WEX Inc (WEX) 2015 Q1 法說會逐字稿

Good morning. My name is Nan, and I will be your conference operator today. At this time, I would like to welcome, everyone to the WEX Inc. Q1 2015 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

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

Thank you, Operator, and good morning. With me today is Melissa Smith, our President and CEO, and our CFO, Steve Elder. The press release we issued earlier this morning has been posted to the Investor Relations Section of our website at www.WEXInc.com. A copy of this 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 first quarter excludes a restructuring charge related to our global operations, an unrealized loss on fuel price derivatives, amortization of acquired intangible assets, expense related to stock-based compensation, 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 26, 2015. While we may update forward-looking statements in the future, we disclaim any obligation 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 and thank you for joining us today. WEX reported strong performance for the first quarter of 2015 achieving top and bottom line results that exceeded our expectations. I'm pleased with the growth we demonstrated across our geographies and verticals this quarter. Our continued momentum following a strong FY14 speaks to the strength of our market position and our ability to grow the business organically and compound that through acquisitions.

For the quarter, we generated $202 million worth of revenue, an 11% increase over the prior-year period. Adjusted net income also grew coming in at $1.10 per share compared to $1.06 for the first quarter of 2014. Even in the midst of ongoing fuel price headwinds, we delivered solid results through broad-based growth and continued execution against our strategic priorities. In fact, if fuel prices had remained at 2014 levels, revenue would have been approximately $230 million which would have been a 26% increase over the prior-year period.

Turning first to our fleet payment segment, we saw payment processing transactions increase by 12% relative to the prior-year period. A decline in fuel prices had an impact on our payment processing revenue. However, our organic growth trajectory is solid. Additionally, we saw strong performance during our first full quarter with our European fleet business.

In domestic fleet, we introduced the WEX fleet flex card, our new revolving payment fuel card for small businesses. This new product is designed specifically for the needs of smaller fleet looking for flexibility, security, data intelligence, and expense control. We are excited to bring this innovative offering to the small fleet market, and we believe it will help drive our ongoing efforts to further penetrate the space.

We continued to see growth in WEX Europe services as we worked collectively with our partner in that space to apply our expertise and improve the profile of the asset portfolio. As a reminder, our European fleet business is based on a reseller model, generating revenues from the spread between the wholesale and retail prices on a per liter transaction basis. This spread, combined with adjusting our pricing to be more consistent with what we're seeing in the market, has yielded positive impacts for the Esso portfolio including early revenue growth and better-than-expected volume. We implemented an aggressive plan that went into effect immediately upon taking over the portfolio on December 1, and the plan is working. Our efforts to build out the WEX platform are on track for pilot and program conversion to begin late this year.

The other payment segment which includes our travel, health, and employee businesses generated 37% growth in spend volume globally and over Q1 last year increasing spend to $5 billion. I'm encouraged by the underlying domestic and global growth of this segment, which has also been positively impacted by contributions from Evolution1, which we acquired in July, 2014.

In our travel business, we continued to sign a steady stream of customers and contract extensions during the quarter. We continued to build out our offering globally, most recently extending our ability to issue and settle in multiple currencies in Europe and Australia. This is a significant benefit for European- and Australian-based businesses and global companies with operations in these regions. We continue to win business in this competitive market by working closely with our customers. This is an example of our ongoing efforts to expand our product offerings to meet the needs of our global customers, and we'll continue to expand our future product offerings to meet both market and customer expectations.

In our healthcare business, Evolution1 had another solid quarter in terms of performance and remains ahead of our expectations. I had the chance to hear directly from many of our partners at our Evolution1 annual partner conference in Phoenix two weeks ago where over 400 representatives of our partner organizations were in attendance. I had the opportunity to hear directly how Evolution1's white label solutions and market-leading technology has helped them grow and expand their businesses in the midst of this rapidly changing environment.

This annual event provides our partners with thought leadership around trends in the consumer-directed healthcare market, tools to help these partners grow their customer base in a profitable manner, and opportunities to network with peers and leaders in this dynamic market. With Evolution1, we continue to bring best-in-class technology to over 125,000 employers and simplify the complexity of consumers' healthcare payments and reimbursements for their businesses. Overall, it has been a very good start to the year.

As I mentioned last quarter, our strategic priorities for 2015 will remain focused on positioning the Company to accelerate growth, to advance the business through targeted investments, and to drive scale across the organization. Let me now provide a look ahead to the second quarter and remainder of 2015.

In terms of accelerating growth, we continued to gain market share within domestic fleet adding new vehicles each quarter and have a very strong pipeline of new customers which we anticipate will benefit us later this year. We also see an opportunity for growth in the OTR market, particularly as we gain traction with our integrated offering. In both the US and Europe, we've rolled out new products and fees that take advantage of the market while being sensitive to customer behavior and feedback. We are continuing to make additional changes based on what we learn, and we're benefiting from the pricing changes we've implemented with minimal attrition to date. In general, the disruption in the market as a result of industry consolidation has been a benefit for us, and we see this period as a time to capitalize and expand our reach in this space.

In Europe, we continued to make investments to build upon our strong brand and technology offering. Our unique pan-European footprint in operations, which are unmatched in the region, as well as our competency to grow portfolios positions us well for accelerated growth in this region longer term. To date, volume has been greater than expected, and we've built a strong pipeline of companies looking to outsource their portfolios across Europe.

We believe our success in executing with precision very complex transactions as well as our proven ability to grow portfolios will set us apart as we aggressively pursue this business. While many of our discussions are in early stages and the sales cycle is expected to be long, we're encouraged by the opportunity and to continue to expand our fleet presence in the larger European marketplace.

In travel, we continued to focus on market share gains and global expansion while laying the groundwork for accelerated growth in key markets. We'll continue to process -- the process of establishing issuing capability in our primary markets. Additionally, we're beginning to explore opportunities in Asia which is the fastest-growing travel market at a time when we are seeing very positive trends in the region. We recognize that a significant ramp in this region will involve a multi-year strategy.

In terms of targeted investments, 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. Our strategy remains focused on broadening and expanding our reach in our existing high growth payment verticals which also helps to reduce our exposure to commodity fuel prices. As I've said, 2015 will continue to be a year of investment as we ramp our fleet business in Europe, further penetrate new markets, and diversify into high growth verticals -- all of which will drive our next stage of growth. In addition given our success with Evolution1 and the opportunities we see in the healthcare payments market, we'll look for ways to deepen and broaden our position in this attractive vertical.

We'll also continue to work across our business to create and enhance scale. We've had some initial success across a number of areas including pricing initiatives in the fleet business as previously discussed. Our teams are working to make our global operations more efficient, and we'll spend this year building out our technology platform in Europe. Additionally, we have identified a number of initiatives to further streamline our business, improve our efficiency, and globalize our operations. All of which will help drive scale and profitability going forward.

Overall, I'm pleased with our performance for the quarter. 2015 is shaping up to be a very good year as we continue to enhance our competitive position within existing verticals, further globalize the business, and strategically invest in areas of the business that have the potential to drive even higher growth. I am confident these efforts will help drive our growth and profitability to new levels in 2016 in the years to come. I'll turn the call over to Steve to discuss our financials and guidance. Steve?

Thank you, Melissa. For the first quarter of 2015, we reported total revenue of $202 million, an 11% increase from the prior-year period and above our guidance range of $192 million to $201 million. Net income attributed to common shareholders on a GAAP basis for the first quarter was $22.3 million, or $0.57 per diluted share, compared with $36.5 million, or $0.93 per diluted share for the first quarter last year. Our non-GAAP adjusted net income was $42.9 million, or $1.10 per diluted share, up from $41.6 million, or $1.06 per diluted share for the same period last year. This also came in better than our guidance range of $0.94 to $1.02 per diluted share. The primary reasons for this outperformance are better credit losses and a couple of nonrecurring items.

As part of our planning process, we conducted a global review of our operations in the first quarter. As Melissa mentioned, we are reviewing initiatives to streamline our business, improve our efficiency, and globalize our operations. And, as part of these efforts, we are recognizing a $9 million restructuring expense in Q1. This cost has been excluded from adjusted net income.

Also, our earnings this quarter were impacted by a $4 million pretax loss related to translation losses from changes in foreign exchange rate. As expected, this is primarily associated with losses in January which occurred prior to the expansion of our FX hedging program. As we said last quarter, we now maintain our hedges over the quarter-end periods and have increased the scope of our hedging program which proved effective over the last two months of the quarter. Although we cannot fully neutralized our risk to foreign exchange fluctuations, the corrective measures we have taken will temper the impact of the currency changes going forward.

Moving on to operations. In the fleet segment, payment processing transactions increased to $81.9 million, 12% higher than the prior-year period. The increase in transactions was primarily the result of the Esso portfolio in Europe as well as organic growth in the US and Australia. For the quarter, our fleet payment processing revenue came in at $73 million, or 15% below the prior-year period. The decline in revenue was primarily driven by lower fuel prices.

Our net payment processing rate was essentially flat when compared to both Q1 and Q4 of 2014. With the decline in fuel prices, we would have expected at this rate to go slightly higher. However, this was offset by mix and some pricing pressure. Through WEX Europe services, we remain focused on growing the Esso portfolio in Europe and improving our profitability. Our teams are working to make our operations more efficient, and we'll spend this year building out our technology [bucket]. As Melissa stated earlier, we expect to see the first conversion to our platform late this year and expect subsequent systems conversions to occur on a country-by-country basis in 2016.

In the other payments segment, revenue for the first quarter increased 58%, or $27.2 million year-over-year to $73.8 million, primarily as a result of the inclusion of Evolution1. Spend volume on our virtual products increased 37% over last year to $5 billion for the quarter. The net interchange rate for our virtual card in Q1 was 87 basis points, up 6 basis points year-over-year and down 2 basis points sequentially. The increase over last year was due primarily to the impact of the merchant settlement agreement last year and a favorable impact from Evolution1.

Moving down the income statement. For the first quarter, total operating expenses on a GAAP basis were $154 million, a $34 million increase versus last year. Salary and other personnel costs for Q1 were $58 million, compared with $44 million in Q1 last year. Additionally, service fees were up $3.8 million from the prior year at $30.1 million. Each of these increases is primarily due to the acquisition of Evolution1 by WEX Europe services.

During the first quarter, credit loss on a consolidated basis totaled $3.9 million. This compares favorably to the $9.1 million in Q1 last year driven by lower balances from declining fuel prices coupled with an improved aging in the portfolio. Total charge-offs in the quarter were $7.4 million. In the fleet segment, credit loss was 6.8 basis points in Q1 compared to 14.1 basis point in Q1 2014.

Our operating interest expense was $1.6 million in Q1 as we continued to benefit from low interest rates in the US. The effective tax rate on a GAAP basis for Q1 was 42% compared to 36.8% for the first quarter of 2014. Our adjusted net income tax rate this quarter was 35.7% compared to 36% for Q1 a year ago.

There are two significant items affecting our tax rate. First, we had a one-time benefit of approximately $900,000 this quarter. Second, we have an additional impact to our tax rate as the result of the jurisdictional mix of our Q1 FX losses which is spread through the year. We have altered the structure of our FX hedging program going forward so it should not have a significant impact on the tax rate beyond this.

Turning to our fuel derivatives program. For the first quarter of 2015, we recognized a realized cash gain of $12.1 million before taxes on these instruments. We also recognized an unrealized loss of $9.3 million due to the change in market value of the outstanding fuel derivatives. We concluded the quarter with a net derivative asset of $32 million.

For the second quarter of 2015, we have locked in at a price range of $3.37 to $3.43 per gallon. For the remainder of the year, the average price locked in is $3.35 to $3.41 per gallon which will limit our earnings exposure to price fluctuations this year. As we discussed last quarter, 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.

Moving over to the balance sheet. We ended the quarter with $511 million of cash, up from $285 million at the end of the fourth quarter. This is primarily due to the seasonality of WEX bank deposits. In terms of capital expenditures, total spending for the first quarter was approximately $12 million. As our track record demonstrates, we've maintained a very disciplined and focused approach to capital allocation since we went public.

Our financing debt balance decreased $86 million compared to the year-end balance due to internal cash flow generation. We ended the quarter with a total balance of $1.2 billion on our revolving line of credit, term loan, and notes. We have completed our Australian securitization and are using those proceeds to pay down this debt which on a pro forma basis would bring our leverage ratio down to 3.2 times EBITDA. However, this was not completed as of the end of the quarter.

Also, during the first quarter, we purchased approximately 210,000 shares of our common stock at a total cost of $22 million to offset expected dilution for the year. In the near term, we will continue to use our free cash flow to reduce our debt level. However, we remain in the market looking at M&A opportunities that meet our strategic and financial criteria.

Now, for our guidance for the second quarter of 2015, and an update on the full year, which reflects our views as of today, and are made on a non-GAAP basis. For the second quarter of 2015, we expect to report revenue in the range of $211 million to $220 million and adjusted net income in the range of $46 million to $49 million, or $1.18 to $1.26 per diluted share. These figures assume normal seasonality trends in the virtual card business as well as credit losses. Our second-quarter guidance assumes that our fleet credit loss will be between 6 and 11 basis points, and that domestic fuel prices will average $2.77 per gallon.

While we are bullish about the fundamentals of our business, our full-year guidance reflects that we are still learning the WEX Europe services business, and we will also be facing uncertainty around foreign exchange rates and fuel prices throughout 2015. So, for the full-year 2015, we are increasing our guidance to revenue in the range of $867 million to $897 million, and adjusted net income in the range of $192 million to $204 million, or $4.92 to $5.22 per diluted share. Our guidance assumes that exchange rates will remain in the range of the current spot rates for the remainder of the year and also 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 9 and 14 basis points and assumes that domestic fuel prices will be $2.71 per gallon. The fuel price assumption for the US is based on the applicable Nymex futures price. Additionally, we expect our adjusted net income tax rate to be between 36% and 37% for 2015, and total capital expenditures to be approximately $65 million to $70 million. The guidance assumes approximately 39 million shares outstanding for the year. Operator, please open the lines for questions.

(Operator Instructions)

Sanjay Sakhrani, KBW.

I guess I had a question on some of the new businesses you have. Is there a little bit more pronounced seasonality from quarter-to-quarter as we look out the year? Because when I look at your second-quarter number for guidance, it was a little bit lower than what we were expecting and I think Street was?

So, Sanjay, I would say there is a little bit of seasonality in Evolution1 as we've been discussing since we bought the Company. Essentially, you get new enrollees every year in January, which will carry through the year, but you also get an increase in the purchase volumes in the first part of the year because people are meeting their full-year deductibles in the first part of the year. So, you get a bit of an increase to spend volume there.

If you step back and look at our full-year guidance, we've got basically 45% or so in the first half of the year and about 55% of the earnings in the second half of the year which is not a tremendously unusual pattern for us. We have embedded in our guidance -- we have fuel prices going up in the second half of the year compared to the first half of the year. We always have a seasonal increase in the volumes from our travel business. And, that's on the order of $1 billion in the second half of the year compared to the first half of the year. And, another factor that we have in this year's guidance, which is slightly new, is we are planning on increasing fees to customers in line with the market again, and as Melissa, said taking into account the reactions that we are seeing and the feedback that we are getting. But, we are planning on raising fee income slightly in the second half of the year as well.

Okay. Got it. Steve, you mentioned some pressure on the payment processing rate from competition even though you expected it to rise with lower fuel prices. Could you talk about how that affects that line throughout the rest of the year?

It's a combination of mix impact and just normal pricing pressure, I'd call it. In the quarter, there's no like big renewal or big repricing of any of our customers or anything like that. We are seeing the full-year impacts in some of the business that we signed last year. The USDA would be one. As an example.

But, it's really some mix impacts in there as well from some of the private label deals we signed as well as the business in Europe impacting it. So, again, I'd call this very normal impacts that we are seeing. I just wanted to be clear that we still have those transaction fees in our discount rate. I know the question came up last quarter as to why the rate isn't moving, and it's really those mix impacts and just some of the normal pricing pressure.

All right. Great. Thank you.

Smitti Srethapramote, Morgan Stanley.

Just wanted to go into the OTA channel in a little bit more detail. This looks like another quarter of strong growth. Can you give some color about where you're seeing the most contribution today? And, where you see the longest runway? In the segment?

Sure. We're actually seeing wins across the globe, which is part of what we are pleased about, so we continue to spend increases with existing customers. We've also seen a new business roll in, and so we're getting the benefit of that. Both in the United States and also outside the United States. When we think about the long-term trajectory, a piece of that is continuing to globalize that part of the business, but it's also for us moving in some of the tangent markets -- some of the tour companies, travel management agencies. So, really extend the product capabilities beyond what we are doing now, and we've got good evidence of that with the offerings we have in Europe -- with the prepaid offerings specifically. We've set up an office in Singapore that this year, and we did that in part because of what we are seeing for growth trends in the travel market. So, it's pretty early on in that marketplace, but when I think about longer term growth it's really extending into some of these adjacent markets as well as moving the product even more outside the United States in some of these new regions.

Great. Thank you. Just another follow-up. In the other payment solutions, we had thought that Evolution1 is a first-half weighted business. We actually saw some to sequential decline in account servicing and other revenue and your other payment solutions business. I guess maybe seasonality only applies to purchase volumes. But, can you comment on how the business tracked versus your expectations?

The business tracked favorably compared to what we had anticipated. We talked last year the fact that we acquired two businesses, Evolution1 and the Esso business in Europe. We also divested two businesses which were much smaller. So, you're seeing the impact of one of those businesses rolling through account servicing fees.

Got it. Thank you.

Mike [Piano], [Berkeley] Partners.

I was wondering if you could help us break down the growth in the fleet card business, the 12% transaction volume. Obviously, Esso helped on that front, but I was kind of curious if the underlying organic growth even if you'd ex out some of the new business if you're seeing a pickup in volume from things like lower gas prices where people might be shipping things via trucks as opposed to rails? If you're seeing any of that in the first quarter?

So, what we typically will see is customer behavior is pretty consistent unless you see trends that affect the overall economy. So, fuel prices get to the point either positively or negatively that you see an overall impact to GDP. So, really one of the advantages I think of the business that we are in is there is a high degree of predictability particularly in the US fleet business. So, we saw, I would say, normal growth rates for us in the first quarter on the organic side of the business. And then, the addition of the Esso portfolios where you're seeing that elevate to that 12% growth rate.

Great. Just curious on the OTA virtual card business. Obviously, the announcement last quarter about Expedia and Orbitz merging Just curious, obviously, I would expect that at some point they would try to extract some pricing concessions, but was curious on how that works and timing? Would a merger trigger a renegotiation? Or, does that would that likely wait until after the contracts expire?

We are in this great position where they're both customers of ours. So, I'd start with that. We have strong relationships with both of the companies. I think as Expedia has been on this acquisition growth spurt, they certainly have more weight within the marketplace, and that will factor into some of the future negotiations. We typically have three- to five-year contracts in that marketplace. And so, they are longer term in nature, and that's something that we would be dealing with in a normal renewal process.

Great. Thank you.

Jim Snyder, Goldman Sachs.

Hi. This is S.K. Prasad for Jim. Couple of questions if I may. Firstly, on the deal pipeline you have in Europe, if you could provide an update on that? And, second, on the healthcare evolution 1 business. Are you already seeing an impact from Cadillac tax impact? Or, are you expecting to see that later in the year or probably more in 2016?

Okay. So, I'll start in order. In terms of the pipeline in Europe, we believe that the reason why we win business is because we partner well. We are really good at dealing with some of these larger complicated transactions, and we think that we've got great proof point with what we did with the Esso transaction. Hitting the ground running as soon as the deal closed was a pretty big deal for us. And so, those are things that are playing well into the overall marketplace.

We have developed a pipeline. I think there's a lot of interest within the European market. I keep categorizing that as longer term in nature just because those sales cycles tend to be longer and the decision process to go through a series of committees. But, there definitely is interest within that marketplace of outsourcing their offerings, and I give a tribute to the team who actually went through change of control and who is running the business over there now because I think that -- they set up the foundation well for that.

Regarding Evolution1 and the Cadillac tax, at this point, there really isn't an impact to Evolution1 related to that. To the extent that there is a tax to the employer on the employee contributions, that's something we're certainly keeping track of. And so, that's something that's on our radar screen. But, at this point in time, there isn't a short-term impact anticipated.

Just on the European deals, are you not seeing an impact because of the oil price collapse in terms of just some of your partners be more interested to deal with you?

I think the oil price impact causes disruption in the marketplace. And, I think about it both positive and negative. There's a lot of effort going on within many of the oil companies focused highly on cost. And so, to the extent that it's something that we do very well is making sure that we are helping our partners reduce their overall cost structure so I think in that way that lines up very positively. I think the other side of that is there's a lot of focus around that cost structure in the short-term, and this tends to be more of a longer term transition and so I'd put that in. There is some positives and negatives, but there is certainly a lot of disruption happening within that market.

Very helpful. Thank you.

Phil Stiller, Citi.

I guess I wanted to ask about the guidance in a little bit more detail. You obviously came in pretty well above in the first quarter, and it looks like you've raised the fuel price assumption for 2015. So, I'm just trying to understand where the offset is because the EPS guidance raise of $0.02 was well below what those factors would suggest?

Sure, Phil. The first thing I'd do is just reiterate some of the comments I made when I was giving the full year guidance. We are looking at a little bit of uncertainty around foreign exchange rates and fuel prices although we give a pretty specific number on the fuel prices, and we are still learning the WEX Europe Services business and how that's going to react. In terms of the fuel prices, you're right. We did raise the domestic price by -- I think it was $0.09 per gallon compared to our last guidance.

The reality though is actually we saw a decline in the Australian fuel price that was pretty significant as well. Their prices came down a little bit slower than they did here as well as the exchange rate changes that they had. So, we really aren't getting much of a benefit, if any at all frankly, in our full-year guidance from that increase in fuel prices.

The second thing I'd point out is the changes in foreign exchange rates did have an impact on our operational -- I'll call it -- earnings. So, we talked a lot last quarter about how we have all these big translation gains and losses on our balance sheet and not a lot of impact on our operations. And, I would still say it's not a lot of impact, but there is some there. And then, the third thing I'd point out would be, I made a comment around the tax rate, so it was in the quarter very favorable basically due to a one-time item coming through.

But, for the year, it's actually going to be a bit higher than we had originally planned, and that's because in Q1, we had -- although we didn't really have much of a foreign exchange net impact in the second two months in February and March, we did have relatively large hedging gains in the US and losses at least partially in other lower tax jurisdictions. So, that mix impact is going to raise our tax rate for the full year. That impact is a spread over the full year.

Again, we have changed our hedging operations or the strategy here, so that we should not see that impact continue going forward through the rest of the year. But, that didn't really start until the beginning of April. So, we did see an impact in the first quarter.

Okay. That's helpful. On Esso, there were some comments about the business performing better than expected at least on the revenue side so I'm just -- maybe you could provide an update to the $35 million or so of revenue that you talked about earlier? And, where the -- I guess, uncertainty -- more uncertainty in guidance seems to be coming from on the expense side?

Yes. Let me say a few things about that. First of all, when we started the year we said that revenue is coming in higher than we had originally anticipated and -- as are expenses. So, we held on the impact to earnings, but there was at a higher revenue trajectory than we had originally anticipated so it's coming in higher than the $35 million. And then, I would say on top of that, volume came in higher than what we had anticipated. Kudos again to the team that's going through this conversion process. I think that because that went as flawlessly as it did, that actually has translated to positive trends in terms of the overall volume.

And, we've been going through this process as we've talked about, of really working through the portfolio. When we first started this, we said we had to go through three steps. We said, first of all, we had to go through regulatory approval then change control which we did both of those things. The third thing is re-platforming, which we're working on, and then the fourth thing is really working on the overall economics of the portfolio in a way that's going to be continuing a growth profile within the European marketplace.

And so, there's been a lot of work on that front. That's also positively impacting what we're seeing from a revenue perspective, but we think of that as very early days. We've had this portfolio now for five months. We've been very actively involved in that marketplace with WEX Europe Services. And so, we wanted to reflect the fact that we are only five months in. We're still learning this market. We are seeing some very positive trends, but it's early.

Okay. And then, last one, and I'll turn it over. Melissa, you made comments about a margin improvement plan across the business as you go into next year. Obviously, you will have some benefits as it sounds like Esso is still on track to hit profitability next year. But, maybe you could give some more detail in terms of some other initiatives ongoing in the business that should help margins going forward? Thank you.

Sure. So, first of all, we are looking at pricing. We're looking at pricing both in the United States, and we're looking at pricing in Europe. We're doing that in part because we found that our products are -- play well in the markets that we are in. We feel very good about our competitive position, but we really hadn't made adjustments in terms of the overall pricing in a number of years. And so, when we stepped back and really started to reflect on the overall value proposition, we started making changes to the overall pricing mix. That's a piece of when I think about scale is making sure that we're putting our products in the marketplace at the right price. And also, making sure that at the end of the day, there's a strong value proposition to our customer.

But, that is first. The second piece is we've talked about going through and changing the overall profile of the business we picked up in Europe. Clear that that's something we need to do in order to make sure that we are moving from the period of investment into a business that we can then build upon. And so, that has been a pretty significant effort within our business.

And then, the third part of that is as we've globalized, we've moved now from having employees in 5 countries which we had in the beginning of the last year to 10 now, is making sure that we are doing that in a way that is sharing best practices and sharing infrastructure in places that makes sense. And so, that's also a piece of the effort that's ongoing. So, there's a number of things that are going on in the background. Some of which are coming through already in terms of earnings, in terms of some of the pricing changes, and some of those will happen over a period of years.

Okay. Very helpful. Thank you.

David Togut, Evercore ISI.

Could you update us on your progress in expanding your fuel card capability in Europe beyond servicing the Esso card? At the time of your analyst meeting, you talked about broader ambitions in Europe. I believe that included building your own proprietary fuel card network?

When we've thought about approaching the European marketplace, we are clearly interested in having a proprietary fuel card product within the European market. We've started through private label relationships, and that's something for us that we do believe that we have a competency there. We can build up scale. And, at some point in time, we do believe that the marketplace will be more open to providing level three data that can create that proprietary card. And so, I think that is longer-term in terms of acceptance within the private label or oil companies within broader Europe. So, again, I put that in one of the things that I would say is part of what we would like to do strategically, but we feel good about moving into Europe even through the private label relationships.

I see. And then, just to follow up on the investment side. You mentioned you're looking to leverage what you're doing in Europe from an earnings perspective. Should we expect 2016 to be another year of investment in Europe? Or, should we start to see some positive earnings leverage from the investments in 2014 and 2015?

When we announced the transaction we said that we anticipated dilutions both in 2014 and for 2015, so for two years. And then, moving the portfolio into something that is not dilutive. And so, I'd say we're still on that track, and that's something that's our plan is to alter the overall profile of the business in a way that's going to be not dilutive in 2016.

Thank you very much.

Ashish Sabadra, Deutsche Bank.

In the other payment volume, I was wondering can you split out what was the growth rate in the core WEX travel business? The payment volume growth in the WEX travel business?

Ashi, as you saw, I'm sure, 37% growth overall in the program. We did get again a seasonally higher contribution from Evolution1 in there. So, we said last quarter that it was about the same number last quarter, and it was kind of low 20%. When you backed out the Evolution1 contribution, it's a little bit lower this quarter. Obviously, Evolution1, as I said, is seasonally higher so you're talking something into the teens for the travel portfolio specifically.

Sounds good. Thanks. And, just quickly on the interchange fees, those increased six basis points year-on-year. And, Evolution1 definitely has a higher interchange rate. How should we think about the cadence going forward through the quarters? I was just wondering if you could qualitatively talk about it -- about the cadence?

Well, going forward through the quarters, the only real impacts you're going to get are around mix. So, I would assume that the mix on the Evolution1 is relatively consistent. The consumers are going to be going to the same drugstores and doctors that they go to today. On the travel side of the business, you're going to get a bigger contribution from those OTAs versus the non-travel pieces that we have in there. Which, again, travel is a dominant piece of this, but those travel companies have bigger rebates. So, you're going to get some mix impacts in that interchange rate through basically the summer months, and then it will normalize again in the fourth quarter. Thanks for the color. And, just quickly on Evolution1, Evolution1 onboarded CBIZ in the fourth quarter in November which is one of the top 20 brokers. As you look at your pipeline for new partnership, can you just comment on the partnership pipeline in Evolution1?

They have a very strong partner pipeline right now. I think they feel very good about the momentum in the business. And, from sitting and talking to their partners, they are tremendous advocates for Evolution1. The products that we offer, and so I would say really strong pipeline going forward to the business.

Great. Thank you.

Glenn Greene, Oppenheimer.

First question, I wanted to get back to the competitive landscape, and it sounded like at the beginning, Melissa, you were alluding to market share gains. But, maybe you could comment competitively, since FleetCor bought Comdata, is that where you're suggesting you might be seeing some market share gains? Or, am I reading too much into that?

What I would say is that since we've bought Fleet One, we've been working on an integrated product offering, and we've seen pretty significant traction. I would say we're seeing more and more as we get that product out into the marketplace. And so, that's really I would say, the part right now for us that's a little bit different than what we've seen historically. We've always done well competing historically for new business. We pride ourselves in making sure that we're very metric-driven and thoughtful about the way we approach sales as well as what we're doing in the rest of our business. And so, we've continued to win business with larger fleets. Those are almost always competitive wins. So, as you're seeing us grow our card base, largely that's through competitive wins. The smaller fleet business we're still taking some of that market share from either general purpose cards or from cash. So, I would say just overall, I always think of disruption as generally a positive point. And, for us, we are continuing to make headway in that OTR marketplace.

Okay. And then, different direction. Steve, on the hedging of the fuel prices, I know you're not hedged beyond this year. Fuel prices have obviously gone up a lot since you gave your initial guidance starting this year, and the futures would suggest even greater gains into 2016 and you have pretty massive sensitivity on 2016. At what point do you change and go back to thinking maybe it makes sense to hedge?

So, I guess the first thing I'd say is yes, we are up $0.08 or $0.09 on the year for this year. We looked -- not this morning or anything -- but very recently at starting a position for next year or extending our position from where we are. The price is actually a little bit lower than where we are today. So, the futures market isn't necessarily predicting an increase in fuel prices, and that's actually a relatively normal curve to those prices. They tail off as you go further out into the future. I think for us, we are evaluating this at almost monthly intervals internally to say, do we want to start up the program again or not? And, is the price right?

I don't think there's any one magic dollar level of fuel prices where we say, that's the one. And, we start with the program again. I think it's going to come down to what's what are the absolute prices? Where do we think that risk-reward trade-off is? What's the trend of the prices? Maybe if they stabilize for some period of time at a price level we like, that would be even better. So, it's a look-and-feel kind of thing as much as anything at this point.

Okay. Last one, Melissa, on the European pipeline commentary, I just want to get clear. Have you seen a notable change since you closed the Esso transaction? Has that been a catalyst for increased discussions with potential European oils who may want to look to outsource? Or, is this more longer-term thinking in pipeline commentary?

No. I would say that when we announced the transaction that definitely got a lot of attention. One of the things we had heard for years was a concern about our lack of expertise within Europe which is part of why we worked with a local partner to bid on the Esso portfolio. But, I think that part of what we are proving by being in the marketplace, by actually going through a transaction that was that complex in working still in great partnership with someone like an Esso, it's just showing competency within that marketplace. Which as we are in these bidding processes, takes proof points that we have in the United States and transfers them to proof points in Europe which matters to the people that we're talking to.

So, I would say it's more that we have a lot more to say about what we can do in Europe. We actually have physical presence now across Europe, which matters also to the people that we are talking to. So, I just feel more confident in our position than I would have said we were prior to the Esso transactions. But, I would say that the level of interest went up around announcement, not so much around implementation.

Okay. Great. Thank you.

Tien-tsin Huang, JPMorgan.

You covered a lot. Just wanted to ask a couple things -- just on, and sorry if I missed this. On the credit losses side, I know that was way better than initial guidance for sure in the quarter. So, what drove the surprise, was there any one-timers?

No, Tien-tsin, there was nothing one-time in the credit loss at all. I would say lower fuel prices, certainly helping the dollar amounts, but even in the business points we were just under seven for the quarter. It was basically an improvement in our aging which drove a lot of that. Charge-offs were very normal and slightly better than we believe, but it was really the aging just got a lot better than we had expected it would.

Understood. Then, on the pricing front, with the change in fee income. Did you quantify the expectation from pricing and the timing of future benefits for FY15?

We didn't quantify any specific timing. There was -- we have been talking about this for some time now. And, some benefit in the first quarter. But, based on the reaction so far and the feedback, we are planning on more. It's probably in the June-July timeframe before anything really gets implemented.

Right. That's baked in guidance, I would assume. And, lastly, on the macro side, I caught the organic same store growth was positive in Australia. Any other call-outs or changes as the quarter progressed, or as we walked into April? That's all I had. Thank you.

On the macro side if you look at same store sales, it was generally flat across the United States. And so, there really wasn't a lot to call out in that. There was a little bit more weakness in the Midwest. A little bit more weakness in the Southwest. But, talking about a 1% difference.

And, those are probably mostly driven by the oil -- the mining sector for us -- but the oil frackers.

Makes sense. Thank you.

Bob Napoli, William Blair.

Just on Esso and Europe. As you're looking at that business and investment year at $11 million to $14 million as you explained back in December. As you look at that business and the changes you've made, what is your confidence level on being able to get that business to profitability levels that we see in the US? Do you need to get that business a lot bigger? Is that more like a 2017? Do you need additional partners, scale to really get it there? Maybe some thoughts around profitability of that market?

Let me start that, and Steve can expand on it. I would say when we've looked at the business, there are a bunch of different levers, if you will. Say, the biggest lever has been around revenue growth. And so, that's the area that we spend a lot of time and focus on. That's where we hit the ground running at the end of last year when we took over the portfolio. And so, we are encouraged by what we've seen so far. We talk about confidence building. That's been confidence building so far, but we were only five months into this. So, it's part of why we're being cautious in terms of our outlook for the year. But, I would say so far, so good. I would say just picking up on that on the expense side of things, getting things on to our platform will certainly help things quite a bit. Just a lower internal cost than an external cost. We've been talking about, as Melissa said earlier, bringing best practices and making the operations more efficient. We've been talking about that since before we bought the portfolio, frankly, as part of the plan here.

The pricing changes take a little bit less time than changing the operations behind the scenes. So, those things will roll out over time, and obviously, we gave you some general timelines on the platform conversions through next year. The expense side of things will take a little bit longer than the revenue side of things, but I think we are on a pretty good track right now.

Can you break out how many vehicles are you managing there? And, what was the volume that went over the Esso, just so we do have a baseline for where we're at? And, what was the revenue?

Yes. I'd say the total number of vehicles was over 1 million, 1.2 million vehicles for the whole portfolio across Europe. They were a pretty big contribution to the number of transaction that we talked about. If you were to pull the Esso portfolio out of our first-quarter results, you'd see a mid-single-digit growth number in the rest of the business. So, they were a significant part of that. I would say the revenue characteristics are not tremendously different. How you earn the revenue is different, but the overall contribution from the vehicles and from the transactions is pretty well in line with what we see in the US and Australia.

Okay. And then, just on Evolution1. You've talked about I think, Melissa, looking at opportunities to build out that business further, strategically, I guess? What areas make -- are of interest to you, to WEX, to build out Evolution1 further?

Right now, we are thinking about Evolution1 as the cornerstone of what we're doing in the healthcare market so we've seen really great trends overall from a macro perspective in consumer-directed healthcare payments. And so, that's our starting point. We are also continuing to see benefit of adoption of virtual cards within the broader healthcare market which is more on the provider side. So, we're seeing a little bit, I would say, put that in smaller category, but some increase there. And then, consumer-directed healthcare payments being the bigger play for us. Just overall evaluating the market, we are still learning in this market some of the adjacencies and some of the unmet needs within that marketplace. So, we are still in that evaluation stage.

Is there much from an M&A perspective in that market that would be like tack-ons or add-ons? Or, that is out there that is interesting?

There is considerable M&A opportunity, I would say, across the board.

Okay. Just last question, the local issuing that you announced you expanded in Europe and Australia. First of all, how quickly does that play through? Does that add volume? You have some big players out of the US that if you travel to that market, does that immediately open up more volume for you? Into those markets? And then, how many more markets are there to -- material markets are there to open up? I don't think you ever really got there yet on Brazil. Or, are you issuing locally out of Brazil?

So, in Brazil actually, our issue wasn't issuing, it was the technology side was getting that in place. And, that has been, I would say, the trailing issue for us in Brazil. Each of these countries that we go into when we decide we're going to be issuing, we have to get issuing capability. We have to get MasterCard or Visa clearance. Clearance from the local regulatory authority and then we have to get the technology in sync with whatever the local needs are. So, that was a trailing piece with Brazil.

In terms of other countries, we've gone through our evaluation. We are continuing to add currency capability, which I would say expands the product, not just for the people that are local, but it also enables the global customers to have a better product experience within each of the local regions. So, part of why we're doing that is to make sure that we are satisfying the global customer's needs.

In terms of next markets, part of why we set up the office in Singapore was the size of the travel market. Particularly the size of the growth rate of the travel market within Asia. And so, that's the next place, I would say, that we're putting significant emphasis on. We have been in a process of beginning regulatory approval within Southeast Asia which has been a slow process to be honest. But, we're continuing to get approval slowly within that region. And, we're going to keep going down that path.

China has just opened up the opportunity to actually go in and seek regulatory approval in June. And so, that's new. It's something that we're certainly going to explore as well, really big market.

Great. Thank you.

Ladies and gentlemen, this does conclude the Q&A session portion of the call today. I would now like to turn the call back over to Mr. Thomas for any closing remarks.

Thank you. That does conclude our call. Thanks for joining us. Goodbye now.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.