WEX Inc (WEX) 2017 Q3 法說會逐字稿

Good morning. Thank you for standing by. At this time, we'd like to welcome everyone to the WEX Third Quarter 2017 Earnings Conference Call. (Operator Instructions)

It's now my pleasure to turn today's conference over to Steve Elder. Sir, the floor is yours.

Thank you, Holly, and good morning, everyone. With me today is Melissa Smith, our President and CEO; and our CFO, Roberto Simon. The press release we issued earlier 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, the adjusted net income, during our call. Adjusted net income for this year's third quarter excludes unrealized gains and losses on derivative instruments, net foreign currency remeasurement gains and losses, noncash adjustments related to our tax receivable agreement, acquisition-related intangible amortization, other acquisition and divestiture-related items, stock-based compensation, restructuring and other costs, debt restructuring and debt issuance cost amortization, ANI adjustments attributable to noncontrolling interest 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 results. Please see Exhibit 1 of the press release for an explanation and reconciliation of adjusted net income to GAAP net income.

I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K filed with the SEC on March 6, 2017, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today.

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

Good morning, everyone, and thank you for joining us today. We're pleased to report another very strong performance this quarter, highlighted by a top line beat and bottom line results above the upper end of our guidance range. Revenue grew 13% compared to last year's third quarter, all of which was organic, reaching $324 million. Net income on a GAAP basis was $0.79 per diluted share, and we generated adjusted net income of $1.43 per share, up 14%. Contributions from all 3 of our business segments, combined with solid execution and more favorable underlying trends, contributed to our strong performance this quarter.

Earlier this year, we introduced our strategic pillars that serve as the foundation of our growth engine in 2017: to drive continued growth, to lead through superior technology and to leverage investments to optimize synergies. Executing against these pillars has allowed us to post our third consecutive quarter of double-digit revenue growth this year and fifth overall. The progress made year-to-date is a testament to our ability to gain market share across all 3 of our core segments by deepening existing relationships, building new partnerships and delivering high-quality service and innovative technologies to our expanding customer base.

I'm encouraged by our track record of competitive wins and partnership re-signings, as we drive growth across our business. New revenue is at an all-time high due to an influx of additional strategic customers and partners. In Fleet Solutions, we extend -- we extended our relationship with the federal government under the GSA's SmartPay 3 contract with a new 13-year agreement. We also renewed our contracts with Sheetz and Savings4Members. In terms of new business, we signed significant contracts with AutoZone and Verizon, who is one of the largest private fleets in the country. We're also excited to ramp up our Chevron relationship, as we closely coordinate with all relevant parties to ensure for as smooth a transition as possible. Although we've experienced delays, we are making progress towards transitioning the portfolio over to our platform.

Internationally, Chevron is going live in Asia, and our new business pipelines are strong in both Asia and Europe. We continued to strengthen our fleet business in Europe, where we have transformed our portfolio and reshaped both the revenue streams and the cost structure to drive profitability. We're nearing our initial goal, and we're in the final phase, which is converting the Esso portfolio onto the WEX platform. We remain well-positioned internationally to capture new business and foster organic growth.

Overall, our sales and marketing teams are performing very well, and we're capturing additional market share.

In Travel and Corporate Solutions, we saw impressive growth in purchase volume as we continue to strengthen and refine our relationships with top-tier online travel agencies. This yielded notable international growth, highlighted by a 45% purchase volume increase in Europe. Similarly, we are accelerating growth in Asia, as our products gain traction and grow rapidly in this emerging market. From a domestic perspective, we experienced continued strength in our corporate payments businesses.

Our record of new business wins and client re-signings continued in the Health and Employee Benefit Solutions segment with another quarter of above market growth. Our successes include new partner signings, renewals and expansions with such companies as Conduent, Infinisource and Trion MMA. We also broadened our relationship with the one of the industry's leading benefit administration software companies and longtime WEX health billing partner for several new offerings, including consumer-directed health care accounts and COBRA. Remarkably, this was our eighth consecutive quarter of 20% or more revenue growth in our U.S. Health care business. In addition, our Brazilian Benefits business has also continued its impressive growth, with volumes up 41% year-over-year, leading to revenue growth of more than 60%.

We are proud of this quarter's successes, which not only highlight how strongly our products and solutions resonate in the marketplace, but also provide a solid foundation for continued momentum and long-term growth.

We also continue to lead through superior technology, our second strategic pillar for 2017. Being on the leading edge of innovation is embedded in our DNA and has been instrumental in enabling us to secure and retain key strategic partners and customers. In our Fleet business, we continue to enhance and refine our offerings to better serve customers. This quarter, we added new features to our mobile fleet app, improved the customer portal experience for fleet managers and expanded adoption of our ClearView analytics tool. The combination of our ClearView product and our new WEX Crossroads product, which is a one card closed-loop solution for both in-town and truck stop fueling needs is the primary reason that we won the Verizon business. In October, we acquired certain assets of AOC Solutions, which has been a key technology provider for our virtual card product offering for many years.

Through this acquisition, we gained access to new technology while making our virtual card offering more vertically-integrated. In addition, it fits within our long-term strategic product roadmap, as we look to extend our capabilities in Corporate Payment Solutions.

In July, we released new products in our U.S. Healthcare business that added 175 new features and functions to the platform. Leading these innovative features are the employee dashboard, consumer personalization technology tool and a post-deductible FSA plan. This release, coupled with our open enrollment initiatives and upcoming November product release, help support new and existing business opportunities. While we're constantly making our business more efficient and more synergistic, our most notable example of this has been the acquisition of EFS, which has had, and will continue to have, a positive impact on our business.

To date, platform consolidation and integration continued to be ahead of schedule, and we remain on track to achieve our $25 million target in synergies. We've completed nearly all of the integration activities, except for the consolidation of the platforms, which is well underway.

Before I turn the call over to Roberto, I'd like to address the impact of the recent hurricanes on our business, which is a topic we've received a number of questions about lately. First and foremost, our hearts go out to those impacted by these devastating storms. From a business perspective, we have seen a similar pattern in previous natural disasters in which an initial volume dip occurs in the immediate aftermath, which is more than offset in the weeks following, as businesses reopen and rebuilding efforts move into high gear. During this time, we proactively suspended all late fee businesses in affected areas for 1 month, because we felt like that was the right thing to do for our customers. Although we gave up some revenue in the short-term due to this policy, we placed greater emphasis on fostering long-term relationships. In addition, we saw a slight impact on the aging of our accounts receivable portfolio that Roberto will discuss later. This is also consistent with our history in similar circumstances.

In summary, I am very pleased by our performance in the third quarter, highlighted by strong profitable growth and underpinned by solid execution against our strategic objectives. We are encouraged by the contributions of all 3 of our business segments to our growth engine this year. Our business is more diverse than ever before. We continued to leverage our core competencies across an evolving and increasingly global marketplace, which will help us build upon our successful track record of competitive wins.

As we look to the fourth quarter and year-end, we look forward to a strong close to an already successful year.

I would now like to turn the call over to our CFO, Roberto Simon. Roberto?

Thank you, Melissa, and good morning, everyone. For the third quarter of 2017, our total revenue was $324 million, a 13% increase over the prior year period and above our guidance range of $302 million to $312 million. Net income on a GAAP basis for the third quarter was $34 million or $0.79 per diluted share, compared to $19.7 million or $0.46 per diluted share for the same quarter last year. Non-GAAP adjusted net income was $61.5 million or $1.43 per diluted share, up 14% from $1.25 per diluted share for the same period last year and above the high end of our guidance range. We are very pleased with our strong organic revenue performance across nearly all areas of our business.

On top of that, we experienced tailwinds in FX rates and fuel prices, which also contributed to the strong performance. Due to our solid underlying fundamentals and normalizing macro trends, we are confident in raising our revenue and earnings guidance for Q4.

During the third quarter, the Fleet Solution segment achieved $212.1 million in revenue, an increase of 15% or $27.3 million compared to the prior year. Payment processing transactions increased to $110 million or 7% versus Q3 last year, which led to a 9% increase in payment processing revenue. Nonpayment processing revenue increased 22 -- $20.2 million or 20% as compared to last year. Finally, our average domestic fuel price in Q3 was $2.51 versus $2.24 in Q3 last year.

We see a number of positive trends across the fleet segment. We saw solid organic transaction growth, and same-store sales were stable. As we continue our price modernization program, finance fees increased 23% versus last year, even though we turned off late fee charges in areas affected by the hurricanes for a period of time in the quarter. This is indicative of continued normalization of our customer payment behavior and our very low customer attrition rates.

EFS posted another strong quarter as well, with fleet revenue up 15% compared to last year. We saw solid growth in both volumes and transactions year-over-year. Integration on platform conversion efforts continue to run smoothly, and we remain on track to reach our targeted $25 million in synergies. Finally, higher fuel prices provided us with $8 million in additional revenue compared to last year, and approximately $2 million versus our guidance net of spread impacts.

In Travel and Corporate Solutions, revenue for the third quarter decreased 4% to $61 million. Total purchase volume reached $8.7 billion, growing 21%, driven by volume growth across all geographies. The net interchange rate for our virtual card in the third quarter was 51 basis points. As we have previously expected, there was no material change to our net interchange rate in the third quarter compared to the second quarter, and it was in line with our guidance from the beginning of the year. We did see some mix impact on the net interchange rate from a greater percentage of purchase volumes occurring outside of the U.S., where interchange rate are generally lower. This international volume growth led to a strong growth in other revenue for the segment. We have a very positive trend in our revenue diversification in the segment, with revenue growing close to 50% outside of the U.S. Travel business, led by Europe and domestic corporate payments.

For Health and Employee Benefit Solutions, revenue for the third quarter increased 28% to $50.9 million, driven by account growth and spend volume in both the U.S. Healthcare and Brazilian benefit businesses. As Melissa mentioned, the U.S. saw a strong momentum stemming from a host of new partnerships and [gross] sales. The sales pipeline remain robust, and we grew more than 20% year-over-year, with the Bank of America portfolio now fully converted onto our platform. Our Benefit business in Brazil also continued to achieve impressive pace, growing more than 60% in the quarter, which is the fifth consecutive quarter of more than 50% growth excluding the impact from currency fluctuation.

Moving down the income statement. For the third quarter, total company operating expenses on a GAAP basis were $260.3 million. Salary expense for the company was $92.3 million, up from $76.7 million in Q3 last year. In addition to headcount increases to support our high-growth areas, we also had increases as part of bringing certain technology functions back in-house from a third-party provider. Finally, based on our strong results to date, we are increasing our variable compensation estimates for the year.

Service fees was $41.2 million in the quarter, which is down $12.2 million compared to the prior year. The majority of the decline is due to closing cost of the EFS acquisition last year that didn't repeat this year. As previously discussed, we are benefiting from the agreement signed with MasterCard a year ago, which is offsetting some of the interchange pressure we have seen in our Travel segment. This will be the final quarter where we see these favorable comparisons.

During the third quarter, credit loss on a consolidated basis totaled $19.6 million. In the Fleet segment, credit loss was 23.5 basis points of spend volume, which was slightly above the high end of our guidance range. The steps we have taken to reduce losses from fraud have started to pay off. As we anticipated, fraud from card skimming trended down as the quarter progress. We are pleased to see positive trends each month during the quarter. The monthly fraud expense from September and October is down around 60% from the high point last quarter. Our new real-time software is now operational and helping to prevent fraudulent transactions.

Turning to regular credit loss. Our portfolio remains in good shape, but we were affected by 2 discrete items: we saw one significant customer in bankruptcy, and we also saw customer in areas impacted by the hurricanes pay more slowly than they normally would. Because of these factors, we did see an increase in the traditional credit loss this quarter. Without this, we would have been within the guidance range for the quarter.

Shifting gears, our operating interest expense was $7.4 million in the third quarter and in line with our expectations. We saw an increase in our average operating debt levels in the U.S. as fuel prices increase. Also, internal rates are higher than last year, and finally, volume increases in Brazil contributed to the higher expense.

On a GAAP basis, the effective tax rate for the third quarter was 35.4% compared to 24% for the third quarter of 2016. On an ANI basis, the tax rate was 36% for the third quarter and 37% last year.

Moving on to the balance sheet. We ended the quarter with $251 million in cash, up from $191 million as compared to the cash position at the end of last year. At quarter end, we had a total balance of $2.1 billion on our revolving line of credit, term loans and notes.

Our leverage ratio, as defined in our credit agreement, stands at approximately 4.1x. In conjunction with the closing of the AOC acquisition, we have added $100 million of capacity to our revolving line of credit to provide us with additional liquidity and flexibility. Based on our guidance, and including this acquisition, we expect our leverage ratio to be approximately 4.2x at the end of the year.

During Q3, we closed the repricing of the secured term loans under our existing credit facility. As stated in the press release, we anticipate approximately $11 million in interest expense savings on an annualized basis, by reducing the spread on our Term B loan by 75 basis points and on our Term A loan by 50 basis points. This led to a reduction in financing interest expense in the quarter of more than $2 million, which was offset by fees paid to close the transaction.

Now for our guidance. Note that these 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 2017, we expect to report revenue in the range of $317 million to $327 million and adjusted net income in the range of $60 million to $63 million or $1.40 to $1.47 per diluted share. These figures assume normal seasonality trends in the virtual card business as well as in credit losses. This guidance assumes that our fleet credit loss will be between 19 and 24 basis points. We assume that domestic fuel prices will average $2.53 per gallon. This assumption for the U.S. is based on the applicable NYMEX future price from this week. We expect our adjusted net income tax rate to be between 36% and 37%.

As part of the AOC acquisition, we have included approximately $7 million in revenue, with an immaterial impact on earnings. Finally, we expect Health and Employee Benefit segment revenue growth to slow in Q4 due to an exceptional performance in our Brazil benefit business last year, when it grew more than 100%. For the full year, we expect revenue to be in the range of $1.24 billion to $1.25 billion and adjusted net income in the range of $228 million to $231 million or $5.31 to $5.38 per diluted share. EPS guidance is based on approximately 43 million shares outstanding.

With that, we will open the lines for questions.

(Operator Instructions) Our first question is going to come from the line of Ramsey El-Assal with Jefferies.

I wanted to ask about the fraud and skimming-related issue. Can you walk us through the technology solution that you sort of implemented? And then talk a little bit about -- I guess, a kind of where we think the level of fraud should come in, in Q4? And then also, next year, or going forward, should we expect that rate to sort of normalize back to historical levels? Or are we always going to operating at a little bit of a higher elevated level until the EMV transition happens at the fuel pump in -- sometime later?

This is Roberto. Let me provide you first with some color, which is important to understand the full picture. First of all, there is nothing to be alarmed, especially because, as we said, fraud is coming down as we expected. Our portfolio remains in a good shape, and we don't see any trends to see differently at this point. Our credit loss for fraud within -- was within the guidance range, and our credit loss is slightly up because of the 2 items that we discussed. And as I also said, the hurricanes had impacted a bit our numbers in this quarter. As we look into Q4, we expect the fleet credit loss, as I said, to be in the range of 19 to 24 basis points, which is just slightly elevated from historical norms. But if you conceded that the fraud is still higher than the past, we are in regular norms. And I will give you a reference. Last year, Q4 '16, we closed at 18.3 basis points. When you think about looking into 2018, obviously, our regular credit loss, we don't expect any changes, as I said, because we don't see any major changes in our trends or macroeconomics. But obviously, the fraud losses, they will continue to trend down quarter-over-quarter. But if you recall from previous conversations, the historical levels of fraud were very, very small. So we will see the trend coming down but, obviously, not as low as historical dates.

Okay. That's helpful. And then I wanted to ask about the Chevron implementation time line. That portfolio still has not changed hands, I believe. And is there -- I noticed you didn't give any kind of guidance in terms of a quarter that it might be falling in. Is there an expectation that that's certainly going to hit in '18? Or what is taking time there in terms of getting that deal kind of consummated?

Yes. I would say this is a particularly complicated transaction in part because you've got 3 parties involved, which makes it just more that you have to work through. And in terms of timing, we had said, last call, that we expected to start the conversion in Q2 and then complete that in Q3, and to begin the actual signing of new accounts on January 1. So we would say, still signing of new accounts, bringing on this new business occur in January 1, as originally planned. The rest of it is really dependent on how the conversion plays out from a timing perspective, some of which we have control over, some of which we don't. And so we continue to work closely with Chevron around making sure that this is as smooth as it possibly can. And we're going to be very considerate of the customers, at the end of the day, that are going to go through this conversion. But just recognize the fact that we don't have total control around the timing.

Okay. And last one for me is just a little bit of commentary, if you don't mind, on your pricing strategy and outlook. I think that the result this quarter was encouraging, and especially in the context of the hurricane and not being able to maybe charge late fees that you might have in those geographies. Is pricing: a, have your customers kind of adapted to your kind of incremental pricing actions? Is their behavior productive in terms of them -- the payment behavior, and should we still see pricing as this kind of ongoing lever in the business? Or are we on a trajectory where it's late innings, early innings in terms of your ability to take price?

You're starting to talk about, specifically, the North American fleet business, where we made a bunch of changes to the small fleet portfolio, where we recognized the fact that we were really quite far out of market. And so we've made a bunch of pretty significant changes in that piece of the portfolio. And I would say across the globe, in each of the part of the business, we have mechanisms in place to make sure that what we're doing is competitive. We're making tweaks constantly. We're making tweaks in our European portfolio as well and have this year, and we'll continue to do that across each of them. We think of it more as just kind of business as usual for us now. And in terms of the impact on our customers, we also made a bunch of enhancements to our products at the same time as we made changes in fees, which allowed them to do things like pay us online easier than they have in the past. And so we thought of this as a combination. And as a result, we've seen really very little impact from a customer attrition standpoint, where our attrition rates are still in that North American fleet portfolio, less than 3% on voluntary attrition. So we feel like we did a good job in a way that we actually rolled out the changes and communicated that with the customer base. And so it's a "so far so good," and we'll continue to make tweaks across our business where we think it's appropriate.

Our next question is going to come from the line of Oscar Turner with SunTrust.

My question is on the Travel segment. Following the AOC deal, how much of the revenue there is from general B2B payment business? And how you think about growth in that business over time?

The revenue from the business is coming from, as you mentioned, it's coming from a bunch of different businesses. It's all business-related, primarily other banks. And when we think about the reason why we did the acquisition is primarily around the technology. We liked the vertical integration, what that allowed us to do both from an innovation perspective and from a cost perspective. It allows us to really scale up that part of the business more effectively. It also gives us new tools that we intended to build in the corporate payments arena. So instead of building that ourselves, we're able to leverage that. So the rationale behind this was more around the technology, what we do with the technology, the synergies that we can create around the integration, and from a customer-facing perspective what we can do in the marketplace with those. But we have had conversations with the people that are using the product now, and we feel good about continuing to service their needs and build relationships in the marketplace. And think of this as a channel that we haven't had in the past.

Okay, good. And then you talked about signing AutoZone and Verizon in fleet. Can you just talk about, I guess, the process for signing those customers, and were those competitive takeaways?

Yes. Pretty much anything we do in the large end of the market is going to be a competitive takeaway. And I'll highlight -- I talked a little bit about Verizon, but it was largely -- the win that was positioned is around the idea that we're now able to use the assets that we have from our EFS acquisition and what we were doing historically in North American fleet, and combine them to the customer. And so from their perspective, what they were able to look at was a product that has one closed-loop network that goes through both the traditional truck stops and also into the, what we would consider, the historical retail arena. So they have this one packaged product that they can use one card on. They also really liked the data analytics tools that we rolled out, our ClearView technology. So this -- what that allows us -- them to do is look at information in a much more targeted way and easier to action upon the information that they're getting. And so that bundled together with some of the broader relationships that we have in the marketplace with merchants really was what made this more compelling for them. And so we think of that as a good example of where we've been able to really build upon what we gave you. We talk a lot about the $25 million worth of synergies that we're pulling out of EFS. But I think that the real win for us is the way that we've been able to combine the different pieces of the business and accelerate our growth. Roberto talked about 15% growth within EFS net -- EFS, specifically, so the historical EFS fleet business. Now on top of that the Corporate Payments Business grew 30%. And if you package EFS with what we've done historically and the over-the-road arena, which includes our old Fleet One business, the growth was 18%. So all of these things that are organic and are really as a result of being able to pull some really great pieces together.

Right, congrats. Sounds like that business is running pretty strong. And then, I guess, last question. Just a clarifying questions around fraud losses. I guess, what were the fraud losses in 3Q? What are the trends in October as far as basis points go? And then, what fraud losses are implied in the 4Q guidance?

So this is Roberto. Let me start with the Q3 numbers. When we talked last quarter, we gave directionally a 50%-50% split between regular credit loss and fraud losses on the credit loss, and we came in slightly better. So the fraud piece was slightly below the 50%, as we anticipated. And as we move into Q4, this trend is continuing down, as we also expected. You had a third question, which was...

Yes. My third question was just around, what is the fraud loss guidance for 4Q in terms of basis points?

Yes. So we provided a credit loss guidance of 19 to 24 basis points. And as I said in the previous question also, from a historical rates as a reference, last year we had 18.3 basis points. Obviously, if you add the fraud losses, that is slightly higher than they were in the historical rate. We have -- we don't have any difference from -- or anything different from a trend point of view on the regular credit loss.

Our next question will come from the line of Sanjay Sakhrani with KBW.

I guess, I wanted to just a dig in a little bit on the hurricane impact. I was hoping, maybe you could give us a little bit more specific data around the impact on revenues, specifically as we look at transaction volumes as well as some of the fee waivers you have. I mean, do you have any more specifics around that?

So what we said is, we turned off late fees in the affected areas for a month. In the grand scheme of things you're not talking about something that's going to move the number. It may be $0.5 million. It's not a big number. And so we think about doing the right thing. A lot of things that we'll do around the time of a hurricane hitting, it's really more protocol for us at this point in time. We will turn off late fees in the affected areas. We'll particularly consider it around emergency response vehicles, which are -- we have a number of them that do business with us, and making sure that they have access. We give tools out to customers so that they can see where fuel is actually located, because that tends to be an issue around a hurricane. And so there's a number of steps that we take. We also have historically seen a little bit of a blip in our aging, because people have difficulty getting back online and making payments. And I would say all of those things are things that we saw happen in this set of hurricanes. It's unusual to have a couple kind of stacked together like we did, but the pattern that we've seen is similar. None of those things, individually, are material, but they all have just a little bit of an incremental hit to the quarter.

Any impact on transactions?

Not typically, because you see a slowdown around the hurricanes, but you see a little bit of an offset afterwards. And so not much of an impact at all, if you think of it over a period of time. If it happened precisely at the end of a quarter, it might impact the quarter.

Okay. And I guess, when we think about just expenses in general. I know there's been a lot of investment also occurring. As we look ahead, should we expect more operating leverage on a go-forward basis? And then, I had question, maybe, to tag onto that. You mentioned, Melissa, the Esso portfolio conversion sort of now on its way to be completed. Can we just maybe think about the revenue? Is there any revenue or expense impact on a go-forward basis by virtue of that?

I'll answer the last one. I think Roberto particularly, should answer the leverage question. The Esso portfolio, there is an expense pick up related to that. So we talked all along about the different things we were doing to improve the profitability of that portfolio. And we've done a number of things over the last several years, which really had some pretty major restructuring moves around consolidation of resources. And then, we knew the last piece was the replatforming. We've been, frankly, winning lots of business that's in -- particularly in the Asian marketplace, and so we've been pretty focused on implementing customers in that marketplace. We have this window that we think that we can migrate and start doing the migration in Europe. And what that will allow us to do is get off some of the Transition Service Agreements that we have in place, and so that does affect our scalability. It also, then, allows us to do more with the product once we get on our own platform.

Sanjay, this is Roberto to answer your question on expenses. What I would say to you is that, in the last, I would say, 4 to 5 quarters, every quarter we have been improving our margins on the bottom line. It's a key focus for us. But what I would say to you also, more importantly, is that we are seeing these underlying trends in the business where we are growing every quarter very nicely from an organic point of view. And we will keep investing in the areas where we feel comfortable that we can see more [that we can see more] revenue. The other thing you need to consider is the credit losses. If you exclude the EBITDA, that is the remainder of the business, not from the credit loss. Our revenue is really growing significantly much better and higher than expected. But again, it is something that we want to continue doing. If we see the opportunity to keep investing in the high-growth areas, we are going to continue doing so because we see momentum in the business from an organic point of view.

And just one final clarifying question on a point you made, Roberto. On the fraud cost, and sort of the outlook into next year, I mean, should we assume we go from like double digits to mid-single digits on a steady state basis if everything goes well? Is that a fair range to assume?

You're talking, specifically, on the fraud side?

Yes, I'm sorry, the fraud cost.

Yes, absolutely. I mean, as we said, we are very confident on what we saw last quarter. We are within the range in Q3. The guidance for Q4 is as we planned, and is in line with our expectations. And obviously, as we move into next year, it's a fair statement to consider those numbers.

Just to add little bit of color on that. The things that we're doing right now, Roberto talked about it, but we had said last call, we would implement the new technology. The new technology is in place, but we also said that there'd be a burn down period or burn-in period, where we take a period of time for us to really adjust the rules in place, which is where we are now. So we're in the process of making adjustments to the real-time logic of the tool, and I think we'll learn a lot more through that process in the next couple of months. And what we've seen so far is this reduction by month in losses. We saw that every month this last quarter just by making a number of changes outside of the technology. Now we are able to couple that with the technology, which is really the last piece that we were missing.

And to add something on what Melissa said, and because of the system implementation, you should expect first half of next year slightly -- fraud losses than in the second half, as we have fine-tuned the system. And from a full year point of view, your expectations are correct.

Your next question will come from the line of Peter Christiansen with Citi.

I'm sorry if I missed this, but Roberto, can you just tell us what organic growth was excluding fuel, and also what same-store sales were for the quarter?

Yes, same-store sales were flat in the quarter, and our organic growth is over 9% this quarter overall, when you exclude the fuel prices and FX. If you include all-in-all together, we are almost 13% growth.

Great. And I guess, last quarter you talked about, as it relates to the fraud issue, there were specific regions where you saw heightened activity. And I know that you're implementing systemwide changes, but have you seen this activity kind of spread into other geographic regions?

There's been a little bit of a spread into Arizona and California. So that -- and just to kind of differentiate, there are 2 pieces. There's where a point of compromise occur, and then where the [wet] plastic fraud is then occurring. The points of compromise were the ones that we talked about, Texas and Florida, being emphasis points, and that's still true. But California and Arizona kind of made the list as well. But the cards are being used everywhere because they're being skimmed and duplicated.

Is there any way that you could implement changes that more of those transactions could happen in-store instead of at the pump? Is that a potential patch in the near term?

Look, we actually have been working with our merchants very closely, and we've known a number of changes, that includes the merchants. Some of them have been limits that we've implemented. We also shut down locations if they appear to be a high-risk location, and we have, in certain times, pushed people into stores. It's -- for us it's there's the balance between making sure that the product works for our customers and it is convenient but at the same time that we're protective of where the loss is going to be. And so we're using all of those tools to mitigate activity. So yes, I guess, (inaudible) and that's something that we will do. We don't do it across the board, but we do it where we think it's higher risk.

That makes sense. And then, I guess, finally, your market share gains have been pretty impressive. It looks like, so far this year you've added 500,000 vehicles to your portfolio. And I know you've called out AutoZone and Verizon, and a couple of other wins in recent quarters, but can you give us a sense of what kind of mix of fleets this is? Is this more -- these wins, are they more enterprise-level or are you seeing also some smaller fleet wins as well?

It's really a combination. If you look at our North American fleet business, our front end is bringing on about 20% more in new revenue this year than they did last year, and that's excluding Chevron. That's just thinking of the traditional sales forces, which includes both an inside sales force, or branded fuel sales force, and outside sales. And so we're bringing on more business that's small in nature as well as some of these large named accounts, and it's a credit to the sales people that are out there. And then we talked about the growth we're seeing with EFS and the growth we're seeing in all the other areas of this business. I think it comes down to really good -- making sure the products are particularly effective, and across the globe we're really good at managing sales pipelines, having really great sales people that are delivering on their promises in the marketplace. And that's really just come together this year.

Our next question is going to come from the line of Bob Napoli with William Blair.

Question, first on the Travel segment. The -- I mean, you're still getting very impressive growth and some very big numbers in payment volume growth. Obviously, you had the reduction this year in the interchange rate. Looking into 2018 and '19, as you think about that business a little longer term, what type of payment volume growth can you get? And do you -- what type of diminution would you expect in the interchange piece?

The business has grown faster than what we had anticipated this year. And so -- let's start with that. I mean, it's [part of this is] we talk about the last few quarters, we're doing just a little bit better across each of the areas of the business than we expected to (inaudible) start in Travel. And so when we think about the growth of the business, and some of that is from penetration of the existing online travel agencies. But it's also the diversification of growth that we're seeing in the corporate payments arena, that grew 30%, growth that we're seeing outside the United States, Roberto talked about the aggregate as being 50%. And so when you look at the future, I think this year was an exceptional year in what we're seeing from a volume perspective. But it's -- we've talked about this in the past, we've seen somewhere between that 10% and 20% has been a more normal range for us. And it's kind of moved around, depending on what's happening, particularly with some of the larger customers in that mix.

Then on the interchange. I saw -- I know it's -- the question is, essentially, are we going to see this growth start to fall through to the bottom line into -- a, into revenue, and b, into profit growth for that segment to faster profit growth?

So we had a really big adjustment as you know this year. We've done a lot on the cost side related to that. And a piece of how we thought about the AOC acquisition was it was vertical integration. As you know, we talked for the last month around the fact that this has been a focus of ours, even predating the repricing. And that's because we know that this marketplace is highly competitive and will continue to be so. And so we're focused on really 2 big things in this part of the business. We're focused on making sure that we are creating scale in this organization, and that we are doing that through reinforcing some of the technology that we have in place. And then, the second part for us is on the innovation side is making sure that we continue to deliver products that are differentiated in the marketplace that allow us to continue to charge premiums in the marketplace. And so those are 2 strategic areas of focus for us to make sure that we can continue to see more of a close association with spend volume growth and revenue growth, knowing that there's always going to be some tensions in the 2 in this business, because it is highly competitive.

And what I will add to what Melissa just said is, to reinforce that the business in the first -- in these 3 quarters of the year, our operating margins, both in dollars and in percentage, are going up. So despite some revenue pressure, as Melissa said, we're working in cost and in other areas, and overall the business, from a profitability point of view, is improving both in dollars and percentage.

No, that's -- the margins have been impressive despite the decline in the interchange rate. What is the other revenue in that segment, that $10 million, it's up 60% year-over-year in the quarter -- $10 million in the quarter?

Yes, I'll talk a bit briefly. The way we have structured our international volume, with companies you get a lower interchange rate. But on the other side, you get basis points in what we call cross international border fees. So we look it as a total revenue. But from a revenue point of view, you see the reduction in the processing revenue, and then you get the upside on the other revenue. But overall, we look at the net basis.

Okay. And then just quickly on AOC. I mean, the -- I didn't see that acquisition announced. It looks like you paid about $100 million for that acquisition? And what do you expect out of that business for next year? What's revenue, and is it profitable, and how do you think about that longer term? So why wasn't it announced? Is it a $100 million? And what do you look for, for next year?

Yes, you are on the ballpark on the price. And from a revenue point of view, you can estimate that range between $30 million and $40 million, aligned with our Q4 results. As I said, we have $7 million for Q4. We closed in October, so directionally, the $30 million to $40 million in revenue is what you can estimate. From an earnings point of view, I also said -- I will say the same, it's going to be accretive from day 1. But obviously, it's a smaller transaction, so it's going to have an immaterial impact to our EPS.

Our next question will come from the line of Tien-tsin Huang with JPMorgan.

Just wanted to ask on pricing on the contract side, both new and -- new deals and renewals, I guess, on fleet and travel. Any change there?

I actually don't think that there really is much that is new in the marketplace. Everywhere we do business, there's competition. There's different competitors in different markets. But we are -- generally speaking, we're able to charge a premium in the marketplace because what we're doing is differentiated. And then we've been able to wrap in some long-term wins. We have the GSA contract being a 13-year win. But -- most of the private label signings that we've had this year, we've had a number of them have been 10-year contracts. And so it's a good way for us to mutually lock in a partner for a long period of time so we can think about how we build the business with them strategically over a long term. And I don't think there's anything really remarkable that I would note, either positively or negatively, from a pricing perspective.

All right, good to hear. And then the customer bankruptcy, sorry if I missed it, was that in the EFS business?

Yes, that was on the EFS business.

Okay, but that's at this point been sized and whatnot. And then -- okay, just the last one. Just in Health and Benefits, just the volume outlook. Fourth quarter, maybe a quick look at next year. I know, obviously, Brazil's got a very high growth rate. You mentioned of tough fourth quarter comp. So any more detail there?

Yes, the only thing I would say to you is, we wanted to highlight -- I mean, we have had 3 impressive quarters and, obviously, last year also we had a great growth in the Brazil business. So although it's the smallest piece of the segment, last year we had an impressive quarter because of some products that we put on the marketplace. And therefore, for Q4 this year, we are going to see a small slowdown in terms of growth. But there's nothing to be alarmed, and the business is in good shape as we move into next year.

Our next question will come from the line of Glenn Greene with Oppenheimer.

I actually wanted to follow up on Bob Napoli's question on the Travel side. It sounds like some of the newer areas of the Travel business are really accelerating, like the international. I think you called out 45% Europe growth, and you called out the corporate payments, I think, 30%. Could you sort of parse the components of travel now, sort of thinking domestic, international, corporate payments, whatever it may be? And what's kind of the volume growth in domestic as well?

Yes. Actually if you look across the business, the volume growth in the domestic business is strong as well. And so you're starting to see some increased diversification as the other pieces are growing faster. But the base business is still growing. And so there's not much of it on the exchange. Overall, it's still about 85% of the spend that was happening was initiated in the U.S. in 2016, and it's about 80% of the spend is in the U.S. in 2017. And so there is this slow change where we're getting more diversification outside the United States just because of the growth we've seen. And we're building upon that. It's just kind of a (inaudible). We talked about last quarter that we got an e-money license in Europe. And what that allows us to do is really expand more into Europe, into other regions we haven't been able to operate in. And so we've had really good success in that market as well as the market in Asia. And we've been adding some resources that we've been fairly cautious (inaudible) through that migration and now that we've gone live with the license, we've been able to ramp up there, more diversification.

So it sounds like you think there is a good, sustainable, sort of nice accelerating growth trajectory in Europe for a while now?

Yes. And I would say outside of the United States, there's a great growth opportunity for us, and we're seeing that. As we've added salespeople, we've seen the benefits of that. And so yes, we think that is a market that we can continue to add in. We think Asia again is a market that we can add into. But the North American-originated business, most of those are global accounts that just happen to be located in North America. We have -- we think, over the longer term, we have seen a considerable opportunity there as well.

Okay. And then on the health care side, maybe just sort of a broad outlook on the upcoming enrollment season, which I know was obviously key for the 2018 trajectory? And then, maybe, just sort of thinking through the growth between the SaaS and the interchange parts of that business, what are the dynamics there?

Yes, they are -- that part of the business, we'd say they are heads down, ready to go into enrollment season. They're very focused on the next release. So they are -- we'll do another product release into the marketplace leading up into enrollment season. They've added a number of partners. A lot of those partners are TPA, third-party administrators. But they're also entering the marketplace through new channels. I talked about benefit admin, that really -- I mean benefit admin is just a new co-branded channel of entering into the marketplace. So they're -- I think they're particularly creative around looking at ways that they can distribute the product into the marketplace. Retention has been really good this year. So we feel like this is going to be a strong enrollment season, and they're very focused on just getting ready for it. It's a lot of work that happens in a short period of time for them.

And our final question for the day will come from the line of Tom McCrohan with Mizuho.

I had a quick question -- 2 quick questions. On the fleet side, it sounds like the addition of EFS has given you the ability to have a more robust value proposition for some larger corporate customers, and that helped to some extent win Verizon. So I'm trying to get a sense for how differentiated that offering is? Is this unique to WEX, this closed-loop card that helped with Verizon? And what is the pipeline on that side of the business for that offering?

Yes. I think that when we looked at the acquisitions, we were hopeful about the revenue synergies associated with that. But we really modeled it based on what we saw were expense synergies. And the more that we've learned about the business, the just more excited we've been around what we can do collectively. Verizon is a good example of that. But we've talked about Enterprise in Canada. There's been a number of places where we've been able to take what EFS has done and where they have capabilities and really joined that together with the traditional WEX portfolio. And so yes, it's called CrossRoads, this particular product that we're talking about, which enables us to put together the closed-loop network, both what EFS has had historically with the WEX product. And that is something that we are actively, in the marketplace, going after prospects with. And we do think that that's just another tool for us that's going to be important for people who care about having mixed fleets. It's part of what we liked about EFS. We saw in our new prospects more and more customers that had mixed fleets, which means that they have some over-the-road trucks combined with light vehicle. And so we're shifting more and more of that, and more people are thinking about it as a (inaudible) as opposed to thinking about them as individual pieces. So we do think this is going to have some momentum for us.

Great. And just one outlook-type of question. It looks like you have really good momentum across the businesses right now, and growing organically in low double digits. And if you exclude the fraud, which seems to be a transitory issue for you folks, this quarter, you would've grown bottom line over 20%. You still had good mid-teens growth, but the fraud was really kind of a drag on EPS growth. So going into next year, assuming these trends are sustainable on a low double-digit growth on the top line, is there any reason why it wouldn't have a sustained acceleration in EPS growth going into next year?

We have said that our long-term range, our revenue growth is 10% to 15% and earnings growth is 15% to 20%. There's always going to be some give or take that happen in the course of any given period, but those are and have been our long-range targets.

I'd now like turn the call over to Mr. Elder for closing comments.

Just thank you, all, for joining us this morning, and we look forward to seeing you again next quarter.

Once again, we'd like to thank you for participating on today's WEX Third Quarter 2017 Earnings Conference Call. You may now disconnect.