Wright Express Corporation Q1 2010 Earnings Call Transcript

| About: WEX Inc. (WEX)

Wright Express Corporation (WXS) Q1 2010 Earnings Call April 27, 2010 10:00 AM ET

Executives

Steve Elder - VP, IR

Mike Dubyak - Chairman, President & CEO

Melissa Smith - CFO and EVP, Finance and Operations

Analysts

Bob Napoli - Piper Jaffray

John Williams - Goldman Sachs

Tom McCrohan - Janney Montgomery Scott

Tien-Tsin Huang - JPMorgan

Robert Dodd – Morgan Keegan

Greg Smith - Duncan Williams

Tim Willi - Wells Fargo

David Parker - Lazard Capital Markets

Paul Bartolai - PB Investments

Operator

Greetings and welcome to the Wright Express Corporation first quarter 2010 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Elder, Vice President of Investor Relations for Wright Express. Thank you. Mr. Elder, you may begin.

Steve Elder

Good morning. With me today is our CEO, Mike Dubyak; and our CFO, Melissa Smith. The financial results press release we issued earlier this morning is posted in the Investor Relations section of our website at www.wrightexpress.com. A copy of the release has also been included in an 8-K we submitted to the SEC.

In the news release, I’d like to call your attention to the summary of first quarter 2010 performance metrics on page two. To allow more time for your question on today’s call, we will not be reviewing the certain metrics listed in the press release in our prepared remarks. As a reminder, we will be discussing a non-GAAP metric, specifically adjusted net income during our call.

For the first quarter of 2010, adjusted net income excludes non-cash mark-to-market adjustments on our fuel price related derivative instruments, the amortization of acquired intangibles and the tax impact of these items. Please see Exhibit 1, included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income and the additional factors that were adjusted in the prior year period.

I’d also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements. As a result of various factors, including those discussed in our press release, most recent Form 10-K and other SEC filings. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not rely on these forward-looking statements after today.

With that I’ll turn the call over to Mike Dubyak.

Mike Dubyak

Hello everyone, and thanks for joining us. We again posted solid results in this quarter, and see a positive signs in the economy as the year rolls out. Total revenue was up 22% from Q1 last year. Adjusted net income grew 46% and exceeded our guidance. This year-over-year growth was driven by higher fuel prices, continued strong results in our MasterCard program, and lower operating interest expense.

Given the improving economic trends, we believe it will be easier to see the positive impact of organic growth initiatives going forward. Thanks to our continued investment in sales, marketing, and customer service, we’ve been able to sustain our traditionally high customer satisfaction levels and keep our voluntary attrition rates low while adding new fleets to our portfolio.

Fleet fueling activity or same store sales in the first quarter of 2010, were essentially flat with Q1 last year. This marks a significant improvement from the year-over-year declines we’ve seen for the past few quarters. Reflecting trends in the overall economy, we’re continuing to see areas of strength and weakness across our various SIC Codes.

Customer activity in Q1 was decidedly stronger year-over-year in the transportation and manufacturing sectors. It was weaker in the construction sector with business services and other verticals continuing to bounce along the bottom.

Unlike last quarter, there were no significant differences in same store sale patters from region to region. Although we’ve seen stabilization in fueling volume, existing customers are still in the process of reducing the number of vehicles in their fleets. As a result, our total vehicle count was down approximately 200,000 from Q1 last year.

This was despite the fact that we added nearly 500,000 new vehicles in 2009 and another 100,000 vehicles this past quarter. We believe our vehicle count is a lagging indicator of volume, as it takes time for fleet managers to adjust the size of their fleets to the ebb and flow of their businesses.

Looking at the first quarter specifically, the average number of vehicles in our large and mid size fleet portfolio was down 7% year-over-year. In small fleets, our average vehicle count was flat with Q1 last year. Our Wright Express direct channel continued to improve with the average vehicle count up 1% from Q1 of 2009. We experienced stronger results in insight sales and sales of WEXSmart units in the quarter.

Looking forward, as more economic data points come out, we’re becoming increasingly confident in our second half of the year. Based on the modeling, we have done in our customer base to determine the drivers of their behavior along with the expected improvement in the economic environment. We expect to see transaction growth in the second half of the year.

We have several key advantages in driving organic growth, according to a third-party research study of fleet prospects, current customers and competitors’ customers that we commissioned during the fourth quarter of ’09, the Wright Express brand is perceived as the number one fleet card program in the country.

We’re clearly doing some things better than our competitors because we scored higher than any other fleet card provider in terms of brand impression and long-term customer satisfaction. This results in better organic growth performance and lower voluntary attrition. For example, the customer satisfaction is hugely depended on perceptions, related to customer service and card acceptance. We lead the industry in both of these areas, thanks to the quality of our service organization, and the scope and functionality of our proprietary closed-loop network.

In addition, our unique financing model enables us to be very efficient in providing attractive credit terms to our customers while managing risk. As a result of these advantages, we have very low attrition rates. Our voluntary attrition for the first quarter of 2010 was 1.7%, compared with 2.5% for Q1 last year. This remains well below our target and at level similar to those we experienced before the recession.

Our strong brand positioning is integral to our value proposition and an important differentiator for us in a fleet card market that remain significantly under penetrated and addressable for long-term growth. We’ve invested over the years in world class front end capabilities to capture this potential. The new marketing campaigns we’ve launched in 2010 are producing solid results and our Fleet and MasterCard new business pipelines are looking very good as we move through the second quarter.

We have the ambitious growth goals for our diversified businesses as well and we’ve been successfully executing against those goals. In aggregate, our diversified businesses led by MasterCard, contributed nearly $18 million of revenue in Q1, or 22% of our total. We expect this contribution to grow to approximately 30% of our total revenue over the next few years. This reflects an important change in our business model, a strategic shift towards businesses that reduce the model’s fuel-price sensitivity and at the same time enhance our customer value proposition.

As an enterprise, Wright Express has successfully expanded beyond the fuel-price sensitive core fleet card business in the U.S. This expansion is best evidenced by the success of our MasterCard product, which continues to be the fastest growing part of our business.

During the first quarter of 2010, our MasterCard revenue grew 57% from Q1 last year. Our single use of MasterCard product continues to grow in the online travel and insurance, warranty markets. Increased purchasing volume from our online travel customers contributed the majority of the MasterCard year-over-year growth in Q1.

Our MasterCard purchasing card product also performed well in the first quarter, contributing double-digit purchase volume growth. We continue to make good progress during the quarter in our ongoing rollout with on of the world’s largest online travel companies. We expect this program to continue expanding over the next few quarters.

In addition, we’re developing targeted marketing campaigns in the insurance and warrantee vehicle and seeing positive results in our pipeline. The growth in our purchasing card demonstrates that it adds value that our small and medium size business customers need, more then ever as they look for ways to cut their operating cost. At the same time, it creates opportunities to cross sell into our core fleet business, which adds to its value as a product offering.

Geographic diversification is also part of our strategy. We’ve targeted a group of major and mid major of oil companies with fleet card portfolios in Europe, the Asia Pacific region, South America and Africa. These large portfolios have the potential to shift to outsource transaction processing solutions. We’re negotiating with several of these companies in an effort to win this business and penetrate the market. One of our core strategies is to sign long-term contracts was major oil companies and subsequently layer on more and more services. They can generate growing revenues overtime.

To put the total available marketing perspective, we estimate the 15 key issuers in Europe, process approximately $1 billion business to business transactions annually. Our plan for 2010 includes a small revenue contribution from our first international oil company transaction relationship processing relationship. We believe, we can penetrate a significant share of this market with our international transaction processing model. At the same time, we’ll also continue looking at card program alliances or acquisitions that can diversify and expand our international presence.

Thanks to this strength and resilience of our business model, we have the liquidity and cash flow necessary to support our organic growth and diversification initiatives while maintaining the strength of our balance sheet. We expect to maintain our bias towards being conservative with our cash while generating the highest possible returns. We’re continuing to target internal reinvestment as our higher priority followed by exploring alliances, mergers or acquisitions it represents strategic opportunities to accelerate our earnings growth.

In our view, these could include transactions that expand our core business within the adjacent markets or that further diversify our revenues even by a vertical market, or as I just mentioned by geography. We’ll also continue to consider stock repurchases as a potential use of our cash.

Above all, whether in the way in which we manage the business, or the way in which we deploy our cash, we remain committed to leveraging our comparative advantages capitalizing on our market opportunities and continuing to deliver consistent results in quarters and years ahead.

With that said, I’ll turn the call over to Melissa, for a review of our financial results and guidance, Melissa.

Melissa Smith

Thanks, Mike and good morning everyone. Looking back on our five years as the public company we have continued to deliver strong earnings growth. We have a proven track record in delivering solid results quarter-after-quarter. The first quarter of 2010 was no exception, as A&I once again exceeded guidance, driven by MasterCard spend, gains from the hedge in credit loss. For the first quarter of 2010, total revenues increased 22% to $83.8 million from $68.5 million for the first quarter of 2009, near the midpoint of our guidance range of $82 million to $87 million.

Net income to common shareholders on a GAAP basis with $18.6 million or $0.48 per diluted share compared with $11 million or $0.28 per diluted share in Q1 last year. Our non-GAAP adjusted net income for the first quarter of 2010 increased to $23.7 million or $0.61 per diluted share, exceeding the high end of our guidance range, which was $0.53 to $0.58 per share.

Non-GAAP adjusted net income for Q1 last year were $16.3 million or $0.42 per share. Our A&I this quarter included cash benefit from our derivatives program. Hedging remains an important part of our business model. We expect to continue purchasing derivatives in the future as a means of reducing our exposure to fuel price volatility.

As Mike said however, our business model has become less-and-less sensitive to fuel price over the past five years. I’d like expand on this for a minute before I delve further into the quarter’s results. At the time of our IPO in February 2005, approximately 64% of our total revenue was impacted by changes in fuel prices. Five years later, it's down to approximately 50%.

Looking at it another way, despite the significant growth in the size of our fleet portfolio during the same period is now hedged around 25% fewer gallons of fuel annually than when we went public. This reflects two drivers, first the success of our hybrid pricing strategy and second MasterCard in our other diversification efforts continued to grow. With that as background, I’ll discuss our financial results in detail.

Our net payment processing rate for Q1 2010 was 1.78%, three basis points higher sequentially. We implemented some new payment processing rates during Q1, increasing the average rate by five basis points. You will continue to see the benefits of these higher rates in future quarters. The offset of two basis points was primarily due to higher fuel prices an impact that has on a hybrid merchant contract.

Consistent with Q4, approximately 60% of our transactions in the first quarter were at merchants with hybrid contracts. Rebased its percentage of fueling dollars paid to large fleets in leasing companies were flat compared to the sequential fourth quarter. We continued to see strong growth in our MasterCard segment this quarter. Total purchase volume was up 31% from Q1 last year to $853 million exceeding our internal forecast by more than $70 million.

Revenue in the MasterCard segment was up by 57% to $10.4 million. MasterCard represented 12% of our total revenue and 11% of total A&I in the first quarter of 2010, up from 10% and 2% respectively in the first quarter last year. The MasterCard net interchange rate for Q1 was 1.06%, up 13 basis points year-on-year primarily due to higher interchange rates adopted by MasterCard last year.

Late fees with the quarter came in where we expected. However, we did see very different customer behavior during the quarter. In January, we’d had very high fleet fees as a percentage of dollar volume and they trended down through March to below levels we have seen for the last year. This downward trend has continued to April, so we are planning on lower late fee revenue as a percentage of spend volume.

Moving onto operating expenses, we’re continuing to keep a tight rein on our underlying cost structure. At the same time, we’ve focused our incremental spending on our growth initiatives, including research, marketing and international business development. On a GAAP basis, our total operating expenses of $51.7 million for Q1 were lower than we expected and only slightly higher than the $49.2 million we’ve reported to the first quarter last year.

Looking specifically at credit loss, we’re continuing to see good results in the steps we’ve taken to improve the portfolios credit quality. Although, the environment has remained challenging, we’ve been able to offer 30 day credit terms to most of customers for controlling bad debt and minimizing our voluntary attrition.

As in Q4, fleet credit loss for the first quarter came in better than we expected at 21 basis points, compared with 24 to 29 basis points we assumed in our guidance. This was somewhat higher than the 17 basis points we’ve reported for Q1 last year, but within our historical loss range of 11 to 22 basis points.

During the quarter, we did have one significant bankruptcy as we disclosed when we gave guidance. The favorable results in credit loss this quarter mainly reflect an improvement in our aging compared to what we expected. Delinquency rates in nine of our 10 largest industries declined compared to Q4.

On a total basis, including both fleet and MasterCard credit loss for the first quarter was up by $1.7 million from Q1 last year to $5.9 million. Total charge-offs in the quarter were $6.1 million and recoveries were $869,000, consistent with prior quarters, the majority of the charge-offs came from customers with balances less than $30,000.

As of March 31, balances due 30 or more days represented 1.4% of the portfolio or about $11 million. All in all, we feel that we’ve continued to execute extraordinarily well in managing our bad debt expense. Looking at other key expense lines, salary and other personal costs for Q1 were $19.6 million, up $1.8 million from the first quarter last year, mainly due to increases in our international headcount.

Operating interest expense again was a positive factor in Q1, declining by $2.7 million, or 65% year-on-year to $1.4 million. Our average operating debt level, including CDs and fed funds was $472 million, compared with $427 million in Q1 of last year. Net of virtually all of our higher rate CDs have matured. The interest rates in our CDs and fed fund borrowings had stabilized at a relatively low level. The rate for Q1 was 1.2% down from 1.3% in Q4.

Our effective tax rate for Q1 on a GAAP basis was 37.5%, compared with 36.9% for the first quarter of last year. Our adjusted net income tax rate this quarter was 37.5%, compared to 37.8% for Q1 a year ago. We adjusted our international tax structure, which reduced our overall tax rate for the year by 1%, compared to the guidance we gave you last quarter. Therefore, we now expected tax rate to be between 37% and 38% for the year.

Turning to our derivatives program, during the first quarter of 2010, we recognized a realized cash gain of $5 million before taxes on these instruments and an unrealized loss of $6.8 million. We concluded the quarter with a net derivative liability of $668,000. I mentioned last quarter, that we completed our purchases for 2010 with a weighted-average price range of $3.04 to $3.10.

As we announced last Tuesday, we’ve also hedged 80% of our exposure through the second quarter of 2011, 53% of our third quarter 2011 exposure and 27% of our fourth quarter 2011 exposure. For the periods we have completed purchases in 2011, the average price we have locked in at the top end of our collar is $2.93. Our most recent purchase locked in a range of $3.03 to $3.09 per gallon. For the last three quarters of 2011, this suggests the market expects that prices will be higher in 2011 than in 2010.

Turning to the balance sheet, we’ve ended the first quarter of 2010 with a balance of $112 million on a revolving line of credit and a leverage ratio of 0.65 times EBITDA. This compares with one-time EBITDA at the end of Q1 last year. During the quarter, we initiated a redemption call on preferred shares and they were subsequently converted into common shares.

One of our main uses the cash last year was the Realogy transaction that we announced in Q2 of 2009. As a remainder, we’ve prepaid our tax receivable liability to Realogy for $51 million in cash, generating a gain of $136 million in the transaction. This transaction adds between $10 million and $15 million annually to our cash flow for the next 10 years, which is equivalent to more than $0.25 of cash earnings per share.

Capital expenditures for the first quarter were $6.7 million. Our anticipated CapEx for 2010 is in the range of $20 million to $25 million, up from actual spend of $17.8 million in 2009. We’ve continued to invest in our new product and efficiency initiatives. We’re also continuing to invest in our International business, which accounts for the majority of the increase year-over-year.

I’ll conclude my prepared remarks with some key assumptions and our financial guidance for the second quarter, an updated guidance with full-year 2010. Reflecting the current economic trends, our guidance now assumes the volume in our existing customer base, or same store sales volume will be neutral to positive for the year.

Credit loss for the second quarter is expected to be 12 to 17 basis points and the full-year is expected to be in the range of 17 to 22 basis points. This loss rate reflects the favorability we experience in Q1 that no other meaningful changes to our assumptions.

As we mentioned on our last call, we believe that recoveries as announced previously charged-off will return to more normal levels in 2010 as compared to 2009, and then the aging of receivable balances will remain consistent.

Interest rates remain low and we expect to continue to benefit from this. We’ve assumed the interest rate increases throughout the remainder of the year based on the LIBOR curve. We continue to recognize some development revenue from our International business in the quarterly results and have included to small amount of international transaction processing revenue.

Although it remains in place, we have not included any potential EPS upsides from our share repurchase program. The fuel prices assumptions are based on the applicable NYMEX futures price. Let me remind you that our forecast reflects our view only as of today, and are made on a non-GAAP basis as Steve discussed earlier.

For the second quarter of 2010, we expect to report revenues in the range of $86 million to $91 million this is based on an average retail fuel price of $2.94 per gallon. For the full-year 2010, we expect revenues ranging from $358 to $368 million based on the average retail fuel price of $2.88 per gallon.

In terms of earnings for Q2 of 2010, we expect to report adjusted net income in the range of $24 million to $26 million or $0.61 to $0.66 per diluted share. We expect adjusted net income to the full year 2010 in the range of $93 million to $99 million or $2.39 to $2.54 per diluted share and approximately 39 million shares outstanding.

With that, we’d be happy to take your questions. Melissa, can you proceed with Q-and-A now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Bob Napoli with Piper Jaffray. Please proceed with your question.

Bob Napoli - Piper Jaffray

A question on the transaction trends through the quarter. I just wondered if you could give some of the growth metrics, same-store sales if you will, January, February, March, and into April, that gives you the confidence that we're going to be seeing improving trends, going forward.

Mike Dubyak

Bob, we talked on our last call that January we saw an up tick across a number of SIC Codes. February, that turned around with negative and then basically it came back to neutral in March. We don’t know if it’s the weather, but we think it could be weather related for February that cause the downward trend in the SIC Codes, but clearly as I said, it came back to only manufacturing and transportation, and really showed strength, a lot we’re just pumping along the bottom, but we’ve done a lot of work over the years working with some outside people on really doing regression analysis our SIC Codes, and the reaction is different economic metrics that really could affect what’s going on with our customer base.

So I think, it’s the combination of understanding if the economy continues to expand and get stronger along with that work that we’ve done on our SIC Codes in our customer base to have the confidence in the second half year to see existing customers, finally start to move off kind of the bottom that we’ve seen on the first quarter into more producing positive results in the later half of the year.

Bob Napoli - Piper Jaffray

The International side I mean, you sound increasingly optimistic. I mean, you give a little more color on the amount of people you’re working with, and the markets and the market size? I mean, how far away are we from actually starting to generate some to having announced signed contracts? Where you’re actually doing some real business there?

Mike Dubyak

Yes, I think as we said, on the prepared remarks that we look to start doing some transaction processing on a small scale this year, which would mean sometime this year making some level of announcement, but it’s really going to be a couple of years as we start to bring these different partners on, as we continue to hopefully win them in the marketplace that we will start to see meaningful transactions. So it’s going to be a couple of years before we actually see meaningful transactions that start to contribute to our overall revenue growth.

Operator

Thank you. Our next question is from John Williams with Goldman Sachs. Please proceed with your question.

John Williams - Goldman Sachs

To jump in, I noticed that your guidance you’ve brought up your earnings expectations a bit more than your revenue. It looks like your revenue stayed in the same range, basically. What’s the driver of the upsides? Improvement in EPS that you expect for the years it mean like higher fuel prices and just a little bit of an improvement in credit losses?

Melissa Smith

Yes, about the four major things they’re impacting our guidance from the previous guidance. The first is the change in our tax rate assumption, so we said we refined our thinking on international and that had about 1% benefit to our tax rate. In addition to that, we’ve got one basis points and we moved up from the range of credit loss, so those two things for expense related. We also increased our expectations with MasterCard spend, but at the same time we’ve reduced our expectation of late fees and those are the two things we’re impacting revenue primarily.

John Williams - Goldman Sachs

The other question, I guess is on credit quality. Correct me if I’m wrong, but I think you said 1.4% was showing 30 days delinquent or more. I guess how do we think about delinquencies flowing through to charge-offs. Is there some sort of an historical way that you guys have seen that play out that we can think about when we're modeling? Thanks.

Melissa Smith

Yes, when we’re modeling and actually looking at our allowances, we’d look at the history of what has move to charge-off over the last three months and so we have a very specific year and that’s why you see volatility from period-to-period and our provision. Going into the second and third quarter, we typically see a reduction in our credit loss and that’s primarily because our charge-off rates reduce over the next couple of quarters and then we would typically see a pickup in the fourth quarter, and so if you look at the amount that past due, there’s a percentage of that, that will ultimately move to charge-off, but it’s not consistent.

Operator

Thank you. Our next question is from Tom McCrohan with Janney Montgomery Scott. Please proceed with your question.

Tom McCrohan - Janney Montgomery Scott

A couple of questions, on the leading versus lagging indicator, Mike, you talked about fleet size not being a good leading indicator more of a lagging indicator. I wonder if you can kind of expand on that and if in fact that is a lagging indicator. What is the leading indicator you guys are tracking?

Mike Dubyak

Well, I think we said was the number of vehicles, number of cards, it’s kind of correcting later than the market starts to move on transaction. So, our transactions were neutral for the quarter, but we still saw the fleets reducing some of their unused vehicles or vehicles that aren’t working for them anymore. So, that was the couple 100,000 vehicles we said that were shaded from the existing customers. So, that was the lagging indicator just saying that, vehicles lag probably what we’re seeing a transaction trends, which we are flat at this point and we see those going up. So, it was more that than anything else.

Tom McCrohan - Janney Montgomery Scott

Okay, just trying to compare this year versus last year. I mean last year this quarter was a pretty difficult time in the economy. You had transaction growth decline a little bit this quarter, year-over-year. So I’m just trying to reconcile that, given the improvement in the economy.

Melissa Smith

If you look at our individual assets, because I think it tracks pretty well with what’s being recorded. In other places we see favorability in areas that you’d expect and then as an example the contractor trades is still showing some negativity year-over-year.

Tom McCrohan - Janney Montgomery Scott

On the funding side, Melissa, the $406 million of deposit, how much of that is, what is the duration of that? How much will roll over this year or next 12 months?

Melissa Smith

Yes, the average duration is above 9.5 months from the end of March.

Operator

Our next question is from Tien-Tsin Huang with JPMorgan.

Tien-Tsin Huang - JPMorgan

My first question, I want to I guess the large portfolios that you’d mentioned - I think you said $15 billion or so. When do you think decisions will be made on some of those opportunities? Is there a way to frame, are they primarily outsourcing contracts or are they also portfolio acquisitions, potentially as well, just a mix there?

Mike Dubyak

Well, there could be a mix. I mean we’ve talked about 15 mid major oil companies. We see a member of them that are looking to outsource in the next couple of years and in that mix you have everything from purely just truncation processing to transaction processing with some of the context under work as well and there maybe a few that they’re also looking for portfolio outsourcing. So it’s a mix bag and again that’s going to play out over the next couple of years and what we see.

Tien-Tsin Huang - JPMorgan

Anything eminent there or is it really just the span over the next 24 months?

Mike Dubyak

The eminent once for us look like they would be primarily processing, just a transaction processing. The others, I think will take longer to play out and longer to put in place.

Tien-Tsin Huang - JPMorgan

Just want to make sure, then my obligatory question about the discount rate. I guess gas prices were up a little bit and the discount rate sequentially was basically flat. So any guidance there on how we should model that going forward, because it's trending a little bit differently than how we anticipated?

Melissa Smith

Yes, we actually renegotiate some of our contracts to increase the rate and we saw the benefit of that in the first quarter and that something we think we’ll continue through the rest of the year. So the rate was up about three basis points sequentially, up five because of the renegotiations and then down two, because the price of gas and this is no easy that in our disclosures in the back, but we reclassified electronic discounts that we have been showing as an operating interest in the past up into revenue. So we’ve shown the rate adjustment in our disclosure.

Operator

Thank you. Our next question is from Robert Dodd with Morgan Keegan. Please proceed with your question.

Robert Dodd – Morgan Keegan

Just going back to kind of the leading indicator, I think is there metric you can give us either in future or give us some color now kind of sales will leads that just seeing and that up year-over-year even with vehicles shrinking a little or is there any color you give us on that for a future outlook.

Mike Dubyak

Yes, we clearly on sales leads, we clearly have seen in the first quarter, Robert, were response rates were up over the last year, close rates were up over last year and we’ve also seen our approvals rates going up over the last year. So all of those were positive signs were a lot of that is small business and we’ve also when we mentioned our telemetics or WEXSmart product also had a very strong first quarter. So it shows us this small business are making decisions again ready to invest some money in their business again and using information where auto manufacturers are saying small business, we at least turning their vehicles over and buying new vehicles so at least gives us confidence with the small businesses or at least making decisions were a year ago, they were not making any decision, and a lot of those numbers I talked about new generation close rates are very compared at last year this time.

Robert Dodd - Morgan Keegan

On the MasterCard Card product, if you have to change any contracts or terms on those cards to comply with some of the fine print in the card act in a reloadable versus single use, gift versus non-gifts things like that. Have there been any changes there or is it just business as usual -- also sort of a partner to do some of the processing there? Has anything changed with relationship given the finicky rules that are in play now?

Mike Dubyak

Yes, there’s been no change to us, I mean that changes have been consumer-related, where business to business we’re not evolving, you’re right, we use a processor to do transactions, but it’s really issue to our bank and that’s where we would feel the impact, if there was any impact and there has been no change.

Operator

Thank you. Our next question is from Greg Smith with Duncan William. Please proceed with your question.

Greg Smith - Duncan Williams

The account servicing fees were down pretty sharply, sequentially, and down year-over-year. Is that just a function of the vehicles? Or is there some pressure on your ability to charge those fees?

Melissa Smith

There’s a combination impact of vehicles, which would be the primary diver and then in addition to that, revenue that we’re receiving on international right now is tied into development revenue so as we’re doing work for these private label, all companies were charging, so that it’s a little lumpier as a result, so it depends really on the workouts in that quarter does is the two primary drivers.

Greg Smith - Duncan Williams

Then just on the interchange fee on the MasterCard product, if you add new customers in there, is there any possibility you fall into different interchange buckets? Or is it all going to be pretty similar because it’s the vast majority is kind of online travel?

Melissa Smith

There MasterCard interchange rates there, obviously this had based on MasterCard and it’s pretty complex grid. We just depend on were people feeling the size of the transaction, so there can be some changes in the rate that the biggest impact, the changing the rate in Q1 was just greater mix in international and that had a little rate associated with that.

Operator

Thank you. Our next question is from Tim Willi with Wells Fargo. Please proceed with your question.

Tim Willi - Wells Fargo

Two questions about margins. First one, Mike or Melissa, could you just remind us or give us a framework to think about the international operation and its profit curve? You’ve talked about a lot of prospects over the next couple of years. I think you talked about this on the last call. But how should we think about that as a profit center, as you sign new customers? Will there be some incremental scalability that will immediately be recognized? Or is this something where you'll probably keep margins pretty flattish as you continue to build out that marketplace even with the customer growth?

Mike Dubyak

Yeah, I think the answer is, it depends how successful we are and we need clearly to bring on some customers with our new processing program that we’re putting in place and we’re hosting in Vienna. So if we’re just doing transaction processing then those are going to be pretty stable revenue and earnings numbers. But as we talk about long-term contracts we’re looking to sign long-term contracts like 10 years and then over time we would like to layer in more the different contact center capabilities. I even mentioned, I think it was Tien-Tsin that asked if there is somebody that even have receivable funding that would change the revenue model. But those are further out, you know a couple of years before we start to see contact centers potentially a year or so or a couple of years out, if we start to see anybody looking for financing of receivables. So it's hard to give you an answer, except I’d say first you are going to see processing revenue which were lower transaction fees because all we have is a transaction process we are feeding back into their systems.

Tim Willi - Wells Fargo

Okay. And then in the U.S., just thinking about as the recovery progresses, you've obviously taken some measures over the last year to 18 months around headcount and expenses and things like that. How do you think about the incremental margin of the core business as we move through the recovery as opposed to what that margin or incremental margin might have looked like prior to the recession? Did you feel like there are expenses you need to bring back in? Or is it probably in a position to be a higher incremental-margin business as you've just gone back and retooled them and look at things closer?

Melissa Smith

I don’t think that there has been a significant change in the incremental margins our business when we made changes in staffing it was because we had seen the decline in transaction growth and we wanted to make sure that we brought down our staffing to the level of the volumes that was running through our business, but general speaking I don’t think there has been significant changes in the margins and the prices that we’re spending money, it’s mostly reinvesting on things that we think are going to bring growth like marketing initiatives that we’ve talked about international as Mike spoke about this more money allocate to research and so those are the prices we have announced spending incremental dollars.

Operator

Thank you. Our next question is from David Parker with Lazard Capital Markets. Please proceed with your question.

David Parker - Lazard Capital Markets

Could you just comment on the progress that you're making with some of these state government contracts that are coming up for renewal, and how that impacts your goal of adding about 400,000 vehicles for this year?

Mike Dubyak

Yes, I would say that some of that is baked into the 400,000, we have nothing that we can announce because nothing has been signed, but we feel very bullish about our success in the state government business and what’s in the pipeline and at least where we think going to land with a few of these so it could add slightly to our 400,000, but I mean, it’s really kind of baked in, but with upside potentially if we are successful with a few of these that we are getting positive signs on. Again the point I’ll make is, what we’ve done is, we’ve taken what we really did with GSA and leverage that across now some of these government businesses as far as is playing the positive for us.

David Parker - Lazard Capital Markets

Great and then if you could just comment on your competitor. One of your leading competitors recently filed an S1 registration to go public and any thoughts on that potential change? The impact to the industry. And just how you differentiate from some of that competitors, specifically? Thanks.

Mike Dubyak

Yeah, I would say that we weren’t surprised by the filing, we weren’t surprised by some of the data we saw. We pretty much have kept track of what they have been doing both domestically and internationally. We probably feel it’s positive to have another peer that’s closer to our model in the market place. We know the differences; we are larger than them, on the domestic side, do things a little bit differently, but we both process private label programs. We both have kind of our own universal card, they play their universal card more with the smaller fleets we do large (request), smaller, mid-size and large.

And then they their international program where they’ve done a number of acquisitions in different countries and have grown that piece of their program pretty significantly. So that was kind of what we look at as the differences. I mean we know they do things a little bit differently on how they financed our receivable and we finance our receivables. So there are differences, but the model itself is very similar.

Operator

Thank you. Our next question is from Paul Bartolai with PB Investments.

Paul Bartolai - PB Investments

Good morning. Just want to follow-up on the revenue guidance. It looked like that actually came down a couple million dollars and given the higher fuel prices and the improved dollar (inaudible) transaction, just a little bit surprised there. I know you mentioned the late fees coming on, but that seemed like a pretty big number to offset. Just curious if there's any other color you could give there?

Melissa Smith

We had late fee change was pretty significant, because the change in customer behavior that we saw between January and March was pretty significant. It brought late fees as percentage of the spend volume down to levels we haven’t seen in over a year. And so that was the most significant negative and then partially offsetting that was a -- as you said the price to gas and MasterCard spend.

Paul Bartolai - PB Investments

Okay, and then just another question on the revenues. The other revenues in the quarter was a couple million higher than we were expecting, just curious what drove that or if there is anything unusual on that number?

Melissa Smith

Mike talked about the Telemetics business performing well in the quarter and you see that reflected in other revenue, it’s grown year-over-year pretty significantly and we’re start to see some pretty good traction there.

Paul Bartolai - PB Investments

So that’s more of a decent run rate, given what you’re seeing in that business?

Melissa Smith

Yeah, actually, it will compound the hardware sales or split out separately, so what you see in there is the monthly revenue that we’re getting and so if we add new vehicle you should see a model similar to what we do in own business, you take the run rate and you are adding new business to it.

Operator

(Operator Instructions) Our next question is a follow-up from Bob Napoli with Piper Jaffray.

Bob Napoli - Piper Jaffray

Thank you. And I know you said upfront that you are being very conservative with your balance sheet. But your leverage has declined so much, and your cash flow is so strong and you know I mean you’ve been content I guess to deleverage, but obviously you’re looking at other -- you are well below target leverage ratios. I mean at what point will you start buying back stock or how long will you wait to see if you get an attractive acquisition before you start returning cash and other methods to shareholders?

Mike Dubyak

Yeah, I think as we said, we’ll continue to invest in our business which we are doing. We are looking at acquisitions and there are opportunities, but you can really time all of those and things don’t always go as you plan, but that sort of bought us, because we believe there is a pipeline of opportunities on the acquisition side, so that is where we are being careful in terms of making sure we have the liquidity to do that, but there will be a point and time we also have 67 million still in our cash repurchase authorization so we will look at that as well depending on what the stock price is?

Bob Napoli - Piper Jaffray

On the acquisition side, what are your primary goal, I guess or how would you prioritize what is the most attractive to the long-term value of this company?

Mike Dubyak

Well, I think clearly we’re going to do everything we can to make sure in our core U.S. or North American market that we are going to be as strong as possible, so are there acquisitions there that can diversify us, strength us with adjacent markets, all of that, if there is opportunities on consolidation we would look at that as well, but even international, we started with our processing strategy. We think that was smart to get a platform, which was a purchase and to start say that could be leveraged with the window of opportunity we saw with the major oil companies that came about even faster than we expected and with more than we expected, but then looking at other alliances or acquisitions that can even expand the international opportunity and diversify the international opportunity, so I think it is looking at the core, looking at the international, but still looking at diversifying opportunities.

Operator

(Operator Instructions) Our next question is another follow-up from Robert Dodd with Morgan Keegan. Please proceed with your question.

Robert Dodd - Morgan Keegan

Just a question about aging rates on kind of credit quality, how far are you -- your aging rates have been declining for a while than improving credit quality. If you’re not at all-time lows, how far are you off that? (inaudible) ideas, and if those aging rates move back to historic averages, how much of an effect would that have, obviously if you at one point go to reserve, but how big of an impact would that be in dollars?

Melissa Smith

Okay, we’ll take that in pieces. The first part of your question, which related to the aging and if you recall last year, we saw improvement in the aging in the first quarter. The second quarter of last year was kind of the benchmark of when it looks the best and then declined slightly in Q3 and Q4 last year and then has improved again in Q1 of this year. So we’re pretty comparable to the first quarter of last year rate now and in terms of impact, it’d be a couple million dollars roughly of credit loss if you were to move it historical level.

Operator

Thank you. Mr. Dubyak, there are no further questions at this time. I would like to turn the floor back over to you for closing comment.

Mike Dubyak

Well, thank you, Melissa, and I appreciate everyone turning in on a busy day. So we look forward to talking with you again next quarter. That concludes our call.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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