, down 7 basis points year over year, and up 6 basis points sequentially.

Moving down the income statement, for the fourth quarter, total operating expenses on a GAAP basis were $150 million, a $39 million increase versus last year. Salary and other personnel costs for Q4 were $58.1 million compared with $42.3 million in Q4 last year. Additionally, service fees were up $8.1 million for the prior year at $31.7 million. Each of these increases is primarily due to the Esso and Evolution1 acquisitions.

During the fourth quarter, credit loss on a consolidated basis totaled $9 million in Q4. This compares to $6.5 million in Q4 last year. Total charge-offs in the quarter were $9.5 million. Fleet credit loss was 13.7 basis points in Q4 compared to 9.9 basis points in Q4 2013. Although the loss rate is higher than last year, it still reflects a strong portfolio.

Our operating interest expense was $1.7 million in Q4, as we continued to benefit from low interest rates in the US. The increase in the expense over last year is due primarily to growth in debt balances in both the US and Brazil.

The effective tax rate on a GAAP basis for Q4 was 40.4% compared to 39.4% for the fourth quarter of 2013. Our adjusted net income tax rate this quarter was 39.7% compared to 38.4% for Q4 a year ago. The increase in the tax rate this quarter was due primarily to foreign exchange losses and related mix impact.

Said another way, this is a case of reducing earnings in low tax jurisdictions and increasing earnings in higher tax jurisdictions, caused by changes in foreign exchange rates. We could see some variability in our tax rate in 2015 due to the impacts of the foreign exchange gains and losses. Looking ahead, we expect to continue to benefit from our strategic tax planning project that we discussed last quarter.

Turning to our fuel derivatives program, for the fourth quarter of 2014, we recognized a realized cash gain of $3 million before taxes on these instruments and an unrealized gain of $34.2 million. We concluded the quarter with a net derivative asset of $41 million. For the first quarter of 2015, we have locked in at a price range of $3.34 to $3.40 per gallon. For the full year, the average price locked in is $3.35 to $3.41 per gallon.

Moving over to the balance sheet, we ended the quarter with $285 million of cash, down from $577 million at the end of the third quarter. The decrease in cash was driven by the seasonality of certain deposits at our bank.

In terms of capital expenditures, CapEx for the fourth quarter was approximately $19 million. Our total CapEx for the full year was $58 million.

As our track record demonstrates, we've maintained a very disciplined and focused approach to capital allocation since we went public. Having completed two significant acquisitions in the last six months, we are a bit above our target leverage of 1.5 to 2 times EBITDA.

Our financing debt balance increased $218 million in the fourth quarter, reflecting the completion of the Esso portfolio acquisition, and we ended the quarter with a total balance of $1.3 billion on our revolving line of credit, term loan, and notes. As of December 31, our leverage ratio was 3.6 times our 12-month trailing EBITDA compared to 2.1 times at the end of Q4 last year.

In the near term, we'll be using our free cash to reduce this debt level. We believe we can reduce our leverage by about 1 turn of EBITDA over the course of the next year. Because of this, we continue to be in the market looking at M&A opportunities that meet our criteria.

Our financial performance in 2014 reflects our commitment to expanding our business through both organic growth and strategic acquisitions. We have continued to make the investments needed to expand into high demand verticals, while strengthening our presence in core markets and across high growth regions. Despite the FX and fuel price headwinds, we are confident that we can sustain our momentum moving into next year as we increasingly benefit from strong volume growth, transactions across key verticals, as well as higher contribution from our expanding partnership network across the globe.

Now for our guidance for the first-quarter 2015 and full year, which reflects our views as of today and are made on a non-GAAP basis. For the first quarter of 2015, we expect to report revenue in the range of $192 million to $201 million, and adjusted net income in the range of $37 million to $40 million, or $0.94 to $1.02 per diluted share. These figures assume normal seasonality trends in the virtual card business, as well as credit losses.

Our first quarter guidance assumes that fleet credit loss will be between 10 and 15 basis points and that domestic fuel prices will average $2.59 per gallon. Our guidance also includes exchange rate impacts of approximately $0.07 of EPS through January 2015 and assumes that exchange rates will remain in the range of the 12/31/14 rates for the remainder of the year.

For the full-year 2015, we expect revenue in the range of $860 million to $890 million and adjusted net income in the range of $191 million to $203 million, or $4.90 to $5.20 per diluted share. Our guidance includes $11 million to $14 million of after-tax losses related to our Esso portfolio in Europe. Our full-year guidance also assumes that fleet credit loss will be between 10 and 15 basis points and assumes that domestic fuel prices will be $2.62 per gallon. The fuel price assumptions for the US are based on the applicable NYMEX futures price.

Additionally, we expect our adjusted net income tax rate to be between 36% and 37% for 2015, total capital expenditures to be approximately $60 million to $65 million. Our guidance assumes approximately 39 million shares outstanding for the year.

And now, we'll take your questions.

(Operator Instructions)

Your first question comes from the line of Bob Napoli with William Blair.

Thank you. Good morning. Just want to clarify on the foreign exchange, especially -- your guidance assumes the foreign exchange rates are at 12/31 levels, but obviously currencies have come down, have weakened, the dollar strengthened against your key currencies since then. You talked about the $0.07 hit in January. The changes you've made, is that -- what if -- if currencies stay where they're at today as opposed to December 31, what effect does that have on your business? I think you suggested this is mostly balance sheet related, because I think the only earnings exposure primarily this year, about the only thing that's material is Australia, since I don't think you're making money with Esso in 2015. Is that -- could you maybe give a little color on this, please?

Bob, I think you largely have it correct. I mean, the loss that we took in the fourth quarter and what we're including for January is balance sheet remeasurements, so these are assets and liabilities that we're holding in currencies, as I said, at WEX Bank, where it's not the US dollar or it could be in the UK, where it's in Euros or just currencies that are not what we're operating in. It's those remeasurements that are causing these losses. If rates stay where they are, we wouldn't have any more of these remeasurement losses going forward. We'll have them all, if rates stayed perfectly steady, which you wouldn't really expect, you wouldn't have any more of these remeasurement losses after January.

That said, we have undertaken a lot of changes to our FX hedging programs and tightened them up in a lot of cases, as well as just bringing down the total exposures since year end. I think the other point you made is Australia is really the only country where we have a significant amount of revenue and earnings, so from an operational perspective, the FX rates are not as meaningful, I guess, from an operational perspective as they are from a balance sheet perspective.

Great. Thank you. That's very helpful. The Esso business, how confident are you that jumping off into 2016 that the Esso business is going to be generating margins close to the corporate average as you get through the expenditures this year? Are we going to be in for another year of investment in 2016?

When we actually announced the deals, we talked about the fact that there were going to be two years of dilution in 2014 and 2015. Really it has performed, I would say, as expected in terms of the fact that when we picked up the business, and we did that in the earliest state possible, working with Exxon, moving into nine countries throughout Europe; we do believe that this is foundationally an investment that's moving us, really in a big way, into the European marketplace. We did that in order to make sure that we actually had the infrastructure in place. We did think of 2015 as another investment year, and that is what we're finding to be true. We do believe that as we're working through the year, we're really changing the economics of the portfolio and we're going to be converting, or starting the process of conversion onto our platform at the latter part of this year. So all of those efforts are underway. They are happening as expected, which would lead us to move the portfolio into a positive in 2016.

Thanks. And last question, just on the growth of the other payments business, can you break out the growth rate of the travel versus Evolution1? I know, obviously, Evolution1 would be pro forma. Then the related, the yields, or I guess, discount rates that you would expect on those portfolios in your guidance?

From a spend volume perspective, we quoted 37% in the fourth quarter. Evolution1 was a good chunk of that. We were in the, I'll call it mid 20%s, low to mid 20%s on the historical virtual card, with the Evolution1 portfolio providing the rest. The interchange rate that we earn on that business is actually a bit higher that what we earn on our virtual card business in the travel sector. That's actually a positive mix impact and one of the reasons why the interchange rate went up sequentially.

Great. Okay. Thank you. Appreciate it.

Your next question comes from Sanjay Sakhrani with KBW.

Hi, thanks. This is actually Steven Kwok filling in for Sanjay. My first question is just around the net payment processing rate. When we look at the change in fuel prices, that declined quarter over quarter. However, the net processing rate remained relatively flat at 1.37%. Typically, we would normally see that move up. Just wanted to know how we should think about that going forward? Thanks.

Some of it's in the rounding. You saw the rate, as we report it to the couple decimal places, is basically flat, but it is actually going up, if you expand it out a little bit further, almost about a basis point. We would expect that to continue to increase as fuel prices drop. We have those, what we call hybrid-type contracts with our merchants, where we have transaction fees embedded in there. What you're really seeing is just mix impacts. There's nothing in our merchant base that's changing. None of the rates are changing, nothing significant at least. None of the major oil company contracts have been changed or anything like that, so you are really just seeing mix impacts in the quarter.

Is there any good rule of thumb around the -- I think before it used to be every $0.10 change in gas prices was like a 1 basis point change, is that different now?

It's a little bit less than a basis point now, yes, for a $0.10 change in fuel prices.

Got it. If we were just to look in terms of your guidance -- it seems to be, obviously, there's a lot of puts and takes, but could you talk a little bit about how you get to the low end versus the high end? What are some of the puts and takes that are within your guidance?

When we actually put together the guidance range, we widened it a little bit during this year. When we thought about the puts and takes, the things that would move us into the positive side of that, there are fluctuations with fuel prices that we contemplated in the range. As Steve said, we believe that we've really significantly tightened up our exposure to FX, but we wanted to contemplate some of that within the guidance range, so we included that. Another piece of that is that we are bringing on a new portfolio with Exxon Mobil. And so early days, we feel pretty confident about it, but willing to have that included in the guidance range, both on the upside and the downside. I talked about the fact that we're working on pricing changes within the European market as part of really looking at that portfolio and optimizing it. That's something that we wanted to contemplate within the range. I would say that those were some of the bigger macro factors that we contemplated when we put together the business range.

Got it. Great. Thanks for taking my questions.

Your next question comes from David Togut with Evercore ISI.

Hi. This is Michael Landau on the line for David Togut. Thanks for taking my questions. Fleet payment processing and transaction growth, we saw in this quarter, 9%. Can you review the primary drivers of this growth acceleration? Do you believe hot single-digit transaction growth is sustainable through 2015?

I would say the slight acceleration, I would say, is a combination of two things. One, it's just our sales and marketing teams doing a great job of bringing on new business and with full pipeline still to come. So they have done a great job with those growth rates. We did get a small contribution in December from the Esso portfolio as well, which was several million transactions as well, and that probably accounts for your -- a lot of your sequential uptick in the growth rate.

I talked about 700,000 new gross vehicles that we added both in the US and in Australia. We really had a strong year, as Steve said, on the acquisition side in both of those regions.

Okay. Any forecast for that kind of growth in 2015?

We would include that in our guidance range, so nothing I would say that's unusual for what you've seen historically.

Okay. Thanks. Then just piggybacking off of a previous question, you mentioned mid 20%s legacy, (inaudible) WEX virtual. It seems quite strong, but overall there was a slight deceleration in other payment solutions volume growth versus last quarter, despite this being the first full quarter of Evolution1? Just wondering how Evolution1 is tracking overall, and what kind of growth contribution you're expecting from Evolution1 in 2015?

Evolution1 has come on very strong. It is, so far, performing better than what we had originally expected. We feel really good about the strength of the team that's working there and that being the cornerstone of our product set going forward. If you recall, Evolution1, there's a piece of their revenue that's coming, is payment processing revenue, but there's also a piece that's coming in staff-based fees.

Okay. Thanks. Then just my last question, do you expect a continuation of 20% plus growth in fee-based revenue on the fleet side through 2015, or should we expect an anniversary of that growth from programs you initiated in 2014?

I would say we've taken a close look at all kinds of pricing initiatives within the fleet segment, and we've implemented a number of them either late last year, continuing into this year, including some changes in payment terms. So we'll -- none of them are as large as the late fee increase that we saw a couple years ago, but they are adding to our revenue base from a fee perspective from the customers.

And just to add to that, when we look across the portfolio, we do believe that there is -- I'll call it latent pricing. If you look at the value proposition that we have in the marketplace and where we're priced compared to other competitors in the marketplace, particularly in the smaller fleet segment. It is an area that we're continuing to explore and talked about some of those changes going through within the first quarter. We saw some of the impact last year, but it's an area that we're continuing to really investigate.

Thanks. I'll jump back in queue.

Your next question comes from Smitti Srethapramote with Morgan Stanley.

Thank you. You mentioned at your investor day that Esso volume was coming in higher than expected, but that revenue per transaction was lower. Can you give us an update on whether that's still the case, and how the contribution from the quarter came in versus your expectations?

I would say that the liters that we processed were actually, did end up above our original expectations. Because of the falling fuel prices, the spreads that we actually earned, -- remember, this is a spread-based business, they were actually favorable in December as well, so we had goodness on both sides there. We did have some higher costs than we had planned around the transition to WEX from Esso. Overall, the net income number was very much in line with what we planned on. But the good news is that we ended up getting more volume than we had originally planned on.

Got it. Does the $35 million Esso run rate still stand?

Yes, I think we'd stick with that for now. As Melissa said, we're in very early days here and the volume is slightly higher, so that's helpful. That would be a positive fact. I think we're still working through how the spreads and how our revenue is going to translate through during the year. We'll stick with that for now, but there is some potential upside by us there.

Got it. Maybe just another follow up on Europe. Can you give us an update in terms of what you're seeing, hearing regarding further RFPs or outsourcing of fuel card programs over there?

Us moving into Europe and doing it in such a, I would say a quick fashion, working in partnership with Exxon has really caused a tension within the European marketplace. We feel good about the position that we have. We continue to work leads that are within our pipeline. I've said before, and I'll continue to say, that these tend to be very slow, long-term processes, so while we're continuing to work on deals within that pipeline, I would expect those to be longer term in nature.

Got it. Okay. Thank you.

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

Can remind us or rather give us your latest thoughts on the timing of the Esso, the pacing of the Esso investment this year? Any updated thoughts on when that spend might fall in terms of the cadence over the year?

I would say it's pretty ratable through the year, Ramsey. Last year, we were building all year long as we continued to just add resources. We -- there's still a little bit more to go, but I think you're looking at a pretty steady operation through the year.

Okay. A really quick update on the European regulatory environment, we think it's kind of broke your way with recent draft language; I think that excluded commercial cards. But any quick thoughts on any latest developments there?

No, you're right. That is the latest development. At this point, commercial cards are excluded within the regulation, and so that's a positive change, clearly, for us.

Okay. Last one for me, changing the channel here a little bit, can you update us on efforts to get your virtual card product into other verticals besides hotel? I noticed with Comdata, FleetCor made quite a bit of noise about healthcare and construction verticals. I know it took you guys quite a long time to develop the OTA vertical that you're in now. You're pretty dominant now. Are there any latest thoughts about your ability to push that into other verticals? Have you started sniffing around with Evolution1 and maybe leveraging those existing distribution relationships to do something there? Just some updated thoughts would be helpful?

What we tend to look for, call them markers within the space. We're looking for areas of complexity that we think that we can bring a solution that's unique. Healthcare is clearly a piece of that with the partnerships that Evolution1 has established. We do see that as an opportunity. Beyond that, we're continuing to test in other markets. I wouldn't say that there's anything that would be big enough that I would call out yet in the course of that testing, but it is an area that we're continuing to investigate.

Great. Thanks a lot. That's all for me.

Our next question comes from Jim Schneider with Goldman Sachs.

Good morning. Thanks for taking my question. On the virtual card business, I think you talked about the fact that the legacy or primarily OTA segment grew in the low 20%s in Q4. Going into 2015, is that a reasonable assumption to make in terms of the growth in that segment for the rest of the year? And maybe talk about some of the puts and takes in terms of the customer base and your share within that market?

We do envision to see continued growth in that space. If you look at the customer base, that some of that's going to come from growth of their existing customers. A piece of that is we're continuing to pick up business on a global basis. I talked about Voxel Group. That is a potential distribution channel that -- right now they are selling the product into their existing customers or into their new customer set as a way to create a little bit more stickiness and to make that product electronic in nature. In doing so, that creates an opportunity for us. We're finding more in those type of either direct channels or distribution channels that lead us to have confidence in the growth rate within this business.

Just to put it in perspective, too, we had about $18 billion worth of purchase volume last year. To maintain those growth rates, those get more and more difficult as the numbers get bigger. We added about $5 billion worth of purchase volume, call it $4 billion of it organically and order of magnitude, maybe $1 billion from Evolution1, a little bit less. To add $4 billion and $5 billion a year in purchase volume a year is not particularly easy, but as Melissa said, expanding those OTAs, relationships and adding more of them is what's been driving it.

Thanks, that's helpful. Then as a follow up, I want to go back to an earlier question on European outsourcing deals. Back at the analyst day, you had talked a little bit about -- I think you gave a relatively constructive tone around whether those would come out sometime in 2015 with more proposals to bid on. Given your earlier comments, is anything changed there? Do you think that the disruption in the oil market is actually causing the European oil companies to think differently about the timing of their outsourcing?

I think that what's happening within the broader markets are certainly impacting the dynamics. In some ways positively, in some ways negatively. I think that use of capital right now is at a premium within that customer base. I think that that's driving them to think about efficiencies, which is positive. I think that there's a lot of change happening, which impacts the ability to make decisions sometimes within organizations from a timeline perspective. I think both of those are playing out within that customer base.

Great. Thank you.

Your next question comes from Ashish Sabadra with Deutsche Bank.

Thanks. Quickly, on Evolution1, I was wondering if you could comment on the HSA contribution during the key enrollment period and how that's trending for Evolution1? Also, just a quick follow up on that, HSA Bank acquired a [$1.3] billion portfolio from JPMorgan, can you just comment on when they plan to transition that portfolio onto the Evolution1 platform?

Yes, Evolution1 is in the process of ramping that portfolio. They are, I would say, in early stages of that. We talked about this I think on the last call of it being a multi-year conversion, because they have to wait until the right cycles when employers are actually in a position to make a transition. A piece of that was happening through this enrollment cycle. A piece of it will happen through the next one. So, I would say early days, so it leads to a transition that's going to happen over a multi-year period.

Okay, that makes sense. Quickly on WEX travel, can you also talk about -- you talked about expansion and new channels. Can you also talk about expansion, like moving into prepaid or low cost carriers, those kinds of areas? What are you seeing in that space?

Sure. That's actually something that we're doing in Europe now. Our product is facilitating some of the low cost carriers in that marketplace. It's something that's more prevalent, clearly within the European marketplace. It's a way that we adapt the product through our corporate pay product set. What we're finding is that we have an ability to expand the customer base that we have there through -- you talk about low-cost carriers, but also looking at some of the OTAs within that space. They now have over 100 of them within the European business, so that's been an area of growth for us.

Then most recently, we've talked about adding an office within Asia. We've done that really, in part, because of the success we've had with our travel products within the Asia region. It's also the largest travel market in the world, so we think of that as foundational for us from our future growth perspective in areas that we're still learning, I would say, of ways to modify the product that are going to be really particularly unique within that region. We're excited about setting up physical space, learning more about that market. We've already had success there, and we think that we can compound that by adding in more local expertise.

That's great. Thanks, Melissa. Just quickly, on the fuel hedging gains, the realized hedging gains expectation for FY15, given your guidance for fuel prices and the hedging, we come up with roughly $40 million of realized hedging gains for 2015. Is that the right way to look at it, roughly in line with the net derivative assets of $41 million?

That's definitely in the ballpark, Ashish.

Okay. That's helpful. Thank you.

Your next question comes from Phil Stiller with Citi.

Hi. Thanks for taking my questions. I wanted to go back to your pricing comments earlier in the fleet side of the business. FleetCor talked about potentially accelerating some of their pricing opportunities in the market, given the decline in fuel prices and impact on your customers. Obviously, you guys are doing some things as well. Just wondering if this is something that creates a potential opportunity for you guys to accelerate or increase the magnitude of what you're doing right now?

I think that we are, and have always been particularly thoughtful about making sure that what we're doing is continuing to add value to the customer, the underlying customer. As we've approached this, we wanted to make sure that it is with that in mind, in making sure also that we're thinking about this from a long-term perspective and what's going to work within the marketplace. There's clearly an opportunity to really create some upside, but at the same time, we have to do it in a thoughtful way that is going to be something that we can really go to market with on a longer-term basis. I talked about the fact we did some of that during 2014. We did more testing and are seeing the benefit of some of that going through 2015. I would say that we're learning a lot as we go, and that's an area that we do believe that there is opportunity going forward.

What about in the OTR space? Obviously, with the consolidation there, that could create some opportunities as well. Is that a market that you feel is more sensitive to the adjustments?

I think in the OTR space, we do believe that we're entering the market with our product and Fleet One had traditionally focused on the small end of the marketplace. What we've been able to find is that we can penetrate some of the larger OTR fleets with our product set in the relationships that we have. So I would say that the whole industry is a little bit in a state of transition. We think of that as an opportunity for us. You talked about that in terms of pricing. I think about that also in terms of just customer wins.

Okay.

They clearly are, though, that segment of the market is price sensitive. It's a more penetrated piece of the market and so there is a price sensitivity there, probably even more than you would see in some of the other segments of the business.

Sure. Switching gears a bit, I think in the prepared comments, there was reference to some key renewals and signings in the travel business. Just wondering, anything material to call out in terms of either revenue impact or impact to the metrics that you report in 2015 from those?

Nothing that would be unusual in terms of renewals. We are always in this renewal cycle, so that's always going to be something that we're factoring in when we give the guidance. But there's nothing that you would expect to see pop out from that.

Okay, and then the last question and I'll turn it over. The M&A pipeline, obviously as you mentioned, you're above your leverage ratios right now. Perhaps give us an update in terms of where you can get near term, either with securitization of the Esso portfolio and how the opportunity set looks in the M&A pipeline relative to your capacity?

I'll have Steve talk about the securitization. On the M&A side, M&A continues to be a key component of our growth strategy. We continue to look at assets within the space. I would say we continue to have pipelines full of targets that we're evaluating to make sure that they meet both strategic and financial criteria. I'll let Steve talk about the securitization.

In terms of securitization, the first one we're doing is actually in Australia. That was one of the reasons that we had some foreign exchange impacts in the fourth quarter and continuing, actually, into the first quarter. Because we are going to securitize that portfolio and bring the cash back, that created a different accounting treatment, so that's part of it, and it's short term. We expect to get that done at least by the end of this first quarter, if not, hopefully, by the end of this month. We'll see a reduction of those FX exposures, just because of the Australian securitization, which will be roughly somewhere in the range of $90 million to $100 million of cash. Then the European stuff, we're working on that at the same time. It's a bit more complex because it's a number of countries, potentially different currencies. It's going to take a little bit of a long time, but it's probably a late second quarter, early third quarter event.

Is that still in the $200 million to $250 million range?

Well, that's the total. That's the total of the receivables that we bought. I would say that the amount that we can securitize would be quite a bit smaller than that, either because you have to do it country by country to hit all the legal requirements, and so maybe the country's not big enough to bother with, or it's just more complex in certain areas and it's just not worth it.

Okay. Appreciate it. Thank you.

Your next question comes from Tom McCrohan with Sterne Agee.

Hi. Thanks for taking my question. I had three quick ones. First one is, which specific countries in Asia-Pacific are you targeting as part of the virtual card acceleration you discussed in your prepared remarks?

We already have business actually within Southeast Asia. Thailand is probably the largest area that we're in. We've been going through a regulatory approval process, as well. It's been a multi-year process to get regulatory approval to become an issuer within those regions. But in the meantime what we've been doing is using our bank that we have in the US to issue into those regions. In terms of future growth, we think of that market, and I would set aside China and India as something that we're looking at in a little bit more of a long-term fashion, but the whole Southeast Asia region is an area of growth for us. When you add on to what we've done in the travel business with what we're doing with Exxon Mobile, within Asia-Pac, and what we're doing with Shell within that broader Asia region, that is an area that's starting to become more significant to us and it's clearly significant to us when you start to do long-range planning.

Okay. A question on guidance, the $11 million to $14 million Esso related after-tax loss included in guidance, just want to confirm, those losses are absolute losses and not incremental to the losses incurred in 2014?

Correct.

Great. My last question, Steve, was on just hedging. Is there a certain price level of oil that would trigger the resumption of your fuel hedging program to 2016?

I don't think it's quite as black and white as what's the absolute dollar amount that we could or would want to hedge at. I think it's more of what do we think the downside protection we're getting is versus the upside that we're potentially giving up? I think it's more of a trending thing as opposed to an absolute dollar amount.

Okay, thanks.

Your next question comes from Tim Willi with Wells Fargo.

Thank you, and good morning. Just two quick questions. A lot of stuff has been covered here. For Steve, on the balance sheets and the debt pay down, once you get through the year and take the debt down by about a turn, I think is what you said you could do, if there have not been any material acquisitions announced or completed, would you look to continue to push the debt levels down or would you be more inclined to let cash build? Trying to think about how we might think about interest expense running out of 2015 and into 2016? Then I had a quick follow up.

I guess if we are successful on the first turn, that would get us I'll call it 2.5, 2.6. Our stated leverage target range is 1.5 to 2.0, so we'd probably continue to push it down for a bit of time. Then, a lot will happen and change between now and that point, so I think we'll reevaluate when and if we get there.

Okay. Then the second thing, I want to go back to Esso. There was a question earlier, I think it might have been from Bob at the beginning of the call, just about the profitability ramp of Esso. If we could go back to that quickly? Is it your intention as you exit 2015 to basically have Esso positioned for normalized operating margins as you start 2016? Or will a declining of that profitability curve still be in process as we go into 2016?

I think what we've said is we're going to be starting the conversions onto our platform in the second half of this year. That will extend into 2016, so it's certainly not a January 1 impact that we'll see those better margins. It's probably more like exiting 2016 more than entering 2016.

Okay, great. That's all I had. Thanks very much.

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

Thanks. Just a couple quick ones at the end. On the single user account business or virtual card business, the Visa and MasterCard talked about cross-border volumes taking a little bit of a hit here at the beginning of the year. Have you seen any of that at all in your business?

I would say not a significant amount. I mean, we've gone down this path of local issuance, so we've removed a lot of the cross-border transactions already. We still have quite a number of them, of course, but I wouldn't say we've seen a real big, significant impact from that.

Okay. So nothing to note there in terms of what you're thinking on the outlook. Then just on the -- I get this question a lot, guys. The vehicles that you have that are tied to, say, energy production or the oil and gas industry, is it disproportionate to other verticals? Just curious.

I wouldn't say it's disproportionate. It's a single-digit market share of our overall portfolio, so certainly not a disproportionate number. But we've had a lot of growth in that area over the last several years and they've performed very well. That's obviously moderating somewhat recently. I think overall with the mix we have, you shouldn't see a real big, material impact from that.

Okay. That's good. Thank you.

Your next question comes from Mike Grondahl with Piper Jaffray.

Thanks for taking my questions. With the lower gas prices, can you comment what trends you're seeing in your core fleet, if you're seeing any uptick? Secondly, lower gas prices and how that relates to finance fees? How should we think about that over the course of the year?

In relation to your first question, the product we find is something that's something that's sellable nearly regardless of what's happening with fuel prices, although there's clearly a little bit more of an uptick when fuel prices are high than they are when they're low. There's a little bit of a difference, but it's not a significant difference. That's really because the product is geared towards making sure that there is control in the user's hand and that there are savings regardless of what's happening with fuel prices.

From a finance fee income or late fees, obviously, if fuel prices are lower, the balances that are going past due would obviously be lower as well. Some of the fee increases we've made would help offset that. A lot of the revenue that's going through that finance fee line is actually from our factoring business, too, at Fleet One. You'll see some offsets for low fuel prices from those things.

Okay.

A lot of the balances, as well -- a lot of the fees that we collect are actually minimum fees as well, so that shouldn't have an impact.

Okay. Thank you.

Thank you. I'll now turn the call back over to the presenters for closing remarks.

Okay. That concludes our call. We're out of time, but thank you all for joining us. Thank you, operator, as well.

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