WEX Inc (WEX) 2009 Q4 法說會逐字稿

Welcome to the Wright Express Corporation 2009 conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Steve Elder, Vice President of Investor Relations. You may begin.

Good morning. With me today is our CEO, Mike Dubyak, and our CFO, Melissa Smith. The financial results press release we issued earlier this morning is posted in the Investor Relations section of our website at wrightexpress.com. A copy of the release has also been included in the 8-K we submitted to the SEC. In the news release, I would like to call your attention to the summary of fourth quarter 2009 performance metrics on page two. We've added two metrics this quarter, revenue for the fleet segment and payment processing revenue for the fleet segment.

To allow more time for your questions on today's call we will not be reviewing these seven metrics listed in the press release in our prepared remarks. As a reminder, we will be discussing a non-GAAP metric, specifically adjusted net income, during our call. Adjusted net income excludes non-cash mark to market adjustments on our fuel price related derivative instruments; the amortization of acquired intangible assets; non-cash asset impairment charges related to internally developed software; adjustments related to the deferred tax asset and related tax receivable agreement; the gain we recorded on the settlement of a portion of the amounts due under our tax receivable agreement, which we prepaid in Q2 and all of the related tax impacts.

Please see exhibit one included in the press release for an explanation and reconciliation of adjusted net income to GAAP income. 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 the 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 may update forward-looking statements in the future, we disclaim any obligation to do so. You should not rely on these forward-looking statements after day.

With that I will turn the call over to Mike Dubyak.

Hello, everyone and thank you for joining us.

Business conditions in the fourth quarter of 2009 were generally consistent with our expectations. We are continuing to manage our way through a tough environment, and we performed very well this quarter. Both total revenue and adjusted net income for Q4 exceeded the high end of our guidance range. Based on the trends in fleet fueling activity we were seeing three months ago, we set our Q4 guidance without assuming a significant improvement in business volume. Total customer fueling activity in the quarter was in line with our forecast, down 2% from Q4 of '08. On a same-store sales basis, existing customer volume declined 7% year-over-year. This was in line with our guidance and it compares with the declines of 9% to 10% over the last three quarters. Even though slight, we started to see improvements in certain SICs and geographies, public administration, excluding the GSA fleet business, actually had relatively steady same-store sales for the year. And in the fourth quarter, customer activity was slightly stronger year-over-year in a number of industries, chiefly transportation, business services, and manufacturing. In terms of geography, the worse performing region in Q4 was the southwest where as Q3 volume was down 13% year-over-year. The northeast and midwest were the strongest regions declining only 4% compared to the fourth quarter of 2008.

It's been two years since the recession began and we haven't for one minute waivered from our commitment to attack the market, strengthen our customer value proposition, and improve our performance at the front end of the business. As a result, we have been able to partially off set the loss of vehicles in our installed customer base by consistently adding new fleets and vehicles and significantly expanding our MasterCard business. Including the GSA and the new city portfolio added in the second quarter of 2009, our total average vehicle comp for Q4 was essentially level with the fourth quarter last year. In 2009, we added nearly 500,000 new vehicles to our portfolio. However, as we have been talking about for more than a year, contraction in our existing customer base and attrition has offset these additions.

We strongly believe we have out-performed our competition in holding our vehicle comps steady over the past year. On a market by market basis in Q4 the average number of vehicles in our large and mid-size fleet portfolio was essentially flat year-over-year. Q4 was a more difficult comparison than in prior quarter this is year, because we added the GSA fleet portfolio in the fourth quarter of 2008, so we are pleased with this result. In small fleets, our average vehicle count was down 2% from Q4 last year, reflecting the underlying weakness in small business activity and slightly higher attrition rates than last year. Our Wright Express direct channel showed some improvement with the average vehicle count up 2% from Q4 of 2008.

While attacking the market, we have also been working to improve the portfolio's credit quality. Our objectives in this effort were to continue offering 30 day credit terms to most of our customers, while controlling bad debt and at the same time holding volume tear attrition below 3%. Our credit loss results for the year speak for themselves. Compared to any other bench mark, we performed extraordinarily well. Our credit losses for the full year were squarely within our historical range at a time when many others are reporting historically high losses. Voluntary attrition for the fourth quarter of 2009 was 2.4% compared with 1.8% for Q4 last year and 2% in the sequential third quarter, well below our target and at levels similar to those we experienced before the recession began.

Comparing our business at the start of the recession to where we are are today, I think the biggest changes relate to the changes we have made relate to the investments we've made in diversification. Our goals for these investments were to develop new revenue streams and growth opportunities for the Company while creating more value for the core customers in our fleet markets. We have aggressively expanded our MasterCard business. We strengthened our presence in the distributor channel by acquiring Pacific Pride; and the global business we launched by creating Wright Express International opens the door to significant future processing opportunities with major oil companies outside the United States.

These efforts are becoming more and more important to our growth. In aggregate, including TelePoint, our diversified businesses have contributed nearly $61 million of revenue, or roughly 19% of our total revenue over the past year. This compares with 49 million or 12% for 2008. Our largest diversification initiative is MasterCard, and through the recession MasterCard has been the fastest part of our business. Our corporate purchasing card product is proving to be a great compliment to our core fleet business, and we are capitalizing on the cross-selling opportunities in that area. Based on the work we did on our coverage model last year, we will be adding four new dedicated MasterCard sales representatives in 2010.

At the same time we have been consistently pleased with the strong performance of our single use account product. This product first caught on in the online travel and automotive warranty markets, and our business in those segments, especially online travel, has done very well during the recession. As I mentioned last quarter, we have started a test program with a large online travel Company. They have the potential to become an important customer for us in this space and the implementation is going very smoothly.

Looking farther ahead, we see additional potential for the single use account product and we are now testing its applicability in new vertical markets. I'm happy to report that after hitting $2 billion in annual spend for the first time during 2008, our MasterCard segment reached the milestone of $3 billion by the end of 2009. Our international business continues to make progress in Q4. We are in an unusually attractive window of opportunity because a number of major oil companies with operations in Europe and Asia Pacific region are considering making a change to outsourced processing for their fleet car portfolios. We are pursuing these opportunities aggressively by developing the unique features each oil company needs for their portfolios. As we have reported in the past, we are actively engaged in negotiations with several of these companies.

Our business plan for 2010 includes a small revenue contribution from our international oil company relationship. Longer term, however, it will take a considerable amount of time to build out the customized features, implement the relationships and deliver on the full potential for predictable and recurring revenue we believe this new business represents. This is why we continue to believe it will be several years before Wright Express International becomes accretive to earnings. Overall, we feel good about the progress we have made in our diversification initiatives. We have been fortunate to have the healthy liquidity and cash flow necessary to support these efforts while strengthening our balance sheet at the same time.

With that said, I will turn the call over to Melissa for a review of our financial results and guidance. I will come back to conclude our prepared remarks after Melissa and then we will take your questions. Melissa?

Thanks, Mike and good morning, everyone.

When we provided guidance for the fourth quarter, we anticipated a relatively stable economic environment, believing the declines in same-store sales were nearing the bottom or had actually bottomed out. We were pretty much on target. Overall, fuel volume in our fleet business, which totaled more than 1 billion gallons was within 300,000 gallons of our forecast for the quarter. Our positive Q4 results were a reflection of higher payment processing revenue driven by higher fuel prices than assumed in our guidance and another quarter of out-performance in MasterCard. Our single use account product has aligned our MasterCard business with the fast growing online travel space and this product has grown to about two-thirds of our total MasterCard spend. Our purchasing card is also performing very well, because it ads value that our customers need more than ever as they look for ways to cut their operating costs.

On the expense side, during the quarter we incurred additional costs related to our growth initiatives in areas like research and development, test marketing programs, and our international investments. Some other expenses came in lower than we anticipated, however. For example, although we did see the expected fourth quarter seasonal credit loss challenges, our loss rate was slightly below our forecast. For the year, our adjusted net income per share was $2.18 compared to $1.88 in 2008. That's an increase of 16% during a very tough year. In addition, we generated $100 million in free cash flow. In addition to investing in capital expenditures, we used this cash to reduce our financing debt by $43 million. This was after using $6 million for share repurchases and $51 million to prepay our tax related liability to Realogy.

With that as background I will discuss our financial results in detail. For the fourth quarter of 2009, total revenues increased 4% to $83.7 million from $80.9 million for the fourth quarter of 2008. This compares to our guidance range of $76.5 million to $81.5 million. Net income to common shareholders on a GAAP basis was $12.1 million, or $0.31 per diluted share compared with $65.2 million or $1.66 per diluted share in Q4 last year. For full year 2009, GAAP net income to common shareholders was $139.7 million, $3.55 per diluted share. This compares with $127.6 million or $3.22 per diluted share for 2008. Our non-GAAP adjusted net income for the fourth quarter of 2009 was $22.1 million or $0.56 per diluted share. This compares with $12.5 million or $0.32 per share for Q4 last year.

As Mike said, the front end of our business continued to perform well in Q4 and we continue to win a significant number of new fleet accounts. The new fleets and vehicles we have brought in have enabled us to partially offset the year-over-year contraction in our existing customer base. We believe that our ability to consistently add new customers even during a downturn positions us for solid rebound in transaction volume when the economy experiences sustained growth.

Turning now to pricing in the fleet business, our net payment processing rate for Q4 2009 was 1.78%, down two basis points from Q3 and down 8 basis points year on year. The sequential decline was driven by the $0.07 increase in fuel prices we saw in Q4. Year-on-year the decrease primarily reflects the significant increase in fuel prices. Consistent with Q3, approximately 60% of our transactions in the fourth quarter were at merchants with hybrid contracts; rebates with a percentage of fueling dollars paid to large fleets and leasing companies were flat compared to the sequential third quarter.

Growth in our MasterCard segment accelerated this quarter. We expected to see a normal seasonal decline in MasterCard purchase volume in Q4. This reflected fewer business days and the slow down in business purchasing and travel around the holidays. However, volume exceeded our internal forecast by more than $100 million coming in at $787 million, which is a 34% increase from Q4 last year. For full year 2009 MasterCard spend grew 28% compared to the 30% increase posted for 2008. MasterCard represented 12% of our total revenue and 12.5% of total ANI in Q4 of 2009, up from 8% and 6% respectively in the fourth quarter last year. Total revenue contributed by MasterCard in Q4 was up 60% to $10.1 million from $6.3 million in the fourth quarter of last year. The MasterCard net interchange rate for Q4 was 1.124%, which is up 13 basis points year-on-year primarily due to higher interchange rates adopted by MasterCard earlier in the year.

Moving on to operating expenses, on a GAAP basis the total for Q4 was down more than 13% to $53.7 million from $61.9 million in the fourth quarter last year and in line with our expectations. The decline for Q4 last year was mainly due to lower credit loss and operating interest expense, partially off set by higher salary and service fees. Fleet credit loss for Q4 was better than we expected, coming in at 20 basis points compared with 51 basis points to Q4 last year. This was essentially flat with a 19 basis points in Q3 and lower than our guidance assumption of 25 basis points to 30 basis points. It was also well within our historical loss range, 11 basis points to 22 basis points. Our full year numbers demonstrate, however, we have come at managing our loss rates. Credit loss for all of 2009 declined to 15.6 basis points from 25.9 basis points in 2008.

Analyzing the reasons for the upside, versus our credit loss guidance in Q4, a couple of things stand out. First, along with a more stable economy, there were no significant bankruptcies in the quarter. Second, recoveries were higher than we anticipated. This includes recoveries on the handful of accounts that were charged off more than 18 months ago. Although this is not unprecedented, we don't normally see significant recoveries after so much time has passed. Aging deteriorated slightly during the quarter as we expected, and therefore did not contribute meaningfully to the upside.

On a total basis including fleet and MasterCard, credit loss for the fourth quarter was down by $9 million or 64% from Q4 last year to $5.2 million. Total charge offs in the quarter were $3.6 million and recoveries were $1 million. For the year, 80% of our charge offs were associated with small businesses that had balances of less than $30,000. As of December 31st, balances past due 30 or more days represented 1.6% of the portfolio or about $12 million. This compares with 1.3% of the portfolio or about $11 million in Q3 and 3.5% of the portfolio or about $23 million in Q4 last year.

Looking at other key expense lines, salary and other personal costs for Q4 were $20.3 million, up $3.4 million from the fourth quarter last year mainly due to employee bonus plan expense. Total average headcount was 713 for the quarter, up ten people from last year. Our international head count was 37 in December 2009, up by 22 year-on-year, reflecting an expansion in that business. This head count growth was off set by comparable reductions domestically. As in the two prior quarters, operating interest expense was a positive factor in Q4, declining by $4.9 million or 67% year-on-year to $2.4 million. Our average operating debt level, including CDs and debt funds, was $475 million -- I'm sorry, $632 million in Q4 of last year.

The interest rate on our CDs and fed fund borrowings, down from 1.6% in Q3. As I mentioned last quarter after declining in 2008 and through the first half of 2009, our interest rates have stabilized at a relatively low level because virtually all of our higher rate CDs have matured. Our interest rate declined more than 200 basis points from 2008. Our effective tax rate for Q4 on a GAAP basis was 40.9%, compared with 37.1% for the fourth quarter of last year. Our adjusted net income tax rate this quarter was 39.1 compared compared with 38.5% for Q4 2008. Our Q4 tax rate was slightly higher than we anticipated due to a somewhat larger investment in our international business, which at this time does not have a corresponding tax benefit.

Turning to our derivative program, during the fourth quarter of 2009 we recognized a real life cash gain of $5.2 million before taxes on these instruments and an unrealized loss of $14 million. We concluded the quarter with a derivative asset of $6 million. We have completed our purchases for 2010 and the weighted average price is $3.04 to $3.10. We have received a total of $20.6 million of realized gains from our counter parties in 2009. Hedging remains an important part of our business model and we expect to continuing to purchase derivatives in the future.

Turning to the balance sheet,we have two years left on a revolving credit facility with pricing significantly better than current market rates. We entered into a new interest rate swap in the second quarter of 2009 that fixes LIBOR at a rate of 1.35% for the next two years on $50 million of our financing debt. We ended the fourth quarter with a balance of $128 million and a leverage ratio of 0.9 times EBIDTA. This compares with 1.3 times EBIDTA at the end of 2008. At the same time, we are continuing to invest in our core product offerings as well as strategic diversification. Capital expenditures for the fourth quarter were $4.7 million. Looking back at the full year total CapEx was $17.8 million.

I will conclude my prepared remarks and our financial guidance for the first quarter of 2010 and the full year. Although we are planning on continued success in winning new business, our guidance assumes that economic conditions will remain stable. As a result, we expect transaction volume within our installed customer base will be slightly negative to slightly positive compared to 2009. We are expecting our credit loss to be in the range of 24 basis points to 29 basis points for the first quarter of 2010 and 18 basis points to 23 basis points for the full year. The loss rate is expected to be higher than in 2009 for a couple of reasons.

First, we are assuming recoveries will return to more normal range in 2010. Second, we don't anticipate the same kind of improvement in the aging we saw in 2009. Our assumption for interest rates is that we expect an increase in 2010 from the historically low levels at the beginning of the year and we have used a LIBOR curve to arrive at our assumptions. Even with these increases, we expect average rates to end up below 2009 levels. From an international perspective, we expect to generate some revenue from development work in 2010 while making significant investments in developing customized features for our partners. As I mentioned, we also expect a small amount of international transaction revenue during the year.

Because of the ramping investments in our international business where there is no tax benefit, we expect our overall blended tax rate to be between 38% and 39%. We expect capital expend towers for 2010 to be in the range of $20 million to $25 million. We believe this continued investment in our products has helped us keep voluntary attrition rates low, while also allowing us to win new business. The majority of increase over 2009 spending reflects our international investment.

Although it remains in place, we have not included any potential EPS upside from our share repurchase program. The fuel price assumptions are based on the applicable 9X futures price. Let me remind you that our forecasts reflect our view only as of today and remain on a non-GAAP basis as Steve discussed earlier. For the first quarter of 2010, we expect to report revenues in the range of $82 million to $87 million. This is based on an average retail sale price of $2.78 per gallon. For the full year, 2010, we expect revenues ranging from $360 million to $370 million based on an average retail sale price of $2.80 per gallon. In terms of earnings for Q1 of 2009, we expect to report adjusted net income in the range of $21 million to $23 million or $0.53 to $0.58 per diluted share. We expected adjusted net income for the full year 2010 in the range of $89 million to $97 million, or $2.26 to $2.46 per diluted share and approximately 39 million shares outstanding.

I will now turn the call back over to Mike.

Thanks, Melissa.

We begin 2010 in a strong position financially, as Melissa said, and with the capability to pursue all available options for generating the highest possible return on our cash flow. These include internal reinvestment, paying down more of our financing debt, buying back stock or exploring alliances, mergers and acquisitions that advance this objective. We've successfully weathered the economic downturn, strategically and competitively. I strongly believe we are in a better place today than we were a year ago. Let me run through the factors that support my optimism.

First we have the advantage of a unique financing model, including an industrial bank charter, which gives us access to exceptionally low cost and flexible financing, coupled with the minimum financing cost we are carrying from acquisitions. This allows us to offer our customers, the majority of which are small businesses, some of the most attractive non-revolving credit terms anywhere, while still managing risk and minimizing bad debt. While some companies charge for 30 day credit terms or limit their customers to shorter credit terms, our research strongly convinces us of the value that small businesses perceive in 30 day credit terms as they manage their working capital needs.

Another advantage is that we continue to have world class customer satisfaction levels and very low attrition rates. These factors have helped keep our customer base stable during the recession. We also have the advantage of our universal closed loop network. This network reaches more than 180,000 fueling and service locations coupled with our proprietary software and web products. Having a closed network allows us to manage the complete life cycle of a purchase transaction. This includes the security and control features we offer at the point-of-sale and the customization and control enabled through our web products. These capabilities enable us to provide our customers with the industry's most convenient, secure, and comprehensive fleet, fueling and service network as well as customize analytical tools.

In addition, the size and stability of our installed base of customers combined with the new business we have been able to add through the downturn by aggressively attacking the market has been another advantage for Wright Express. As we begin 2010, our new business pipelines are very full in both fleet and MasterCard. In addition, our 160 people dedicated to bringing on new business and the new marketing campaigns we have recently implemented have the potential to drive even more organic growth in the year ahead.

Another advantage is our long-term relationships with the large leasing companies. Our partner and co--brand relationships compliment our Wright Express universal card business, while providing a high level of revenue visibility and stability. These relationships also provide us with strategic benefits. They improve our ability to play offense by securing new business through many of these partnerships. On the defensive side of the ball, our partners provide a comprehensive value proposition that enables us both to optimize customer satisfaction and retention in a competitive market.

Finally, the growth of our MasterCard segment has benefited our diversification strategy. In the longer term, we are anticipating that our international business will contribute to this effort as well. I believe these advantages create an environment in which our business will be strongly positioned when an economic recovery becomes sustained. In the meantime, we will remain focused on executing our strategy and serving the best interest of our shareholders. With that, we will be happy to take questions.

Operator, you can proceed with the Q&A now.

(Operator Instructions). Our first question is from Tien-Tsin JPMorgan Chase. Please proceed with your question.

Thanks so much. I wanted to ask about your transaction growth assumptions for the year. In your guidance what kind of payment processing transaction growth are you expecting for 2010? Can you give us some help there?

We said on the installed customer base, we think in total transactions we're going to be slightly negative to slightly positive. We will see not as much upside as we have in stronger economic years, but not the drag that we have seen last year. In terms of new vehicle growth, we are expecting to see a pretty standard year this year.

A standard, new vehicle adds, but flatish transaction growth on the install base?

Correct. Yes, slightly negative to slightly positive.

Melissa, on the credit losses you talked about why you are looking for it to step up a little bit in 2010. What exactly drove the upside in the fourth quarter?

There were a couple of things. The first and the largest were recoveries were much higher than we anticipated. The aging looked very similar to what we had expected, but we had significantly more recoveries and some of those recoveries were pretty dated. They were from things we charged off about 18 months ago which is not normal. When we looked at our 2010 guidance, historically, we have recovered around 15% of what we charged off. Last year it was closer to 25%.

One of the assumptions we are making going into 2010 is that it will return to a more normal level. That has been the stat for many, many years with the exception of last year. I think what is driving the first quarter numbers, we did have a significant bankruptcy in the first quarter of this year. That is driving some of the increase in Q1.

Got it. That's very helpful. Maybe I can sneak in one more. Can you remind us how your CDs roll off in the coming quarters, just for modeling purposes?

Yes, the average life that is left on our CDs is about eight months. They are rolling off, I would say [irratibly].

Irratibly, with the average life of 8 months. Great. Thanks a lot.

Yes.

The next question is from Tom McCrohan with Janney Montgomery Scott.

He asked exactly the three questions I was going to ask. Mike, if you can talk about the leasing customers you have in your conversations with them, is there outlook as far as organic growth in their fleet base consistent with your out look for this year?

Yes. As you know the relationships we have are with the six largest leasing companies where we do a co-branded card, so it's good at our closed-network sites. They are the ones that basically in most cases are billing their customers, consolidating their billing and wrapping around their other value proposition. So, as I mentioned, that has been a strategic offensive relationship as well as defensive, knowing the value they wrap around it. What we have seen and I think what they have seen is as we look at segments in our business, the larger businesses are not recovering as fast. If anything, we have seen the smaller businesses starting to recover slightly, but the larger businesses are still kind of contracting a little bit.

They are also seeing a lot of these businesses are not stepping up to new vehicles. There was some movement in the third quarter last year where they started to renew or basically turn over their old vehicles, but that slowed down in the fourth quarter. I still think the larger marketplace is still struggling a little a bit.

And any changes contemplated in your hedging strategy going-forward. Thank you.

We will continue to hedge and think it is an important part of our business model and to give some visibility and transparency into the future on what fuel prices have an affect on our business model.

Our next question from David Parker of Lazard Capital Markets.

Mike, you mentioned that you are seeing a window of opportunity as you look over to Europe and as some of those oil companies are anticipating a change and shifting over to an outsourced fleet processing solution. Can you give any more color about the size of the companies or also the timing that you anticipate signing some of these deals?

Yes, the size are typically large international oil companies, so they could be in different geographies. They may start in one particular geography. We believe if we can get started with them in one geography, we have the ability to expand in other geographies. We are talking multiple countries. We may start a few -- a few of the relationships may start with a few countries, but again with that ability to expand into other countries over time.

I guess we are talking about how long will some of that take? I think we are probably going to be developing and making an investment in this business probably for the next couple of years. The good news is the more we can win some of this business, the more we will be developing some of the front end needs. They have very large portfolios. Their customers, if they switch over, if the oil switch over to our processing system require a, basically, seamless transition if their customers are being processed by us.

Even think we have a strong core system, we have to build out to their specifications that their customers are used to today, and that's what's going to take some of the time. As we say, it's going to be a while before we start to see this turn into a recurring and predictable cash program that we see in the US because of the development we will be doing over the next few years.

Understanding that it will take some time to do that development and to actually roll the customer onto the platform once the announcement is made, should we anticipate some announcements this quarter or is this more of a second half issue?

I think that the best we can say is when it is appropriate and when we can say something, we will. But it's probably going to be sometime -- all I can say at this point, is in 2010 we hope to have some announcement. As you can see from the people we have in place, and Melissa mentioned, we have expanded the number of developers that are working on the platform. Some of the increase in revenue is because some of that is being reimbursed by the oils. Some of that is not yet ready to announce a final contract. When we're ready and it's appropriate with them, we will make the announcements.

Just on the tax rate, Melissa, you mentioned that you are making a larger investment in international business, but there is no corresponding tax benefit at this point. Can we anticipate some benefit going forward or will that continue to be status quo?

The structure that we have set up is something that will benefit us over the long-term. As Mike talked about when the periods we start to see accretion, you will see benefit in those periods in those low tax rates. So, longer term, yes, we will see a benefit, but in the short-term it is something that is bringing our tax rate up.

We will need to move on now. Our next question is from John Williams with Goldman Sachs. Please proceed with your question.

Can you hear me?

Yes.

Thanks for taking my question. So it's nice to be on board. Some of the questions we have gotten during our first few days of talking to people about you have revolved around your use of capital and your plans, whether it be buybacks or acquisitions. It is something you touched on in the past, seeing opportunities internationally, and you mentioned in your comments, Mike. I was wondering if you could give a little more color of what you would think about and where you might look first in those international markets

I guess on the international markets, as we are saying we are making investments now to get to a position where those investments will start turning into a recurring predictable revenue model. If there are opportunities to expand though internationally with acquisitions, clearly that is something we will consider in addition to being a processor for some of the major oil companies. We will look at that as an opportunity as well. There are limited opportunities as we look around the globe but those are things we will be considering.

One other piece of information that you have talked about in the past is what you are seeing in terms of overall performance in fleet activity on a year-over-year basis, and I was wondering if you might be able to update that. I think you said it was 9% to 10% down year-over-year range in activity. Maybe you can give a definition on what you mean by activity and also a little bit of an update, that might be helpful?

We do track our top SIC codes. We were pretty clear in what happened during the fourth quarter. We have seen in January some positive movements among a number of SIC codes. We are cautious because it is only month of data.

We have seen for the first time not just a few, but we are talking seven of the ten SIC codes that we track were showing some positive moves in January year-over-year. Slight as it is, it is the first time we have seen a majority of the SICs starting to show a positive movement up over the previous January, the previous year.

Right. Have you ever said what those SIC codes are or high level what you are looking at, which ones?

High level you have everything from the contractor construction trade, you've got manufacturing, you've got wholesale, you've got retail, you've got business services, we've mentioned those. You've got public administration. All of those are the key ones we will be tracking and there are a few other ones as well. Those are the key.

Thanks, guys. Appreciate it.

Our next question is from Tim Willi of Wells Fargo Securities. Please proceed with your question.

Good morning. First question I had was around the competitive environment. Mike, you talk a lot about -- you used the word "aggressive" have you talked about the strategy and execution in ' 09 and an update, anything you can give around what is going on competitively both in terms of your strategies as well as just the overall pricing environment you have seen from the competition?

Our strategies are that I think we have built a very strong front end and we try to highlight that a little bit with what we accomplished during the year, a very tough year. That is something we pride ourselves on in the organic capability. We grew in all segments, large, medium, and small fleets,s o we feel good about that. We have been very aggressive cross-selling our MasterCard. It shows with the MasterCard growth in the traditional purchasing card as well as the online hitting $3 billion.

We have invested in CapEx to strengthen our value proposition. We have talked about increase in marketing spend. We have done significant research on the marketplace to give us more visibility into our competitive situation against our competitors, what are they doing, what are the fleets doing, how have the fleets changed coming through this recession? We want to turn that knowledge into power in terms of what are our road maps, what are we doing on the marketing side and sales side to continue to drive the front end.

We think those advantages have paid off against our competition. We don't know of anybody that can make the claims that have the high organic growth rates we have had with low attrition rates. So, we see the market being more reasonable in their pricing. We said basically, there hasn't been much change in rebates. People are more rational in how they are pricing. I think all of that bodes well for us, because it says we can compete with the functionality and the advantages we have. All we are going to do is take the research that we have invested in to find ways to be smarter and more focused on attacking the market

Great, thanks. My follow-up question was around the international side. Thinking about -- you talked about sizable customers, although maybe starting off with smaller mandates once you get contracts in hand. In what you have learned about the European market in the time you have studied it and had these conversations, do you envision situations which would obviously be hard to predict, but situations that could arise where a good degree of success in Europe could result in a temporary accelerated investment spend that would have a suppressing affect on the aggregate bottom line?

We have seen companies talk about very positive things going on that require some accelerated short-term investment where the bottom line growth may not keep track of where people would like. If you handy cap the odds, could you find yourself in the situation in the next couple of years, do you think it is likely that you would have nice new business to talk about, but have to talk about a little bit slower bottom line growth to get that stuff up and running?

I think that is very fair. We have tried to say in so many words that this window of opportunity is probably more robust than we expected. We went into it thinking there are a couple of major oil companies. We will leverage our brand in the new platform we do believe provides us a world class capability in the fleet processing business; and now we find there are a number of -- many more than we expected trying to get into the same window or trying to at least saying they would like to be in the same window. Now, it is a matter of how much we can manage.

We have, clearly, got George Hogan, our CIO, squarely in the middle of this and see who has done international programs in the past on payment processing, and now it is a matter of how much can we actually manage and focus on. I think there is that ability that we will be making investments to try to take on the business, but be smart about how much we can bite off at one time.

Thank you.

Our next question is from Greg Smith with Duncan-Williams. Please proceed with your question.

Good morning. When I look at the average fuel price, the realized price during the quarter, it seems like it was significantly above the EIA data we have been tracking. There is the first time I can recall there was a discrepancy. I would say the same thing for your first quarter guidance, Melissa. The $2.78 per gallon seems higher than we would've expected. Is there anything going on differently in your mix that could make this difference or are we looking at some bad data? There is diesel in the mix, but that has been historically true. That would affect the price compared to an index that you are looking at. I'm not sure why that would create a difference than what you have seen historically. Going forward we are using the futures curve in order to impute the fuel price for Q1. It is showing an increase in the curve right now. That helps a little bit. Then, do you have a sensitivity -- you used to be able to say for every $0.01 increase in realized fuel prices, it used to result in an actual $0.01 of EPS. Do you have a current sensitivity for that? Yes, it is about -- a $0.10 change in 2009 would have been about $7.5 million worth of revenue on a full year, and historically about 85% of that in a rough order magnitude would drop through to earnings previously -- previous to the hedge. Okay. And then any reason 2010 should be substantially different than that? No, we think that the hybrids are going to be pretty constant. One quick one, are you expecting any change in the MasterCard interchange rate for the year? We are not anticipating one in our guidance, no. Great. Thanks a lot.

Our next question from Bob Napoli with Piper Jaffrays. Please proceed with your question.

Good morning everyone. This is Jason Deleeuw calling in for Bob. I have a few questions here still. First, for the transaction growth outlook for next year -- for 2010, slightly negative, slightly positive for the install base. What do you expect from new customer ads this year given all the initiatives and the focus you have on adding new customers ? Are you still suspecting a couple percentage point of growth from new

I would say it is going to be similar. We talked about 500,000 new vehicles that we added this year. In that is the one large portfolio from Citi. If you back that off, we have been very predictable.

We would expect to be at least north of 400,000 vehicles and hopefully with some of the new things we are putting in place, we will see a little bit of an uptick. Some of the things we are putting in place may not show the payback until next year. Somewhere in that range in terms of total vehicles added.

On the finance fees, those continue to be higher than what we would expect, but probably what you guys are expecting. What are you seeing there on those trends and what do you have baked in for your outlook for 2010?

For 2010 we are presuming a similar trend to what we have seen in 2009. We've got enough experience now that it would seem that customer behavior doesn't change all that much or hasn't changed all that much in this last year based on the change we paid in the late payment fees. When we look at it, we are looking at it generally as basis points of the spend that is going through when we are presuming a pretty similar level in 2010.

So similar basis point percentage trend this year as last?

Yes.

And then getting to MasterCard, the purchase volume growth there continues to be very good. Accelerated again in the fourth quarter year-over-year. What is the outlook for 2010?

There are moving parts there. You have the new client coming on that will ramp up throughout the year. You still have the strong growth from some of the existing online travel companies. What can we expect for purchase volume growth there in 2010?

Historically when we are on MasterCard, we are expecting spend growth to be above 20% over the long-term. Obviously, we have been higher than that this year. That has been a longer range number we have given out.

Was there anything in 2010 with some of the new clients coming on board that boosted that number above the longer term view? That will be a tough comparison for 2010 here.

In 2009 you saw the benefit as were tied into some of these online travel companies to the extent they were seeing an increase in their spend volume. We obviously benefited were. In 2010 we will be somewhat tied into what happens to their business models.

Please limit yourself to one question and one follow-up in the interest of time. Our next question is from Robert Dodd of Morgan Keegan. Please proceed with your question.

Going back to the international development expenses, if we can for a minute. What proportion, if you can characterize this, of the expenses are just for the expansion itself versus customer specific? How much of this is, tying into with an earlier question, it will be reproduced or the curve to each new customer you sign? Is that the majority is customer specific or is the majority setting up the international operation?

There is some setting it up which is more putting in place an international team. But most of the spend or the investments we're talking about are specific to the different oil company programs that we would have to bring on.

I alluded to the fact they have very strong and large and robust customer bases spread across different geographies with products that are already embedded that have different functionality that we have to build out to. Everyone is going to be unique to some extent and that's where a lot of the up front investments will take place, adding staff and doing the development work and being able to manage those relationships over time.

Following on through that, in the US, the products seem to be -- perhaps there is more overlap between different vendors or oil companies when you come to that. Is that a very different marketplace internationally, the products and card services are completely different or is there going to be a 50% overlap internationally and then 50% fine tuning? Any color you can give us on that?

When we have actually rolled out these portfolio domestically in the US for our private label oil companies, we have had to do something similar. You have to do customized development that meets each of the individual portfolio needs. When we added Exon Mobile a few years ago, it would have been the same process.

I'm sorry we need to move onto the next person. Thank you for your question. Our next question is from Paul [Barlay] of PB investments.

Thanks for taking my question. Want to follow-up on the finance fees and the loss rates. It seems like the late fees are driving a little bit higher revenues there. It did sound like the delinquencies did take up 4Q. I'm trying to reconcile the delinquencies and the higher late fees with your expectations for loss rates, which given the 1Q guidance versus the full year does look like you expect to improve throughout the year?

The actual late fees was a little bit higher than what we had expected, but in terms of basis points of spend, pretty consistent with the last several quarters. And, so again, we are expecting in 2010 to see a similar trend going forward into the future; and in terms of credit loss, if you look at 2009 compared to what we are giving guidance in 2010, the two things we are saying we think will be different for the full year. If we expect recovery to return to a more normal range than what we saw -- particularly in the latter half of 2009, we saw it step up pretty drastically.

The second thing we are presuming in 2010 is a loss within each of the quarters and more significant loss. We saw that in some of the quarters in 2009, but not every quarter. The third thing I would say is that in 2009 we get a benefit for the fact that our aging improved in the quarter of 2009. We think the aging on whole will be pretty comparable in 2010 to 2009, and that has been true so far in January.

The credit losses in 4Q -- it sounded like if you looked at it on a gross basis (indiscernible), is that in line with what you were expecting?

It was pretty comparable to what we expected.

The last one it looked like the gain on the hedge, was there a benefit on timing for 4Q? It seemed like for most of ' 09 there was a little bit of a benefit versus what we would expect. Was that something that was a little different with the structure of the hedge or was that random timing?

We haven't changed anything with the structure of the hedge. The timing should be consistent, too. It is a settlement process that happens on a monthly basis.

Our next question is a follow-up from Tien-Tsin Huang from JPMorgan Chase.

I'm sorry if I missed it, did you actually quantify the investments that you are expecting to make internationally in 2010?

We did not.

Obviously there is enough in the guidance. In terms of some of the growth initiatives, can you rank for us what you are expecting in terms of level of growth for some of the growth initiatives? Is it going to be MasterCard again or could it be international that takes the lead in terms of driving growth?

It depends on what period you are talking about. If you are talking 2010 --

2010, sorry.

Yes, yes. MasterCard will clearly have more as an impact on growth. International will be a few years before you see much that is meaningful from a revenue perspective. MasterCard, we would think will be the largest and the diversified. We also think we will get continued contributions from each of the other things including that diversification, like telesmart, sorry Park Smart which is our telematics cross sell, Pacific Pride in telepoint.

Thanks.

Thank you. There are no further questions in queue at this time. Mr. Dubyak I would like to turn the floor back to you for closing comments.

Thank you, Melissa. Thank you everyone for joining us. We will look forward to speaking with you next quarter.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.