WEX Inc (WEX) 2016 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. And welcome to the WEX third-quarter 2016 earnings call.

(Operator Instructions)

Mr. Steve Elder, Senior Vice President of Investor Relations, you may begin your conference.

Thank you, Taniva and good morning everyone. With me today is Melissa Smith, our President and CEO and our CFO, Roberto Simon. The press release we issued early this morning has been posted to the investor relations section of our website at wexinc.com. A copy of the release has also been included in an 8-K we submitted to the SEC.

As a reminder we will be discussing non-GAAP metrics, specifically adjusted net income, during our call. Adjusted net income for this year's third quarter excludes acquisition and divestiture related items, certain debt restructuring costs and debt issuance cost amortization, stock-based compensation, restructuring and other costs, net foreign currency remeasurement gains, non-cash adjustments related to our tax receivable agreements, similar adjustments attributable to our non-controlling interests, and certain tax related items.

The Company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis as we are unable to predict certain elements that are included in reported GAAP earnings. Please see Exhibit 1 for an explanation and reconciliation of adjusted net income to GAAP net income, included in the press release. The adjustments for the amortization of deferred financing costs are new this quarter and we have restated prior periods' adjusted net income to reflect this change.

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, 2016, and our quarterly report on Form 10-K filed with the SEC on April 28, 2016. 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 everyone and thank you for joining us today. We are extremely pleased to announce another strong quarter of performance in 2016, in which all business lines performed favorably. We exceeded our expectations on both the top and bottom line, driven by continued focus on organic growth, execution against our strategic priorities and the performance our latest acquisition, EFS.

I'm encouraged by the strength of our organic growth engine, our initial progress in integrating EFS, in the diversity of our business as we continue to expand globally and into new products and new sources of revenue. During the quarter we generated an impressive 27% growth in revenue to $288 million which includes approximately 7% organic growth despite continued headwinds in fuel prices. Net income on a GAAP basis was $0.46 per diluted share and we generated adjusted net income of $1.25 per share.

This quarter's strong performance demonstrates an ongoing commitment to our strategic pillars, which I would like to touch upon before going into segment performance. As we continue to grow, diversify and scale the business, our focus is driven by our innovative technology offerings and our unrelenting commitment to our partners and clients. This allows us to put control in the hands of our customers through our industry-leading tools.

Our distinctive technology and established track record of customer service also led to great new contract signings around the world. This quarter we signed a new ten-year contract with ExxonMobil covering North America, including additional services in Canada, Caltex in Australia, Progressive Insurance and Cox Communications.

Our EFS business is showing strong momentum with signings and renewals this quarter including FedEx, Hogan, Kenco Logistics, Archer Daniels Midland, Titan Transfer and Best Pass to name a few. Our ability to attract new business and extend existing contracts demonstrates the strength of our sales force capabilities and relationships. This also serves as the growth engine of our core domestic fleet business.

With regards to travel, our leadership position continues to strengthen as we extend our strategic partnerships in Latin America, Germany and Australia this quarter. Importantly this provides a solid foundation from which to continue growing our global presence. Diversification this quarter has helped us to develop new products and identify new sources of revenue.

Our price modernization efforts continue to contribute positively to our fleet results. The EFS integration is off to a great start and as we leverage the power of our proprietary platform with EFS's modular technology and our collective relationships. Our health and employee benefits businesses continue to post impressive results and we believe there's a great pipeline going forward.

Lastly we're focused on capturing efficiencies and scale across the business. As we have become an increasingly global organization we have leveraged the capabilities proven across all our highly scalable product offerings. Our recent acquisition of EFS serves as a great example.

While we are still in the early integration phase, the team has done some great work in taking the best of both organizations to begin integrating back-office functions as well as analyzing our products and fee structures to ensure we focus on the highest value offerings. We remain confident that this acquisition provides significant opportunities to drive scale and create value for our fleet customers and shareholders.

We remain committed to our target of $25 million of synergies, which we expect to be fully realized over the next three years. The favorable impact of this acquisition this quarter reinforces our belief that EFS's functionality and complementary footprint enhances our strategic position within the fleet space. Also we renewed our contract with MasterCard during the quarter, which will provide positive scale benefits to our business going forward. Roberto will provide further detail during his remarks.

Turning to segment details. Our fleet solutions business performed very well this quarter. Revenue in the segment was $184.8 million growing 29% over last year driven by contributions from EFS, in addition to our price modernization efforts that continue to offer incremental benefits to our performance. We implemented the full rollout of the pricing program following our second quarter pilot.

Early results have been very encouraging as attrition remained low at industry-leading levels. While it's still early in the process and we expect some increases going forward, our low attrition rates highlight the strength of our relationships with our customers and the value of our products and solutions. We're also encouraged by developments in our international fleet business.

We completed the successful conversion and migration of ExxonMobil fleet card customers in Hong Kong and Macau on to our international platform. This completes all of the migrations for the Asia-Pacific region for Exxon. We see continued steady performance coming out of Australian but we saw some softness in Brazil in the agricultural sector.

In Europe, we are transforming the business that we acquired from Exxon by aligning the cost structure. This business is still expected to at least break even on an operating income basis this year.

We continue to see strong interest across oil companies in Europe, but the decision to outsource takes some time as we expected. Clearly we have made some progress this quarter in fleet both domestically and internationally. And I am encouraged by our expanded footprint and strengthening product offering.

Our products are resonating with the market, our sales pipeline remains robust and our EFS integration efforts have progressed nicely. Our fleet products are now being used in 25 countries and territories across the world.

Let's turn now to our travel and corporate solution segment, which performed in line with our expectations. Revenue grew 12% during the third quarter due primarily to the addition of EFS. Purchase volume also increased 23% during the third quarter.

Specific to the travel business, as anticipated, we experienced softness in cross-border revenue. We also had a negative impact to revenue due to customer mix.

We see favorable trends within travel that will benefit us and we increase -- as we increase our presence outside of the United States. We continue to focus on further globalizing our virtual card product and pursuing value added enhancements to our existing product portfolio, which positions us well to capture the growth from global travel trends.

We are refining our existing relationships so that they may better serve marquee clients globally. In China we continue to expand our partnerships with key OTAs. In addition, we recently introduced our customized virtual payment solution in Latin America via Argo, the leading provider of corporate travel and expense management in Brazil and Mexico. Latin America remains a promising region for growth in travel payments and we look forward to launching our solution and expanding our market share in this region.

Lastly health and employee benefit solutions continue to gain momentum. As evidenced by the revenue growth of 48% this quarter. We had exceptionally strong organic growth within our Brazilian benefits business along with WEX Health. Even excluding the acquisition of Benaissance, WEX Health continues to grow in excess of 20% this quarter driven largely by momentum from new implementations earlier in the year.

We are excited to announce that we recently signed a contract with PNC, one of the 10 largest diversified financial services institutions in the United States. BeneFit Plus, PNC's consumer directed healthcare solution offers HSAs, FSAs, HRAs, and transit accounts.

Overall I am very pleased with our performance this quarter and the underlying organic growth which sets us up in a solid path going forward. We made significant progress in achieving our strategic objectives for the year. And remain excited about our ability to carry this momentum through Q4 and into next year.

As I mentioned we took a big step forward this quarter with a further rollout of our pricing modernization initiatives. We continue to expect positive contributions from our pricing initiatives through the end of the year and into 2017. With these changes in place, we will now move into a test and learn environment with respect to future potential actions. With regards to EFS, integration is on track and we anticipate meaningful synergies to soon take effect as we delve further into the integration process.

Our milestones for day 1 and day 90 synergies were met and the consolidation of back-office functions as well as product and fee structure analysis are well underway. Overall this marks a very good start to the integration effort. We continue to build upon the significant growth we are seeing outside of our fleet segment.

Our corporate payments business is building beyond travel with the additions of the WEX payables offerings. This is a meaningful opportunity for growth. Additionally we continue to expand our virtual payments technology with further advancements in Latin America and Asia.

Finally we are building upon the organic success we've had with new partner signings in our WEX Health and benefit businesses, which will greater diversification to our business as we penetrate large and expanding markets. In summary, we are proud of the way in which we executed upon our strategic pillars this quarter and feel very good about where we stand entering fourth quarter and FY17.

Now I would like to turn the call over to Roberto Simon, our CFO, for a deeper dive into the financials. Roberto?

Thank you Melissa and good morning everyone. For the third quarter of 2016, our total revenue was $287.8 million, a 27% increase over the prior-year period and above the high end of our guidance range of $272 million to $282 million. Net income on a GAAP basis for the third quarter was $19.7 million or $0.46 per diluted share compared to $32.2 million or $0.83 per diluted share for the third quarter last year.

Non-GAAP adjusted net income was $53.4 million or $1.25 per diluted share. Down from $1.30 per diluted share for the same period last year. This decline includes a $6.4 million impact from lower fuel prices in the third quarter of 2016.

In addition, 2015 results benefit by $6.6 million gain from our fuel price hedges. In EPS terms this is a swing of $0.30. We are extremely pleased with our results of this quarter as we continue to execute on our growth strategy across our three segments and are starting to capture operational efficiencies.

The fleet solution segment achieved $184.8 million in revenue, an increase of 29.3% or $42 million compared to the prior year. The largest contributor to the growth was the acquisition of EFS, which contributed $35 million of the revenue in the fleet segment in the quarter. Our implementation of price modernization initiatives continued to contribute significantly to the growth of the segment. While the declining fuel prices reduced revenue in the quarter by $10.7 million.

During the third quarter, payment processing transactions increased to $102.9 million, or 14.9% as compared to prior year. Excluding EFS, payment processing transactions grew 8.2%, which includes the impact of a customer conversion at the beginning of the year.

Non payment processing revenue in the fleet segment increased $39 million as compared to last year. Approximately 60% of the increase was from EFS, with the remaining 40% primarily related to increases in late fees and account servicing fees as part of our price modernization efforts.

The average domestic fuel price in Q3 was $2.24 versus $2.61 in Q3 last year. Although retail diesel fuel prices are generally higher than gasoline prices, the EFS acquisition actually lowered our average fuel price for the quarter because EFS offered discounts to its customers off the retail fuel price.

The net payment processing interchange in the segment was down 9 basis points compared to Q2. Excluding the acquisition of EFS, the rate was essentially flat.

In travel and corporate solutions revenue for the third quarter increased 12% to $63.3 million. As Melissa mentioned most of the revenue increase was due to the EFS deal.

As we guide the last quarter we saw some softness in the third quarter fees, which we expect to continue. We also have some revenue softness due to customer mix impacts. However, we remain optimistic about our current customers and our pipeline of new clients outside of the US. Volume in the segment was $7.1 billion, which is an increase of 23% over the prior year.

The net interchange rate for our [build] in the third quarter was 74 basis points which was helped by a one-time benefit from the new contract signed with MasterCard, which added about 2 basis points. In addition, EFS added another basis point to the rate. Our new agreement with MasterCard will provide ongoing benefits to the Company.

We will receive significant cost reductions for cross-border fees, which we expect to substantially pass along to our customers, making us more competitive in the marketplace. In addition, the new contract with MasterCard provided us with an incremental one-time benefit in Q3 only of approximately $0.09 of EPS.

For health employee benefit solutions, revenue for the third quarter increased 48% to $39.7 million. Resulting from a strong accounting growth in both the US and Brazil and the contribution from the Benaissance acquisition.

Moving down the income statement for the third quarter total operating expenses on a GAAP basis were $233.2 million. Salary expense for the Company was $76.7 million up from $57.2 million in Q3 last year. The increase was primarily due to the acquisitions of EFS and Benaissance.

Service fees were $53.4 million in the quarter, which is up $16.5 million from the same quarter last year. The majority of the increase is related to closing the EFS transaction. Additionally, this increase also includes cost for volume increases in our travel segment, cost for outsourcing much of our back-office technology, and operation recurring costs related to EFS.

During the third quarter, credit loss was on a consolidated basis totaled $9.5 million up $2.9 million compared to the third quarter last year. The travel and corporate solution segment was impacted by two discrete credit losses, including the European bankruptcy noted last quarter. In the fleet segment, credit loss was 8.6 basis point of spend volume, which was at the low-end of our guidance range compared to 10.6 basis points in the third quarter 2015.

The EFS portfolio creditor rates are lower than our existing fleet portfolio, which was a contributing factor to the rate. We continue to see very high asset quality and solid portfolio performance. Our operating interest expense was $2.6 million in the quarter as we continue to benefit from low interest rates in the US.

We expect that our agreement with Higher One will end during Q4 and as a result there will be a slight increase in our operating interest expense as we replace them. On a GAAP basis the effective tax rate for the third quarter was 24% compared to 42.4% for the third quarter of 2015. On an A&I basis, the tax rate was 37% compared to 40.6% last year.

Moving on to the balance sheet we ended the quarter with $537.2 million of cash, up from $280 million as compared to the cash position at the end of last year. The increase is related to the seasonality of deposits and in anticipation of the wind down of the Higher One program. We ended the quarter with a total balance of $2.1 billion on our revolving line of credit, term loans and notes.

Our leverage ratio as defined in our trade agreement stands at 4.7 times. We are looking to potentially hedging a portion of our inter-rate exposure on our financing debt which could increase our financing interest expense, but offer longer term protection against rising interest rates. By year end, we project our leverage ratio to be approximately 4.5 times in line with our expectations when we announced the EFS acquisition.

Before we give guidance, I would like to update you on our expectation on EFS on our financials. We expect a positive impact to our adjusted net income EPS in 2016, as we continue to execute on our integration and synergy plans. We are pleased with our progression during the first 90 days and confident with our path moving forward.

Now for our guidance. Note that this expectation reflects our view as of today and are made on a non-GAAP basis with respect to adjusted net income. This guidance is based on exchange rates at the end of the third quarter.

For the fourth quarter of 2016 we expect to report revenue in the range of $272 million to $282 million and adjusted net income in the range of $52 million to $55 million or $1.20 to $1.27 per diluted share. These figures assume normal seasonality trends in the [bill for card] business as well as credit losses.

Our fourth quarter guidance assume that our fleet credit loss will be between 12 and 17 basis points. It also assumes that domestic fuel prices will average $2.32 per gallon.

For the full-year we expect revenue to be in the range of $1 billion to $1.01 billion and adjusted net income in the range of $186 million to $189 million or $4.53 to $4.60 per diluted share. This also assumes that the credit fuel loss will be between 10 and 11 basis points and the domestic fuel prices will average $2.22 per gallon.

The fuel price assumptions for the US are based on the applicable NYMEX future price. We expect our adjusted net income tax rate to be between 36% and 37% for 2016. We have updated the number of shares for the remainder of the year to approximately 43 million shares outstanding.

With that, we will open the line for questions.

(Operator Instructions) Tim Willi, Wells Fargo.

Thank you and good morning. A couple quick questions. One is could you just talk about anything you saw organically around sort of same customer growth metrics or geographically anything to call out there as you have typically done in the past?

Yes, sure, Tim. I didn't talk about it because it looks pretty similar. It was a little less than 4% negative, so it was I think 3.7% negative in the quarter, so it was a little bit better than it had been sequentially. Similar trends if you look into the portfolio, mostly biggest driver was what was happening in the oil and gas industry. So that was down almost 30% so that was the largest, even though it's a small and I would say diminishing part of the portfolio, it still because of the size of that had an impact.

And then if you look across pretty much every SIC was negative, it's just a question of how negative it was. Some of them looked a little bit better sequentially. Construction was only down 28 basis points so that looked a little bit better sequentially. The other one that was kind of a stand out I'd say from a negative perspective is retail, which was down just a little under 10%. Very similar, slightly better trends than what we saw a quarter before.

Okay. Great. You had referenced I believe in the discussion around travel and corporate payments, I thought you said sort of diversifying the business base, broadening it out and seeing new revenue opportunities and business lines, et cetera.

I don't know if I characterized that correctly, but I think that was the direction the comments were. Can you just talk about that a little bit? I know you've over the years tried to crack other industries with the product. Are we seeing some momentum and some things open up?

There's a combination of two different things. That's true that we have been looking at other industries and we actually have added other industries in the portfolio, just nothing of the size of travel. In addition to that in this last quarter when we picked up the EFS portfolio, 90% of their business is fleet, but the other 10% is in corporate payments. Heavily focused on what I would describe as e-payables arena and they are seeing some good success with their business model. It's a highly integrated offering. Very much a technology-based offering and one of the advantages that we now have is the ability to process that internally, which gives you a little bit more flexibility around the product itself and what you can do.

So a combination of two things are coming together. As we continue to work across our existing portfolio to add new customers and the vast majority of what we add are outside of travel. Travel continues to be the biggest size of the portfolio and the place that we're seeing the largest amount of global expansion is in travel. But we feel the diversification that's coming from the new capability that we have with EFS is going to be really impactful for us over the long term. It's still a relatively small portfolio now but it's got really good momentum in their pipeline.

Great, if I could just ask one more in and then I'll hop back in the queue. Just on the commentary around pricing and the modernization which I know you guys have talked about for a while. As you look forward out over several years, does that become another pillar of this story I guess?

Not just to raise price for the sake of price, but is it actually just a more assertive stance by WEX that as products are created and evolve, the Company feels more emboldened to make sure you're getting paid for that? Versus maybe how the Company had viewed that previously or do you think it's just surgically putting price increases in and seeing how people react?

That's a good question, Tim. I'd start with part of why we started looking at this is if you look across our portfolio there is areas of our business where we've always been the premium product set. And that's because we were charging for the value of the product we bring, we really believe strongly in the underlying technology and the products. But that's been true more with larger customers.

With the smaller customer set, what had happened is the market had really moved over time where there was more of an orientation to getting fees from customers and we really have spent some time just looking at that trend and better understanding how that trend affected our smaller fleet customers in particular. And made a series of changes over the last couple of years that have been pretty impactful and now we are in a stage where as we roll out products regardless of size of customers -- so it was both small customers and larger customers -- we are being pretty thoughtful about how we price, how we monitor changes in the marketplace and giving customers lots of different options too. So as we roll out product offerings in the marketplace we may set something up in a certain way that is attractive to one set of customers, but you can actually alter the pricing mechanism and the set of services that they get.

And have that equally beneficial to us but more attractive to the customer. So I would just say that we are getting much more sophisticated about how we think about that not just with large customers, but also across all of our portfolios. And we have seen a step function increase as a result of that, but now it's just embedded in the fiber of how we think about things.

Great. That's all I had. Thanks so much.

Bob Napoli, William Blair.

Thank you. A lot more going on in this Company than there was five years ago. On the pricing side, you said you expanded the test. When did you expand the test and is it only to the direct SMB fleet or are you going to roll it out to other parts of the SMB business? If you can give some sense of timing of the expansion and the opportunity that's left.

We have been doing this in phases, as you know. And so the first thing we had done was affect changes to late fees to our small direct fleet customers in the United States and we learned from that. As a result of that we made some changes to our partner portfolios after having some very lengthy discussions with our partners and then we started doing further testing. We've rolled that out into our direct portfolios at this point and we did that early in the quarter so you've seen the full impact of that coming through with the quarterly results.

Any further impact that we do to the partner portfolios would be something that would be fully discussed and rolled out in conjunction with them. And mindful of that fact that part of what the partners that we do business are interested in is making sure the customers are going to their locations and they are seeing volume growth, which we have got a really good track record of. And so as we have these discussions with the partners we're making sure that we are mutually aligned and getting the results that they are interested in as well as making sure that we're offering things in the marketplace that make sense from a pricing perspective and a functionality perspective. So I put that in kind of the longer-term category of something that we are working through individually with our different partners.

At the same time on their direct portfolios, we're continuing to roll out new product offerings in the marketplace and testing how we price those. Particularly related to risk-based pricing because not all customers are the same. We're getting more sophisticated in the back end of our system so that we can identify that and make sure that we are categorizing people appropriately.

Just my follow-up question. You have a very large investment in accounts receivable on your balance sheet. I think one of the things on the small SMB side where you -- is there an opportunity if you look at your closest peer, with SMBs they maybe bill a lot more frequently, a couple of billion dollars of receivables it seems like there could be an opportunity to substantially to reduce that investment by having some different terms on the SMB market on the payments. Is there any thoughts to doing that and is there a material opportunity or am I off base?

Well one of the things that we changed, we did shorten payment terms to those customers. We shortened them by a few days and I will say that in terms of what we got for feedback affecting the payment terms was something that had more of a negative reaction than some of the other actions that we took.

As we continue to work through our portfolio it's one of the things that we'll be thoughtful about, but I would say it's also one of the places that we have learned to go cautiously with. And so I would say the category of whole list of things that we're working our way through on more of a test and learn basis than a very quick implementation.

Thank you. Appreciate it.

Glenn Greene, Oppenheimer.

Thank you, good morning. The first question, Melissa, maybe you could just talk a little bit about the Exxon renewal. It sounded like there was some upsell of services and I suspect conversely some rate pressure, but maybe you could help us think through that as we go forward.

That's well said. I would say that first of all we are really excited to re-sign a contract with ExxonMobil. We've got a tremendous amount of respect for them in the marketplace and we are excited to continue to do business with them on a more global basis. We are doing more with them in Asia as well as North America.

In regards to [nabore] we are providing more services for them specifically in Canada. So we're expanding the relationship in Canada to look more closely like what we have done with them in North America. Primarily around increased funding for them so if you think of it as a value stack, we have added onto the value stack with them in Canada.

I would say just generally I am not going to talk specifically about any customer contract, but we have said generally when contracts come up for renewal there's always a little bit of a pricing discussion that we have. But we are really excited about the fact that we've entered into another 10 years with them and I can't say enough about as we have worked together with them how this is something I would describe as a true partnership.

Okay. Different direction. The travel segment which seems like a lot of moving parts and I guess I'm confused. The 12% revenue growth but included EFS and it sounded like it included sort of a one-time benefit maybe from MasterCard. So I was surprised that the basis point yield went down despite it sounded like a benefit from EFS and benefit from MasterCard, and I guess what I'm trying to get at, what was the organic growth and what are all the moving parts there?

I will talk a little bit about the rate just briefly and Roberto might want to add to this. But there were three things that were going on that affected the rate. The two of them with the addition of EFS, which was a positive uptick and that will continue. The MasterCard contract which was also positive but one-time and then the third part was mix.

So we've talked a lot about the fact that where the customer portfolio, where the volume actually happens affects the mix of the overall rate. So we saw some mix changes that were negative within the quarter. So think of that as some of the larger customers grew faster and that had an impact in terms of the overall rate.

And at the same time if you're tracking that to revenue, we saw softness in cross-border revenue which we had fully anticipated as a trend. I would say that's an ongoing trend. Roberto mentioned that in his remarks but we are seeing that more and more softness each quarter relating to cross-border revenue.

Could you give us a sense for the revenue contribution from EFS and MasterCard?

Just in terms of spend volume it was about half of the spend volume, which was coming from each. It's a roughly equal split.

Half of the growth you said?

Yes. Half of the growth is EFS and half of the growth is the regular WEX business.

And the MasterCard benefit was sort of a one-time benefit that went right to revenue or is that how we should think about it?

Yes, what I would say to you is on the MasterCard, on the new agreement, what we had before was a bunch of different agreements in different jurisdictions and now we have a global MasterCard agreement. So due to that we had some settlements of deferred revenue, as well as a one-time cost savings so you see some moving pieces in different lines. But as Melissa said going forward on the net interchange rate we will no longer get the benefit from MasterCard on the revenue side but on the other side we will have a significant cost on the service fee reduction.

Great, thank you very much.

David Togut, Evercore ISI.

Good morning. Could you bring us up-to-date on your new business pipeline in Europe, particularly your ambitions of expanding with other large oil company contracts to build on Esso?

Sure. I would say it's pretty similar to what I have said in the past, meaning that we have quite a bit of interest. When we show the product we get a lot of encouragement based on what people are looking at in terms of the product functionality, what we can offer in the marketplace.

In terms of timing, the decisions seem to take a very long time. These people are choosing to outsource their underlying technology and so it's not a decision that they take lightly and so I can say we are in a similar position where we're active in the marketplace. We feel good about our prospects in the marketplace, but the timing continues to delay a little bit. Which is why I have always described it as a long-term, in my mind these things take -- they just take a long time.

Understood. Do you expect the European business to be mostly focused on oil company cards or you have ambitions to expand more into your own proprietary fuel card as well?

In Europe, we have two active businesses in Europe. We have our virtual payments business, which has been growing really nicely within the European market and then on top of that the fleet business, which is -- the cornerstone is the ExxonMobil portfolio that we have there. When we have looked at that marketplace the predominant interest in that market right now still is around outsourcing technology and keeping the proprietary data.

And so if you look at the way that we are approaching marketplace it's in partnership with the oil companies that are there. We do believe at some point in time they're going to be more interested in releasing level three data, in which case you could turn that into a more proprietary platform. But they are not there yet.

Understood. Thank you very much.

Sure.

Darrin Peller, Barclays.

Thanks guys. Just quickly on the late fee side, what was the weighted average rate this quarter versus I think last quarter it was 5% and how has that change been received? If I remember correctly you guys have been saying the attrition levels, the voluntary attrition levels, were low.

The rate is very similar if you look at it sequentially from quarter to quarter. And in terms of attrition I would say also very similar. It's up ever so slightly and not enough that you would actually notice the difference. Historically we've had less than 3% voluntary attrition across our US fleet portfolios and we're still in that range.

Okay. All right. So when you look at the opportunity that I know Bob was talking about earlier with sustainability to these pricing changes, I guess how much do you look at those metrics? If those metrics stay stable I guess that's a big factor in the runway?

I look at a bunch of different things. We talk about that as people talk with their feet so we look at attrition as a very heavy component. We also look at customer satisfaction scores, net promoter scores, things that can be leading indicators towards attrition. And at the end of the day we also think about the brand that we have in marketplace and making sure that as we price products into the marketplace that the customer is getting value for that and so all of those things factor into how we think about pricing.

So far what we've learned is that we have a really good relationship with the customers. They do notice when we make pricing changes in the marketplace and we can see that reflected in some of the scores, but we haven't seen that result in attrition. And it really depends a little bit on the type of changes. In the end we've moved that portfolio to closer to a 50-50 between merchant rates and customer associated fees since we've made some pretty dramatic shifts in the last couple of years.

Just very quickly on the travel side I think if I heard correctly you said from growth, a volume growth standpoint, about half the growth is coming from EFS. I guess I'm just curious on the cross-border trends; you said they were obviously still slower. I guess sequentially from last quarter were they worse or the same and where do you see that going forward?

Yes cross-border was a little bit worse sequentially. We had anticipated that just from what we were seeing going into the quarter. I think that what we are hearing from our travel partners is that there's just been a fundamental mix in where people are traveling to and that's affecting the actual mix that we are seeing coming through from a revenue perspective.

And just last question really very quickly. On the RFP side in Europe, I know you mentioned before similar trends around falling off from Esso, but how close do you think we are to something else on the horizon in terms of an announcement or potential deal decision made? Thanks guys.

I feel that there's a rolling 6 to 12 months that happens there. I think still within the next 6 to 12 months, but I think it could be that long.

Okay. Thanks guys.

Sanjay Sakhrani, KBW.

Thanks. Good morning. Quick question on EFS. Is there seasonality to that business when we look throughout the year? Maybe you could help us get some clarity on that.

Sure, there is seasonality and I'd say there's similar seasonality that we see in our US fleet business. The fourth quarter is lighter than the third quarter. And that's driven really by a combination of the number of business days and offsetting that the number of holidays. Things tend to get pretty quiet around the holiday periods and as I understand it maybe even a little bit more quiet on the [FS] side than what we see in the rest of the base business.

So we should expect those revenues to come down in the fourth quarter relative to the third quarter?

We have two things happening. We are continuing to grow so you have got added revenue that's coming on as we continue to implement customers. Their implementation period, because they are highly integrated takes a period of time. And so as they pull customers from their backlog and move them into implementation we are seeing revenue growth but offsetting that revenue growth would be some seasonality.

I mean that was actually my second question. You guys talked about that backlog last call I guess or within the 8-K. How much of that backlog was in the third quarter numbers?

We saw the customers and just to kind of refresh, when we looked at the business we could see the pipeline that was sitting there that were waiting for implementation. Some had already been implemented that just needed to run rate, if you will.

Some of that was sitting there and still waiting for implementation and customers like I talked about like Hogan was an example of something like that were sitting waiting for implementation and so we're earning revenue associated with that. We anticipate that to come through into revenue over the next couple of years.

Okay. Is there any sense of what -- and I don't know if you could give this, but is there a revenue contribution piece for the fourth quarter that you can help us with just so we can think about the seasonality of that business for EFS?

What I would say to you is going to be very similar to the numbers that we have seen on the third quarter. Although as Melissa said, we have some seasonality. On the other side we have noticed new customer implementation as well as the growth. So I would say to you that directionally it is going to be in the same ballpark.

Got it and then for the MasterCard contract renewal, obviously you guys talked about the benefits and to the service fees. Can you help us think about how we model that looking forward? Should we look at it as a percentage of MasterCard volumes and then how should we gauge the benefit going forward?

What I said on the call is number one we will get a significant benefit in cost, so you should see the cost on the service fee line going down. On the other side we are giving up on some of the revenue because we have an incentive from MasterCard. All in all we get a positive and Melissa has also mentioned that we get a positive impact on this net of the revenue on cost.

And on the other side we have the cross-border fees. As I discussed as well, we are going to be passing along to the customer to obviously be more competitive on the marketplace. Overall I will say to you that it's going to be positive as we move along.

Okay. And there's no way to help us disaggregate that across our model?

So you've got a run rate and we've said it's 2 basis points higher than what you would normally expect. So I think you've got the pieces, generally, included in the last quarter.

Okay.

The other thing I would say to you as well is if you look on the travel segment on the other revenue side is where you have the cross-border fees. And we said in the previous quarter we were slightly down this quarter. We continue to go down. So this can help you as well to do the modeling.

Got it. And then final question on the fee increases that you have been implementing. Is it safe to assume the third quarter includes the full run rate of the late fee increases you made last quarter? And then as we think about other repricing initiatives throughout your partner portfolios, that would come through over the course of the next 12 months or so?

You've got the full impact of the changes that we've made that are sitting in the third quarter and that we're moving into other portfolio changes. They may not include the partner changes within the next 12 months, but we will be implementing further changes. I'm just trying to infer the fact that we hit the really big changes now and it's just embedded in how we're thinking about the rest of the portfolio. So you saw this big step function.

We will get the benefit of that rolling through the next year and we're going to continue -- I don't want anyone to think we're just stopping at that point because we're not. But as we do the rest of the changes they're going to take longer and they become increasingly more sophisticated as we continue to work our way through the portfolio. So that will happen over the next several years. It's not going to be all coming through at once.

Perfect. Thank you.

Tom McCrohan, CLSA.

Hi guys. The other fee category in the fleet solution segment was up materially, sequentially. Can you give us a little color on that?

Yes. Tom what I said on the call is that most of the fleet non-processing revenue 60% of that is related to EFS. And I would say to you specifically on the other revenue line is materially higher than the 60% is related to the EFS transaction.

Okay. When you read last quarter's 10-Q, the growth in other fee revenue was also attributable to pricing modernization. So outside of late fees which are captured in a different revenue bucket, they're in the finance fee bucket, what are the other pricing modernization levers that you're pulling in the small fleet segment?

There were activity based fees, so we're charging customers for a variety of fees depending on what type of behavior they exhibit. It's not one specific fee, there's a whole series of them that we've implemented, again, over the last couple of years.

Okay. And then on the healthcare side, congrats on the [PNC] win. Can you give us a little idea of how we should be thinking about that in terms of the size of PNC relative to other customers you have, was it a competitive takeaway? Any color on that as well?

Sure. We are excited about it obviously. It's a customer that's already been implemented and the partner is live and when I say implemented typically what happens is that these customers ramp over a series of years. So it tends to start smaller and then build over a three-year period of time as they go through benefit cycles.

So it will provide revenue contribution into next year which it is not small but it's not huge. But over the next few years we think it will build into something that's pretty nice.

And is there anything unique about the PNC win or is it the same kind of services that they are consuming versus other clients?

I'd say similar. What they're really looking for with WEX Health is the underlying technology platform, the ability to white label in their name. The ability to do multiple type of offerings on one existing platform. It's really a similar value proposition that we have to other partners in the marketplace, just a build on the momentum that we already got within that business.

Great. My last question and I'll jump off. In Latin America it sounds like you're finally seeing some traction globalizing the OTA offering down there with this other win that you just mentioned. Can you give us a little sense in that market what the competitive intensity is like, who are you competing against, and the win that you announced this quarter, where they rank in terms of market share within that market?

We are really just in the implementation phase in Latin America so we feel pretty good about the fact that they're signing partnerships but they are partnerships that are just in the making right now. So there's really very little volume that's coming through from that business.

Competitively, they are competing against some of the bigger banks down there and in terms of positioning we feel really good about the positioning. In part because our business in Brazil is unique within Brazil and the fact that we are a direct MasterCard issuer. And so it allows them to go into the marketplace with a universal offering, and because we're processing on our own, doing it in a way that is also cost competitive and gives us flexibility in terms of the product set.

It's a marketplace that is relatively new. Excited, I was going back and forth with our GM down there last night. Argo is something -- he's excited about the potential but because it's so early, we just don't know how big that could be.

Thank you.

Ashish Sabadra, Deutsche Bank.

Hi. Solid results. Just a couple of quick clarifying questions. Melissa, I believe you mentioned 7% organic growth I believe that's constant currency and including the impact, but excluding the impact of oil prices. If I back in, I get $35 million of EFS revenues for the quarter. I just wanted to make sure that I have the right numbers.

Yes so, just to be clear the 7% is not adjusted, it's just an organic growth rate.

If you were to adjust out all of the acquisitions, we would have a 12% growth rate including the fuel price adjustment. 7% just has the acquisitions if you add FX and fuel prices and FX wasn't that meaningful. But fuel prices was, we would have 12% organic growth. The number you used for EFS was the fleet component which is about 90% of the revenue. There's also something a piece that's sitting in our corporate solution segment.

Okay. That's helpful. And just quickly on the MasterCard benefit. As I understand there is a $0.09 benefit to the EPS, which is one time and there is also a 2 basis point benefit on the interchange fees. So if I back in I get around $7.5 million of one-time benefit in the quarter, I just wanted to make sure if I have my numbers right again there?

You have the numbers correct. A piece of the numbers will be as we said before on the revenue side and another piece will be on the cost side.

Okay, no that's helpful. Just quickly, can you also talk about the Esso migration like the ExxonMobil European fleet migration onto the WEX platform, how is that coming along?

Yes, so we have been focused over the last couple of years on making sure that we are meeting all of the partner needs. So we talked about the Esso portfolio migrating in Asia and so we just completed the Asia migration onto our international platform. And so next in sequence is to migrate the European platform onto our international platform and so we're in the process of completing the final tweaks and expect to start rolling that portfolio over in 2017.

That's helpful. And maybe one final question for me. Can you just comment on the margins in the healthcare business? We are seeing some solid topline growth there. Should we start to see margin expansion in this business going into the next year?

I would say our focus in the healthcare business because we see that there is so much market opportunity, that we have been reinvesting pretty heavily within that business. Some of that's reinvestment in the implementations of these large customers that are coming through. Some of that is more in R&D.

We have been more focused with them on the top line and longer-term earnings growth than we have been trying to maximize short-term earnings. And it's a conversation that we have on a regular basis which is just kind of play out the marketplace, but that's been our primary emphasis point.

Thanks for the color. And again, solid results.

Ladies and gentlemen, that does conclude the allotted time for Q&A. I will now turn the call back over to the presenters for closing remarks.

I just want to say thank you for once again joining us this quarter and we look forward to speaking to you again next quarter.

This concludes today's conference call. You may now disconnect your lines.