WEX Inc. (WEX) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Trish Carter [ph], and I will be your conference operator today. At this time, I would like to welcome everyone for the WEX Q4 quarter financial earnings call. [Operator Instructions] Thank you. I will now turn the conference over to Mr. Micky Thomas, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, operator, and good morning everybody. With me today is Melissa Smith, our President and CEO; and our CFO, Steve Elder. The press release we issued earlier this morning is posted in the Investor Relations section of our Web site 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 fourth quarter excludes unrealized gains on fuel price derivatives, amortization of acquired intangible assets, expense related to stock-based compensation, certain acquisition-related expenses, non-cash adjustments related to our cash receivable agreement, gain on divestitures, adjustments attributable to non-controlling interests, and the tax impact of these items. Please see Exhibit 1 included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release, and the risk factors identified in our Annual Report on Form 10-K filed with the SEC on February 27, 2014. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa Smith.

Good morning everyone, and thank you for joining us today. This morning, I'm pleased to report our results for the fourth quarter and full year 2014. Before we get into the specifics, let me say that I'm very pleased with our performance throughout the year, particularly the progress we made against our strategic objectives. This interim led to excellent top line growth and strong operating performance during the year. We generated $212 million of revenue in the fourth quarter and $818 million for the full year, both of which were at the top end of our guidance range. This represents growth of 16% and 14% for the fourth quarter and full year respectively as compared to the prior year periods. Adjusted net income came in below our guidance range of $0.96 per share for the quarter and $4.96 per share for the full year 2014. While I'm disappointed with missing our earnings guidance, the GAAP is driven entirely by a non-operating foreign exchange loss of approximately $0.18 of EPS, including the tax impacts. We've identified the issues that led to the loss, and are taking corrective measures to address them on a go-forward basis, which Steve will cover in detail during his prepared remarks. That said, our underlying operating performance was strong during the quarter in spite of what the headline number might suggest. If we back out the impact of the foreign exchange loss to A&I, we would have been at the high-end of our guidance range for both the quarter and the year. Let me now spend a few minutes on the specific progress that we've made against our strategic objectives during the fourth quarter and full year. As you'll recall, we have been focused on three key strategic objectives since I became CEO; first, position the company to accelerate growth; second, to advance the business through targeted investments; and third, to drive scale across the organization. I will cover each of these in more detail. In terms of accelerating growth, we had a very good year. Our top line growth came in at the high-end of our long-term target range driven by broad-based execution across all of our product sets and geographies. In our fleet business, we continue to see favorable trends. During the fourth quarter, we had payment processing transaction growth of 9% relative to the prior year period. Domestic growth was fueled by a steady stream of wins, which will have a positive impact on our business going into 2015. To give you some numbers here, our sales teams in the U.S. and Australia added over 700,000 first new vehicles organically in 2014. We've also made great strides by broadening the reach of our fleet payment products internationally into Brazil, Europe, and Asia-Pac, opening up significant new markets. We now have established substantial presence throughout Europe, and we are in the process in opening up a physical presence in Asia with an office in Singapore. This leverages the strong demand in business that we now have in Southeast Asia, an important region for our long-term growth. In the Other Payment segment, which includes our travel, health, and employee businesses we generated an impressive 37% year-over-year growth in volume globally growing spend of $4.5 billion in Q4. The quarter saw several key customer wins and contract extensions in the travel business. We also increased our distribution channels in Europe by establishing partnerships in 2014, most recently with the Voxel Group. Total revenue in the other payment segment grew 55% in the fourth quarter. In terms of target investments, WEX Europe services recently closed the acquisition of ExxonMobil's European commercial card portfolio, which extends our international footprint and provides WEX with a foundation that is differentiating in the Europe market. The market is approximately 1.5 times the size of the U.S. market. Consistent with our original announcement of the ExxonMobil acquisition, 2015 is a continued year of investment as we utilize our skills in optimizing the portfolio and upgrading the underlying product. Evolution 1 was another notably transformative investment that we made in 2014. As I've said before, Evolution 1 provides us with an entry into the consumer-directed healthcare market with an estimated $1 billion revenue opportunity. While we presently have roughly 7% market share, we have a lot of room to grow. With Evolution 1, we bring to partners the technology that simplifies the complexity of consumer healthcare payments and reimbursement. It is the proven cornerstone of our health business, and we will continue building this business to capitalize on this growing market. The fourth quarter was our first full quarter since the close of the transaction, and our team has performed exceptionally well. We continue to expand on North American share of consumer-directed healthcare payments, driven by purchase volume increases and steady gains from our existing partners and new ones. Let me turn now to our third objective, driving scale across the organization; we've been working across our business to identify opportunities to create and enhance scale, and we have strengthened in a number of areas of our business in several manners. Last year, we began efforts to update our pricing model in U.S., and we have already seen the positive impact of this effort in the form of higher fleet fee revenue. In Q4, we implemented a series of pricing and payment term initiative that will add new sources of revenue in 2015. We've also continued to leverage the synergies from our Fleet One acquisition by consolidating fleet operations in U.S. and maintaining our office in Nashville as a center of excellence for our OTR products. The Fleet One business has afforded us the opportunity to enhance scale by cross-selling to customers, and we continue to see significant traction from this integrated offering along with other OTR wins. Looking into 2015, our strategic priorities remain as important today as they were a year ago, to grow, scale, and make targeted investments. We will continue to expand our reach in existing verticals which was where we see the greatest potential for near-term value creation. Of course, we'll also continue to look at entering new markets that meet our established criteria. These big markets that are facing complex challenges and inefficiencies are where we think we can address an unmet need with our products and services. In fleet, we are bullish on our profits and expect to gain market share amongst small, large and mixed fleet. We're having a very strong pipeline of new customers domestically and internationally. We're also continuing to expand internationally, extending our position into Asia-Pac with both Shell and ExxonMobil. This growth will be compounded with a systematic approach to modernizing our pricing with an eye around value to our customers in our fleet segment, improving the economic profile. As we've said before, 2015 will be an investment year for the Esso portfolio. We'll continue focus on transitioning the European operations by completing the conversion of the Esso portfolio to WEX systems, which will begin in the second half of the year. WEX Europe services will also be making significant enhancements to the profitability of the underlying portfolio through a rigorous portfolio management approach. In travel, we'll continue to focus on market share gains and global expansions while laying the ground work for accelerated growth in Asia. In North America, we'll be focused on capturing a greater share of overall travel spend, accomplished by leveraging our strong existing relationships to serve a broader set of customers and needs. We'll also continue to evaluate opportunities to move into other adjacencies outside of the OTA market. In healthcare, we'll build on the success of Evolution 1, while extending the partner network innovating through leading technology and leveraging our expertise for new offerings. As we pursue these objectives, we'll maintain our disciplined approach to capital allocation considering strategic acquisition opportunities in organic growth initiatives that align with and help accelerate our plans. Before I conclude my prepared remarks, let me share a few comments regarding fuel prices. First is, we've said before, for the 2015 hedges that have been completed we've locked in an average fuel price of approximately $3.35, which will limit our exposures to price fluctuations this year. As you know, we have suspended purchasing another program as we believe the risk-to-reward trade-off is not balanced at this time. We will continue to evaluate our alternatives going forward. That said, our strategy to broaden our business and expand into other high-growth payment verticals has helped to lessen our exposure to commodity fuel prices. For example, when we first went public 10 years ago, our revenues were approximately 65% exposed to fuel prices. Today through our expansion into new verticals like travel and healthcare as well as structural changes in our fleet revenue streams we've reduced our exposure to less than 40%. We expect this will continue to decline as non-fuel price sensitive areas of our business grow to comprise a greater proportion of our overall revenue base. However, it is currently having an estimated impact of about $0.65 of EPS compared to 2014. So it is headwind into 2015. In summary, I'm pleased with that performance for the year and the foundation that we have built to accelerate our growth and improve our scale going forward. 2015 is shaping up to be a very good year for WEX as we continue to penetrate our existing verticals further globalize the business and strategically invest in areas of the business that have the potential to drive even higher growth in years to come. I'll turn the call over to Steve to discuss our financials and guidance. Steve?

Thank you, Melissa. For the fourth quarter of 2014, we reported total revenue of $212 million, a 16% increase from the prior year period and above the high-end of our guidance range of $206million to $211 million. Net income attributed to common shareholders on a GAAP basis for the fourth quarter was $47.9 million or $1.23 per diluted share, compared with $34.5 million or $0.88 per diluted share for the fourth quarter last year. Our non-GAAP adjusted net income came in at $37.2 million or $0.96 per diluted share down from $45.7 million or $1.17 per diluted share for the same period last year. For the full year 2014, revenue increased 14% to $817.6 million from $717.5 million in 2013. On a GAAP basis, net income in 2014 was $5.18 per diluted share compared to $3.82 per diluted share in 2013. On an adjusted net basis, adjusted net income increased 8% to $4.96 per share from $4.60 per share in 2013. As a reminder, for the purposes of comparison, adjusted net income for prior periods reflects the exclusion of stock based compensation expense to confirm with the approach that we adopted in 2014. As Melissa mentioned, our earnings in this quarter were impacted by a non-operating $8.1 million pre-tax loss related to foreign exchange rates. I'd like to take a moment to walk you through our foreign exchange exposure and then more importantly, talk about how we're adjusting this moving forward. As you know, globalization is a key component of WEX's growth strategy and one that is allowing us to establish market leadership in high demand regions across the world. Today, we have a presence in 10 countries and several transactions in 17 currencies with our virtual card products. This global footprint serves as a competitive differentiator but this also means we are increasingly influenced by fluctuations in foreign exchange rates. In the past quarter and continuing into January, we saw sharp fluctuations in exchange rates. This resulted in significant devaluation of major currencies to which our business is exposed, including the Australian Dollar, the Euro and the British Pound. These devaluations range from 4% to 7% during the fourth quarter. Let me explain how this impacted our results. Unlike many companies, our foreign exchange exposure is primarily related to our balance sheet and the re-measurement of our assets and liabilities. This is a natural by-product of our business strategy to provide customers with the flexibility to transact in currencies other than our functional currency. As an example, WEX Bank is settling in many currencies other than the U.S. Dollar. For each of the assets and liabilities we hold in foreign currencies the accounting rules require that we record the change in market value of these assets and liabilities on our income statement. It's also worth noting that the recent addition of the Esso portfolio has increased this type of exposure. We've taken immediate steps to mitigate the impact of FX fluctuations moving forward. First, we will now hold FX hedges outstanding over the quarter and periods beginning with the first quarter of 2015. In the past we managed our foreign exchange exposure on an inter-quarter basis. Second, we are more tightly our exposures overseas and working to minimize the balances. Lastly, we've expanded the scope of our hedging program for currency risk. We've increased the number of currencies we hedge and we're increasing the estimated percentage of our exposure on balances that fluctuate due to customer activity. To aid us in these efforts, we are also bringing in some outside consultants. We are excited to continue building our strong international presence and are committed to executing a plan to prudently resolve this issue as quickly as possible. But we do not expect to completely eliminate our currency risks; we do expect these measures will reduce our exposure to foreign exchange movements. However, given the movement in exchange rates and the timing of when these adjustments were implemented, we already know about a foreign exchange loss in January which has been included in our guidance. Outside of this impact we are pleased with our performance across the business. For the quarter payment processing transactions increased to $79.2 million, 9% higher than the prior period. For the full year consolidated payment processing transactions increased to $311 million 7% higher than 2013. The increase in transactions was the result of solid execution from our sales and marketing teams combined with a small contribution coming in December from the Esso portfolio. Although we hedge against domestic fuel price fluctuations on an earnings basis, our revenue is still impacted by the recent price decline. As a result, even with our solid transaction growth our payment processing revenue in the Fleet segment came in 2% below the prior year period. We were very pleased with the performance of the Esso portfolio in the first month we owned it. We know there is a significant amount of work to do to transfer to our systems and operate it more efficiently. Given our experience we are confident that we can accomplish this over the next year. Transaction processing revenue was down 16% in the fleet segment, primarily due to the divestiture of Pacific Pride earlier in the year. Finance fee revenue in the fleet segment increased $5 million compared to Q4 of last year. This increase was driven by fee increases as well as shortening payment terms for certain customers. In the other payment segment, revenue for the fourth quarter increased 55% or $26.6 million year-over-year to $75.5 million primarily as a result of the acquisition of Evolution 1 and continued strong growth in our virtual card purchase volumes. Spend volume on our virtual products increased 37% over last year to $4.5 billion for the quarter, driven by these two factors. The net interchange rates for our virtual card in Q4 was 89 basis points down seven basis points year-over-year and up six basis points sequentially. Moving down to the income statement, for the fourth quarter total operating expenses on a GAAP basis were $150 million, a $39 million increase versus last year. Salary and other personnel costs for Q4 were $58.1 million compared with $42.3 million in Q4 last year. Additionally service fees were up $8.1 million for the prior year at $31.7 million. Each of these increases is primarily due to the Esso and Evolution 1 acquisition. During the fourth quarter, credit loss on a consolidated basis totaled $9 million in Q4. This compares to $6.5 million in Q4 last year. Total charge-offs in the quarter were $9.5 million. Fleet credit loss was 13.7 basis points in Q4 compared to 9.9 basis points in Q4 2013. Although the loss rate is higher than last year, it still reflects a strong portfolio. Our operating interest expense was $1.7 million in Q4 as we continue to benefit from low interest rates in the U.S. The increase in the expense over last year is due primarily to growth in debt balances in both the U.S. and Brazil. The effective tax rate on a GAAP basis for Q4 was 40.4% compared to 39.4% for the fourth quarter of 2013. Our adjusted net income tax rate this quarter was 39.7% compared to 38.4% for Q4 a year ago. The increase in the tax rate this quarter was due primarily to foreign exchange losses and related mixed impacts. Said another way, this is a case of reducing earnings in low tax jurisdictions and the increasing earnings in higher tax jurisdictions caused by changes in foreign exchange rates. We could see some variability in our tax rate in 2015 due to the impacts of the foreign exchange gains and losses. Looking ahead, we expect to continue to benefit from our strategic tax planning project that we discussed last quarter. Turning to our fuel derivatives program, for the fourth quarter of 2014, we recognized a realized cash gain of $3 million before taxes on these instruments and an unrealized gain of $34.2 million. We concluded the quarter with a net derivative asset of $41 million. For the first quarter of 2015, we have locked in at the price range of $3.34 to $3.40 per gallon. For the full year, the average price locked in is $3.35 to $3.41 per gallon. Moving over to the balance sheet, we ended the quarter with $285 million of cash, down from $577 million at the end of the third quarter. The decrease in cash was driven by the seasonality of certain deposits at our bank. In terms of capital expenditures CapEx for the fourth quarter was approximately $19 million. Our total CapEx for the full year was $58 million. As our track record demonstrates we've maintained a very disciplined and focused approach to capital allocation since we went public. Have completed two significant acquisitions in the last six months we are bit above our target leverage of 1.5 to 2 times EBITDA. Our financing debt balance increased to $218 million in the fourth quarter reflecting the completion of the Esso portfolio acquisition. And we ended the quarter with a total balance of $1.3 billion on our revolving line of credit, term loan and notes. As if December 31, our leverage ratio was 3.6 times our 12 months trailing EBITDA compared to 2.1 times at the end of Q4 last year. In the near-term we will be using our free cash to reduce this debt level. We believe we can reduce our leverage by about one churn of EBITDA over the course of next year. Because of this we continue to give market looking at M&A opportunities that meet our criteria. Our financial performance in 2014 reflects our commitment to expanding our business through both organic growth and strategic acquisitions. We have continued to make investments needed to expand into high demand vertical while strengthening our presence in core markets and across high growth regions. Despite the FX and fuel price headwind we are confident that we can sustain our momentum moving into next year as we increasingly benefit from strong volume growth, transactions across key verticals as well as higher contributions from our expanding partnership network across the globe. Now, for our guidance for the first quarter 2015 and full year, which reflects our views as of today and are made on a non-GAAP basis. For the first quarter of 2015, we expect to report revenue in the range of $192 million to $201 million and adjusted net income in the range of $37 to $40 million or $0.94 to $1.02 per diluted share. These figures assume normal seasonality trends in the virtual card business as well as credit losses. Our first quarter guidance assumes that fleet card loss will be between 10 and 15 basis points and that domestic fuel prices will average $2.59 per gallon. Our guidance also includes exchange rate impacts of approximately $0.07 EPS through January 2015 and assumes that exchange rates will remain in the range of 12/31/14 rates for the remainder of the year. For the full year 2015, we expect revenue in the range of $860 million to $890 million and adjusted-net income in the range of $191 to $203 million or $4.90 to $5.20 per diluted share. Our guidance includes $11 million to $14 million of after tax losses related to our Esso portfolio in Europe. Our full guidance also assumes that fleet card losses will be between 10 and 15 basis points and that domestic fuel prices will be $2.62 per gallon. The fuel assumptions for the U.S. are based on the applicable NYMEX futures price. Additionally, we expect our adjusted-net income tax rate to be between 36% and 37% for 2015, total capital expenditures to be approximately $62 million to $65 million. Our guidance assumes approximately $39 million shares outstanding for the year. And now we will take your questions.

[Operator Instructions] Your first question comes from the line of Bob Napoli with William Blair.

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

Yeah, Bob I think you largely have it correct. I mean the loss that we took in the fourth quarter and what we are including for January is balance sheet re-measurements. So these are assets and liabilities that we are holding in currencies as I said at WEX Bank where it's not the U.S. dollar or it could be in the U.K., where it's in Euros or just currencies that are not what we are operating at, and it's those re-measurements that are causing these losses. If rates stay where they are, you wouldn't have anymore these re-measurement losses going forward we will have them all -- if rates stay perfectly steady, which you wouldn't really expect, you wouldn't have any more these re-measurement losses after January. That said, we have undertaken a lot of changes to our FX hedging programs and tightened them up in a lot of cases, as well as just bringing down the total exposures since year end. I think the other point you made is Australia is really the only country where we have a significant amount of revenue and earnings. So from an operational perspective, the FX rates are not as meaningful I guess from an operational perspective as they are from a balance sheet perspective.

Great. Thank you, that's very helpful. And the Esso business, how confident are you that jumping up into 2016 that the Esso business is going to be generating margins close to the corporate average as you get though the expenditures this year? Are we going to be in for another year of investment next in '16?

So when we actually announced the deals, we've talked about the fact that they're going to be two years of dilution in '14 and '15, and really it has performed I would say as expected in terms of the fact that when we picked up the business and we did that in the earliest day possible working with EXXON, moving into nine countries through Europe, we do believe that this is foundationally an investment that's moving us really in a big way into the European marketplace. We did that in order to make sure that we actually have the infrastructure in place. We do think of 2015 as another investment year and that is what we're finding to be true. We do believe that as we are working through the year we're really changing the economics of the portfolio and we're going to be converting or starting the process of conversion onto our platform at the later part of this year. So all of those efforts around the way they're happening as expected which would lead us to -- through the portfolio into positive in 2016.

Thanks. And last question just on the growth of the other payments business, can you break out the growth rate of the travel versus Evolution 1, I know obviously Evolution 1 would be pro forma. And then the related; the yields are -- I guess discount rates that you would expect on those portfolios in your guidance.

So from a spend volume perspectives, we recorded 37% in the fourth quarter. Evolution 1 was a good chunk of that. We are in the -- I'd call it mid-20s, low to mid-20s on the historical virtual card with the Evolution 1 portfolio providing the rest. The interchange rate that we earned on that business is actually a bit higher. That won't be earned on our virtual card business in the travel sector. So that's actually a positive mix impact and one of the reasons why the interchange rate went up sequentially.

Great, okay. Thank you, appreciate it.

Your next question comes from Sanjay Sakhrani with KBW.

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

Yeah, some of it's in the rounding. You saw the rate as we've reported to the couple of decimal places is basically flat, but it is actually going up, if you expand that a little bit further almost about a basis point. Yeah, we would expect that to continue to increase as fuel prices dropped and we have those, what we call, "Hybrid type contracts" with our merchants where we have transaction fees embedded in there. It's really what's you're really seeing is just kind of mix impact. There is nothing in our merchant base that's changing; none of the rates are changing. Nothing significant at least, none of the major oil company contracts have been changed or anything like that. So you are really just seeing mixed impacts in the quarter.

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

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

Okay, got it, got it. And then if we were just to look in terms of your guidance, I mean it seems to be obviously there is a lot of puts and takes, but could you talk a little bit about what -- how you get like the low-end versus the high-end. What are some of the puts and takes within your guidance?

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

Got it, great. Thanks for taking my questions.

Your next question comes from David Togut with Evercore ISI.

Hi, this is Michael [indiscernible] on the line for David Togut. Thanks for taking my questions. Fleet payment processing transaction growth is about 9%; can you review the primary drivers of this growth acceleration, and do you believe high single-digit transaction growth is sustainable through 2015?

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

I talked about several hundred thousand new growth vehicles that we added both in U.S. and in Australia, we really had strong year as Steve on the acquisition side in both of those regions.

Okay. And any forecast for that kind of growth in 2015?

We would include that in our guidance range. Nothing I would say that's unusual from what you have seen historically.

Okay, thanks. And then just backing up to the previous question, you mentioned mid-20's legacy kind of legacy I guess WEX Virtual seems quite strong but overall there was slight deceleration in other payment solutions, volume growth versus last year. Despite this being first full quarter of Evolution 1. Just wondering how Evolution 1 is tracking overall and what kind of growth contribution you are expecting from Evolution 1 in 2015?

Evolution 1 has come on very strong. It is so far performing better than what we had originally expected and we feel really good about the strength of the team that's working there and that being the corner stone of our products going forward. And if you recall Evolution 1 has a piece of their revenue that's coming is payment processing revenue but there is also a piece that is coming in SaaS-based piece.

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

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

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

Thanks, I will jump back in the queue.

Your next question comes from Mitti Srethapramote with Morgan Stanley.

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

I would say that the leaders that we processed were actually did end up above our original expectations. And because of the falling fuel prices the spreads that we actually earned -- remember this is kind of a spread based business, they were actually favorable in December as well. So we had kind of goodness on both sides there. We did have some higher costs than we had planned around the transition 2 x from Esso. And so that overall the net income number was very much in line with what we've planned on, but the good news is that we ended up getting more volume than we had originally planned on.

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

Yeah I think we stick with that for now as Melissa said. We're very early days here. And the volume is slightly higher. So that's helpful and that would be a positive fact. I think we're still working through how the spreads and how our revenue is going to translate through during the year. So we'll stick with that for now, but there is a potential upside bias there.

Got it. And maybe just another follow-up on Europe, can you give us an update in terms of what you're seeing here in regarding further RFPs for outsourcing of fuel card ramps over there.

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

Got it, okay. Thank you.

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

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

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

Okay, and a really quick update on the European regulatory environment, I think things kind of broke your way with the recent draft language I think that excluded commercial cards, but just any quick thoughts on any latest developments there?

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

Okay, and last one from me, changing the channel a little bit. Can you update us on efforts to get your virtual card product into other verticals besides Tella [ph]; I noticed with Comdata, we quite a bit noise about healthcare and construction verticals and I know it took you guys quite a long time to develop the vertical that you're in now -- you're pretty dominant now. Is there -- are there any latest thoughts about your ability to kind of push that into other verticals, have you just kind a started significant round with Evolution 1 and maybe leveraging those existing distribution relationships to do something there. Or just a kind of some updated thoughts would be helpful.

Yeah what we tend to look for -- call the markers within the space. We're looking for areas of complexity that we think that we can bring a solution that's unique. Healthcare is clearly a piece of that with the partnerships that Evolution 1 has established. When we view that is an opportunity, but beyond that we're continuing to test in other markets. I wouldn't say that there is anything that would be big enough to call out yet in the course of that testing, but it is an area that we're continuing to investigate.

Great, thanks a lot. That's all from me.

The next question comes from Jim Schneider with Goldman Sachs.

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

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

Just to put it in perspective, so we had about $18 billion worth of purchase volume last year and so to maintain those growth rates those get more and more difficult as the numbers get bigger. We added above $5 billion worth of purchase volume -- call it 4 or it organically and what's been driving it.

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

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

Great, thank you.

The next question comes from Ashish Sabadra with Deutsche Bank.

Thanks. Quickly on Evolution 1, I was wondering if you could comment on the HSA contribution during the key enrollment period and how that's trending for Evolution 1? And then also just a quick follow up on HSA Bank acquired a $1.3 billion portfolio from JPMorgan, can you just comment on when they plan to transition that portfolio on to the Evolution 1 platform?

Yes, the Evolution 1 is in the process of ramping that portfolio. So they are I would say in early stages of that. we talked about this I think in the last call of it being a multiyear conversion, because that's the way into the lifecycle when end players are actually in a position to make a transition. So a piece of that was happening through this oil cycle, piece of it will happen through the next one. So I'd say early days -- so we leave to a transition that's going to happen over a multi-year period.

Again that makes sense. Quickly on WEX travels, can you also talk about -- you talked about expansion a new channels and stuff, can you also talk about expansion like moving into prepaid or low cost carriers, those kind of areas what are you seeing in that space?

Sure. So that's actually something that we're doing in Europe now to our product is facilitating some of the low cost carriers in that market place. It's something that's more prevalent clearly within the European market place. And so it's a way that we adapt the product through our corporate pay product set. And what we're finding is that we have an ability to expand the customer base that we have there through -- you talked about low cost carriers but also looking at some of the OTAs within the space. They now have over a 100 of them within the European business. So that's been -- in every growth process and then most recently we talked about adding an office within Asia. We've done that really in part because of the success we've had within the Asia region. It's also the largest travel market in the world. So we think of that as foundational for us from our future growth perspective. And in areas that we're still learning I would say ways to modify the products. There are going to be really particularly unique within that region. So we're excited about setting up physical space, learning more about that market. We've already had success there. We think we can compound that by adding in more local expertise.

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

Yeah, that's definitely ballpark, Ashish.

Okay, and that's helpful. Thank you.

Your next question comes from Phil Stiller with Citi.

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

Yeah, I think that we are and have always been particularly thoughtful about making sure that what we're doing is continuing to add value to the customer -- the underlying customer and so if we approach this we want to make sure that this is with that mind and making sure also that we're thinking about this from a long term perspective and what's going to work within the market place. So, there's clearly an opportunity to really create some upside but at the same time we have to do it in a thoughtful way that is going to be something that we can really go to market laid on a longer term basis. And so when I talked about the fact that we did some of that during 2014 we did more testing and you're seeing the benefit of some of that coming through 2015. But I would say, eluding a lot as we go and that's an area that we do believe that there is opportunity going forward.

And what about in the OTR space, obviously with the consolidation there -- that could create some opportunities as well -- is that a market that you feel is more sensitive to the adjustment?

I think that in the OTR space we do believe that we were entering the market with our product and Fleet 1 had traditionally focused on the small end of market place. But we've been able to find is that we can penetrate some of the OTR fleets with our products that in the relationships that we have and so to say that the whole industry is a little bit in the state of transition we think of that as an opportunity for us. You talked about that in terms of pricing I think about that also in terms of just customer wins.

Okay.

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

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

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

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

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

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

And if that's still in that $220 million, 250 million range?

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

Okay, appreciate it. Thank you.

Your next question comes from Tom McCrohan with Sterne Agee.

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

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

Okay. And a question on guidance, the $11 million to $14 million Esso-related lawsuits included in the guidance I just wanted to confirm do those law suits as absolute law suits they're not incremental to the losses incurred 2014?

Correct.

Great. And my last question, Steve, was on the hedging; so is there a certain price level of oil that you -- that would trigger to resumption of your fuel hedging program for 2016?

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

Okay, thanks.

Your next question comes from Tim Willi with Wells Fargo.

Thank you, and good morning. Just two quick questions, a lot of stuff had been covered here; you first, Steve on the balance sheet and the debt pay down. Once you sort of get through the year and take the debt down by about a term if I think its what you said you could do if there has not been any material acquisitions announced or completed would you look to continue to push the debt levels down or would you be more inclined the way cash build sort of trying to think about how you might think about interest expense running out of 2015 then to 2016? And then I have a quick follow-up.

So I guess if we are successful on the first turn that would get us, I would call 2.5, 2.6. Our stated leverage target range is 1.5 to 2. So we probably continue to push it down for a bit of time. And then -- a lot of can change between now and that point so well I think we'll kind of reevaluate when and if we get there.

Okay and then the second thing I want to go back to -- so there was a question earlier -- it might've been from Bob, it at the beginning of the call just about sort of the profitability ramp I just wanted to -- if you could go back just real quickly; your intention as you exit 2015, the basic we have Esso position from normalized operating margins as we start 2016 or well sort of the climbing of that profitability curve still be in process isn't going to 2016?

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

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

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

Hey, guys, just a couple of quick ones. I know we are at the end here. Just on the single-use account business, for the official card business, Visa MasterCard talked about cross-border volumes taking a bit of a hit here at the beginning of the year; have you seen any of that at all in your business?

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

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

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

Okay, that's good. Thank you.

Your next question comes from Mike Grondahl with Piper Jaffray.

Yeah, thanks for taking my questions. With the lower gas prices, can you comment kind of what trends you're seeing in your core fleet, if you're seeing any uptick in usage? And then secondly, lower gases and how that relates to finance fee income? How should we think about that over the course of the year?

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

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

Okay.

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

Okay, thank you.

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

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