WEX Inc (WEX) 2010 Q2 法說會逐字稿

Greetings, and welcome to the Wright Express Corporation second quarter 2010 conference call. (Operator instructions.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Elder, Vice President of Investor Relations for Wright Express. Thank you. Mr. Elder, 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 early 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 an 8-K we submitted to the SEC.

As a reminder, we will be discussing a non-GAAP metric, specifically adjusted net income, during our call. For this year's second quarter adjusted net income excludes noncash, mark-to-market adjustments on our fuel price related derivative instruments and the amortization of acquired intangible assets, as well as the related tax impacts.

Please see Exhibit 1 included in the press release for an explanation and reconciliation of adjusted net income to GAAP net 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 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 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 today.

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

Hello, everyone, and thanks for joining us.

Our results this quarter were led by increased fleet customer revenue. This was driven by the first quarter of growth in existing customer transactions since the start of the recession two-and-a-half years ago.

Total revenue was up 17% from Q2 last year, primarily due to a $0.54 increase in fuel prices and accelerating MasterCard spend, as well as increased fueling activity. Adjusted net income increased 20% and exceeded the top end of our guidance by $0.02, reflecting revenue growth as well as a decline in operating expenses, highlighted by lower than expected credit loss.

Since the third quarter of 2008 fleet fueling activity in our installed base or same-store sales has been consistently down on a year-over-year basis. These declines, however, have been narrowing for nearly a year now as the economy recovers. Same-store sales in the first quarter of 2010 were essentially flat on a year-over-year basis, which suggested to us that we were finally seeing direct evidence of the economic recovery in our core business.

We were pleased to see this trend continue in the second quarter as same-store sales finally turned positive, increasing consistently from month to month in the quarter and growing a solid 4% from Q2 last year. Total payment processing transactions were up 2.5%, the first year-over-year increase since Q3 of '08.

As in the first quarter, the transportation and manufacturing sectors experienced the strongest rebound in fueling activity in Q2. Construction remained our weakest major sector, but even construction improved to essentially flat year-over-year. Last quarter we reported that business services and the other verticals were continuing to bounce along the bottom. This quarter we saw the majority of our SIC codes post year-over-year increases, including business services, which is second in size only to construction.

We will continue to watch this metric closely for signs of changes in economic activity. Unlike Q1 when patterns were consistent from region to region, we did see some significant differences in Q2 with the Southwest outperforming the other regions and the West underperforming.

Fueling volume on a total basis turned positive this quarter, despite a continued year-over-year reduction in the number of vehicles in existing customer fleets. Although our frontend programs have added nearly 425,000 new vehicles to our installed base since Q2 '09, our second quarter 2010 total vehicle count was still down by approximately 100,000 vehicles from a year ago.

We did see an increase in the number of vehicles services as compared with the first quarter, however. Excluding the fourth quarter of '08 when we added the GSA fleet portfolio Q2 marked our first sequential increase in vehicles since the beginning of the downturn nearly two years ago.

Breaking it down by fleet segment, the average number of vehicles in our large and midsize fleet portfolio declined 3% year-over-year. In small fleets our average vehicle count was flat with Q2 last year. In both our Wright Express direct and co-brand channels the average vehicle count was up 2% from Q2 of '09, while private label was down 2%.

We're continuing to invest in building the strongest frontend capabilities in the industry, and the sales force produced some significant wins in the second quarter. These included the State of Florida, New York City's Metropolitan Transportation Authority, and the U.S. Department of the Treasury. Together these new fleet customers will add more than 35,000 vehicles to our portfolio. In addition, our co-brand leasing partners were also successful this quarter in signing up some new large customers.

Our investments in sales, marketing, and customer service also had the affect of keeping our customers satisfied and our attrition rates very low. Voluntary attrition for the second quarter of 2010 remained well below our target at 1.4% compared with 2.9% for Q2 last year.

One of the keys to customer satisfaction in the fleet car business is the ability to offer attractive credit terms, and our unique financing model creates a significant competitive advantage for us as a credit provider.

In this regard we expect the new financial reform legislation to be essentially neutral as far as our business is concerned. The new law takes a measured approach to the regulation of industrial loan corporations. It imposes no new requirements or limitations on existing ILCs, such as ours, and calls only for a three-year moratorium on new ILC applications, and an 18-month study of the ILC industry by the Government Accountability Office.

Let's turn now to our diversified businesses, led by MasterCard, these businesses are continuing to perform well, contributing more than $20 million of revenue this quarter or 22% of our total revenue. This is up from 21% of total revenue in Q2 last year despite the increases in fuel prices since then.

We've been working strategically to expand our footprint in ways that reduce the fuel price sensitivity of our business model, while at the same time adding to the overall product and service value we can provide our customers.

The growing share of revenue contributed by these new businesses demonstrates the progress we've made in executing on this strategy, and we expect this contribution to grow to approximately 30% of our total revenue over the next few years.

Our MasterCard product continues to drive this growth. MasterCard revenue for the second quarter of 2010 was up 37% from Q2 last year, and MasterCard spend was more than a billion dollars. Most of the growth in purchase volume is continuing to come from our single use account product.

The rollout with one of the world's largest online travel companies that we've mentioned the past two quarters is on track and continuing to expand. The spend volume on this program grew to $85 million in the second quarter from $20 million in the sequential first quarter. We expect this ramp to accelerate through the end of the year as we've signed a contract for another portion of that same customer's business.

In addition, the targeted MasterCard marketing campaigns we've been implementing this year in the insurance and warranty vertical are now producing tangible results. We signed deals with two insurance companies during the second quarter. At the same time we significantly expanded our sales pipeline in what looks to be an increasingly receptive market for our MasterCard single-use account product.

We're also seeing double-digit spend growth in our MasterCard purchasing card product. We envision the purchasing card as a way to add value for our small and medium sized business customers by helping them reduce their operating cost while at the same time creating a cross-selling opportunity for us in our core fleet business. And it's serving both purposes very well.

We're continuing to make progress on our international strategy. We've been in negotiations for some time with a group of major and mid-major oil companies. These talks are going well and we expect to record a small revenue contribution from our first international transaction processing relationship before the end of 2010.

We're also exploring a strategy focused on card, program alliances, or acquisitions that have the potential to expand our international presence, and we look forward to reporting progress in that area in the future.

Clearly with our load debt level ratio and strong cash flow we're in a position to make significant investments in expanding our business. These investments are designed to drive organic growth in the fleet market or to accelerate our diversification, which will further reduce the fuel price sensitivity of our model. That said, we're anticipating no change in our bias towards being conservative with our cash as we seek the highest possible returns.

We've continued to include stock repurchases in the mix, and in the second quarter we spent $10.5 million buying back 334,000 shares of our stock. We repurchased another 261,000 shares in July, bringing total repurchases for the year to approximately $18 million or 595,000 shares.

Since the inception of our current repurchase plan in 2007 we've bought back approximately 3.1 million shares at a total cost of $96 million. We have approximately $54 million remaining under the current authorization.

While we expect to continue buying back stock when opportunities present themselves, internal reinvestment to drive organic earnings growth continues to be our highest priority use of cash. We will also continue to explore alliances, mergers, or acquisitions that represent strategic opportunities for incremental growth.

So to wrap-up this was a strong quarter for Wright Express, highlighted by existing customer growth of 4%, and the dynamics in the business are uniformly positive as we begin the third quarter. We're very much aware of the economic uncertainty right now, and we're watching the trends closely. But we see nothing as yet in terms of customer feedback or purchasing activity that would lead us to dial-down the sense of confidence in the second half of the year that we expressed last quarter.

Melissa will discuss our guidance assumptions in detail at the conclusion of her prepared remarks, so I'll turn the call over to her. Melissa?

Thanks, Mike. And good morning, everyone.

Q2 2010 was another quarter of solid earnings growth as A&I once again exceeded our guidance, driven by payment processing transaction growth, MasterCard spend, late fee revenue, and lower credit loss. These positive factors more than offset a $0.07 decline in fuel price per gallon compared to our guidance.

As Mike said, we were successful in adding fleets and vehicles in the second quarter, and we feel good about the trends we're seeing in the business as we begin Q3. Even if the economic recovery remains slow next year we believe that we can continue this performance going forward. This gives us confidence in our transaction volume and A&I growth trajectory moving into 2011.

Turning now to our results for the second quarter of 2010, total revenues increased 17% to $91.4 million, from $77.9 million for the second quarter of 2009, slightly above the top end of our guidance range of $86 million to $91 million.

Net income to common shareholders on a GAAP basis was $30 million or $0.77 per diluted share compared with $93.2 million or $2.36 per diluted share in Q2 last year. Q2 last year included a pretax gain of $136.5 million on the prepayment of the Company's liability under a tax receivable agreement.

Our non-GAAP adjusted net income for the second quarter of 2010 increased to $26.8 million or $0.68 per diluted share, exceeding the high end of our guidance range, which was $0.61 to $0.66 per share. This represents an increase of 20% over the adjusted net income for the second quarter last year, which was $22.4 million or $0.57 per diluted share.

With that as a background, I'll discuss our financial results in detail. Our net payment processing rate for Q2 2010 was 1.73%, down three basis points sequentially from Q1. As a reminder, we implemented some new payment processing rates during Q1, increasing the average rate by five basis points. We'll continue to see the benefit of these higher rates in future quarters.

For the current quarter the reduction of three basis points compared to Q1 was due to the impact of higher fuel prices on our hybrid merchant contracts and the slight increase in our rebates to major customers.

Consistent with the first quarter approximately 60% of our transactions in Q2 were at merchants with hybrid contracts. This was another strong quarter of growth in our MasterCard segment. Total purchase volume was up 34% from Q2 last year to $1 billion, again exceeding our forecast. Revenue in the MasterCard segment was up by 37% year-over-year to $13.1 million. MasterCard represented 14% of total revenue and 12% of total A&I in the second quarter of 2010, up from 10% and 12%, respectively, in the second quarter last year.

The MasterCard net interchange rate for Q2 was 1.07%, down four basis points year-on-year, primarily due to an increase in the average rebates we paid. Late fees for the quarter declined both sequentially and year-over-year. As you may recall, in January of 2010 we had very high late fees as a percentage of the dollar volume. Late fees then trended down through March and April but rose slightly in May and June, so the decline was not as large as we expected in the quarter.

Moving on to operating expenses, our strategy remains the same, tightly controlling our underlying cost structure while making targeted incremental investments in growth initiatives, including research, marketing, and international business development.

On a GAAP basis our total operating expenses of $52.1 million for Q2 were lower than we expected primarily due to credit loss. Fleet credit loss was seven basis points compared with the 12 to 17 basis points we assumed in our guidance. This is roughly equivalent to the exceptionally low eight basis points we recorded for Q2 last year and well below our historical loss range of 11 to 22 basis points.

Although our guidance assumed that we would have one significant bankruptcy during the second quarter this did not occur. Smaller bankruptcies in the normal course of business were also better than we anticipated. The accounts receivable aging also improved from Q1 more than we expected.

On a total basis, including both Fleet and MasterCard, credit loss for the second quarter was $2.9 million compared with $2.6 million in Q2 last year. Total chargeoffs in the quarter were $5.6 million and recoveries were $1.1 million, consistent with prior quarters the majority of the chargeoffs came from customers with balances less than $30,000.

As of June 30th balances past due 30 or more days represented 1% of the portfolio or about $8.8 million compared with 0.8% last year and 1.4% at the end of the Q1. This is a $2 million improvement sequentially in past due balances. This is the primary driver of the improvement in our allowance for credit losses.

We track the accuracy of our allowance as compared to the next six months of net chargeoffs. Historically we have a high degree of accuracy in this estimate. As an example, net chargeoffs for the first half of 2010 were $10.3 million compared with a reserve of $10.7 million at December 31st, 2009.

Looking at other key expense lines, salary and other personnel costs for Q2 were $20.4 million, up $2.2 million from the second quarter last year. This increase was primarily due to expanded international staffing, increased commissions, and modest salary and benefit increases.

Lower operating interest expense again was a positive factor in Q2, declining by $1.1 million or 44% from Q2 last year to $1.4 million. Our average operating debt level including CDs, money market accounts, and sub funds was $545 million compared with $394 million in the second quarter of 2009.

During the quarter we began a program to use brokered money market deposits in addition to the CDs we have used historically. As of the end of the quarter we had approximately $60 million in money market funds paying interest tied to short-term rates. We expect the balances to grow slightly over the next few months and reduce the CD balances.

Now that virtually all of our higher rate CDs have matured and interest rates have remained very low, the interest rate on our operating debt again declined in Q2 to 1%, down from 1.2% in Q1.

Our effective tax rate for Q2 on a GAAP basis was 37.5% compared with 37.3% in the second quarter last year. Our adjusted net income tax rate this quarter was 37.5% compared with 37.8% for Q2 a year ago. We expect our tax rate to be between 37% and 38% for the year.

Turning to our derivatives program, during the second quarter of 2010 we've recognized a realized cash gain of $2.8 million before taxes on these instruments, and an unrealized gain of $6.5 million. We've concluded the quarter with a net derivative asset of $5.9 million.

As previously reported, we've completed our purchases for 2010. For the remainder of the year we have locked in at a price of $2.87 to $2.93. We've also hedged 80% of our exposure through the second quarter of 2011, 53% of our exposure through the third quarter of 2011, and 27% of the fourth quarter 2011 exposure. For the periods in 2011 for which purchases have been completed the average price we've locked in at the top end of our collar is $2.93.

Turning to the balance sheet, we ended Q2 2010 with a balance of $91 million on our revolving line of credit and a leverage ratio of 0.5 times EBITDA. This compares with 1.4 times EBITDA at the end of Q2 last year.

Capital expenditures for the second quarter were $6.8 million. Our anticipated CapEx for 2010 is in the range of $20 million to $25 million, up from the actual spend of $17.8 million in 2009. Again, this is comprised of ongoing investments in new products and efficiency initiatives with the majority of the year-over-year increase reflecting our international investments.

I'll conclude my prepared remarks with some key assumptions on our financial guidance for the third quarter and updated guidance for the full year 2010. Reflecting the thoughts Mike expressed, our guidance assumes that volume in our existing customer base or same-store sales volume will be positive for the remainder of the year.

Credit loss for the third quarter is expected to be 11 to 16 basis points, and full year is expected to be in the range of 14 to 19 basis points. This loss rate reflects the favorability of experience so far this year but no other meaningful changes to our assumptions.

We're assuming that the aging of the receivables balances will remain consistent and that there will be one significant bankruptcy each quarter.

Although it remains in place we have not included any potential EPS up side from our share repurchase program other than the purchases that we have already completed this month. The fuel price assumptions are based on the applicable NYMEX futures price which is down $0.13 from the $2.88 per gallon assumed in our prior full year 2010 guidance.

Let me remind you that our forecasts reflect our view only as of today and are made on a non-GAAP basis, as Steve discussed earlier. For the third quarter of 2010 we expect to report revenues in the range of $91 million to $96 million. This is based on an average retail sale price of $2.75 per gallon. For the full year 2010 we expect revenues ranging from $354 million to $364 million based on an average retail fuel price of $2.75 per gallon.

As for earnings, for Q3 2010 we expect to report adjusted net income in the range of $25 million to $27 million or $0.65 to $0.70 per diluted share. We expect adjusted net income for the full year 2010 in the range of $97 million to $101 million or $2.47 to $2.57 per diluted share on approximately 39 million shares outstanding.

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

Thank you. (Operator instructions.)

Our first question is coming from John Williams with Goldman Sachs. Please state your question.

Good morning, guys. Thanks for taking my questions. The -- just looking at the acquisition environment, I know this has been something that's been out there for awhile when you've been on the earnings calls, what are you looking for I guess that would be a signal that you're finding the right possible partner and, or company to combine with going forward? I know this is something that comes up a lot with investors, and I'm just curious to get your opinion on that?

Yes, I think, well, first of all, in terms of areas and categories we would look at something that could kind of expand our market capabilities in North America, could be a contiguous market, could be something else in our space. We'd look at something that can further diversify our business model as we've done with some acquisitions in the past that could take us into some new market spaces but still leverage our core assets today.

And we'd also look at international opportunities that could either enhance our processing capabilities with different products and services or processing capabilities or look at acquisitions where potentially we would be an issuer and then also have call centers that we can provide to some of the processing relationships we have in different parts of the world.

So I think all of those would be possibilities for us as we look to expand, and then it's just a matter of making sure you find the right deal and make sure it fits with Wright Express' strategy.

In terms of CapEx what's your philosophy for the longer term way to think about this as a percentage of revenues? Or I guess how do you think about it going forward, especially with the expansion coming up I just want to make sure that we're looking at our modeling in the right way and that we're not moving it too far one way or the other when we look out towards 2011, 2012?

Yes, if you look at what we've spent historically it's been in that -- between $15 million and $20 million. This year we said $20 million to $25 million because of international expansion. I think that that's a pretty good run rate going forward from what we see in our business, you know, it's not a perfect view but I'd say that that's probably a safe assumption.

Okay. Just a last one, a quick thing. The significant bankruptcy that you assume in the annual numbers is that just based on historical experience and that's a good way to think about it or is that based on something that you're concerned about now versus say the way you might have thought about this two or three years ago? Or is this sort of a new thing to worry about?

I think it is new in terms of the fact that they're more elevated since there's been [steepness] in the economy. We've had one, I think five out of the last six quarters, so as we're looking forward in our forecasting we're just being prudent to include that as an assumption.

Got it. Can you be like more specific, I guess, about when you say significant is it 5% of revenue, 2% of revenue, what would significant be?

Yes, I think they're between $200,000 and $300,000, $200,000 and $400,000, I guess, $200,000 and $400,000 is what we're looking at as generally significant.

And that's revenue?

No, no, no, $200,000 and $400,000 is about the amount of the loss. We've only had one loss greater than a million dollars in the history of the Company, and so when we say significant, that's a good point, it's less than half a million dollars, and as we're looking forward, we're including it in our assumptions, we're assuming something in the range of $200,000 to $400,000.

Great. Thanks.

Our next question is coming from the line of Bob Napoli with Piper Jaffray. Please state your question.

Thank you. Good morning. I was just wondering if you could go -- give a little more color on the month-to-month trends in the core business same-store sales that's blended out to 4%? And if you had any color on July?

Yes, as we said in the prepared remarks, every month was progressively better than the previous month. We basically saw all the different regions of the country either flat or up except for the West. We probably saw somewhere, I could count them off right here, but I think pretty much seven out of our 10 top SIC codes were up, even as I said construction was down but only slightly.

So far in July we have seen still strength, so we have seen nothing that has said that is changing in terms of at least the sequential changes we've been seeing month-over-month so far, from the first quarter into the second quarter, and now into July.

So that's why I think in Melissa's prepared remarks we talked about saying we see continued growth in -- transaction growth mostly because we're also now seeing the same-store sales bounce back.

No, I mean if it -- you've averaged 4%, was the month of June 8%, or what did?

Yes, the month of June was a little over 5%.

Okay, and then the MasterCard business, obviously very strong growth there. Should I -- I mean are the profit margins, are the margins on the new business that you're signing similar to what is the business, as a whole?

Generally, yes. They're -- the single East Coast account product, they typically are rapid payment terms, and so that there isn't as much interest expense requirements, as much credit exposure. And they tend to have higher rebates, but from a profitability perspective they look pretty similar.

I mean and that accelerated, and I mean you gave some nice metrics on the new customer, the new large travel customer. You said that that -- the percentage growth rate accelerate through the quarter, and you expect -- and it sounds like your pipeline may have even expanded of new business?

Yes, we talked about the $20 million in the first quarter and $80 million or $85 million in the second quarter. That's continuing to expand, and we've, as I said, signed another piece of their business which we're not sure exactly when that will come on. At the earliest, that would come on as additional ramping and rollout, if you will, by the fourth quarter at the earliest. And that's still to be determined just based on what it takes to start rolling that out. But that just says there's continued momentum to see the build, and that build now will continue into next year.

Okay, and the last question, on your reserves I guess the -- your forward-looking, I mean your reserves have to be forward-looking, not backward looking. I think -- I don't think I've ever seen a backward looking reserve. But the number, the $7.7 million and the 11 to 16 basis point guidance that you're giving, it looks like that reserve may be a little bit low relative to the chargeoffs that you're expecting in the back half of the year or is that because you're not reserving for the bankruptcies that you may get, or is -- why would that?

Yes, the reserve is our estimate of what we think is going to chargeoff over the next six months.

Okay. Thank you.

Our next question is coming from the line of Tom McCrohan with Janney Montgomery Scott. Please state your question.

Hi, guys. What is the definition for same-store sales? I'm trying to figure-out the metric that you're using to calculate the 4% growth?

Yes, we typically look at customers that are with us at least 12 months, so that's what we look at same-store sales so everything after that would be considered the new business we're bringing off from the sales force.

Yes, the transactions, Mike, that you're looking at or dollars of spend?

Well, we look at a couple of things but it's primarily gallons because that's what's going to drive revenue eventually based on the payment processing rates or whatever, so it's really the gallons that we're looking at.

The gallons per fill up, is that 4% year-over-year, is that the way to think about it?

Well, these are gallons that are up from these customers that have been with us basically at least a year or longer. What we're saying is those customers, no new customer is impacting that volume if they've been with us a year or longer. We're now seeing their actual growth of gallons go up 4%.

So I remember last quarter you were talking about kind of a rebound, so I'm just trying to -- I don't want to read too much into the 4% as kind of an indication of a recovery as much of what you were kind of talking about last quarter where you're going to get naturally just kind of the math, right, a little bump up in growth on that definition just because last year was so weak, right? So how much of this is a recovery, right? Versus if you just think last year of the comps, you know, were so weak due to what was going on in the market?

Well, there's no doubt, I mean we were down and we said at 10% in the first quarter last year, 10% in the second quarter, like 9% in the third quarter, and I think it was 7% in the fourth. So it was going down, down, down.

Yes.

It flattened in the first quarter. So you're clearly comparing over a period that's gone down, down, down, you're still comparing to a number that was fairly low in the second quarter that had gone down another 10%, and now we're bouncing off of that. And then hopefully we're feeling comfortable that what we see with our trends in our analysis is that it will continue into the third and fourth quarter.

Getting back to normal but not -- you wouldn't encourage us to kind of model growth after you kind of normalize for the weakness last year?

I think another way of saying it is that we've presumed all along that you kind of reset the bar, that you went down 9% last year and you've reset kind of what the normal is, because a lot of the fleets within our business model reduced their fleet size. And so if they had a 10-vehicle fleet in the past, they had a nine-vehicle fleet by the end of last year. And so what we're seeing now is positive improvement in what was remaining of that fleet. So we view it as a positive, and I hear what you're saying, it is because in part because of the comparison, but.

So basically so (inaudible) average fleets and the activity as we get a little bit better in the remaining fleet.

Right, exactly.

That's good.

Yes.

And, Melissa, just one last question and I'll jump off, on the reserves. I was modeling for reserves kind of to be a little bit higher, and I understand we don't have access to kind of how you [effect out] chargeoffs, but I was surprised in light of the fact of the uncertain outlook that, Mike, in your press release, in the comment, you talked about kind of those uncertainties in the economic outlook.

But given that and given the trailing trend in chargeoffs you had no improvement in kind of sequentially in chargeoff trends, that the reserves went down, right? So I would have thought the reserves would have been higher heading into what appears to be kind of an uncertain economic outlook.

So could you just give us a little more comfort, Melissa, on the analysis you do? You talk about the compare remarks on the aging and what you're seeing that gives you comfort in your current reserve levels? Thanks.

Sure. As I said, when we look at this we actually we look at on a quarterly basis if not more frequently how we're doing compared to our allowance, compared to chargeoffs over the preceding six months. And we have actually a very high correlation. As we're estimating chargeoffs, a big part of what drives that is what's happening to the aging. And in the second quarter the aging improved pretty significantly, so we had a reduction of $2 million of balances past due, and that's the primary driver of why you've seen a reduction in the reserve, itself. And so you see that pick-up in the provision for credit loss.

But in looking at our future view what we'll do is estimate what we think is going to happen in terms of chargeoffs. We gave assumptions on the call of what we think is going to happen to the aging and typically representing it to stay pretty steady. And then we'll look at what we think is going to happen to overall rates, and as a result of that what we give is a forward view.

Okay. Thanks.

Our next question is coming from Tien-Tsin Huong with J.P. Morgan. Please state your question.

Hi, thanks for all the disclosure. I just wanted to ask about the competitive wins, the 35 vehicles you talked about, Mike. What kind of business would that be? Are you going to be funding the receivables? I just want to get some details around that.

Yes, and those wins, those are all on the Wright express card, so we will clearly be funding the receivables. The State of Florida was an RFP that basically different people can bid on. We were able to take over a piece of the Federal Government, since there's opportunities from other agencies that we did not win, to potentially win that business, and that was the Treasury business that we won. And then it was just basically a regular competitive process for the Metropolitan New York Transit System. So just under different contexts but all competitive wins under different opportunities, all on the Wright express card, and we will be funding receivables.

Okay, good to know. And then the timing of when that 35 will roughly come in? And I guess what were the factors to get you guys to win that business relative to the incumbent?

Well, probably most of this will roll-out either later in this quarter or fourth quarter in terms of the 35,000 vehicles. I think in the competitive wins it's a matter of services and products, and we feel what we've done with continuing to invest in our business as we talk about with these larger fleets they look at ways to manage their business effectively with our online tools and the ability for them to go in and customize their programs on who can buy, what they can buy, when they can buy, how they can buy, and then the different reports they can pull from this.

It's really all of those capabilities with the services we offer that allow us to win. Clearly, we have to be competitive on price. We're not necessarily the leader on being the lowest price, but we think the overall value still allows us to win these big opportunities.

Okay, that's great, that's great. Just on the MasterCard side, obviously, that was very strong with the new customer rolling out. How far along are you in ramping up that core business, excluding that secondary piece that you might get later on this year?

Yes, I'd say the $85 million is pretty strong, but there's still some room to grow. But I don't know the exact percentage because they keep adding incrementally to the business, and we have some sense of that but not a complete sense of that.

So I think there's growth opportunities in which -- ramping currently. Let's say, we're in the range of 60% to 80%, so that can still ramp, and then we'll be adding the new business which would start as early as the fourth quarter, but again that has to be determined just working with them on how does this work and how do we integrate.

All right. Great. Good stuff. Just a last one for me on the BP front, I'm curious if -- with all the clean-up going on with BP I'm just thinking back to Katrina, which had some benefit to your volumes, are you seeing any kind of impact from that?

No, I think we're not. I think there's no real impact with what's going on in the Gulf with our business, and I think that as we know from the press some people have reasons not to purchase from BP but that's the fleets' choices and doesn't affect us. They still have options to go wherever they'd like to use our card.

Right. Okay, just wanted to check. Appreciate it.

Sure.

Our next question is coming from the line of Robert Dodd with Morgan Keegan. Please state your question.

Hi, guys. One of the questions, going back to the kind of chargeoffs and actually late fees or finance fees rather, which are apparently tied to the late balances. If the -- I had a little trouble reconciling it. The amount, the overdue balances declined fairly substantially end of Q1 to end of Q2. Why then were the late fees or finance fees up modestly sequentially, but it certainly didn't decline sequentially? Can you give us an idea of have you changed the pricing for those fees recently or can you give us some more color on that?

We said that in January we saw a significant amount of late fees and that's often driven by the behavior of people that are slightly late. They may move in and out of, say, they'll go from 30 to 60 days briefly and go back in. So there isn't as much of a correlation between late fees as you'd expect and credit loss.

So when we're modeling out late fees, actually we're looking at customer behavior patterns, more specifically it's how they move in and out of that late fee, the late fee bucket. When we're looking at credit loss, as you said, we saw an improvement in Q2 in credit loss, which was driven as eight out of 10 of our top industries improved sequentially in terms of their aging, and that reflected in the total improvement in the aging.

Okay, got it. Thank you. On the -- a small detail, when the average gallons per transaction on the payment process like picked up a little bit, it was down a bit the first quarter, can you give some color on that given if the large fleet vehicles were down 3% I can't imagine it, you know, larger gas tanks. I would think it would be smaller gas tanks, and I would think that should be drifting slightly down. Can you give us any color on what's driving the increase there?

The only thing I could say is it probably came, the little bit of reduction that we saw over the last 12 months or so might have been because the GSA does buy less in their fills, but now that's been kind of steady state for awhile. And now as we're adding new business it's probably getting back to higher transactions that we usually see from most commercial accounts.

When we say large fleet we don't mean large vehicles, we mean fleets with greater than 100 vehicles versus those with less than a hundred vehicles, so it still could be automobile fleets or small light van fleets even if it's a large customer. It's just a matter of what is the type of customer we're bringing on and what is the average fill.

And all I would say is I think we've now seen maybe the bottom of what the impact of the GSA could have been, that's my speculation, and now we're just seeing normal fills that are bringing it back up. But I think it's going to bounce around. We've seen anywhere from 20.4 pretty steadily, it did go down Q1 to 20.2, and now it's back up to 20.5.

Okay, got it. On the service fee line, there's a fairly substantial increase against sequentially, Q1 to Q2. Obviously, you know, this was seasonality. There's MasterCard in there, et cetera. I mean could you give us some color on what was driving that? Was it the incremental growth in the MasterCard business? Was it international investments? Is the $9.5 million a sustainable level or can we expect that to continue outpacing overall revenue versus even MasterCard volume growth by a margin?

Yes, it's a combination of both. So MasterCard spend is the primary driver, so we'll have increased fees there associated with MasterCard. There also was some incremental accounting and legal fees associated with both [international] and other investments.

And -- Okay. Thank you. The last question for me, at least, I think on the last quarter you gave us some kind of color where you think your vehicle growth would be by the end of the year. And I think that was mid to maybe high single digits because of new sales initiatives you've got underway. Obviously, up sequentially, and vehicles are still down year-over-year. What's your comfort level of seeing, you know, positive vehicle growth, maybe in the 5% to 10% -- putting words in your mouth there -- growth rate by the end of Q4?

Well, I think that we clearly saw the growth sequentially, so we are forecasting that sequentially it'll continue to grow. Overall we know on the frontend we're still saying it's going to bring in 400,000 new vehicles, and we're pretty much on track with that. We've brought in over 200,000 new vehicles in the first half of the year.

So it then really does matter of what is the existing customers doing, as Melissa said are they just growing transactions and gallons or are they starting to actually add new vehicles, and that's hard to calculate right now. I don't think there'd be a lot out of that. And then the rest is what is the attrition that's offsetting that.

Okay, good. Thank you.

Our next question is coming from the line of Greg Smith with Duncan Williams. Please state your question.

Yes, hi. Just hoping we could get an update on the service network and the telematics products? How are those two kind of progressing?

Yes, they're actually progressing very well. We see our service network program continuing to grow. We're doing more and more, quite frankly, on the service network with some of our larger partners and some of our larger accounts, even using our MasterCard product, where small garages, it's very difficult to get a point of sale device that accepts our card but we can use our MasterCard program to pay those garages so they have money quickly. We can pay them over the phone and the customer can still do a transaction there, so we're seeing nice growth on that side.

And we're seeing telematics, I think last quarter we talked about seeing the confidence of small businesses picking up. We've continued to see telematics have strong growth this year compared to last year. Nothing that's going to be moving the needle that dramatically but it still builds the ability to have this annuity with these customers that bring on telematics, as well. So that's growing very nicely, beating what our plan was for the year.

Okay, great. That's all I have. Thank you.

Our next question is coming from the line of Paul Birdali with PB Investments. Please state your question.

Thanks. Good morning. Just first wanted to follow-up on the same-store sales question from earlier. I just wanted to make sure I'm understanding this right, the 4% growth is that really more of a same vehicle growth, meaning that adjusts for existing customers that have lost vehicles?

Yes. So I mean this is really saying same-stores, these are customers that we've had on the books at least for a year, so we're really looking at -- in this case, we're looking at mostly just the gallons and that's what we're really tracking when we say same-store sales are up, not the vehicles. I don't have the tracking on the vehicles.

Yes, just to clarify your question, I think what you're asking is whether we make any type of adjustment to the metric based on the number of vehicles that are remaining in the fleet?

Right.

And we don't do that. It's the number of gallons associated with that account. So if the account was there a year ago and it's there a year later it's whatever gallons are being driven based on that total account. The only adjustment we make is adjusting it based on equivalent fueling days, so if there's more business days in one particular quarter to another, but it's a pretty minor adjustment.

Okay, so I guess I'm trying to reconcile then is just the -- you have a flat transaction growth versus kind of what's happening in the customer base, is it -- and the vehicles being down?

Well, I -- we, I guess would answer it that we know that we have the growth of the 4% with the existing customers. We know that we have an offset to that based on attrition, and attrition can be in the range of 5.5% to 6% between voluntary and involuntary, and then it's really just the timing of rolling out some of the new vehicles that we've added, say, the 200,000 vehicles in the first half of the year.

So some of that timing affects the growth, as well, but we do see that timing in the second half of the year helping us and we see net growth in the second half of the year because of all those factors, the new vehicles coming on, the existing customers growing and minimizing our attrition levels.

Okay, and then just a follow-up on that. The -- if you look year to year you're down 100,000 vehicles, and I think you mentioned the 425,000 that you've added from new. Of that 500,000 or so that you've lost I'm just wondering if you could comment on that and maybe the mix of existing customers that have just decreased their fleets versus customers that have gone away?

Yes, if you look at just round numbers, if we're saying 6% on attrition all in, that's probably 50% of a loss, and then the other 50% is from the existing customers just contracting, as Melissa alluded to, a 10-vehicle fleet is now a nine or an eight-vehicle fleet. So it's a combination of both.

So we feel that if the existing customers have now stabilized and starting to grow their gallons, and it's just a matter of are they still cleaning up a little bit of their vehicles, we feel by seeing the sequential growth in the second quarter potentially that has even stopped. So hopefully you won't see more shedding of the existing customers, you would then have them either stabilize or slightly growing, you bring on the new business, and then you have the attrition vehicles leaving Wright Express.

Okay, so just if I can clarify? So have you seen an improvement in the existing customers, what they're doing with their fleets?

Only on the gallons, I don't think we have statistics to give you of the vehicles. We don't have it today but we've seen the gallons grow, so that's why I'm saying there has to be at least some stability in that existing customer base by seeing them grow their gallons. I don't know, though, whether the vehicles are kind of coming from one or the other.

Okay, great. And then just a last one for me, on the finance fees I'm just trying to make sure I heard this right, were the late fees down from last year? Just trying to compare that to the finance fees that were up year-to-year.

The late fees went from 30 basis points in Q1, so I'm talking sequentially down to 27 basis points of total spend in Q2. Last year it was 30, about 30 basis points in Q2 of 2009. So it's down, and so just to be clear it went down from Q1 to Q2. We anticipated that it was going to go down and included that assumption in our guidance, but it was better, stronger than we had expected, so the fees were a little bit higher than what we had anticipated, but down sequentially and down year-over-year.

Thank you. Our next question is coming from the line of David Parker with Lazard Capital Markets. Please state your question.

Thank you. Good morning. In your comments you talked about the hybrid contracts and the rebates, was there anything different this quarter or do you anticipate anything different next quarter in that area, and just can you give your general views on pricing? Thanks.

Yes, there's no change on the hybrid contracts or the mix, so again just depending on what people buy it's going to stay at the 60% of our overall merchant purchases are through hybrid contracts.

On the Fleet side by getting these big wins, they typically will have rebates so that has an impact but it's a positive impact because we're winning large customers in the marketplace. And then the rebates we're giving them get netted out, as you know. So we talk about we feel good about our business uniformly, our pipelines are strong even on the large and midsize, so if we see further slight deterioration of the overall payment processing fee it's because we're continuing to win in the marketplace.

Okay, and then do you have any indications for where you can roll-out the next hedge at?

Yes, to that, '11 prices right now are somewhere in the $2.80 --

$2.83.

$2.85 TPG.

Okay.

That would get -- that's a swap price, not a collar price, but it's somewhere in that range the last few times I've looked at it.

Okay, so below where the other last one was rolled out?

Yes.

And then just in general I'm looking at your international business, how satisfied are you with the progress so far? Is it going according to plan or are you -- are there any challenges that have arisen or made things more difficult or are you happy with the way things are progressing?

Well, I think that, as we say, we're talking to a lot of oil companies. We've been very pleased with the response from the oil companies. And we're looking to have our first processing relationship in place by the end of the year. It probably has taken a little bit longer than we'd like but now we feel like we're starting to see transactions that will be on the books by the end of the year. We feel good about that and we feel good about other opportunities that can be signed up and rolled out in the future.

Okay, thanks, Mike. And then just my final question is just from a strategic perspective as you look to leverage the distribution channel that you do have into these fleets where are you at in potentially partnering with someone to deliver or provide a prepaid card or a loyalty card or a payroll card to some of your customers?

Well, we're still in kind of the research and just talking to a lot of people. We know it's something that we've been upfront saying prepaid should help us in our marketplace, as well as leverage some of our assets. But we're not ready to say we have something ready for the market, but we continue to do our research and our diligence, talking to a number of players in the marketplace.

Okay. Thank you, guys.

Thank you.

Mr. Dubyak, there are no further questions at this time. I'd like to turn the floor back over to you for any closing comments.

Thank you, Claudia. And thanks, everyone, for listening. We look forward to speaking with you again next quarter. This concludes our call for today. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.