WEX Inc (WEX) 2015 Q3 法說會逐字稿

Good morning my name is Deshawnta and I will be your conference operator for today. At this time, I would like to welcome everyone to the WEX third-quarter 2015 earnings conference call.

I would now like to turn the call over to Mickey Thomas, Vice President of Investor Relations and Treasurer.

Thank you, Operator. Good morning.

With me today is Melissa Smith, our President and CEO and our CFO, Steve Elder. The press release we issued earlier this morning has been posted to the Investor Relations section of our website at www.wexinc.com. A copy of the release has also been included in an 8-K which we submitted to the SEC.

As a reminder, we will be discussing a non-GAAP metric, specifically, adjusted net income, during the call. Adjusted net income for this year's third quarter excludes an unrealized loss on fuel price derivatives, net foreign currency remeasurement gains, amortization of acquired intangible assets, expenses related to stock-based compensation, restructuring charges, certain acquisition-related expenses, non-cash adjustments related to our tax receivable agreement, a discreet charge attributable to our regulatory reserve, adjustments attributable to non-controlling interest, including a change to the redemption value and the tax impact of these items.

For consistency, we have revised adjusted net income for the third quarter 2014 to exclude the impact of remeasurement nonoperating FX losses to conform to the approach that was adopted earlier this year. Our full-year guidance excludes the impact of these foreign exchange gains and losses consistent with the guidance previously announced. 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 Litigation Securities 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 obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today.

With that, I will turn the call over to Melissa Smith.

Good morning and thank you for joining us today. Before we jump into the third-quarter results, I would like to take a quick moment to talk about the two recent acquisition announcements.

Our intention is to build upon the success that we've seen to date in our geographic entry into Europe with the Esso portfolio purchase and our expansion into the healthcare payments space with the purchase of Evolution1. Both of these acquisitions open up new markets for WEX, which we anticipate will contribute to the long-term growth profile of the Company. By adding in Benaissance, we extended our capabilities further for our healthcare payment business, bolting on billing capabilities into a market that has an increasing level of complexity.

The largest of the acquisitions, EFS, will round out our product set in the North American fleet market by extended our reach into the mid and large OTR markets and significantly enhance the scale of the enterprise. These acquisitions, combined with our underlying growth engine that is consistently growing our revenue approximately 10% on an organic basis, excluding the effects of FX and fuel prices, lay the foundation for meeting our long-term financial targets.

The fundamentals of our business remains strong and we operated well during the quarter. However, our financial results were challenged by a choppy economic environment and historically low fuel price is and therefore results were mixed.

During the third quarter 2015, we generated $226 million of revenue, in line with our guidance range. This represents a 2% increase over the prior-year period. If fuel prices had remained at third-quarter 2014 levels, revenue would've been approximately $215 million -- $251 million for the quarter, which would've represented a 13% increase over the prior period. However, adjusted net income came in below our guidance range of $1.29 per share.

While I'm disappointed that A&I did not meet our expectations, the GAAP is driven by three discrete items that are not related to the operational performance of the business. These items include $0.06 related to discrete tax items, $0.05 related to unfavorable fuel pricing, and $0.05 attributable to M&A activity. Excluding the impact of these items, adjusted net income would have been within our guidance range.

Our solid operating performance this quarter reflects ongoing execution against our strategic priorities and continued focus on growing, accelerating and scaling the business, both organically and through targeted investments. Our recently announced acquisitions of Benaissance and EFS aligned to the priorities of our targeted acquisition strategy, creating scale, improving functionality and enhancing our geographic footprint. Importantly, both acquisitions helped to a diversify our business and reduce our exposure to fuel price sensitivity.

Let me briefly provide more color on these important announcements. On October 15, we announced a definitive agreement to acquire Benaissance, a leading provider of integrated SaaS technologies and services for advanced billing and corporate management within the healthcare markets. The transaction will enable us to provide an expanded and differentiated payment solution, continuing the success we've had with Evolution1, an elevator position in an attractive, high-growth healthcare vertical.

We believe this will enhance our addressable market opportunity and increased partner loyalty while strengthening our overall value propositioning and offering to partners. This transaction will also further our reach into the exchange marketplace.

On October 19, we announced a definitive agreement to acquire EFS, a leader in corporate payment solutions for the over-the-road fleets and corporate customers in the US and Canada. EFS's offering complements our existing OTR business by providing entry into the mid- and large-fleet segment while accelerating our efforts to better serve mixed fleets. The combined Company will drive significant scale for our business by offering a best-in-class portfolio of products and service capabilities of serving the full spectrum of fleet customers with a more efficient, comprehensive and better integrated product offering.

EFS has been winning successfully in their marketplaces and has an adjusted 2015 run rate EBITDA of approximately $90 million. As we mentioned earlier, we anticipate approximately $25 million of synergies realized within these three years. The product offering and growth profile of the business underscore why we feel that this combination is so attractive. Ultimately, these acquisitions represent an exciting opportunity for WEX that will build on the successes we've had with Evolution1 and WEX Europe Services, both of with which continue to perform above expectations.

I would now like to provide more detail on our results for the quarter. In fleet payment solutions, we saw payment processing transactions increase by 11% relative to the prior-year period. In domestic fleet, organic growth was impacted by a decline in same-store sales of approximately 2.7%, which was in line with last quarter.

The two biggest contributors to this decline were in the oil and gas industry and our large fleets. That said, the same-store sales trend masked the very good momentum that we are seeing in the underlying business as we continue to have success in the marketplace and grow our portfolio.

Payment processing gallons grew 3.4% in the US year-over-year, reflecting strong growth and new customer wins in spite of the drop in same-store sales. We maintain low attrition rates and have achieved a number of encouraging customer wins this quarter. These include five agreement signed for our new FlexCard product with Citgo, Kum and Go, MAPCO, Sheetz and CSI.

Our international fleet business again demonstrated strong performance, driven by WEX Europe Services, which continues to exceed our expectations. In particular, I'm pleased with our ability to stabilize and grow the business, which has resulted in higher volumes across the network.

We are leveraging the presence that we have established across Europe to scale our business processes and optimize our assets in this important region. Our team continues to work diligently on building out the WEX platform in Europe, which is progressing well. We launched in pilot mode by successfully testing production transactions and we'll load a small customer set by year-end. The country-by-country conversions are planned for 2016.

We also experience strong performance in our fleet business in Brazil and Australia. In Brazil, we reported a 20% increase in payment processing transactions over the prior-year period.

In spite of the challenging economy, we continued to perform well and are excited to have acquired the remaining 49% stake in UNIK, which enable us to further leverage the deep expertise in fleet over-the-road business solution and employee benefit products.

Australia also posted strong results, including a 9% increase in payment processing transactions over the prior-year period. It was a good quarter for new fleet wins, including our signing with, ORIX, a large Australian fleet leasing company. Overall we feel very good about the potential of our fleet business, both domestically and abroad, and are encouraged by the growth we're seeing across our core markets.

Shifting over to our other payments segment, I am pleased by the momentum we are seeing across our travel, healthcare and employee businesses. Overall, this segment generated 18% growth in spend volume globally over last year, increasing spend to $6.5 billion. This was driven primarily from growth in the travel vertical and from Evolution1 and travel volume increased 15% over the prior-year period. We remain focused on expanding relationships with existing partners and on boarding new customers during the quarter.

We're working on further globalizing our virtual card product and pursuing value-added enhancements to our core service offerings to meet the needs of our customers in high-growth markets. For example, this quarter we launched a new debit card solution for airline payments targeted at European online travel agents and tour operators.

We also entered into a strategic partnership with Universal Air Travel Plan, or UATP, an airline-owned payment network, to provide the WEX virtual card solution to the entire UATP network. Delta Airlines will be the launch UATP issuer and will utilize our solution for expanded card acceptance for hotel and car rental purchases. Finally, we entered into a partnership with Grasp technologies to launch GraspPay, a unique product that seamlessly integrates virtual cards the to the travel management company's existing booking flow.

Turning to our business in Asia, we have signed our first five virtual contracts. We're in the early stages of building market entry plans for the region but are encouraged by these new signings as they illustrate the strength of our virtual card offering. And more importantly, our ability to address the unique needs of the global travel market, particularly in Asia, where we see the potential for significant long-term growth.

Evolution1 had another solid quarter and continues to exceed expectations. We signed a new business with Task, PNC Bank, and Medica, extending our strong customer network. Evolution1 remains a fundamental component of our strategy to accelerate organic growth within the attractive consumer driven healthcare vertical, consistently delivering innovations that elevator market position. We remain excited about the opportunities Evolution1 affords us in healthcare and see a long run rate for continued growth, particularly if we close our acquisition of Benaissance and begin integrating the business.

Looking ahead, we remain focused on our strategic priorities for the remainder of 2015, positioning WEX for growth, enhancing our value-added products and service offerings and driving scale across the entire organization. We are excited about the expansion of our global assets and talent base. We will continue to work diligently to ensure that we are maximizing the efficiency and value of our network.

As we continue to position WEX for accelerated growth, we're focusing on identifying pursuing opportunities to drive scale across the organization in order to deliver top-line growth and profitability. We will leverage our repeatable business model, as we believe our success in executing very complex transactions, as well as our proven ability to grow portfolios, set us apart as the corporate payments leader.

Overall, I'm pleased with the headway we have made in the executing against our strategic priorities this quarter. We took significant steps to strengthen our business and enhance our position across our core verticals. We generated solid organic growth in spite of continued pressure from macroeconomic headwinds, including fuel prices and foreign exchange rates. I'm encouraged by the results demonstrated by both Evolution1 and WEX Europe Services and I'm looking forward to the momentum that will come from the acquisitions of Benaissance and EFS.

We exited the quarter having strengthened our business while enhancing our position across our core and emerging verticals. We continue to win competitively in the domestic fleet business and add new clients to the portfolio. We've successfully globalizing our virtual card offering. We foresee accelerated momentum to our recently announced acquisitions and are pleased with the solid performance of the investments we have made.

Our global reach and expanding network of customers and partners in corporate payment expertise continues to position us well for sustainable growth and profitability long term. I will turn the call over to Steve to discuss our financials and guidance. Steve?

Thank you, Melissa. For the third quarter of 2015, we reported total revenue of $226 million, a 2% increase from the prior-year period and in line with our guidance range. Net income attributable to common shareholders on a GAAP basis for the third quarter was $32.2 million, or $0.83 per diluted share, compared with $74.4 million, or $1.91 per diluted share, in the same period last year. Our non-GAAP adjusted net income was $49.9 million, or $1.29 per diluted share, down from $66.2 million, or $1.70 per diluted share, for the same period last year.

As Melissa had mentioned, the adjusted net income per share reported for this quarter was impacted by three discrete items, which caused us to fall outside of our guidance range. This includes $0.06 related to discrete tax-related items, $0.05 attributable to M&A activity, and $0.05 attributable to lower fuel prices. Although we have made an assumption for lower fuel prices in our guidance, the retail price dropped significantly faster in August and September than our guidance contemplated.

Also, as we have continued to prioritize the diversification of our business, our recently announced acquisitions will help lessen our exposure to commodity fuel prices. To put this in perspective, our exposure to fluctuations in fuel prices was approximately 40% prior to our acquisition of Evolution1. We expect this to decreased to approximately 25% to 30% when the acquisition of EFS is completed.

Our adjusted net income this quarter also excludes a $2.3 million reserve for a potential regulatory penalty related to WEX Bank's bin sponsorship of Higher One. The matter pertains to an allegation for the period of May 2012 to December 2013 that Higher One and WEX Bank provided inadequate disclosure around certain fees related to Higher One's One account. WEX Bank has already taken steps to comply with the relevant regulatory standards.

Although the allocation includes the potential for restitution to deposit holders of approximately $31 million, we expect to be indemnified by Higher One. The ultimate cost could be less than this amount if the bank successfully contests the proposed restitution calculation or if the FDIC agrees to modify the amount of restitution. The indemnification obligation extends to any restitution the bank may be ultimately required to pay but does not include the amount of any civil money penalty.

Due to the receipt of the proposed order, the Company has recorded a liability for the proposed amount of financial restitution and a corresponding asset for the contractual indemnification of $31 million, respectively. We will keep you updated on this pending matter.

Moving on to the operations, in the fleet segment, total revenue was $141 million, which is down 3% versus last year, primarily attributable to lower fuel prices and foreign exchange rates and partially offset by WEX Europe Services. Payment processing transactions increased to $89.6 million, 11% higher than the prior-year period. The increase in transactions was a result of the acquisition of WEX Europe Services as well as organic growth.

For the quarter, our fleet payment processing revenue came in at $80 million, or 14% below the prior-year period. The decline in revenue was given by fuel prices that were approximately 20% lower versus last year. Our net payment processing rate increase one basis point when compared to the prior-year period, also due to the lower fuel prices.

During the quarter we implemented changes to our customer late fees in line with our previous discussions. As a result, financing income was up 15% versus last year, despite the lower fuel prices.

Through WEX Europe Services, we remain focused on growing the Esso portfolio in Europe and improving our profitability. As a reminder, revenue in our European fleet business is based on a spread which results in less retail fuel sensitivity in this market. Our sales and marketing teams in Europe continue to make great strides winning new business and at the same time, we are working to make our operations more efficient and we'll spend the remainder of this year testing our new technology platform. We continue to expect WEX Europe Services will at least break even next year on an operating basis.

In the other payments segments, revenue for the third quarter increased 10%, or $7.7 million, year over year to $85.4 million. Spend volume increased 18% over last year to $6.5 billion for the quarter. The net interchange rate during the quarter was 81 basis points, down 3 basis points sequentially and 2 basis points year over year. These decreases are due to the mix of business being seasonally skewed towards our large travel customers and the renewal of the Expedia contract that we announced last quarter.

Moving down the income statement, for the third quarter total operating expenses on a GAAP basis were $158 million, a $39 million increase versus last year, which included a gain on a divestiture of $27 million. Salary and other personnel costs for Q3 were $57 million compared with $55 million in Q3 last year, up primarily due to the acquisitions of Evolution1 and WEX Europe Services.

Service fees were up $2.9 million from the prior year at $36.9 million, due to virtual volumes and M&A expenses. While at the high end of our guidance range, current loss was in line with our expectations for the quarter, totaling $6.6 million on a consolidated basis. This compares to $7.3 million in the third quarter last year.

Total charge offs in the quarter were approximately $5.6 million. Fleet credit loss was 10.6 basis points in Q3, compared to 10.4 basis points in Q3 2014. We saw a slight softening of our portfolio aging in August, which pushed the expense towards the high side of our guidance. Our operating interest expense was $1.5 million in Q3 as we continued to benefit from low interest rates in the US.

The effective tax rate on a GAAP basis for this quarter was 42.4% compared to 25.1% for the third quarter of 2014. Our adjusted net income tax rate this quarter was 40.6% compared to 23% a year ago. Both periods contain discrete tax items driving the effective tax rate to deviate from our typical effective tax rate.

Last year, we completed a strategic tax review, recording about $12 million of tax benefit as a result. This year, we have a number discrete tax items that are increasing the rate in Q3 but are not expected to have a material impact on the rate going forward. Note that we expect our adjusted net income tax rate for Q4 to be approximately 36%.

Turning to our fuel derivatives program, for the third quarter of 2015 we recognized a realized cash gain of $11 million before taxes on these instruments. We also recognized an unrealized loss of $3 million, due to the change in market value of the outstanding fuel derivatives. We concluded the quarter with a net derivative asset of $13 million. For the fourth quarter of 2015, the average price locked in is $3.33 to $3.39 per gallon.

As we had previously discussed, we have suspended purchasing under the fuel derivatives program as we believe the risk/reward trade off is not balanced at this time. Q3 represents at the last quarter we were hedged at the 60% targeted levels and we have partial hedges in place for the fourth quarter of 2015 and first quarter of 2016. We will continue to monitor the market and evaluate our alternatives going forward.

Moving over to the balance sheet, we ended the quarter with $534 million of cash, up from $285 million at the end of last year, due to the seasonality of deposits at our bank. In terms of capital expenditures, total spending for the third quarter was approximately $19 million. As our track record demonstrates, we've detained a very disciplined and focused approach to capital allocation since we went public.

We ended the quarter with a total balance of $1.1 billion on our revolving line of credit, term loan and notes, which is down $192 million from the beginning of the year. At the end of the third quarter 2015, our leverage ratio stood at 2.9 times EBITDA. Upon close of the EFS transaction, our leverage ratio will increase to approximately 4.2 times EBITDA with pro forma debt of approximately $2.2 billion, assuming a close on April 1, 2016. Given the high cash flow generative nature of both WEX and EFS, we expect to deleverage rapidly at 0.5 to 0.73 of a turn per year.

Now for our guidance for the fourth quarter 2015 and full year, which reflects our views as of today and are made on a non-GAAP basis. As we discussed earlier, our guidance exclude the impact of foreign currency remeasurement gains and losses and related hedges. In addition, we are expecting the softness in our same-store sales to continue through the remainder of the year.

For the fourth quarter of 2015, we expect to report revenue in the range of $198 million to $207 million and adjusted net income in the range of $39 million to $42 million, or $1.02 to $1.09 per diluted share. These figures assume normal seasonality trends in the virtual card business as well as credit losses.

Our fourth-quarter guidance assumes that fleet credit loss will be between 10 and 15 basis points and that domestic fuel prices will average $2.39 per gallon. For the full year 2015, we expect to report revenue in the range of $840 million to $849 million and adjusted net income in the range of $184 million to $187 million, or $4.74 to $4.81 per diluted share. These figures assume normal seasonality trends in the virtual card business as well as credit losses.

A full-year guidance also assumes that fleet credit loss will be between 8 and 10 basis points and that domestic fuel prices will average $2.58 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 near 36% for the fourth quarter 2015 and total capital expenditures for the year to be approximately $65 million to $70 million. Our guidance assumes approximately 39 million shares outstanding for the year.

Deshawnta, at this time, please open the lines for questions.

(Operator Instructions)

Ramsey El-Assal, Jefferies.

Hi, guys. I was wondering if you could walk us through the -- there's a lot of moving parts this quarter, obviously. But for the -- your guidance revision for the full year, can you break out the component drivers there? I understand fuel prices have deteriorated, there are some other things going on in the business. What drove the full-year guide down?

Ramsey, when you look at the -- just the top end of our guidance for Q4 versus what we implied last quarter, you get a drop of about $0.15 in EPS. Most of that change -- almost all of that change is just a continuation of a couple of the trends that we saw in Q3. So, macro factors like fuel prices and foreign exchange rates contributed a little bit more than half of that decrease, about $0.08 per share. And we are also planning on about $0.04 per share, which we're classifying as pre-integration work for the EFS acquisition. Then you are left with, call it $1 million or so, of just other movements within the business. So the big factors really are the macro fuel price and FX and then some of the assumptions we are making on integration work related to EFS.

Okay, got it. So the third quarter -- those factors that caused the miss in third quarter flowing through in there is just some incremental continuation of the trends and some deal-related costs, et cetera. Okay, I got it.

Also, I wanted to ask you about your Other Payment segment. The volume growth rates and the revenue growth rates there have decelerated sequentially. I was just wondering if there was any commentary that you can give us in terms of parsing out maybe Evolution1's performance. I know you talked about -- I know you gave us some metrics around the virtual card segment, but was just wondering if you could go a little deeper on the Other Payment segment and talk about some of the dynamics this quarter?

If you parse out Evolution1 -- and remember, there was -- we closed the acquisition in the third quarter last year so it's not a full quarter of activity last year, Evolution1 actually grew spend volume about 48%. And, again, temper that with a little bit of non-comparability due to the timing of the close of the acquisition. And the virtual card business, which again is -- in this quarter, is about 85% travel related and 15% other stuff, that grew about 15%, to $5.8 billion of the $6.5 billion in total.

In terms of the growth rates, I would say the travel stuff is actually pretty well in line with where it was before, and what you are probably seeing is a deceleration in the Evolution1 side because of the comparability, right? We didn't have it at all in the second quarter of last year.

Okay. Great. And just one other quick question. Did you guys ever give us any kind of qualitative or quantitative direction on Benaissance and the potential for -- how that will impact 2016?

We actually said that it would be slightly accretive. Just overall, we think about it as a long-term growth play for us in the marketplace. It's not going to have a significant impact from a financial perspective in the next year.

Just in terms of revenue, you're talking $20 million, $25 million business, right, so it's fairly low.

Okay, great. Thanks a lot. That's all from me.

Phil Stiller, Citi.

Hi, guys, thanks for taking my question. Just to dig deeper on the guidance, it seems like the lower fuel prices take out $8 million or $9 million, so it seems like there's a little bit more that came off the high end of the range. Just wondering if you guys can provide some more color on the top-line guidance change? Thanks.

Yes, for Q4, you're right. If you're talking about full year, that $8 million or $9 million, I think, is what you came up with. That would be pretty well in line. Foreign exchange rates took another $3 million, $4 million and then you're kind of left with, call it, $4 million of other movements within the business, both in the third quarter and the fourth quarter combined. So, again, it's mostly those macro factors that are moving the revenue guidance.

Okay. I guess from your guys' perspective, the transaction activity in Fleet and Other Payments was consistent with your prior expectations. Is that right?

Generally speaking, it's actually, and the results came in, if you look at all the other factors from a revenue perspective within Q3 and what we are projecting forward, there's some give or takes, as Steve said. Some things came in a little higher and some things came in a little lower, but generally it actually came in pretty close to what we expected.

Okay. And then, I mean in terms of the expenses, so you had some M&A-related costs in the third quarter, sounds like some integration work in the fourth quarter. I guess, I mean mostly you talked about setting this business up for margin expansion. How should we think about 2016? I know you're not prepared to give guidance at this point, but should we view some of these costs as one time or will some of these costs flow into 2016, understanding also that we have a fairly significant flip in the Esso business for 2016 as well?

Yes, just again to give you little color and, as you said, it's not guidance, but the costs that we are incurring right now I would put into the categories as one time. The costs we incurred in the quarter were legal costs largely associated with the transactions. And Steve talked about the pre-integration work. If you continue down that band, it's work that we're going to do in advance of the actual integration.

Going into 2016, you kind of lay out the different pieces. One of the things that's obviously top of people's mind are fuel prices and as part of what we are doing from an acquisition perspective is to create more of a buffer around that. But, as we go into 2016, obviously we're unhedged for that period of time, so there will be an impact associated with that, depending on what actually ultimately happens with fuel prices. But then, on the positive side, we will end up with the benefit of the acquisitions rolling into the business. And we've talked about the accretion we expect from that, and primarily EFS would obviously be the leading component of adding in accretions. We also get a little bit of a benefit through purchasing the other half of UNIK and, as I said, Benaissance will be slightly positive.

We will have [WEZ] rolling into a new period as you go into next year, so we have been in this period of time of really making rapid changes to the overall portfolio, both in terms of revenue -- we're very proud of the fact that we are growing that portfolio. I think that's important for our customers in that marketplace. Yet, at the same time, we are looking at the overall cost structure of that business and those changes are going to affect 2016. We view that as a positive year over year.

And then, in the backdrop of that, we just got an organic growth engine that's continuing to deliver very consistently, and so you won't have the fuel price overhang in terms of the revenue comparison year over year, hopefully. Or if you do, it hopefully is positive. That will actually give more transparency around the actual organic growth of the business. And then the last factor is really what's going to happen to FX. It's been a negative headwind for us this year, and we will see our view of that as you get closer to the end of the year.

Okay, that's helpful. A lot of puts and takes going on. Maybe one last one, then. I think last quarter you guys talked about an organic constant currency revenue growth number for Q2. I didn't hear it for this quarter. Can you guys provide, I guess, the currency impacts to the top line for the quarter and maybe also size some of the divestitures that you made and how that impact the revenue during the third quarter? Thanks.

The number that you talked about last quarter, we quoted 10% in Q2. This quarter was 9% and change, like 9.5% in the third quarter. Compared to last year, the revenue was down about $10 million for FX rates and then fuel prices were well into the $20 millions, almost $30 million of fuel price impacts compared to last year. Adjusting for those things, as well as the two acquisitions, two divestitures, that gets you in the 9.5% range.

Great, thanks.

Darrin Peller, Barclays.

Thanks, guys. The 1.38%, or the almost 1.4% net interchange rate in the payment process was pretty good. Just can you give us some color on what drove that, given it's been ticking down for the past few quarters? And then I just have a follow-up question on the net interchange rate on the Other Payment side.

One of the things we announced last quarter is that we'd extended a relationship with Expedia, which has had an impact on the comparability of that number. You can see that factoring in, which I'd say is the biggest factor.

That's on the Other Payment side. On the fuel side, I would say it's just kind of stabilizing. Fuel prices have gone down a little bit, which helps bring that rate up just a touch as well. And really nothing aside from mix is really changing in there. We're very stable with the rates that we're getting from the merchants. The rebates, I'd say, are only really changing to the extent we win business. So that's a good thing. That's just leveling off, is how I would phrase it.

Okay. All right. So I guess back to the Other Payment side for a moment. There was nothing else from -- other than Expedia, nothing else from mix or any other re-signed contracts?

No, nothing significant at all.

No.

Okay. And then, just one quick follow-up on the Esso side. I know you guys mentioned breakeven on that next year. You've obviously been making a substantial amount of investment in the platform. Any progress with other major oil brands at this point in time?

I would say we feel really good about how we're positioned from a product perspective. Every time that we show the product and the underlying technology, it is incredibly well received. And the market is active. So you've heard me say for a while I think of this as kind of longer-term life for the business. But the investments we're making are actually resonating within the marketplace, and I think that's a very positive sign for us.

Yes. And is it too far-fetched to assume that we'd see other announcements within the next year to year and a half, or is it just that much longer of a sales cycle?

No, I don't think that, that's far-fetched. You're getting -- a year and a half is quite a bit of time still. So -- but I think that, that's certainly possible.

Okay. All right, guys. Thanks very much.

Tien-tsin Huang, JPMorgan.

Great, thanks. You guys gave a lot of good disclosure already. I'm just curious, on the hedges, if you were to strike the hedge today, what would that look like?

I assume you mean next year, Tien-tsin.

Yes, sorry. Looking out, exactly. Thanks.

It would be plus or minus a few pennies. It would be right around $2.50 a gallon.

Got you. So $2.50 is sort of a good assumption. Thanks. And then, just the softness in the same store. I know you talked about that for a couple quarters now, but just curious, just thinking about the correlation of that to credit losses ahead, is it reasonable to think that maybe we could see a little bit of a tick up in credit loss or not necessarily, based on history?

It's interesting. There's not always a direct correlation, as you might think, although it's certainly something we're paying attention to, particularly with the SIC codes. If you look at it across the market, we're tracking about a half a dozen -- I'm sorry, two dozen SIC codes and about half of them are negative and about half of them are positive. So you've got this interesting market right now where you've got industries, like obviously oil and gas, that's getting hit pretty hard, but we are also seeing softness in same-store sales in our larger fleet customers, which are typically more resilient in terms of credit loss. And some of the places where you typically might see more softness, like the construction trades, are actually looking good in terms of same-store sales. So I wouldn't say that we are making a direct correlation between what we are seeing in same-store sales and what we anticipate in credit loss, but we are certainly paying attention to what we're seeing overall in the economy and being thoughtful about that in terms of how we approach our credit procedures.

Okay. Good. One more -- that's helpful. One more on Benaissance. Is a costly to integrate that with Evolution1? Have you sized that for us? Thank you.

No, we don't think of that as costly. The business, from a product perspective, we think, is going to be just a natural extension of what Evolution1 has been doing in the marketplace. They've already been partnering with Benaissance and they've had success in that market. So there will be some ordinary course work that we do, but we don't envision this to be a significant cost.

Okay. Great. Thank you.

Jim Schneider, Goldman Sachs.

Good morning. Thanks for taking my question. Regarding the same-store sales trends I think down 2.7%. I think last quarter they were in the same kind of ballpark. Can you maybe highlight whether that's extended -- or that weakness is extended to any other verticals other than the trucking and energy segments you cited last quarter? And, I guess, do you see any signs that -- or any prospects of that recovering in the near term, or do you think it's going to be a weakness for another couple of quarters to come?

Jim, I would say, we just called out the two areas that really contributed the 2.7% this quarter were the large fleets and the oil and gas industry. If you take those two things out, everybody else was basically flat. So, last quarter, we talked about manufacturing was weak in Q2 and we did see that one get somewhat better, but still down about 4%. I think it was 7% last quarter. And the other one we called out last quarter was transportation, down about 3%. That was actually pretty flat in this quarter. And, as Melissa just mentioned, construction was actually pretty solid, at almost 3% positive. In terms of where it goes in the future, I think we really correlate that to where the economy is headed. And so, if you've got a crystal ball to tell us where the economy is going, we will tell you where the same-store sales are going.

(laughter) Fair enough. And then, just a clarification. Regarding the Esso accretion statements, Steve, that you made about turning positive or accretive in 2016, is that a full-year statement? And, if so, does that kind of imply that you would see still some losses in the first half offset by gains in the back half?

It is a full-year assumption. I don't think we're going to sit here and predict that it will be a certain day next year that we turn the quarter and now we're suddenly positive. I think, with fuel margins that can go up and down, you can get some variability in there. Obviously, credit losses could have some variability as well. So it's clearly our expectation to be at least breakeven next year on an operating basis out there. It could go up and down in the first half of the year, it could go up and down in the second half of the year with some of that variability, but the expectation is still at least breakeven next year.

Thank you.

Meghna Ladha, Susquehanna.

This is Hamza Fodderwala in for Meghna Ladha. Thanks for taking my question. Just to follow up on the same-store sales growth, could you maybe break out what your overall same-store sales growth was this quarter, and then also specifically in some of your main verticals like mining, transportation, and manufacturing?

Same-store sales were actually negative 2.7% in our US fleet market.

Okay.

The big categories -- we talked about our large fleets being down. Mining was also down pretty significantly year over year. I can go through a lot of detail there, but if they look at the bigger categories, transportation was down a little, and construction was one of the bigger ups, up 3%. So you've got just a bunch of gives and takes. About half of them are positive and about half of them are negative. Construction, because there's a decent correlation between that and our business, is probably the biggest positive driver.

Okay. Okay. And then, just a follow-up. Given some of the consolidation -- the Fleet Payment space over the past year -- how should we think about the pricing environment in general? And maybe could you elaborate on some of the pricing initiatives that you are thinking about as you get ready to close the EFS transaction next year?

Sure. Pricing is something that we think about -- and we've spent a lot of time, obviously, thinking about the last couple of years -- how to make sure that we are priced competitively and consistent with the value propositions that we have in the marketplace. We've made a number of tweaks just to bring the two things in alignment in their marketplace, and you've seen some the benefit of that rolling through our business in 2015.

I would say just as a philosophy that's been a philosophy of ours is to make sure that we are thinking about that on a periodic basis and that we are being thoughtful about the correlation of those two things -- the value proposition and the pricing in the marketplace -- and where that stands competitively. And, when we think about competitively, we think about across a wide spectrum of competitors in the marketplace, including third-party cards, including new interest into the marketplace, and so it's a very broad view that we take when we think about that. And I would say that, that's been true across the board and that will be true for us on a go-forward basis, regardless of what's happening with any particular competitor.

Okay. And then, just lastly, do you see any lifts in your transaction growth, generally, in periods of lower fuel prices? And, if not, why is that the case?

I would say that the absolute dollar level of fuel prices doesn't really impact our customer base directly. If you think of yourself as a small businessperson, say you are a plumber or an electrician or something like that, it doesn't matter whether the price of fuel is $2 or $4 a gallon. You're going to go to the job sites and calls that you have to operate you business. If that weakness or strength in the price of fuel translates more broadly into the general economy, then you can have more of a secondary impact and we've seen that before. But, even going back a few years, if you go back to Hurricane Katrina, we had a spike in fuel prices -- a pretty severe one -- but we saw no impact on our customer buying behavior, because the economy was still strong and they still had work to do and job sites to go to.

And it works in reverse as well, right? I don't think that the same-store sales is correlated to fuel prices or just because price is lower, businesses aren't going to drive more. They're going to drive what they need to do to operate their business.

Okay. Thank you. That's it for me.

Tom McCrohan, CLSA.

Hi, everyone. A couple of questions, the first one on Higher One. I just want to make sure that those deposits are benefiting your operating interest expense line today. Is that right?

That's correct, Tom.

Great. And can you remind us the amount of funding that you're getting from Higher One?

Yes, it's really quite variable and seasonal, right? We're talking about students getting financial aid, so actually September quarter is really, from a reporting perspective, our high point of the year. As students go back to school in September, they get a lot of financial aid and they haven't had too much time to spend it yet. To a lesser extent, we get a bump again in the January/February timeframe. On average for the year, we're probably looking at about $400 million worth of deposits when you look at it over the course of the year. But it can range from a low of, say, $250 million to $300 million, to a high of $800 million-ish.

And your total funding requirement, is it kind of -- it kind of tracks along fuel expenditures, I guess, so what percentage of your funding do you think Higher One is?

Right now, our bank deposit base is, I will call it, $1.2 billion or so, so maybe a third of the total deposit base is with Higher One today.

Okay.

I don't have any worries about if these deposits go away, the market is very robust for us to be able to raise deposits pretty rapidly, should we need to.

Right. These are free, though, right, for the most part? (Multiple speakers)

Essentially the relationship is we're the deposit holder, we're the issuer on the cards that the students use to access the funds. Any of the fee income generated in any of the direct expenses with operating that is passed through to Higher One and we hold the deposits for essentially -- effectively, at this point at least, with the low interest-rate environment, no cost to us.

Okay, great. A couple of quick questions on virtual cards, Steve. I thought I heard you say in the prepared remarks -- maybe it was you, Melissa -- that the volume growth in Evolution1 this quarter was 48% and OTA was 15%. Is that right?

48% and 15%. Yes.

Yes.

What was the volume growth of Evolution1 when you acquired them?

We said that it was a high double-digit grower. High-teens grower.

And the acceleration just all execution, new clients?

One of the things Steve said is that we didn't own them for the full period of last year, so you're getting some benefit of comparability year over year.

That's good.

We are seeing them grow at about that same rate as what we had anticipated, so that high-teens growth rate --

Okay.

-- is what we are anticipating for this year.

And then the 15% growth in OTA this quarter, has that -- how has that trended the last few quarters? Has that been steady at 15%, decelerating, accelerating?

It is pretty steady, I would say, overall. You're getting some noise in there from foreign exchange rates because 35% to 40% of the volume is outside of the US. So the 15% is probably up a point or two, sequentially, from first or second quarter, but I would attribute that mostly to foreign exchange rates.

Okay. And, last question, on the volumes. Was there any noise in Q3 of last year in the volumes? If you take away Evolution1, was there any other noise in the quarter? One timers?

On the virtual side?

Yes. Just volume-specific question, so was there any noise in volumes?

No.

No, it would be pretty rare for us to get volume-specific anomalies in that business.

Okay. That's all I had. Thank you.

Mike Grondahl, Piper Jaffray.

Thanks for taking my questions. On the fee increases that you made, were those late fees? Can you just give us an example of the fee went from X to Y? And then, secondly, on the financing that you're going to do for EFS, are you planning on fixed-rate financing or variable? How do you envision that next spring?

I will respond to -- the financing fee was a piece of the changes that we made. We looked across the spectrum of how we were priced and made some modifications, and we've been doing that over the course of the last couple of years. The financing fee was probably the biggest leverage point, though. And as we had looked at that, we were pretty far out of the marketplace and so we made changes in terms of the rate and the minimums. And that's what's coming through in the calculations.

Mike, in terms of the debt, if you will, on the -- for the EFS acquisition, we've got a firm commitment from a group of banks that's a total of $2.1 billion commitment, so the bonds that we currently have outstanding would be in addition to that. So it consists of a $350 million revolving line of credit, floating LIBOR based at plus 275 basis points. And then the majority of it -- the $1.8 billion-almost -- is a term loan B, and that is also floating rates, so it's LIBOR plus 350 basis points. But LIBOR has a 75-basis-point floor built into it, so no lower than 4.75.

I would say also that this is the -- they're subject to flex terms as well that could add up to as much as a couple hundred basis points depending on what the market conditions are when we actually put the debt in place. And I guess the other thing I would say is what we have right now is a firm commitment that's basically all floating-rate debt and we can look at the desirability of fixing some of that as well just through a financial instrument to fix LIBOR.

Got it. And then, Steve, if you could just clarify, a prior question asked you about Higher One and I think you felt comfortable with that financing source, but I think you mentioned if you had to go elsewhere for financing that, that was readily available in the market. Is it readily available at the same prices, or the same cost?

It's tough to beat a -- essentially a non-interest-bearing deposit, so the short answer is, no, right? There would be an impact on the price there. It's small. Our CDs are -- we're probably paying something like 50 basis points today. So, it's not a crippling impact, but like I said, it's tough to beat zero.

Got you. Okay. Thank you.

Glenn Greene, Oppenheimer.

Thanks. Good morning. A couple of clarifications on prior questions. Steve, could you just clarify, what was the constant currency volume growth in the OTA business?

We quoted the total volume at 15%. So you're probably looking at a couple of percentage points of impact from foreign exchange rates coming down.

So very similar to last quarter.

Yes.

And then, we're going back and forth on the E1 volume growth of 48%, but what was the apples to apples if you had it in both periods for the full quarter?

I don't have that information in front of me, Glenn. Sorry.

Okay.

(Multiple speakers) When we look at the full-year forecast of that, we expect it to be growing as we had expected it to. We're thinking about it more in terms of revenue growth in the high teens.

High teens, okay. And then, Melissa, you were helpful giving the puts and takes for 2016, but at this point, could you clarify what the drag for WEX Europe is this year and also the converse, the hedging gains on the fuel that's baked into this year's guidance?

Sure. The hedging gains that are based in this year's guidance is about $40 million in a rough order of magnitude. So you're essentially this year capturing about half of the revenue loss that we had related to fuel prices. And, next year, we talked about moving to a breakeven level. We've been saying that there is roughly about $10 million negative impact to -- with [WEZ], to the business this year. So it's a pretty big swing also.

And then the final one, about the UATP, which you talked about. It was pretty interesting. Could you give a little more color on that? Is that potentially a meaningful volume driver to the OTA business going into 2016?

Yes, we're excited about it. Just contextually, UATP has processes for the airline, something rough order about $12 billion worth of spend. And, typically, what you see for a hotel and car rental roughly equals that amount. So when you think about this as -- it's potentially $12 billion worth of spend. We are in the very early stages and so I always say going into it, it's a big potential market opportunity, but we will learn a lot as we go through this rollout with Delta to see really what the take rate is. But what we are providing today airline as they issue the UATP card is the ability to integrate other purchases into one billing. And so it's an advantage to their customer set and we are able to do it in a way that's (technical difficulty). So we think that this is going to be a good product offering in the marketplace but we will learn more about what the actual revenue opportunity is as we roll out Delta.

All right, great. Thank you very much.

Bob Napoli, William Blair.

This is actually Brian Hogan filling in for Bob. Thanks for taking the questions. Esso, you mentioned breakeven. You covered that in 2016, but I was just curious what is your outlook on revenues? I think you were talking, call it $32 million, $35 million-ish for 2015. What kind of growth do you expect?

We had said that after we purchase the portfolio, there were a number of things that were different than what we had expected and, in aggregate, that has resulted in more revenue. And, if you go through them, the volume of the portfolio was bigger than we expected when we brought it over. We've been able to actually grow the portfolio, and we've grown it very successfully in terms of also placing it well within the local marketplace. And so those have been additive. So when I talk about the business doing better than expected, it's really been on the revenue side.

And then, in terms of earnings, we also said that we took on more cost than we had anticipated and that, that's going to be a process in order to change the ultimate cost structure. So I'd say revenue is higher than that number that we originally quoted. As Steve said, the revenue will fluctuate based on spreads and so, think of the portfolio as a single-digit grower, normally, but you are going to see some volatility in terms of the revenue based on what's happening with spreads in the local environment. And so all those things we're going to have to factor in when we give guidance out next year.

Okay, thanks for that. The increase in the late fees and modernization of your fees, have you received any pushback? Is that the driver of some of the softness in the credit in August? Or do you -- and do you have any more room to raise prices? You kind of talked about it earlier, but where are you at in the increasing fee game?

Yes, actually let make sure I clarify. We track very closely both customer satisfaction and attrition rates and those would be the indicators really of whether or not we are doing something that's making our customers dissatisfied. Both of those have been very strong for us. So we haven't seen a deterioration in our attrition rates nor have we seen really any meaningful impact on overall customer satisfaction. That's something that's clearly important to how we think about our position in the marketplace. What is impacting the overall credit loss is more just softness that we experienced within the aging, as Steve said, at the portfolio, particularly in the month of August. And so that can roll through in what we experienced with a little bit of elevation in our credit losses.

But if you look at our overall credit losses for this year, what we're anticipating is a very low number still. So I wouldn't make any type of correlation between those two things. And in terms of future opportunity, I would say we have more of just a normal course now as we think about where we are situating ourselves in the marketplace and making sure that, that's in line with the value propositions. And it's part of what we're going to be evaluating when we think about 2016.

The vehicles -- it's a very minor question here, but I mean they went from $9.8 million in 2Q to $9.7 million. Usually it goes up, not down. Just curious what's going on.

Yes, that's just related to the transaction we did when we sold Pacific Pride. It is just the tail to that transaction. So I would put it in the category of just cleaning up related to that and it has nothing to do with the underlying growth of the business. And you can see that translating into the fact that we saw actual gallon growth in their business.

Right. And so a bigger picture strategic question, deals with the leverage and M&A pipeline, there's a lot of opportunities out there, especially in healthcare, it seems, rapidly growing space. I guess what is your thoughts on future M&A, especially considering you have this EFS and Benaissance coming on, your leverage going up to 4.2, which is the highest you've -- I guess we have on record, at least. And you've mentioned that your cash flow is very strong and you delever a half a turn to three-quarters of a turn. Is that your focus, is to deleverage initially and then M&A later, or do you need to raise more capital, or would you raise capital at the right price?

Yes, so I would suggest bringing it up a level. We were very thoughtful about the combination of acquisitions that we did and part of what we liked about adding in Benaissance was about growth. As we looked at -- and I would argue the other half of UNIK, even though Brazil is a tough market right now. We've actually had good success in Brazil. So we think of both of those in the growth category.

With EFS, we are able to actually do something that we think is good for our customers because we're really rounding out our product set, but it also creates significant scale. And whenever we actually set back and model the scenarios of how we could deploy capital, the consistent theme is, with EFS, you actually increase the level of cash flow generation just because of the scale of the business and that actually ultimately feeds your ability to do a lot more. So as we think about other opportunities in the marketplace and further acquisitions, we're actually going to be able to, from a cash flow generation from that business, do things that will also feed into some of the top-line growth initiatives that we are interested in.

So, we think of EFS as actually being additive on a bit of a longer-term basis to our ability to do other acquisitions. And, in terms of the pipeline, we will continue to look and be active in the marketplace, but I would say our primary focus in the short term will be delevering. That being said, it's going to continue to be an active market and we will make sure that we are playing in that.

Okay. Thanks, Melissa. The one last question is, Element Financials acquired a bunch of the leasing fleets. Have you seen any -- have you had any discussions with them, any change in the -- on their behavior?

Element has been a great partner with us. As, I would say, is GE. We have a good relationship with both entities as they go through their integration process. We've enjoyed working with them as we would any of our other partners. I would say no significant change in behavior.

At this time there are no further questions. I will turn the call back over to Mickey for closing remarks.

Thank you for joining us today. That concludes our call. Goodbye, now.

Thank you, ladies and gentlemen. This concludes today's call. You may now disconnect.