Wright Express Corporation Q2 2010 Earnings Call Transcript

Jul.27.10 | About: WEX Inc. (WEX)

Wright Express Corporation (WXS) Q2 2010 Earnings Call July 27, 2010 10:00 AM ET

Executives

Steve Elder - VP, IR

Mike Dubyak - Chairman, President and CEO

Melissa Smith - CFO and EVP, Finance and Operations

Analysts

John Williams - Goldman Sachs

Bob Napoli - Piper Jaffray

Tom McCrohan - Janney Montgomery Scott

Tien-tsin Huang- JPMorgan

Robert Dodd - Morgan Keegan

Greg Smith - Duncan Williams

Paul Bartley - PB Investment Research

David Parker - Lazard Capital Markets

Operator

Greeting and welcome to the Wright Express Corporation Second Quarter 2010 Conference Call. At this time, all participants are in a listen-only mode. A 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 to 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 are our CEO, Mike Dubyak and our CFO, Melissa Smith. The financial results and press release we have issued early this morning is posted in the Investor Relation 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 second quarter, adjusted net income excludes non-cash, mark-to-market adjustments and our fuel price related derivative instruments and the amortization of acquired intangible assets as well as the related tax impacts.

Please see exhibit one 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 obligation to do so. You should not rely on these forward-looking statements after today.

With that I will turn the call over to Mike Dubyak.

Mike Dubyak

Hello everyone and thanks for joining us. Our results this quarter were lead by increased fleet customer revenue. This was driven by the first quarter of growth in existing customer transactions since the start of the recession two and a half years ago. Total revenue was up 17% from Q2 last year primarily due to a $0.54 increase in fuel prices and accelerating MasterCard spend as well as increased fueling activity.

Adjusted net income increased 20% and exceeded the top end of our guidance by $0.02 reflecting revenue growth as well as a decline in operating expenses highlighted by lower than expected credit loss. Since the third quarter of 2008, fleet fueling activity in our installed base or same-store sales has been consistently down on a year-over-year basis.

These declines however have been narrowing for nearly a year now as the economy recovers. Same-store sales in the first quarter of 2010 were essentially flat on a year-over-year basis, which suggested to us that we were finally seeing direct evidence of the economic recovery in our core business.

We were pleased to see this trend continue in the second quarter as same-store sales finally turn positive. Increasing consistently from month-to-month in the quarter and growing a solid 4% from Q2 last year.

Total payment processing transactions were up 2.5%, the first year-over-year increase since Q3 of '08. As in the first quarter, the transportation and manufacturing sectors experienced the strongest rebound in fueling activity in Q2. Construction remained our weakest major sector but even construction improved to essentially flat year-over-year.

Last quarter we reported that business services and the other verticals were continuing to bounce along the bottom. This quarter we saw the majority of our SIC codes post year-over-year increases, including business services which is second in size only to construction. We will continue to watch this metric closely for signs of changes in economic activity.

Unlike Q1 when patterns were consistent from region-to-region, we did see some significant differences in Q2 with the South West out performing the other regions and the West under performing. Fueling volume on a total basis turn positive this quarter, despite a continued year-over-year reduction in the number of vehicles in existing customer fleets. Although our front end programs have added nearly 425,000 new vehicles to our install base since Q2 '09, our second quarter 2010 total vehicle count was still down by approximately 100,000 vehicles from a year ago.

We did see an increase in the number of vehicle serviced as compared with the first quarter however, excluding the fourth quarter of '08 when we added the GSA fleet portfolio; Q2 marked our first sequential increase in vehicles since the beginning of the downturn nearly two years ago.

Breaking it down by fleet segment, the average number of vehicles in our large and mid-sized fleet portfolio declined 3% year-over-year. In small fleets, our average vehicle count was flat with Q2 last year. In both our Wright Express direct and program channels, the average vehicle count was up 2% from Q2 of '09 while private label was down 2%.

We are continuing to invest in building the strongest front end capabilities in the industry and the sales force produce some significant wins in the second quarter. These included the state of Florida, New York City's Metropolitan Transportation Authority and the US Department of the Treasury.

Together these new fleet customers will add more than 35,000 vehicles to our portfolio. In addition, our CoBrand leasing partners were also successful this quarter in signing up some new large customers.

Our investments in sales, marketing and customer service also have the effect of keeping our customers satisfied and our attrition rates very low. Voluntary attrition for the second quarter of 2010 remained well below our target at 1.4% compared with 2.9% for Q2 last year.

One of the keys to customer satisfaction in the fleet card business is the ability to offer attractive credit terms and our unique financing model creates a significant competitive advantage for us as a credit provider. In this regard, we expect the new financial reform legislation to be essentially neutral as far as our business is concerned. The new law takes a measured approach to the regulation of industrial loan corporations.

It imposes no new requirements or limitations on existing ILCs such as ours. It calls only for a three year moratorium on new ILC applications and an 18 month study of the ILC industry by the government accountability office.

Let's turn now to our diversified businesses. Led by MasterCard, these businesses are continuing to perform well, contributing more than $20 million of revenue this quarter or 22% of our total revenue. This is up from 21% of total revenue in Q2 last year, despite the increase in fuel prices since then.

We've been working strategically to expand our footprint in ways that reduce the fuel price sensitivity of our business model while at the same time adding to the overall product and service value we can provide to our customers. The growing share of revenue contributed by these new businesses, demonstrates the progress we've made in executing on this strategy and we expect this contribution to grow to approximately 30% of our total revenue over the next few years.

Our MasterCard product continues to drive this growth. MasterCard revenue for the second quarter of 2010 was up 37% from Q2 last year and MasterCard spend was more than a $1 billon. Most of the growth in purchase volume is continuing to come from our single use account product. The roll out with one of the world's largest online travel companies that we've mentioned in the past two quarters is on track and continuing to expand. The spend volume on this program grew to $85 million in the second quarter from $20 million in the sequential first quarter. We expect this ramp to accelerate through the end of the year as we've signed a contract for another portion of that same customer business.

In addition, the targeted MasterCard marketing campaigns we've been implementing this year in the insurance and warranty vertical are now producing tangible results. We signed deals with two insurance companies during the second quarter. At the same time we significantly expanded our sales pipeline in what looks to be an increasingly receptive market for our MasterCard single use account product.

We are also seeing double digit spend growth in our MasterCard purchasing card product. We envision the purchasing card is a way to add value for our small and medium size business customers by helping them reduce their operating cost while at the same time creating a cross selling opportunity for us in our core fleet business and it's serving both purposes very well.

We're continuing to make progress on our international strategy. We've been in negotiations for some time with the group of major and mid major oil companies. These talks are going well and we expect to record a small revenue contribution from our first international transaction processing relationship before the end of 2010.

We are also exploring strategy focused on card, program alliances or acquisitions that have the potential to expand our international presence and we look forward to reporting progress in that area in the future. Clearly with our low debt leverage ratio and strong cash flow, we are in a position to make significant investments in expanding our business. These investments are designed to drive organic growth in the fleet market or to accelerate our diversification which will further reduce the fuel price sensitivity of our model. That said we are anticipating no change in our bias towards being conservative with our cash as we seek the highest possible returns.

We've continued to include stock repurchases in the mix and in the second quarter we spend $10.5 million buying back 334,000 shares of our stock. We repurchased another 261,000 shares in July, bringing total repurchases for the year to approximately $18 million or 595,000 shares. Since the inception of our current repurchase plan in 2007, we bought back approximately 3.1 million shares at a total cost of $96 million. We have approximately $54 million remaining under the current authorization.

While we expect to continue buying back stock when opportunities present themselves, internal reinvestment to drive organic earnings growth continues to be our highest priority use of cash. We will also continue to explore alliances, mergers or acquisitions that represent strategic opportunities for incremental growth.

So to wrap up, this was a strong quarter for Wright Express highlighted by existing customer growth of 4% and the dynamics in the business are uniformly positive as we begin the third quarter. We are very much aware of the economic uncertainty right now and we are watching the trends closely. But we are seeing nothing as yet in terms of customer feedback on purchasing activity that would lead us to dial down the sense of confidence in the second half of the year that we expressed last quarter.

Melissa will discuss our guidance assumptions in detail at the conclusion of her prepared remarks. So I will turn the call over to her, Melissa?

Melissa Smith

Thanks Mike and good morning everyone. Q2 2010 was another quarter of solid earnings growth as A&I once again exceeded our guidance driven by payment processing transaction growth, MasterCard spend, late fee revenue and lower credit loss. These positive factors more than offset a $0.07 decline in fuel price per gallon compared to our guidance.

As Mike said, we were successful in adding fleets and vehicles in the second quarter and we feel good about the trends we are seeing in the business as we begin Q3. Even if the economic recovery remains slow next year, we believe that we can continue this performance going forward. This gives us confidence in our transaction volumes in A&I growth trajectory, moving into 2011.

Turning now to our results for the second quarter of 2010, total revenues increased 17% to $91.4 million from $77.9 million for the second quarter of 2009, slightly above the top end of our guidance range of $86 million to $91 million. Net income to common shareholders on a GAAP basis was $30 million or $0.77 per diluted share, compared with $93.2 million or $2.36 per diluted share in Q2 last year. Q2 of last year included a pre-tax gain of $136.5 million on the prepayment of the company's liability under a tax receivable agreement.

Our non-GAAP adjusted net income for the second quarter of 2010 increased to $26.8 million or $0.68 per diluted share, exceeding the high end of our guidance range which was $0.61 to $0.66 per share. This represents an increase of 20% over the adjusted net income for the second quarter of last year, which was $22.4 million or $0.57 per diluted share. With that at the background I've discussed our financial results in detail.

Our net payment processing rate for Q2 2010 was 1.73%, down 3 basis points sequentially from Q1. As a reminder, we implemented some new payment processing rates during Q1, increasing the average rate by 5 basis points. We'll continue to see the benefit of these higher rates in future quarters. For the current quarter, the reduction of 3 basis points compared to Q1 was due to the impact of higher fuel prices on our hybrid merchant contracts and a slight increase in our rebates to major customers.

Consistent with the first quarter, approximately 60% of our transactions in Q2 were at merchants with hybrid contracts. This was another strong quarter of growth in our MasterCard segment. Total purchase volume was up 34% from Q2 last year to $1 billion, again exceeding our forecast. Revenue in the MasterCard segment was up by 37% year-over-year to $13.1 million. MasterCard represented 14% of total revenue and 12% of total A&I in the second quarter of 2010, up from 12% and 10% respectively in the second quarter last year. The MasterCard net interchange rate for Q2 was 1.07%, down 4 basis points year-on-year, primarily due to an increase in the average rebates we paid.

Late fees for the quarter declined, both sequentially and year-over-year. As you may recall, in January 2010 we had very high late fees as the percentage of the dollar volume. Late fees then trended down, through March and April, but rose slightly in May and June, so the decline was not as large as we expected in the quarter.

Moving on to operating expenses, our strategy remains the same, tightly controlling our underlying cost structure, while making targeted incremental investments and growth initiatives, including research, marketing in international business development. On the GAAP basis, our total operating expenses is $52.1 million for Q2 were lower than we expected, primarily due to credit loss. Fleet credit loss was 7 basis points compared with the 12 to 17 basis points we assumed in our guidance. This is roughly equivalent to the exceptionally low 8 basis points we recorded for Q2 last year, and well below our historical loss range of 11 to 22 basis points. Although our guidance assumed that we would have one significant bankruptcy during the second quarter, this did not occur. Smaller bankruptcies in the normal course of business were also better than we anticipated. The accounts receivable [ATM] also improved from Q1 more than we expected.

On a total basis including both Fleet and MasterCard credit loss for the second quarter was $2.9 million, compared with $2.6 million in Q2 last year. Total charge offs in the quarter were $5.6 million, and recoveries were $1.1 million. Consistent with prior quarters the majority of the charge offs came from customers with balances less than $30,000.

As of June 30, balances passed dues 30 or more days represented 1% of the portfolio, or about $8.8 million, compared with 0.8% last year and 1.4% at the end of Q1. This is a $2 million improvement sequentially in the past due balances. This is the primary driver of the improvement and their allowance for credit losses.

We track the accuracy of our allowance as compared to the next six months of net charge offs. Historically, we have a high degree of accuracy in this estimate. As an example, net charge offs for the first half of 2010 were $10.3 million compared with a reserve of $10.7 million at December 31, 2009.

Looking at other key expense lines, salary and other personnel costs for Q2 were $20.4 million, up $2.2 million from the second quarter last year. This increase was primarily due to expanded international staffing, increased commissions and modest salary and benefit increases. Lower operating interest expense, again was a positive factor in Q2, declining by $1.1 million or 44% from Q2 last year to $1.4 million.

Our average operating debt level, including CDs, money market accounts and Fed funds, was $545 million, compared with $394 million in the second quarter of 2009. During the quarter, we began a new program to use brokerage money market deposits in addition to the CDs we have used historically. At the end of the quarter, we had approximately $60 million in money market funds paying interest tied to short-term rates. We expect the balances to grow slightly over next few months and reduce the CD balances.

Now that virtually all of our higher rate CDs have matured and interest rates have remained very low, the interest rate on our operating debt again declined in Q2 to 1% down from 1.2% in Q1. Our effective tax rate for Q2 on a GAAP basis was 37.5% compared with 37.3% in the second quarter last year.

Our adjusted net income tax rate this quarter was 37.5% compared with 37.8% for Q2 a year ago. We expect our tax rate to be between 37% and 38% for the year.

Turning to our derivatives program, during the second quarter of 2010, we've recognized a realized cash gain of $2.8 million before taxes on these instruments and an unrealized gain of $6.5 million. We concluded the quarter with a net derivative asset of $5.9 million.

As previously reported, we have completed our purchases for 2010. For the remainder of the year, we have locked in at a price of $2.87 to $2.93. We have also hedged 80% of our exposure through the second quarter of 2011, 53% of our exposures through the third quarter of 2011 and 27% at the fourth quarter of 2011 exposure.

For the periods in 2011 for which purchases have then completed, the average price we have locked in at the top end of our [caller] is $2.93.

Turning to the balance sheet, we ended Q2, 2010 with a balance of $91 million on our revolving line-of-credit and a leverage ratio of 0.5 times EBITDA, this compares with 1.4 times EBITDA at the end of Q2 last year. Capital expenditures for the second quarter were $6.8 million, our anticipated CapEx for 2010 is in the range of $20 million to $25 million up from the actual spend at $17.8 million in 2009.

Again this is comprised of ongoing investments in new products and efficiency initiatives with a majority of the year-over-year increase reflecting our international investments. I will conclude my prepared remarks with some key assumptions on our financial guidance with the third quarter and updated guidance for the full year 2010.

Reflecting the thoughts Mike expressed, our guidance assumes that volume (inaudible) existing customer base or same-store sales volume will be positive for the remainder of the year. Credit loss for the third quarter is expected to be 11 to 16 basis points, in full year it's expected to be in the range of 14 to 19 basis points. This loss rate reflects the favorability of experience so far this year but no other meaningful changes to our assumptions.

We are assuming that the aging of the receivable balances will remain consistent and that there will be one significant bankruptcy each quarter. Although it remains in place, we have not included any potential EPS subside from our share repurchase program other than the purchases that we have already completed this month.

The fuel price assumptions are based on the applicable NYMEX futures price which is down $0.13 from the $2.88 per gallon assumed in our prior full-year 2010 guidance. Let me remind you that our forecast reflect our view only as of today and remained on our non-GAAP basis as Steve discussed earlier.

So the third quarter of 2010, we expect to report revenues in the range of $91 million to $96 million. This is based on an average retail fuel price of $2.75 per gallon. For the full year of 2010, we expect revenues ranging from $354 to $364 million based on an average retail fuel price of $2.75 per gallon. As for earnings for Q3 of 2010, may expect to report adjusted net income in the range of $25 million to $27 million or $0.65 to $0.70 per diluted share. We expect our adjusted net income for the full year of 2010 in the range of $97 million to $101 million or $2.47 to $2.57 per diluted share on approximately $39 million shares outstanding.

With that, we will be happy to take questions. Claudia, you can proceed with your Q&A now.

Questions-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. (Operator Instructions). Our first question is coming from John Williams with Goldman Sachs. Please state your question.

John Williams - Goldman Sachs

Just looking at the acquisition environment, I know this has been something that's been out there for a while when you've been on the earnings calls, what are you looking for, I guess, that would be a signal that you are finding the right possible partner and or company combine with going forward, I know this is something that comes up a lot with investors, I'm just curious to get your opinion on that?

Mike Dubyak

I think, well, first of all in terms of areas and categories, we would look at something that could kind of expand our market capabilities in North America could be a contiguous market, could be something else in our space. We'd look at something that can further diversify our business model as we've done with some acquisitions in the past that could take us into some new market spaces but still leverage our core assets today. And we would also look at international opportunities that could either enhance our processing capabilities with different products and services or processing capabilities or look at acquisitions where potentially we would be an issuer and then also have call centers that we can provide to some of the processing relationships we have in different parts of the world.

So I think all of those would be possibilities for us as we look to expand and then its just a matter of making sure you find the right deal and you know make sure it fits with Wright Express's strategy.

John Williams - Goldman Sachs

In terms of CapEx what's your philosophy for the longer term way to think about this as a percentage of revenues or how do you think about it, going forward especially with the expansion coming up. Just want to make sure that we are looking at our modeling in the right way and that we are not moving it too far one way or the other when we have to lookout towards 2011-2012?

Melissa Smith

Yes, if you look at what we've spent historically extending that between $15 million and $20 million this year and it's obviously $20 million to $25 million because of international expansion. I think that's a pretty good run-rate going forward from what we see in our business, no, it's not a perfect view but I would say that's probably a safe assumption.

John Williams - Goldman Sachs

And then just last one quick thing, the significant bankruptcy that you assumed in the annual numbers, is that just based on historical experience, so that's a good way to think about it or is that based on something that you are concerned about now versus say the way you might have thought about this two or three years ago. Is this sort of a new thing to worry about?

Melissa Smith

I think it is new in terms of the fact that they are more elevated since there has been softness in the economy. We've had one; I think five out of the last six quarters. So as we're looking forward in our forecasting, we are just being prudent to include that as an assumption.

John Williams - Goldman Sachs

Melissa, can you be like more specific what this is about, when you say significant, is it 5% of revenue, 2% of revenue, what would significant be?

Melissa Smith

Yes, I think they are between $200,000 and $300,000, $200,000 and $400,000 I guess, $200,000 to $400,000 so what we're looking at is generally significant.

John Williams - Goldman Sachs

And that's revenue?

Melissa Smith

No, $200,000 and $400,000 is about the amount of the loss. No, we only had one loss greater than $1 million in the history of the company and so when we say significant, at this point it's hard. It's less than $0.5 million and when we're looking forward and we're including in their assumption so assuming something in the range of $200,000 to $400,000.

Operator

Our next question is coming from the line of Bob Napoli with Piper Jaffray. Please repeat your question.

Bob Napoli - Piper Jaffray

Thank you, good morning. Just wondering if you could go, give it a little more color on the month-to-month trends in the core business same-store sales that blended out the 4% and if you had any color on July?

Mike Dubyak

Yes, as we said in the prepared remarks, every month was progressively better than the previous month. We basically saw all the different regions of the country either flat or up except for the West. We probably saw somewhere like, you can count them off right here but I think pretty much seven out of our ten top SIC Codes were up. Even as I've said construction was down but only slightly. So far in July, we have seen still strength, so we have seen nothing that has said that is changing in terms of at least sequential changes we've been seeing month over month so far from the first quarter into the second quarter and now into July. So that's why I think in Melissa's prepared remarks we talked about saying we see continued growth in, transaction growth mostly because we are also now seeing the same-store sales bounce back.

Bob Napoli - Piper Jaffray

Your average 4% was the month of June, 8% or was it.

Mike Dubyak

Yes, the month of June was a little over 5%

Bob Napoli - Piper Jaffray

Okay. And then the MasterCard business obviously very strong growth there, are the profit margins are the margins on the new business that you are signing similar to what is the business as a whole?

Melissa Smith

Generally yes, there is single used account product, there are typically have rapid payment terms and so there isn't as much interest expense requirement, much credit exposure. And then they have higher rebate but from profitability perspective they look pretty similar.

Bob Napoli - Piper Jaffray

I mean that accelerated I mean you gave some nice metrics on the new large travel customer, Mike said that the percentage growth rate accelerate through the quarter and you expect, it sounds like your pipeline maybe even expanded of new business?

Mike Dubyak

Yes, we talked about the $20 million in the first quarter and $80 million or $85 million in the second quarter, that's continuing to expand and we've as I said signed another piece of their business which we are not sure exactly when that will come on at the earliest. That would come on as additional ramping and rollout if you will by the fourth quarter at the earliest. That still to be determined just based on what it takes to start rolling that out. But that just said as there is continued momentum to see the build and that build now will continue into next year.

Bob Napoli - Piper Jaffray

Okay, and the last question on your reserves, I guess your reserves have to be forward looking not backward looking. I don't think I have ever seen a backward looking reserve, but the number the $7.7 million and the 11to 16 basis point guidance that you are giving, it looks like that reserve maybe is a little bit low relative to the charge-offs that you are expecting in the back-half of the year, or is that because you are not reserving for the bankruptcies, that you may get or why would that --?

Melissa Smith

The reserve is our estimate of what we think is going to charge off over the next six months.

Operator

Our next question is coming from the line of Tom McCrohan with Janney Montgomery Scott. Please state your question.

Tom McCrohan - Janney Montgomery Scott

Hi guys. What is the definition for same store sales? I'm just trying to figure out the metric that you are using to calculate the 4% growth.

Mike Dubyak

Yes, we typically look at customers that are with us at least 12 months. So, that's when we look at same store sales, so everything after that would be considered the new business we are bringing off in the sales force.

Tom McCrohan - Janney Montgomery Scott

Is it transactions Mike that you are looking at or dollars of spend?

Mike Dubyak

Well we look at a couple of things, but it's primarily gallons because that's what's going to drive revenue eventually, based on the payment processing rates or whatever. So it's really the gallons that we are looking at.

Tom McCrohan - Janney Montgomery Scott

Gallons per fill up, is that 4% year-over-year, is that the way to think about it?

Mike Dubyak

Well these are gallons that are up from these customers that have been with us basically at least a year or longer. Or saying is those customers, no new customers impacting that volume if they've been with us a year or longer. We are now seeing the actual growth of gallons go up 4%.

Tom McCrohan - Janney Montgomery Scott

In my last query, you talking about kind of a rebound. I don't want to read too much into the 4% as kind of an indication of a recovery as much as what you were kind of talking about last quarter where you are going to get naturally just kind of the math, right a little bump up in growth on that definition just because last year was so week, right? But how much of this is a recovery, versus you just think last year the comps were so weak due to what's going on in the market?

Mike Dubyak

Well there is no doubt, we were down and we've said it, 10% in the first quarter of last year, 10% in the second quarter, like 9% in the third quarter and I think it was 7% in the fourth. So it was going down, down, down flattened in the first quarter. So you are clearly comparing over a period that's going down, down, down you are still comparing to a number that was fairly low in the second quarter that had gone down another 10%, and now we are bouncing off of that. And then hopefully we are feeling comfortable that what we see with our trends and our analysis is that it will continue into the third and fourth quarter.

Tom McCrohan - Janney Montgomery Scott

Getting back to normal, but not wouldn't encourage us to kind of model growth after you kind of normalize for that weakness last year.

Melissa Smith

I think another way of saying it is, that we present all along that you kind of reset the bar that you went down 9% last year, and you reset kind of what the normal is. They say July of this week's within our business models reduced their fleet size. And so if they had a 10 vehicle fleet in the past, they had a nine vehicle fleet by the end of last year. And so what we are seeing now is positive improvement and what was remaining of that fleet. So view it as there is a positive, and that here what you are saying is because in part because of the comparison.

Mike Dubyak

But you've seen that shrinkage in the average fleets in the activity as we get a little better in the remaining fleet, it is good?

Tom McCrohan - Janney Montgomery Scott

And Melissa just one last question I'll jump off on the reserves. I was modeling for reserves going to be a little bit higher, and I understand we don't have access to kind of how you project down charge offs, but I was surprised in light of the fact that the uncertain outlook and like in your press release in the comment you talked about kind of those uncertainties in the economic outlook, but given that and given the trailing trend and charge offs you had no improvement kind of sequentially in charge off trends that the reserves went down, right? So I would have thought the reserves would have been higher heading into what appears to be kind of an uncertain economic outlook. So could you just give us little more comfort Melissa on the announced that you do? You talked about the prepared remarks on the aging and what you're seeing I guess your comfort in your current reserve levels. Thanks

Melissa Smith

Sure, as I said when we look at this we actually, we look at on a quarterly basis if not more frequently how we are doing compared to our allowance, compared to charge offs over the proceeding 6 months. And we've actually a very high correlation. Is we are estimating charge offs a big part of what drives that is what's happening to the aging. And in the second quarter the aging improved pretty significantly. So, we had a reduction of $2 million as balances past due. And that's the primary driver of why you have seen a reduction in the reserve itself. And if you see that'll pick up in the provision for credit loss, but we are looking at our future view what we will do is estimate that what we think is going to happen in terms of charge offs. We give assumptions on the call of what we think is going to happen to the aging, and typically representing it to a state pretty static And then we will look at what we think is going to happen to all rates and as a result of that, that's what we give as a forward to you.

Operator

Our next question is coming from Tien-tsin Huang with JPMorgan. Please state your question.

Tien-tsin Huang- JPMorgan

Thanks for all the disclosure. I just wanted to ask about the competitive wins, the 35 vehicles you talked about Mike. What kind of business will that be? Are you going to be funding the receivables? I just want to get some details around that.

Mike Dubyak

Yes in those wins, those who are all on the Wright Express card, so we will clearly be funding the receivables. The State of Florida was an RFP that basically different people can get on. We were able to take over a piece of the federal government since there's opportunities from other agencies that we did not win to potentially win that business and that was the treasury business that we won and then it was just basically a regular competitive process for the metropolitan New York transit system.

So just, under different contexts but all competitive wins under different opportunities all on the Wright Express card, we will be funding receivables.

Tien-tsin Huang- JPMorgan

And then the timing of when that 35 will roughly come in and I guess, what were the factors that get you guys to win that business relative to the income?

Mike Dubyak

Well probably most of this will roll out either later in this quarter or fourth quarter, in terms of the 35,000 vehicles. I think in the competitive wins, it's a matter of services and products and we feel what we've done with continuing to invest in our business as we talk about with these larger fleets, they look at ways to manage their business effectively with our online tools and the ability for them to go in and customize their programs on who can buy, what they can buy, when they can buy, how they can buy and then the different reports they can pool from this, its really all of those capabilities with the services we offer that allow us to win, clearly have to be competitive on price. We are not necessarily the leader on being the lowest price, but we think the overall value still allows us to win these big opportunities.

Tien-tsin Huang- JPMorgan

Just on the MasterCard side, obviously that was very strong with the new customer rolling up. How far along are you in ramping up that core business excluding that secondary piece that you might give later on this year?

Mike Dubyak

Yes, I'd say the $85 million is pretty strong but there is still some room to grow but I don't know the exact percentage because they keep adding incrementally new business and we have some sense of that, but not a complete sense of that. So, I think there is growth opportunities in which ramping currently, let's say we are in the range of 60% to 80% so that can still ramp and then we'll be adding the new business which would start as early as the fourth quarter, but again that has to be determined just working with them on how does this work and how do we integrate?

Tien-tsin Huang- JPMorgan

Just last one from me on the [BP] front. I'm curious if with all the [acronym] going on with BP, I'm just taking back to Katrina which has some benefit to your volumes. Are you seeing any kind of impact from that?

Mike Dubyak

No, I think we are not. I think there is no real impact with what's going on in the Gulf with our business. And I think that as we know from the press some people have reasons not to purchase from BP but that's the fleet's choices and doesn't affect us. They still have options to go wherever they would like to use our card.

Operator

Our next question is coming from the line of Robert Dodd with Morgan Keegan. Please state your question.

Robert Dodd - Morgan Keegan

One of the questions, going back to kind of charge-offs and actually late fees or finance fees rather, which from a kind of tight to the late balance. I'm having a little trouble to [reconcile] it, the overdue balances declined fairly substantially in the end of Q1 through end of Q2, why then were the late fees or finance fees modestly, sequentially that so it didn't decline sequentially. Can you give us an idea of have you changed the pricing for those fees recently or can you give us some more color on that?

Melissa Smith

We said it in January that we saw a significant amount of late fees and that's often driven by behavior of peoples that are slightly late and then they may move in, in and out of say 60 bucket that will go from 30 to 60 days briefly and go back end.

So the reason isn't as much of a correlation between late fees that you'd expect and credit loss. So when we are modeling out late fees actually we are looking at customer behavior patterns more specifically as how they move in and out of that in the late fee buckets.

When we are looking at credit loss as you said, we saw an improvement in Q2 in credit loss which was driven as eight out of 10 of our top industries improved sequentially in terms of their aging and that reflected in the total improvement in the aging.

Robert Dodd - Morgan Keegan

Small detail, when average gallons per transaction on the payment process are like picked up a little bit or was down a bit in the first quarter. Can you give us some color on that given if the large fleet of vehicles were down 3% I can't imagine it's a larger gas tanks. Now I think it would be small gas tanks and I would think that should be drifting slightly down, could you give us any color on what's driving the increase there?

Mike Dubyak

The only thing I can say is it probably came the little bit of reduction that we saw over the last 12 months or so might have been because the GSA does buy less in their fills but now that's been kind of steady state for a while now, as we are adding new business it's probably getting back to higher transactions that we usually see from most commercial accounts. When we say large fleet we don't mean large vehicles, we mean fleets with greater than a 100 vehicles versus those with less than a 100 vehicles, so it still could be automobile fleets or small like van fleets even if it's a large customer, it just a matter of what is the type of customer we are bringing on and what is the average fill. And all I would say is I think we've now seeing maybe the bottom of what the impact of the GSA could have been, that's my speculation, now we are just seeing normal fills that are bring it back up. But I think it's going to bounce around, we've seen anywhere from 20.4 pretty steadily, it did go down Q1 to 20.2 and now it's back up to 20.5.

Robert Dodd - Morgan Keegan

On the service fee line, there was a fairly substantial increase against sequentially Q1 and Q2 obviously this was seasonality. There is MasterCard in there, I mean can you give us color on what was driving that or was it the incremental growth to MasterCard business. Was the international investments, is $9.5 million a sustainable level or could we expect that to continue outpacing overall revenue growth volume even MasterCard volume growth by a margin?

Melissa Smith

It's a combination of both so as MasterCard spend is a primary driver, do we have increased fees there associated with MasterCard. There also was some incremental accounting and legal fees associated with both international investment.

Robert Dodd - Morgan Keegan

The last question for me at least, I think on the last quarter you gave us some kind of color where you think your vehicle growth would be by the end of the year I think that was mid to maybe high single digits because of new sales initiatives you have underway. Obviously up sequentially in vehicles but still down year-over-year. What's your comfort level of seeing you know positive vehicle growth maybe in that 5 to 10 putting words in your mouth there percent growth rate by end of Q4?

Mike Dubyak

I think that we clearly saw the growth sequentially so we are forecasting that sequentially it will continue to grow. Overall we know on the front end we are still saying we are going to bring in 400,000 new vehicles and we are pretty much on track with that. We brought in over 200,000 new vehicles in the first half of the year so it then really doesn't matter of what is the existing customers doing as Melissa said, are they just growing transactions in gallons or they starting to actually add new vehicles and that's hard to calculate right now. I don't think there will be a lot out of that and then the rest is what the attrition that's offsetting that

Operator

Our next question is coming from the line of Greg Smith with Duncan Williams.

Greg Smith - Duncan Williams

Just hoping we get an update on the service network and the telematics products, how are those two kind of progressing?

Mike Dubyak

They are actually progressing very well. We see our service network program continuing to grow. We are doing more and more, quite frankly on the service network with some of our larger partners and some of our larger accounts even using our MasterCard product where small garage, it's very difficult to get a point of sale device that accepts our card but we can use our MasterCard program to pay those garages so they have money quickly, we can pay them over the phone and the customer can still do a transaction there. So we're seeing nice growth on that side and we're seeing telematics I think last quarter we talked about seeing the confidence of small businesses picking up. We've continued to see telematics have strong growth this year compared to last year. Nothing that's going to be moving the needle that dramatically but it still builds the ability to have this annuity with these customers that bring on telematics as well. So that's growing very nicely beating what our plan was for the year.

Greg Smith - Duncan Williams

Your next question is coming from the line of Paul Bartley with PB Investment.

Paul Bartley - PB Investment Research

Just first, I want to follow-up on the same-store sales question from earlier. I just want to make sure that I'm understanding this right. The 4% growth is that really more of a same vehicle growth, it mean there are just four existing customers that have lost vehicles?

Mike Dubyak

Yes. So I mean this is really saying same stores these are customers that we've had on the books at least for a year. So we're really looking at, in this case, we're looking at mostly just the gallons, and that's what we're really tracking when we say same-store sales are up, not the vehicles. I don't have the tracking on the vehicles.

Melissa Smith

Yes, just to clarify your question. I think the draft for the remake of any type of adjustment to the metrics based on the number of vehicles that are remaining in the fleet and we don't do that, it's the number of gallons associated with that account. So if the account was there a year ago and its there a year later. It's wherever gallons or being driven based on that total account. The only adjustment we make is adjusting it based on equivalent fueling base so there is more business days in one particular quarter to another but it's a pretty minor adjustment.

Paul Bartley - PB Investment Research

Okay, so I guess I'm trying to reconcile, it's just the flat transaction growth versus kind of what's happening in the customer bases and the vehicles being down.

Mike Dubyak

We I guess would answer it that we know that we have the growth over the 4% with the existing customers. We know that we an offset to that based on attrition and attrition can be in the range of 5.5% to 6% between voluntary and involuntary. And then it's really just the timing of rolling out some of the new vehicles that we've added say the 200,000 vehicles in the first half of the year. So some of that timing affects the growth as well, but we do see that timing in the second half of the year helping us and we see net growth in the second half of the year, because of all those factors, the new vehicles coming on, the existing customers growing and minimizing our attrition levels.

Paul Bartley - PB Investment Research

Okay and then just a follow up on that. If you look year-to-year you are down 100,000 vehicles and I think you mentioned the 425,000 that you've added from new, of that 500,000 or so that you've lost, I was just wondering if you could comment on that, and maybe the mix of existing customers that have just decreased their fleets, versus customers that have gone away.

Mike Dubyak

Yes, if you look at just round numbers, if we are saying 6% on attrition all in, that's probably 50% of the loss, and then the other 50% is from the existing customers just contracting as Melissa alluded to a 10 vehicle fleet is now a nine or a eight vehicle fleet. So it's a combination of both. So, we feel that if the existing customers have now stabilized and starting to grow their gallons, and it's just a matter are they still cleaning up a little bit of their vehicles, we feel by seeing the sequential growth in the second quarter, potentially that is even stopped. So hopefully, you won't see more shedding of the existing customers. You would then have them either stabilized or slightly growing, you bring on the new business, and then you have the attrition vehicles leaving Wright Express.

Paul Bartley - PB Investment Research

Okay, so just so that I can clarify, so have you seen an improvement in the existing customers? What they are doing with their fleets?

Mike Dubyak

Only on the gallons, I don't think we have statistics to give you the vehicles. We don't have it today, but we've seen the gallons grow, so that's why I'm saying there has to be at least some stability in that existing customer base by seeing them grow their gallons. I don't know though whether the vehicles are kind of coming from one or the other.

Paul Bartley - PB Investment Research

Okay great. Then just a last one for me, on the finance fees, just trying to make sure I heard this right, were the late fees down from last year? Just trying to compare that to the finance fees that were up year-to-year.

Melissa Smith

The late fess went from 30 basis points in Q1, see I'm talking sequentially down to 27 basis points of total spend in Q2. Last year it about 30 basis points in Q2 of 2009. So, it's down, just to be clear, it went down from Q1 to Q2 we anticipated that it was going to go down and included that assumption in our guidance. But it was better, stronger than we had expected so the fees were a little bit higher than what we had anticipated, but down sequentially and down year-over-year.

Operator

Thank you, our next question is coming from the line of David Parker with Lazard Capital Markets. Please state your question.

David Parker - Lazard Capital Markets

Thank you, good morning. In your comments you talked about the hybrid contracts and the rebates, was there anything different this quarter or do you anticipate anything different next quarter in that area? And just could you give your general views on pricing? Thanks.

Mike Dubyak

Yes, there is no change on the hybrid contracts or the mix. So again just depending where people buy it's going to stay at 60% of our overall merchant purchases of few hybrid contracts. On the fleet side, by getting these big winds, which typically will have rebates, so that has an impact, but it's a positive impact because we are winning large customers in the marketplace. And then the rebates we're giving them get netted at out as you know. So we talk about, we feel good about our business uniformly; our pipelines are strong even on the large and mid size. So, if we see further slight deterioration of the overall payment processing fee, it's because we are continuing to win in the marketplace.

David Parker - Lazard Capital Markets

And then do you have any indications for where you can roll out the next (inaudible)?

Melissa Smith

The 2011 prices right now are somewhere in the 285 PPG. That's a flop price not our caller price, but it's somewhere in that range, the last few times we've booked that up.

David Parker - Lazard Capital Markets

Okay so below where the last one was rolled in?

Melissa Smith

Yes.

David Parker - Lazard Capital Markets

And then just in general I'm looking at your international business, how satisfied are you with the progress so far? Is it going according to plan or are there any challenges that have arisen or made things more difficult, or are you happy with the way things are progressing?

Mike Dubyak

Well, I think that you say we are talking to a lot of oil companies; we've been very pleased with the response from the oil companies. And we are looking to have our first processing relationship in place by the end of the year. It probably has taken a little bit longer than we'd like, but now we feel like we are starting to see transactions that would be on the books by the end of the year. We feel good about that, and we feel good about other opportunities that can be signed up and rolled out in the future.

David Parker - Lazard Capital Markets

Okay thanks Mike, and then just my final question is just from a strategic perspective that you look to leverage that the distribution channel that do you have into these fleets, where you at in potentially partnering with someone to deliver or provide a prepaid card or loyalty card or a pay-role card to some of your customers.

Mike Dubyak

While we are still in kind of the research and just talking to a lot of people. We know its something that we have been upfront saying prepaid should help us in our marketplace as well as leverage some of our assets but we are not ready to say we have something ready for the market but we continue to do our research and our diligence talking to a number of players in the market place.

Operator

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

Mike Dubyak

Thank you, Claudia and thanks everyone for listening. We look forward to speaking with you again next quarter. This concludes our call for today. Thank you

Operator

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.

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