WEX Inc (WEX) 2008 Q2 法說會逐字稿

Good morning, everyone and welcome to the Wright Express Corporation second quarter 2008 conference call. There will be an opportunity for questions after the prepared remarks. (OPERATOR INSTRUCTIONS) Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Steve Elder, Vice President of Investor Relations. Please go ahead, sir.

Good morning. With me today is our CEO, Mike Dubyak, and our CFO, Melissa Smith. The financial results press release we issued early this morning is now posted in the Investor Relations section of our website at wrightexpress.com. A copy of the release has also been submitted as an exhibit to an 8-K we filed with the SEC.

We'll be discussing a non-GAAP metric, specifically adjusted net income, during our call. Please see Exhibit One included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income. As a reminder, adjusted net income excludes the amortization of purchased intangibles.

I'd 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, most recent Form 10-K and other SEC filings. While we might- - while we may update forward-looking statements in the future, we disclaim any obligation to do. You should not rely on these forward-looking statements after today.

With that, I'll turn the call over to our CEO, Mike Dubyak.

Good morning, everyone. And thanks for joining us. This was a strong quarter for Wright Express. In a very difficult quarter for the economy we met or exceeded our internal projections on every one of our key metrics. As a result, revenue for the second quarter exceeded our guidance by $6 million and adjusted net income exceeded the top end of our guidance by $0.01 per share.

Netting out the various moving parts in determining earnings, the key factor leading to the upside this quarter was fuel price, which at $3.96 per gallon, was nearly $0.40 higher than we forecast.

Generally speaking, the higher fuel prices translate into a higher dollar value on payment processing transactions, which flows through our model in a positive way. We're also seeing greater business interest in fleet card solutions, as price per gallon rises, resulting in an increase in new business coming on the books in our direct line of business.

Of course, the economy is a challenge, so first let's talk about how economic conditions are affecting the core of our business, fuel purchasing by fleets.

Here we look at three key things. First, how was our existing customer base performing in terms of the number of active vehicles and transaction volume? Second, how are we doing on attrition? That is, are we retaining the fleets and vehicles in the installed base? And third, what kind of growth are we generating on the front end? That is, the number of new vehicles and fleets we add to our base.

In the first of these areas, transaction volume in the installed base, our metrics this quarter were in line with our forecast. Historically, transaction growth on our existing customer base has closely tracked overall growth in GDP. For about the past year and a half, activity in our existing base of business has been slowing along with the economy. With a slowdown becoming more pronounced in the first quarter of 2008, after essentially no growth in the install base during 2007, volume turned slightly negative in Q1 and remained slightly negative in Q2. Fleets are adding fewer new vehicles than in the past and we're seeing more fleets cutting back on the number of vehicles they operate. And these trends lead to fewer transactions within our existing base of customers. We expect this trend to continue through year end.

Turning to the second question, we're still doing very well in terms of retaining our customers and minimizing attrition. Retaining customers is mainly a function of keeping them satisfied and actively using our cards. We've now seen six months in a row of less than 2% voluntary attrition, which is lower than our past experience.

And in answer to question three, we're also continuing to perform well on the front end of our business, which is another requirement for growth. Thanks to the hard work of our team and the programs we've rolled out in marketing and sales, we've been able to maintain a solid new business pipeline in both our direct and co-brand channels.

We're continuing to see good success in generating new fleet accounts and active cards. The higher price per gallon has done nothing to dampen interest in our products and may in fact be creating greater interest, particularly in the small business sector. Reflecting continued solid performance on the front end, coupled with low attrition, organic growth and total fuel transactions for the second quarter remained in the mid single digit range, increasing 4% from Q2 last year.

In small fleets, the number of vehicles overall was up 1% in Q2 compared with the second quarter of 2007. As in the past few quarters, growth in the Wright Express direct channel, where average vehicles grew 6% year-on-year, was partially offset by private label, where small fleet vehicles were down 2%.

Turning to the mid-size and large fleet markets, average vehicles increased 4% from the second quarter of 2007. Looking ahead, we feel very good about our potential for continued growth in this segment. Last quarter, we announced winning a contract with the Department of Defense through a new relationship with Citibank covering approximately 47,000 vehicles. Not long after that, we won a small contract for the Federal Department of Energy, like the DOD contract, under the auspices of the General Services Administration.

One of the GSA's operations is GSA Fleet, which functions like a leasing company for agencies within the federal government and manages more than 211,000 vehicles. I am pleased to announce this morning that we've been selected to provide GSA Fleet with fleet card services for those vehicles. This is through our relationship with Citibank, under their master contract for the GSA's SmartPay 2 Program. This is a great competitive win for us. Under the contract, the vehicles served by GSA Fleet will be using Wright Express for fuel purchases, vehicle maintenance and accident management services. Based on GSA Fleet's rollout schedule, we expect this portfolio to be on board by the end of 2008.

The other fleet segment we serve is heavy truck, where our business consists of primarily private carrier fleets. For the second quarter our heavy truck vehicle count was up 8% from a year ago.

Let's turn now to the challenges I mentioned earlier related to higher fuel prices, the first being the pressures on our net payment processing rate. As part of the normal course of business at any given time we're involved in renegotiations with a few of our larger oil merchants. As gas prices rise, we're using more of our hybrid, or fixed variable pricing, which is a win-win under these circumstances, because it reduces the variability for both parties tied to the price of gas. The merchant gets a lower rate on the variable component, but it adds a fixed component that enables us to reduce the total amount we hedge with derivatives.

As a result, we built a lower net processing rate into our guidance for the second half of the year and at this point in the year, we haven't seen a significant deviation from our forecast. Looking ahead, by year end, we will have renegotiated most of the major oil companies, so visibility into the rate for 2009 should be good.

The second challenge associated with rising fuel prices I mentioned is credit portfolio performance. Melissa will speak to this in detail, but I am pleased to say that the overall trend we're seeing is really very solid. This is in contrast to other businesses with consumer portfolios and revolving credit products. Unlike purchases made on consumer cards, fuel purchases made by businesses are an integral part of running their operations. They are as essential as rent or utilities.

Another key difference is that Wright Express's card is a charge card, without revolving payment options, so payments are due in full at the end of each billing cycle.

Similar to the consumer portfolios, however, we've seen an increase in bad debt because the economy is clearly having an impact on businesses, but not nearly to the same extent. Looking at our statistical data, whether you slice it by geography, SIC code, fleet size segment or aging in the portfolio, we haven't seen anything surprising, given the current economic conditions.

This is not to suggest that we've been in any way complacent about the challenges to growth we face in our core business. We have been executing on a revenue diversification strategy for the past few years, most recently with new ventures like TelaPoint, Pacific Pride and our telematics program in niche opportunities adjacent to the Fleet Card business.

We're also working to capture a larger share of total business spend in markets outside the fleet industry. In our MasterCard program, which has created a position for Wright Express in the mid-size business and single use account markets, purchase volume grew more than 34% from the second quarter last year to $623 million this quarter.

Looking farther ahead, new products like WEXSMART, our telematics offering, will take us beyond payment processing and into new kinds of fleet-related business information. During Q2 Enterprise Leasing extended their contract with us and they will now be marketing our WEXSMART offering to their customers.

As TelaPoint and Pacific Pride demonstrate, we're open to diversification through acquisitions when the opportunities make sense. As we announced this morning, we entered into a $9 million transaction this week that has some interesting implications for our long-term future as a player in the fleet card market globally. We will be acquiring the assets of Financial Automation Limited, known in the industry as FAL, a New Zealand-based provider of fuel card processing software, which will give us an international presence that we can leverage in geographic markets around the globe.

We work closely with the major oil companies on their fleet card programs in North America and we know they manage their card programs on a more global basis. We also know there are opportunities to work with these companies in a number of large international markets. These opportunities may be three, four or five years out, but the strategic moves to develop global processing and operational capability will take time.

Acquiring FAL will accelerate our speed to market as we pursue these opportunities, allowing us to offer fleet card processing and operation solutions to oil companies as they look to consolidate their processing relationships around the globe. Near term, FAL also brings us software revenues from an existing relationship with a major oil company operating in multiple countries in the Asia Pacific and Australian markets. We expect to close the FAL transaction in the third quarter and to see no impacts on this year's earnings. Over the next several years, we will be patient and methodical, as we work to expand our footprint internationally.

Before I turn the call over the Melissa, I'd like to address the question of why we didn't purchase or repurchase stock in Q2. We spent considerable time this quarter working on a relatively large M&A transaction. In anticipation of the deal, we decided to minimize activity on the share repurchase program, but it ultimately did not materialize. Melissa will talk more about the related charge to earnings, but it's our policy not to comment on acquisition discussions. So, we won't be providing any further details about the transaction itself.

We were aggressive last year in utilizing our existing repurchase authorization and we intend to look very carefully at this option as we move through the third quarter. During July, the Board voted to increase the authorization for share repurchases by $75 million over the next 24 months. As in the past, any future buybacks will be funded primarily through the Company's future cash flows and may be commenced or suspended at any time. This new authorization reflects the Board's confidence in our future prospects and its commitment to enhancing shareholder value.

I'll wrap up simply by saying that our business is performing well in a very difficult environment and, based on our current data and the trends we're seeing in the business, we have every reason to expect that it will continue to do so in the quarters ahead.

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

Good morning, everyone. We're pleased to report another strong quarter of earnings and continued revenue growth. Once again our business demonstrated predictability, while the broader economy remained clouded with uncertainty. All of our key business drivers came in as expected, with the exception of the price of fuel, which was significantly higher than the NYMEX curve predicted at the time we provided guidance.

New sales drove our volume growth in Q2. Similar to last quarter, we observed a decline in fueling amongst existing customers. This decline was evident across all the diverse types of businesses we serve, from construction trades to state fleets to pharmaceuticals to telecommunication companies.

The diversity of our customer base also helps mitigate our losses on customer payments. While the credit environment is weaker than in 2007, customer behavior patterns are consistent with trends we've seen in the past. Losses came in as expected in Q2, reinforcing our confidence in the full year guidance.

Our diversification initiatives are starting to bear fruit, with approximately $4 million of revenue in Q2 relating to the TelaPoint and Pacific Pride acquisitions and our telematics offering, WEXSMART. These initiatives were well timed to supplement our growth, while adding to the overall predictability of our business model with their reoccurring revenue streams.

Looking at our results for the second quarter of 2008 in detail, total revenue increased 29% to $111.2 million from $86 million for the second quarter of 2007. Net loss to common shareholders on a GAAP basis was $24.4 million or $0.63 per share. This compares with net income of $16.4 million or $0.40 per diluted share for Q2 last year.

The Company's adjusted net income for the second quarter of 2008 increased 17% from last year to $22.4 million or $0.57 per diluted share. This non-GAAP figure excludes an unrealized mark-to-market loss on our derivative instruments, as well as the amortization of purchased intangibles. Adjusted net income for the second quarter last year was $19.2 million or $0.47 per share.

We grew transactions 16% in Q2 2008 to $72.9 million from $63.1 million in the second quarter last year. Combined with a 34% increase in the price of gas, this increased fleet revenue by 29% to $104 million. Our transaction growth reflects a combination of the new Pacific Pride transactions and 4% organic growth for our sales channels.

The average number of vehicles serviced in Q2 2008 was approximately 4.5 million, compared with 4.4 million a year earlier.

Payment processing revenue in our fleet segment was up 30% to $80.2 million from $61.8 million in Q2 last year. This also was being driven by the increase in the price of fuel. The average retail fuel price rose to $3.96 per gallon from $2.95 in the second quarter last year and the average expenditure per payment processing transaction for Q2 increased 31% from last year to $78.72. The growth in payment processing revenue also reflected a 5% increase in the number of payment processing transactions this quarter.

Our net payment processing rate dropped 11 basis points in Q2 2008 from the prior year to 1.82%. This has been driven mainly due to increases in the price of fuel. We estimate for every $0.15 change in fuel prices, our net payment processing rate changes by one basis point due to the transaction fees embedded in our merchant rates.

As Mike mentioned, we anticipate this rate to drop in the second half of 2008, reflecting renegotiated rates with merchants. In addition, we expect to renegotiate a contract with one of our partners during the third quarter which will move them from a payment processing relationship to a transaction processing relationship.

The MasterCard segment contributed $7.2 million in total revenue in Q2, compared with $5.6 million a year ago, which is an increase of 29%. This growth was once again largely driven by MasterCard purchase volume, which increased 34% from $464 million in Q2 last year to $623 million this quarter.

Increased rebates were due to some of our larger customers hitting higher rebate tiers, resulting in declining net interchange rates compared to last year. We continue to expect strong revenue growth in this segment.

Turning now to operating expenses, on a GAAP basis, the total for Q2 was $60.3 million. This compares with $43.3 million in the second quarter last year. The increase reflects a combination of higher salary expense, service fees, credit loss and depreciation and amortization, much of it related to the addition of TelaPoint and Pacific Pride.

Salary and other personnel costs were $18.3 million in the quarter, up $2.6 million from last year. Our average head count for Q2 was 728, compared to last year at 686. Of the 42 new employees compared to last year, 38 of them were TelaPoint and Pacific Pride employees.

Our service fee expenses increased by $2.4 million in Q2 2008. About $800,000 relates to professional service fees for the acquisition Mike mentioned that did not materialize. Approximately $500,000 represents additional processing services for our MasterCard purchase volume. In addition, we saw an increase in professional fees related to Pacific Pride and our diligence into international markets.

On a total basis, including both fleet and MasterCard, credit loss in the second quarter was up $7.8 million from Q2 last year to $10.8 million. As I mentioned earlier, our credit losses on the fleet segment came in as projected at 22.8 basis points. While this is 13.5 basis points higher than the 9.3 basis points in the prior year, the customer behavior patterns were within our historical norms as a percentage of payment processing expenditures.

This is aided in large part by the diversity of our base of customers. We cover a wide range of SIC codes, where the only common denominator is that purchasing fuel is an important element to their business model. There is no single area of concentration, either geographically or by SIC. The credit we extend is business-to-business. It's not revolving credit. And if we're not paid on time, we charge a late fee. Most important, fuel that's purchased is integral to the vast majority of the businesses we serve, so the ability to keep using their fleet cards is critical. As a result, our customers have continued to pay us on average in less than 30 days in the same way these businesses pay most of their other critical suppliers.

We continue to have success managing our credit exposure with our proprietary credit scoring and collection tools. While we cannot totally limit our exposure to losses in a period of economic decline, we do have a positive history of continued customer payment in economic downturns. Our fleet customers overall remain more than 99% current. In fact, more customers are current in Q2 2008 than Q2 2007. It is the less than 1% of balances aging into delinquent categories that is driving an increase in losses.

There are more customers experiencing cash flow shortages, leading to an increase in charge offs for those that are delinquent. We anticipated this trend in Q2 and continue to believe our losses for the year will move to the high end or slightly above our five-year range of 11 to 22 basis points for the year.

The increase in depreciation and amortization for the second quarter was primarily the result of new internally developed software placed in service and the amortization related to purchases of TelaPoint and Pacific Pride. As you will see on the reconciliation of adjusted net income to GAAP net income in the press release, we had approximately $1.2 million of amortization this quarter related to the two acquisitions. We expect depreciation to continue increasing moderately, reflecting our recent increase in capital investments.

Operating and interest expense for the second quarter was relatively flat in Q2, increasing only $300,000 from Q2 a year ago to $9.3 million. The increase in fuel prices predominantly drove the higher average debt level, which was up 24% on average from last year. The increase in debt was offset by a reduction in rates.

For the quarter, our interest on certificates of deposit in fed fund borrowings declined approximately 70 basis points from Q1 to 4.27%. For the remainder of the year, we anticipate continued benefit as existing CDs roll off and are replaced at lower rates. Approximately $187 million, or one-quarter of our CD portfolio, with a weighted average rate of 4.2%, will mature during Q3.

Our effective tax rate on a GAAP basis was 38.4% for the quarter, compared with 84.8% for Q2 a year ago. As a quick reminder, due to a change in State of Maine tax laws, we adjusted our income tax rates in 2007 and the majority of this impact was seen in the second quarter of last year.

Our adjusted net income tax rate this quarter was 37.5% compared with 36.9% for Q2 last year.

Turning to our derivatives program, during the second quarter, we recognized a realized loss of $13.2 million before taxes on these instruments and an unrealized loss of $74.1 million. Obviously there has been a lot of volatility in the oil markets, and as of today our derivative liability is $30 million lower than it was at June 30th.

At this point, we've completed hedging 90% of our anticipated earnings exposure through 2009 and we have partially hedged the first two quarters of 2010. The weighted average prices for 2008 are locked in between $2.54 and $2.60. And the range for 2009 is locked in at $2.79 to $2.84. The two most recent purchases, both at prices of approximately $3.17 to $3.20.

Due primarily to higher fuel prices at the end of the quarter, our accounts receivable balance, net of reserves for credit loss, was $1.6 billion compared with $1.1 billion as of December 31st. All of this increase was offset by increases in our accounts payable and operating debt.

Our financing debt balance increased by $19 million from approximately $200 million at the end of last year to $219 million. You may recall that our financing debt totaled $247 million at the end of Q1, so our debt pay down in Q2 was significant.

We concluded Q2 with a leverage ratio of approximately 1.5 times. We continue to target leverage between 1.5 and 2.0 times and will allocate our free cash flow to its best use, whether it's debt pay down, share buybacks, acquisitions or internal reinvestment.

Capital expenditures were $4.4 million for the quarter, reflecting our continued reinvestment in our core products offerings and strategic diversification. We anticipate total CapEx to be between $20 million and $23 million in 2008.

I'll conclude with some major assumptions and our financial guidance for the third quarter and full year 2008. Let me remind you that our forecasts for these periods are valid only as of today and are made on a non-GAAP basis that excludes the impact of non-cash mark-to-market adjustments on the Company's fuel price-related derivative instruments and the amortization of purchased intangibles.

Although our share repurchase program remains in place, we have not included any potential EPS outside from this.

The fuel price assumptions are based on the applicable NYMEX futures price.

For the third quarter of 2008, we now expect to report revenues in the range of $108 million to $113 million. This is based on an average retail fuel price of $3.89 per gallon.

For the full year 2008, we now expect revenues ranging from $421 million to $431 million based on an average retail fuel price of $3.75 per gallon.

As for earnings, for Q3 of 2008 we expect to report adjusted net income in the range of $22 million to $23 million, or $0.55 to $0.58 per diluted share. We are maintaining our adjusted net income guidance for the full year 2008. We expect adjusted net income for the full year in the range of $84 million to $87 million or $2.11 to $2.17 per diluted share on approximately 40 million shares outstanding.

With that, we'll be happy to take your questions. Ryan, you can proceed with Q&A now.

Thank you. Ladies and gentlemen, at this time we'll be conducting a question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Tien-Tsin Huang with JPMorgan Chase.

Hi. Can you hear me?

Yes.

Good morning. Great results. I'll start with the losses. The losses were better than we expected. Sounds like you've got some visibility into losses, stabilizing to the high end of your historical range, Melissa, for the year. What's your confidence level there? What kind of visibility do you have going into that, into the second half?

Well, I can say, if we look at the trends, they've been, again, consistent with what we've seen historically over a, obviously, broader period of time. Both the first quarter and the second quarter have come in really dead on what we had anticipated. And so that's increased our level of confidence of our ability to predict this even in the market that we're in right now. So, I'd say overall, we're feeling pretty good about the year, coming in at again the high end of that 11 to 22 or slightly above that.

Can you remind us of the historical seasonality and charge offs that you've seen, or losses that you've seen, in 3Q and 4Q?

Yes. Typically we've seen some pretty dramatic swings. I mean, you can see that even in Q2 compared to last year.

Right.

Q3 has traditionally been lower than Q4. And I'd say this year we haven't seen the same seasonality impact that we've seen in most years. So, there is definitely some volatility quarter-to-quarter. We've seen that since we've been public.

Got it. And then any update on your thinking on the fuel hedge? You know, specifically with the timing and where the new hedge could get struck today?

Well, we won't comment on- - we still will do a hedge in the third quarter, so I'm not going to comment on when exactly we'll execute the hedge.

And if we looked at the hedge right now, the prices in 2010 are around $3.60. That's excluding diesel.

Got it. And then I guess I asked it that way and given your negotiations on the discount and the hybrid pricing, is that going to require some change in the form of how you strike those hedges, for example the 90% that you typically hedge to?

We had anticipated, even in the hedges that we've purchased, that we would be moving more to these hybrid prices. And so, we've been factoring that into the amount that we've purchased over time.

And we also, as we've looked at this, knowing the hybrids start to reduce, if you will, the amount of the needed hedge on a percentage or variable basis, we've also felt that we can take a little bit more volatility in our business model and accept a little more of that, so we're actually reducing the percentage from 90% to 80% as we go forward.

Got it. Okay. That's good to know.

2010 and beyond, as we get into 2010.

Got it. Good to know. Then lastly, the share repurchases, the timing and appetite for repurchases under that new authorization, given what you're seeing in the M&A pipeline today.

Yes, we're going to weigh each, you know, as we look at how much and when to time purchases. And as we've said before, we're going to do it mostly out of our free cash flow, as opposed to levering up. But, and then we're looking at both avenues to determine what we think is the best use of cash, given the information we have right now.

Great. Thank you.

Our next question comes from the line of Anurag Rana with Keybanc Capital Markets.

Good morning, everyone. Congratulations on a good quarter. Just wanted to get an update on the Citi portfolio as to when do you expect that to roll out, as to which quarter next year.

Yes, the plan right now is, as you know, we've talked about two portfolios with Citi. It looks like now, because there's three parties involved- - us, the oil company and Citi- - that has to do all the work to get this in place. As we get more visibility, it looks like we're going to do one of the portfolios in the first half of next year and the second one will be in the second half of next year. We might see some new business from the first portfolio by the end of this year, but the actual conversion will be in the first half of 2009.

Great. And as I look at the spread, you know, for the transaction processing revenue, and it declined sequentially. And I guess the PHH portfolio was primarily the reason for that. As we look at for next year, should we assume further decline in that rate when the Citi portfolio comes in?

The Citi portfolio would be transaction processing, so it would be a transaction fee.

That's what I was referring to, Melissa. The transaction processing -- transactions sequentially went up from $11.6 million to $17 million. And I think there are some acquisition-related transactions there.

Yes, it wasn't the PHH. It was the Pacific Pride- -

Sorry about that.

If you were referring to- -

Okay. Thanks.

Well, should we expect that spread to decline even more next year when the Citi portfolio comes in?

Yes. We've said that it's much larger than the average and so it will reduce the average fee and overall reduce our margin by roughly 1%.

Great. And I know Mike you have said that you're not going to comment on the acquisition, but could you just give us an idea as to large this would have been?

No, I don't think we want to comment.

Okay. Thank you.

All right. You're welcome.

Our next question comes from the line of Bob Napoli with Piper Jaffrey.

Thank you. Good morning. And congratulations on a good quarter. A question on the payment processing rate and how much, with adding a variable pricing as you give an outlook, how much further decline would you expect on the payment processing rate? And if oil were to decline significantly from where we're at, do you think you can recoup some of the reductions in the rate?

We've had- - if the price of oil stays where it is today, as we said, we're increasing the numbers. So, we'll be going from approximately 30% that has the hybrid pricing and we'll start to approach 60%. With the price of oil where it is today, we've seen declines in the first half of this year in the payment processing numbers and that would be somewhat consistent going into the second half of this year as well.

If the price of oil goes down, quite frankly, the overall percentage together in terms of the transaction, as well as the variable piece, will go up, because the transaction fee will be a higher percentage on a lower price of oil.

Okay. That makes sense. On the hedging, I guess I was given that we're positive on your stock and kind of rooting that you guys would put the hedge in right at the beginning of the quarter when oil was at 145. I was just curious as to why- - and I don't understand the intricacies and how difficult it would have been to do, but why you would not have hedged when oil- - I mean, who knows? I guess everybody was saying oil was going to 200 or whatever, but it just seemed to me that, with prices as high as they were, why wouldn't you have put a hedge on as quickly as you could?

Well, I think in hindsight it's easier to see what happened. I guess we try to just say that we do the best we can within a quarter to try to time it properly. And sometimes you're on the mark, sometimes you're not. But that's something that we just talk about internally and try to make a decision that's best for the Company. And clearly in hindsight it looked like we could have done something earlier in the quarter.

Okay. The MasterCard business was pretty strong and I know- - what is your outlook for that business? It's still not generating like a heavy amount of income, but the growth- - and I know most of that is travel-related and, given, I mean, you would expect that- - we would have expected that to be somewhat softer, given the economy, but, you know, the growth was nice to see. And what is your outlook for that business? Why did it grow that strongly in a weak economy? And how meaningful can it become to the bottom line?

Yes. Well, we've looked at growth in that channel. You've seen revenue growth pretty consistently over 20%. And part of what we've been able to do is find other avenues of spend. So, Mike's talked quite a bit in the past of different markets that we've entered. We've also increased some of the existing relationships we've had with the travel providers to increase spend within their business. And so, all those things have factored into our growth historically and we look forward and see an ability to continue to grow that portfolio.

Okay. The international business- - last question. I mean, it was nice to see the move into the international markets. The growth in that area, where you look for other platforms and other countries, or do you- - is this kind of the platform you want to start- - you want to build your base from? And are there other acquisitions? Are there a lot of other interesting acquisition opportunities or not?

Yes, we look at the SAL transaction as being our core international platform. So, it has the ability to move around the globe, which may mean we're hosting it in different parts of the world over time, depending on the business we have in those parts of the world. But it was specifically built in construction and architected to take care of currency, taxes, language, metrics, and it's been in different parts of the world in the past. So, we see this as our core processing system as we look to do international processing for our oil partners around the globe. So, we don't see a need for an acquisition for a processing system. If something else enhances our abilities in the international market, we'll look at it, but not on the processing side.

I mean, have you had conversations with some of your current customers on, you know, U.S. customers and working with them internationally in line, conjunction with making this acquisition?

Yes. And that's why I was careful to say some of these are three to four to five years out. There's no doubt we've got great relationships in North America. They appreciate the value we drive with them and continue to drive. And, as you know, some of those people have upped on long term contracts with us. So, we have also seen over the last two years the majors start to manage themselves on a global basis, where in the past they were geographically managed. So, with all of that happening, and I think with our reputation in the world, we felt we had to do something to get into this market. And we're doing it with this acquisition and we'll build slowly as there's opportunities to expand with the oil companies around the globe.

Great. Thank you very much.

Our next question comes from the line of Tom McCrohan with Janney Montgomery Scott.

Yes, hi. Can you hear me okay? I'm calling on a cell phone.

Yes, we can.

Okay, great. Can you guys talk a little bit about working capital? Since this quarter (technical difficulty).

You're cutting in and out. I'm sorry. We heard working capital and not much beyond that.

Mr. McCrohan was just- - just got disconnected. We're going to take our next question from the line of Greg Smith with Merrill Lynch and Co.

Yes, hi, guys. Nice quarter. Looking at the hedging more broadly, I mean, just given the volatility we've had and the fact that it seems like there's sort of a mismatch between contracts you're negotiating and where the economics are today versus where your hedge is and it seems like you're getting zero kind of benefit in the stocks multiple for the hedging. I mean, have you reconsidered lately the whole idea of hedging to begin with and maybe biting the bullet and buying your way out of the hedges? Is that something you're even considering?

Our plan is to continue to do the hedges. You know, I did talk about reducing it somewhat. And then I think we've also reduced it by doing some of these hybrid prices that effectively reduces the amount of the variability pricing that we have that we have to hedge. But we're still going to continue with our hedge policy.

So, that on the variable pricing, do you- -? So you view that as a net positive for you, then?

There's a piece of it that's variable that we think- - that we need in order to cover the variable costs of operating interest expense and our credit exposure. So, there's a piece of it we want to keep that floats with the price of gas. So, that part is definitely intentional. And then, what we're trying to do is fix the larger part, which is obviously not tied into fuel prices.

Yes. Okay. And then, Visa has made some noise about moving interchange around based on fuel prices. I mean, it looks like it's really just smoke and mirrors when you work through it. But has that had any direct impact on your pricing at all?

I don't think there's any one particular card issuer association that has any impact. I think just because of the high price of gas, there's been pressure on the merchants with their margins that are somewhat tied to cents per gallon. So, I think it's just been felt across the board and that's why we've moved in some of these areas to put in more of our hybrid pricing with some of the majors. But I don't think there's any one association or whatever that's having a direct impact. It's just across the board.

Yes. And these, you know, I think you now have three new federal contracts. Were those all three competitive takeaways?

They were, yes.

Excellent. And then just lastly, you did mention, I think, Melissa, you had a client moving from payment to transaction processing. Just wondered what kind of happened there and any other details you can provide on that?

Yes. I think we make it available to our partners to look at what's best for them. And this partner, just for different reasons, decided they wanted to move to a transaction processing. They were already carrying the bad debt and responsible for their customers, so they just decided to take it all in house and we'll just move to a transaction processing relationship.

Okay. So, it has less of an impact, if they hadn't been responsible for anything on the bad debt side?

Yes. It's just going to move our metrics around more than anything.

Okay. Perfect. Great. Thank you.

Our next question comes from the line of Pat Burton with Citi Group.

Hi. Congratulations on the quarter. I guess I'll ask about, Mike, your early comments about fleet card solution interest up in the direct channel. Can you just maybe talk about in this environment the opportunity to gain more clients?

Yes. What we're seeing, again, we're somewhat limited by the people we have on the street. We have coverage models and also by, with the inside sales, what we do in terms of lead generation. But we've seen the leads increase, hits on our websites increase. We've seen the close rates go up significantly. So, we've seen application flow coming in from even what we're doing with the ExxonMobil sales force where we're controlling that directly. So, from small fleets on private label that we have control over to our direct channel where we have control, we're seeing applications up, we're seeing close rates up. So, all of that's been very positive.

Thank you.

Our next question comes from the line of Marshall Jaffe with Henry H. Armstrong.

Hi. Can you just provide some color on what you've been doing to put a cap on the- - on the credit exposure? You know, in light on the environment and in light of the higher average transaction now.

Yes. I'd say we've been pretty aggressively working our customer base, more aggressively [than] in the past. There's a balance to make sure that you keep the relationship over the long haul. But we've been looking through and doing post-mortems on every loss. And based on that information, we make tweaks to our overall credit policy, if we need to make tweaks to our credit adjudication model.

We've tightened down the amount of credit that we're giving out to individual customers and so it's a little bit more restrictive than we've seen in the past. And overall you've seen a drop in our approval rates as a result. Just, you know, businesses are coming in, it's not getting approved as fast as it would in the past. It's a combination of a bunch of different factors.

Right. One thing I was thinking about specifically is that, given the higher tickets, you might reach a limit for a month, or for any billing period. And I was wondering how you handle that specific issue.

There are hard credit lines, so if someone actually hits their credit exposure, they get shut off at the pump. And that would happen, too, if someone doesn't make a payment within a certain period of time, we actually shut them down for about 50 days. So, there's a whole host of controls that are automatically in place.

Okay. Even on an interim billing, on an interim billing period basis?

Yes. Yes. So, if they're fueling and it's maxed out on a credit line, they'd be shut down at the tank. They wouldn't be able to actually fill.

Let me just also mention, though, from a customer satisfaction standpoint, they're notified a few days before that happens, so they're not- - they're not caught by surprise with all their drivers sitting at a pump and can't get authorization. So, in one form or another, they at least know they're bumping up and they've got to get more money into us.

Thanks very much.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Robert Dodd with Morgan Keegan.

Hi, guys. Congratulations. Can you give us- -? Since you mentioned having such a lot of success right now, signing government contracts, more productivity in the sales force and getting more applications and more close rates, how do you feel about your current head count levels and your current capabilities to support that, that increased level of activity, if your success keeps going? I mean, are you going to have to staff up or do you feel pretty good right now?

There's some level of staffing as we bring on more business, but it's kind of in a step function. But we've continued to drive productivity within the organization, which shows -- when I think Melissa talked about our headcount was up 42 or whatever, but only three was in the core business outside of TelaPoint and Pacific Pride. So, through productivity, through getting our fleets to use more of our online program, whether calling less into our queues, just a host of things that we have done to improve productivity throughout the company. But there will be some step function of some needs for customer contacts as we do grow the portfolio.

The government contract that we are anticipating coming on at the end of the year and we'll staff up a little bit for that. It's going to bring about 9 million fuel transactions and a couple of million service transactions annually, once it comes on. So, there will be a little bit of an increment for that, but it's not significant.

Okay. And what about, you know, obviously in the heavy truck area, you've had to do some investments in kind of the product and the software platform. Is there anything you have to do to continue gaining share on the government side in terms of additional functionality or different reporting or anything like that?

There's some basic requirements that they may have that are a little specific. But, based on our online capabilities and what we can do, we're satisfying that with our core large fleet product.

Okay. Excellent. On- - moving back to the hedge. Looking at where your guidance is for the fuel price for the back half of the year, it's relatively close to what you saw in Q2. Your hedge range is relatively close to what we saw in Q2. Should we expect the realized loss to be roughly similar to the Q2 levels? Obviously it's, you know, one of the things I have a little bit of difficulty predicting accurately. Put it that way. So, any hints you can give about where it would be relative to that 13 million would be very helpful.

Yes. And it's clearly going to depend on what happens within the market. But all things being neutral, that would be true.

Okay. Got it. And then one final question -- within, you know, the percentage of transactions that get fixed- - that have a fixed fee, as well as a variable component in the payment processing segment, is that still about a third of transactions that have that that you expect it to go up?

Yes. I think we have said in the past it was around 30%. And I mentioned earlier that it's going to be approaching, with some of the new contracts we put in place with some of these merchants -- by the end of this year, you'll see it step up to close to 60%.

Okay. Got it. Thank you.

Being as there are no further questions, I'd like to turn the call back to management for concluding remarks.

Thank you, Ryan. And thanks everyone else for listening. We look forward to speaking with you again next quarter. That concludes our call.

Ladies and gentlemen, that concludes our conference call. Thank you for joining us today.