WEX Inc (WEX) 2011 Q1 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wright Express First-Quarter 2011 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Elder, you may begin your conference.

Good morning. With me today is our CEO, Mike Dubyak. 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 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 first quarter, adjusted net income excludes non-cash, 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 would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release, most recent Form 10-K, and other SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations 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.

Good morning, everyone, and thank you for joining us. 2011 is off to a great start as we reported first-quarter revenue growth of 43% and adjusted net income growth of 23% over the prior year. First-quarter revenue and earnings growth surpassed our expectations with total revenue increasing to $120 million and adjusted net income growing to $29 million, or $0.75 per share. Our revenue growth was primarily driven by strong growth in our MasterCard revenue, growth in domestic fuel transactions processed, coupled with an increase in fuel prices, and a full quarter of revenue from our Australian business.

Moving to some of our key metrics, payment processing transactions, on a consolidated basis, including WEX Australia, increased 14% year over year; and in North America, we saw an increase of 6%, the highest growth since Q4 2008. Additionally, this represents the fourth consecutive quarter of year-on-year growth. Fleet fueling transactions in our install base of customers, or same-store sales, increased 1% over the prior year. The Southwest region saw the best growth for the quarter, followed by the Northeast.

The Midwest and, to a lesser extent, the Southeast, were negatively impacted by inclement weather in the months of January and February, which kept the overall number low. However, on a positive note, same-store sales in March returned to the levels we saw in Q4 last year, and total transaction growth in April has trended in line with March. I would just note that the slight deceleration from Q4 to Q1 in same-store sales follows a similar pattern that was recently reported with respect to GDP. The total number of vehicles serviced averaged 5.4 million.

In North America, our sales force added 103,000 vehicles in the quarter, and they continue to make headway with new private label wins. The momentum we are seeing with private label wins has continued into the second quarter, as we have received several verbal commitments from domestic prospects. In addition, we are seeing growth in the small fleet market and believe that it will continue to be a source of opportunity going forward.

I am also pleased to say that BP in Australia, which is roughly double the size of BP New Zealand, successfully came online a few days ago. We have also continued to expand our acceptance network to better serve our customers, most recently announcing an agreement with RaceTrac, a southeast chain of convenient stores that adds over 300 locations to our existing network.

As a reminder, our closed-loop network is a significant competitive differentiator for us, as our relationships with both fleets and merchants enables us to provide security and control on the front end, while offering customized reporting for our fleet customers. In addition, the sheer size of our network, which is not easily replicable, is a significant advantage for us in the marketplace. Along those lines, we continue to look for additional ways to enhance our value proposition to our customers by adding new features and services to help them manage their fleets more efficiently and effectively.

In early April, we introduced new features and reports to WEXSMART, a full-featured GPS telematic solution. The new features combine information from fuel card transactions with GPS vehicle tracking information in meaningful ways to save even more. This capability is particularly useful to our customers in an environment of increasing fuel prices.

We also launched our Fuel Site Locator mobile app during the first quarter, which also allows our customers to locate the type of fuel they need at the lowest price. Our real-time data allows us to capture up-to-date fuel price information for our customers.

Turning to our other payment solutions segment, our corporate charge card product continues to post remarkable growth, with spend volume in the first quarter increasing 68% year over year to $1.4 billion, driven largely by our single use electronic payment product. To put this in perspective, in 2006 -- the year after we went public -- total purchase volume was $1.3 billion for the full year.

The online travel vertical continues to be a source of strength and the primary driver behind the huge growth numbers. We remain focused on expanding the customer base for our payment solutions into additional verticals, including the insurance and warranty market where we continue to have success. More recently, we began the exploration of the medical and education verticals with our AP Direct product.

As we mentioned last quarter, we will be expanding our sales force in the upcoming quarters in order to build off these successes. We have also been hard at work looking to expand into new payment markets, such as in the prepaid card space.

On that front, we recently announced the acquisition of rapid! PayCard, a privately held provider of payroll debit cards, which focuses on small and medium-sized businesses. Although this was a small transaction, it is strategically important as it jump starts our entrance into the domestic prepaid market. It also broadens our other payment solutions offering and coincides well with our customer base and our strengths. rapid! has a strong go-to-market capability in the payroll sector, with a deep focus on customer service and training that naturally complements our corporate culture.

With over 285,000 businesses that we service directly, or through partners in North America, we believe our verticals are, in many cases, prime candidates for a prepaid payroll product. This, combined with the level of strong customer satisfaction across our install base, provides us with an opportunity to offer a payroll product to current and future customers.

Turning to our international business, the Wright Express Australia integration has been progressing smoothly and continues to meet our expectations. We have seen an increasing amount of interest from oil and leasing companies in Australia as we leverage Wright Express' strong brand.

As we continue to diversify and expand our business, we recently implemented changes to our leadership structure to better support our global growth efforts. Last month, we announced Melissa Smith's appointment to the newly created role of President of Wright Express North America, and Steve Elder's appointment as Chief Financial Officer.

We believe these changes will better enable us to innovate and collaborate across the Company in order to accelerate our growth internationally. With Melissa leading the day-to-day strategy and execution of our North American business, I can now focus more of my time and attention on international expansion and corporate development opportunities, which will further support our strategy to drive substantial long-term growth for Wright Express. Along those lines, we're in the process of negotiating a new credit facility, which will provide additional flexibility to pursue our growth strategies.

Now, before I turn the call over to Steve, I would like to briefly comment on the increases we have recently seen in fuel prices with respect to our business. During the first quarter, the average price for fuel in the US increased approximately 22% over last year. While we believe that further escalation in price could become a drag on future transaction growth, we have not seen any evidence of that yet. That being said, we believe that demand in our business is more heavily impacted by the strength of the economy, rather than the cost of a gallon of fuel.

Although fuel prices were a significant factor in the quarter, I do not want that to overshadow the strong fundamentals of the business. Our corporate purchase card volume was up 68%, with an associated revenue gain of 80%; and, our domestic payment processing transaction volume was up 6%, while maintaining low attrition rates and low credit loss rates. In addition, the fundamentals underlying our recent acquisitions are performing as we expected. All combined, this underscores our positive outlook for the business.

Just to recap, our strategy and focus has remain unchanged. We are making steady progress on the execution of our plans to strengthen our leadership position in North America, grow our Fleet business, build out our other payment solutions segment and further develop our international business. We are excited about the opportunities we see in the marketplace and look forward to updating you on our progress.

With that, let me turn the call over to Steve Elder, our newly promoted CFO, to discuss our financials in more detail and to provide our updated guidance for 2011. Steve?

Thank you, Mike. We're happy with our performance this quarter and, aside from the increase in fuel prices, the significant drivers of our business played out pretty much as expected -- strong year-over-year growth being driven by increased corporate card purchase volume, growth in North American transaction volume, higher fuel prices, and the acquisition of Wright Express Australia.

For the first quarter of 2011, we reported total revenue of $120.1 million, an increase of $36.2 million from the prior-year period. This compares to our guidance range of $113 million to $118 million. Net income to common shareholders on a GAAP basis for the first quarter was $12.1 million, or $0.31 per diluted share, compared to $18.6 million, or $0.48 per diluted share, in Q1 last year. Our non-GAAP adjusted net income increased to $29.2 million, or $0.75 per diluted share, which was above our guidance range of $24 million to $27 million, or $0.63 to $0.69 per diluted share.

Let me quickly cover a few of our key statistics which are provided in Exhibit 2 of our press release. As a reminder, the statistics presented as of Q4 are presented on a consolidated worldwide basis. Our net payment processing rate for Q1 2011 was 1.68%, which was down 10 basis points versus Q1 2010 and down 5 basis points from the fourth quarter of 2010. The decrease in the rate is due mainly to the increase in fuel prices, which affect our hybrid pricing contracts with our merchants, and also a slight decrease as we average in the lower rates at our Australian business.

Corporate card purchase volume was up 68% from Q1 last year to $1.4 billion, which was ahead of our expectations. Revenue was up 80% year over year to $18.8 million. The net interchange rate for Q1 was 1.01%, down 8 basis points year over year, primarily due to the mix of contracts and higher foreign spend, which has a lower interchange rate.

Growing our other payment solution segment, which is mainly comprised of our corporate charge product, continues to be a priority for us and represented 18% of our total revenue in the quarter. Finance fee revenue in the Fleet segment, which represents customers who do not pay their bill on time, was in line with the amounts recognized last year. However, as a percentage of total dollars of fuel purchased, it was significantly lower domestically than last year and our expectation for the quarter. The average balances that are past due and incurring late fees is smaller, and the number of customers that are paying late has decreased. Both are positive signs for the health of the portfolio.

Moving down the income statement, for the first quarter, total operating expenses on a GAAP basis were $73.9 million versus $51.7 million last year. About half of the total increase was due to the acquisition of our Australian businesses last year. We continue to focus on tightly controlling our underlying cost structure, while making incremental investments in growth initiatives including research, marketing, and international business development.

Salary and other personnel costs for Q1 were $25.7 million, compared with $19.6 million in Q1 last year. The majority of the increase is due to the addition of the employees in Australia. In addition, we have increased our estimates for bonus payouts for the year, based on our revisions to our earnings guidance.

Service fees are up $5.4 million over last year. Of that total, $4 million relates to the processing of our corporate charge card, due to the increase in purchase volume and cross border transactions. The remainder of the increase is from our Australian businesses.

Domestic fleet credit loss was 14 basis points for the first quarter, compared to 21 basis points in the prior-year period and better than our guidance assumptions of 20 to 25 basis points. In total, credit loss for the first quarter was $5.7 million, compared with $5.9 million in Q1 last year. Total charge-offs in the quarter were $5.5 million and recoveries were $1 million.

The improvement in credit loss is due to an improvement in the aging of receivables. This is related to the lower than expected finance fee income that I just mentioned. The favorability that we saw in credit loss this quarter, compared to our expectations, was offset by the decline in finance fee income.

Our effective tax rate for Q1 on a GAAP basis was 36.4%, compared with 37.5% in the first quarter of last year. Our adjusted net income tax rate this quarter was 35.8%, compared with 37.5% for Q1 a year ago. The decrease in the rate is due to the mix of international earnings. We now expect our A&I tax rate will be between 36% and 37% for 2011, which is 1% lower than our prior guidance.

Turning to our derivatives program, during the first quarter of 2011, we recognized a realized cash loss of $4 million before taxes on these instruments and an unrealized cost of $21 million. We concluded the quarter with a net derivative liability of $32 million. As a reminder, including our most recent purchase that we announced last week, we have hedged approximately 80% of our domestic exposure through the second quarter of 2012, approximately 53% of our exposure for the third quarter of 2012, and approximately 27% of our exposure for the fourth quarter of 2012.

For the portion of 2012 that we have completed, the average price locked in is $3.36 and increases each quarter as we move through the year. For the second quarter of 2011, we have locked in at a price range of $2.87 to $2.93 per gallon. For the full year, the average price we've locked in at the top end of our collar is $2.95 and increases each quarter as we move through the year. By hedging in an environment of increasing fuel prices, the Company's average hedged price of fuel continues to rise while protecting the Company against the volatility in both short-term fuel prices and cash flow.

We do not plan to hedge our fuel price exposures specific to Australia as the exposure is more limited and has not historically fluctuated to the degree it has in the United States. We will continue to target hedging 80% of our fuel price exposure in the US on a rolling basis, which will effectively cover 65% to 70% of our overall exposure. In addition, we have not hedged our currency exposure specific to Australia, which was a small benefit during the quarter.

Turning to the balance sheet, we ended Q1 2011 with a balance of $338 million on our revolving line of credit and $75 million on our term loan. Our line of credit carries an interest rate of LIBOR plus 70 basis points, while our term loan carries an interest rate of LIBOR plus 250 basis points. As we mentioned last quarter, and Mike commented on in his remarks, we are now in the process of refinancing our current credit facility. Although the agreement is not final, we expect to increase the size of the facility, and we expect our financing interest cost to increase in line with current market rates.

The expected increase in interest costs is included in our updated guidance assumptions. However, we have not included any charges associated with writing off deferred financing fees from the current facility, which we estimate to be in the range of $0.02 of EPS.

As of March 31, our leverage ratio was 1.9 times EBITDA, compared with 0.65 at the end of Q1 last year. As we have previously mentioned, our near-term priority will be to pay down debt to get closer to the bottom end of our long term range of 1.5 to 2 times EBITDA while we continue to explore acquisitions. In the first quarter, capital expenditures were $6.4 million. For 2011, we continue to expect CapEx to be in the range of $28 million to $35 million.

Now, to our updated guidance for 2011, which reflects our views as of today and are made on non-GAAP basis -- for the second quarter of 2011 we expect to report revenues in the range of $131 million to $136 million, and adjusted net income in the range of $33 million to $35 million, or $0.83 to $0.89 per diluted share. For the full-year 2011, we expect revenues in the range of $533 million to $553 million, and adjusted net income for the full year of 2011 in the range of $132 million to $140 million, or $3.40 to $3.60 per diluted share. Although there are moving parts any time we update guidance, the significant changes for the full-year earnings are due to 3 factors -- lower tax rates, higher fuel prices, and a stronger Australian dollar.

Q2 and full-year guidance assumes normal seasonality trends in the corporate charge card and prepaid businesses, as well as credit losses. Our guidance assumes domestic fleet credit loss for the second quarter will be between 9 and 14 basis points, and the full year is expected to be in the range of 13 to 18 basis points.

The fuel price assumptions for the US are based on the applicable NYMEX futures price. For the second quarter, we expect fuel prices to be $3.86 per gallon. For the full year, we expect fuel prices to be $3.67 per gallon. We are also assuming that the Australian dollar will remain at the current premium to the US dollar for the remainder of the year.

Now, we'll be happy to take your questions. Jennifer, you can proceed with the Q&A session.

(Operator Instructions) Greg Smith, Duncan-Williams.

Mike, you talked a little bit on the onset about the higher fuel prices not impacting transactions. And I was just wondering, is there a magic price that you look to at which point we should become concerned about demand destruction?

Well, I think it's more what does it do to the overall economy and GDP projections? So even with the high prices, people are still projecting GDP to grow over last year throughout this year. I think that's the biggest impact to us is what's going on with the economy. I don't think it's related necessarily to just the high price of gas that's going to change our fleet patterns, it's really going to be the overall business climate and the economy that's going to change fleet patterns.

Okay. Along the same lines, are there any initiatives out there among fleets to sort of combat the high fuel prices with more efficient vehicles, hybrids or anything that could have sort of a long-term negative impact on your business?

We definitely -- first of all, we know there are cafe standards that Obama's administration has put in place that also has higher MPGs. We know that fleets will look, as they roll over vehicles for more efficient vehicles. All that's built in to what we look at on a regular basis. We're even making sure our card's accepted at C&G facilities and we're now even talking to people that'll provide charging capabilities on electric cars. All that can have an impact, but we'll still be tracking information, providing a payment solution and all of that's being looked at, naturally, on a long-term basis with our strategic planning process.

Good. And then, it sounds like you're a little freed up to focus even more on the international side and possibly acquisition. Where are the kind of key areas where we're most likely to maybe see some expansion through acquisition? Is it internationally in the core fleet business or are you looking outside the box in prepaid and other areas as well?

It could be a combination of any of those. Quite frankly, we are looking to expand our single-use product internationally.

Gareth Gumbley comes with a payment processing background as being very aggressive on saying, hey, we've got a great product, we have lighthouse accounts that we can point to, those lighthouse accounts are already using the product significantly in the international markets, why can't we be talking to international players? So, can we do something there to help that business? We'll look at that.

Can we replicate what we've done in Australia with kind of getting a beachhead with buying a business that gives us operating centers and the ability to do full service for oil companies? We'll look at that in different markets. But I don't want to lose sight of even North America. We made a small acquisition in North America. But it starts to open us up with payroll cards into our SIC codes that we think, based on the research we've done, will be candidates for payroll cards. We'll look at North America on corporate solutions -- I should say corporate card solutions as well as fleet card solutions.

Okay. Great. Thank you.

You bet.

Bob Napoli, Piper Jaffray.

I want to follow up on the MasterCard business -- the corporate card business. Also, your stock is trading at a couple multiple discounts, your competitor came public and you're growing faster and I just wondered if you had thoughts on why the valuation disconnect to -- between the two?

And on your corporate card, the growth rate, 68% volume growth, 80% revenue growth, what's driving the higher revenue growth versus volume growth and how far penetrated are you on your key accounts at this point? (multiple speakers)

I'm not going to comment on the difference between us and our competitor that's gone public. That's something that I don't think I can really feel comfortable commenting on. If you look at the growth, though, there's no doubt that we're still seeing strong roll out of one of our major players that we've brought on in the last year and a half or so.

But we're also seeing great strength of growth from international transactions with some of the other players that are more mature and just growth overall still on the online travel side of things, as well as I've talked about some of these new verticals. I think the difference in the span versus the revenue is that it just depends on what products are being sold and its just the mix.

Okay. But how far penetrated like on some of these where you're growing internationally. Are you getting 10% of their business where you think you can get 50% of their international business that you're working on? Maybe try to give some feel, because the growth is so dramatic. And are you getting a higher price on international, is that why the revenue growth is faster than the volume growth?

No. If anything, the interchange is lower on international. So it will be different for the international side of the business. All I can say is that these companies have been very aggressive, either through acquisitions or expanding internationally. And all we're going to do is make sure we continue to provide a quality service and grow with them on these international markets. But it's -- they're doing things that we don't have control over that are positive for us.

Bob, it's Steve. The biggest difference between the 68% and 80% is the cross border fees on these foreign transactions that we're charging.

Great. Thank you. Congratulations. Nice job.

Thank you.

Sanjay Sakhrani, KBW.

Thank you. I was wondering if you could talk about any impact, if any, from the earthquake in New Zealand, as well as the bad weather in the US? Was there any specific impact this quarter from those events?

I wouldn't -- in New Zealand specifically, our operations are in Auckland, so it had no impact to us in that particular area where we do development on our international platform. Clearly, the weather had an impact for us in the US. We were trending in the 3% to 4% same-store sales growth in the third and fourth quarter. As I said in January and February, we saw some areas go negative. Even the Northeast wasn't strong, Southeast wasn't strong, Midwest wasn't strong in the first quarter because, I think, of the weather.

March bounced back. So as March's weather got better, we saw March bounce back pretty much to the same-store sales growth we saw in the third and fourth quarter. So that was a positive sign. All we can report on for April is total transactions because we don't have same-store sales, but we're seeing that trending very nicely as well. So, we at least think it was weather-related in January and February as much as anything. And that was why you saw GDP also be ratcheted down, because I think it also affected the economy in the first quarter.

Okay. That's good color. Second question, just on the high fuel prices, would you guys consider even hedging a higher amount or extending the duration of those hedges even further given where prices are today?

Well, I think at this point we've been consistent with what our strategy has been. I think, if things change dramatically, we may look at that, but at this point, our strategy is to continue doing what we've been doing on a quarterly basis. But we'll always reevaluate based on what's going on in the world and with the prices.

Okay. And just finally, just in terms of capital management, you mentioned share buyback in the press release and you spoke to acquisitions previously, but I was wondering just how we should think about it for the near to intermediate term? And could you maybe just provide some perspectives on the prepaid acquisition you made? Any initial observations? Thank you.

Yes, I think there's no doubt that at this point, we'll continue to pay down some of our debt because we want to make sure, even though we've talked about a new credit facility, to have the ability if the right strategic opportunities come along international or domestically, we have the opportunity to, hopefully, look at those acquisitions to diversify and grow our business.

Besides paying down debt, I think we are going to be looking at acquisitions, as I said even on one of the other questions, domestically and internationally with the right criteria -- what's strategic; what's the return on the investment; how much can we absorb in terms of multiples of EBITDA? We have a lot of criteria that we'll consider. Stock buyback, I think right now the stock's trading at higher multiple, clearly, compared to maybe one of our competitors. We'd like to see it trade a little bit higher. But it's still trading pretty high. I think paying down debt and probably looking at acquisitions would probably be the first two areas we'll look to.

On prepaid, it's a small business, but what we liked about these guys -- we had seen some write-ups, we had met with them. They're very customer-focused. They don't come at it from necessarily purely a payment processing perspective. They come at it from, this is payroll and you have to have great customer service, great training programs, you've got to get people on these programs and satisfied and all the research we did on their customers -- they have over 300 customers today, was very positive. For us to have the brand we have where our customers trust us, rely on us to provide high levels of service, we wanted to make sure we had that sort of product available.

Now having said that, the opportunity, as I've of commented on, is our 285,000 businesses. A number of these SIC codes probably have [under bank], probably have contractors, probably have seasonal workers, all the things that can play into a payroll product. So, we're really saying, how do we leverage an asset we have which are these 285,000 customers that we think would be prime over time for using the payroll card. We feel very good about the business, even though it's small. We've been training our sales force, so both on the MasterCard side and the Fleet side so they can start talking to their customers. There's already been some great synergies between their program and some of our customers and we see that developing, hopefully, even more aggressively in the future.

Okay. Thank you.

Tien-Tsin Huang, JPMorgan.

Thanks. Congrats to everyone on the new roles. I wanted to ask Mike about the private label commentary you gave. I think you mentioned that you've seen a lot of activity there and some verbal commitment is what I wrote down. Can you elaborate on that in terms of size, magnitude, timing?

Yes, these are not large.

Right.

You know about ConocoPhillips and we've guided a little bit there and Sunoco in the past. These are not that large, but it still adds cards and the ability, I think, to penetrate more aggressively in the small fleet market. So, we always talk about that as a marketplace that's under penetrated, it's mostly cash as a competitor and corporate payment cards.

Now by having more and more of these private label programs coming online, it gives us access, I think even in a larger way, to that small fleet market. Two of them are not even fuel-related, they're more mechanical and service-related, so that's a diversification that's great for us to get private label in a vehicle-related market, but private label with non-fuel but in the service side of the business as well. So that's a good diversification.

How about the pipeline for some larger engagements? Has that moved or shifted since the last time we spoke?

Yes, there's nothing imminent that there's -- nobody that's up for rebid if you will, but we'll look at that on a regular basis. But there's nothing that's in the pipeline that's imminent right now that's up for bid.

All right. Great. Just a couple of numbers questions, if you don't mind. The EPS raise, Steve, you called out the components of it, but I was wondering if you could break it down further in terms of the contribution from each source, whether FX, fuel, and in credit losses. Can you give us an idea of how much of the raise came from each of those?

At the top end of the guidance range, we went up $0.23 over the prior guidance. The tax rate and the PPG are about equal and clearly quite a bit bigger than the Aussie exchange rate. So that's $0.03, $0.04 and then the rest of it's coming from the tax rate and the PPG.

Understood. Okay. And then-- I guess I haven't ask this one in awhile -- the rule of thumb on the discount rate impact from changes in gas prices, we're at a new level of price. You've got Australia now for a little bit, can you update us on that, Steve?

Yes. A $0.10 change in fuel prices for a full year would increase your revenues about $8 million for the year and that does include the Australian business. Primarily in North America, it would knock your discount rate down about 1 basis point.

Just one basis point. Okay. Good to know. Last one I promise, just the MasterCard acceleration, I know that was asked a couple of times. Did you board some new customers there? Because it looked like it did pick up quite a bit from a percentage and a nominal basis as well so, curious if that's sustainable.

It's not new. It's a customer that just has been more aggressively rolling out more of their business that's been converting from another competitor.

I see.

So it was much that as well as I said some of the international business and then seeing some strength in some of these verticals we've been getting into. The online travel has been the biggest area in that one major account has been rolling out more aggressively.

Even with the general purpose corporate card, the more purchasing card, that's had 18% growth on the quarter which is certainly not bad. But it's definitely the online travel guys.

All right. No, it's been great growth. Well done. Thank you.

Thank you.

David Parker, Lazard Capital Markets.

Congratulations to Melissa and Steve on their new roles.

Thank you.

Mike, you mentioned that BP Australia was online, that you finished that. Is there anything else that you guys are working on in the pipeline in terms of just -- that you've already signed that you're now rolling onto the platform or was that the last big one?

We're working on some, but I think they're going to be longer term in nature in terms of when they would come on. But we are continuing to have discussions in different parts of the globe, both Asia-Pacific and in Europe. But I don't think you're going to hear anything that's going to be imminent, these are longer term relationships that we're trying to build.

Okay. You announced some new features with, I believe it was WEXSMART, are you actually charging your customers for this or does this make the overall product a little bit more stickier?

No. We are charging for these new features. It gives them greater control over the security and control of who's purchasing and where they're purchasing.

How has the progress been so far in terms of just getting the customers to pay for the new features and the response?

Still early to say. Keep in mind the GPS is still a very small piece of our business. So this is a new feature to those current customers, but hopefully allows us to be more aggressive with larger customers. Quite frankly, in the first quarter, we had our largest customer to date come online, which was somewhere greater than 700 vehicles. That was nice to see that happen because most of the business in the past were smaller fleets with less than 25 or less than 50 vehicles. That was a positive trend for us.

Okay. And then, you also mentioned that you're expanding the sales force to address some of these new verticals. I assume that's going to take a near-term -- just there's going to be a cost associated with it before you see the revenue. I assume that's in the guidance, but can you also remind us just how many individuals you're looking to hire at this point?

Yes, it's 12 for the year. Now, not all those are sales, some of those are the support people internally to help roll out. We want people out there signing new accounts and then we turn them over to business account managers who would then roll the accounts out. It is a combination of both in that 12 number. And yes, it is in our guidance. It was built into our budget and our plans for the year.

Okay. And then, just final question, you've addressed this to some extent, but just looking at your acquisition on the payroll debit card, how many of your customers are currently using a card? When you were doing your analysis, did you get to those numbers, what the opportunity is within your existing customer base? And is there any overlap between your current customers and the 300 customers that rapid! had?

First, there is some overlap, but it's only 300 out of 285,000. But it showed us that our SIC codes, at least the ones they had penetrated, were also in line with our SIC codes. So, I think that was very positive. And we didn't do a lot of research on it because a lot of this might be smaller businesses. What we do know is that our SIC codes working with different consultants are prime for, at least, looking at payroll cards if it is underbanked, if it is contractors, if it is seasoned workers.

Maybe not all of their employment ranks would use a payroll card, but there might be a percentage of different companies because of those different factions of their employee base that would be prime for a payroll card. We're not making any major projections. I think even before we announced this, we said that we were going to be slightly dilutive this year and that's still the case. But we're going to keep building this and doing the research to see if it can penetrate more aggressively our current customer base.

Okay. Great. Thank you and congratulations again.

Thank you.

Robert Dodd, Morgan Keegan.

Just looking on Europe, the platform has been up and running there for a while (inaudible). Can you give us any color on sales pipeline interest levels or anything like that?

Yes. It is up and running in Europe and the European platform is processing for BP New Zealand and Australia, so those transactions are running through that platform, since we wanted to have a centralized international processing capability and we've decided to do that in Europe.

We are continuing to talk to, first of all, BP, to look for other opportunities with them and then we are talking to other oil companies, as I said, both in the Asia pacific market and in the European market about doing processing. None of that is imminent. But we continue to work that and we hope to even provide more than processing if we can get to some of the operational services over time, as well.

Okay. Thanks. And secondly, on domestic pricing, last time oil or fuel prices were high, it triggered a wave of shifts over to the hybrid pricing model. Are you seeing any additional push in contract renewals or maybe the customers that aren't actually up for renewal to increase the mix in hybrid or change the pricing structure to make it less valuable?

Robert, we're still -- around 60% of our total transactions are with merchants that have these hybrid arrangements. Quite frankly, it's the larger merchants that have these arrangements and we went through that renegotiation process a few years ago, so I wouldn't expect that to happen again. This time, the prices are no different than they were -- at this point at least, still less than they were at the time, back in '08. We're not expecting anything significant to happen again this year.

Okay. Thank you.

Tom McCrohan, Janney Capital Markets.

Steve, just had a question for you in regards to the direction of funding. Looks like average cost of funds went down a little bit again this quarter, so just trying to figure out directionally how that's going to trend for the rest of the year.

It was about 0.9% on our operating interest on average for the quarter. We're planning on it going up. We're planning on interest rates going up, not dramatically, but still going up through the rest of the year. Sequentially, it was pretty much in line with Q4 and Q3 last year.

And noticed that borrowed fed funds were pretty much zero this quarter, right? Just trying to understand how you -- if you can remind us again -- when you use the fed fund line versus deposits?

The primary way we do it is to say that certificates of deposit that we get through brokers are the absolute primary source of funds. And then we can have fluctuations based on timing of when we receive payments of upwards of $50 million to $100 million in a day. We use those fed funds lines, which are basically arrangements with other banks, on a uncommitted overnight basis. But we use those to fill in day to day. I wouldn't read anything into it that it was zero at the end of the quarter. It's simply a matter of the timing and what day of the week the quarter ends on and what happened to come in, in cash during that day.

Steve, what's the average of the $660 million of borrowed deposits right now, what's the duration of those? Do you have that money locked in for over 12 months?

Not over 12 months. The weighted average remaining duration is about just a little bit under 9 months.

Okay. And do you have any hedges on the interest rate side in case rates go up?

Not on the operating debt side. We do on our line of credit. We have two interest rates swaps in place, one will expire in July, which is at 1.3% on $50 million and we have one that will expire next March for $150 million with LIBOR at, I believe, 56 basis points.

Credit recoveries, were there any recoveries this quarter?

Yes. It was $5.5 million of adjust and $1 million of recoveries.

Okay. And gas price assumptions, I apologize, I missed that, if you can give those again for the balance of the year?

For the full year, we're saying that fuel price will be $3.67 and it's $3.86 for the quarter, second quarter.

Perfect. And my last question, and I apologize if you mentioned this in the beginning of the call. Michael, you had talked about, last quarter, about SIC codes and recovery and everything but I think you said public administration -- any kind of change sequentially in what you're seeing?

Public administration was fueled -- actually I take that back, it wasn't bad in the first quarter. The (technical difficulty) was down in the first quarter that had been up in the third and fourth quarter of manufacturing. I'm sorry. In public administration was down, so it was pretty much flat in the fourth quarter and it was slightly down in the first quarter. So those were the only two SIC codes that we saw that kind of were not showing strength. And manufacturing was every month, so it was probably worse in January than the other months, but it was every month it was down.

That's all I have. Thanks.

Okay. Thanks, Tom.

Bob Napoli, Piper Jaffrey.

Thanks, just first, Steve, congratulations on your promotion, Melissa as well, she's probably listening somewhere. The Dodd-Frank bill, was there anything in there that would affect your hedging program?

We're looking at that right now. It's still kind of being hashed out and there's some question as to whether we'll have to post collateral, is really the key thing. It won't prevent us from doing it. But it might make it a little bit more expensive.

Okay. Do you have feel for how much more expensive?

Right now we have unsecured credit with our counterparties, so that would no longer be available to us. I believe it's somewhere in the $15 million to $20 million range in total. So, if that goes away, then we'd probably post a letter of credit or have to cash (multiple speakers) it.

Okay. That's helpful. Can you give an example of the some of the programs or a program that's right down the middle of the fairway for insurance and medical verticals for the MasterCard business?

Yes. It's a little different for those two. On the insurance side, it's very similar to the online travel where the warranty and the insurance companies now can negotiate with a car shop to do work on someone's car that has an extended warranty. They're integrated with our system. They basically can send off, once they've negotiated basically the value amount and then send somebody in and we put security around that transaction. So there's only that dollar amount for that person at that location on that day, similar to a hotel program.

When we start talking about the medical and the education, we talked about our AP Direct, where in this case, you can integrate with our system, you have the ability to line up all of your payments, date-specific and basically on those dates, they then can send off to their vendors the dollar amount and the vendors will be paid. So it's a little bit different than the [SUGA] but similar. So you have your charter of accounts to pay and you can really determine when and how much. That's what we're -- it's a little bit of different product that we're going into the medical and the education vertical.

Have you signed up any major companies in either vertical at this point?

We have on the insurance side. There's a number of major companies that are using us on the warranty and the insurance side.

Okay. And then just the final question on the BP Australia, how many transactions is that and what -- can you remind me the amount of revenue per transaction?

(technical difficulty) Bob, we are literally taking -- when the card is swiped, we're authorizing the transaction, collecting the data and sending it back to BP for them to do the rest of the processing. It's a very small amount per transaction.

But its like 35 million transactions or something like that?

There are a lot of transactions. I don't think we'd ever want to call out exactly how many we have for a specific customer, but its a big portfolio, yes.

And are you doing any prepaid business on your own outside of the rapid! acquisition at this point?

Other than what we do in Australia with our prepaid business, there's nothing else in North America that I would classify as really prepaid business.

Has anything surprised you in Australia and how do you feel about the growth outlook for that platform?

Are you talking just the overall fuel platform specifically?

Both.

Well, the fuel side we see opportunities, I mentioned on the call both with expanding with oil companies and leasing partners, I think our brand resonates well. People know who we are and I think there are opportunities that, hopefully, we'll start to see something we can announce later in the year on some growth capabilities on the fuel side.

On the prepaid side, we're looking to expand. That marketplace has been primarily a gift card. We'd like to see opportunities open up for us on the open loop side and we're pursuing that. I think there's opportunities on both products or both companies.

Thank you.

John Williams, Goldman Sachs.

Good morning, guys. Thanks for taking my questions. Quick question, so you talked a little bit on the initial comments that you'd made about the fact that gas prices really are a function of the underlying economy. I was curious if you had some color in the last go around that we had with pretty high fuel prices, whether or not you saw a tipping point between where it was a good thing and where it created some demand destruction. Do you have any color on that?

I would say last time it was hard because the overall economy had different factors affecting it, as you know. Clearly, when it got between $3.50 and $4, there were impacts, but I don't know how much of that was because of the price of gas. There's no doubt that everything I've read said that people are more prepared, driving more efficient vehicles and that the higher price right now, at least because people are still forecasting GDP to grow during the year, is not showing the same sort of headwinds that it did last time.

But again, there were different factors last time versus this time. And that's what we're looking at. We're looking at what's happening with GDP projections because that's what's really going to affect our business in terms of are people going to buy less or more on our fuel cards. It's all about them having to fulfill commitments on their business services.

Mike, you give me a good segway to the next question which was, I know we talk a lot about SIC codes within the business, but I would imagine that given the close loop data that you guys capture, you have a sense on what's going regionally, particularly within the US and specifically within what I might call the key shipping-related corridors. Can you give some color maybe on things like the West Coast, Port of Long Beach, places like that, are you seeing and pull back or are you still seeing reasonably robust mileage coming out of the vehicles that are under your control?

Do you have the SIC specific?

Yes, we don't have down to the city level right in front of us here, John.

We can get that, but we don't have that in front of us.

If you want to look at California, it was actually up pretty much in line with what it was in Q4. They didn't have the weather impacts that we were talking about in the Midwest. I think the other thing that -- the specific example you gave, I'm not sure that transportation is a big enough piece of our over all customer base, so that it would pop like you're looking for.

So, you don't really see something radiating out of a particular corridor in terms of demand that it's not all necessarily all that useful?

Transportation's a pretty good indicator for us on maybe being ahead of the economy a little bit and it also had a strong first quarter. So, it's been very consistent over Q3, Q4 and Q1 in terms of overall transportation growth. Even though it's a small part of our business, we do look at that as maybe one key indicator.

Got it. Okay. I appreciate the color, guys, and Steve, congrats on the new role. Speak to you guys soon.

Thank you.

There are no further questions. This does conclude today's conference call. You may now disconnect.