WEX Inc. (WEX) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the WEX Third Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Steve Elder, Senior Vice President of Investor Relations. You may begin your conference.

Thank you, [Tineva], 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 www.wexinc.com. A copy of the release has also been included in an 8-K we submitted to the SEC. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, during our call. Adjusted net income for this year's third quarter excludes acquisition and divestiture-related items, certain debt restructuring costs and debt issuance cost amortization, stock-based compensation, restructuring another costs, net foreign currency remeasurement gains, non-cash adjustments related to our tax receivable agreement, similar adjustments attributable to our non-controlling 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 our reported GAAP earnings. Please see Exhibit 1 for an explanation and reconciliation of adjusted net income to GAAP net income included in the press release. The adjustments for the amortization of deferred financing costs are new this quarter and we have restated prior period adjusted net income to reflect this change. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our Annual Report on Form 10-K filed with the SEC on February 26, 2016 and our Quarterly Report on Form 10-K filed with the SEC on April 28, 2016. While we made 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 extremely pleased to announce another strong quarter of performance in 2016 in which all business lines performed favorably. We exceeded our expectations on both the top and bottom line driven by continued focus on organic growth, execution against our strategic priorities and the performance of our latest acquisition EFS. I’m encouraged by the strength of our organic growth engine, our initial progress in integrating EFS in the diversity of our business as we continue to expand globally and into new products and new sources of revenue. During the quarter we generated an impressive 27% growth in revenue to $288 million which includes approximately 7% organic growth despite continued headwinds and fuel prices. Net income on a GAAP basis was $0.46 per diluted share and we generated adjusted net income of a $1.25 per share. This quarter strong performance demonstrates an ongoing commitment to our strategic pillars, which I'd like to touch upon before going into a segment performance. As we continue to grow diversify and scale the business. Our focus is driven by our innovative technology offerings and our unrelenting commitment to our partners and clients. This allows us to the control in the hands of our customers through our industry leading tools. Our distinctive technology and established track record of customer service also lead to great new contract signings around the world. This quarter we signed a new 10-year contract with ExxonMobil covering North America including additional services in Canada, Caltex in Australia, Progressive Insurance in Cox Communications. Our EFS business is showing strong momentum with signings some renewals this quarter including FedEx, Hogan, Kenco Logistics, Archer Daniels Midland, Titan Transfer and Beth path to name a few. Our ability to attract new business and extend existing contracts demonstrates the strength of our sales force capabilities and relationships. This also serves as the growth engine of our core domestic fleet business. With regards to travel our leadership position continues to strengthen as we extend our strategic partnerships in Latin America, Germany and Australia this quarter. Importantly this provides a solid foundation from which to continue growing our global presence. Diversification this quarter has helped us develop new products and identify new sources of revenue. Our price modernization efforts continue to contribute positively to our fleet result. The EFS integration is off to a great start as we leverage the power of our proprietary platform with EFS is modular technology and our collective relationships. Our Health and Employee Benefits businesses continue to post impressive results and we believe there is a great pipeline going forward. Lastly we’re focused on capturing efficiencies and its scale across the business. As we become an increasingly global organization, we’ve leveraged the capabilities proven across all of our highly scaleable product offerings. Our recent acquisition of EFS serves as a great example. But we are still in the early integration phase. The team has done some great work in taking the best to both organizations that began integrating back office functions as well as analyzing our products and fee structures to ensure we focus on the highest value offerings. We remain confident that this acquisition provides significant opportunities to drive scale and create value for our fleet customers and shareholders. We remain committed to our target of $25 million of synergies which we expect to be fully realized over the next three years. The favorable impact of this acquisition this quarter reinforces our belief that EFS’ functionality and complementary footprint enhances our strategic position within the fleet space. Also we renewed our contract with MasterCard during the quarter, which will provide positive scale benefits to our business going forward. Roberto, will provide further detail during his remarks. Turning to segment details. Our Fleet Solutions business performed very well this quarter. Revenue in this segment was a $184.8 million growing 29% over last year, driven by contributions from EFS in addition to our price modernization efforts that continue to offer incremental benefits to our performance. We implemented the full rollout at the pricing program following our second quarter pilot. Early results have been very encouraging as attrition remained low at industry leading levels, but still early in the process and we expect some increases going forward our low attrition rates highlight the strength of our relationships with our customers and the value of our products and solutions. We are also encouraged by developments in our international fleet business. We completed the successful conversion in migration of ExxonMobil’s fleet card customers in Hong Kong and Macau on to our international platform. This completes all of the migrations for the Asia Pacific region for Exxon. We see continued steady performance coming out of Australia but we saw some softness in Brazil in the agricultural sector. In Europe, we are transforming the business that we acquired from Exxon by aligning the cost structure. This business is still expected to at least break even on an operating income basis this year. We continue to see strong interests across oil companies in Europe but the decision to outsource take some time as we expected. Clearly, we made some progress this quarter in fleet both domestically and internationally. And I am encouraged by our expanded footprint in strengthening product offerings, our products are resonating with the market, our sales pipeline remains robust and our EFS integration efforts have progressed nicely. Our fleet products are now being used in 25 countries and territories across the world. Let's turn now to our Travel and Corporate Solution segment, which performed in line with our expectations revenue grew 12% during the third quarter due primarily to the addition of EFS, purchase volume also increased 23% during the third quarter. Specific to the Travel business as anticipated we experienced softness in cross-border revenue. We also had a negative impact of revenue due to customer mix. We see favorable trends within Travel that will benefit us as we increase our presence outside of United States. We continue to focus on further globalizing our virtual card product and pursuing value-added enhancements for our existing product portfolio, which positions us well to capture the growth from global travel trends. For our finer existing relationships so that they better serve marquee clients globally. In China we continue to expand our partnerships with key OTAs. In addition we recently introduced our customized Virtual Payment Solution in Latin America via Argo the leading provider of corporate travel and expense management in Brazil and Mexico. Latin America remains a promising region for growth in travel payments and we look forward to launching our solution and expanding our market share in this region. Lastly Health and Employee Benefits solutions continued to gain momentum as it evidenced by the revenue growth of 48% this quarter. We had exceptionally strong organic growth within our Brazilian benefits business along with WEX Health even excluding the acquisition of Benaissance, WEX Health continues to grow in excess of 20% this quarter driven largely by momentum from new implementations earlier in the year. We are excited to announce that we recently signed a contract with PNC, one of the 10 largest diversified financial services institutions in the United States. Benefit plus PNC’s consumer directed healthcare solutions offers HSAs, FSAs, HRAs and transit accounts. Overall, I am very pleased with our performances this quarter in the underlying organic growth which sets us up and a solid path going forward. We made significant progress in achieving our strategic objectives for the year and remain excited about our ability to carry this moment through Q4 and into next year. As I mentioned, we took a big step forward this quarter with a further rollout of our pricing modernization initiatives. We continue to expect positive contributions from our pricing initiatives through the end of the year into 2017. With these changes in place, we will now move into a test and learn environment with respect to future potential action. With regards to EFS integration is on track and we anticipate meaningful synergies to soon take effect as we dealt further into the integration process. Our milestones for day-one and day-90 synergies were met in the consolidation of back office functions as well as product and fees structure analysis are well underway. Overall, this marks a very good start to the integration effort. We continue to build upon the significant growth we are seeing outside of our fleet segment. Our corporate payments business is building beyond travel with the addition of the WEX tables offerings. This is a meaningful opportunity for growth. Additionally, we continue to expand our virtual payments technology with further advancement in Latin America and Asia. Finally, we are building upon the organic success we've had with new partner signings and [WEX] Health and Benefit businesses which will create further diversification to our business as we penetrate large and expanding markets. In summary, we are proud of the way in which we executed upon our strategic pillars this quarter and feel very good about where we stand entering fourth quarter and fiscal 2017. Now, I'd like to turn the call over to Roberto Simon, our CFO for a deeper dive into the financials. Roberto?

Thank you, Melissa, and good morning, everyone. For the third quarter of 2016, our total revenue was $287.8 million, a 27% increase over the prior year period, and above the high-end of our guidance range of $272 million to $282 million. Net income on a GAAP basis for the third quarter was $19.7 million or $0.46 per diluted share, compared to $32.2 million or $0.83 per diluted share for the third quarter last year. Non-GAAP adjusted net income was $53.4 million or $1.25 per diluted share, down from $1.30 per diluted share for the same period last year. This decline includes a $6.4 million impact from lower fuel prices in the third quarter of 2016. In addition, 2015 results benefit by a $6.6 million gain from our fuel price hedges. In EPS terms, this is a swing of $0.30. We are extremely pleased with the results of this quarter as we continue to execute on our growth strategy across our three segments and is starting to capture operational efficiencies. The Fleet Solutions segment achieved $184.9 million in revenue, an increase of 29.3% or $42 million compared to the prior year. The largest contributor to the growth was the acquisition of EFS which contributed $35 million of revenue in the Fleet segment in the quarter. Our implementation of price modernization initiatives continue to contribute significantly to the growth of this segment, while the declining fuel prices revenue in the quarter by $10.7 million. During the third quarter, payment processing transactions increased to $102.9 million or 14.9% as compared to prior year. Excluding EFS, payment processing transactions grew 8.2% which includes the impact of our customer conversion at the beginning of the year. Payment processing revenue in the Fleet segment increased $39 million as compared to last year. Approximately 60% of the increase was from EFS with the remaining 40% primarily related to increases in late fees and account servicing fees as part of our price modernization efforts. The average domestic fuel price in Q3 was $2.24 versus $2.61 in Q3 last year. Although retail diesel fuel prices are generally higher than gasoline prices. The EFS acquisition actually lowered our average fuel price for the quarter, because EFS offered discounts to its customers of the retail fuel price. The net payment processing interchanging the segment was down 9 basis points compared to Q2. Excluding the acquisition of EFS, the rate was essentially flat. In Travel and Corporate Solutions, revenue for the third quarter increased 12% to $63.3 million. As Melissa mentioned, most of the revenue increase was due to the EFS deal. As we guide the last quarter, we saw some softness in the cross-border fees, which we expect to continue. We also cut some revenue softness due to customers mix impacts. However, we’ll remain optimistic about our current customers and our pipeline of new clients outside of the U.S. Volume in the segment was $7.1 billion, which is an increase of 23% over the prior year. The net interchange rate for our virtual card in the third quarter was 74 basis points, which was by a one-time benefit from the new contract signed with MasterCard, which added about 2 basis points. In addition, EFS added another basis point to the rate. Our new agreement with MasterCard will provide ongoing benefits to the Company. We will receive significant cost reduction for cross-border fees, which we expect to substantially pass-along to our customers, making us more competitive in the marketplace. In addition, a new contract with MasterCard provided us with an incremental one-time benefit in Q3 only of approximately $0.09 of EPS. For Health and Employee Benefit Solutions, revenue for the third quarter increased 48% to $39.7 million, resulting from a strong organic growth in both the U.S. and Brazil and the contribution from the Benaissance acquisition. Moving down the income statement, for the third quarter, total operating expenses on a GAAP basis were $233.2 million. Salary expense for the Company was $76.7 million, up from $57.2 million in Q3 last year. The increase was primarily due to the acquisitions of EFS and Benaissance. Service fees were $53.4 million in the quarter, which is up $16.5 million from the same quarter last year. The majority of the increase related to closing the EFS transaction. Additionally, this increase also include cost for volume increases in our Travel segment, cost for outsourcing much of our back office technology and operational recurring cost related to EFS. During the third quarter, credit loss on a consolidated basis totaled $9.5 million, up $2.9 million compared to the third quarter last year. The Travel and Corporate Solution segment was impacted by two discrete credit losses including the European bankruptcy noted last quarter. In the Fleet segment, credit loss was 8.6 basis point of a spend volume, which was at the low end of our guidance range, compared to 10.6 basis points in the third quarter 2015. The EFS portfolio credit low rates are lower than our existing Fleet portfolio, which was our contributing factor to the rate. We continue to see very high asset quality and solid portfolio performance. Our operating interest expense was $2.6 million in the quarter, as we continue to benefit from low interest rates in the U.S. We expect that our agreement with Higher One during Q4 and as a result there will be a slight increase in our operating interest expense as we replace them. On a GAAP basis, the effective tax rate for the third quarter was 24%, compared to 42.4% for the third quarter of 2015. On an ANI basis, the tax rate was 37% compared to 40.6% last year. Moving on to the balance sheet, we ended the quarter with $537.2 million of cash, up from $280 million as compared to the cash position at the end of last year. The increase is related to the seasonality of deposit and in anticipation of the wind down of the Higher One program. We ended the quarter with the total balance of $2.1 billion on our revolving line of credit, term loan and notes. Our leverage ratio as defined in our credit agreement stands at 4.7 times. We are looking into potentially hedging a portion of our interest rate exposure on our financing debt which could increase our financing interest expenses, but offer longer-term protection against raising interest rates. By year-end, we project our leverage ratio to be approximately 4.5 times in line with our expectations when we announced the EFS acquisition. Before we give guidance, I would like to update you on our expectations of EFS and our financials. We expect a positive impact to our adjusted net income EPS in 2016 as we continue to execute on our integration and synergy plans. We are pleased with our progression during the first 90 days and confident with our path moving forward. Now for our guidance. Note that this expectation reflects our view as of today and are made on a non-GAAP basis with respect to adjusted net income. This guidance is based on exchange rates at the end of the third quarter. For the fourth quarter of 2016, we expect to report revenue in the range of $272 million to $282 million, and adjusted net income in the range of $52 million to $55 million or $1.20 to $1.27 per diluted share. These figures assume normal seasonality trends in the virtual card business, as well as credit losses. Our fourth quarter guidance assumes that our fleet credit loss will be between 12 basis points and 17 basis points. It also assumes that domestic fuel prices will average $2.32 per gallon. For the full-year, we expect revenue to be in the range of $1 billion to $1.01 billion, and adjusted net income in the range of $186 million to $189 million or $4.53 to $4.60 per diluted share. This also assumes that the credit fleet loss will be between 10 basis points and 11 basis points and the domestic fuel prices will average $2.22 per gallon. The fuel price assumptions for the U.S. are based on the applicable NYMEX future price. We expect our adjusted net income tax rate to be between 36% and 37% for 2016. We have updated the number of shares for the remainder of the year to approximately 43 million shares outstanding. With that, we will open the lines for questions.

[Operator Instructions] And our first question comes from the line of Tim Willi with Wells Fargo.

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

Yes, Tim. I didn't talk about it, it look pretty similar. It was a little less than 4% negative. So I think 4.7% negative in the quarter. So it's a little bit better than it had been sequentially, similar trends if you look into the portfolio was mostly biggest driver was what’s happening in the oil and gas industry. So that was down almost 30%. And so that was the largest, even though it's a small and I would say diminishing part of the portfolio it had - it’s still because of the size of that had an impact. And then if you look across pretty much every SIC was negative. It's just a question of like how negative it was and some of them looked a little bit better sequentially, construction was only down 28 basis points. So that looked a little bit better sequentially. The other one that was kind of a standard I would say from a negative perspective is retail which was down little under 10%. So this is very similar, slightly better trends than what we saw a quarter before.

Okay, great. And then you’ve referenced I believe in the discussion around travel and corporate payments sort of diversifying the business space and broadening it out and seeing new revenue opportunities in business lines et cetera. I don't know if I can characterize that correctly, but I think that was the direction the comments were, could you just talk about that a little bit. I know over the years try to crack other industries with the products. Are we seeing some momentum and some things open up?

Yes. This is a combination of two different things and that's true that we've been looking at other industries and we actually have added other industries in the portfolio is just nothing with the size of travel in addition to that in this last quarter when we picked up the EFS portfolio, 90% of their business is fleet with the other 10% is in corporate payments heavily focused on to describe with e-payables arena and they’re seeing some really good success with their business model. It's again it's a highly integrated offering, very much a technology based offering and one of the advantages that we now have is the ability to process that internally, which just gives you a little bit more flexibility around the product itself and what you can do. So a combination of two things are coming together that we continue to work across our existing portfolio to add new customers. The vast majority of what we add are outside of Travel. Travel continues to be the bigger size of the portfolio and the place that we're seeing the largest amount of global expansion is in travel, but we feel the diversification that’s coming from the new capability that we have with EFS is going to be really impactful for us over the long-term and still it's a relatively small portfolio now, but it’s really good momentum in their pipeline.

Great, if I can just ask one more and then I'll hop back in the queue. Just on the commentary around the pricing in the modernization, which I know you guys have talked about for a while. As you look forward out over several years, does that become another pillar of the story I guess, not just to raise price for the sake of price. But is it actually just more assertive stance by WEX that its products are created and evolve you know the Company feels more bold and to make sure you're getting paid for that versus maybe how the company view that previously, or do you think it’s really just surgically putting price increases in and seeing how people react?

That's a good question, Tim. I think - I'd start with part of what we started looking at this is if you look across our portfolios, there's areas over our business where we've always been a premium products that and that because we were charging for the value of the product we bring, we really believe strongly in the underlying technology in the product. But that's been true more with larger customers. But the smaller customers said what it happen is the market that really moved over time where there was more of an orientation to getting fees from customers and we really spend some time just looking at that trend and better understanding how that trend affected our smaller fleet customers in particular. It made a series of changes over the last couple of years that have been pretty impactful. And now we're in this stage where as we rollout products regardless of size of customer. So it was both small customers and larger customers were being pretty thoughtful about how we price? How we monitor changes in the marketplace? And giving customer lots of different options too, so as we rollout product offerings in the marketplace, we may said something up in a certain way that's attractive to one set of customers, but you can actually alter the pricing mechanism and that the set of services that they get and have that equally beneficial to us but more attractive to the customer. And so I would just say that we're getting much more sophisticated about how we think about that, not just with large customers, but also crossed all of our portfolios and we've seen a step function increases as a result of that, but now it just embedded in the fiber of how we think about things.

Great, that's all I have. Thanks so much.

And our next question comes from the line of Bob Napoli with William Blair.

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

Yes. So we've been doing this in phases as you know and so the first thing we had done was effect changes, late fees to our small direct fleet customers in the United States and we learned from that, it was a result of that, we made some changes to our partner portfolio after having some very lengthy discussions with their partners. And then we started doing further testing, we’ve rolled that out into our direct portfolio at this point and we did that early in the quarter. So you've seen that the full impact of that coming through with the quarterly results. Any further impact that we do to partner portfolio would be something that would be fully discussed and rolled out in conjunction with them. And mindful of the fact that part of what the partners that we do business are interested in is making sure that customers are going to their locations and they're seeing volume growth, which we've got a really good track record of and so as we have these discussion with the partners, we're making sure that were mutually lined in getting the result that they were interested in as well as making sure that we’re offering things in the marketplace that make sense from a pricing perspective and a functionality perspective. So I put that in kind of the longer-term category of something that we're working through individually with their different partners. And at the same time on their direct portfolios, we're continuing to rollout new product offerings in the marketplace and testing how we price those particular related to risk-based pricing because not all customers are the same.

Right.

We're getting more sophisticated in the backend of our systems. So that we can identify that and make sure that we're categorizing people appropriately.

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

One of the things that we changed, we did shorten payment terms to those customers, we shorten them by few days and I would say that in terms of what we got for feedback that affecting the payment terms with something that at more of a negative reactions and some of the other actions that we took. So as we continue to work through our portfolio, it’s one of the things that will be thoughtful about. But I would say it’s going to also one of the places that we've learned to so cautiously with.

Okay.

And so I look at that category of a whole list of things that we're working our way through and more of a test and learn basis in a very quick implementation.

Thank you, appreciate it.

Okay.

And our next question comes from the line of Glenn Greene with Oppenheimer.

Thank you. Good morning. The first question was that maybe you could just talk a little bit about the Exxon renewal, it sounded like there were some up sell of services and suspect some conversely some rate pressure, but maybe you could help us sort of think through that as we go forward?

Yes. Well said, I would say that first of all we’re really excited to resign a contract with ExxonMobil. We've got a tremendous amount of respect for them in the marketplace and we’re excited to continue to do business with them on a more global basis. We're doing more with them in Asia as well as North America. In regards and to more - we're providing more services for them specifically in Canada so we are expanding the relationship in Canada to look more closely like what we've done with them in North America, primarily around increased funding for them. Just if you think of it is value stack or we've added on to the value stack with them in Canada. And I would say just generally I’m not going to talk specifically about any customer contract. But we've had said generally when contracts come up for renewal. There's always a little bit of a pricing discussion that we have. But we're really excited about the fact that we've entered into another ten years with them and it can’t be enough about - as we work together with them how this is something I would describe as a true partnership.

Okay, different traction. The Travel segment, which seems like a lot of moving parts, I guess I'm confused, so the 12% revenue growth, with included EFS, but it sounded like included sort of a onetime benefit maybe for MasterCard. So I was surprised that the basis point yield went down, despite the - it sounded like the benefit from EFS and a benefit from MasterCard and I guess what I’m trying to get what was the organic growth and what are all the moving parts there?

Yes, so I’ll talk a little bit about the rate just briefly and revert them when we add into this, that there were three things that were still going on that affected the rate that two of them, with the addition of the EFS, which was a positive uptick and that will continue that MasterCard contract, which was also positive, but one-time and then the third part was mix, and so we talk a lot about the fact that where the customer portfolio, where the volume actually happens affects the mix of the overall rate. And so we saw some mix changes that were negative within the quarter, and so think of that is some of the larger customers grew faster and so that had an impact in terms of the overall rate. And that at the same time, if you're kind of tracking that to revenue we saw softness in cross-border revenue, which we had fully anticipated as a trend. And I would say that’s an ongoing trend Roberto mentioned that in his remarks. But we're just seeing that more and more softness each quarter relating to cross-border revenue.

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

I think just in terms of spend volume it was about half of the spend volume, which was coming from each - we would say roughly equal split.

Half of the growth you said?

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

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

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

Okay, great. Thank you very much.

And our next question comes from the line of David Togut with Evercore ISI.

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

Sure. I would say it's pretty similar to what I've said in the past meeting that we have quite a bit of interest when we show the product we get a lot of encouragement based on what people are looking at in terms of the product functionality what we can offer in the marketplace. In terms of timing the decisions seem to take a very long-time and then these people are choosing to outsource their underlying technology and so it's not a decision that they take lightly and so say we’re in a similar position where we’re active in the marketplace and we feel good about our prospects in the marketplace, but timing continues to delay a little bit, which is why I’ve always described as a long-term, never mind these things take and they just take a long time.

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

Yes. In Europe - so we have two active businesses in Europe. We have our virtual payments business, which has been growing really nicely within the European marketplace. And then on top of that the Fleet business, which is the cornerstone, is the ExxonMobil portfolio that we have there. And when we’ve looked at that marketplace, the predominant interest in that market right now still is around outsourcing technology and keeping the proprietary data and so if you look at the way that we're approaching the marketplace, it’s been partnership with the oil companies that are there, we do believe at some point in time, they are going to be more interested in the leasing Level III Data in which case you could turn that into a more proprietary platform, but they're not there yet.

Understood. Thank you very much.

Sure.

And our next question comes from the line of Darrin Peller with Barclays.

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

The rate is very similar, if you look at it sequentially from quarter-to-quarter. And in terms of attrition, I would say also a very similar it’s up ever so slightly and not enough that you would actually notice the difference…

Okay.

So historically we had less than 3% voluntary attrition across our U.S. fleet portfolio and we're still in that range.

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

Yes, I look at a bunch of different things. We talk about that is people do in top of their feet and so we look at attrition is a very heavy component. We also look at customer satisfaction scores, net promoter scores things that can be leading indicators towards attrition. And at the end of the day, we also think about the brand that we have in the marketplace and making sure that as we price products into the marketplace that customer is getting value for that and so all of those things factor into how we think about pricing. So far what we've learned is that we have a really good relationship with the customers. They do notice when we make pricing changes in the marketplace and we can see that reflect in some of the scores.

Okay

But we haven't seen that result in attrition and it really depends a little bit on the type of changes. In the end, we move that portfolio to closer to 50/50 between merchant rates and customer associated fees and so we have made some pretty dramatic shifts in the last couple of…

Okay, thanks. And then just very quickly on the Travel side, I mean I think if I heard correctly you said from a growth of - volume growth standpoint about half the growth is coming from EFS. I guess I'm just curious on the cross-border trends. You said they were obviously still slower. I guess sequentially from last quarter were they worse or the same or where you see that going forward?

Yes, cross-border was a little bit worse sequentially.

Okay.

And we had anticipated that just from what we were seeing going into the quarter. I think that what we're hearing from our Travel partners is that there's just been a fundamental mix and where people are traveling to.

Got it.

And affecting the actual mix that we're seeing coming through from a revenue perspective.

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

I feel like that’s a rolling six months to 12 months that happens there. So I think still within the next six months to 12 months, but I think it could be that long.

Okay. Thanks guys.

And our next question comes from the line of Sanjay Sakhrani with KBW.

Thanks. Good morning. Quick question on EFS, is there seasonality to that business when we look throughout the year, maybe you could just help us give us get some clarity on that?

There is seasonality in it. I would say there is similar seasonality that we see in our U.S. Fleet business. The fourth quarter is lighter than the third quarter. And that’s driven really by a combination in the number of business days and offsetting that for holidays. So things tend to get pretty quiet around the holiday period, and as I understand that maybe even a little bit more quiet on the Esso side then what we see in the rest of the base business.

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

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

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

Yes. So we saw the customers in just kind of like refresh part when we looked at the business we could see the pipeline that was sitting there or waiting for implementation some had already been implemented that just needed to run rate if you will. Some of that was sitting there and still waiting for implementation and then customers like I talk about like Hogan as an example of something like that we’re sitting, waiting for implementation and earning revenue associated with that. So we anticipate that to come through into revenue over the next couple of years.

Okay. Is there any sense of like what - if you could give us, but like is there a revenue contribution piece for the fourth quarter or you can help us with just so we can think about the seasonality of that business for EFS?

But I would say to you is going to be very similar to the numbers that we have seen on the third quarter. Although as Melissa said, we have some seasonality. On the other side, we have noticed new customer implementation as well as the growth. So I would say to you that the directional is going to be on the [indiscernible].

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

So what I said on the call is number one, I mean we will get a significant benefiting cost. So you should see a cost on the service fee line going down. On the other side, we are given up on some of the revenue, because we have an incentive from MasterCard. All-in-all we get a positive - and Melissa has also mentioned that we get a positive impact on these net of revenue on cost. And on the other side, we have the cross-border fees that I discuss as well, we are going to be passing along to the cost of that tool obviously be more competitive on the marketplace. But overall, I would say to you that is going to be positive as we move along.

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

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

Okay.

The other thing I would say to you as well is on the - if you look on the Travel segment, on the other revenue side, is what you have the cross-border fees and as we said knowing the previous quarters we were slightly down. This quarter we continue to go down so we can’t help you as well, to do the modeling.

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

You've got a full impact of the changes that we've made that are sitting in the third quarter and that we're moving into other portfolio changes. They may not include the partner changes within the next 12 months, but we'll be implementing further changes. I’m just trying to infer the fact that we hit the really big changes now and it's just embedded in how we're thinking about the rest of the portfolio. So you saw this big step function. We'll get the benefit that rolling through the next year and we're going to continue and I don't even think we're just stopping at that point, because we're not. But as we do the rest of the changes, they're going to take longer and they become increasingly more sophisticated as we continue to work our way through the portfolio, so that will happen over the next several years and it’s not going to be all coming through at once.

Okay, perfect. Thank you.

And our next question comes from the line of Tom McCrohan with CLSA.

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

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

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

They’re more actively base fees. So we’re charging customers for variety of fees depending on what type of behavior they Exhibit. So it’s not one, specific fees. There is a whole series of them that we’ve been [indiscernible] again over the last couple of years.

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

Sure. We are excited about it, obviously it's a customer that’s already been implemented with the partner is live and when I say implemented typically what happens is that these customers ramp over series of years. And so it tends to start smaller and then build over a three year period of time as they go through benefit cycles and so it will provide a revenue contribution into next year which is - it's not small, but it's not huge, but over the next few years that we think will build into something that’s really nice.

And is there anything unique about the P&C win or is the same kind of services that they're consuming versus other clients?

Yes. I would say similar - where they are really looking for with WEX Health is the underlying technology platform. The ability to white-label in their names the ability to do multiple types of offerings on one existing platform and it's a similar, it's really a value proposition that we have to other partners in the market just to build on the momentum that we've already got within that business.

Okay, great. And then my question, I will jump off. In Latin America its sounds like finally seeing some traction globalizing the OTA offering down there with this other win that you just mentioned. Can you just give us a little sense in that market what the competitive intensity is like? Are you competing against the win that you announced this quarter? Where they rank in terms of market share within that market?

Yes. So we are really just in the implementation phase in Latin America, so we feel pretty good about the fact that there are signing partnerships, but there are partnerships that are just in the making right now. So there's really very little volume that’s coming through from that business. Competitively if they are competing with some of the bigger banks down there, and in terms of positioning, we feel really good about the positioning. In part our business in Brazil is unique within Brazil the fact that we're a direct MasterCard issuer. And so it allows them to go into the marketplace with a universal offering and because we're processing on our own doing it in a way that also cost competitive and gives us flexibility in terms of the products set. So it’s a marketplace that is relatively new to excited that was going back and forth with their GM down there last night. Argo is something that he's excited about the potential, but it’s - really we just don't know how to make that big.

Thank you.

And our next question comes from the line of Ashish Sabadra with Deutsche Bank.

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

Yes. So just said to be clear, the 7% is not adjusted. It's just an organic growth rate, if you were to adjust out all of the acquisitions that we have a 12% growth rate including the fuel price adjustments. So 7% is just the acquisition to be just at EFS and fuel price in EFS wasn’t that meaningful. But fuel price was we would have 12% organic growth. The number you use for EFS was the fleet component, which is about 90% of the revenue. There is also something piece of sitting in our Corporate Solution segment.

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

Hey, you have the numbers correct. A piece of the numbers will be as we said before on the revenue side and then this will be on the cost side.

Okay. That's helpful. Just quickly can you also talk about the Esso migration like the ExxonMobil, European fleet migration on to the WEX platform, how is that coming along?

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

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

So I would say our focus on the healthcare business because we see that there is so much market opportunity that we have been reinvesting pretty heavily within that business. Some of that's reinvestment in the implementation of this large customers they are coming through some of that more in R&D. So we've been more focused with them on the topline and longer-term earnings growth and have been trying to maximize short-term earnings. And it’s the conversation that we have in a regular basis. This is the kind of play of the marketplace so that’s in our primary emphasis point.

Thanks for the color and again solid results.

Thank you.

Ladies and gentlemen, that does conclude a lot of time for Q&A. I will now turn the call back over to Steven Elder for closing remarks.

Just want to say thanks for once again joining us this quarter and we look forward to speaking to you again next quarter.