WEX Inc (WEX) 2012 Q2 法說會逐字稿

Good morning. My name is Kayla and I will be your conference operator today. At this time I would like to welcome done to the Wright Express second quarter 2012 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). 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 Wright Express.com. A copy of the release has also been included in an exhibit as an 8-K to the SEC this morning. As a reminder, we will be discussing a non-GAAP metric, specifically adjusted net income during our call. For this year's second quarter, adjusted net income excludes noncash mark to market adjustments on our fuel price related derivative instruments and the amortization of acquired intangible assets as well as the related tax impacts which includes impacts from recently enacted tax legislation in Australia, which I will discuss later.

Please see exhibit 1 included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors including those discussed in our press release most, recent Form 10-K, and other SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that I will turn the call over to Mike Dubyak.

Good morning, everyone. And thanks for joining us. The second quarter was a good quarter for Wright Express with both revenue and adjusted net income exceeding our expectations. Revenue in the second quarter increased 8% to $153 million despite the decline in fuel prices, and EPS on an A&I basis increased 10% to $1.00 per share versus the prior year. Our three-prong strategy of expanding our America's Fleet business, diversifying our revenue streams, and building out our international presence continues to serve as our platforms for growth. Highlights from the America's Fleet business included approximately 270,000 gross new cards added by our sales force in the first half of 2012 and the signing of the State of Pennsylvania. This coupled with record low domestic fleet credit loss and continued low attrition rates yielded good performance in this arena despite economic headwinds. Our diversification efforts continue to be led by a very strong performance from our corporate charge card product with spend volume increasing 49% over the prior year period of $2.8 billion.

We also announced our entry into the healthcare vertical with the signing of PaySpan, one of the nation's largest healthcare payments and reimbursement processors. On the international front, in May we acquired CorporatePay, a leading provider of corporate prepaid virtual cards to the travel industry in the UK. OTA wins included the implementation of our first customer in the UK and the signing of Webjet a leading OTA in Australia.

On the fleet side, we announced an agreement to resell our fleet processing capabilities in South Africa. Moving on to the segments. In the second quarter, we continued to focus on driving new business growth in our fleet business and achieved vehicle growth of 7% over the prior year. Consolidated payment processing transactions increased 1% over the prior year, and we posted a total fuel transaction growth of 3%. Overall revenue in our fleet payment segment was up 1% over the prior year.

With respect to our America's Fleet business, we continue to work on driving additional growth in this part of our business and have had good success in bringing on new vehicles despite the sluggish economy. On the large fleet side, our contract with the state of Pennsylvania will contribute 26,000 vehicles in the fourth quarter. We also had strong vehicle growth in small to mid-sized fleets in the quarter. This growth coupled with low total attrition of 4.4 bodes well for this segment. When looking forward, recent discussions with some of our larger customers indicate they are cautious on the US economy. That said, they still expect to see growth in their business albeit slower growth.

We have been forecasting same-store sales to be flat. However, our existing customer base or same-store sales were down approximately 1% compared to the second quarter a year ago. Given the current economic environment, we are not anticipating a pickup in our same-store sales, but we continue to believe our new business success in tackling all spectrums of the fleet market, small, mid and large, provides us with the pipeline for future growth. In terms of the second pillar of our growth strategy, we made greater strides in continuing to diversify our business during the second quarter. Revenue from the other payment solutions segment increased 39%, driven predominantly by strong growth in our corporate charge card product. While the online travel vertical is and will continue to be an important area for us, penetrating additional verticals remains a key objective, which is why we were pleased to have signed PaySpan during the quarter. One of our competitive advantages and a critical reason customers like PaySpan choose Wright Express is our ability to understand and solve complex payment needs in both closed-loop and open-loop systems while also delivering increased security, control, and greater processing efficiencies in their business.

Though still in the early stages, our partnership with PaySpan is a significant step in terms of expanding the usage of our single-use virtual payment solutions to the healthcare medical payment space which is a large and growing area. With $35 billion in spend volume annually and growing, PaySpan is a large player in its space and this agreement offers Wright Express an opportunity to capture a portion of that spend. Furthermore, the signing of a marquise account in the healthcare payment arena raises the visibility of our payment solutions to provide value and savings in this large and growing vertical. As implementation is expected to begin in the latter part of Q3, we anticipate the contribution from PaySpan to be immaterial this year. However, we believe PaySpan has the potential to become a meaningful contributor to our other payment solutions segment longer term, growing significantly in subsequent years with the possibility of becoming one of our largest customers. We should have better visibility when we report Q3 earnings and look forward to updating you on our progress. Additional client wins, international expansion, and further penetration into additional verticals give us confidence that we will continue to see strong growth in this area of our business in the future.

That said, we now anticipate spend growth for our corporate card product to be in the 30% to 40% range for this year including the impact from the CorporatePay acquisition. Turning now to the third pillar of our growth strategy, we have been working diligently on building our international presence with several positive developments occurring in the second quarter. On the fleet side, Wright Express Australia continues to perform to our expectations posting steady growth including 7% payment processing transaction growth over the prior year. Australia continues to grow based on their core small fleet, go-to-market strategy; and we are working on opportunities to grow the business even further by targeting large fleets. Outside of Australia, we signed a five-year agreement with OTI, leveraging technology developed by our New Zealand subsidiary. Our processing solution provides a multi-country, multi-language, and multi-currency back office solution for a vehicle fleet payment device management and transaction processing services. This is a small deal but notable as this is a new region for Wright Express and illustrates our commitment to expanding our international footprint.

Accelerating the development of our international fleet business remains an important priority for us, and we continue to be active in pursuing acquisitions and strategic alliance opportunities in several markets in order to further this objective. On the other payment side, during the quarter, we announced our acquisition of CorporatePay. We are currently in the integration phase and are taking a deeper look at synergy opportunities. With the product suite of single-use accounts and prepaid solutions, CorporatePay's offerings complements our own by rounding out our corporate payment solutions offering with a debit virtual card product. The addition of a debit product enhances Wright Express' broad competitive positioning in the marketplace relative to credit-only players as a debit offering is a must-have requirement for some European OTAs.

In addition, as we work on seeking approval for our credit product in new markets, this acquisition also accelerates our market entry. More importantly, this transaction aligns with our strategy to globalize our virtual card business which we have discussed with you previously. In addition to CorporatePay, we have accomplished a number of operational objectives in the UK for our virtual charge card product, which provide the foundation from which we will build upon. Bringing together CorporatePay's virtual debit card product with our virtual charge card product provides us with a product suite that spans the continuum of the marketplace, enabling greater opportunity for Wright Express to penetrate a broader, addressable market and satisfy customers with diverse needs and requirements. Initially, we plan to build out our international virtual card business leading with OTA in specific target markets.

This is our greatest opportunity for growth, and we are making investments to advance on this strategy. With respect to our two previously announced UK OTAs, while we are still in the early stages of development, we are pleased to announce that one has begun processing transactions. Though still small in dollar terms at this point, we expect this customer to make more of a contribution in 2013 once they are fully implemented. As far as expanding our single-use virtual card product to additional markets, we made greater progress on this objective during the second quarter and enter Australia with the signing of Webjet. Webjet is one of the two largest OTAs in the country, and we expect implementation to begin in September. The potential revenue from this agreement is small in relation to the size of our US OTA business, but it is significant as it provides access into the Australian market with a meaningful player in that market. With this in hand, we plan to continue working on building the pipeline in this region as well as other target markets as we work to globalize our virtual card business.

In conclusion, we are very pleased with our second quarter results and the opportunities we see on the horizon for continued growth and expansion of our business. We expect declining fuel prices, continued softness on same-store sales, and to a lesser extent, FX rates to become headwinds in the second half of 2012 as it relates to our guidance. We remain confident in our long-term success given the diversity of our business and the fact that the fundamentals of our business remain strong. Furthermore, we see various opportunities for growth in both segments of our business. As a result, we plan to further invest in our fleet and other payment segments to drive growth now and in the future. In addition, we remain inquisitive in pursuing strategic corporate development initiatives to capitalize on these opportunities.

We will continue to execute against our multi-prong strategy to grow our core fleet business, further diversify our business, and accelerate the development of our international presence in both the fleet and other payment solutions segment to drive greater growth over the near and long term. With that, I will turn the call over to Steve to discuss our financials in greater detail as well as our revised guidance for 2012. Steve?

Thank you, Mike. For the second quarter of 2012, we reported total revenue of $153.1 million, an increase of $11.8 million or 8% from the prior year period and above the high end of our guidance range of $145 million to $150 million. This compares to our previously stated long-term revenue growth rate of 8% to 10%. The predominant driver of this performance was our corporate charge card product. Net income to common shareholders on a GAAP basis for the second quarter was $30.3 million or $0.78 per diluted share.

Our non-GAAP adjusted net income increased to $39.1 million or $1 per diluted share, an increase of 10% from Q2 last year. The outperformance relative to our guidance was due primarily to lower credit losses. In terms of some key performance metrics for the second quarter, total fuel transactions increased 3% over the prior year. Payment processing transactions were up 1% in total while transaction processing transactions increased 8% primarily driven by the addition of the BP contract in Australia. Each of these growth rates were in line with our expectations for the quarter. The net payment processing rate for Q2, 2012, was 1.63% which was down 1 basis point versus Q2 2011 and the first quarter of 2012. Finance fee revenue in the fleet segment was up $600,000 compared to Q2 last year. As a percentage of total dollars of fuel purchased, it was approximately 5% higher than last year and better than our expectations as we had conservatively anticipated late fees to move in line with credit losses.

In the other payments segment, revenue for the second quarter increased 39% or $10.8 million year-over-year to $38.4 million and now represents 25% of our total revenue. Revenue growth in this segment was driven primarily by our corporate charge card product and the online travel vertical with a small contribution also coming from rapid! PayCard and the recently-acquired CorporatePay. Spend volume in our corporate charge card product increased $922 million over last year or 49% to $2.8 billion for the quarter.

The net interchange rate on our corporate charge card product for Q2 was 90 basis points, down 7 basis points year-over-year. As we discussed last quarter, the drop was primarily due to the mix of contracts, higher foreign spend which generally has a lower interchange rate than domestic transactions, and a reduction in customer-specific incentives received from MasterCard. Moving down the income statement, total operating expenses on a GAAP basis for the second quarter were $90.2 million versus $80.1 million last year. Our strategy remains the same. To tightly control our underlying cost structure while making targeted investments in growth initiatives. The majority of the increase in operating expenses was related to salary and other personnel costs and services. Salary and other personnel costs for Q2 were $30 million compared with $26.4 million in Q2 last year.

The increase was driven primarily by additional head count to support our growth strategy as well as a reduction in the amount of capitalized payroll related to internally developed software. Service fees were up $6.6 million over the prior year to $24.8 million. The increase this quarter was primarily related to the 49% increase in volume on our corporate charge card product as well as an increase in cross border fees.

In addition, we had an increase in expenses related to the acquisition of CorporatePay as well as ongoing corporate development activity. Credit losses continued on their positive trajectory in the second quarter and, once again, exceeded our expectations. In total, credit loss for the second quarter was $4.2 million compared with $6.1 million in Q2 last year. Total charge-offs in the quarter were $7.8 million while recoveries of amounts previously charged-off were $1.4 million.

Domestic fleet credit loss was just under 7 basis points, a record low for the second quarter, compared to 12 basis points in the prior year period. The outperformance in credit loss relative to our expectations was driven by improvement in the accounts receivable aging. Our effective tax rate for Q2 on a GAAP basis was 66.5% compared to 36.4% in the second quarter of 2011. During the second quarter we he recorded a charge of approximately $31 million due to the impact of tax legislation in Australia enacted on June 29, the impact of which as I stated earlier has been excluded from adjusted net income for Q2. This legislation eliminated the past and future deductibility of approximately $72 million of amortization related to customer relationships.

The cash impact of this charge will be spread out over many years. In addition, the Australian government is also looking at changing their transfer pricing rules in the area of allowable debt levels. If this proposed legislation is passed, this may result in a current period charge in the period the change is enacted as well as increase our tax rate in the future. On an operating basis, we also had an increase in our tax rate related to the acquisition of CorporatePay as some advisor expenses were not deductible for tax purposes. As a result, our tax rate was about 50 basis points higher than we had expected in the second quarter at 36.3% compared to 35.8% for Q2 a year ago. We expect our A&I tax rate to be approximately 36% for the remainder of the year pending an outcome on the potential change to debt transfer pricing rules in Australia.

Turning to our derivatives program, for the second quarter of 2012, we recognized a realized cash loss of $3.8 million before taxes on these instruments and an unrealized gain of $24.6 million. We concluded the quarter with a net derivative asset of $11 million. As the interest rate environment stays low -- stays at very low levels and our credit losses have outperformed our expectations from when we executed our hedges, we are currently under our target level of 80% and expect to remain below for the next few quarters. For the third quarter of 2012, we have locked in at a price range of $3.45 to $3.51 per gallon. For the fourth quarter, the average price locked in is a penny higher. Spending a moment on the balance sheet, our financing debt balance increased $32.3 million in Q2 given the acquisition of CorporatePay, and we ended the quarter with a total balance of $320.7 million on our revolving line of credit and term loan. During the second quarter, we also repurchased approximately 200,000 shares of our stock for approximately $11 million to offset dilution related to equity awards this year. As of June 30, our leverage ratio was 1.2 times EBITDA compared to 1.7 times at the end of Q2 last year.

We ended the quarter with $208 million of cash. The majority of the increase in cash was driven by our new relationship with Hire One. Recall that the agreement with Hire One 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, such as this quarter, this may lead to having a cash balance, and if so, related interest income. We will pay a service fee to Hire One that is a variable interest rate on the average balance based on market rate.

As we have previously stated, we expect this will lead to meaningful operating interest expense savings in the second half of this year which had previously been incorporated into our guidance. Given the growth we experienced in our payment offerings and the related fluctuations in our daily cash needs, we plan to maintain greater levels of liquidity at our bank subsidiary going forward which will result in an increase in cash on our balance sheet. In addition, due to the growth on our corporate charge card product, we have placed $50 million into an interest-bearing account to secure performance on our obligations to MasterCard which is included in other assets on our balance sheet.

In terms of future capital allocation, our main priority is to look be at acquisitions as a way to further our growth objectives. However, in the absence of any deals, our near term priority will remain to pay down debt. In terms of capital expenditures, CapEx for the second quarter was $11 million. This was a bit higher than our run rate due to a new licensing agreement with Oracle that will cover the next three years. For the full year, we continue to expect CapEx will be in the range of $30 million to $32 million.

Now, for our guidance, which reflects our views as of today and is made on a non-GAAP basis. For the third quarter of 2012, we expect to report revenue in the range of $153 million to $158 million and adjusted net income in the range of $42 million to $45 million or $1.08 to $1.15 per diluted share. These figures assume normal seasonality trends in the corporate purchase card and prepaid businesses as well as credit losses. Our third quarter guidance assumes that domestic fuel prices will be $3.46 per gallon and that domestic fleet credit loss will be between 9 and 14 basis points. For the full year 2012, we have updated our guidance and now expect revenue in the range of $591 million to $601 million and adjusted net income in the range of $156 million to $162 million or $4.00 to $4.15 per diluted share. Our full year guidance assumes that domestic fuel prices will be $3.55 per gallon which implies a fourth quarter price of $3.25.

We anticipate that domestic fleet credit loss will be between 9 and 12 basis points for the full year. We are also assuming that the Australian dollar remains at a premium to the US dollar in the range of $1.03. As a reminder, fuel price assumptions for the US are based on the applicable NYMEX futures price which may not reflect the actual prices during the quarter. Before we open it up for questions, let me spend a minute walking through our revised guidance. As Mike alluded to earlier, the bulk of the revision to our full year guidance is being driven by lower fuel prices, FX rates, and to some extent continued softness in same-store sales from our existing customer base. Compared to the guidance we provided back in May, our domestic fuel price assumption for the second half of the year is now about $0.35 lower. The impact from the lower fuel price assumption is exacerbated given that we are underhedged as a result of lower-than-expected interest rates and credit losses. In addition, we are now expecting to be below the bottom end of our hedge range which leaves us fully exposed to changes in fuel prices as prices drop within the range of the collar.

If we are below the bottom end of the range, we will collect payments from our counter parties. Furthermore, FX rates turned against us as the US dollar has strengthened versus the Australian dollar relative to our prior expectation. Our revised guidance also takes into account a few cents of dilution from the acquisition of CorporatePay, including the related tax impact. Finally, we expect a continued sluggishness in the US economy which is being reflected on our same-store sales metrics to persist. We had previously anticipated that same-store sales would be flat in the second half of the year, but given the current environment, we do not expect this to occur.

And now we will be happy to take your questions. Kayla, please proceed with the Q&A session now.

(Operator Instructions). Your first question comes from the line of Robert Napoli with William Blair.

Thank you. Good morning.

Good morning.

Maybe start off with PaySpan and maybe a little bit of color on how you won that business, and talking about the size, the $35 billion to $40 billion that PaySpan thinks is somewhere around 20% on a run rate basis will be done on cards by the end of this year. That is almost $7 billion of volume. I know you guys are conservative but it hasn't even started. What can go wrong and how does the program work? Is that -- 20% of $40 billion is more like $8 billion of potential volume for 2013.

Yeah, Bob, thanks. And I know you have done a little bit of work on that yourself. Clearly, this was a great win because you it puts us in a new vertical. It is a vertical that we believe will continue to grow in spite of the economy or whatever, just knowing the dynamics that is going on in the country, and PaySpan is a large provider of services. They basically manage payments for insurance companies and third-party administrators, and they have to reconcile basically all of the payments to make sure everything ties out on both ends. They do that today through you a non-card program, primarily checks.

They look at our product as being, I would say, best in class; and they will use that product initially to pay, again, on behalf of the insurance companies and the third-party administrators to the medical providers. So that is basically what they are going to do initially. We think there are other strategies and opportunities we will pursue with them, but that is where we are going to get started in the fourth quarter. There is no doubt they can become a very large player for us.

I would say that they -- and we would say if we are only doing $1 billion dollars next year, we would be disappointed; but I don't think we are in a position to say over and above that what that looks like, and that is why we said we would share more during the Q3 call. They are very bullish and we are very bullish. The integration is not difficult; it is similar to what we do with the OTAs. A lot of the work is going be on their side, but they think they will have it up and running by the end of the third quarter and be ready to do transactions in the fourth quarter.

Great. Thanks. Just in that segment, the OPS, I mean the spend growth that you had -- 49% spend growth. Really not down much from the first quarter. Where -- is that still coming primarily from the two largest players, and have you moved into new geographies because they are not growing that fast? They are doing well but not that well.

They are growing.

Yes.

And it is coming primarily from our online travel companies.

But you must be moving into new geographies because their top line -- their hotels growth isn't 49%.

I think mostly it is just continued increased penetration. They are growing at pretty healthy rates. I would say the 49% does include the impact of CorporatePay in the quarter which was in the range of $100 million of spend as well. But as you would test, it is our biggest customers that are driving the majority of this growth.

Thanks. And just last question on your core business in the US and same-store sales being weak with this economy is not surprising but is the -- your attrition rate sounded a little bit higher than it historically has been. I mean, has -- I think your head salesperson is now running Europe. Have you lost any focus, or I mean, this company is growing rapidly in a lot of different directions. Do you have the internal executive level support that you need or are you thinner than you have been?

No, I know that, as you know, Melissa Smith is running the Americas. She has a very strong team that Dave Maxsimic has in place and had in place that is still driving our core business. I don't think the attrition rate is indicative. A lot of that comes from also what is going on with our client service organization. It is slightly up over last year but not much. I mean, anything under 5% all-in we think is pretty spectacular numbers. So we don't see any change there. I think that is also probably indicative of the economy being controlled. I think our customers, if we look at that aspect, we look at the aging buckets, we look at that debt also tells us even though the economy is sluggish, at least businesses are managing their programs better. On the attrition, we are very pleased with the numbers of 4.4% all-in.

And any slight increase we did have came on the involuntary side. It wasn't customers choosing to leave us.

Our mantra has always been on the voluntary to be under 3% so be all-in voluntary and involuntary at 4.4% we feel is very strong.

Thank you.

You're welcome.

Your next question comes from the line of Sanjay Sakhrani with KBW.

Thank you. I know Bob kind of rattled off some numbers in terms of what the potential could be for you guys from PaySpan. I was wondering if you could clarify that or at least articulate how significant that ramp could be over a short period of time, and obviously over a longer period of time it could be in the entire pot. That is question one. And then just question two, on the fleet business, could you just maybe just talk about the M&A opportunity? I know you guys had some stuff in Africa. How significant is that opportunity? And then what other stuff is out there? Thanks.

Okay. On PaySpan, the numbers we have are $35 billion in total spend in terms of what they are paying for the insurance companies, let's say, to the medical providers. Right now we are addressing that with them. We are trying to work out what are the opportunities, and clearly I think it is very clear their C.E.O. is very bullish about it, but I think we have to sit down and really strategise this. It may even mean exploring some other products with them beyond the regular virtual card. We are in those discussions. I just don't think we are ready to say what that looks like long-term. That is why I at least try to say to you if it is only $1 billion next year, I think they would be disappointed and we would be disappointed; but I don't think we are ready to say what the numbers look like.

The other thing, Sanjay, is we have included very, very little in this year's numbers essentially in the fourth quarter. I think we called it out as immaterial. We do expect some spend volume, but it's not going to be a tremendous amount this year.

On the fleet side, OTI is really a partner, it is not an acquisition; so they are basically going to be providing their product to oil companies. They already have some in place. They provide contactless services for payments, and they are going to use our back end to be their core processor for those fleet transactions; and they will continue to look for other opportunities in the South African marketplace. So not quite an acquisition. We are pursuing and looking at acquisitions in the fleet business as well as some strategic alliances that we think will be very powerful as well, but not ready to talk much about those at this point.

Okay. Just one final follow-up. In the online travel side, you guys mentioned that you do have some conversions next year. Is there any shot that we could have a little bit of an acceleration of those conversions and they could come into this year? And how material could they be?

When you say conversions, for example, are you talking like Webjet in Australia?

Yeah, some of the wins you guys had.

Yeah, the UK, well, the UK one, the good news is it is up and running. We always said it wasn't very large so it is not that material, but it still is going to add to our growth in the UK market. The Webjet, we hope to have transactions going through that this year; and we think that has opportunities for us more next year than this year. And we are working aggressively on all of these. I don't think we are standing still. Some of this you have to stand up the regulations which we did in the UK. Make sure you have a bin sponsor and have your processor in place, which we do. All that is there and we are processing so I think we can now say in the UK, we are processing credit virtual cards and through CorporatePay, we are processing prepaid virtual cards. But we are moving as aggressively as we can to stand these up and try to penetrate as aggressively as possible.

Great. Thank you.

You bet.

Thank you. Your next question comes from the line of Julio Quinteros with Goldman Sachs.

Thanks for taking my question. I guess on the international expansion opportunity, you had a number of key wins this quarter mostly on the virtual card, but your competitors actually signed or announced a few acquisitions internationally. Just curious, were you involved in some of those deals, and I guess ultimately what led you to perhaps not pursue that more aggressively? Was it just a matter of valuation or something more strategic than that?

Yeah, I would say that we are looking through our own strategic lens of what we think we have to do to make sure we are winning in our core markets, diversifying our business, and looking at the international opportunities. I can't say that we were involved in all of the different ones. We don't even know all of the announcements except for the one in Brazil, but I do think they are very aggressive on the inorganic side. We are very strategic on the inorganic side, and I think we are going to find ourselves even being in different markets knowing the OTA markets and some of the different things we are doing in prepaid. So our lens is a little different than their lens on the fleet side clearly. They are talking about some of their wins, I guess, they will probably give you more color in the future. Again, we are not pursuing it as aggressively maybe as they are in some of these areas. We are looking at some of the things that we think are very strategic to us, and what we are looking to do on the fleet side.

Okay. And then on PaySpan, what is the go-to-market strategy, or I guess what drives the confidence in some of the numbers you are giving on the -- at least $1 billion dollars next year. Is this just a preliminary sense of conversations you have had with some of PaySpan's end customers or is this something in the go-to-market strategy that boosts your confidence there?

I think it is really working with them and understanding the value proposition and how the value proposition works and getting the confidence from them and their sales organization that the value proposition is something that people will sign up for and bring even greater reconciliation and accuracy in terms of booking the billings, if you will, to these different agencies or I should say insurance companies for them. It is really them knowing their business, knowing our value proposition, and how bullish they are, saying, we really think this can be a winner for us and differentiate them in the marketplace.

Lastly, just on the same topic, when we try to connect the dots from the potential volume opportunity to the revenue impact, should we assume similar interchange dynamics that we see currently today in your other payment business?

Yeah, I mean, this is a very large customer; and so you know you would expect our net interchange rate to be in line with our other variable customers, which it is. We will earn on a gross basis the issuing bank rates that MasterCard accepts, and we think this is a very big relationship that has a potential to be one of our top customers, absolutely.

Makes sense. Thank you.

Thank you.

Your next question comes from the line of Tom McCrohan with Janney.

Hi. Quick question on trends in the fleet segment. Can you give us any color on what the growth rate was in payment transactions for the month of June and for the month of July?

I would say that there was not any kind of sharp deceleration or acceleration in the growth rates. You know, through the -- through July, and I'm not sure I have yesterday's data, but the same-store sales trends were pretty much in line with what we were seeing through the second quarter. So for kind of the second half of the year we are expecting pretty much more of the same. We're going to be low single digits and we're expecting our same-store sales to be a bit of a headwind.

Okay. So the growth this quarter of 1% is a good run rate to go with, hasn't decelerated like if you look at the month?

No, it hasn't decelerated from there certainly.

Great. And then to ask another question on PaySpan, do the insurance carriers need to opt-in to this program to shift payment on to the credit card rails, or is this something that you and PaySpan control without their input?

I think they do have to work with the medical providers who they are paying on behalf of the insurance companies, so I think those people are already taking credit card transactions. But it is not what PaySpan is doing with them today, but they do accept credit cards for other payments. So there does have so be some opting-in, but they are very comfortable because they have been talking to customers so they are the ones right now telling us what they think the opportunities are because of the initial discussions they have had with some of their big customers, if you will.

So does the medical provider need to opt-in to -- or if they accept credit cards, you can send them any payment you would like?

They still have to opt-in.

They have to opt-in. Got it.

Yes.

Mike, as far as obviously it is going to generate the income that didn't otherwise exist before to the extent there will be HEH systems, so how would the split work? How would those fees be divided amongst you, PaySpan, and presumably the insurance carrier?

I can't speak for what they will do with the insurance carriers or their customers. For us, it will be similar to what we do with the OTAs. We get our merchant interchange, and we will be rebating part of that back to them. So that will be typical for us. They will drive the other part of their pricing valuations, if you will, or pricing programs.

Got it. Great. Thanks very much.

You're welcome.

Your next question is from the line of Tim Willi with Wells Fargo.

Thanks and good morning. A couple of questions. Mike, on the housekeeping side, what was the revenue contribution of CorporatePay during the quarter? Or how should we think of that in terms of just the underlying organic growth rate?

Yeah, the actual revenue contribution is a little over $1 million dollars for the couple months we owned them. I think you can kind of comfortably put this in the $5 million to $10 million range -- annualized revenue. Much like our OTAs, they have a spike in the summer months when people travel more, so you will see a little bit more in the third quarter. But kind of think of it as about a $10 million revenue business.

Okay. And then in terms of guidance, you mentioned dilution, some slight dilution from this deal. Is that mostly the one-time costs associated with closing on the transaction or is that -- you have got intangibles backed out of just the guidance, so what would cause that dilution from this acquisition?

The Company on a standalone basis before we bought it was a profitable business. What is causing the dilution? Part of it is one-time expenses including the small tax impact that we had in Q2. But mostly it is the integration expenses that we have plans for the Company to grow the business, and so we are going to throw some resources at it to integrate it into our business.

Okay. Two more questions. On M&A and I think international, you've talked and done more so obviously Europe, et cetera, but what is Asia and sort of the greater sort of Pacific Rim look like within the presence you have in Australia and with the software platform you bought several years ago? Are there active discussions and pipelines in the APAC region relative to what you think about in Europe or elsewhere?

There is both active and future opportunities. We are pursuing some active opportunities in the Asia PAC market as we speak, and a lot of those are through oil companies, and then we are also looking at other opportunities in some of the more emerging markets which would we more long-term and is that an alliance, an acquisition, whatever, I can't say at this point but more long-term.

The last, in the MasterCard business. Any updates on verticals? I think you mentioned education as one that you think has a lot of potential over time, and then I think you have also from time to time talked about property about, P&C insurance, personal property insurance is another opportunity outside of the healthcare business that you've signed. Any updates on either of those verticals and progress you are making?

Nothing that is material like a PaySpan, but I think we have made progress on the education side. We have some things in the pipeline that potentially give us more opportunity in that marketplace. We've continued to grow on the insurance side, and that has been a nice steady growth strategy and growth for us over the last number of years but nothing to the extent of the OTAs or what a PaySpan would bring.

Okay. That's all I have. Thanks very much.

Your next question is from the line of Mike Grondahl with Piper Jaffray.

Thanks for taking my question. Could you help us understand what your customers need to see and maybe it is just a better environment for same-store sales to get a little bit of a boost?

Yeah, I think the real issue is it's somewhat tied to GDP. So they are going to move more products and services if the economy is stronger, and as you know GDP was 1.5% and people like UPS and others are forecasting it is not going to be much better than that, if not weaker than that going forward. So I think until we see the economy -- people have more confidence in the economy because there is so much uncertainty, I think that they are going to fulfill their services, but I think that is why we are saying we are going to see it probably a little bit below being neutral in terms of same-store sales growth.

Got you. And then you did mention, I think it was a $50 million deposit with MasterCard. Could you just maybe highlight what that was for a little bit more specifically?

Yeah, it really comes down to the growth in the program. And MasterCard has a lot of internal metrics that they look at in terms of the size of the customers they are dealing with and essentially they made a credit decision that they would prefer to have us place a little money on deposit. It is in an escrow account and it is earning interest, but that will stay in the account. But it's certainly something we will earn. But it really just comes down to a risk management decision based on the really, pretty high growth rates we had in the business.

Got you. Okay. Thank you.

You're welcome.

Your next question is from the line of Tien-Tsin Huang with JPMorgan.

Good morning. Just wanted to ask about, first, the credit outlook, credit loss outlook. I know your term is pretty clear and your favors are performing, but is the slowing same-store a precursor for higher losses that maybe we should think about in 2013? I know it is too early to give guidance but just directionally, what is the playbook?

I think we have seen a lot of really great results in our credit loss really for a couple of years now, but this year is really kind of standing out as -- we have done some things that we are just improving the aging and we are improving the collectability of older balances, and I don't think those are temporary factors. I think we will continue to do that. All of the signs we have right now point to a very strong performance over the second half of this year which our guidance reflects. If we hit the lower end of our credit loss range domestically, that will be at an all-time low for us for a full year. It may be a precursor but coming from the levels we are at, you know, it wouldn't do anything but put us back into a more normalized range, I wouldn't think.

But just bridging that to the underhedging given the overperformance at the lower rate, are you going to change your notional hedging strategy overall? I may as well ask where the hedge rates are at today and so on?

At this point, we are not, but we are always looking at -- we are discussing with the board on a regular basis. But we are not changing it as of now.

If we were to execute another, you know, our next hedge is in the range of $3.30 today.

Last one, just on the merchant litigation, nothing directly impacting Wright Express, but in terms of the surcharges it wasn't clear to me if Wright Express as a network would be included at that level playing field discussion of being surcharged or not. So what is your view on that, Mike, or Steve, around surcharging and what it means?

Yeah, as you know, it is a proposed settlement, still in process. MasterCard is -- I have no idea what happened on their call and what they talked about, but we are in close conversations with them. We know they have some proposed settlement at this point that would impact us potentially, which would look like at this point somewhere in the middle of next year and go on for a number of months. So we would have a temporary impact to our revenue stream, if you will, if it stays the way it is. We are watching it closely. You're right, Tien-Tsin, we have nothing that we can do about it. Just stay close to it, watch it, and be in conversations with MasterCard.

But any way to potentially size what that might look like or --?

What we are referring to is the 10 basis points for a period of 8 months, so we would be looking at our -- you'd have to look at our volume. And it depends on what period of time that relates to as well, they actually implement it because we do have some seasonal.

Good. I didn't know if some was protected or not. Very good. I appreciate everything, guys.

You're welcome.

Your next question is from the line of Phil Stiller with Citi.

Hi, guys. I just wanted to follow up on the last question on the credit settlement. If the surcharges would go into effect at gas stations, would your customers have to pay a higher rate; and I guess from that, what has your experience been in Australia where a certain percentage of the gas stations have been surcharging for a number of years in terms of the value proposition and the ability to sign up new clients?

You are talking about the gas stations or retailers having the ability to charge for credit?

Yes.

Yes. I think that talking to the oils, that is not their preference. I know they can't control each of their individual stations. In some cases, some retailers have been doing this for awhile regardless, and it hasn't been an impact. It has been a very small number of stations that have been surcharging. That is not happening in Australia, so we are not seeing any surcharging for our product in Australia. I don't know of any other surcharging going on down there.

Okay. Just switching gears on the transaction growth. Total transaction growth grew 3%, vehicles were up around 7%, which implies that transactions per vehicle is down about 4% which is pretty consistent with the first quarter. Any ideas on what is driving that lower transaction volume per vehicle? And have you guys done any further work on the fuel efficiency impact on your business?

Yeah, we do believe in the number that there is some fuel efficiency. I don't think it is caused by cafe standards. I think it is caused by people just being smarter. They are using GPS either through us or through another provider and trying to get more productivity out of their vehicles. I think we are seeing that, but it is not a major impact if you think about GDP at 1.5%, and we said we are down 1%, it is impacting below GDP, but it is not a major impact. I've recently read a study that says if you really start talking about impacts on cafe standards long-term that through 2025, there's only going to be a 17% decline in fuel consumption based on cafe standards. So I don't think we are seeing it yet, and I think it has a long-term impact and not even that big of an impact.

Okay. And then just last question on the hedging strategy, you guy haven't put on the new hedge yet. It has been about five months. Are you guys price sensitive at the $3.30 level or what is the strategy there?

No, I think that we had suspended sometimes in the past. We have been looking at things like the 200 a day average in trying to say, you know, should we do a hedge in the last quarter? We decided not to but our plan is to still do hedges on a regular basis going forward.

Thank you.

The next question is from the line of Greg Smith with Sterne Agee.

Hi, guys. Steve, you mentioned this tax issue in Australia. If that sort of goes against you, what impact could that have on your overall effective tax rate?

So, I mean, essentially what we are talking about is kind of thin cap rules, and the intercompany debt that we have in place related to the purchase of retail decisions at the time. You know, essentially that tax impact of that interest would be disallowed. At least some portion of it. I can't really estimate it for you particularly well because they are still kind of in the early stages of discussions down there, and so until we know what the actual final rules are, it will be difficult. What I can tell you is that we are currently deducting in the range of -- well, we are currently receiving a benefit of between $5 million and $6 million a year in our tax rate which we would certainly not expect to lose 100% of that, but depending on what the final outcome of those rules are, it could be certainly some portion of that.

Okay. And then just back to PaySpan to kind of sum it up a little bit. Once you guys have built the product and maybe some additional products that you might need, once that is sort of built, it is handed over to PaySpan and really up to them to drive the growth? There's not a lot you can do to further drive penetration? Is that a good way to think about it?

That's fair. I mean a lot of it is going to be up to their sales force that is out there talking to their providers and customers on a regular basis. They will really be the drivers of the product, and that is why I think they are so bullish on the potential to penetrate into their markets.

And they are obviously incensed to do it this, too, because they get a share. Not only is it maybe more efficient and better for their customers but economically they are highly incensed to move volume from a paper check who a card transaction, right?

Correct. Absolutely.

Okay. And then just lastly, on just your traditional fleet business, are you seeing any pressure on the rebates on large contracts or on contract renewals?

No, I mean we see clearly with the large fleets on contract renewals there is some of that going on, but it is not any different than it has been in the past, so we are not seeing any further pressure, if you will.

Great. Okay. Thank you.

Thank you. And your last question is a follow-up from the line of Robert Napoli with William Blair.

Thank you. Any update on your efforts in the big truck sector?

Yeah, I think that it is still the chicken and egg. You know, we have built the product so the investment has been made and now it is a matter of just getting more sites signed up, and that is the process we are driving right now to try to get to the fleets longer term.

It looks like US bank is maybe getting -- after kind of ignoring this business for awhile, it looks like they are getting a little more aggressive. Are you seeing that in the market?

No, we know who TransCard is. I think that is the name of the company they bought. So no, I mean, we know what the acquisition or at least the target acquisition was, so I think that probably makes sense. They do some things with their payment services that help heavy trucking companies so I'm not surprised by it. Overall, though, I think they are still focused on their core markets which are primarily corporate customers and government customers, and now we are going to see them a little bit more on the heavy truck side.

Then last question. Are there any big programs out there -- how is the pipeline? I missed the very first comment that you had. Is there a pipeline of new business in the fleet segment in the US? And are there any potential moving -- I guess, the metric-moving customers out there like the post office or anything like that?

Well, I think, yes, there is the post office. There is still other state governments. We won the State of Pennsylvania. There are still other private label portfolios that are in play currently, and we know there will be some in the future and some other opportunities for portfolios. And we are pursuing all of those. I think we still feel pretty good about bringing 270,000 vehicles in the first half of this year as well, and the nice thing is that we're spread pretty evenly across small, medium, and large. So we are taking market share. But there are those opportunities for some step functions as well.

Thank you.

At this time, there are no further questions. Do you have any closing remarks?

No. I think we just say thank you for joining us today, and we'll look forward to talking to you again next quarter.

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