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Executives

Steve Elder – SVP and CFO

Mike Dubyak – Chairman, President and CEO

Melissa Smith – President, The Americas

Analysts

Roman Leal – Goldman Sachs

Phil Stiller – Citigroup

Sanjay Sakhrani – KBW

Greg Smith – Sterne Agee

Bob Napoli – William Blair

Tom McCrohan – Janney Capital

Tien-tsin Huang – JP Morgan

Mike Grondahl – Piper Jaffray

Mark Best – Evercore Partners

WEX, Inc. (WEX) Q1 2013 Earnings Call May 1, 2013 10:00 AM ET

Operator

Good morning. My name is Kimberley, and I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Inc First Quarter 2013 Fiscal Results Conference 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.

I would now like to turn the call over to your host, Steve Elder, CFO. Please go ahead, sir.

Steve Elder

Good morning and, thank you for joining us. With me today is our CEO, Mike Dubyak. In addition, our newly appointed President, Melissa Smith is also here to answer questions after our prepared remarks. Let me be the first to publicly congratulate Melissa on the promotion of President and eventually CEO. The earnings press release we issued earlier this morning is posted in the Investor Relations section of our website at wexinc.com. A copy of the release has also been included in an 8-K we submitted to the SEC.

As a reminder, we will be discussing a non-GAAP metric, specifically adjusted net income, during our call. This year’s first quarter, adjusted net income excludes unrealized losses on fuel price derivatives, amortization of acquired intangible assets and the write off of deferred financing costs associated with the extinguishment of debt, 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, the risk factors identified in our annual report on Form 10-K, filed with the SEC on March 1, 2013. 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 Mike Dubyak.

Mike Dubyak

Good morning, everyone, and thanks for joining us. Earlier today, WEX reported strong results for the first quarter of 2013. Before discussing highlights from the quarter, I would like to touch on the announcements we made this morning regarding WEX’s management transition plan for those who have not seen our press release.

For some time, the Board of Directors and I were closely together to implement a longstanding succession planning process that will happen in two phases over the next 20 months. Effective immediately, Melissa Smith has been appointed President of WEX. As President, Melissa will be responsible for the day-to-day operations of WEX on a global basis, while I will remain Chairman and Chief Executive Officer through the end of this year.

During this transition period, Melissa and I will work closely together to oversee the execution of our strategic initiatives as well as our strategic planning for 2014 and beyond, which she will develop and manage. As of January 1, 2014, Melissa will assume the role of Chief Executive Officer in addition to our current role as President and will also assume a seat on the Board of Directors. At that time, I will transition into a newly created role of Executive Chairman.

Executing this succession plan from a position of strength across all facets of our organization, provides us with exciting opportunities ahead and strong momentum at our back. Importantly, we also benefit for many years of thoughtful discussion and planning. That will ensure a seamless change in leadership and allow the executive management team and the company at large to maintain focus on executing our long-term strategic plan.

For the past 27 years, I have dedicated myself to building WEX into what it is today. And I will maintain the same level of passion and commitment as we execute our transition plan and continue to grow the company both in the near and long-term.

We feel fortunate to have identified what we believe is the natural successor in Melissa. I’ve had the distinct pleasure of working closely with her for the past 16 years. Melissa has a long history at WEX and a proven track record of leadership. She has excelled in various positions of increasing responsibility across all areas of the company. Most recently, as President of the Americas and prior to that a CFO and Head of Operations.

Since taking on the role of President of the Americas, Melissa has overseen critical initiative to expand our fleet business generating record card growth, while further globalizing our virtual card business, which also had a record year in 2012. Her experience in domain expertise uniquely positioned her to continue to drive the company’s momentum forward through the execution of our long-term growth strategy.

I’m excited for the opportunities ahead of us, both organically and inorganically in the fleet and virtual card business. And I’m confident in Melissa’s ability to lead WEX into its next chapter of growth. I would like to publicly congratulate her on this significant leadership promotion and opportunity.

With that let me move on to review our first quarter results. For the first quarter, both revenue and adjusted net income came in above our guidance range as a result of continued execution on our strategic initiatives, expanding our US Fleet business, diversifying our revenue streams and further developing our international business.

Q1 revenue increased 18% over the prior year to $165 million and adjusted net income increased 8% to $0.98 per share. These results were driven by strong transaction growth and record low credit loss and were also impacted by incremental issuance cost related to our recent bond offering.

Turning to our Fleet Payment segment, we achieved strong revenue growth of 15% during the first quarter, driven by solid growth in new vehicles as well as the acquisition of Fleet One. Consolidated payment processing transactions increased 14% in Q1. Taking Fleet One out of the picture, we still saw a good growth in our core Fleet business, which exceeded our expectations.

Looking at our Americas Fleet business, excluding Fleet One, we are beginning to see some positive signs in our same-store sales trends, which were up %0.20 over the last year. While growth in our existing customer base is modest, this is the second consecutive quarter of improvement in our same-store sales numbers and the first time it has been positive since Q1 2011.

Coupled with the performance in transaction growth and vehicles, our Americas business continues to expand organically and the pipeline remained strong. During the quarter, we had several marquee wins including the US Department of Agriculture and the State of Maine in addition to several corporate fleet wins. The pipeline remains active with both fleet and partner opportunities setting us up for a solid second half.

With respect to Fleet One, we saw a solid performance with results coming in above our expectations for the quarter. As far as the integration goes, we remain on track with our plans and continue to make good progress on these initiatives. Once the integration has been completed, we continue to expect that we will increase Fleet One’s margins to be in a comparable range with the WEX fleet business prior to the acquisition.

On the international side of our business, we experienced good performance out of WEX Australia fuel. For the first quarter, total cards increased 10% over the prior year and we’re seeing early signs of success in signing up large fleets versus their traditional small fleet customer base.

Moving on to our Other Payments segment. Revenue for this segment increased 27% to $39 million in the first quarter as a result of strong performance in our virtual payments business, otherwise known as WEX Virtual.

Spend volume for WEX Virtual increased 20% to $2.6 billion in Q1, which was largely due to growth in our virtual payments solution for the travel industry. Given the expansion of WEX Virtual into a variety of industries, we’ve organized this area of our business along the verticals we serve such as WEX Travel, WEX Health, WEX Insurance and WEX Education, which you’ll hear us refer to from time to time.

Since we last spoke, we have made progress in our efforts to broaden the geographic reach of WEX Travel solution aided by our investments in this area. As far as endeavors to organically grow within Asia-Pac, we’re seeing good traction in the countries where we’re deploying capital.

We’re making steady progress in several Southeast Asia countries. And if all goes according to schedule, our goal is to establish our business in several countries later this year.

And currently, our Australian team is leading our sales efforts in these countries to optimize our activities in advance of our launch. With respect to Australia, we have a strong pipeline and are in discussions with several of the major online travel agencies that service the Asia-Pacific region. As a result, we expect to see this business ramp in the second half of the year.

We also grew our WEX virtual presence within Europe and entered Spain, leveraging CorporatePay, our strategic asset in the UK, we’ve signed two large travel partners in Spain. Grupo Transhotel and Globalia and we continue to have discussions to build the travel pipeline in Europe.

Lastly, we recently expanded our travel solution to Brazil. This product builds on WEX’s entrance into this market through unique and our success in other geographies in virtual payments for the travel industry. We currently have approval to issue with UNIK and we’ll be working to develop our processing capabilities, which is expected in the second half of the year. From here, we will look to leverage our relationships to develop a growing pipeline of opportunities. All in all, we are making great strides in the East Winds and to our growing portfolio within the travel space.

Moving on to WEX Health, our virtual payment solution for the healthcare vertical, while this area of the business met our expectations during Q1, the conversion of the end users of our first major customer has been slower than expected. We believe the customer base and the pipeline still provide opportunity to expand our offerings going forward that the healthcare vertical continues to be an exciting area of growth in this segment of our business.

In terms of our PayCard, we also remained focused on selectively growing this offering. During the quarter, we brought on additional sales reps in this part of our business. In addition, UNIK continues to exceed our expectations and has some exciting opportunities to pursue. Going forward, we’re looking to leverage our newly formed relationship with MasterCard in Brazil to broaden our prepaid offering.

In summary, we’re pleased with the performance in our fleet, in our other payment segments this quarter. We’ve generated good momentum to date and anticipate making further progress as we push forward. Looking ahead the pipeline remains robust with opportunities across our business both organic as well as inorganic, which we believe positions us well to drive growth over the near and long-term.

On the fleet side we expect to post similar growth to what we achieved in 2012. In our core US fleet business while we’ve seen positives signs emerge for our same-store sales trends, our expectations for same-store sales growth remains muted until we see sustained momentum in the economy. That said, new wins will help to offset some of this pressure and the recent declines in PPG.

With regards to our other payment segment we’ll continue to invest in this part of our business to expand our penetration in existing markets and establish a foothold in our various target markets within Asia-Pac. Our advances today drive greater confidence in our multi-pronged strategy to grow our core fleet business, diversify our business and accelerate our international presence, which we will continue to execute against over the remainder of 2013. Of course the strategy will also be supplemented by capitalizing on M&A and strategic alliance opportunities as a way to accelerate our growth objectives.

To conclude we believe we’re on a solid path and feel good about the investments we are making in our business as we move ahead with our focus on growth.

And now, I’ll turn the call over to Steve to discuss our financials and guidance. Steve?

Steve Elder

Thank you, Mike. For the first quarter of 2013, we reported total revenue of $165.4 million, an increase of $25 million from the prior year period and above the high-end of our guidance range of $158 million to $165 million. This performance was driven primarily by strong transaction growth in our Fleet business.

Net income to common shareholders on a GAAP basis for the first quarter was $28.7 million or $0.73 per diluted share. Our non-GAAP adjusted net income increased to $38.3 million or $0.98 per diluted share. This compares to our guidance range of $0.89 to $0.96 per diluted share and $0.91 per diluted share, reported in Q1 last year on an adjusted net income basis.

Taking a look at some of the key performance metrics, which include Fleet One, consolidated fuel transactions increased 10.6% over the prior year. Consolidated payment processing transactions increased 13.5% over the prior year, primarily due to the acquisition of Fleet One, as well as strong organic growth from our Americas Fleet business.

Consolidated net payment processing rate for Q1 2013 was 1.38%, which was down 26 basis points versus Q1 2012 and 2 basis points versus the fourth quarter of 2012. Similar to Q4 2012, this reduction was primarily due to the lower rate charge by Fleet One on their diesel transactions, which are bigger transactions given the nature of vehicle serviced.

Finance fee revenue in the Fleet segment increased $2.1 million as compared to Q4 last year. As a percentage of total dollars of fuel purchased, it was approximately 11% lower than last year, reflecting the healthy condition of our portfolio. The growth in Fleet One’s factoring business also contributed to the increase in revenue.

In the Other Payments segment, revenue for the first quarter increased 27% or $8.4 million year-over-year to $39.3 million as a result of continued strong performance in the online travel vertical of our virtual card product. We also continue to see good gains from rapid! PayCard, CorporatePay and UNIK.

With respect to our WEX Virtual product, spend volume increased $445 million over last year or 20% to $2.6 billion for the quarter. The net interchange rate for our virtual payment solution in Q1 is 96 basis points, up 6 basis points year-over-year and up 2 basis points sequentially. The increase was primarily due to the customer specific incentives we received from MasterCard and we expect to have the benefit of these incentives through the end of 2013.

Moving down the income statement, for the first quarter, total operating expenses on a GAAP basis grew $104.8 million, a $22.7 million increase versus last year. The majority of which was related to salary costs and service fees. Overall, the major driver of expense growth was increased investments to support future growth in our business and the three acquisitions we completed in 2012.

Salary and other personnel costs for Q1 were $40.1 million compared with $28.7 million in Q1 last year. The increase was predominantly due to our acquisitions of Fleet One, UNIK, and CorporatePay. Services fees were up $3.5 million over the prior year to $23.8 million and was driven by the 20% increase in spend volume in WEX Virtual payments.

During the first quarter, we saw excellent performance in our credit losses, which on a consolidated basis totaled $3.8 million in Q1. This compares to $5 million in Q1 last year. Consolidated charge-offs in the quarter were $6 million, while recovering of amounts previous charged-off were $1.4 million. Consolidated domestic fleet credit loss was 6 basis points in Q1 compared to 7 basis points in the prior year period.

Our operating interest expense was $1.1 million in Q1 as we continued to benefit from low interest rates in addition to savings resulting from the Higher One deposits.

The effective tax rate on a GAAP basis for Q1 was 36.8%, compared to 36.9% in the first quarter of 2012. Our adjusted net income tax rate this quarter was 36.4% compared to 35.9% for Q1 a year ago. The slight increase is due to a greater percentage of profits coming in the US with the Fleet One deal, as well as the change in Australian tax law we’ve discussed with you previously. For the full year we expect our A&I tax rate to be approximately 36.5%.

Turning to our derivatives program, for the first quarter of 2013, we recognized a realized cash loss of $1.9 million before taxes on these instruments and an unrealized loss of $5.9 million. We concluded the quarter with a net derivative liability of $7.6 million. For the second quarter of 2013, we’ve locked in at a price range of $3.44 to $3.50 per gallon. For the full year, the average price locked in is $3.43 to $3.49 per gallon.

Moving over to the balance sheet, we ended the quarter with $350 million of cash, up from a $198 million at year end. The increase is due to higher financing debt as well as operating debt balances.

This is due in part to seasonal season signal of impact from Higher One and cash on hand at the corporate level due to the bond offering which we completed in January. During the first quarter, we also repurchased approximately 240,000 shares of stock for approximately $18 million to offset dilution relating to equity awards festing this year.

In terms of capital expenditures, CapEx for the first quarter was $5.6 million. We continued to expect our CapEx for the full year to be in the range of $40 million to $45 million which includes approximately $15 million related to the consolidation of data centers as we combine our operations with Fleet One.

Our financing debt balance increased $75 million in Q1 and we ended the quarter with a total balance of $696 million on our revolving line of credit, term loan and notes. This increase in our debt balances is offset by an increase in cash at the parent level. As of March 31, our leverage ratio was 2.2 times, our 12 month trailing EBITDA compared to 2.0 times at the end of Q1 last year, with a slight increase driven by our highly successful bond offering in Q1.

Regarding our capital allocation strategy, our primarily objective remains to reinvest in our business and drive future growth coupled with acquisitions and strategic alliances as a way to supplement these growth objectives.

Now for our guidance for the second quarter of 2013 in the full year, which reflects our views as of today and are made on a non-GAAP basis. Overall, we expect to build upon the positive momentum in Q1. However, we are updating our guidance to reflect the recent decline in fuel prices and foreign exchange rates in addition to the impact to our business from the proposed US MasterCard merchant litigation settlement.

The second quarter of 2013, we expect to report revenue in the range of $170 million to $177 million and adjusted net income in the range of $38 million to $41 million or $0.98 to $1.05 per diluted share. These figures assume normal seasonality trends in the virtual card and prepaid businesses as well as credit losses.

Our second quarter guidance assumes a domestic fleet credit loss will be between 8 and 13 basis points and that domestic fuel prices will be $3.58 per gallon. For the full year 2013, we expect revenue in the range of $716 million to $736 million and adjusted net income in the range of $64 million to $170 million of $4.20 to $4.35 per diluted share.

Our annual guidance continues to assume $5 million to $6 million of integration costs associated with the fleet one acquisition and an incremental $15 million in interest expense compared to 2012 as a result of our bond offering. In addition our guidance continues to assume a significant level of investments related to WEX Virtual to expand into new geographies as well as the expense of additional sales reps for unique, rapid! PayCard and CorporatePay.

Our full year guidance also assumes that domestic fleet credit losses will be between 9 and 14 basis points and assumes that domestic fuel prices will now be $3.49 per gallon versus our prior expectation of $6.65 per gallon. Fuel price assumptions for the US are based on the applicable NYMEX futures price. We are also assuming that exchange rates will remain in the range of the current spot rates, which are generally down from our last guidance.

Lastly given the higher likelihood of depending merchant litigation settlement will be implemented. We’re now incorporating into our guidance, the negative impact to our interchange rate, which we expect to be 10 basis points for an eight month period beginning in August, or $0.07 per share in 2013.

Our guidance does not reflect the impact of any further stock repurchases that may occur in 2013.

Now, we will be happy to take your questions. Kimberley, please proceed with Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Julio Quinteros.

Roman Leal – Goldman Sachs

Hi. It’s actually Roman Leal in for Julio. Thanks for taking my questions. Two questions. First on the Other Payments solutions and specifically with your international efforts, how would you characterize the kind of the timing revenue impact there?

I think you mentioned that some of the opportunities should be ramping up in the second half, but also you’ll be launching in more geographies in the second half as well. So, is this more of perhaps we get an initial revenue impact in 2013, but really the goal is to expand the distribution and presence so that the real or significant revenue impact comes in 2014.

Mike Dubyak

That’s pretty much the case. So, clearly there is going to be revenue in 2013, some of the Australian business that we have, some of the business in Europe will start to ramp in the second half of this year, and we’ll start to see that revenue. But, I think to see that mature and also to see some of the other countries we’re working on, we talked about even UNIK in Brazil.

We have the – right now the issue of MasterCard, we’ve got to stand up if you will or put in place the process and capability, so we’ll see some of that fruition of revenue come through next year. So, it really is, the investments are being made this year seeing some of the revenue come through this year, but really talking about 2014 is where we’d really see the ramp and the increase.

Roman Leal – Goldman Sachs

So, when you track this to your plan and see whether it meets or exceeds your expectations, for 2013 is really a question of, how many partners you can land and plants you can land for kind of second half of the year?

Steve Elder

Well. It’s kind of a two part strategy. It’s how many partners can we bring on within some of the countries that were basically trying to be able to issue and process but we’re also looking at those countries where our current international customers need us to also have presence in those markets. So I think we will look at both of those in terms of revenue, capabilities and growth in the future from our existing customers as well as the new customers we’re signing.

Roman Leal – Goldman Sachs

Got it, that makes sense.

Steve Elder

Within country.

Roman Leal – Goldman Sachs

Yeah, makes sense. Last one is on the potential cost synergies from Fleet One. Can you remind us what the time will be like, is that’s mostly kind of a 14 event or is that going to carry out over the next two years or three years?

Steve Elder

Well, I think that was our plan, we’re actually able to see some of those synergies sooner. Actually we’re seeing more opportunities than we initially anticipated. So, we’re starting to see the operating efficiencies, the platform, consolidation capabilities that are helping us. We’re even seeing more opportunities on the revenue side than we anticipated. So, I think we’re going to see a lot of this hit in 2013 as well as we’ll see a lot of it in 2014.

Roman Leal – Goldman Sachs

Great. Thanks.

Operator

Your next question comes from the line of Phil Stiller.

Phil Stiller – Citigroup

Hi guys. First, I just wanted to congratulate Mike and Melissa on the new roles and good luck. First question, just following up on the prior question on Fleet One. I guess what was the – first I guess what the revenue contribution from Fleet One in the quarter and then as we think about these synergies. How much is reflected in the guidance Mike you just alluded to, expecting to see some this year, but it doesn’t seem like there is a significant pickup in the margin reflected in the guidance?

Steve Elder

Yeah, Phil, its Steve, I would say that the contribution from Fleet One in the quarter was pretty much the same as it was in the fourth quarter, a little bit seasonal around the turn to the calendar year, so that being slowed down a little bit there, very similar to what we have here.

So, the revenue and profit contribution from them was pretty consistent with the fourth quarter. In terms of the synergies and what we expect this year I would say that the integration cost that we’re putting into getting those synergies are pretty well offsetting, if not more than offsetting what we expect to realize this year. So, right now, you’re not going to see it in the full year numbers for this year, but you should see it, as we return into next year.

Phil Stiller – Citigroup

What’s the full year integration cost expectation for this year?

Steve Elder

Between $5 million and $6 million.

Phil Stiller – Citigroup

Okay. And then, moving to the other payment segment, it seems like PaySpan has been a little slower that you’ve expected. Just wondering if you guys could comment as to why you think that is and what your expectations are for this year for that program?

Mike Dubyak

Yeah. I would say that, first of all, we’re still very bullish on PaySpan and we’re bullish on the relationship we have. I think the reality is, as we’ve been a little cautious talking, this is new space, but it’s a space that’s rapidly evolving. So, we’d like the space a long-term, we even have others in the pipeline.

We’re not new to moving into new spaces, but we sometime realize it takes longer than you expect. So, we still feel very bullish about the healthcare program overall. We prefer not to keep focusing on PaySpan since we are looking at others in that space,. But we are continuing to work with them. They still have control over what they’re doing with their customers. And there is still great opportunity there.

Phil Stiller – Citigroup

Okay. And then, last question for me. Any update on the M&A pipeline, are you guys still somewhat hesitant near-term given the number of acquisitions you made over the last year or there’re still a lot of activity out there?

Mike Dubyak

No, we still have opportunities in the pipeline. So, there are a couple of that we are working on. Without getting into details everything from small tuck-ins to help us in some markets, as well as even looking at some larger opportunities. But still early to comment on.

Phil Stiller – Citigroup

Okay. Great. Thanks and congratulations again.

Mike Dubyak

Thank you.

Operator

Your next question comes from the line of Sanjay Sakhrani.

Sanjay Sakhrani – KBW

Thank you very much. So I’m just going to follow-up on kind of the theme some of these growth opportunities coming in 2014. I was just wondering, like what is coming in 2013 maybe in the second half? You guys talked about some marquee wins in the Fleet business in the press release. I think, you won Marathon’s private label portfolio. I was just wondering, if you could just talk about that and how much of that’s going to captured and your thoughts for the year? Thanks.

Mike Dubyak

Well, there is the private label business that we’ve talked about. I talked about some of the Fleet wins. So if you add up the US Department of Agriculture, that’s almost 50,000 vehicles, you add the State of Maine, you add some of the other ones that we have assigned we feel very bullish about them. So that’s all build in.

We do have, as we said some of the growth coming from international virtual card program that is already in our numbers that’s coming through in the second half of the year. So, we are continuing to see growth out of our current customers in the second half of the year even ramping a little bit. So, from all aspects of our business – we typically see the second half of the year being more a contributor to our overall results in the first half of the year and that’s proving out this year as well.

Sanjay Sakhrani – KBW

Okay. And maybe if we could just back up a little bit and just think about kind of big picture – tell me what top-line growth and bottom-line growth expectations you have? And it seems like, from my recollection is kind of high single digits top-lined, mid-teens, bottom-line, last year was little bit below and this year seemingly kind of below. I mean, could you just talk about kind of what your expectations are from 2014 onwards? Thanks.

Steve Elder

I think that’s still pretty well in line, Sanjay. I mean, I think the goal in the kind of the more matured Fleet business if you will here in the US is a mid-single-digit kind of number in the revenue side.

And then – the virtual payment side, still 20% plus growth rates on the revenue side there. There is scale in the business and we’ll say that we try and reinvest a lot of that scale to keep the growth rates up year after year. But sometimes we can expand margins as well. So, that would translate into something little bit higher than the 8% to 10% growth rate to those things would kind of blend too.

Sanjay Sakhrani – KBW

Okay. And I think what’s suppressing it over the short run is these investments you’re making?

Mike Dubyak

Yeah. Over the short-run – I mean, if you look year-over-year, it’s really the three acquisitions that we made. Two of them were somewhat smaller and really not at any kind of scale point. So, their margins were little bit lower. Fleet One was the bigger one. At the time we made acquisition, we said that their margins were little bit lower than ours. But that we would bring that up over time with the synergies in terms of the integration. On a net income basis you’ve also got the impact of the bond offering that we did this year as well. So, all of those things contribute.

Sanjay Sakhrani – KBW

Okay. All right, great. Thank you very much.

Operator

Your next question comes from the line of Greg Smith.

Greg Smith – Sterne Agee

Hi. Good morning. Just back to PaySpan on the healthcare side, is there a specific reason it’s ramping a little slower, is interchange proving a hurdle or anything – any other color Mike you could give us?

Mike Dubyak

No. As I said, they’ve got their pipeline, we have definitely put in place some sales people to help them, but they are still driving their priorities of who they are going after first. They are still bullish. I’d say we’re still a little cautious just until we see more, but still feel very good about this. I think we said on the last call, it’s not a matter of feeling good about the overall opportunity and the potential, but we’ve got to be careful on the timing.

Greg Smith – Sterne Agee

Okay. And then, Steve, where is the visibility come on the merchant settlement that – starting in August, is that date setting stone? I just can’t recall anybody else kind of coming out and putting this in their guidance. So, where is your visibility coming from on the August 3rd date for that?

Steve Elder

We’ve seen that reported July 29th kind of start of the implementation dates. So, pretty well published from what you’ve seen.

Greg Smith – Sterne Agee

Okay. Great. And then, one last question. Just the service fee expenses were a lot lighter than what we were expecting, it just seems like the growth slowed there, this is on the expense side and was there any change, was there anything different mix or contract terms or anything that caused that expense to maybe feel a little lower going forward?

Steve Elder

I’m assuming you’re look at it sequentially from Q4, but my guess is...

Greg Smith – Sterne Agee

And year-over-year?

Steve Elder

Year-over-year, well, the – sequentially it was the expenses related to the acquisition of Fleet One, some investment banker fees and auditors and accountants and all those kinds of folks. Year-over-year, it’s mainly just driven by the acquisitions. So, I don’t want to say there is anything an usual in there at all. It was right in line with what we planned on it to be for the year.

Greg Smith – Sterne Agee

Okay. Thank you.

Operator

Your next question comes from the line of Bob Napoli.

Bob Napoli – William Blair

Thank you. Good morning. Just, I missed the beginning of the call, and congratulations to Melissa. But, I guess I’d like to understand the structure and Mike, are you retiring at the end of the year? I mean Executive Chairman is a title of somebody who’s going to be actively involved and how long, I mean does that a title till the end of the year or kind of what’s the role play and what is your plan as far as being involved with WEX?

Mike Dubyak

Well, so the plan has a couple of steps to it. As of today, Melissa takes over the President title for WEX. And basically, the International operations which have been reporting into me and the Americas which have been reporting into me, all of that goes under her. So, she’ll have David Maxsimic, who’s been driving the International side of our business reporting now into her. That’s the biggest change on her side.

I still have my key reports, Steve and legal and HR and strategy and M&A. So as CEO, I’ll still be driving that side, Melissa and I are working closely on making sure we’re driving our strategy for this year.

And then, as of the beginning of next year, January 1, she will take on the CEO title. So, she will then be President and CEO of WEX. We talked about the fact, the plan is that she would then also become part of the board. I will become Executive Chair for all of 2014, and at the end of 2014 and at the end of 2014 we’ll no longer be Executive Chair and then it’s just really up to myself and the board of what happens next, but that’s kind of the plan at this point at least through the end of 2014.

Bob Napoli – William Blair

Okay. Thank you. That’s helpful. Just on a numbers question, the payroll expense in the quarter was higher than what we were looking for and I guess I’m not sure if that’s kind of run rate number or if there were integration costs in there.

Steve Elder

I think you can kind of say it’s pretty much a good run rate number. If you look compared to last year, we got to call it $11 million, $12 million increase over last year. That’s based – most of that is from the acquisitions that we completed last – in the last year. If you look at it sequentially you’ve actually picked up a couple extra weeks of payroll from Fleet One since we didn’t close the deal till mid-October. And sequentially again some of the payroll taxes were just...

Mike Dubyak

Price currently.

Steve Elder

Thanks. But again, the FTE plan was what we expected it to be and maybe even a few people liked, but pretty much in line with what we have thought it was going to be.

Bob Napoli – William Blair

And then on the M&A front just the – just to understand how organizationally you ramped up to manage. So just some of your – one of your competitors – you have a nice property in Australia, it seems like it’s performing well. One of your competitors made two acquisitions in that region, which would seem like if you already had a platform like those would be really good incremental acquisitions for WEX.

So I mean I’m sure you were aware of the transactions, but why – are you staffed to manage the M&A process or – I mean just strategically your strategy on an M&A front isn’t as aggressive as your main competitors, but I was just trying to understand why deals that would fit a platform, that fits you well would have gone to your competitor and they have an army of bankers on their payroll, if you’re kind of under-armed on the competitive front on a relative basis.

Mike Dubyak

Yeah, we are staffed. I mean I think, I’ve said in the past we keep adding to our bench strength, we’ve done that across our business from legal to finance to Melissa’s team to Max’s team. So we’re still very active on the M&A route. We know those businesses down there, we know of card link.

We’ve had a lot of meetings, a lot of discussions; know them very well since we have an operation in New Zealand. With our operation in Australia, we definitely know about that company. We felt very good about our business in Australia to be our driving force in that part of Asia-Pac. So it wasn’t a matter of us, just not looking at it or considering it in terms of just having a lot of discussions over time.

On the other acquisition in Australia, the fact is besides the relationship they’ll have with G.E. There’s like 30,000 vehicles on the non-G.E. business. The biggest asset that was being sold was their network of acceptance and we spend a lot of money with buying our Australian business that already had that acceptance and to pay money for another accepting network that we wouldn’t use, because it’s duplicative. Didn’t make any sense, so wasn’t a good use of our cash. So just looking at the opportunities, it’s not a matter of saying we couldn’t take them on, it was a matter of doesn’t make sense or not.

Bob Napoli – William Blair

Okay and then the increase – the incremental investments that you pointed out on – into your guidance on the fourth quarter call. How much of that – I mean how do we track – I guess, what would like to be able to track if we could is those investment dollars and then the returns on those investment dollars in some fashion. I mean how would you – how could you guide us to help to try to do that?

Mike Dubyak

I think in the quarter we obviously set out the plan. We’ve obviously been a little shy about sharing exactly the details of those plans. We’re tracking through the milestones specific around the virtual card. It’s all around getting call it regulatory compliance. But essentially approval from the central banks of the various countries to issue will need to go through a process with MasterCard in our case to get their approval to extend our licenses.

And then, we know we have to get processing systems in place and people in place to answer the phones when they ring. Those kinds of things. I’d say, we’re tracking along in our milestones and we feel very good about where we are. In terms of the actual dollars spent in the quarter, it was pretty close to what we had planned on in the quarter. So, we’re feeling pretty good about our position there.

Bob Napoli – William Blair

Thank you.

Operator

Your next question comes from the line of Tom McCrohan.

Tom McCrohan – Janney Capital

Hi. Let me echo my congratulations on your successful tenure CEO in creating some shareholder value over the years. And Melissa congratulations to you as well as you transitioned to your new role.

Mike Dubyak

Thank you.

Steve Elder

Yeah. Thank you.

Tom McCrohan – Janney Capital

Yeah. The absolute dollars in investment spending to globalize the online travel offering that you said this quarter, Steve, it was kind on in-line with what you had expected. But the total dollar amount you expect to spend this year, are they consistent with what you thought when you provided guidance back in February. Was it changed that all?

Steve Elder

That’s comedown a tab but not materially different.

Tom McCrohan – Janney Capital

Okay. And so the real change this quarter again was just this expectation that your interchange rate will somehow be impacted by this pending merchant litigation. What’s your kind of rank order that being the primary reason the guidance kind of came down again?

Steve Elder

Yeah. I mean, if you just kind of look at guidance in total for the year came down $0.15 cents at the top end and we kind of shrink the range over that. But I would put fuel prices and the $0.07 that we talked about for the merchant litigation settlement. Those are basically equal. The fuel prices maybe even a $0.01 more. And then foreign exchange rates didn’t help us any but, if that had been the only thing that’s changed it, we probably wouldn’t have changed guidance. It’s a negative impact, but that’s relatively small.

Really the two big pieces are, the forward curve if you will, the NYMEX futures price on gasoline prices came down significantly. Based on our guidance, we dropped the price $0.16 for the full year. But that includes a little bit of higher prices in the first quarter, so even more over the last three quarters of the year. So that was equally as important as the litigation settlement.

Tom McCrohan – Janney Capital

Got it. And just a final question on the OTA market, you’ve talked about these six markets previously that you wanted to enter. Can you just give us a rundown of which are the six markets you expect to be up and running by the end of this year and Spain, I didn’t think it was on the initial list, so congratulations again to Spain. But just can you give us a rundown of the six markets where you stand with each of them or which one do you expect to get into by the end of the year? Thanks.

Mike Dubyak

Yeah. I think we always talked about Europe. So I think the good news is now we have the ability in Europe to issue our travel product in Spain, France, and the UK as I said. So that’s positive. Brazil has been wined, so I think it’s positive news that we can now issue a virtual MasterCard in Brazil, still work to be done, just getting the processing side in place.

Australia has been one that we’ve been focusing on, so we’re seeing really strong response from the market down there, signing people or having people in the pipeline that look ready to sign. And then we talked about Hong Kong, Singapore and Thailand. And all I can say is we’ve got go through regulatory hurdles, but we feel good about that. So at this point our goal is to have all three of those online by the end of the year, but something could delay.

We’re working with a government in a forward entity, but we’re moving very aggressively, we’re there on the ground working with them and at this point we’re bullish that we can make that goal work, which should be good, both for international customers to use those countries but then also start to actually have people eventually later this year, next year looking at online travel, within those countries as well.

And by the way Brazil has been rated one of the top online travel countries in the future. So we like the fact that we can put in place our online travel for some of our international customers, but also start to look at soliciting business within Brazil.

Tom McCrohan – Janney Capital

(Inaudible)?

Mike Dubyak

We couldn’t hear, you were a little muted.

Tom McCrohan – Janney Capital

And Australia, I thought you already had an online travel customer signed up?

Mike Dubyak

Oh, we do. Yeah, we have a couple signed.

Tom McCrohan – Janney Capital

You did.

Mike Dubyak

We’ve talked about web jets. So there is business already going through in Australia and that’s part of our ramp later in the year as we’ve talked about. But we’re even signing more and we have more in the people that we’re confident that we have a strong opportunity of signing as well.

Tom McCrohan – Janney Capital

So, and of the six markets, three of them you already have the regulatory and licensing approvals and processing with the exception of Brazil, which you’re working on now. Is that the way to think about it?

Mike Dubyak

Yes. Correct.

Tom McCrohan – Janney Capital

All right. So, then we – how much in terms of modeling volume growth in the OTA segment, which was 20% this quarter, we’ve gotten so accustomed to that growing so fast. How should we be thinking about how these three markets that you’re in now impacting the growth rates for the rest of the year?

Steve Elder

Tom, I think we’d stick with probably, 20% or a little bit higher growth rates in the purchase volumes.

Tom McCrohan – Janney Capital

Got it. That’s all I had. Thank you very much.

Steve Elder

Thank you.

Operator

Your next question comes from the line of Tien-tsin Huang.

Tien-tsin Huang – JP Morgan

Hi, thanks. Congrats to Melissa and Mike as well from me.

Mike Dubyak

Thanks.

Tien-tsin Huang – JP Morgan

CEO succession is always important.

Melissa Smith

Right.

Tien-tsin Huang – JP Morgan

So good to get that. The – I wanted to ask I guess a lot of good questions have been asked already. The credit losses were a lot better than what we had modeled again. I know there’s a lot of product of what you guys have been putting in place, but it seems like the guidance is still pretty wide, which given the uncertainty. But it seems like the low-end is the right place to be, what could push it higher beyond obviously, big change in the cycle. It just seems like with what you’re calling out that the low-end seems to be the right place to be. Is that fair?

Mike Dubyak

You know, I’d always stick by guidance Tien-tsin. We’ve got a range in there for a reason. Things can change on, one of my favorite examples is a few years, we had a cement company in Denver that was current was right up until the day they fell bankruptcy and that cost us several hundred thousand dollars in a quarter. Those things kind of happen.

The roll rate methodology that we use is pretty sensitive to the timing of when people make their payments. So single days can matter when you’re looking at the end of the month. So – and we’ve always said if there’s one place in the income statement that’s going to be relatable that’s volatile, that’s probably it. So we do like to have a little bit of space there.

Tien-tsin Huang – JP Morgan

Yeah. But we’ve been overly conservative to – so it sounds like really it’s just those one-off bankruptcies and surprises that come along, I mean given the roll rates, there is nothing to call out.

Mike Dubyak

No, it’s been very good. The roll rates have been great. The ageing is still very current portfolio, so things have gone very well. Bankruptcies have been pretty well so recovers have actually outperformed a little bit, so...

Tien-tsin Huang – JP Morgan

Yeah.

Mike Dubyak

Everything is going on the right direction. That’s hard to believe you get much better.

Tien-tsin Huang – JP Morgan

Okay. That is great, that is great. And just for Mike, I give this question a lot of, a figure I’d ask you on the public call be, can you compare and contrast for us sort of the healthcare market versus the OTA market as it relates to virtual card. I know they are different, direct and indirect competitors and ticket sizes are a lot different and the velocity of the transactions are a lot different. What can you tell us there, was it relates to virtual card?

Mike Dubyak

Well, I think it just that – I mean the most important thing to us it’s a new market. Again, we’re used to going in the new markets and I think we’re finding that, it just not going to ramp as quickly as we’d like, but still in market we see great opportunity in.

Depending on their customer base they can have very large ticket numbers as well, so they kind of cover the gamut and they also cover the gamut with smaller customers that they work with, the TPAs versus some very large commercial customers they work with. So you are seeing different types of customers within the segment, within the partnerships that we’re working with and you’ll see different spend numbers, but also very large spend numbers as well as covering the gamut on small or large.

Tien-tsin Huang – JP Morgan

Right. So distribution is different as well as that – is that too simple – is that too a simple statement to make that the distribution and how you actually access the endpoints is a lot more challenging on the health care side.

Mike Dubyak

Yes, that’s true. I think it is more distributed. I can’t answer how many, but with all the doctors’ offices pharmacies, hospitals, so the distribution is not as concentrated like you would have in the hotel industry.

Tien-tsin Huang – JP Morgan

Yeah. Understood. No – it’s – I mean it’s complicated but I know that it’s new and obviously very large. Just trying to get a better understanding of the outlook, appreciate it. That’s all I got.

Operator

Your next question comes from the line of Mike Grondahl.

Mike Grondahl – Piper Jaffray

Yeah. Thanks for taking my questions. Could you just highlight for us, how many sales people you hired in the first quarter and in what areas and kind of what your outlook for the year is, kind of total hiring of sales people?

Mike Dubyak

Yeah, in the first quarter we hired somewhere in the range of 20 people in the sale and marketing group, so it’s kind of spread across all of the businesses and across all the – various entities that we’ve required. I think over the course of the year, we’re going to continue to hire and there’s probably an equal number, probably another 20 odd folks that we’ll add to that group as we go through the year.

Mike Grondahl – Piper Jaffray

Okay. Great, thank you.

Operator

Your final question comes from the line of Mark Best.

Mark Best – Evercore Partners

Thanks a lot for taking my call. I just want to circle back to the MasterCard net interchange rate year-over-year in the first quarter is up six basis points. And then, in the last half of the year, we’re going to get a 10 basis point improvement as for decrease as well. Can you take me through the puts and takes and specifically why in Q1 we have the interchange benefit?

Mike Dubyak

The biggest driver that was the – we get customer specific incentives that we flow through revenue. And those incentives are kind of on a contract cycle basis. So, as contracts come up or come up the renewal or if they’re new, we’re typically incented based upon incremental purchase volume. So, when somebody renews a contract, it looks like the new customer to also essentially for the purposes of those incentives, and we’re just going through a period where we’re getting a little bit more benefit this year than we did last year from those incentives.

Mark Best – Evercore Partners

Should we expect that six basis point improvement year-over-year to flow through each quarter?

Mike Dubyak

Yeah. I mean those incentives being the major piece of it. Those will essentially continue through this calendar year.

Mark Best – Evercore Partners

Okay. And then, is there any interchange impact from PaySpan?

Mike Dubyak

From PaySpan, it’s obviously it’s going to depend on their volume, right, if they become a bigger piece of the volume. I think their net rate is not a lot different than any other large customer, so you shouldn’t really see much of an impact from them.

Mark Best – Evercore Partners

All right. Great. And then, in Fleet, can you quantify vehicle attrition for me?

Mike Dubyak

Attrition was still very low.

Steve Elder

The voluntary was like right at 2%.

Mark Best – Evercore Partners

Okay. Great. And that’s all I’ve got for you. Thank you very much.

Steve Elder

Thank you.

Mike Dubyak

Thank you.

Operator

Thank you. That was our final question. I would now like to turn the call back over to Mr. Elder for any closing remarks.

Steve Elder

We just thank everyone for joining again this quarter. And we look forward to speaking with you next quarter.

Operator

Thank you. That does concludes today’s WEX, Inc. first quarter 2013 financial results conference call. You may now disconnect.

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