Ladies and gentlemen, thank you for standing by, and welcome to the Rex's 4th Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will
follow at that time.
As a reminder, this conference call is being recorded. I would now like to turn the conference over to
your host, Steve Elder. You may begin, sir.
Thank you, sir, and good afternoon, everyone. With me today is Melissa Smith, our President and CEO and our CFO, Roberto Simon. The press release we issued earlier today has been posted to the Investor Relations section of our website at rexlink.com. A copy of the release has also been included in an 8 ks we submitted to the SEC. As a reminder, we will be discussing non GAAP metrics, specifically adjusted net income during our call.
Adjustments for this year's Q4 and full year to arrive at this metric include unrealized gains and losses on financial instruments, net foreign currency remeasurement gains and losses, acquisition related intangible amortization, other acquisition and divestiture related items, stock based compensation, restructuring and other costs, impairment charges and asset write offs, the gain on the divestiture, debt restructuring and debt issuance cost amortization, non cash adjustments related to our tax receivable agreement, similar adjustments attributable to non controlling interest and certain tax related items as applicable. The company provides revenue guidance on a GAAP basis and earnings guidance on a non GAAP basis as we are unable to predict certain elements that are included in reported GAAP results. Please see Exhibit 1 of the press release for an explanation and reconciliation of adjusted net income attributable to shareholders to GAAP net income attributable to shareholders. 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 ks filed with the SEC on March 18, 2019 and subsequent SEC filings.
While we may update forward looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward looking statements, all which speak only as of today. With that, I'll turn the call over to Melissa Smith.
Good afternoon, everyone, and thank you for joining us today. I'm excited to report a strong finish to 2018. We delivered 4th quarter revenue that exceeded the top end of our guidance range and strong bottom line results that grew 34% year over year. Revenue grew 15% to $381,000,000 compared to last year, making our 10th consecutive quarter of double digit revenue growth. This includes strong revenue growth in our Fleet Solutions and Travel and Corporate Solutions segments as well as in our U.
S. Healthcare business. The positive impacts of higher fuel prices, foreign exchange rates in the new revenue recognition standard and M and A activity were 6%. On the bottom line, net income on a GAAP basis was $0.49 per diluted share and adjusted net income was $2.11 per diluted share. Overall, we executed well this quarter on the backdrop of favorable macroeconomic conditions.
Looking at the full year, 2018 was another record year for WEX. Revenue increased 20% to $1,490,000,000 GAAP net income per diluted share increased slightly to $3.86 per diluted share, while adjusted net income per diluted share increased 56 percent to 8.28 The full year earnings for 2017 2018 include adjustments to the preliminary results we announced on February 22 due to corrections of previously disclosed errors relating to our Brazil operations as well as other immaterial corrections we identified during our review. Roberto will give some more details, but the changes to our preliminary 2019 guidance are not related to the issues we corrected for. Our performance in 2018 was guided by the strategic pillars we set years ago that serve as the guidepost for our business. We remain committed to building upon our best in class growth engine, leading through superior technology, delivering scale through superior execution and leveraging our culture to attract and retain the best employees.
Executing against these pillars has allowed us to post another outstanding year underscored by record revenue, new and innovative products and strategic M and A that has expanded our penetration into the high growth and dynamic corporate payments and consumer directed healthcare markets. The progress made in 2018 is a testament to our ability to gain market share by deepening existing relationships, building new partnerships and delivering high quality service and innovative technologies to our expanding customer base, while executing on our acquisition strategy for long term growth. We continue to have significant new segment wins in contract renewals in the 4th quarter. In Fleet Solutions revenue grew 15%, driven by higher volume growth, increased late fees and favorable macroeconomic tailwinds, including higher fuel prices. Our strong track record of new contract wins and partnership renewals gained momentum in 2018.
For example, we signed new fleet contracts with RailCrew Express in Aramark Canada and also renewed significant contracts with Element Financial and Enterprise Rental. In the Over the Road business, we had one of our best implementation quarters in the history of the business, including Horizon Transport and CSI. We also made significant progress on the implementation and integration of several large prior contract wins, most notably Shell and Chevron portfolios. Both conversions are progressing, and I'm pleased to report that the new WEX cards have been issued to all customers of the 2 portfolios. We're now in a transition period as customers convert to the new products and the accounts receivable balances fall over to us, which we expect to be complete over the next several months.
We remain well positioned to win new business and generate organic revenue growth. Our best in class marketing and sales teams are helping us to capture additional market share. In addition to wins and renewals, the service and support we provide our customers day in and day out truly differentiates us from our peers. One example of this is our ExxonMobil portfolio, which has had one of its best years ever in terms of new account growth in the U. S.
In Travel and Corporate Solutions, we closed out the year with an impressive 29% increase in revenue during Q4. This was driven by strengthening our relationships with industry leading online travel agencies, while penetrating further into the rapidly growing corporate payment space. We had $8,200,000,000 in purchase volume this quarter, which is an increase of more than $800,000,000 over last year. Approximately 45% of this increase came in our corporate payments business. In addition to our own sales efforts, our partnership strategy has proven to be successful and a strong revenue driver for us.
One of these partners is American Express, and we signed an agreement later in Q3 for the use of our technology platform. Although we're still in the early stages of this relationship, we're beginning to see increasing volumes as we get the program up and running. We also had a handful of significant contract wins and renewals during the Q4. One that I'm excited to announce is the signing of Swedish based eTraveli, one of the largest OTAs in Europe in the top 15 globally. Travel and corporate payments remains an important area for our future growth given the size and the underlying growth dynamics in the market.
While we've had more than $34,000,000,000 in purchase volume during 2018, there is still ample room for growth, and we look forward to these opportunities in the coming year. As I mentioned at the November Investor Day, corporate payments will be a key area of focus for us in 2019 and beyond. Moving on to the Health and Employee Benefit Solutions, our U. S. Healthcare business was robust and posted top line growth of more than 12% in the quarter and 13% for the full year.
In Health, we saw a successful open enrollment season with the volume of transactions up 18% year over year. We closed 2018 with over 65 new or renewed partners. The service we offer our partners sets us apart from our competition and we continue to see 50% growth in utilization of our mobile app and online partner portal. These tools continue to enhance the partner experience and the constant innovation is key to the success in this market. Turning to new signings and renewals, we're pleased to announce that we have signed Associated Bank, Nova, Stanley Benefits and Voya Financial in the 4th quarter, in addition to renewing a number of meaningful contracts.
We now have more than 28,000,000 consumers on the WEX Health Cloud platform. I'd like to delve a little deeper in our second strategic pillar in the bedrock of our business, WEX's superior technology. We spent a significant amount of time over the past year adopting a cloud first development process, which we talked about at length in November. During Q4, we began migrating our fleet technology platform to the cloud. This is the first of many conversions over the next several years.
We're making great progress with little disruption to our customers. Also in the fleet segment, we're making progress towards consolidating processing platforms and has eliminated 1 platform this year. We plan to continue with this consolidation strategy. We're also migrating the processing of our travel product onto an internal cloud based virtual card platform we call Tag, which was acquired as part of the 2017 AOC acquisition. We're starting to move our U.
S. Business on to TAG and have already processed over $1,500,000,000 of transactions on a run rate basis in Q4. This too was completed with little to no disruption to our customers. As we talked about in our Investor Day in November, these moves to the cloud will allow us to improve performance and stability, increase the pace of product development and eventually deliver significant cost savings, which we're starting to see in our 2019 guidance. Since we last spoke, we've acquired Discovery Benefits, one of the fastest growing benefit solution providers in the market place with operations in all 50 states.
We're particularly excited about this transaction as it expands our penetration into the attractive high growth consumer directed healthcare market, aligns with our growth strategy, including further diversifying the business away from fuel, complements and enhances our value proposition in the marketplace and provides significant cost synergies with long term upside potential. Ultimately, we believe this transaction strengthens Flex's position as a leading provider of innovative healthcare technology solutions. With greater size, scale and capability, we plan to successfully leverage our core technologies to improve our competitiveness in the CDH market and our strong platform for future acquisitions. Before I wrap up my remarks, I also want to provide an update on the Zavencys acquisition we closed in January. As a reminder, they're an electronic payment network and optimize the payment delivery process through their patented scalable technology.
It complements our current offerings with new payment delivery capabilities that enhance AP payments and provide seamless delivery of electronic payments. This acquisition expands WEX reach as a corporate payment supplier and provides more channels to billing aggregators and financial institutions. We're on schedule to fully integrate Noventis into the WEX corporate payments platform by the end of this year. We're very excited about the new opportunities that we expect to capture in the years ahead. As I look back at 2018, I'm very pleased that we'll be able to execute against all of our strategic pillars.
We've had revenue and earnings per share growth in line with our long term targets. We again achieved recognition with Great Place TO Work is rated by almost 90% of all WEX employees who filled out the survey. Finally, this year marked a year of significant technology milestones for WEX. We're excited to see what's next as we expand our capabilities. We've had huge wins in the marketplace like Shell and Chevron.
We had a very successful execution of the AOC integration, which surpassed our initial expectations. We've undertaken and made significant progress on digital transformation of our business, all while maintaining a corporate culture that supports our competitive advantage. In summary, I'm very pleased with our performance in 2018. I'm proud of the foundation we've built for our investments over the past few years that will support long term growth and value creation. Most of all, I'm thankful to all of our employees who are successfully executing on our strategic pillars and are the backbone of our growth.
We remain poised for growth in 2019, and I look forward to another successful year for WEX. I'd now like to turn the call over to our CFO, Roberto Simon. Roberto?
Thank you and good afternoon everyone. As Melissa mentioned earlier, I would like to provide you with an update on WEX's internal financial statement review. In addition, the recently filed 10 ks, 10 ks8 and press release contain updates to the preliminary results issued on February 22, 2019. During the company's 2018 year end close process, WEX identified immaterial errors in the financial statements of our Brazilian subsidiary, which began before 2015 and are primarily related to accounts receivable and accounts payable. The financial statements have been corrected for these matters.
At the same time, we revised the financial statements to correct other immaterial variances impacting prior years that were not previously recorded. WEX believes that the effects of this revision is not material to our previously issued consolidated financial statements. We are actively engaged in the implementation of our remediation plan to ensure that controls are designed appropriately and will operate effectively. Changing gears to the 2018 results, I want to pause for a moment to discuss the results for the full year. In 2018, WEX outperformed again with revenue growth of 20% and adjusted net income growth of 56% when compared to 2017.
We had significant organic revenue growth in the business, supplemented with M and A activity. In the Fleet segment, revenue grew 18%. 10% of this relates to macroeconomic factors and revenue recognition. In the Travel and Corporate Solutions segment, revenue grew 35%. Approximately half of this growth was due to M and A and revenue recognition.
Finally, the U. S. Health Business grew 14%. Now let's move to the Q4 results. We saw strong organic revenue and adjusted net income growth driven by robust results from Fleet Solutions and Travel and Corporate Solutions segment.
The U. S. Healthcare business also performed better than expected with solid revenue growth. From an earnings point of view, we continue to benefit from this organic growth, positive macroeconomic trends and a lower tax rate. Overall, we are pleased with the Q4 performance on both top and bottom line results.
For the Q4 of 2018, our total revenue was $381,200,000 a 15% increase over prior year. Non GAAP adjusted net income was $91,800,000 dollars or $2.11 per diluted share, up 34% from $1.57 in line with guidance. I want to quickly point out that we are still benefiting from the new revenue recognition standards. The total benefit was €10,900,000 which is similar to prior quarters. Now on to the segment results.
The Fleet Solutions segment achieved $253,800,000 in revenue, an increase of 15% compared to prior year. Payment processing revenue increased 35% and financing revenue increased 10%. The gains were led by the North America flip set business, which grew 14%, followed by the over the road, which grew 22%. Both of these growth rates benefited from higher fuel prices and the new revenue recognition standards. We also saw strong growth rates in Asia at 59% and Europe at 15%.
Within the fleet segment, we continue to see solid organic transaction growth of 6.5%, driven by new sales. At the same time, we continue to maintain very low attrition rates. And finally, same store sales were marginally negative due in part to the government shutdown. The net interchange rate in Q4 was 138 basis points, which was up 20 basis points over last year. There are 3 items that had a positive impact on the rate.
A year to date revenue reclassification, higher fee respect from the European operations and the revenue recognition changes. Finally, in the segment, the average domestic fuel price in Q4 was $2.94 versus $2.68 in 2017. We have approximately $13,500,000 of additional revenue versus prior year due to higher fuel prices including spread impacts in Europe. Turning to our Travel and Corporate Solutions segment, we finished the year with the same strong momentum that we had all year. Total revenue for the quarter increased 29% versus last year, which was almost all organic.
Total purchase volume issued by WEX reached $8,200,000,000 This represents 11% organic growth and excludes ASE customers. Within the U. S, the travel business remained steady with revenue growth of 13%. And the corporate payment business was very strong with revenue growth exceeding 100%. Lastly, the international business growth was led by Europe, Brazil and Australia.
The net interchange rate in the 4th quarter was 64 basis points, which was 11 basis points higher compared to Q4 2017. The increase was due to customer volume mix, domestic and international spend mix and lower rebates. Moving on to Health and Employee Benefits segment. The U. S.
Health business surpassed expectations again, growing 12% year over year and continues to support its vigorous growth momentum. The average number of SaaS accounts was up 17% and total purchase volume was up 12%. The volume of transactions during open enrollment season was up 18% over the prior year and the pipeline remains strong. In the long term, we continue to expect high teens growth in this business. As expected, we continue to see significant slowdown in the Brazilian benefits business.
As a result, revenue in the Health and Employee Benefit Solutions segment decreased 4% in the quarter. Let's now move to expenses. For the quarter, total cost of service expenses were $137,600,000 up from $126,400,000 in Q4 last year. $400,000 in Q4 last year. Total SG and A, depreciation and amortization expenses were $149,800,000 which is up 18,100,000 Breaking down the line items within these categories, processing costs increased 7,700,000 dollars primarily due to AOC and the onboarding costs for Shell and Chevron.
Service fees were down 1,700,000 mainly due to the reclassification of network fees as part of the revenue recognition changes. Revenue loss during the quarter was 16,100,000 up from 13,500,000 a year ago. We recorded 1,300,000 expense related to the Brazil benefit business. In the fleet segment, credit loss was at the low end of the guidance, coming in at 12.2 basis points of spend volume. Operating interest was 10,100,000 dollars This is in line with expectations and was mostly due to higher fuel prices and interest rates.
G and A expenses were up $6,300,000 for acquisition related costs and legal expenses. Finally, sales and marketing expenses were up $18,500,000 largely due to the new revenue recognition and the onboarding costs for Shell and Chevron. Now on to discuss taxes. On a GAAP basis, the effective tax rate this quarter was 44.3%. On a non GAAP basis, the ENI tax rate was 25% compared to 36% a year ago.
The company continued to benefit from the tax reform. I will now be discussing our balance sheet. We ended the quarter with $541,000,000 in cash, up from $504,000,000 at the end of last year. Our corporate cash balance at year end stands at BRL181 1,000,000 after making the payment related to the acquisition of the Chevron portfolio. Additionally, we have approximately €666,000,000 available on the revolving line of credit, which gives us access to more than €800,000,000 in capital.
Also, at year end, we had a total balance of $2,100,000,000 on the revolving line of credit, term loans and notes. The leverage ratio as defined in our credit agreement stands at approximately 3.1 times, down from 3.7 times at the end of last year. As a reminder, we have been de levering as expected since the time of the TSS acquisition at a rate of half a turn to 3 quarters of a turn per year. During January, we announced that we can increase borrowing capacity and improve our financial covenants in order to fund acquisitions. When we pro form a for the Noventis and DBI transactions, we expect the leverage ratio to be approximately 4 times.
We continue to see unrealized gains on the interest rate hedges we have in place. As of quarter end, the market value of those hedges was $18,000,000 We had $250,000,000 of hedges rolling off at the end of 2018. During March this year, we executed another BRL450 1,000,000 of interest rate hedges, locking in LIBOR at approximately 2 40 basis points. Including the debt from the DBI and Noventis deals, we expect to have about 65% of our financing debt balance essentially at fixed interest rates. Finally, let's look at our guidance.
Note that these expectations reflect our views as of today and are made on a non GAAP basis with respect to adjusted net income. Before we get into the numbers, I want to give you some puts and takes that should be considered when modeling 2019. First and most important, the guidance is within our long term targets of 10% to 15% growth in revenue and 15% to 20% growth in earnings. These targets assume constant fuel prices and FX rates. Starting with the fleet segment, our 2019 plans are notably higher than the long term targets provided at the Investor Day for 3 key factors.
1st, we look to maintain strong transaction growth rates. 2nd, we anticipate to fully benefit from the Shell and Chevron portfolios in the second half of the year. And third, we look forward to continued progress in the international businesses. Specific to the Shell and Chevron wheels, I want to give you some details around the progression through the year. As Melissa said, we have mailed out parts to all of the customers and we are beginning to see the transition onto our platform.
It will take several months for this transition to be complete. Meanwhile, we are carrying significant costs as we did at the end of 2018. So we expect the 2 portfolios to be dilutive to earnings for the first half of this year and move to normal profitability when fully converted in the second half of the year and beyond. Finally, in this segment, we anticipate that fuel prices will be lower than 2018, negatively impacting revenue by approximately 50,000,000. Moving into the Travel and Corporate Solutions segment, revenue is expected to grow in excess of 30%, including approximately $35,000,000 from the Noventis acquisition.
Excluding Noventis, we expect the revenue will be within our long term guidance range of 10% to 15% growth. We also expect organic volume to grow in the mid to high teens. Turning to the net interchange rate. For the full year, we expect the rate to increase approximately 10 basis points versus the full year rate in 2018. The main reasons for the increase are the acquisition of Noventis and the renegotiation of an OTA contract, which will shift revenue from other revenue to payment processing revenue.
Regarding the Health and Employee Benefits segment, we expect our U. S. Health business to grow revenue in the high teens in line with expectations set at Investor Day. Additionally, we expect approximately $75,000,000 in revenue as a result of the TDI acquisition, which closed earlier this month. As we said when we announced the deal, we do not expect a material impact on earnings this year.
In the Brazil benefits business, we expect another challenging year. Moving on to the financing side, we are assuming an increase in LIBOR of approximately 40 basis points on average from 2018. This increase would impact approximately €900,000,000 of floating net debt, which includes the debt for DBI and Noventis. In addition, we have approximately 1,200,000,000 in deposits at our bank that will also be impacted by the higher interest rates. Now for our guidance numbers.
We have updated our revenue range by $50,000,000 from our previously issued revenue guidance. This includes an increase of approximately €75,000,000 for DBI. This also includes a €25,000,000 reduction from Noventis after concluding how the new revenue recognition standards will play to this transaction. For the full year, we expect revenue to be in the range of BRL1.68 billion to BRL1.72 billion dollars and adjusted net income in the range of $385,000,000 to 4 0.3 million On an EPS basis, we expect adjusted net income to be between $8.80 $9.20 per diluted share. For the Q1, we expect revenue to be in the range of €375,000,000 to €380,000,000 and adjusted net income to be in the range of 72,000,000 to 74,000,000.
On an EPS basis, we expect adjusted net income to be between 1 point 6 4 dollars and $1.70 per diluted share. Now let me walk you through a few more assumptions. Exchange rates are based as of mid February 2019. We assume that domestic fuel prices will average $2.60 in the Q1 $2.63 for the full year. This assumption for the U.
S. Is based on the applicable NYMEX future price from the week of February 18. The fleet credit loss will be between 13 18 basis points, both for the Q1 and the full year. The company expects 2019 adjusted net income tax rate for the full year to be between 24.5% 26%. And finally, we are assuming that our there will be approximately 43,800,000 shares outstanding for the year.
To conclude, we are very confident about 2019 guidance and are looking forward to a great year. And now we are opening the line for questions. Our first question comes from the
line of Ramsey El Assal from Barclays. Your line is open.
Hi, guys. Thanks for taking my question. Can you give us a little more color on the Brazil situation, sort of what happened there exactly? Was it just an accounting error, but there's no indication of any type of malfeasance or anything like that or willfulness statements of past results? It's just simply an error that you've cleared up and now it's completely behind you.
If you could provide a little more color there, it'd be appreciated.
So this is Roberto. Good afternoon. The majority of
the issues we found in
the Brasil fleet was in the Brasil fleet business. The processes we have were highly manual. And in the past few years, we have been improving those processes over time. And the other thing
I would say to you
is that finally, the volume on this particular segment has declined significantly in the past 2 years. So this is why as we look into 2019, we feel comfortable on where we are.
It's Melissa. I'll make sure that we respond to your second question too. One of the things we did as part of the process is we engaged 1 of the big 4 firms to perform work for us, and we did not find any evidence of fraud or intended errors as far as that process, just to make sure we're absolutely clear.
Okay. That's super helpful. Thanks so much. I wanted to ask also about your corporate payments growth rate, which was extraordinary. Can you give us a little more color in terms of what industry verticals there are driving that or solutions that you have that are driving that?
And also just bolted onto that, it looked like your credit loss expectations for 2019 were a little higher than your full year 2018 outlook. And I was just curious as to what is causing that to be elevated a little bit? Is it increases? Is it on
the credit side rather than the fraud side?
Or any color there could help as well? And then I'll hop back in the queue.
Yes, sure. Roberto actually gave some pretty good color on the corporate payment side. We actually if you look across the portfolio, we saw great growth, but we saw oversize growth in some of the areas like the corporate payments itself. In more words, when we think about that business, we're segmenting it between travel and corporate payments. Corporate payments, it's a bigger market, it's a higher growth rate, and we've been putting an increasing amount of capital and effort towards that space.
So that's a piece of it. We're going up relatively small base, which helps. But that's a piece that also work outside of United States. The businesses we've continued to globalize that we've added in and really strengthen up our European office. And we're seeing the benefit that I talked about one of the wins we just had in that space in Europe and I think that there's a direct correlation between work we've done in product at Alta, the work we've done in that office and making sure that we have really high talent that's focused on
globalizing
Great. Yes.
This is Roberto. Let me take the credit loss question for you. I mean, this is the way we see. So, we closed 2018 with 12.5 basis points of spend volume on the fleet credit loss. And as you know, I guided 13 to 18 basis points.
We don't expect any change from the 2018 results with just one exception that is related to the Shell and the Chevron portfolios. And here there are 2 pieces. Number 1, these accounts have small businesses, which as you know come with higher credit loss than the average North American fleet business. And the second thing is specifically to Shell, there is a revolver portfolio that also comes with a higher credit loss than the average of the business we have today. Our next question comes from
the line of Darrin Peller from Wolfe Research. Your line is
open. Thanks guys. You continuously show mid single digit growth in your transaction levels in the fleet segment, which I guess just give us a little more update on what you're seeing that's driving that level versus what we see at industry at some of your competitors? Is it and then just maybe expand on sustainability to that as we get more organic going forward?
Yes. When we think about growth in that part of the business, there's a lot of blocking pipeline. As we continue to roll out products, we have salespeople that are selling against both our partner portfolios and then directly. And over time, as we've added partners, it might be counterintuitive, but it actually helps build the ability to grow in the marketplace because you have customers that have many different options and there's something unique about each brand and we market to make sure that we're really being thoughtful about what people are attracted to about that brand and that may be site acceptance, it may be something around brand loyalty, there's a whole host of reasons that people pick a particular product. But that's an area of expertise of ours is to really understand what is going to drive somebody to that product to make sure there are markets to that.
And at the same time, we have Alexa offering, which gives you the universality, if that's something that they're interested in alternatively. And if you look across our partner portfolios, we had a really great growth year this year on half of our partners working in conjunction with them. And then the Universal business has done well on the over the road business and talked about having one of the biggest implementations in the history of the over the road business. I think that there's really good momentum behind the fact that the technology was always good, but we've really added on to that with new products and features that's resonating in the marketplace.
All right. Thanks. Melissa, you've mentioned, I think, 800,000,000 gallons expected to roll on associated with Chevron and Shell through the year. First of all, is that still on target? And then just quick update on the trend on the overall integration and bringing those clients on, how has it been going?
That is still actually the target for us. And we have rolled out the cards. What will happen with the customer base, they now have 2 cards in hand. They cut over periods where we're starting to migrate those customers onto our platform. They have to go through if they're interested in being on using our online tools, which a lot of people are.
But they have to go through an activation process, but also process of getting online. And so we're in the thick of that right now. But we're seeing that migration happen. We talked before about having those tranches executed by the first half of this year, and we're still on target to do that. So very much on target.
But Roberto pointed out this concept of dilution in the first half of the year, we tried to talk about that at the end of last year, those ideas that we've got costs that are going to come in advance of when we see revenue, and that's very normal for us as we go through a private label implementation. It's a little bit abnormal to have 2 stacked up of this size and so it's a little bit more accentuated than it normally would be. But the costs are there, the associates were out selling these new products, the customers have cards in and the tranches are converting over. We're seeing some volume coming through now, and so we feel very much on track to what we had said on our last call.
Okay. All right, guys. Thanks.
Our next question comes from
the line of Bob Napoli from William Blair. Your line is open.
Thank you and good afternoon. First on the healthcare business, with the acquisition of Discovery Benefits, WEX has well stated over the years has increased its investment in healthcare. Now this is a the Discovery Benefits, I think that business was growing at a high rate, if you can but it does bring up some questions of whether there's some conflict channel conflict between Discovery Benefits and your other partners. But if you could just talk a little bit about the investment in Discovery Benefits and the Healthcare business and the high teens growth that you're is are you seeing more of that from product basis, HSA, FSA? So just kind of a broad question there, conflict of interest and just the overall healthcare business.
Sure. Sorry. Sure. Actually, I'd like to know that's great. I'd like that actually tied right after that last question.
When we think about multichannel, that's something that we do in every part of our business. And we're very conscious about how we go into a marketplace and how we make sure that we're transparent. When it comes down to going into a marketplace with partners and directly, a lot of it's around creating rules of engagement and being transparent with people around what you're going to do and then making sure you follow through. Very
rich and deep history of
making sure that we are supporting our very rich and deep history of making sure that we are supporting our partners, while at the same time having a direct product. And as we think about this space, part of what we were interested in with BDI, you talked about a growth rate and that's certainly part of what was interesting to us as they've been growing at a rate higher than our core healthcare business historically. And at the same time, it adds a product extension. We can sell some of the products that they have to our existing partners, so they have an ability to use that into the marketplace. We can share best practices of some of what they're doing that we think of as unique with their partners into the marketplace.
And then we have an ability to have an offering that is integrated into the marketplace. And we like that as a setup in the background, and we need to be able to show our partners in the marketplace that we can do that. So, from a conflict perspective, that's something we intend to continue to work through with our partners and the way that we have in every other part of the business. And in terms of our interest in growth in this marketplace, it is got some great tailwinds behind it. We like the just the market dynamics.
We like the size of the market. We think that it is a market that healthcare in general is big, it's complicated, it's a place that we think that we can help. And you asked about growth, it's kind of coming all over the place. People think of FSA accounts as not growing, but they actually do. It's just growing at a lower rate.
And then you see oversized growth going in the HSA side of the marketplace. And it comes from adding new partners, spend volume going up and the partners that we have continue to grow, it's a combination of all of those things.
Thank you. My follow-up question would be just on the economy. I mean, you saw FedEx report some weaker news. The Federal Reserve today said they're not going to raise rates anymore. So there are signs of global softness, but it doesn't sound like I mean, you certainly didn't call I guess same store sales were a little weaker.
But what are you seeing as far as the what's your view on the economy?
So same store sales were negative 0.4 percent. So I'd say, we really didn't see a significant change, and that was in the period where the government shutdown. Apparently, you can see it's getting through in some of our volume trends. So from our perspective, there isn't really been a really much of a change in what we're seeing for activity in the market. And we think that our fleet business is a pretty good deal because we do business way different to FICs.
Okay. So you're not seeing any slowdown in the economy, nothing that's worrying you. And just if I could just sneak in the Q1 guidance, And I know you talked about the dilution, but is that Shell, Chevron? Is that can you quantify the EPS dilution in the Q1?
So, Bob, this is Roberto. Obviously, I'm not going to get specific on how much is Shell and Chevron for the quarter. But if you position what we have been saying now in the past few calls, I mean, those portfolios, as Melissa said, they are big portfolios. They are going to bring a significant amount of revenue and to get them up to speed, the onboarding cost of this is significant. So, I wouldn't quantify how much is the amount related to those portfolios, but it's a significant amount obviously.
What I think is important yes, what I would say Bob, what is important is the confidence on the guidance that we have for the full year, which is we have a growth within our long term targets. And that's where we want to reinforce that and we are working towards that. Thank you.
Our next question comes from the line of Jim Schneider from Goldman Sachs.
I was wondering if you could maybe talk a little bit more about the macro environment you're seeing maybe by geography. It sounds like things are still pretty strong in Europe, but I guess maybe talk about either the difference between the U. S. And Europe and specifically your expectations for new sales in Europe outside of the new portfolio, since you've already talked about the U. S?
Yes. When we are looking at any of our sales pipeline, we break down our year as we go into executing the year. We look at what retention rates need to be by products and by geo and then what we need from new sales coming in. And as we thought about that across the world, I guess is what your question is. U.
S. Marketplace, we're right now envisioning it's from the economics perspective, it being similar to last year. We know that we have these 2 major implementations that we're executing on. So that's a little bit unusual in the backdrop, but that doesn't really impact it's not affecting my view of the overall macro. And then in Europe and in Asia, I'd say similarly, we've had really significant growth in those marketplaces during 2018, albeit off a smaller basis, but we don't envision that change when we look at how much we're going to bring in in 2019.
There's a little bit more lumpiness as you bring in one large account. Like I talked about, that can cause a little bit more lumpiness just because of the size of the business. But in terms of new wins and what we're seeing in the pipeline, we feel pretty good across any of these markets. And the fact that Brazil is being the one standout in the fact that we're expecting to have headwinds there this year, which is something we talked about the last 2 or 3 calls. We envisioned that to happen through at least the first half of twenty nineteen.
We would say that, again, we still think it could happen through at least first half of twenty nineteen.
That's helpful. Thank you. And then maybe turning to the corporate payments space for a minute. Clearly, continued strength in the results there. But one of the things that we've seen from some of your competitors is the acquisition outright of our portfolios for the accounts payable and accounts receivable type management software where you have chosen to rely exclusively on a partner strategy.
Can you maybe talk about your appetite for potential additional M and A specifically to have your own software solution in the future?
So we have if you look at our software now, when we bought AOC, a combination of AOC and what we had prior to that and then people that were sitting in the EFS, we actually feel pretty good about the underlying product capability and we like the fact that we've built it using microservices, cloud based and we just keep adding to the stack that we have. And so when we think about acquisitions, I think about it 2 different ways. I think about them in that space as technology plays. And for us, that becomes a build versus buy analysis. And we look at that to say, are there certain things that we need to do in order to build out the product?
But we like the ability to build on what we've got. And then on the more vertical side of that, that's something we will continue to play in the marketplace. We'll be interested if someone has a piece of the product or a piece of what they're doing that we think is unique that comes with a book of business, then we'll continue to be interested in that as well. So, we look at both of those things pretty softly, but we also feel pretty good about what we can build upon based on what we've already acquired and put together so
far. Great. And then maybe just one clarification, if I could. Clearly, there is some dilution on both the new portfolios as well as the acquisitions in the beginning of the year. As you exit Q4 of 2019, would you expect operating margins to be up, flat or down on a year over year basis?
So, let me tell you, I mean, specifically to those portfolios. Obviously, when you look at 2019, as we said, we expect to be dilutive on the first half. And then on the second half, we are going to be we expect to be like a fully ramped. So what you should expect for 20 20 is obviously the full year portfolio is fully combated. And obviously, when you look 2019 to 2020, your margin should be better than 2019 because you will have the 2 full halves with the revenue and the cost base aligned.
Thank you.
Our next question comes from the line of Sande Sakhlani from KBW. Your line is open.
Over to Sanjay. Thanks for taking my question. I guess first I had a quick question on the travel business. It seems like you guys announced some good wins there, including the etravel portfolio. How should we think about the potential opportunity there?
And when does that start to ramp in?
Sure. It's starting to ramp now and so it will ramp throughout the year. And you talked more broadly about what we expect to see in the corporate payments business. I would restate what Roberto said, we expect it to be in line with our 10% to 15% guidance range, our long term guidance range in the course of this year. The acquisitions are going to push it on top of that, but the organic growth rate is expect to be between 10% to 15%.
And then we aggregate that with acquisitions, you'd have to be over 30%.
Thanks for that. And I guess a quick clarification on the Shell and Chevron portfolios. We've had quite a bit of discussion on that already. But I guess once you're past the upfront expenses, how should we think about the profitability of these portfolios versus the rest of the fleet business?
I will answer the question for you. I mean, this is once we have those fully portfolios ramped on a run rate basis, the profitability of those two portfolios is going to be very similar to any of the overall companies that we operate. You know that within the fleet business, we have the over the road on the trucking industry side. And then when you get more on the fleet, North America side, you have a small fleet, you have larger fleet. And when you compare the portfolio within the old companies, the profitability is going to be very similar to the other old companies that we run.
Got it. And if I can squeeze in a last one on Discovery Benefits. I know it's not contributing to earnings this year, but I guess going forward, how should we think about the accretion expectation on an earnings basis?
So what we've said about BBI, we've talked about it being immaterial from an EPS perspective this year. We obviously think it's going to continue to grow. We talked about it as combined with our health tenants, we think it will continue to be a high teens grower and it will continue to scale. We also talked about the fact that we expect to see $20,000,000 worth of synergies that we're going to get over time. So if you accumulate all of those things, we do expect it to look more like a margin profile than the rest of their Healthcare business.
Got it. Thank you very much.
Our next question comes
from the line of Oscar Turner from SunTrust. Your line is open.
Hey, guys. Good afternoon. First question is just on fleet. I was wondering,
did you guys provide the expected revenue contribution from Shell and Chevron this year? Apologies if
I missed that. And just to clarify,
it sounds like we shouldn't expect to see material revenue contribution until the second half of twenty nineteen?
So, this is Roberto. You know we don't disclose revenue or profitability by customer or portfolio. But and Melissa has just mentioned a while ago, we gave direction on the number of gallons that those two portfolios will add to our business. And if you take these gallons and you translate them into revenue, you will have approximately €60,000,000 to €70,000,000 in revenue on a full year basis. So this will give you an idea obviously on where we should be in 2021, not those two portfolios are fully ramped and obviously considering the fuel prices that we have today.
Okay. Thanks. And
then
Our next question comes from the line of Matt O'Neill from Autonomous Research. Your line is open.
Yes. Hi. Thanks guys for taking my question. Actually, almost all of them have been basically asked and answered. But I guess if I could try to ask on the sort of travel and corporate momentum we saw in the 4th quarter in another way, maybe what would you characterize if anything is not being necessarily repeatable, if we wanted to think about that kind of levels going forward versus maybe not?
One of the things that Roberto talked about in his section was around the idea that we had the rates were elevated. Some of our discount rates on interchange was a little bit higher in the Q4. So, and he talked about the ratings around that. So that's something that it's something we didn't expect will repeat throughout the course of this year. In terms of spend volume, we some of what we will experience, it depends on what's going to happen overall in the travel marketplace because that's still a significant part of the portfolio.
So we continue to bring on new business, how our existing partners perform has a pretty big impact and what happens to their growth and volume. So we're going to talk about expecting that to be mid teens to high teens and of course that's 2019 just to kind of give you an indicator. So the rate is expected to
be a little bit different
than what you've seen in Q4, but from a spend volume perspective, we expect to continue to see volume coming through that will be driven based on existing customers and the performance of those portfolios, but also adding in new portfolios. We also saw if we're looking at growth rates year over year, just keep in mind that we get the benefit of Brent Brack in 2018 compared to 2017. So it's a little bit of a lift in terms of revenue.
Got it. Thank you for that. And then I guess just sort of a follow on that and specific to the interchange in that segment. Trying to think about kind of the overall bias going forward sort of higher or lower, I think I'm going to guess that it's probably complex or maybe the organic business or the business prior to Noventis is maybe stable, but then with Noventis, it will weight the average hires that volume gets internalized. Am I thinking about that conceptually correctly?
Yes. Let me put this in context for you. So as I said that during the call, we expect for 2019 approximately 10 basis points on the net interchange higher than on the average of 2018. And there are a couple of reasons. Number 1, obviously, the acquisition of Noventis is going to add a few points to our interchange rate.
The second thing, as I said, with one of our LTAs, we amended the contract. There's no impact to total revenue. What we are doing, you will see during the year, a reclassification from other revenue into payment processing revenue. And the way we calculate the net interchange is based on the processing revenue. So that's another reason why you're going to see the rate to go up.
And then the final thing that you always see is more difficult not to manage is both the customer spend mix as well as from where the spend comes between domestic and international.
Got it. Thank you very much for that clarification. Appreciate it.
There are no more questions over the phone. Presenters, you may continue.