WEX Inc (WEX) 2011 Q3 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Wright Express Corporation earnings 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 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 third quarter, adjusted net income excludes noncash, mark-to-market adjustments on our fuel-price related derivative instruments, a small impact related to our tax receivable agreement, 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 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.

Good morning, everyone, and thanks for joining us. We are very pleased with our results for the third quarter with revenue and adjusted net income exceeding our expectations.

Our revenue increased 52% to $152 million and adjusted net income grew 38% to $39 million or $0.99 per share. We executed well again this quarter with exceptional growth coming from our corporate charge card product in our other payment solutions segment, and a solid increase in fleet transactions. But more importantly, our strategy to capitalize on the strategic opportunities in front of us including expanding our core fleet business, diversifying our business, and building out our international presence continues to gain momentum. We believe we are in an excellent position to continue to drive performance across our businesses in spite of a challenging macroeconomic environment.

Let me now turn to a few key metrics. Consolidated payment processing transactions increased 14% over the prior year with North America increasing 7%. Existing customer gallons domestically or same-store sales was more or less flat with Q2, down roughly 0.8%. We continue to believe our same-store sales trends, which have been relatively consistent, reflect the broader macro economic landscape. That said, we continue to focus on driving new customer wins and acquisitions which has helped contribute to our overall growth.

Breaking down same-store sales by SIC code, our two largest concentrations are business services which was positive for the quarter, and construction which was slightly negative for the quarter. Regionally, the Southwest posted strong positive same-store sales growth, while the Southeast was the weakest region.

In terms of vehicle growth, the total number of vehicles serviced averaged 6.5 million, a 29% increase from the same period last year driven by the launch of BP Australia last quarter, the acquisition of Red Express Australia and Fleetwinds in North America. Our core fleet business in North America has performed steadily, and we continue to have low voluntary attrition rates at 1.4% for the quarter. This is one of the lowest attrition rates we've seen since 2008.

In North America, our private-label channel continues to be a source of opportunity for us and positions us well for future growth. Last quarter, we discussed that we had signed Huawei as a customer, and I'm happy to report that they have gone live during the third quarter. And we have begun implementation on the Pep Boys program announced in August. We expect Go Gas, which was signed earlier this year, to begin implementation in the fourth quarter, and we just signed a seven year extension with Conoco. And we expect to announce the signing of another regional oil company who has a portfolio to convert, is scheduled to go live next year. These private label programs all provide access to small businesses and add critical mass to our strategy down market.

Looking ahead, we expect to see nice transaction growth in our core fleet business as we increase our penetration down market and take market share from our competitors up market. We also continue to look for ways to capitalize on market opportunities and expand our product offering as we build the business for future growth. As an example, in August, we launched our OTR Pro Fuel Card program through a strategic alliance with Sky Capital, LLC. This program is designed to meet the needs of long-haul fleets and truck stop owners, an area where we are currently underpenetrated. Although we are still in the early stages, we are optimistic about the long-term potential of the OTR product.

On the international side of the fleet business, Wright Express Australia continues to hit our expectations, and we expect to drive incremental revenue from the pipeline of customization work for BP Australia on our processing system. While the economy in Australia has been a bit softer than we anticipated, this has not hindered our ability to expand the Wright Express customer base, and we continue to look for additional opportunities for growth in this market.

Elsewhere, we continue to foster relationships with major and regional oil companies in Asia and Europe, and have been working on building our sales pipeline with these companies. In addition, we continue to pursue strategic alliances and/or acquisition opportunities in order to build our on-the-ground presence overseas.

Moving on to other payment solutions, growth in this segment continues to exceed our expectations primarily due to our corporate charge card product in the online travel vertical. Spend volume in the third quarter increased 83% over the prior year to $2.4 billion driven by our single-use electronic product in the online travel vertical. The single-use electronic product has seen tremendous growth since its introduction with spend volume increasing from $2.4 billion for all of 2008 to $2.4 billion in this quarter alone. We expect growth in this segment to be very strong again for the fourth quarter.

Diversifying our customer base and the verticals that we operate in remains a priority for us in this segment. On our last call, we mentioned our plans to increase the size of the sales team dedicated to our electronic corporate payments area in order to accelerate this strategy. During the third quarter, we added six sales reps, increasing our team by 50%. In addition, we continue to make inroads in our targeted verticals, which will serve as new avenues for future growth.

Most recently, we have signed the University of Montana in the education vertical. And we have made solid progress in the insurance and warranty verticals. In the future, we continue to expect great growth in our corporate charge card product driven by continued execution in our existing verticals, new wins, and international expansion.

As our corporate charge product has experienced aggressive growth and has a significantly larger base of volume spend, our growth rate for this product is expected to moderate to the 20% to 30% range in North America. However, we will continue to focus on generating new client wins and expanding this area internationally, which could provide additional layers of growth.

The international team is delivering new opportunities for our existing product suite, as well as working on expanding our corporate payments products. We are laying the foundation for future growth by adapting our payment processing capabilities to foreign markets, including Europe and Asia. We expect to have our first foreign customer using the single-use electronic product in the first half of next year.

In the prepay payroll card product, we are making good traction, and rapid! PayCard continues to meet our expectations in terms of adding new customers. We have become more aggressive in this market; and in order to capitalize on the opportunities in front of us, we have substantially increased the number of sales reps from 4 to 8 year to date.

The progress we have been making with rapid! has been encouraging, and we are seeing success in cross-selling efforts into our existing fleet customer base. In the first six months we have owned rapid!, we have increased the overall number of cards issued by more than 50%. In 2009, prepaid payroll cards loads totaled almost $20 billion and are estimated to be growing at 15% to 20%. We believe prepaid payroll along with other prepaid corporate programs have the ability to become an important contributor long term as we continue to gain market share and expand our product offerings.

As we wrap up 2011 and look out to 2012, we continue to believe that we are in an excellent position to drive solid performance across our businesses.

Before I turn the call over to Steve, I would like to provide some color on our thoughts regarding the macro environment. Despite lingering concerns about the economy, our same-store sales numbers indicate to us that the economy continues to be relatively stable. In addition, we believe we have the capacity to still generate strong growth in spite of a potential slowdown in the economy due to new client wins, multifaceted expansion of the business, increased hedge prices, and good control over our credit loss expense.

Further, recent conversations with our customers in the construction, trucking, and travel industries indicate they expect stable, if not stronger, demand for their products and services in 2012 which gives us additional confidence that we are well positioned to execute through this choppy macro economic environment. While data points and economic indicators can fluctuate, we have proven our ability to grow earnings, generate significant cash flows, and maintain strong liquidity in a challenging environment.

Importantly, while we have built the foundation for future growth, we believe we are also better prepared to navigate through varying economic conditions given the diversity of our business. Our continued focus and execution on multi pronged growth strategy has resulted in greater diversification of our business from where we stood just a few years ago, and today roughly 33% of our business is generated outside of the North America fleet card business. These elements in conjunction with the fundamental performance across our business support our optimism as we continue to execute on our strategy.

Additionally, our new credit facility, which we discussed last quarter, will facilitate our ability to capitalize on the opportunities on the horizon enabling us to expand our core fleet business, diversify our business, and build out our international presence.

With that, I'll turn the call over to Steve to discuss our financials in greater detail and provide our outlook for 2011. Steve?

Thank you, Mike. For the third quarter of 2011, we reported total revenue of $151.9 million, an increase of $51.6 million from the prior year period and above our guidance of $145 million to $150 million.

Top-line results were driven primarily by performance in our other payment solutions segment which helped offset a small decline in fuel prices relative to our guidance and speaks to the diversity of our business model.

Net income to common shareholders on a GAAP basis for the third quarter was $48.1 million or $1.23 per diluted share. Our non-GAAP adjusted net income increased to $38.7 million or $0.99 per diluted share, which was above our guidance range of $0.89 to $0.95 per diluted share. This compares to $0.72 per diluted share reported in Q3 last year.

We benefited in the third quarter from a couple of items that we did not anticipate would happen until later in the year. Taking a look at some key performance metrics this quarter, total fleet transactions increased 19% over the prior year. Payment processing transactions were up 14% in total and 7% in North America. Transaction growth was in line with our expectation for the quarter. Our net payment processing rate for Q3, 2011, was 1.64% which was down 14 basis points versus Q3 2010, and flat with the second quarter of 2011. This rate will vary with fuel prices due to the impacts of our hybrid pricing contracts. The primary reason for the decline in our rate from last year is due to changes in fuel prices.

Finance fee revenue in the fleet segment was up $3.3 million compared to Q3 last year. However, as a percentage of total dollars of fuel purchased, it was significantly lower domestically than last year. The average balances that are past due and incurring late fees continue to be smaller when adjusted for changes in fuel prices and the number of customers that are paying late has continued to decrease compared to the same period last year. This is a good sign for the long-term health of the portfolio. However, it impacts our short-term profitability.

Revenue in the other payment segment increased 108% year over year to $34.8 million. For the third quarter, the other payment segment represented 23% of our total revenue. Growth in this segment was again driven primarily by our corporate charge product and in particular the online travel vertical. The spend volume was up $1.1 billion over last year or 83%. In addition, our acquisitions of rapid! PayCard and Wright Express Australia Prepaid contributed to the increase in revenue.

The net interchange rate on our corporate charge product for Q3 was 99 basis points, down 4 basis points year over year. This was primarily due to the mix of contracts and higher foreign spend which has a lower interchange rate. In addition, we also had a one-time benefit in this rate for additional incentives we received from MasterCard for new business generation, which added a couple basis points to the rate. While this benefit had been assumed in our previous guidance for the full year, we had anticipated it in the fourth quarter rather than the third quarter.

Moving down the income statement, total operating expenses on a GAAP basis for the third quarter were $86.6 million versus $64 million last year. The prior year operating expenses included approximately $5.4 million for the purchase of Wright Express Australia. Roughly $13 million of the increase was driven by the operations of the Australian businesses we acquired in Q3 last year. The remainder of the increase is due to higher service fees and credit losses.

Salary and other personnel costs for Q3 were $27.4 million compared with $23.7 million in Q3 last year. The increase is due to the addition of the employees in Australia. We also have additional headcount in the US primarily in the sales and marketing group.

Service fees increased $4.8 million from the prior year to $20.8 million. Recall that the prior year included approximately $5.2 million related to our Australian acquisition. The majority of the expense increase was driven by the significant increase in volume of our corporate charge product as well as the increase in cross-border fees. In addition, we also had increases for the acquired businesses and the cost related to our telematics product as it continues to gain penetration in the market.

Domestic fleet credit loss was 17 basis points for the third quarter compared to 12 basis points in the prior year period, and our guidance range of 18 to 23 basis points. In total, credit loss for the third quarter was $8.7 million compared with $3.9 million in Q3 last year. Total domestic charge offs in the quarter were $5.2 million and recoveries were $1.3 million.

Last quarter, we indicated that the aging of our receivables was coming off the very low delinquency levels and trending back towards historical levels. This played out as we expected during the quarter. We continue to maintain good control over our credit loss expense given the practices we have put into place over the last several years.

Effective tax rate for Q3 on a GAAP basis was 35.3% compared with 45.5% in the third quarter of last year. Our adjusted net income tax rate this quarter was 35.8% compared with 40.1% for Q3 a year ago. The decrease in the ANI tax rate compared to the prior year is due to nondeductible items associated with the purchase of Wright Express Australia last year. We expect our ANI tax rate will be just under 36% for the year and the fourth quarter.

Spending a moment on our derivatives program, during the third quarter of 2011 we recognized a realized cash loss of $6.8 million before taxes on these instruments and an unrealized gain of $20.7 million. We concluded the quarter with a net derivative asset of $2.9 million.

In August, we announced that we had extended our fuel price management program to include a portion of 2013. We have now hedged approximately 80% of our domestic exposure to the third quarter of 2012 and portions of the fourth quarter of 2012 and first quarter of 2013.

For the fourth quarter of this year, we have locked in at a price range of $2.97 to $3.03 per gallon. For the portion of 2012 that we have completed, the average price locked in is $3.30 per gallon and increases each quarter as we move through the year. While fuel prices have moderated recently, we had been hedging in an environment of increasing fuel prices. As such, 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. All else equal, the higher prices that we have already locked in for 2012 roughly equate to an incremental $0.25 in EPS compared to this year. We 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.

On the currency side, we have not hedged our exposure to the Australian dollar which had a small negative impact during the quarter, a reversal from the prior two quarters where we had a small benefit.

Turning now to the balance sheet, we ended the quarter with a total balance of $360.2 million on our revolving line of credit and term loan as we paid down $26 million in debt during the quarter.

As of September 30th, our leverage ratio was 1.5 times EBITDA compared to 2 times at the end of Q3 last year on a pro forma basis. Our near-term priority continues to be paying down debt, but we continue to look at acquisitions as a way to further achieve our growth objectives.

With respect to capital expenditures during the third quarter, CapEx was $7.4 million. For the full year, we expect CapEx to be approximately $29 million.

Now on to our guidance for the remainder of the year which reflects our views as of today and made on a non GAAP basis. The fuel price assumptions for the US are based on the applicable NYMEX futures price. For the fourth quarter, we expect domestic fuel prices to be $3.41 per gallon. This is $0.17 less than our previous estimate for the fourth quarter and would make the full-year average $3.59 per gallon. We are also assuming that the Australian dollar will remain at a premium to the US dollar for the remainder of the year, although it has weakened compared to our last guidance.

Given the decline in fuel prices and the weakening of the Australian dollar from our guidance last quarter, we now expect to report revenues in the range of $135 million to $140 million for the fourth quarter and adjusted net income in the range of $34 million to $36 million or $0.88 to $0.94 per diluted share.

For the full year 2011, we now expect revenues in the range of $548 million to $553 million and adjusted net income in the range of $138 million to $140 million or $3.53 to $3.59 per diluted share. Our guidance assumes domestic fleet credit loss will be between 22 and 27 basis points for the fourth quarter and in the range of 16 to 17 basis points for the full year.

With that, we'll be happy to take your questions. Jennifer, please proceed with the Q&A session now.

(Operator Instructions) Your first question comes from Sanjay Sakhani with KBW.

Good morning. Good quarter. I was just wondering if you could talk about the opportunities for M&A broadly and specifically in Europe within the fleet business. And then secondarily, I was just wondering on the MasterCard business, I think last quarter you guys talked about a little bit of moderation in the purchase volume growth, and we did have a pretty strong growth. Sorry if I missed it. I hopped on a little bit late. But could you just talk about what drove the strong growth this quarter and kind of how we see it playing out over the course of the next four quarters? Thank you.

Yeah. On the M&A side, I can't get specific. Clearly, we're going to be looking at ways to either enter different markets or accelerate our potential in different markets internationally if that's on the fleet side or the other payment solutions. So there are opportunities that we're looking at and pursuing. As you know, you have to look at a lot and go through the process. So it's hard to predict any of that. And we're doing the same thing domestically. We feel very bullish about what can we do to continue to invest in our fleet car program in the US, if it's adjacent markets or even if it's a possibility to help expand incurring markets looking at the payroll prepaid space as well as the other payment solutions with our MasterCard. So, all of those are being explored. All kind of fitting with our strategic vision of where do we want to drive opportunities in these new markets internationally and also make sure we're going to be strong in the US market and North American markets.

On the MasterCard side, we've continued to roll out aggressively with the new business that we've been bringing on. That pretty much has now been fulfilled. There's no additional rollout of that new business, but we're still going to see because of that business strong growth in the fourth quarter, probably not at the same range of the 83%, but still a very strong number. We'll continue to see strong numbers in the first half of next year, and then we talked on the call about moderating to the 20% to 30% range, which will probably be something we'll start to see as we get further into next year, but still a very strong growth in those markets.

The good news is, you asked where it came from. So it is bringing on this new business. It's other online travel programs growing very nicely. But if we look at some of the other verticals we're in, they also were growing at 25%, which are good growth rates. So we feel very good about the other verticals that we're entering as well.

Okay, great. Thank you.

Your next question comes from Robert Napoli with William Blair.

Thank you. In followup on the corporate card, I think, Mike, you had mentioned that North America you thought 20% to 30%, but you suggested that international -- there are international opportunities. What percentage of that business right now is of that volume is US versus international?

The only international on the other payment solutions right now is the gift card program in Australia which, as you know, is a small part of the overall Australian business. But that's the only international business. I did say, as you probably heard, Bob, that we're looking at bringing on business in the first half of next year on the other payment solutions. So we feel pretty bullish about that. These are not big pieces of business. I think it's just indicative of the ability to transfer our intellectual capital in our products into those markets. So it will be small in terms of numbers, but I still think indicative that we will start to see more penetration. We're going to start to build our sales force in those markets as well.

But you're also processing internationally for Priceline and Expedia, I guess.

That's true. I guess I wasn't thinking of it from that aspect. But it's well over $1 billion dollars. I don't know if Steve has more of an accurate number.

Yes. For those US-based customers that have been --

Right.

businesses in foreign countries, it is about $1 billion dollars annually.

(Inaudible - multiple speakers)

Okay. Is that growing faster? I would imagine that's growing faster. You would expect that to grow faster over the next few years than North American piece, or than the US-based piece?

Well, I think it's really it's hard to predict because I think some of this is both their organic growth as they enter these markets, but they also look at acquisitions which we have very little insight into.

Okay.

So we'd like to believe they'll continue acquiring since their business models work well in the international markets, but, again, we just don't have that insight.

Okay. Then just on the core business, I'm trying to understand. What of the transaction growth, what I think you said same store sales were stable. I think they were flat last quarter. So ex Australia, you had, what was it, Steve, 8% growth? So your -- that growth always essentially from adding new customers?

Yes. What we reported is in North America the payment processing transactions were up 7%. And it was 14% in total worldwide with all that extra coming from Australia, the acquisition there.

But I think it is new business. I think we're trying to emphasize that with kind of same-store sales just being flat which is indicative, I think, of the economy to some extent, we're continuing to add new business. We try to highlight some of that with some of the wins that we've had with Huawei now going live. You know, Pep Boys gets us into maintenance products, which are higher-spend items, but they have the ability to allow their customers to also buy fuel so it gives us a great diversification into those markets. Go Gas, we have another private label portfolio that will be converting over to us next year. You know, we talked about extending the contract with [Sunoco]. So, all of that is down market. So we're seeing growth down market. And, as we said, we continue to take market share in the mid and large fleet marketplace as well.

And just one last question. On the terms, if you compare yourself to Fleetcor, if you look at the accounts receivable relative to revenue, I mean, you have a much higher receivable. So they have kind of a higher-return receivable, if you will. I think it's -- is it purely the mix of business and you're doing a lot more of the large, like, you're not going to dictate the terms to the US government or the state governments? And are you -- are there opportunities on your down market and mid market to have terms that would be similar to what Fleetcor offers?

Well, we don't believe so. All of our research tells us that during some difficult periods in '08 and '09 they shortened their payment terms on a regular basis. They still offer, our understanding from our research, 30 day terms or whatever. But they charge for that is what the research we've been able to gather. So we're still offering primarily 30 day terms. We do offer shorter terms. All of our research tells us that these small businesses want the cash flow capability so they can collect some of their customers before they have to pay. So we believe the 30 days is still very important to us in terms of giving us differentiation. We actually from a sales perspective use that to sell against our competition when we're selling down market.

Thank you.

Your next question comes from Robert Dodd with Morgan Keegan.

On the credit side, can you give us a little bit more color, if you can, on obviously there's kind of the underlying credit in terms of what your core portfolio is doing, and then the volatility that comes from potential bankruptcy or a particular nonpayment from a customer in a quarter. When you look at Q3 to Q4, and obviously the higher credit loss projection of Q4, I mean, how much of that is developing from expectations of bankruptcies, which you talked about a little built on the last call for Q3, versus just the aging and just kind of the core underlying credit performance?

Bankruptcies for us are maybe 25%, 30% of the total charge-off that we see in a quarter. They're quite volatile. Obviously, you can't it's just pretty hard to predict those things. But what we've seen and we can go back many, many years showing the pattern that Q4 is just seasonally weaker than either the second or third quarter. There is nothing in our guidance that is anything different than these normal seasonal changes that we see. Essentially what it comes down to is that receivables age out in the fourth quarter, especially in December. They recover somewhat in the first quarter, and then they recover back to the normal low levels in the second and third quarters. So in our guidance there's really nothing that we're expecting out of the ordinary in Q4.

Great. Thank you. On the OTR program, it's shows you [owing] you and it's a partnership. Can you give us any color on how you're, you know, obviously in collaboration with Sky Capital, how your sales approach differs in terms of trying to get obviously a long-haul fleet which is very different from a small business owner with 10 vehicles? What's the difference in approach? And so far, have you picked up any noticeable things that you have to do differently in that market, and how is that getting factored in?

Well, we know going into the market we have to do things fundamentally different for fleets. As you know, different products and services, realtime transactions that they can make changes to who can buy, where they can buy, when they can buy. But I think the differentiation is that we're signing up merchants because we're putting in kind of a new pricing model with the merchants that we think will be more consistent and will allow us to also offer more consistent pricing to the fleets across the board, not just by different chains, but consistently across the board.

I think the biggest opportunity for us is Sky Capital has a lot of customers that they provide a host of internet services to today with all the different services that trucking companies require. The only thing they did not have was the fleet card product. So they are soliciting their greater than 1 million customers that are basically vehicles to use this new product over time. So we think that gives us a great advantage in the marketplace.

And on the mixed side, if we have a fleet that has mixed vehicles, sometimes we would not service their heavy truck program because we didn't have some of the services or products that they needed to satisfy that mixed fleet. Now we do. So we're both attacking it from the mixed fleets as well as the, if you will, the long-haul trucking market.

Okay. Thank you.

(Operator Instructions) Your next question comes from Tien-Tsin Huang with JPMorgan.

Hi. Thanks. Good morning. Good quarter here. Just a couple of modeling questions. First on the Australian piece, I know that the gift card business is there seasonally. Anything we should look for there in terms of a pickup?

The gift card business is obviously seasonal. They're selling essentially retail gift cards. So the holiday season in December is primetime for them. You know, that said, it is a pretty small piece of the overall business. So I'm not sure you would really notice much of an impact. But clearly to them, that is their busy time and, frankly, when we earn most of the net income for the year in that business.

Okay. But probably not big enough for -- to call that in. I wasn't sure if maybe some of the revenue that comes in the first quarter.

No. Most of the revenue in their experience gets recognized in that final week of the year for the transactions, but also the activation of the actual card happens when people buy it.

Okay, understood. And then on the interchange rate or the yield on the MasterCard product, what's the midterm outlook for that? Like, for Steve, and I know I understand (inaudible), but some of your corporate clients there are getting quite big too. So how should we model that in the midterm?

I think with those larger customers that essentially have the larger rebates, they're in long-term contracts and what you've seen over the last, say year or so, is them affecting the overall mix. I wouldn't expect anything to change with those contracts for a year or two other than the mix on those.

Okay. So that really should just track just closer to volume growth give or take a few bps here and there?

Yeah. And like I said, we did have that one-time benefit in Q3 this year which helped the rate.

Yes. That was very clear. Last one, just thanks for giving us the $0.25 lift from the hedges baked in for next year or, I guess, locked in. What's the strategy here? I guess, what is the what would the hedge rate look like now if you were to lock it in today? And I'm curious given some of the volatility here, are you going to be a little bit more opportunistic?

We always try to be a little opportunistic. I mean, we'll say that we'll make one purchase in a quarter, and, you know, it's not a given day. It's not the midpoint of the quarter or anything like that. So we're always a little bit opportunistic, or at least we try to be. I think today, you know, the prices have been so volatile, you're probably talking in the $3.20 range if we were to execute our next hedge right now. I'm haven't seen what's going on in the last few hours today. But that was the last thing I saw.

[Well, done.] Thanks.

Your next question comes from Greg Smith with Sterne Agee.

Hey, guys. First question, just within the fleet segment, the account servicing revenue, the $17 million, that's been growing very nicely. It must be what's driving that? That used to just be the fees on your core fleet business. But is that international? What's driving that to continue to grow so much year over year and sequentially?

Most of that is just the Australian business that we acquired last year. So you'll see that growth rate level out when we have a full quarter of comps next quarter.

But even sequentially it was up quite a bit. I mean, we're only talking a few million dollars, but on a sequential basis just 3Q over 2Q this year anything unusual?

No. I don't think there was anything unusual in there. I mean, the pieces that you have in there, you know, just the account fees that we charge on our core North American suite customers, they have the same thing in Australia as well. But those fees are higher in Australia than what we get here in the US. And then we have monthly fees on our telematics product and the TelaPoint business we bought a few years ago. But that's been pretty steady. So I don't think there's anything unusual in there.

Okay. Okay. And then just back to the single-use MasterCard product, I just want to understand. First, it sounds like with your two large travel customers, you're at the point where you've sort gained shared of their business. So now you're going to grow as their business grows? Is that a fair characterization?

Yes. That's true.

Okay. Okay. Perfect. And then second, if I understand correctly, with the single-use MasterCard product you do have some new international customers that are going to get rolled out. Is that correct?

That's correct. We're saying in the first half of next year.

And what vertical is that in?

Well, it's in the travel vertical.

Okay. So it's new. But these are entirely new customers.

That's correct.

Okay, excellent. So you've been able to port that same product, new customers internationally. And then what is the prospect for the single-use outside of travel? What other verticals are you targeting and what are the prospects there?

Yes. As you know, we've been talking about the insurance warranty business, and that's been something we've been penetrating with our sales force. It's actually a larger market than the online travel market. But it's not you don't have the concentration hitch that you would have. So it's more sales reps on the street winning that business, and we grew that vertical in the range of 25% during the quarter.

We've talked about entering the education and the medical area. And we talked about winning the State of Montana. So it's indicative again of our sales force penetrating in that vertical. We have our core purchasing card product that we also offer AP direct where, you know, they can line up all their payments and pay it through a MasterCard solution in the US. And that's been growing in the range of 25%. And when I say 25%, these are more mature verticals that we've been in for awhile. So it's not like from a very low base. It's from a reasonable base that are growing. They're just not explosive growth, but they're nice growth that will continue as we talk about moderating to the 20% to 30% range. Seeing those grow, seeing our online travel customers grow domestically, internationally, and now seeing some of the traction on the international side with businesses outside of the US.

And then, this has been a fantastic business for you. I don't want to say it too loudly. But what's going on in the competitive front? Are you seeing anybody or how do you think about the barriers to entry for competitors?

Well, the product is there. There's a lot of banks doing it clearly in the US. There's a lot of banks doing it in Europe as we have seen. So, again, it's a matter of continuing to make investments that build barriers in terms of our overall product solution and service solution.

Okay, great. Thanks a lot, guys.

You're welcome.

Your next question comes from Roman Leal from Goldman Sachs.

Hi. Thank you for taking my questions. Actually a lot of them have been answered, so a few quick followups. First, with the single-use product and the entrance into the online vertical internationally, just wondering if that says you're just trying to replicate your success there or it's just kind of, you know, that's the first vertical that they are entering and eventually you try to get into other verticals such as the insurance and warranty internationally as well?

And then secondly, on the prepaid side, it seems like it's been growing pretty rapidly in North America. And given that you have some gift card expertise in Australia, I'm wondering if you have any plans to roll that payroll card product internationally as well?

Yes. On the verticals, there's no doubt we're targeting travel first. We've got a business that's been successful so we can point to that. And we can talk to people about solutions that are real with what we're doing with US-based companies, but they're even doing it internationally. So travel is going to be a focus, but we are going to be doing more research around some of the other verticals to see if that single-use product can play in the international markets as well.

On the prepaid side, clearly we like what we see there. It is a marketplace that is doing well in the US. And then we'll look at other international markets. The Australian market, its dynamics do not show a real unbanked portion of their population. So it would not have the same opportunity that we would see say maybe in Europe where there is payroll cards, and we think we have opportunities there. So we'll be looking at that. We don't have a product yet ready for Europe, but we're clearly exploring and doing the research on payroll solutions at least in the European market.

And then just one final one. Given that you essentially already have two customers that you're rolling out with in 2012 internationally, you know, and getting back to the single use card product, are you still comfortable with the 20%, 30% type of range for purchase volume or does that basically holds that roll out in or is that being fairly conservative at this point?

Well, I think we're doing the best we can at this point looking at 2012 as we're starting to roll up our budgets for next year. We're not done by any means. But it is giving us some visibility. Depending how successful we are international, but again, right now we don't see any major step function win. We're just going to see small wins is what we see on the horizon right now both domestically in some of the verticals and internationally.

Thank you.

Your last question comes from Robert Napoli with William Blair.

In followup, I just want to understand a little better the $0.25 comment, Steve, that you and I'm looking at your hedge, your average hedge price I think for next year, tell me if I'm wrong, is around $3.38 is the average hedge price, and the current gas price is around $3.40? I mean, that's what you're assuming for the fourth quarter? Shouldn't the hedge at this point almost be a neutral?

My comment was around the average price to be locked in for 2011 versus the average price for 2012.

Okay.

So the price in '11 was or the price in 2012 is about $0.40 higher than the price this year. So when you've got about, you know, roughly 40 million gallons, a little bit less than that, but about 40 million gallons of fuel at $0.40 higher price, you know, that's about $0.25 in EPS.

Right. But if you think about it as if you had never even hedged, right now you're almost balanced. I mean, there would be almost no gain or loss.

That's true. That would overall for the year be about right.

Kind of be a more designation of kind of earnings power. Okay. I just wanted to make sure that that was understood.

The University of Montana thing that you mentioned, the signing of the University of Montana with the corporate card, what is that product? Is it for I mean is that entering a new market of is that students and parents paying the University? Is it is or how are you what is that product for universities? Is that something that you expect to expand significantly?

Yes. It's more the University paying their typical vendors and suppliers.

Okay.

So it's still a virtual or kind of single-use product, but it's more kind of an accounts payable product, if you will. So they can line up who they have to pay. They can put the dates and the dollar amounts. And they're integrated with our system, and then on those dates, those dollar amounts are basically released to pay those suppliers or those vendors, if you will. So a little bit different than on the hotel side where it's every one is a different consumer, if you will. In this case, they pretty much know who their suppliers are and they can line up payments on a regular basis.

Okay. Then Australia, what are -- I mean, if 100 basis-point move in the currency, Steve, what is the effect on earnings, because you're not hedging? And what are the margins in Australia? Are they I think they were slightly higher than the US.

Yes. The margins in Australia are slightly higher. A 1% move in the exchange rate is a couple of hundred thousand dollars or so of earnings. So, you know, it's not a massive impact, but it has some.

Okay. Let's see. I think that's then, I guess as far as you've been paying down a fair amount of debt. It sounds like, when you talk about share count, there are no with the strong cash flow you have, you're not looking at you're still not considering buybacks at this point given the debt pay down and potential acquisitions?

Yes. We still have the authority, but quite frankly, our priority is to invest in the business both from an organic standpoint, and we will continue to do that, create differentiation as we talked about on an earlier question with our single-use product. And also look at acquisitions as I've talked about. looking around different parts of the world as well as domestically. So that's our preference, to keep investing in the business.

And I just. I wasn't clear on your M&A comment. Mike, are you I mean do you have a pipeline such that you expect that you'll be making some acquisitions in 2012?

Well, you can't predict it because you can get all the through the diligence process and something blows up on you and you walk away from the deal. But I mean our plans are we are pursuing inorganic opportunities both domestically and internationally. And it's part of our strategy. But you got to make sure the right things are fitting at the right time, and we're being very careful in the macroeconomic situation both domestically and internationally right now.

But there are numerous opportunities that are worth considering that you're is that --

Yes. That is true.

Okay. All right. Thank you.

You bet.

There are no further questions.

Okay. Well, we appreciate everyone joining us this morning, and we look forward to speaking to you next quarter. Thank you.

This does conclude today's conference call. You may now disconnect.