WEX Inc (WEX) 2011 Q4 法說會逐字稿

Good morning. My name is Jennifer and I will be your conference operator today. At this time I want to welcome everyone the Wright Express Corporation fourth quarter 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 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 fourth quarter, adjusted net income excludes non-cash mark-to-market adjustments on our fuel price related derivative instruments, the amortization of acquired intangible assets, and a small adjustment from our tax receivable agreement, 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'll 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 place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Mike Dubyak.

Good morning everyone and thanks for joining us. By all accounts, 2011 was a strong year for Wright Express. For the full year, revenue grew 42% and adjusted net income grew 32%. This compares to our initial guidance for 2011 of revenue growth of 30% and adjusted net income growth of 19% at the midpoint of the ranges. This performance was driven by continued execution against our multi-pronged growth strategy to expand our North American fleet business, diversify our revenue streams, and build out our international presence. We experienced transaction growth of 8%, added another large travel client in our Other Payment Solutions segment, and had the impact of the acquisitions of Wright Express Australia in 2010, and rapid! PayCard last year.

For the fourth quarter, revenue came in at the top end of our guidance range and earnings exceeded our expectations. Revenue grew 22% to $140 million, and adjusted net income increased 33% to $38 million, or $0.98 per share. During the quarter, we once again saw strong growth from of our corporate charge card product in our Other Payment Solutions segment and steady growth in our Fleet segment. In addition, we saw improved performance in our credit trends. Reviewing some key metrics, consolidated payment processing transactions increased 3% over the prior year; existing customer gallons domestically or same store sales was down approximately 0.4%, an improvement from the third quarter. We believe this continues to be reflective of the overall economic picture.

Taking a look at our same store sales by SIC code, we had mixed results in our two largest concentrations. Business services was slightly negative for the quarter, and construction was slightly positive for the quarter. Also positive, transportation was up 3% which is generally considered a good indicator for the economy. By region, we saw a continuation of recent trends. The southwest was the strongest region while the southeast was the weakest region. Overall, we believe these results are basically neutral, with continued slight variations and stable trends. In terms of vehicle growth, the total number of vehicles serviced averaged 6.6 million, a 14% increase from the same period last year, driven by the launch of BP in Australia and New Zealand, as well as growth within our core fleet business.

In North America, the core fleet business posted steady performance as previously announced signings were implemented in the fourth quarter. In addition, our sales force added new wins in the mid to large fleet market in the energy, government, communications, and construction industries. Over the past year, we saw good momentum in the core North American fleet business. We extended our market share with both large and small fleets by increasing our penetration and signing new private label customers. Furthermore, our continued focused on innovation led to the introduction of new products, features, and applications such as Fuel Site Locater, WEXSMART's Fuel Guard and Pump Shut-Off. These products enhance the value we provide to our customers and increase the efficiency and effectiveness of their fleets. Internationally, Wright Expresses Australia continued to meet our expectations. During the quarter, we had continued smaller fleet wins and signed a few existing larger clients to multi-year contract extensions.

Turning to the Other Payment Solutions segment, this segment once again posted strong growth in the fourth quarter driven by our corporate charge card product. Spend volume increased 66% over the prior year to $2 billion, primarily from our single-use electronic product and the online travel vertical. While online travel has been the predominant growth channel for this product, customer and industry diversification has also been an objective for us in this segment. In 2011, we made some traction on this goal within the insurance and warranty vertical and we continue to build on the pipeline, both here and in additional verticals. In terms of our prepaid card, rapid! PayCard has performed to our expectations since we acquired it back in April and broadened our payment solutions offering. We like what we see in this space and it increased our sales rep headcount to further enhance our future growth on this initiative.

I now want to discuss our thoughts and outlook for 2012. In our Fleet segment, we expect our North American business to see steady growth driven by the continued execution of our strategy to grow both up and down market. Of the 5.4 million cards that we have in North America, roughly 60% are composed of medium to large fleets with the remainder being small fleets. One of the areas we plan to focus more of our attention on during the year is our OTR product. While this product is still relatively new and development is still in the early stages, we remain optimistic about its long-term potential. As such, we plan to make additional investments in this program over the next couple of years to increase our acceptance network and accelerate its growth timeline. At Wright Express Australia, we will continue to be diligent in exploring additional ways to increase our penetration in underpenetrated segments of the fleet market and identify opportunities to enter the Asia-Pac market. Over the course of 2012, we expect to see continued steady growth in our Australian fleet business.

Outside of Australia, we will remain focused on building stronger relationships with major and regional oil companies as well as looking for additional ways to further accelerate our on-the-ground presence overseas. This could include the entrance into new core markets via bolt-on acquisitions or strategic alliances. In our Other Payment Solutions segment, we plan to build off our successes and position the business for future growth through further diversification. In North America, now that one of our new major accounts is fully implemented, we expect growth for the corporate charge card product this year to be in the 20% to 30% range. We also expect international expansion of the product to have the potential to layer on additional growth in the future. Another priority in 2012 also on our Other Payment Solutions segment will be to accelerate the growth and development of our prepaid payroll card. We still see great success from the cross-selling efforts by our sales team and we see promise in the payroll space, both organically and inorganically. As a result, we plan to ramp up our investment in this product and double the number of sales reps dedicated to this business. We continue to believe prepaid payroll cards have the potential to become an important contributor to our Other Payment Solutions segment over the longer term.

With respect to our corporate charge card product, we recently signed our first foreign customer for the single-use electronic product in Europe. This new customer is in the online travel vertical and we view this as an important step as it transports our intellectual capabilities outside the US. This win is in an area where we have tremendous amount of expertise and proven success with our US travel partners, which are key selling points in this region. For these reasons, online travel will be a focus as we look to grow in Europe with new clients, with the pipeline indicating another potential signing later this year. We also see opportunity to grow with our US travel partners as they expand their business overseas. To put this opportunity in perspective, in 2011 international bookings from our US travel partners totaled $2.6 billion or about one-third of total purchase volume. We will also be looking at additional verticals where a single-use product could be successful. Overall we feel very good about our expansion into Europe and growing this business will be another top priority for us in 2012.

To conclude, we are very pleased with our performance in 2011 and the foundation it establishes as we embark on 2012. We believe we are well-positioned to further capitalize on opportunities in the marketplace. While the broader economic picture remains more or less stable, our three main priorities for the upcoming year are clear and our overall strategy remains unchanged. We will continue to execute against our multi-pronged strategy to grow our North American fleet business, diversify our business and further develop our overseas presence to drive continued performance across the Company. We look forward to updating you on our progress throughout the year and now I'll turn the call over to Steve to discuss our financials and review our outlook for 2012. Steve?

Thank you, Mike. For the fourth quarter of 2011, we reported total revenue of $139.8 million, an increase of $24.9 million from the prior year period and at the high end of our guidance range of $135 million to $140 million. This performance was driven primarily by strength in our Other Payment Solutions segment and higher fuel prices. Net income to common shareholders on a GAAP basis for the fourth quarter was $32.8 million or $0.84 per diluted share. Our non-GAAP adjusted net income increased to $38.4 million or $0.98 per share, which is above our guidance range of $0.88 to $0.94 per share. This compares to $0.74 per share reported in Q4 last year on an adjusted net income basis. The increase versus our guidance was primarily driven by improvement in our credit loss trends and good control over our operating expenses. For the full year 2011, revenue increased 42% to $553 million from $390 million in 2010. On a GAAP basis, net income was $3.43 per diluted share in 2011, compared to $2.25 per diluted share in 2010. On an adjusted net income basis, earnings increased 32% to $3.64 per share from $2.75 per share last year.

In terms of key performance metrics for the fourth quarter, total fleet transactions increased 8% over the prior year. Payment processing transactions were up 3% in total. Transaction processing transactions increased 31%, resulting from the addition of the BP contract in Australia and New Zealand. I'd like to point out that in Exhibit 2 of our press release, Q4 2010 data has been updated to remove some non-fuel payment processing transactions from Wright Express Australia operations. Our net payment processing rate for Q4 2011 was 1.66%, which was down 7 basis points versus Q4 2010, and up 2 basis points versus the third quarter of 2011. This rate will vary with fuel prices due to the impacts of our hybrid merchant contracts. The primary reason for the decline in our rate from last year was due to changes in fuel prices. Finance fee revenue in the Fleet segment was up $1.1 million compared to Q4 last year. As a percentage of total dollars of fuel purchased, it was approximately 10% 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 hurts our short-term profitability.

For the fourth quarter, revenue in the Other Payment segment increased 54% or $11 million year-over-year and represented 23% of our total revenue. The increase in revenue was driven primarily by our corporate charge card product in the online travel vertical with a smaller contribution coming from rapid! PayCard. Spend volume on our corporate charge card product increased $800 million over last year or 66% to $2 billion for the quarter. The net interchange rate on our corporate charge card product for Q4 was 98 basis points, down 3 basis points year-over-year primarily due to the mix of contracts and higher foreign spend which generally has a lower interchange rate than domestic transactions. Moving down the income statement, total operating expenses on a GAAP basis for the fourth quarter were $79.1 million, versus $71.9 million last year. The majority of the increase was related to our service fees with the remainder being smaller increases. Salary and other personnel costs for Q4 were $25.1 million compared with $23.6 million in Q4 last year. The increase was driven primarily by a reduction in internally capitalized payroll and headcount related to the acquisition of rapid! PayCard.

As I mentioned earlier, we saw an increase in service fees, which were up $4.9 million over the prior year to $18.2 million. The majority of this was related to the 66% increase in volume on our corporate charge card product as well as an increase in cross-border fees. In total, credit loss for the fourth quarter was $7.1 million compared with $7.2 million in Q4 last year. Total domestic charge-offs in the quarter were $8 million and recoveries were $1.5 million. Domestic fleet credit loss was 15 basis points for the fourth quarter, compared to 19 basis points in the prior year period and our guidance range of 22 to 27 basis points. The outperformance relative to our expectations was driven by improvement in the aging and an increase in recoveries. We expected to see our aging deteriorate during Q4 as it normally does. However, it came in better than we anticipated as we did not see our normal seasonal degradation. Our effective tax rate for Q4 on a GAAP basis was 36.1%, compared to 37.6% in the fourth quarter of last year. Our adjusted net income tax rate this quarter was 35.8%, compared to 37.5% for Q4 a year ago. The decrease in the ANI tax rate compared to the prior year is due to our decision to indefinitely reinvest our Australian profits outside the US. We expect our ANI tax rate to be between 35% and 36% for 2012.

Spending a moment on our derivatives program, during the fourth quarter of 2011 we recognized a realized cash loss of $4 million before taxes on these instruments and an unrealized loss of $2.9 million. We concluded the quarter with a net derivative liability of $5,000, essentially break-even. As we have indicated previously, we have hedged approximately 80% of our domestic exposure through the fourth quarter of 2012, and lesser percentages through the first half of 2013. For the first quarter of this year, we locked in at a price range of $3.09 to $3.15 per gallon. For the full year, the average price locked in is $3.33 to $3.39 per gallon and increases each quarter as we move through the year. All else equal, the higher prices we have locked in for 2012 roughly equate to an incremental $0.25 in EPS in 2012 compared to 2011. While fuel prices have moderated from their highs, 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. 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. The impact from currency movements, while negative, was minimal during the fourth quarter. Turning now to the balance sheet.

We ended the quarter with a total balance of $295 million on our revolving line of credit in term loan as we paid down $65 million in debt during the quarter. As of December 31, our leverage ratio was 1.2 times EBITDA, compared to 1.9 times at the end of Q4 last year. For the full year, we paid down a total of $112 million on our financing debt balance. The near term, our priority remains to pay down debt while we continue to look at acquisitions as a way to accelerate our growth objective. In terms of capital expenditures, CapEx for the fourth quarter was $5.3 million, and total CapEx for the year was $25.1 million. Our depreciation expense was in line with the CapEx we recognized during the year. Before I move on to guidance, I want to discuss the agreement with Higher One that was announced last month.

While not part of our historical funding strategy, this was an opportunistic deal that made a lot of sense from both a financial and risk perspective as it lowers our overall funding cost and diversifies our funding sources. This agreement will bring a minimum level of deposits to our bank, which we will be able to use to replace a portion of our CD portfolio. At times, this may lead to having a cash balance and if so related interest income. We will pay a variable interest rate on the average balance based on the market rates. We expect this will lead to meaningful operating interest expense savings in the second half of this year. The expected decrease in interest costs is included in our guidance assumptions which I will discuss next. 2012 we look to build off the strong foundation in 2011 and deliver continued solid performance across our Business.

Our guidance for the first quarter of 2012 and the full year reflects our views as of today and is made on a non-GAAP basis. For the first quarter of 2012, we expect to report revenue in the range of $134 million to $139 million, and adjusted net income in the range of $34 million to $36 million or $0.87 to $0.93 per diluted share. These figures assume normal seasonality trends in the corporate purchase card and prepaid businesses. For the full year 2012, we expect revenue in the range of $590 million to $610 million, and adjusted net income in the range of $160 million to $168 million or $4.10 to $4.30 per diluted share. This guidance assumes that domestic fleet credit loss will be between 13 and 18 basis points for the first quarter and for the full year. Our guidance also assumes domestic fuel prices for the first quarter will be $3.56 per gallon, and $3.59 per gallon for the full year. These fuel price assumptions are based -- for the US -- are based on the applicable NYMEX futures price. We are also assuming that the Australian dollar will remain at a premium to the US dollar in the range of the current spot rate. In 2012, we expect CapEx to be in the range of $28 million to $32 million, compared to $25 million for 2011, and will be composed of ongoing investments in new and existing products as well as international investments. And now we will be happy to take your questions. Jennifer, please proceed with the Q&A session.

(Operator Instructions)

Your first question comes from Sanjay Sakhrani with KBW.

Hello?

I'm sorry. Can you hear me now?

Yes.

Sorry, I had it on mute. Good morning. I had a few questions. One is just on payment processing transaction growth which was up like 3% year-over-year. Could you just talk about how we should think about that growth rate this year, because it was a little bit softer than what I had thought. And then just on credit quality, I think last conference call you talked about perhaps it being a little bit softer than what you guys had anticipated but now it seemed to have come in quite nicely. So could you just talk about what the trends are there and then maybe finally, just ask my questions up front, just Steve you talked about paying down debt with excess capital generation. Is that assumed in your guidance? Thanks.

On the transaction growth, we clearly saw the comparable was compared to the fourth quarter of '10, which actually was a pretty good year with same-store sales growth, which we saw actually slightly negative same-store sales growth in the fourth quarter of 2011. So that was probably a couple percentage points. We also had less equivalent fueling days or business days in the quarter, just the way the holidays and the weekends fell. So that hurt us to some extent. But I think going forward, we're still going to see low single digit growth unless we start to see our existing customers or same-store sales start to grow. If they stay flat, which we've assumed right now in our guidance and our budget process, we're looking at low single-digit growth on the fleet payment processing transactions.

Sanjay, the only thing I'd add to that as well is if you notice in the exhibit in the press release, each transaction was actually a little bit bigger as well. So that -- if you normalize that, that's about 1.5% of a change as well. Just in terms of the credit, I think it was in the kind of the summer months in July or August when we kind of saw a little bit of softening and we warned everyone. That turned around pretty quickly and that does from time to time happen. Usually what we see is in Q4, the aging gets worse, especially in December, and that just did not happen this year. It was very consistent with what we saw at the end of Q3. So obviously when we gave our guidance last time we had expected that to soften up a little bit as it usually does and built that into the basis points that we guided everyone towards. But like I said, customer behavior, it just didn't happen and therefore our credit loss was a lot better than we expected it to be.

And then on capital?

Yes, on capital, we're going to continue to invest in our business. We are looking at some potential acquisitions that hopefully will come to fruition but there's no guarantee on that and then we would also look beyond that, if we continue to pay it down and don't do an acquisition, at some stock repurchases.

But just embedded in your guidance, do you guys assume that you pay down the debt and that helps interest expense?

Yes, we do.

Okay. Great. Thank you.

Your next question comes from Roman Leal with Goldman Sachs.

Yes, thank you for taking my questions. I guess first on the commentary, when you look at all the SIC codes, I think the comments were you basically saw it overall as neutral. I guess, was the biggest driver on the light same-store sales in the quarter business services and is that the only call-out there and more broadly speaking where do you think the biggest risk comes from in 2012?

Yes, I mean, if we look at same store sales they're all just bumping around close to being just neutral but quite frankly except for construction and transportation, some of the others, manufacturing, retail, we talked about business services, were also down. Wholesale was down. But they're slight. Some are down less than 1%. We're seeing pretty much the same thing in January. We're seeing, again, construction being positive in January, business services being down and transportation being up. So again, unless the economy improves, that's why we said right now it's stable and we've kind of factored in just basically stable trends throughout the year. We would love to see the economy get better and start to see the trends go up, which would help our growth rates.

Okay. And how much from your international win on the single-use product did you have baked into your guidance for 2012 and is that kind of a potential upside to the guidance?

I mean, we do have the international win that we talked about. It is in the guidance. But I would say in Europe, generally, it's much, much more fragmented market. This is a relatively small client. The more important part of that win is the fact that we can take the process that we have here, the intellectual capabilities I think, as Mike described it, and move it to another geography. (Inaudible) that works.

And we're going to be expanding sales reps because we're comfortable now. We can do that. We actually brought over one of our strongest sales reps from kind of our MasterCard program, online travel program here in the US, who is already there in the UK and helping us go out and really expand our sales efforts against that product. So again, the intellectual capabilities are now being transported and we start to -- we want to ramp up the go-to-market strategy.

Okay. And lastly on the LTR product, seems like you're having some early success there. Have you shared how large the opportunity there is and how competitive the industry is?

Well, it's a very large opportunity. The over-the-road, heavy truck business, I don't have it in front of me but it's probably pretty close to a third of the overall volume that's spent by commercial fleets even though less vehicles but their fills are more -- 10 times as much as what a small van or automobile vehicle would be. So it's a very large market. The market we're going after is to make sure we can satisfy our mixed fleets but also then go into the over-the-road market as well, directly. We won't see a lot of that success this year. We're still building out acceptance. But we believe building our own closed loop network is the right thing to do for us to control that and then as we do get further acceptance and critical mass on acceptance, get to a tipping point, then really try to ramp up the growth on that product.

Got it. Thank you.

Your next question comes from Phil Stiller with Citi.

Thanks for taking my questions. I had a question on the deal pipeline on the fleet payment side of the business. I was wondering if you could comment on the materiality of any deals that you have in there, is there anything big enough that could materially change the transaction growth rate for 2012?

No, I would say that we're working on some things that might have impact more in 2013. I don't think there's any real large step function on the fleet side for 2012. So it's really just our core North American go-to-market strategy of going after it directly and working with our channels, either our leasing companies or oil companies, to gain market share.

Okay. And on the expense leverage that you guys experienced, you did a great job sequentially, expenses were down 9%. Most of that came from the salary and other personnel. I was wondering if you could comment on what your expectations are there for 2012, and what your plans are for headcount overall?

I mean in terms of the base employees that we have, we've obviously built in some normal salary increases for everyone. We've got plans to add somewhere in the range of 50-odd people next year across all geographies and all products and everything. But in total. So that's all built in the guidance and relatively normal. We've got a pretty scalable business and so that head count growth is kind of reflecting that. When you look at the guidance ranges on revenue, at essentially flat fuel prices, you're looking at real volumes there as opposed to fuel prices. So you're looking at 10% kind of revenue growth or a little bit less on the bottom end of our range and in the range of 5% headcount growth. So it's showing some nice scale there.

Okay. And then on the MasterCard purchase volume, did I hear you guys right, that you thought it was going to be up 20% to 30% this year and if so, I understand you're going against a little tougher comps but why does it decelerate so much from the fourth quarter level of 66%?

It's really the large online travel customer that we brought on and it's essentially annualizing that. I mean, you'll see it, that 20% to 30% was for the full year and you'll see it probably a little bit stronger than that in the first half and getting down to that range by the second half of the year.

Is there anything we should know about the interchange rate on that side of the business for 2012? I know you had a small benefit in the third quarter but how should we expect that to trend this year?

Well, that's somewhat out of our control. We don't set the interchange rates, obviously, and it's a matter of how much data the merchants pass and the mix of where the transactions occur, whether they're domestic or international. So we're planning on things to remain pretty consistent. And then you're going to see mix changes by contract essentially during the year.

Okay. Great. Thanks, guys.

Your next question comes from Bob Napoli with William Blair.

Thank you. Good morning. The customer retention, Mike, well you guys have always had high customer retention. Any change? I don't think you gave that metric or I missed it, in the fourth quarter?

We probably should have given it because it was a record low year. It was probably our best year I know at least in the last five. Total attrition, voluntary, involuntary was 3.5%, which is extremely low. So we were very proud of that, which shows the customer experience continues to be very strong working with us. It's probably the lowest we've had in 10 years.

Okay. And is it getting any more competitive? I don't know if you have any -- one of your competitors, Fleetcor, yesterday announced a deal with PHH Arval and is that a -- I mean, PHH I know has been a customer of yours for a long time. Is it -- any color on that?

No. We have a great relationship with PHH in the core business that we do business in the US today. We have over 200,000 vehicles with them on a co-brand card that's very strong in terms of that relationship. They were looking for -- they have a heavy truck segment of their business that we were not servicing. They did want greater site acceptance than our new OTR product is giving today, since as we say, we're still building that out. We did not even bid on that business because we knew we did not have the capability in terms of site acceptance. We have the functionality that we're building but they wanted the functionality across a broader range of sites that we could not supply but -- so we did not even bid on it. So we feel very good about the relationship with PHH. It's just the heavy truck program in that case was not something we were able to take on.

Okay. And then the -- great job on the Other Payment business but now that it's getting so much larger, I'd just like to understand a little bit more maybe what the length of the contracts are with people like -- I know you've been working with Priceline for a decade, but Priceline, Expedia -- what are the terms of these contracts and how often do the terms get renegotiated?

They're typically long-term, in the range of three to five years. So we do renegotiate on a regular basis. I think we announced, I'm not sure, on one of the last calls last year that we had re-upped with Priceline.

Okay.

So they are long-term contracts.

And then just on the BP business in Australia, New Zealand, I know that initially it's very small revenue per transaction. But I think the goal is to move that over time to a payment processing transaction type of -- to a full outsource, if possible. Are you making any headway in that? Are you providing any additional services? It looked like your revenue per transaction in the transaction processing area was up a little bit?

But it's not due to BP, so--

Okay.

There's discussions going on but there's nothing that's happened that has moved any of the operating back-end over to, if you will, Wright Express Australia. But we've got a great relationship. They're very pleased with the product. We keep building out the product for them and we think it will give us an opportunity at least to have serious discussions around providing other services in the future but it's not there right now. It's not built into anything for 2012.

Thanks. And last question, on your acquisitions strategy, I mean, how many people are you -- who are you competing with? I would imagine you're probably seeing Fleetcor. Certainly, at any sizable acquisition you guys are probably competing with each other. And did you bid on the AllStar transaction that they got? So how competitive is it? I would imagine you looked at the AllStar transaction?

Yes, we did. We knew there was a process. We knew the business since they were a sister company of ours back in the early part of 2000, '99, that time period. So we knew the business but that's basically all I can comment on regarding that piece of business. I think it's fair to say if there's processes then we're going to run into Fleetcor and probably some of our other competitors. We're clearly looking at other areas of diversification where then we run into other competitors. In the case of rapid!, it wasn't a process. This was something that we were pursuing and we were able to work something out with them so as we look at diversified opportunities, you know, a lot of these may be early on in terms of their maturation and you won't really do a process but I'm sure in the future we could see some processes on the Other Payment Solutions as well. So it varies. It's all over the board, quite frankly.

Thank you.

Your next question comes from Greg Smith with Sterne Agee.

Yes, hello, guys. Just first question, Steve, where can you currently hedge as far as what kind of rough ranges?

It's right around $3.45 to $3.50, somewhere right in that range.

Okay.

I mean, that's out into the future.

Yes. Okay. And then what's the rational for -- it sounds like you prefer to pay down debt over buybacks. I would assume buybacks are much more accretive. What's kind of the rational there?

It's just really, I think, saying there may be opportunities to invest in either organic or inorganic situations.

Okay.

I don't want to make a statement to say exactly what that means. It just says we're looking at opportunities.

Okay. Okay. Fair enough. And then I guess where, as we just think about your sort of CapEx and investment spending in 2012, where is that going to be focused? I mean, you've mentioned some of the new products. Sounds like it's the long haul over-the-road, prepaid. Are there other areas where you're going to be spending a significant amount of investment dollars this year?

I think there's a chunk internationally as well. But for the most part, it's internally developed projects.

Okay. And then can you just talk about how your contract renegotiations generally have gone with the fuel distributors just in your core North American fleet business. Is pricing coming in favorably? Is there pressure? Just give us some thoughts on that, please?

No, there's really been no change of any materiality last year or as we look forward into the future. I mean, there's always that chance that something gets into negotiation but right now they're very stable, is the best way to categorize it.

Excellent. That's all I have. Thank you.

Your next question comes from Tien-Tsin Huang with JPMorgan.

Hello. Good morning, nice job here. Just, Mike, you mentioned the possibility of a big signing on the single-use side. Where is this in the award process and how big could this be? Could this be a big, or I guess, maybe a top five kind of customer?

I think the only signing I mentioned was in Europe.

Right.

And it's a small customer. I think it's more indicative as we talk about moving our product capabilities into that market and then, as I said, starting to grow the sales force and go further into trying to extend our presence in that market. But, so it's not a large OTA customer in the market but it's indicative again of being able to at least start to penetrate with our products in that market.

Understood. I thought you also mentioned the possibility of a big signing this year. Did I hear that incorrectly?

Well, maybe -- I thought it was regarding the fleet business overall.

Oh, okay.

What I was saying was there's opportunities that we're looking at that would have more step function impact next year, if we're successful,, than this year.

Okay. That's on the fleet side then. I'm sorry I thought that was tied to the single-use that you were talking about.

Well, maybe I missed it. I thought it was on the fleet side. That's what I answered it against. I thought it was against the fleet.

Oh no. No, it's fine. My head's spinning from all the earnings anyway. So I'm sure I misheard that. On the Higher One bank deal, Steve, did you give the interest savings and how the balances are going to vary quarter- to-quarter? I'm sure there's going to be a little bit more volatility than what we're used to. So just want to make sure I get the modeling right on that?

Yes, I mean, the balances will be -- these are funds from college students.

Right.

So essentially, when they get their financial aid packages, so it's typically going to be highest in the winter -- January, February kind of months -- and then it will trail down and then you'll get some more in the fall. So it is going to be a bit volatile. Like I said, though, we do have minimum commitments of deposits so that's what we'll be using to offset our CD portfolio and then to the extent that we are able to, we will let other CDs and/or fed fund balances expire and use the Higher One funds for those. But I pretty much expect at points in time we're going to have some cash balances that we'll be unable to take advantage of in terms of offsetting other balances but we'll just take those and put them on deposit and earn our interest income from the Federal Reserve on those.

Right. So I know you mentioned second half we'll see a lift but can you be a little more specific there?

Well, I don't want to give out too many specifics on the contract but in terms of the deposits, I think it's fair to say that we're expecting hundreds of millions of dollars when the program gets ramped up.

Okay. I guess -- okay. Well I'll follow up with you. I was thinking more about the interest line there as the year progresses, how -- I can follow up with you offline on that.

Okay.

I guess just last one from me, just I caught the same-store discussion being stable for the year but what about in Australia, what's the outlook there for same-store growth in Australia?

Yes, we don't have the same sort of data, unfortunately.

Yes.

We hope to get to that point somewhere down the road. I think their economy is strong. So that's all we can base it on at this point. Hopefully seeing their economy continue to stay strong and so they can continue to grow but we don't have the same-store sales kind of business intelligence that we have here in the US.

Okay. No, that's fine. I'm good. Thank you.

Your next question comes from Tom McCrohan with Janney.

Hello, everyone. Just wanted to drill down on the fleet business, given that it's probably over half of your total revenues, and just want to understand, for the guidance this year, what are you baking in as far as growth in payment transactions?

You know, I think it's pretty consistent with what we've said historically. It's going to be mid to single-digit kind of transaction growth rates would be the baseline. If the economy improves, as Mike said, we could get a little bit of a lift on that. But the fleet business, essentially North America, is going to be a mid single-digit kind of grower and then we supplement that with other fees and the Other Payment Solutions segment.

So, I mean, it just sounds conservative. And just hear me out. I want to get your thoughts on this. I mean, that would imply you'll add this year about 10 million of incremental payment transactions, so if I'm doing the math right you exited this year around 250 million. A little under. And the last two years, Steve, you've added each year an incremental about 25 million of new payment transactions in '10 and this past year. And if you look at the last eight years you've grown payment transactions between 9% and 16% with the exception of '08 and '09 due to the economic downturn. So why -- help me reconcile the last two years, you're adding I think 25 million transactions, your guidance this year which is implying only about 10 million, 12 million of incremental transactions and the longer term trend while you're seeing growth well above what you're baking in for guidance this year?

I think this past year in 2011 and to a degree in 2010, the Australian acquisition certainly helped our transaction levels and again to Mike's point, to the extent we get something like another fuel type acquisition in the future, that would clearly help those numbers. The other big thing is we had a series of large fleet wins in kind of the '09 and '10 time frame and they were significant, the State of Florida, you know, Florida Power & Light, all kinds of big names that we have described over the course of the last couple of years, those all came on. We also brought on a couple of decent size private label portfolios with the Sunoco portfolio and the ConocoPhillips portfolio.

The GSA.

The GSA in 2009. So there's been some very large fleet wins in there and it's been great execution over the last few years. I think when you look at just kind of normal growth coming from our sales force without some of those very large wins, that's kind of what we're looking at is in that kind of range.

Yes, that's helpful and that's -- that makes sense -- that helps kind of bridge the gap. And on acquisitions, since the Australian deal was so successful and I know you talked a little about on this call, but if there was a market that would make sense to enter, can you give us kind of the short list of areas you think your product could translate well into that you're not in today?

Well, we're looking at Europe, which we have been and still looking to make progress there in 2012, and we're also looking at entry strategies and models for parts of Asia-Pacific and doing some exploration as well in the Latin American, South American markets. So we're looking at all those but we would like to see progress in Europe specifically in 2012, the others probably we just have entry strategies that would be built out in 2012.

Mike, are the markets set up in those markets you just called out, dominated by a handful of players or is it more fragmented?

Well, in Europe, I think it's controlled by the majors and even the national oil companies that have their own fleet card programs. There really are not truly if you will universal fleet card products in Europe of any size. There are some within segments. I mean, quite frankly, the Arval program in the UK, only in the UK, was a small -- a large universal product in that marketplace but you don't find that in the Pan-European market of any size. So I think that a lot of this will be through the oil companies, bringing our processing and back-end operations capabilities and hopefully funding capabilities to penetrate that market and then try to build out some of the other segments as we have in the US. When you get over to Asia-Pac, it's very different by market and we're trying to narrow down to two or three markets that we're focusing on. We've done some entry strategy consulting work so each one of those could be very different, even the way the products that we go to market could be different. You might go to market with a prepaid product versus a credit product, as an example.

That's helpful. And one last question, I'll jump off the queue. The Australia deal, Mike, was that like 10 years in the making or was that something that happened quickly?

Well, it's a business that quite frankly we've known about, I've known about, for a long time and we watched it. It actually came up for an opportunity to buy it in '06 and Management took it private with a private equity group. So we were looking at it then and made sure that if they were going to do something we would have a chance again. It was a process that was run with the private equity group but it was something that we had known about for quite a while and thought it would be the kind of the easiest way to kind of move into the Asia-Pac marketplace and then try to build from there.

Thank you, Mike.

Thank you.

Your next question comes from Tim Willi with Wells Fargo.

And thank you. Good morning. Some questions I had just to follow up here. Number one is on the investments that you're making this year that you talked about, is there anything around those types of investments that would be maybe a one-timish or sort of transitory in nature that would not occur in '013 or are these sort of permanent parts of the expense structure that you're putting into place as we think about building out '013 models. Just wanted to understand that dynamic a little bit?

I would say, if we're looking at the OTR, that's probably going to be something that we will continue to invest in even into 2013. Payroll is something that we are looking at expanding so I think there will be investments there to keep expanding that both either the go-to-market strategy or trying to find other portfolios and ways to grow in that business. And Steve talked about Europe. So we're getting traction in Europe. There's going to be some build-out cost, not expensive, but you still have to do some things to make sure you're putting everything in place to be a player in the European market, especially with our online travel program and potentially as I said earlier with the fleet program in Europe. So those investments would continue into the future as we enter different markets or different countries.

Tim, I'd kind of characterize it as like start-up expenses. We're really starting things up from scratch and the people you put in place to start those businesses or start those products, they don't go away but you eventually hopefully get some revenue to offset them and start making some money.

Yes. Okay. Great. And my second question, just going back to US fleet, just sort of curious, obviously you guys had good success in signing up customers throughout the course of the year to offset the slightly negative same-customer growth. Are these -- would you predominantly describe these as customers that just haven't been using the product or do you feel like there's a little more competitive take-away involved, just sort of curious how you're viewing the target base and the types of new wins that you're thinking, just out of curiosity?

I talked about like 60% of our business would be considered mid to large businesses. In that case, we're mostly taking market share. So we are winning against the competition when we're winning in the mid to large business segment. If we're down market, as we've said before, the biggest competitor is probably cash and general purpose cards. And that's why it's so important, as we talked about signing Wawa and different smaller portfolios, Pep Boys, whatever, they allow us just to get into those smaller businesses as through a channel. So we're, as I said, we're moving up and down the market in different ways but we're growing in the small fleet segment and we're growing in the mid to large. But some we're taking market share. The others we're taking market share not from competitors but, as I said, from cash or general purpose cards.

Are you seeing anything around small business formations just with your market intelligence and things like that, that you're encouraged by or do we just tie it back to your comments around the economy sort of is what it is?

Well, I think it's encouraging to see the bad debt trends, even the attrition trends, people are loyal but I think that's a lot to do with our customer experience. At least it's stable out there right now. I think business confidence hopefully will continue to grow. We all read the nightly news or see the nightly news and see that at least job applicants there's opportunities now in the marketplace. So all of that has to hopefully be positive signs for small businesses. As the economy grows, we see that in the construction area. It's up. It may be slightly up but it's nice to see it up versus just falling as it was for a couple of years and then to see transportation showing better signs as well which I think is indicative of the future growth in the economy. So there's nothing that's spectacular but I think we're all being surprised a little bit by some of the positive trends we're seeing in the economy.

You referenced transportation, do you mean sort of the OTR, the trucking type companies, or what exactly does that speak to?

Yes, it's just one of the SIC codes that we have that would include transportation. So we have some. We don't have much of that but it's still a portion of our overall SIC code that we cover so it gives us a little bit of visibility into that SIC and what that trend may look like.

Okay. No, great. Thanks so much.

Your next question comes from Robert Dodd with Morgan Keegan.

Hello, guys. Going back to the investment for a second, on the payroll card, I mean, adding incremental headcount now, are you focused on, how can I say, accelerating the penetration of your existing customer base with cross-selling or are you looking to broaden that product and approach non-customer prospects? What exactly is your market approach going to be there?

Yes. That's a good question, Robert. We're doing both. So we're clearly going after customers that would not have fleet vehicles but we're also cross-selling. So our fleet sales force, our MasterCard sales force, likes the ability now to offer another payment mechanism and solution for customers if they're primed for a payroll card but we are definitely doing both so we need to have additional sales reps to take the cross-sell and help them close, but also to go after markets that have nothing to do, say, with our other core payment solutions.

Okay, great. Thank you. And then, secondly, on the credit, if I can go back to that for a second, I mean, rising fuel prices tend to make the credit metric look slightly better, right? Because I mean, the credit losses are tighter, fuel prices up a quarter or two ago and the volume obviously is current quarter. So that tends to have a positive effect. And I think we've seen that in '11 versus '10. How much of that is a factor that if we look at '12, when adjusting for that fuel price, it does look like you're looking for somewhat better credit metrics certainly at the low end, I mean what are the kind of drivers for your expectations about why that's going to come in, in that range? Certainly a wide range but 13 basis points would be about one of the best numbers you've ever seen for years. I mean, can you give us a bit more color on what's driving that range of expectations and how you think it could end up at that bottom end?

Well, I mean, you're right, 13 basis points, I think as a public company, that would be one of our best years. I think '05 was probably our best year at 11. But so it's not like it's out of the question. I mean, essentially what we're looking at is the last three quarters have been between 12 and 17. All four quarters, really, in 2011 were in that range already. If we don't see that historical degradation in the first quarter, which we clearly didn't see it in December, that trend has pretty well continued through January, so that's another good sign, so that's going to give us a great start to the year, which is different than most years, and I think that's how you're going to really end up at the bottom of that range.

Okay, so that makes sense. Thanks.

Your last question comes from Bob Napoli with William Blair.

Thanks. I just wanted to dig a little bit more into the transaction growth in the US. I guess I mean, MasterCard put out something yesterday that there are spending polls saying that demand for US gasoline fell by 5% last week and, granted this includes a lot of consumer, but they're seeing, the spending policy is showing weaker demand than they've seen since 2008 and trend-wise. And your transactions, while your same-store sales were about flat, I mean, your overall North American transactions growth slowed a little bit. Do you think -- I mean, what is going on? I mean, is there more use of hybrid vehicles, maybe, or is that a risk? How do you feel about the economy? Do you feel like -- I mean, the [Mac] and a number of statistics sound like we're improving but I'm not sure I see that in that piece of your business?

Yes, and Bob, as you can imagine, we have to separate consumer from commercial.

Right.

Because consumer can say just taking too much of my disposable income and I've got to cut back and I've got to still pay my rent and eat and whatever. On the commercial side, it's all about their need to move their products and services. So but there's still the dynamic, as they turn over vehicles, they may be getting more efficient vehicles. But I don't think, you're not going to see a lot of commercial fleets making a big push on hybrids or anything that doesn't give them a reasonable payback. Some will do it for green reasons. I mean, GE does it for reasons with their fleet because they're committed to electronic vehicles and fueling those vehicles or whatever or energizing those vehicles but overall it's just not something that we see in a big way in terms of having a major impact. But it will, over time, as CAFE standards continue to rise, have an impact but I think it's still going to be, businesses are going to drive based on their demand.

Do you think, Mike, I mean, your view of your business, and maybe, do you think the economy is improving?

I think it's slightly improving, even our last quarter we talked to number of our key fleets in different SICs that we thought are leaders and good visionaries, getting good sense of what their markets are doing and they said that they thought 2012 would be slightly better than 2011. I'd feel and say the same thing right now, if you had to ask me, I would say I think it's going to be slightly better than 2011. We're seeing some economic indicators saying that's hopefully going to be true. And then we just hope there's not a European crisis or something else but if you just talk about steady state, we would like to believe it's going to slightly increase as the year goes on but I don't think it's going to expand radically.

And the transportation sector, which you said, there's a little bit of the big trucks in there. What else is in that sector? I mean, because you said you feel like that sector is a good indicator?

Yes, we have -- there's electric utilities, communications, so there's a number of things wrapped in with that SIC code.

Okay. Thank you very much.

Bob, just to be clear on the fourth quarter transactions, I mean, it was 3% growth year-over-year. But the number of business days, as Mike alluded to, was down 1% year-over-year and the gallons per transaction were up about 1.5% year-over-year so you add those two things together and you're in the 6% range normalized.

Okay. That's very helpful. Thank you. That's it. Thanks.

There are no further questions.

Great, Jennifer, thank you for hosting us and we look forward to talking to everyone next quarter.

Thank you.

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