WEX Inc (WEX) 2012 Q4 法說會逐字稿

Good morning. My name is Dawn and I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Inc. fourth-quarter 2012 fiscal results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

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

Good morning. With me today is our CEO, Mike Dubyak. The press release we issued earlier this morning is posted in the Investor Relations section of our website at wexinc.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 the amortization of purchased intangibles, goodwill impairment, asset impairment, and other charges related to the acquisition of Fleet One. The net impact of tax rate changes on the Company's deferred tax asset, and related changes in the tax receivable agreement, including the former shareholder of RD Card Holdings Australia. 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, the risk factors identified in Exhibit 99.2 to our current report on Form 8-K furnished to the SEC on January 22, 2013, 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. Earlier today, we reported our results for the fourth quarter and full year of 2012. For the fourth quarter, both revenue and adjusted net income came in at the top end of our guidance range. Q4 revenue increased 21% to $169 million, and adjusted net income increased 9% to $1.07. This resulted in a full-year revenue growth of 13% and adjusted net income growth of 12% for 2012.

In 2012, we made significant strides in executing against our multi-pronged strategy of expanding our US fleet business, diversifying our revenue streams, and further developing our international business. The progress we've made over the last 12 months set the stage for continued strong revenue growth for our business in 2013.

As we think about the upcoming year and driving the next phase of our Company's development, we see a number of opportunities across our business, including global prospects for our successful virtual card product. With a track record of making investments that have yielded impressive results, we plan to make meaningful strategic investments to maximize the potential of our businesses. As a result, 2013 will be an investment year as we plant the seeds for our long-term growth, as well as to advance our competitive position.

Before I provide more detail on those investments, let me quickly review our results for 2012. Looking at our Fleet Payment segment, we achieved strong revenue growth of 20% during the fourth quarter, driven by the acquisition of Fleet One and new vehicle signings. Consolidated payment processing transactions increased 16% in Q4. Excluding the impact of Fleet One, we also posted solid results, with vehicle growth up 6% and payment processing transactions growth up 7% year-over-year.

With respect to our US fleet business, same-store sales remained soft and were down less than 1%, compared to the fourth quarter of 2011. This was a sequential improvement from the 1.4% decline we saw in the third quarter. Though the existing customer base has been under some pressure, our core business continues to expand, as illustrated by the growth in transactions and vehicles. Our front-end sales continues to pay off, and for 2012, we exceeded 600,000 cards -- a record year for WEX -- approximately one-third coming from small businesses.

As far as new developments, during the quarter, we were very pleased to have signed Marathon, a competitive private-label win that WEX obtained as a result of our strong value proposition. This account is similar in size to ConocoPhillips, and will be implemented during Q1.

We are also well underway in the integration process with Fleet One, which is more complex than any of our previous integrations. Over the past quarter, we solidified our integration plans and made some key strategic decisions to position the combined company for future success. Our integration plans entail consolidating three platforms to one platform, which includes winding down WEX's existing OTR program, optimizing our sales force and go-to-market strategy, migrating Fleet One contracts over to WEX Bank, and combining our back-office operations and enhancing our IT infrastructure to support the combined entity going forward.

The completion of all integration activities is part of a multi-year effort. Based on where we are today in this process, we feel good about the progress we've made as we are tracking to our plan.

Moving on to the international side of the Fleet business, WEX Australia continues to perform well. For the fourth quarter, payment processing transactions increased 8% over the prior year, and total cards increased 10%. Outside of Australia, we remain very active and working to develop our business with the major oil companies. While we have opportunities that we are pursuing in Europe and Asia-Pac, the sales cycle for this type of business is fairly long, and it will continue to be some time before we secure any new business.

Turning now to our Other Payment segment. We continue to be optimistic on the long-term trajectory of this part of our business, as we further expand our virtual card product into new markets and grow our PayCard offering over time. Revenue for this segment increased 24% to $40 million in the fourth quarter, led by our virtual card product. Spend volume for our virtual card business increased 24% to $2.5 billion in Q4, culminating in 38% growth for the full year, which exceeded the high end of our original expectations for 2012.

Regarding the implementation of PaySpan, as I mentioned on our prior earnings calls, we successfully implemented the national accounts, but the contribution was limited relative to our overall revenues. We are in the ramp-up phase, and anticipate any meaningful revenue contributions to be back-end loaded for 2013. We reiterate our belief that PaySpan has the potential to become an important contributor to this part of our business over the long-term.

We continue to make good progress in growing our PayCard product offering. Additionally, UNIK had a strong year compared to the prior year, and we think this bodes well for future investment and growth opportunities within Brazil.

Overall, we feel good about our performance in 2012. Though the economic environment continues to be challenging at times, we believe our results speak to the resiliency of our business model and the strength of our multi-pronged growth strategy. We also think our results reflect the strategic investments we've made over the last few years to grow our business, and stay ahead of the curve within the complex and continually evolving payment space and landscape.

These investments help us to remain competitive, enhance our ability to service customers, and allow us to develop new products, as well as introduce our existing products into new geographies in order to further our growth. As I mentioned, we expect significant investments in 2013 to further accelerate these opportunities, which will impact our near-term results, but will ultimately -- ultimately -- lead to greater growth as we move ahead.

These growth investments will be predominantly focused on globalizing our OTA virtual card, which has an addressable market of $500 million in revenue in the geographies we are targeting. Based on the extensive research we've conducted on market opportunities, we plan to target several new markets in the coming year.

Over the course of 2013, in addition to growing our existing presence within the UK, Australia and Brazil, we will start the process of expanding our business, beginning with the Asia-Pac region, including Thailand, Singapore and Hong Kong. This will include building the foundation and a physical presence with sales, service, and compliance support. All of these countries share key attributes that make them right for entry with our virtual card. Besides being markets that are key growth targets for our domestic travel partners, they also have attractive in-country growth, as well as fewer hurdles for market entry relative to other countries we've researched.

We also plan to conduct a deeper look into bringing our virtual card into other countries within Europe, as we leverage CorporatePay together with our credit product. In addition, we will be exploring opportunities to use our bank as an issuer internationally, which would enhance our operating leverage through the reduction of cross-border fees. We will also be making some sizable investments to expand the sales force at rapid! PayCard, UNIK, and CorporatePay, given their performance to date and their future prospects.

On the whole, we expect the returns from our investments to materialize in 2014 and beyond. As for (technical difficulty) 2013 to be more or less similar to that of 2012. In our US Fleet business, specifically, we expect a continuation of low single-digit organic growth in the absence of an economic rebound. We will also be focused on continued integration work at Fleet One, which will entail some additional investments, as I stated earlier.

Finally, we will also remain opportunistic with respect to M&A (technical difficulty). We have no immediate plans for the additional capital raise from our recent bond offering or expanded credit facility, but they do provide us with additional dry powder to capitalize on any opportunities that may arise in the future. While we experience incremental interest expense as a result of this financing, it provides us with a low fixed cost of capital for the next 10 years.

To conclude, as we head into 2013, we believe we are on a strategic path for current and future growth, and are well-positioned to continue executing against our strategy of expanding our America's Fleet business, diversifying our products, and growing our international business. We look forward to updating you on our progress.

And now, I'll turn the call over to Steve to discuss our financials and review our outlook for 2013. Steve?

Thank you, Mike. For the fourth quarter of 2012, we reported total revenue of $169 million, an increase of $29 million from the prior-year period, and at the high end of our guidance range of $162 million to $169 million. This performance was driven primarily by strong growth from our virtual card product and the acquisition of Fleet One.

Net income to common shareholders on a GAAP basis for the fourth quarter was $29.1 million or $0.74 per diluted share. Our non-GAAP adjusted net income increased to $41.8 million or $1.07 per diluted share. This compares to $0.98 per diluted share reported in Q4 last year on an adjusted net income basis.

For the full-year 2012, revenue increased 13% to $623 million from $553 million in 2011. On a GAAP basis, net income was $2.48 per diluted share in 2012 compared to $3.43 per diluted share in 2011. On an adjusted net income basis, earnings increased 12% to $4.06 per share from $3.64 per share last year.

Our key performance metrics for the fourth quarter were very much affected by the acquisition of Fleet One, which was completed on October 4. Given that Fleet One will be integrated with our US Fleet business, our performance metrics going forward will be reported on a consolidated basis. For this quarter, however, I will discuss the metrics, both as they will be reported going forward as well as excluding the acquisition of Fleet One for comparative purposes.

Consolidated fuel transactions increased 12.1% over the prior year. Consolidated payment processing transactions increased 15.7% over the prior year, primarily due to the acquisition of Fleet One. Excluding Fleet One, we had a growth rate of 7%. The consolidated net payment processing rate for Q4 2012 was 1.4%, which was down 26 basis points versus Q4 2011, and 22 basis points versus the third quarter of 2012. This reduction was primarily due to the acquisition of Fleet One. The rate would have been 1.61%, excluding Fleet One, a sequential decline of only 1 basis point.

Finance fee revenue in the Fleet segment increased $2.3 million compared to Q4 last year. As a percentage of total dollars of fuel purchased, it was approximately 16% lower than last year, reflecting the sound condition of our portfolio as we head into the new year.

In the Other Payment segment, revenue for the fourth quarter increased 24%, or $7.7 million year-over-year, to $40 million. Revenue growth in this segment continues to be driven by our virtual card product and the online travel vertical, with contributions also coming from rapid! PayCard, CorporatePay, and UNIK in Brazil. For the full-year 2012, this segment represented 24% of our total revenue, up from 21% last year.

Spend volume on our virtual card product increased $476 million over last year or 24% to $2.5 billion for the quarter. Then that interchange rate on our virtual card product for Q4 was 94 basis points, down 4 basis points year-over-year, and up 4 basis points sequentially. The increase was primarily due to the spend mix in the customer base.

As mentioned in previous earnings calls, we have continued to closely monitor the pending MasterCard merchant litigation settlement. As of today, it looks as though MasterCard could implement a settlement plan as early as July 2013, although it has not gotten final approval from the courts. In the event this comes to fruition, we would expect this to negatively impact our interchange rate by 10 basis points for an eight-month period. This has not been included in our full-year guidance. However, we will continue to watch the situation closely, and will provide updates on the impact to us accordingly.

Moving down the income statement. Total operating expenses on a GAAP basis for the fourth quarter were $119.5 million, a $40.4 million increase versus last year, a majority of which was related to salary costs and service fees. Overall, the major driver of the increase in expenses was the three acquisitions we completed during the year.

Salary and other personnel costs for Q4 were $35.9 million compared with $25.1 million in Q4 last year. The increase was predominantly due to our acquisitions of Fleet One, UNIK, and CorporatePay.

Service fees were up $10.9 million over the prior year to $29.1 million. The increase this quarter continues to be a product of the 24% increase in volume on our virtual card product. In addition, we had $4.8 million of deal-related and integration costs associated with the Fleet One acquisition.

Credit losses continued their solid performance in the fourth quarter. On a consolidated basis, credit loss was $7.7 million in Q4 compared with $7.1 million for the same period last year. Consolidated charge-offs in the quarter were $8 million. Excluding Fleet One, credit loss was $7 million and net charge-offs were $7 million. Recoveries of amounts previously charged off were $1.5 million.

Consolidated domestic fleet credit loss was 11 basis points in Q4 compared to 15 basis points in the prior-year period. Excluding Fleet One, domestic fleet credit loss was 12 basis points for the quarter and 9 basis points for the year. This represented our best year ever for credit loss rates.

Our operating interest expense was $1.6 million in Q4, as we continued to benefit from low interest rates in addition to savings resulting from the Higher One deposits. The average net interest rate this quarter was 34 basis points.

The effective tax rate for Q4 on a GAAP basis was 33.7% compared to 36.1% in the fourth quarter of 2011. Our adjusted net income tax rate this quarter was 36% compared to 35.8% for Q4 a year ago. The slight increase is due to a greater percentage of profits coming in the US with the Fleet One deal, as well as the change in Australian tax law we discussed last quarter. We expect our A&I tax rate to be between 36.5% and 37.5% for 2013.

As Mike touched on earlier, as part of the integration of Fleet One, we decided to use their OTR platform and stop further development on our platform. As a result, we recorded a non-cash impairment charge in the amount of $8.9 million to write down the value of our OTR platform in the fourth quarter. In addition, we decided to discontinue the development of a MasterCard-based product at Fleet One, which resulted in an additional one-time expense of $1.7 million.

Turning to our derivatives program. For the fourth quarter of 2012, we recognize a realized cash loss of $400,000 before taxes on these instruments and an unrealized gain of $100,000. We concluded the quarter with a net derivative liability of $1.7 million.

As we announced previously, as a result of the Fleet One acquisition, we are now approximately 60% hedged with regards to our fuel price-related earnings exposure in the US. For the first quarter of 2013, we have locked in at a price range of $3.42 to $3.48 per gallon. For the full year, the average price locked in is $3.43 to $3.49 per gallon.

Moving now to the balance sheet. We ended the quarter with $198 million of cash, down from $435 million last quarter. The decline, which we expected, is due to the seasonal nature of the deposits related to the Higher One program.

In terms of capital expenditures, CapEx for the fourth quarter was $6 million. Our total CapEx for the full year was $28 million. Our financing debt balance increased to $321 million in Q4, and we ended the quarter with a total balance of $621 million on our revolving line of credit and term loan, due to the acquisition of Fleet One.

In January, we expanded our existing credit facility by $100 million to a total of $1 billion. In addition, we completed an offering of $400 million of 10-year 4.75% notes to take advantage of the favorable interest rate environment and lock in long-term funding at historically low fixed rates. The proceeds from the bond offering were used to pay down our credit line borrowings related to the acquisition of Fleet One.

Although the bonds carry a higher interest rate than our bank facility currently, we believe that this will prove to be a very attractive rate over the 10-year term. In addition, with our new public ratings from S&P and Moody's, we'll have greater access to capital in the future. As of December 31, our leverage ratio was 2 times EBITDA compared to 1.2 times at the end of Q4 last year. Pro forma for our recent $400 million notes offering, leverage at the end of Q4 would have been 2.3 times.

As far as future capital allocation, our primary objective remains to reinvest in our business and drive future growth, which is reflected in our 2013 guidance. In addition, we will continue to look at acquisitions and strategic alliances as a way to supplement our growth objectives.

Over the past year, we have delivered solid financial results while actively investing in our business to drive future growth. And we expect this momentum to persist into this year. With respect to our expectations for 2013, our guidance reflects continued strong revenue growth in both our fleet and other payments segments. We are taking advantage of our strong position to reinvest in the business and aggressively expand our virtual card product internationally.

Overall, we believe these investments are essential to drive sustainable growth for our business over the long-term. We expect to start seeing the benefits of these investments in 2014 and beyond.

Now for our guidance for the first quarter of 2013 and the full year, which reflects our views as of today and are made on a non-GAAP basis. For the first quarter of 2013, we expect to report revenue in the range of $158 million to $165 million, and an adjusted net income in the range of $34 million to $37 million or $0.89 to $0.96 per diluted share. These figures assume normal seasonality trends in the virtual card and prepaid businesses as well as credit losses.

Our first quarter guidance assumes that domestic fleet card loss will be between 9 and 14 basis points, and that domestic fuel prices will be $3.72 per gallon. For the full-year 2013, we expect revenue in the range of $721 million to $741 million, and adjusted net income in the range of $168 million to $176 million or $4.30 to $4.50 per diluted share.

This assumes an additional $5 million to $6 million of integration costs associated with the Fleet One acquisition, and an incremental $15 million in interest expense as a result of our bond offering. There is a significant investment related to our virtual card product to expand into new geographies, as well as the expense of additional sales reps for UNIK, rapid!, and CorporatePay.

In addition, our guidance does not reflect the impact of any future stock repurchases that may occur in 2013 or any potential write-offs relating to refinancing our credit facility. Our full-year guidance also assumes that domestic fleet credit loss will be between 9 and 14 basis points, and assumes that domestic fuel prices will be $3.65 per gallon. Fuel price assumptions for the US are based on the applicable NYMEX futures price. We are also assuming that exchange rates will remain in the range of the current spot rates.

We expect CapEx to be in the range of $40 million to $45 million compared to $28 million for 2012. This includes approximately $15 million in the first half of the year related to the construction of a new data center, as we consolidate our operations with Fleet One.

And now we'll be happy to take your questions. Dawn, please proceed with the Q&A questions.

(Operator Instructions). Sanjay Sakhrani, KBW.

I just had a question on the opportunities you discussed globally. I mean, it sounds like a lot of them are on the organic side of the -- via acquisition. Is that right? That's kind of what's assumed in your guidance?

Yes, I mean, in terms of the virtual card in particular, at this point, we're saying that we're just moving into these countries. We're going to use our Bank wherever we can to issue. And then do the compliance work, stand up some operations where necessary, and also put in sales organizations.

Now if we can find an opportunity to accelerate the presence and the growth, if it's a JV or an acquisition, we will clearly look at that. But at this point, we're saying it's based on just going into those countries ourselves, and standing up the operations and the necessary compliance parts.

Okay. And then, I mean, is it possible to just size what that investment spend is in 2013? And maybe talk about what drives the confidence that we'll see revenue starting 2014?

Well, we haven't been specific. I think you can imagine that some of that is one-time to do the compliance and maybe stand up some of the operations. But over time, you'll still have ongoing operations and ongoing sales forces. And there may be additional countries. We're identifying the countries we're going to be focusing on in 2013, and there will be additional countries over time.

We've done the work. We know we can get into some of these areas where there's expanding OTA operations. And we also know it's going to help some of our international partners with their OTAs. But we haven't been specific, but it's a big piece of our reinvestment for 2013.

So as we go along, I mean, is it fair to assume that you guys will talk about these one-time costs? Because you also talk about platform integration and stuff. I mean, it would seem to me like some of that stuff's kind of one-time, but it's embedded in your guidance. Will you try to kind of highlight those as we go along?

I think where it's appropriate, we'll do that as we go through next year.

Okay, great. And then just two data point questions, Steve. Just the step-up in interest expense from the bond deal, I mean, I would assume you're going to pay down the revolver. So, kind of what is the net step-up in interest expense?

And then also, if you could just talk about how big ConocoPhillips is? Just -- I'm trying to think of the Marathon deal. Thank you.

On the bond interest, we placed $400 million worth of notes. We had just a little bit over $300 million on our revolving line of credit at the time we did it, so we actually have a bit of a cash balance as of today -- as of yesterday, I think it was just a bit under $100 million.

So in terms of the incremental costs, really, if you stay with the $300 million on the revolver that we pay down, the interest rate differential on that is, essentially, we're at LIBOR plus 175 basis points, so call it 2% in round numbers going to 4.75%. So that will cost you a little over $8 million annually. And then the other $100 million that's really sitting in cash. With the interest rate environment today, that's -- we're not going to earn much on that. So that's another $4.75 million.

Okay.

In addition, we mentioned pro forma for the deal. That would put our leverage at 2.3 times. So we are assuming that -- you know, we have a term loan and we have bonds outstanding, so we have limited ability to reduce the debt levels. So we're assuming our leverage is going to stay above 2.25 times, which will add in some extra cost to our bank facility as well, compared to where we were at the end of the year. And then just the last part of it is just all the fees and legal fees and placement fees and all that to get all this done.

Okay, and then ConocoPhillips?

Yes, I mean, these are, I would say, great private-label wins to have. I mean, we have made a practice of really not describing exactly how big any particular portfolio is, but if you go back and look, there was an impact back when that came on. And we'll expect a similar impact when Marathon comes on later this year.

Okay, great. Thank you.

Bob Napoli, William Blair.

Trying to understand a little bit more on the investment. And should we see -- how much are you increasing sale -- I guess, compensation expense, sales reps in your guidance? Is that -- are we going to see most of the step-up, I guess, Mike, Steve, in the compensation expense line?

Yes, most of the expense you're going to see, especially the sales rep increases, are going to show up in the salary line. There's clearly salaries in there for the virtual card. I mentioned some of the compliance and some of the other things we have to do. And over time, as we stand up operations, there will be other costs associated. But most of it, I think, is going to show up in the salary line.

You know, we're increasing -- because we see the performance in UNIK, in CorporatePay, in rapid! PayCard -- so we're seeing great performance. And, in some cases, we're doubling the sales force. So, that will spread out over the year, but you won't see the impact until next year on the return on some of those. But we are getting aggressive there beyond even the virtual card entry into some of these markets.

How fast is UNIK growing?

They're coming off of relatively small numbers, and so they're growing at a pretty hefty pace. But it's just the fact that it's still small, so it's not having an outsized impact on our EPS right now.

The revenue is -- can you give us the revenue number?

It was about $4 million to $5 million in the fourth quarter.

Okay, in the fourth quarter. Okay. And then just if I could get a little more clarity on PaySpan, if you could. And kind of the ramp-up and the rate of ramp-up on the PaySpan card, is -- are things -- when did -- you started in October. How quickly has that been ramping up? Is at least $1 billion still the right number? Are you feeling more or less confident on that?

Well, I think in terms of expectations, we're -- probably fair to say we're staying with the number we gave you before. So, the $1 billion is kind of the range of what's in there.

They're clearly working with us. We have a great relationship. We know this is a great opportunity for us. It's a matter of how fast does it roll out this year. They're starting with some of their smaller providers and partners. And then we'll, as the year goes on, start to market to some of the larger ones. So that's why it's more back-end loaded.

And, again, it's just a matter of timing, I think, on a lot of that. We're getting more transparency working with them, but we still have to see how this plays out over time. But, again, even if there is some slippage this year, we still feel very confident about the long-term impact of PaySpan.

And then on Fleet One, are we going to see, I guess -- and in your Fleet business, are we going to see a significant step-down in margins in that segment in 2013, before seeing a significant ramp-up in '14 as you integrate? Is that the right way to think about that? And if so, could you give some color around the numbers?

Sure. We've said, when we announced the acquisition, that their margins are somewhat below ours on an operating basis. So that will average in clearly and bring our margins down somewhat.

In addition, we mentioned the $5 million to $6 million of integration costs that we're going to incur the next year -- or this year, I should say. That will, obviously, bring margins in that segment down as well. And once we get the majority -- hopefully, the majority of the integration activities done, and get those expenses behind us, you should see margins come right back to where we've been accustomed to seeing them.

That $5 million to $6 million, Steve, is that primarily first-quarter or --?

No, I'd say it's not primarily first-quarter, but it is spread throughout the year.

Thank you.

Greg Smith, Sterne Agee.

Just on PaySpan, just wondering if -- I know you have limited experience so far, but has there been any pushback on the paying of interchange for somebody that wasn't paying it previously?

I don't know if I have enough visibility there. I mean, we know they're going to have some resistance. That's why they're not saying that all their business will convert; but they also know there's areas where they think the value proposition is strong enough that they will get conversions.

So, you know, in some cases, that's going to be the case. We know that going in. But I don't think we're seeing anything more than we expected going in at this point. It's the way they're playing it out with their customer base, I think they're really going to go after the larger ones as the year plays out. And that's why it's back-end loaded.

Yes, okay. And then just, I guess, Steve, as we think about Fleet One and the numbers, I think the impact is sort of obvious. They have a much larger transaction size, but a lower discount rate? Is that the right assumption?

That's exactly right. On an over-the-road transaction, you talked about gallons in excess of 100, so, yes, it's a much bigger transaction. And because of that, it's a lower fee to the merchant.

Yes, okay. And do you guys have any large -- just large fleet renewals this year that are -- we should be watching closely or think about? How do you stand on that front?

No, nothing that's any different than most years. You know, most -- there are always ongoing negotiations, but there's nothing that's outstanding that I would say that's in the mix or in the pipeline.

Okay, good. And then just one last question. I was a little confused, Mike, what -- are you able -- what do you need to do, I guess, to be able to issue cards internationally on the bank side? What capabilities do you have today? And what actually needs to be done to get those capabilities in the future?

Greg, essentially what you need to do is to go into each individual country and get approval to be an issuer. And note it varies, obviously, by country, but some sort of essentially a banking license in each country.

By using our Bank, which is already recognized as a regulated entity, that can cut down on the amount of scrutiny you're going to get and the amount of time it will take to get that approval. It's not going to work in all countries. And in those countries where we can't use it, maybe we find a partner bank; maybe we start from scratch.

But it's the regulatory compliance. It's a regulated entity already, and that gives some comfort to those foreign countries that we're trying to enter.

Got it, thank you.

Julio Quinteros, Goldman Sachs.

It's actually Roman Leal in for Julio. Thanks for taking the questions. First, a follow-up on the integration efforts and the additional expenses.

Can you maybe help us think through -- I know you said it's going to be spread out over the year, but will some of these expenses -- or will it get most of the expenses done in the first half, so that we can start seeing some benefits, at least from the integration efforts, in the back half of the year? Or is this purely a 2014 benefit scenario?

I wouldn't say it's purely 2014. I think we've got a multi-year plan to integrate this business fully. Obviously, we'd like to make it as rapid as possible, as everyone who's living through this day-to-day wants to do that.

I would not characterize it necessarily as the expenses of integration being first-half-loaded or anything like that. I'd say it's pretty much radically through the year. And we'll start seeing incremental benefits as we start completing projects.

Okay. And on the M&A pipeline, it just felt like your commentary perhaps -- we understand you have the capacity and that there's nothing imminent in the short-term. Is that a statement on the pipeline, you know, it's less attractive than perhaps what you saw back-half of last year? Just help us think how that's changed?

Yes, there's still opportunities in the pipeline, but there's nothing large. And I think we're looking at opportunities both internationally and domestically, but there's nothing like a Fleet One that is imminent. There are some others that would be considered tuck-ins that we're looking at, and then some others that could materialize over time. So it's different stages in the pipeline, but at least what's imminent, there's nothing large.

Okay, and then one last one on the Other Payment Solutions. Any commentary on volume there? I know there's multiple puts and takes there, but is there -- did you guys provide a guidance on the volume?

We obviously didn't. We didn't provide anything specific. I think we would say that it's obviously the faster growing part of the business, and we'd probably be looking for something in the 20%-plus range.

Got it, thank you.

Tien-Tsin Huang, JPMorgan.

Just wanted to -- I think, Mike, you mentioned that some of these countries you see fewer hurdles, and I'm sure your diligence has historically been great. Can you elaborate on that? Is that just less competition, greenfield or --? Just trying to understand what gives you that confidence to make that comment.

I think a lot of it is compliance. So it's not to say we aren't looking at those that are tougher on compliance, but they're probably not going to be a 2013 event.

So as I said, there's going to be more countries over time, but I think we're at least using that criteria of what's the barriers to entry. A lot of that's being compliance using our Bank. But also where do we need to satisfy those international players? And where is their growth on OTA?

So, I think we're looking at all of that. And it, again, doesn't mean that we're not working the others, but that's why it's going to be staged.

Understood. Now that you -- it sounded like -- I mean, I think going the organic route makes sense, but you sort of left it open that you could do an acquisition. So, is there stuff to buy to accomplish what you could accomplish based on your diligence? And to the extent that you'd do some of these deals, could your investment spending, therefore, be lower if you were to do that?

I don't think that's the case. I don't think there's a lot of assets, but I do think there is opportunities for JVs that could help accelerate, I think, growth more than anything else. I think standing up some of these areas -- it's not like you can go in and find somebody who's in that country necessarily, who's doing what we do today. We'll still look, but at this point, we're not anticipating that. I think it would be more on the acceleration of growth.

Okay, yes. So it sounds like it's a greenfield, so just got to be there to win. That makes sense.

Just on the EPS sensitivity side, now that you're sort of, I guess, 40% unhedged here, what's the latest and greatest EPS sensitivity now to a $0.10 change in spot fuel prices?

It'd be -- the sensitivity -- the $0.10 change in fuel prices is about $8.7 million worth of revenue annually. And then depending on revenue -- excuse me -- depending on loss rates and interest rates, somewhere around, say, 90% of that will fall to operating income. And then that's what we try and hedge the 60% of.

Do we need to contemplate more in the way of diesel mix with Fleet One?

Yes, that's a great question. Because when you look at the prices that we gave in our guidance today, a little bit higher than you might have seen normally. And that is because of the diesel mix. With Fleet One lumped in or combined in, that would make the mix about 60/40. So about 60% gasoline and 40% diesel. So about a 10% shift from where we were before.

Okay, understood. And last question, so the same theme around the discount rate -- 1.61%, is that fourth-quarter -- you gave 1.61%, I think, excluding Fleet One, is that sort of a good base to work from, given your spot fuel outlook, Steve?

Yes, I mean, you know the sensitivity with the transaction fees that are embedded in there, and how the rate will move up and down with fuel prices. But, yes, it's a pretty solid rate.

Okay, terrific. Thanks for the details.

Tom McCrohan, Janney.

Steve, if you took out the growth-related investments and I guess investments in the data center -- I'm not sure if I would characterize that as a growth investment -- if you take those investments in 2013 and put them aside, was the only real headwind going into 2013 incremental interest expense, the $15 million and the $5 million, I guess, integration expense related to Fleet One?

Yes, I think, you know, said another way, Tom, if I add back the excess bond interest, the integration expenses and what we're planning on for virtual card costs to globalize that, would we be within the consensus range? The answer is absolutely. There's nothing -- there's no (technical difficulty) -- we're expecting a very strong year. We're taking what is a very strong business model and trying to reinvest some money back into it, to keep that strength over the long-term.

And if I heard you correctly, the investments in those initiatives, it's not just contained in 2013; this is a multi-year effort?

Well, at least a lot of it will be, because if we're increasing sales reps, if we're putting sales reps in countries, that's going to be ongoing. It's just that when you increase those sales reps, as we're doing this year, say, at UNIK and CorporatePay and rapid!, you're not going to see the results till next year. And then, hopefully, next year, we may reinvest and put more reps if we have the right coverage models to continue doing that. But you'll at least start to get the results of what we put in place this year.

So, we haven't decided what to reinvest next year, but at least it will start to pay off on the investments we're making this year with those sales reps, and the additional people we're putting against the virtual card.

Okay, great. And, Mike, is it possible just to break out the investments between those that are intended to accelerate topline revenue growth versus others that will then improve operational efficiencies, such as the data center?

Oh, I would say by far the predominant number is against growth. If it's the virtual card or if it's more sales reps at CorporatePay or UNIK or rapid!, all of that is towards growth. The data center, I mean, clearly has the CapEx piece. There is some expense, but nothing near the CapEx piece.

Yes, it's actually a pretty minimal expense next year. There's some headcount and some space that we're going to rent for the actual facility. But overall, that's relatively minor compared to the other things we're talking about.

Is there a certain type of coupling revenue growth that you folks have in mind that you're trying to achieve?

No, I would just say we clearly are showing strong revenue growth this year. We're saying we see opportunities to build on that. So I don't think we're going to start talking about 2014 yet, but clearly, we're bullish in terms of what we're putting in place this year on the revenue side, and what we see as opportunities to kind of meet these and hit these windows of opportunities for future growth.

Okay, great. Congratulations. You have a lot going on. Sounds like a lot of good opportunities. Thanks for taking the questions.

Yes, thank you.

Thanks, Tom.

David Togut, Evercore Partners.

Two questions. And there have been a couple of earlier questions around this, but could you help me quantify the cost of your global expansion for virtual card in 2014 and beyond? And what I'm really trying to understand is sort of what's the business case in terms of potential earnings impact longer-term, or however you measure it, IRR -- but if '13 is an investment year, what should we expect for '14 and beyond?

Well, the only thing I'll say is the majority of the investment is on the virtual card side. I think we've identified in the prepared remarks that it's a very large market in the countries we've identified. And by the way, in that research was Brazil, was the UK, was Australia. So we were already in those countries and showing results.

So that $500 million revenue opportunity that we've identified, we think we have a good shot at getting a reasonable piece of that, knowing we're a leader in kind of what we're doing in the US, and knowing that's emerging, and knowing the products we have. And the faster we can set up our shops in those emerging markets, the more market share we think we can gain over time. So, we haven't said how much of that $500 million, but we just feel we have a shot at a reasonable piece of it.

I guess in other words, would you expect the global expansion to be significantly dilutive to earnings in 2014?

I think part of that will come down to our success, obviously, in signing it up, right? To stand up the operations, to get the lease, to get the compliance functions in place, to get all those kind of base functionality that you need to start something new, that's obviously pretty dilutive. If you get some business to put against it, it clearly helps. I guess I wouldn't go much further than that in terms of 2014.

I think what's encouraging for us is the pipeline we see in the markets we've already hit. So in Australia, not only Webjet's, but we're seeing others in the pipeline that we feel very confident about. In the UK and even beyond the UK, we're confident about what we're seeing develop. And in Brazil, for them to help us -- UNIK to help us stand up our virtual card down there, we already see the beginnings of opportunities.

So, based on that, those are going to throw off returns in 2014 and beyond. The others, it just depends how fast we can ramp those. But we're very encouraged by the areas we've already addressed. And that's why we're encouraged about moving into some of these other areas that were also identified in the research.

I see. That's helpful. Just a quick final question. Can you maybe lay out the competitive strengths and weaknesses of your combined position with Fleet One versus Comdata in the over-the-road market? You know, in other words, what do you think you can do better than Comdata? Where do you think you need to improve?

Yes, I would say that primarily, if you look at the product set, which includes the convenience of location of the truck stop, so the coverage, we have the coverage; we have a competitive product. This program has been very downmarket-focused. The average fleet size is 3 to 4 vehicles. We like that.

They've been under the radar a little bit -- not to say others aren't competing there, but they've been very aggressive in going after that small end of the market. We will continue to be very aggressive going after that small end of the market. It doesn't mean, over time, we won't look at larger fleets; we have mixed fleets. We've talked about those that have heavy trucks -- they're big fleets. We service maybe their gasoline and their small truck program today.

We have co-brand partners. So it doesn't mean we won't get some larger fleets, but we're going to stay with the focus downmarket. They have a very competitive product, and I think we feel good about the opportunities.

So you think your offering combined with Fleet One is better than Comdata? Or is just positioned differently than Comdata in terms of target fleet size?

I can't say it's better. I'd say it's competitive. I think it's just the matter that we are very focused on a piece of the market that, as I said, is a little bit under the radar. And, again, doesn't mean other people don't compete there. I'm not saying it's, like, wide open. It's not like the underpenetrated local business when we talk about cash and general-purpose cards.

Even those small fleets use a card product today. So it is a penetrated market. It's just that they have been very successful with their go-to-market strategy, and having a product that's competitive in the marketplace to win market share.

I see. Thanks for taking my questions.

You bet.

Phil Stiller, Citigroup.

Thanks for taking my questions. Just following up on the geographic expansion in the virtual card product, can you give us some rough time frames in terms of how long it takes to get up, operational in some of these new markets, in terms of getting the compliance, signing relationships, and then ramping relationships?

The biggest hurdle there is the government approvals in any particular country. And that's -- those are very difficult timelines to predict or adjust. So we are obviously -- you know, we have started a lot of those conversations in many countries already, but to handicap exactly how long that's going to take would be pretty difficult.

So is it safe to assume that none of that is expected in 2013?

I would say that there is an outside chance that we would get something towards the end of '13, but I wouldn't count on it as a big driver.

And can you start client discussions prior to that approval? Or does that have to wait as well?

We absolutely can start client discussions. I mean, what we can do is -- like what we're doing with Webjet, we're not issuing locally in Australia right now; we're issuing from a US-based product. And you pay the cross-border fees on that. We can absolutely do that in a whole bunch of different geographies, anywhere in the world we want. But what we can't do is avoid those cross-border fees that come with those transactions. It's a much more compelling proposition for our customers to avoid those transactions -- those cross-border fees.

And it wouldn't make sense to not have the ability to go after the in-country OTAs if we don't have the ability to issue in-country.

Okay, that makes sense. Shifting to the fleet business, I think you said payment processing transaction growth was 7%, excluding Fleet One. Obviously, that was up a lot. I think you guys were around 1% the last couple of quarters. So just wondering if you had some color on that increase, whether that's sustainable or not?

Yes. I mean, I'd say two things about that. I mean, obviously, it was a great headline number for us, and one that we're happy with. There was an extra business day in the fourth quarter this year compared to last year, so that helped us out by a couple of percentage points. It was actually the reverse in Q3. We had one less business day in Q3 and that hurt us by a couple of points.

But those things kind of even themselves out over the course of the year. And each transaction, when you look at -- when you take out the impacts of Fleet One, each transaction was just a little bit lower, a little bit smaller than it had been in the prior year. So if you look at it, it's still a great number, still solid growth, but maybe not quite as strong as the number would imply in reality.

So the 2013 guidance implies something, I guess, on a normalized basis in the mid-single digits? Is that fair for the Fleet segment?

Yes, that would be the implication, yes. And Mike kind of said that in the prepared remarks. We expect '13 to be pretty similar to -- excuse me, to 2012, and organic growth rates in the low to mid-single digits.

But we're confident that Washington will get more confidence into the market by getting more certainty, so (laughter).

(laughter) That always helps.

If we could see that, that's why we said, with better economic situations, I think we'd start to see the growth in the same-store sales that we haven't been able to see for a while.

And what was the revenue contribution from Fleet One in the fourth quarter? And what are you guys expecting in '13 in that?

When we announced the deal, we talked about $14 million, $15 million kind of run rate. I'd say they were right in line with that. And our guidance for next year is right in line with that -- you know, given that they're going to grow a little bit over time as well. They're actually, in the first quarter out, done exactly what we expected out of them. So it was a nice, smooth entry, if you will, for Fleet One into our business.

Great. Thanks, guys.

Mike Grondahl, Piper Jaffray.

Thanks, guys, for taking my questions. Can you just remind us what is the amount that you believe you have in total liquidity for future acquisitions? And how high would you take your leverage?

As of right now, we've got -- like I said before -- just a little bit less than $100 million in cash sitting on the corporate balance sheet. So, I know we've talked in the past about any kind of cash is -- typically been trapped at our Bank subsidiary and not really available to us.

Again, we've got about $100 million as a result of this recent bond offering. As of today, our revolver is 100% available to us, assuming we meet all the covenant compliance requirements. But that $700 million, that's completely available to us. In terms of where we would take it, I think we've been saying the same thing for many years. You know, 1.5 to 2 times EBITDA is the target. And for the right acquisition, we'd probably bring it up in the range of 3 times.

Great. Okay, thank you.

And there are no further questions at this time. I would now like to turn the call back over to our presenters for any closing remarks.

Thank you very much. Once again, we thank you guys for listening in this quarter, and we'll look forward to speaking with you next quarter.

And this concludes today's conference call. You may now disconnect.