WEX Inc.
Q1 2011 Earnings Call Transcript

Published: 4 May 2011

[Operator:]

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

[Steven Elder:]

Good morning. With me today is our CEO, Mike Dubyak. The financial results press release we issued earlier this morning is posted in the Investor Relations section of our website at wrightexpress.com. A copy of the release has also been included in an 8-K we submitted to the SEC. As a reminder, we will be discussing a non-GAAP metric, specifically adjusted net income during our call. For this year’s first quarter, adjusted net income excludes non-cash mark-to-market adjustments on our fuel price related derivative instruments and the amortization of acquired intangible assets, as well as the related tax impacts. Please see Exhibit 1 included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release, most recent Form 10-K and other SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not rely on these forward-looking statements after today. With that, I’ll turn the call over to Mike Dubyak.

[Michael Dubyak:]

Good morning, everyone. And thank you for joining us. 2011 is off to a great start as we reported first-quarter revenue growth of 43% and adjusted net income growth of 23% over the prior year. First quarter revenue and earnings growth surpassed our expectations with total revenue increasing to $120 million and adjusted net income growing to $29 million or $0.75 per share. Our revenue growth was primarily driven by strong growth in our MasterCard revenue, growth in domestic fuel transactions process coupled with an increase in fuel prices and a full quarter of revenue from our Australian business. Moving to some of our key metrics, payment processing transactions on a consolidated basis including WEX Australia increased 14% year-over-year, and in North American we saw an increase of 6%, the highest growth since Q4 2008. Additionally, this represents the fourth consecutive quarter of year-on-year growth. Fleet fielding transactions in our installed base of customers or same-store sales increased 1% over the prior year. The South West region saw the best growth for the quarter followed by the northeast. The Midwest and to a lesser extent the southeast were negatively impacted by inclement weather in the months of January and February which kept the overall number low. However, on a positive note, same-store sales in March returned to the levels we saw in Q4 last year and total transaction growth in April has trended in line with March. I would just note that the slight deceleration from Q4 to Q1 in same-store sales follows a similar pattern that was recently reported with respect to GDP. The total number of vehicle serviced averaged $5.4 million. In North America, our sales force added 103,000 vehicles in the quarter and they continue to make headway with new private label wins. The momentum we are seeing with private label wins has continued into the second quarter as we have received several verbal commitments from domestic prospects. In addition, we are seeing growth in the small fleet market and believe that it will continue to be a source of opportunity going forward. I am also pleased to say that BP in Australia, which is roughly double the size of BP New Zealand successfully, came online a few days ago. We have also continued to expand our acceptance network to better serve our customers most recently announcing an agreement with RaceTrac, a southeast chain of convenience stores that adds over 300 locations to our existing network. As a reminder, with our closed loop network is a significant competitive differentiator for us, as our relationships with both fleets and merchants enables us to provide security and control on the front end, while offering customized reporting for our fleet customers. In addition, the sheer size of our network, which is not easily replicable, is a significant advantage for us in the marketplace. Along those lines, we continue to look for additional ways to enhance our value proposition to our customers by adding new features and services to help them manage their fleets more efficiently and effectively. In early April, we introduced new fleet features and reports to WEXSMART, a four featured GPS-telematics solution. The new features combine information from fuel car transactions with GPS vehicle tracking information in meaningful ways to save even more. This capability is particularly useful to our customers in an environment of increasing fuel prices. We also launched our Fuel Site Locator mobile app during the first quarter, which also allows our customers to locate the type of fuel they need at the lowest price. Our real time data allows us to capture up-to-date fuel price information for our customers. Turning to our other payment solution segment. Our corporate charge card product continues to post remarkable growth with spend volume in the first quarter increasing 68% year-over-year to $1.4 billion driven largely by our single use electronic payment product. To put this in perspective, in 2006, the year after we went public, total purchase volume was $1.3 billion for the full-year. The online travel vertical continues to be a source of strength and the primary driver behind the huge growth numbers. We remain focused on expanding the customer base for our payment solutions into additional verticals including the insurance and warranty market where we continue to have success. More recently, we began the exploration of the medical and education verticals with our AP Direct product. As we mentioned last quarter, we will be expanding our sales force in the upcoming quarters in order to build off these successes. We have also been hard at work looking to expand into new payment markets such as in the prepaid card space. On that front, we recently announced the acquisition of rapid! PayCard, a privately held provider of payroll debit cards, which focuses on small, and medium size businesses. Although this was a small transaction, it is strategically important as it jump-starts our entrants into the domestic prepaid market. It also broadens our other payment solutions offering and coincides well with our customer base and our strengths. rapid! has a strong go-to-market capability in the payroll sector with a deep focus on customer service and training that naturally complements our corporate culture. With over 285,000 businesses that we service directly are through partners in North America. We believe our vertical are in many cases proven candidates for prepaid payroll product. This combined with the level of strong customer satisfaction across our installed base provides us with an opportunity to offer a payroll product to current and future customers. Turning to our international business. The Wright Express Australia integration has been progressing smoothly and continues to meet our expectations. We have seen an increasing amount of interest from oil and leasing companies in Australia as we leverage Wright Express’ strong brand. As we continue to diversify and expand our business, we recently implemented changes to our leadership structure to better support our global growth efforts. Last month, we announced Melissa Smith’s appointment to the newly created role of President of Wright Express North America and Steve Elder’s appointment as Chief Financial Officer. We believe these changes will better enable us to innovate and collaborate across the company in order to accelerate our growth internationally. With Melissa leading the day-to-day strategy and execution of our North American business, I can now focus more of my time and attention on international expansion and corporate development opportunities, which will further support our strategy to drive substantial long-term growth for Wright Express. Along those lines, we are in the process of negotiating a new credit facility, which will provide us with additional flexibility to pursue our growth strategies. Now before I turn the call over to Steve, I would like to briefly comment on the increases we have recently seen in fuel prices with respect to our business. During the first quarter, the average price for fuel in the U.S. increased approximately 22% over the last year. While we believe that further escalation in price could become a drag on future transaction growth we have not seen any evidence of that yet. That being said, we believe that demand in our business is more heavily impacted by the strength of the economy rather than the cost of a gallon of fuel. Although fuel prices were a significant factor in the quarter, I did not want that to overshadow the strong fundamentals in the business. Our corporate purchase card volume was 68% with an associated revenue gain of 80%. And our domestic payment processing transaction volume was up 6%, while maintaining low attrition rates and low credit loss rates. In addition, the fundamentals underlying our recent acquisitions are performing as we expected. All combined, this underscores our positive outlook for the business. Just to recap, our strategy and focus remain unchanged. We are making steady progress on the execution of our plans to strengthen our leadership position in North America, grow our fleet business, build out our other payment solutions segment and further develop our international business. We are excited about the opportunities we see in the marketplace and look forward to updating you on our progress. With that, let me turn the call over to Steve Elder, our newly promoted CFO, to discuss our financials in more detail and to provide our updated guidance for 2011. Steve?

[Steven Elder:]

Thank you, Mike. We are happy with our performance this quarter and saw from the increase in fuel prices significant drivers of our business laid out pretty much as expected. Strong year-over-year growth being driven by increased corporate card purchase volumes, growth in North American transaction volumes, higher fuel prices and the acquisition of Wright Express Australia. For the first quarter of 2011, we reported total revenues of $120.1 million, an increase of $36.2 million from the prior year period. This compares to our guidance range of $130 million to $118 million. Net income to common shareholders on a GAAP basis for the first quarter was $12.1 million or $0.31 per diluted share compared with $18.6 million or $0.48 per diluted share in Q1 last year. Our non-GAAP adjusted net income increased to $29.2 million or $0.75 per diluted share, which was above our guidance range of $24 million to $27, or $0.63 to $0.69 per diluted share. Let me quickly cover a few of our key statistics, which I have provided in the exhibit two of our press release. As a reminder, the statistics represented as of Q4 are represented on a consolidated worldwide basis. Our net payment processing for Q1 2001 was 1.68%, which was down 10 basis points versus Q1 2010 and down five basis points from the fourth quarter of 2010. The decrease in the rate is due mainly to the increase in fuel prices, which affect our hybrid pricing contracts with our merchants and also a slight decrease as we average in the lower rates at our Australian business. Corporate card purchase volumes was up 68% from Q1 last year to $1.4 billion, which was ahead of our expectations. Revenue was up to 80% year-over-year to $18.8 million. The net interchange rate for Q1 was 1.01% down eight basis points year-over-year primarily due to the mix of contracts and higher foreign spend which has lower interchange rate. Growing our other payments solutions segment, which is mainly comprised of our corporate charge products, continues to be a priority for us and represented 18% of our total revenue in the quarter. Finance fee revenue in the fleet segment, which represents customers who do not pay their bill on time, was in line with the amounts recognized last year. However as a percentage of total dollars of fuel purchased, it was significantly lower domestically than last year and our expectations for the quarter. The average balances that are past due and incurring rate fees are smaller and the number of customers that are paying late has decreased. Both are positive signs for the health of the portfolio moving down the income statement, for the first quarter, total operating expenses on a GAAP basis were $73.9 million versus $51.7 million last year. About half of the total increase was due to the acquisition of our Australian businesses last year. We continue to focus on tightly controlling our underlying cost structure while making incremental investments in growth initiatives including research, marketing and international business development. Selling and other personnel costs for Q1 were $25.7 million compared with $19.6 million in Q1 last year. A majority of the increase is due to the addition of the employees in Australia. In addition, we have increased our estimates for bonus payouts for the year based on our revisions to our earnings guidance. Services fees are up $5.4 billion over the last year. Of the total, $4 million relates to the processing of our corporate charge card due to the increase in purchase volume and cross border transactions. The remainder of the increase is from our Australian businesses. Domestic fleet credit loss was 14 basis points for the first quarter compared to 21 basis points in the prior year period and better than our guidance assumptions of 20 to 25 basis points. In total, credit loss for the first quarter was $5.7 million compared with $5.9 million in Q1 last year. Total charge off in the quarter was $5.5 million and recoveries were $1 million. Improvement in credit loss is due to an improvement in the ageing of receivables. This is related to the lower than expected finance fee income that I just mentioned. The favorability that we saw in credit loss this quarter compared to our expectations was offset by the decline in finance fee income. Our effective tax rate for Q1 on a GAAP basis was 36.4% compared to 37.5% in the first quarter of last year. Our adjusted net income tax rate this quarter was 35.8% compared with 37.5% for Q1 a year ago. The decrease in the rate is due to the mix of international earnings. We now expect our ANI tax rate will be between 36% and 37% for 2011, which is 1% lower than our prior guidance. Turning to our derivatives program. During the first quarter of 2011, we recognized a realized cash loss of $4 million before taxes on these instruments and unrealized loss of $21 million. We concluded the quarter with a net derivatives liability of $32 million. As a reminder, including our most recent purchase that we announced last week, we have hedged approximately 80% of our domestic exposure through the second quarter of 2012 approximately 53% of our exposure for the third quarter of 2012. And approximately 27% of our exposure for the fourth quarter of 2012. For the portion of 2012, that we have completed the average price locked in is $3.36 and increases each quarter as we move through the year. For the second quarter 2011, we have locked in at a price range of $2.87 to $2.93 per gallon. For the full year, the average price we’ve locked in at the top end of our color is $2.95 and increases each quarter as we moved through the year. By hedging in an environment of increasing fuel prices the company’s average hedged price of fuel continues to rise while protecting the company against the volatility in both short-term fuel prices and cash flow. We do not plan to hedge our fuel price exposure specific to Australia as the exposure is more limited and has not historically fluctuated to the degree it has in the United States. We will continue to target hedging 80% of our fuel price exposure in the U.S. on a rolling basis which will effectively cover 65% to 70% of our overall exposure. In addition, we have not hedged our currency exposure specific to Australia which was a small benefit during the quarter. Turning to the balance sheet. We ended Q1 2011 with a balance of $338 on our revolving line of credit and $75 million on our term loan. The line of credit carries an interest rate of LIBOR plus 70 basis points, while our term loan carries an interest rate of LIBOR plus 250 basis points. As we mentioned last quarter and Mike commented on his remarks, we are now in the process of refinancing our current credit facility. Although the agreement is not final we expect to increase the size of the facility and we expect our financing interest cost to increase in line with current market rates. The expected increase in interest cost is included in our updated guidance assumptions. However, we have not included any charges associated with writing off deferred financing fees from the current facility which we estimate to be in the range of $0.02 of EPS. As of March 31, our leverage ratio was 1.9 times EBITDA compared with 0.65 at the end of Q1 last year. As we have previously mentioned, our near-term priority will be to pay down debt to get closer to the bottom end of our long-term range of 1.5 to 2 times EBITDA while we continue to explore acquisitions. In the first quarter, capital expenditures were $6.4 million. For 2011, we continue to expect CapEx to be in the range of $28 million to $35 million. Now to our updated guidance for 2011, which reflects our views as of today and are made on a non-GAAP basis. For the second quarter of 2011, we expect to report revenues in the range of $131 million to $136 million and adjusted net income in the range of $33 million to $35 million, or $0.83 to $0.89 per diluted share. For the full year 2011, we expect revenues in the range of $533 million to $553 million and adjusted net income for the full year of 2011 in the range of $132 million to $140 million, or $3.40 to $3.60 per diluted share. Although there are moving parts, any time we update guidance, the significant changes for the full-year earnings are due to three factors. Lower tax rate, higher fuel prices and a stronger Australian dollar. Q2 and full-year guidance assumes normal seasonal trends in the corporate charge card and prepaid businesses as well as credit losses. Our guidance assumes domestic fleet credit loss for the second quarter will be between 9 and 14 basis points and the full-year is expected to be in the range of 13 to 18 basis points. The fuel price assumptions for the U.S. are based on the applicable NYMEX futures price. For the second quarter, we expect fuel prices to be $3.86 per gallon. For the full-year, we expect fuel prices to be $3.67 per gallon. We are also assuming that the Australian dollar will remain at the current premium to the US dollars for the reminder of the year. Now we will be happy to take your questions. Jennifer, you can proceed with the Q&A session.

[Operator:]

(Operator Instructions) Your first question comes from Greg Smith with Duncan Williams.

[Greg Smith:]

Yeah, hi guys. Can you hear me, okay?

[Michael Dubyak:]

Yes, thank you.

[Greg Smith:]

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

[Michael Dubyak:]

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

[Greg Smith:]

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

[Michael Dubyak:]

Well we definitely, first of all we know there are CAFE standards at Obama’s administration has put in place. It also has higher MPG’s. We know that fleets with looked as they roll over vehicles for more efficient vehicles. All of that’s build into what we look at on our regular basis. We are even making sure our cards accepted at CNG facilities and we’re now even talking to people that will provide charging capabilities on electro cars. All of that would have an impact but we will still be tracking information providing a payment solution and all of that’s being looked at naturally on a long-term basis with our strategic planning process.

[Greg Smith:]

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

[Michael Dubyak:]

Well it could be a combination of any of those. I mean, quite frankly we are looking to expand our single use products internationally. So Gareth Gumbley comes with a payment processing background has been very aggressive on saying hey, we’ve got a great product, we have light house accounts that we can point to. Those lighthouse accounts are already used in the product significantly in the international markets like we’ve been talking to international players. So can we do something there to help that business? We’ll look at that. Can we replicate what we’ve done in Australia with kind of getting a beech hedge with buying the business that gives us operating centers and the ability to full service for oil companies will look at that in different markets. But I don’t want to lose sight of even North America. We made a small acquisition in North America but it starts to open itself with payroll cards into our SIC codes that we think based on the research we’ve done will be candidates for payroll cards. So we look at North America on corporate solutions, corporate card solutions as well as free card solutions.

[Greg Smith:]

Okay, great. Thank you.

[Michael Dubyak:]

Okay.

[Operator:]

Your next question comes from Bob Napoli with Piper Jaffray.

[Bob Napoli:]

Thank you, good morning. I guess follow-up on the MasterCard business, the corporate card business. But also just I mean your stock is trading at a couple of multiple discounts your competitive came public and you are growing faster. And I just wondered if you had thoughts on why the valuation disconnect between the two. And on your corporate card the growth rates 68%, volume growth 80%, revenue growth. What’s driving the higher revenue growth versus volume growth and how far penetrated are you on your key accounts, at this point?

[Michael Dubyak:]

I’m not going to comment on the difference between us and our competitors going public. I think that’s something that I don’t think I can really feel comfortable commenting on. If you look at the growth though, there is no doubt that we are still seeing strong roll out of one of our major players that we brought on in the last year and a half or so. But we are also seeing great strength of growth from international transactions with some of the other players that are more mature and just growth overall still on the online travel side of things, as well as I have talked about some of these new verticals. I think the difference in the spend versus the revenue is that, it just depends on what products are being sold and it is just a mix.

[Bob Napoli:]

Okay. But how far penetrated like on some of these – where you are growing internationally. I mean are you getting 10% of your business, where you think you can get 50 of the international business that you are working on, may be try to give some feel because the growth is so dramatic. And I know you are getting a higher price on international. Is that right, the revenue growth is faster than the volume growth?

[Michael Dubyak:]

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

[Steven Elder:]

Bob, its Steve. The biggest difference between the 68% and 80% of the cross-border fees on these foreign transactions that we are charging.

[Bob Napoli:]

Great, thank you. Congratulations, nice job.

[Michael Dubyak:]

Thank you.

[Operator:]

Your next question comes from Sanjay Sakhrani with KBW.

[Sanjay Sakhrani:]

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

[Michael Dubyak:]

I wouldn’t – in New Zealand specifically, our operations are in Auckland. So it had no impact to us in that particular area where we do development on our international platform. Clearly the weather had an impact for us in the U.S., we were trending in the 3% to 4% same-store sales growth in the third and fourth quarter. And as I said in January and February, we saw some areas go negative even the Northeast wasn’t strong, Southeast wasn’t strong, Midwest wasn’t strong in the first quarter because I think of the weather March bounced back. So as March’s weather got better we saw March bounce back pretty much the same store sales growth we saw in the third and fourth quarter. So that was a positive sign, all we can report on for April is kind of total transactions because we don’t have same-store sales, but we are seeing that trending very nicely as well. So we at least think it was weather-related in January and February as much as anything. And that’s probably why you saw GDP also be ratch it down. So I think it also affected the economy in the first quarter.

[Sanjay Sakhrani:]

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

[Steven Elder:]

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

[Sanjay Sakhrani:]

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

[Michael Dubyak:]

Sure. Yeah. I think that at this point, we’ll continue to pay down some of our debt because we want to make sure even though we talked about a new credit facility to have the ability, if the right strategic opportunities come along internationally or domestically, we have the opportunity to hopefully look at those acquisitions to diversify and grow our business. So besides paying down debt, I think we are going to be looking at acquisitions as I said, even on one of the other questions domestically and internationally. So with the right criteria, what’s the strategic, what’s the return on the investment, how much can we absorb in terms of multiples of EBITDA, so we have a lot of criteria that we will consider. Stock buyback, I think right now the stocks trading at a higher multiple, clearly compared to maybe one of our competitors, we’d like to see a trade a little bit higher. But it’s still trading pretty high. And I think paying down debt and probably looking at acquisitions will probably be the first two areas we look to. On prepaid. It’s a small business, but what we liked about these guys, we had seen some write-ups, we had met with them. They are very customer focused; they don’t come at it from necessarily purely a payment processing perspective. They commented from this as payroll and you have to have great customer service, great training programs, you got to get people on these programs and satisfy that all the research we did on their customers. They have over 300 customers today was very positive. And for us to have the brand, we have what our customers trust us; rely on us to provide high levels of service. We want to make sure that we had that sort of product available. Now having said that the opportunity is, I kind of commented on is our 285,000 businesses a number of these SIC codes probably have underbanned probably have contractors, probably have seasonal workers. All of the things that that can play into a payroll product. So we really saying how do we leverage an asset we have each of these 285,000 customers that we think would be prime over for using the payroll cards. So we feel very good about the business even though it’s small, we’ve been training our sales force. So both on the MasterCard side and the fleet side, so they can start talking to their customers, there’s already been some great synergies between their program and some of our customers, and we see that developing hopefully even more aggressively in the future.

[Sanjay Sakhrani:]

Okay. Thank you.

[Operator:]

Your next question comes from Tien-tsin Huang with JP Morgan.

[Tien-tsin Huang:]

Hi, thanks. Congrats to everyone on the new roles. I want to ask Mike about the private label commentary you gave. I think you mentioned that you’ve seen a lot of activity there and some verbal commitments will go down. Can you elaborate on that in terms of size, magnitude, timing?

[Michael Dubyak:]

Yeah, these are not large, so you know about ConocoPhillips and we kind of guided a little bit there and Sonoco in the past. These are not that large. But it’s still lots cards and the ability I think to penetrate more aggressively in the small fleet market. So we always talk about that as a marketplace that is underpenetrated it’s mostly cashed as a competitor and corporate payment cards. So now if I’m having more and more of these private label programs coming online, it gives us access, I think in a larger way to that small fleet market. Two of them are not even fuel related, they are more mechanical and service related, so that’s a diversification that’s great for us, to get private label in kind of the vehicle related market but private label with non-fuel, but in the service side of the business as well. So that’s a good diversification.

[Tien-tsin Huang:]

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

[Steven Elder:]

Yeah, there is nothing imminent. There’s nobody that’s up for rebid if you will but we’ll look at that on a regular basis, but there’s nothing that’s in the pipeline that is imminent right now, that’s up for bid.

[Tien-tsin Huang:]

Hi, great. Just a couple of numbers questions. If you don’t mind, just the EPS raise you saw called out the components but I was wondering if you could break it down further in terms of the contribution – being sourced, whether effects fuel and credit losses. Can you give us an idea of how much of the raise came from each of those. So at the top end of our guidance range, we went up $0.23 over the prior guidance. The tax rate and the PPG are about equal. And clearly quite a bit bigger than the OXY exchange rates. So that’s $0.03, $0.04 and then the rest of it is coming from the tax rate and the PPG.

[Tien-tsin Huang:]

Understood. Okay. And then I guess I haven’t asked this for a little while. The rule of thumb on the discount rate impact from changes in gas prices. We were sort of the new level of price, Australia now for a little bit. Any can you update us on those fees?

[Steven Elder:]

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

[Tien-tsin Huang:]

One basis point, okay. Good to know. Last one I promise just the MasterCard acceleration. I know that was asked a couple of times. Did you bought some new customers back or did they look it did pick up quite a bit from a percentage on a nominal basis as well? So curious if that’s sustainable.

[Michael Dubyak:]

It’s not new. It’s a customer that just been more aggressively rolling out more of their business it’s been converting from another competitive. So much that as well as I said some of the international business. And then seeing some strength in some of these verticals we have been getting into. But the online travel is been the biggest area and that one major account is being rolling out more aggressively.

[Steven Elder:]

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

[Tien-tsin Huang:]

All right. Now it’s been great growth. Well done. Thank you.

[Michael Dubyak:]

Thank you.

[Operator:]

Your next question comes from David Parker with Lazard Capital Markets.

[David Parker:]

Yeah, good morning. Congratulations to Melissa and Steve on their new roles.

[Steven Elder:]

Thank you.

[David Parker:]

Mike, you mentioned that BP Australia was online, you finish that. Is there anything else that you guys are working on in the pipeline in terms of just that you have already signed that are now going on to the platform or it was at the last big one?

[Michael Dubyak:]

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

[David Parker:]

Okay. And then you announced some new features with I believe it was (inaudible) Are you actually charging your customers for this or just make the overall product a little bit more stickier?

[Michael Dubyak:]

We are charging for these new features that give them greater control over the security and control of who’s purchasing and where they are purchasing.

[David Parker:]

How’s the progress been so far in terms of just getting the customers to pay for any features in there – the response?

[Steven Elder:]

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

[David Parker:]

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

[Michael Dubyak:]

Yeah, it’s 12 for the year. And then all those are sales, some of those that support people internally to help roll out. So we want people out there, assigning new accounts and then we turn them over to business account managers who will then roll the accounts out. So it is a combination of both in that 12 number. Yes, it is in our guidance it was built into our budget and our plans for the year.

[David Parker:]

Okay. Then just final question. You address to some extent. But just looking at your acquisition on the payroll debit card. How many of your customers are currently using a card. When you are doing your analysis. I mean did you get those numbers, what the opportunity is within your existing customer bases. And is there any overlap between your current customers and 300 customers that Rapid had?

[Michael Dubyak:]

Well first there is some overlap. But it’s only 300 out of 285,000. But it showed us that our SIC codes at least the ones they have penetrated were also in line with our SIC codes. So I think that was very positive. And we didn’t do a lot of research, because of a lot of that might be smaller businesses. What we do know is that our SIC codes working with different consultants are prime for at least looking at payroll cards if it is under bank, if it is contract is, if it is seasonal workers those sorts of maybe not all of their employment ranks would use the payroll card but there might be a percentage of different companies because of those different fractions of the employee base that would be prime for a payroll card. So we are not making any major projections. I think even before we announced this we said that we we’re going to be slightly dilutive this year and that still the case. But we’re going to keep building this into the research to see if it can penetrate more aggressively our current customer base.

[David Parker:]

Okay, great. Thank you and congratulations again.

[Michael Dubyak:]

Thanks.

[Operator:]

Your next question comes from Robert Dodd with Morgan Keegan.

[Robert Dodd:]

Hi, guys. Just looking Mike on Europe, I mean the platforms been up in the running a while and end of it. Can you give us any color on sales pipeline, interest levels or anything like that?

[Michael Dubyak:]

Yeah, it is up and running in Europe and the European platform is processing for BP New Zealand and Australia. So those transactions are running through that platforms since we wanted to have a centralized international processing capability and we decided to do that in Europe. We are continuing to talk to first up all BP to look for other opportunities with them. And then we are talking to other oil companies as I said both in the Asia-Pacific market and in the European market about doing processing. Just none of that is eminent. But we continue to work that. And we hope to even provide more than processing, if we can get to some of the operational services over time as well.

[Robert Dodd:]

Okay, Thanks. Secondly on domestic pricing, I mean last time oil or fuel prices were high. It triggered a wave of shift, so if it’s the hybrid pricing involved. I mean, are you seeing any additional push in compact renewables or may be the customers are actually up for renewal? It increased the mix in hybrid or changes the pricing structure to make it less variable?

[Michael Dubyak:]

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

[Robert Dodd:]

Okay. Thank you.

[Operator:]

Your next question comes from Thomas McCrohan with Janney Capital Markets.

[Thomas McCrohan:]

Thanks folks. Steve, just I had a question for you in regards to the direction of funding. It looks like average cost of funds went down a little bit again this quarter, just trying to figure out directionally. How this going to trend for the rest of the year?

[Steven Elder:]

I mean, it was about 9/10 of 1% on our operating interest on average for the quarter. We’re planning on it going up. We’re planning on interest rates going up not dramatically but still going up through the rest of the year. Really the – sequentially it was pretty much in line with Q4 and Q3 last year.

[Thomas McCrohan:]

And I noticed that borrowed set funds where pretty much mark it zero this quarter. right. So I just tried to understand how if you could remind us again like when you use the online versus kind of deposits?

[Steven Elder:]

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

[Thomas McCrohan:]

So Steve what’s the average of the called $650 million of borrowed deposits right now. What’s the duration of those locked in for over 12 months?

[Steven Elder:]

Not over 12 month the weighted average remaining duration is about – just a little bit under nine months.

[Thomas McCrohan:]

Okay. And do you have any hedges on the interest rate site if rates go up?

[Michael Dubyak:]

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

[Thomas McCrohan:]

So (inaudible) detailed questions. Credit recovery whether any recovery this quarter?

[Steven Elder:]

Yeah it was $5.5 million in charge-offs and $1 million of recoveries.

[Thomas McCrohan:]

Okay. And gas prices assumptions, I apologize I miss that. You can give those again for the balance of the year?

[Steven Elder:]

So for the full year we are saying that fuel price will be $367 and it’s a $386 for the quarter, second quarter.

[Thomas McCrohan:]

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

[Michael Dubyak:]

Yeah, public administration was filled actually take that back. It wasn’t bad in the first quarter. The one area that was down in the first quarter that had been up in the third and fourth quarter manufacturing. I’m sorry, and public administration was down. So it was pretty much flat in the fourth quarter and it was slightly down in the first quarter. So those are the only two SIC codes that we saw that kind of not showing strength. Our manufacturing was every month, so it was probably worse in January than in the other months, but it was every month it was down.

[Thomas McCrohan:]

That’s all I had. Thanks.

[Michael Dubyak:]

Okay. Thanks gentlemen.

[Operator:]

Your next question comes from Bob Napoli with Piper Jaffray.

[Bob Napoli:]

Hi, thanks. Just first Steve congratulations on your promotion and Liz as well probably listening somewhere. The DoD Frank there was anything in there that would affect your hedging program?

[Steven Elder:]

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

[Bob Napoli:]

Okay. And do you have a feel for how much more expensive?

[Steven Elder:]

Well I remain right now we have, we have unsecured credit with our counter parties. So that would no longer be available to us. My belief it’s somewhere in the $15 million to $20 million range in total. So if that goes away then we probably post a letter of credit or have to cash.

[Bob Napoli:]

Okay, that’s helpful. Could you give us an example of some of the programs, programme that’s kind of write-down in the middle of the fairway for the insurance and medical verticals for the MasterCard business?

[Steven Elder:]

It’s a little different for those two. On the insurance side it’s very similar to the online travel, where the warranty and the insurance companies now can negotiate with a shop a card shop or whatever to do work on someone’s card that has an extended warranty. They integrate with our system, they basically can send off once they negotiate it, basically the value amount and then send somebody in and we put security around that transaction. So there’s only that dollar amount for that person at that location on that day similar to a hotel program. When we start talking about the medical and the education we talked about our AP Direct, where in this case you can integrate with our system you have the ability to line up all of your payments, date specific and basically on those dates they can then send off to their vendors the dollar amount and the vendors would be paid. So it’s a little bit different than the (inaudible) but similar. So you have your chart of accounts to pay and you can really determine when and how much. So that’s, it’s a little bit of a different product that we are going into the medical and the education vertical.

[Bob Napoli:]

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

[Michael Dubyak:]

We have on the insurance side. So there are a number of major companies that are using us on the warranty and insurance side.

[Bob Napoli:]

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

[Michael Dubyak:]

It’s pennies per transaction, Bob. And we are literally taking, when the card is swiped, we are authorizing the transaction, collecting the data and sending it back to BP, for them to do rest of the processing. So it’s a very small amount per transaction.

[Bob Napoli:]

But it’s like 35 million transactions or something like that?

[Michael Dubyak:]

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

[Robert Dodd:]

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

[Michael Dubyak:]

Well other than what we do in Australia with our prepaid customers. There’s nothing else in North America that I would classify as really prepaid business.

[Robert Dodd:]

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

[Michael Dubyak:]

We feel – are you talking just the overall fuel platforms specifically or...

[Robert Dodd:]

Both.

[Michael Dubyak:]

Yeah, well the fuel side we see opportunities. I mentioned on the call both with expanding, with oil companies and leasing partners. I think our brand resonates well, people know who we are. And I think there are opportunities that hopefully we’ll start to see something we can announce later in the year on some growth capabilities on the fuel side. On the prepaid side, we’re looking to expand. That market place has been primarily a gift card. We’d like to see opportunities open up for us on the open-loop side and we’re pursuing that. So I think there are opportunities on both products and both companies.

[Robert Dodd:]

Thank you.

[Operator:]

Your next question comes from John Williams with Goldman Sachs.

[John Williams:]

Good morning, guys. Thanks for taking my question.

[Michael Dubyak:]

Good morning, John.

[John Williams:]

A quick question. So you talked a little bit on the initial comments that you had made about, in fact the gas prices really are a function of the underlying economies. First, if you add some color on – in the last go round that we had with pretty high fuel prices. Whether or not you saw a chipping point between where it was a good thing and where it sort of created some demand destruction. Do you have any color on that?

[Michael Dubyak:]

Well, I would say last time it was hard because the overall economy had different factors affecting it as you know. Clearly when it got between $3.50 and $4, there were impacts. But I don’t know how much of that was because of the price of gas. There’s no doubt that everything that I’ve read said that people were more prepared driving more efficient vehicles and that the higher price right now at least because people are still forecasting GDP to grow during the year. It’s not showing the same sort of head winds it did last time. But again there were different factors last time versus this time. And that’s we are looking at. We’re looking at what’s happening with GDP projections because that’s which really going to affect our business. In terms of people our people going to buy less or more on our fuel cards it’s all about them having the fulfilled commitments on their business services.

[John Williams:]

Mike can you give me a good – way to the next question, which was I know we talk a lot about SIC codes within the business. But I would imagine that given the closest data you guys capturing. You have a sense on what’s going on regionally particularly within the U.S. and specifically within what I might call the key shift related corridors. Can you give some color may be on things like the West Coast (inaudible) Long Beach places like that. Are you seeing any pullback or you still seeing reasonably robust mileage command of the vehicle that are under your control?

[Michael Dubyak:]

Do you have the SIC specific?

[Steven Elder:]

I mean we don’t have, we don’t have down to the city level right in front of us here, John.

[Michael Dubyak:]

We can get that but we don’t have it yet.

[Steven Elder:]

I mean if you want to look at California was actually up pretty much in line with what was in Q4. So they didn’t have the weather impact, so we’re talking about Midwest. I think the other thing the specific example you gave I’m not sure that transportation is a big enough piece of our overall customer base so that it would pop like your –

[John Williams:]

You don’t really something radiating out of a particular card or in terms of demand that’s not necessarily all that useful?

[Steven Elder:]

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

[John Williams:]

Got it. Okay. I appreciate the color guys. And Steve congrats on the new role.

[Steven Elder:]

Thank you.

[Operator:]

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