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Executives

Steve Elder - SVP & CFO

Mike Dubyak - Chairman, President & CEO

Analysts

Robert Napoli - William Blair

Sanjay Sakhrani - KBW

Tom McCrohan - Janney

Tim Willi - Wells Fargo

Michael Grondahl - Piper Jaffray

Tien-tsin Huang - JPMorgan

Phil Stiller - Citi

Greg Smith- Sterne Agee

Wright Express Corp. (WXS) Q2 2012 Earnings Call August 1, 2012 10:00 AM ET

Operator

Good morning, my name is Kela and I will be your conference operator today. At this time I would like to welcome everyone to the Wright Express second quarter 2012 financial results conference call. (Operator Instructions).

Thank you. Mr. Elder you may begin your conference.

Steve Elder

Good morning. With me today is our CEO, Mike Dubyak. The financial results press release we issued early this morning is posted in the Investor Relations section of our website at wrightexpress.com. A copy of the release has also been included in an exhibit, as an 8-K to the SEC this morning.

As a reminder, we will be discussing a non-GAAP metric, specifically adjusted net income, during our call. For this year’s second quarter, adjusted net income excludes non-cash mark-to-market adjustments on our fuel price related derivative instruments and the amortization of acquired intangible assets as well as the related tax impacts, which includes impact from recently enacted tax legislation in Australia which I will discuss later. Please see Exhibit 1 included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income.

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

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

Mike Dubyak

Good morning everyone and thanks for joining us. Second quarter was a good quarter for Wright Express with both revenue and adjusted net income exceeding our expectations. Revenue in the second quarter increased 8% to $153 million, despite the decline in fuel prices and EPS on an A&I basis increased 10% to $1 per share versus prior year.

Our three-prong strategy of expanding our Americas fleet business, diversifying our revenue streams and building out our international presence continues to serve as our platforms for growth.

Highlights from the Americas fleet business included approximately 270,000 gross new cards added by our salesforce in the first half of 2012 and the signing of the State of Pennsylvania. This coupled with a record lower domestic fleet credit loss and continued low attrition rates yielded good performance in this arena despite economic headwinds.

Our diversification efforts continue to be led by very strong performance from our corporate charge card product with spend volume increasing 49% over the prior-year period to $2.8 billion.

We also announced our entering in to the healthcare vertical with the signing of PaySpan, one of the nation’s largest healthcare payments and reimbursement processors.

On the international front, in May we acquired a CorporatePay, a leading provider of corporate prepaid virtual cards to the travel industry in the UK. OTA wins included the implementation of our first customer in the UK and the signing of Webjet, a leading OTA in Australia. On the fleet side, we announced an agreement to resell our fleet processing capabilities in South Africa.

Moving on to the segments, in the second quarter we continue to focus on driving new business growth in our fleet business and achieved vehicle growth of 7% over the prior year. Consolidated payment processing transactions increased 1% over the prior year and we posted total fuel transaction growth of 3%.

Overall revenue in our fleet payment segment was up 1% over the prior year. With respect to our Americas fleet business, we continue to work on driving additional growth in this part of our business and it had good success in bringing on new vehicles despite the sluggish economy.

On the large fleet side, our contract with the state of Pennsylvania will contribute 26,000 vehicles in the fourth quarter. We also had strong vehicle growth in small to midsized fleets in the quarter, this growth coupled with low total attrition of 4.4 bodes well for this segment.

When looking forward, recent discussions with some of our larger customers indicate they are cautious on the US economy. That said they still expect to see growth in their business albeit slower growth. We have been forecasting same-store sales to be flat. However our existing customer base for same-store sales were down approximately 1% compared to the second quarter a year ago.

Given the current economic environment, we are not anticipating a pickup in our same-store sales, but we continue to believe our new business success in tackling all spectrums of the fleet market small, mid and large provides us with the pipeline for future growth.

In terms of the second pillar of our growth strategy, we made greater strides in continuing to diversify our business during the second quarter. Revenue from the other payment solution segment increased 39% driven predominantly by strong growth in our corporate charge card product.

While the online travel vertical is and will continue to be an important area for us, penetrating additional verticals remains a key objective. Which is why we were pleased to have signed PaySpan during the quarter. One of our competitive advantages and a critical reason customers like PaySpan choose Wright Express is our ability to understand and solve complex payment needs in both closed loop and open loop systems while also delivering increased security control and greater processing efficiencies in their business.

Though are still in the early stages, our partnership with PaySpan is a significant step in terms of expanding the usage of our single use virtual payment solutions to the healthcare medical payment space which is a large and growing area. With $35 billion in spend volume annually and growing PaySpan is a large player in its space and this agreement offers Wright Express an opportunity to capture a portion of that spend.

Furthermore the signing of a marquee account in the healthcare payment arena raises the visibility of our payment solutions to provide value in savings in this large and growing vertical. As implementation is expected to begin in the latter part of Q3, we anticipate the contribution from PaySpan to be immaterial this year. However we believe PaySpan has the potential to become a meaningful contributor to our other payment solutions segment longer term, growing significantly in subsequent years with the possibility of becoming one of our largest customers.

We should have better visibility when we report Q3 earnings and look forward to updating you on our progress. Additional client wins, international expansion and further penetration into additional verticals give us confidence that we will continue to see strong growth in this area of our business in the future. That said we now anticipate spend growth for our corporate card product to be in the 30% to 40% range for this year including the impact from the CorporatePay acquisition.

Turning now to the third pillar of our growth strategy. We have been working diligently on building our international presence with several positive developments occurring in the second quarter. On the fleet side Wright Express Australia continues to perform to our expectations posting steady growth including 7% payment processing transaction growth over the prior year. Australia continues to grow based on their core small fleet, go-to-market strategy and we are working on opportunities to grow that business even further by targeting large fleets.

Outside of Australia, we signed a five-year agreement with OTI leveraging technology developed by our New Zealand subsidiary, our processing solution provides a multi-country, multi-language and multicurrency back office solution for vehicle fleet payment, device management and transaction processing services.

This is a small deal but notable as this is a new region for Wright Express and illustrates our commitment to expanding our international footprint. Accelerating the development of our international fleet business remains an important priority for us and we continue to be active in pursuing acquisitions and strategic alliance opportunities in several markets in order to further this objective.

On the other payment side, during the quarter we announced our acquisition of CorporatePay. We are currently in the integration phase and are taking a deeper look at synergy opportunities. With the product suite of single use accounts and prepaid solutions, CorporatePay's offerings compliments our own by rounding out our corporate payment solutions offering with a debit virtual card product.

The addition of a debit product enhances Wright Express’ broad competitive positioning in the marketplace relative to credit only players, as a debit offering is a must have requirement for some European OTAs. In addition, as we work on seeking approval for our credit product in new markets, this acquisition also accelerates our market entry.

More importantly this transaction aligns with our strategy to globalize our virtual card business which we've discussed with you previously. In addition to CorporatePay, we've accomplished a number of operational objectives in the UK for our virtual charge card product which provides the foundation from which we will build upon.

Bringing together CorporatePay's virtual debit card product with our virtual charge card product that provides us with a product suite that spans the continuum out of marketplace enabling greater opportunity for Wright Express to penetrate a broader addressable market and satisfy customers with diverse needs and requirements.

Initially, we planned to build out our international virtual card business leading with OTA in specific target markets, greatest opportunity for growth and we are making investments to advance on this strategy. With respect to our two previously announced UK OTAs while we are still in the early stages of development, we are pleased to announce that one has begun processing transactions.

Though still small in dollar terms at this point, we expect this customer to make more of a contribution in 2013 once they are fully implemented. As far as expanding our single use virtual card product to additional markets, we made greater progress on this objective during the second quarter and enter Australia with a signing of Webjet.

Webjet is one of the two largest OTAs in the country and we expect implementation to begin in September. The potential revenue from this agreement is small in relation to the size of our US OTA business, but it's significant as it provides access into the Australian market with a meaningful player in that market.

With this in hand, we plan to continue working on building the pipeline in this region as well as other target markets as we work to globalize our virtual card business. In conclusion, we are very pleased with our second quarter results and the opportunities we see on the horizon for continued growth and expansion of our business. We expect declining fuel prices, continued softness on same store sales and to a lesser extent FX rates to become headwinds in the second half of 2012 as it relates to our guidance.

We remain confident in our long-term success given the diversity of our business and the fact that the fundamentals of our business remain strong. Furthermore, we see various opportunities for growth in both segments of our business. As a result, we plan to further invest in our fleet and other payment segments to drive growth now and in the future.

In addition, we remain inquisitive in pursuing strategic corporate development initiatives to capitalize on these opportunities.

We will continue to execute against our multi-pronged strategy to grow our core fleet business, further diversify our business and accelerate the development of our international presence in both the fleet and other payments solution segment to drive greater growth over the near-term and long-term.

With that I'll turn the call over to Steve to discuss our financials in greater detail as well as our revised guidance for 2012. Steve?

Steve Elder

Thank you Mike. For the second quarter of 2012, we reported total revenue of $153.1 million, an increase of $11.8 million or 8% from the prior year period and above the high end of our guidance range of $145 million to $150 million.

This compares to our previously stated long-term revenue growth rate of 8% to 10%. The predominant driver of this performance was our corporate charge card product.

Net income to common shareholders on a GAAP basis for the second quarter was $30.3 million or $0.78 per diluted share. Our non-GAAP adjusted net income increased to $39.1 million or $1 per diluted share, an increase of 10% from Q2 last year.

The outperformance relative to our guidance was due primarily to lower credit losses. In terms of some key performance metrics for the second quarter, total fuel transactions increased 3% over the prior year. Payments processing transaction were up 1% in total while transaction processing transactions increased 8%, primarily driven by the addition of the BP contract in Australia.

Each of these growth rates were in line with our expectations for the quarter. The net payment processing rate for Q2 2012 with 1.63% which was down one basis point versus Q2 2012 and to the first quarter of 2012. Finance fee revenue in the fleet segment was up $600,000 compared to Q2 last year. As a percentage of total dollars of fuel purchased, it was approximately 5% higher than last year and better than our expectations as we had conservatively anticipated late fees to move in line with credit losses.

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

Spend volume on our corporate charge card product increased $922 million over last year or 49% to $2.8 billion for the quarter. The net interchange rate on our corporate charge card product for Q2 was 90 basis points, down seven basis points year-over-year. As we discussed last quarter, the drop was primarily due to the mix of contracts, higher foreign spend which generally has a lower interchange rate in domestic transactions and a reduction in customer specific incentives received from MasterCard.

Moving down to the income statement, total operating expenses on a GAAP basis for the second quarter were $90.2 million versus $80.1 million last year. Our strategy remains the same to tightly control our underlying cost structure or making targeted investments in growth initiatives.

The majority of the increase in operating expenses was related to salary and other personnel costs and service fees. Another personnel cost for Q2 were $30 million compared with $26.4 million in Q2 last year. The increase was driven primarily by additional headcount to support our growth strategy as well as a reduction in the amount of capitalized payroll related to internally developed software.

Service fees were up $6.6 million over the prior year to $24.8 million. The increase this quarter was primarily related to the 49% increase in volume on our corporate charge card product as well as an increase in cross border fees. In addition, we had an increase in expenses related to the acquisition of CorporatePay as well as ongoing corporate development activities.

Credit losses continued on their positive trajectory in the second quarter and once again exceeded our expectations. In total, credit loss for the second quarter was $4.2 million compared with $6.1 million in Q2 last year.

Total charge-offs in the quarter were $7.8 million or recoveries of amounts previously charged off were $1.4 million. Domestic fleet credit loss was just under seven basis points a record low for the second quarter compared to 12 basis points in the prior year period. The out performance in credit loss relative to our expectations was driven by improvement in the accounts receivable aging.

Our effective tax rate for Q2 on a GAAP basis was 66.5% compared to 36.4% in the second quarter of 2011. During the second quarter, we recorded a charge of approximately $31 million due to the impact of tax legislation in Australia enacted on June 29. The impact of which as I stated earlier, has been excluded from adjusted net income for Q2.

This legislation eliminated the past and future deductibility of approximately $72 million of amortization related to customer relationships. The cash impact of this charge will be spread out over many years. In addition, the Australian government is also looking at changing their transfer pricing rules in the area of allowable debt levels. If this proposed legislation is passed, this may result in a current period charge in the period the change is enacted as well as increase our tax rate in the future.

On operating basis we also had an increase in our tax rate related to the acquisition of Corporate Pay as some advisory expenses were not deductible for tax purposes. As a result, our tax rate was above 50 basis points higher than we had expected in the second quarter at 36.3% compared to 35.8% for Q2 a year ago. We expect our ANI tax rate to be approximately 36% for the remainder of the year pending an outcome on the potential change to debt transfer pricing rules in Australia.

Turning to our derivatives program. For the second quarter of 2012, we recognized a revised cash flow of $3.8 million before taxes on these instruments and an unrealized gain of $24.6 million. We concluded the quarter with a net derivative asset of $11 million. As the interest rate environment stays at very low levels and our credit losses have outperformed our expectations from when we executed our hedges, we are currently under our target level of 80% and expect to remain below for the next few quarters. For the third quarter of 2012, we have locked in at a price range of $3.45 to $3.51 per gallon. For the fourth quarter, the average price locked in is a penny higher.

Spending a moment on the balance sheet; our financing debt balance increased $32.3 million in Q2 given the acquisition of Corporate Pay and we ended the quarter with a total balance of $320.7 million on our revolving line of credit and term loan.

During the second quarter, we also repurchased approximately 200,000 shares of our stock for approximately $11 million to offset dilution related to equity awards this year. As of June 30th, our leverage ratio was 1.2 times of EBITDA compared to 1.7 times at the end of Q2 last year.

We ended the quarter with $208 million of cash. Majority of the increase in cash was driven by our new relationship with Higher One. Recall that the agreement with Higher One will bring a minimum level of deposits to our bank which we will be able to use to replace a portion of our CD portfolio.

At times, such as this quarter, this may lead to having a cash balance and if so related interest income. We will pay a service fee to Higher One that is a variable interest rate on the average balance based on market rate. As we previously stated, we expect this will be to meaningful operating interest expense savings in the second half of this year which had been previously been incorporated into our guidance.

Given the growth we've experienced in our payment offerings and the related fluctuations in our daily cash needs, we plan to maintain greater levels of liquidity at our bank subsidiary going forward which will result in an increase in cash on our balance sheet. In addition, due to the growth on our corporate charge card products, we have placed $50 million into an interest bearing account to secure performance on our obligations to MasterCard, which is included in other assets on our balance sheet.

In terms of future capital allocation, our main priority is to look at acquisitions as a way to further our growth objectives. However, in the absence of any deals, our near-term priority will remain to pay down debt.

In terms of capital expenditures, CapEx for the second quarter was $11 million. This was a bit higher than our run rate due to a new licensing agreement with Oracle that will cover the next three years. For the full-year, we continue to expect CapEx will be in the range of $30 million to $32 million.

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

For the full-year 2012, we have updated our guidance and now expect revenue in the range of $591 million to $601 million and adjusted net income in the range of $156 million to $162 million or $4 to $4.15 per diluted share.

Our full year guidance assumes that domestic fuel prices will be $3.55 per gallon, which implies the fourth quarter price of $3.25. We anticipate that domestic fleet credit loss will be between 9 and 12 basis points for the full-year. We are also assuming that the Australian dollar remains at a premium to the U.S. dollar in the range of 103. As a reminder, fuel price assumptions for the U.S. are based on the applicable NYMEX futures price, which may not reflect the actual prices during the quarter.

Before we open it up to questions, let me spend a minute walking through your revised guidance. As Mike alluded to earlier, the bulk of the revision to our full year guidance is being driven by lower fuel prices, FX rate and to some extent, the continued softness in same store sales from our existing customer base.

Compared to the guidance we provided back in May, our domestic fuel price assumption for the second half of the year is now about $0.35 lower. The impact from the lower fuel price assumption is exacerbated given that we are under hedged as a result of lower than expected interest rates and credit loss.

In addition, we are now expecting to be below the bottom-end of our hedge range which leaves us fully exposed to changes in fuel prices as prices drop within the range of the collar. If we are below the bottom-end of the range we will collect payments from our counterparties.

Furthermore, FX rates turned against us as the U.S. dollar has strengthened versus the Australian dollar relative to our prior expectation. Our revised guidance also takes into account a few cents dilutions from the acquisition of Corporate Pay including the related tax impact.

Finally, we expect the continued sluggishness in the U.S. economy which is being reflected in our same store sales metrics to persist. We had previously anticipated that same store sales will be flat in the second half of the year, but given the current environment we do not expect this to occur.

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

Question-and-Answer Session

Operator

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

Robert Napoli - William Blair

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

Mike Dubyak

I know you have done a little bit work on that your self; clearly this was a great win, because it puts us in a new vertical. It’s a vertical that we believe will continue to grow inspite of the economy or whatever just knowing the dynamics that’s going in the country and PaySpan is a large provider of services. They basically manage payments for insurance companies and third party administrators and they have to reconcile basically all the payments to make sure that ties that on both ends. They do that today through a non-card program, primarily checks. They look at our product as being I would say best-in-class and they will use that product initially to pay again on behalf of the insurance companies and the third party administrators to the medical providers.

So that’s basically what they are going to initially; we think there are other strategies and opportunity we will pursue with them, but that’s where we are going to get started in the fourth quarter. There is no doubt, they can become a very large player for us; I would say that they and we would say if we are only doing $1 billion next year we would be disappointed, but don’t think we are in a position to say over and above that what that looks like and that’s why we said we would share more during the Q3 call. But they are very bullish; we are very bullish. The integration is not difficult; it’s very similar with what we do with the OTAs and a lot of the work is going to be their side, but they think they will have it up and running by the end of the third quarter and be ready to do transactions in the fourth quarter.

Robert Napoli - William Blair

And then just in that segment, the OPS I mean the spend growth that you had 49% spend growth you know really not down much from the first quarter. Where is that still coming primarily from the two largest players and have you moved into new geographies because they are not growing that fast, but they are doing well, but not that well.

Steve Elder

They are growing. And it is coming primarily from our online travel companies.

Robert Napoli - William Blair

So you must be moving into new geographies because they are top line, their hotels’ growth is in 49%.

Steve Elder

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

Robert Napoli - William Blair

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

Mike Dubyak

No I know that as you know, Melissa Smith is running the Americas. She has a very strong team that Dave Maxsimic has in place and had in place, that's still driving our core business. I don't think the attrition rate is indicative. A lot of that comes from also what's going on with our client service organization. It's slightly up over last year but not much, I mean anything under 5% all in, we think is pretty spectacular numbers. So we don't see any change there.

I think that's also probably indicative of the economy being controlled. I think our customers, if we look at that aspect, we look at the ageing buckets, we look at bad debt, it also tells us even though the economy is sluggish at least businesses are managing their programs better. But on the attrition, we are very pleased with those numbers of 4.4% all in.

Steve Elder

And any slight increase we did have came on the involuntary side, it wasn’t that customers choose to wave off.

Mike Dubyak

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

Operator

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

Sanjay Sakhrani - KBW

I know Bob kind of rattled about some numbers in terms of what the potential could be for you guys from PaySpan, but I was just wondering if you could just clarify that or at least kind of articulate how significant that ramp could be over a short period of time and obviously over a longer period of time it could be in the entire [pot]. That's question one.

And then just question two on the fleet business, could you just maybe just talk about the M&A opportunity. I know you guys had some stuff in Africa, how significant is that opportunity and then you know what other stuff is out there. Thanks.

Mike Dubyak

Okay. On PaySpan, the numbers we have are $35 billion in total spend in terms of what they are paying for the insurance companies, let's say to the medical providers. Right now we are addressing that with them, we are trying to work out what are the opportunities and clearly I think it's very clear their CEO is very bullish about it, but I think we have to sit down and really strategize this.

It may even mean exploring some other products with them beyond the regular virtual card. We are in those discussions. I just don't think we are ready to say what that looks like long term. That's why at least I try to say to you if it's only $1 billion next year I think they would be disappointed and we would be disappointed, but I don't think we're ready to say what the numbers look like.

Steve Elder

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

Mike Dubyak

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

Sanjay Sakhrani - KBW

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

Mike Dubyak

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

Sanjay Sakhrani - KBW

Yes some of the wins that you guys have?

Mike Dubyak

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

Operator

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

Unidentified Analyst

Hi, it’s (inaudible) and thanks for taking my questions. First thing on the international expansion opportunity, you had a number of key wins this quarter mostly on the virtual card, but your competitor has actually signed or announced a few acquisitions internationally. Just curious where you involved in some of those deals and I guess ultimately what led you to perhaps not pursue that more aggressively, was it just a matter of valuation or something more strategic than that?

Mike Dubyak

Yeah, I would say that we are looking though our own strategic lens of what we think we have to do to make sure we are winning in our core markets, diversifying our business and looking at the international opportunities. I can’t say that we were involved in all the different ones. We don’t even know all the announcements except for the one in Brazil, but I do think they are very aggressive on the inorganic side. We are I think very strategic on the inorganic side.

And I think we are going to find ourselves even being in different markets knowing the OTA markets and some of the other things we are doing in prepaid. So our lens is a little bit different than their lens. On the fleet side clearly, they are talking about some of their wins. I guess they will probably give you more color in the future, but again we are not pursuing it as aggressively maybe as they are in some of these areas. We are looking at some of the things that we think are very strategic to us and what we are looking to do on the fleet side.

Unidentified Analyst

Okay and then on PaySpan, what's the go-to-market strategy or I guess what drives the confidence in some of the numbers you are giving on, at least a million dollars next year, is this just a preliminary sense of conversations you've had with some of the PaySpan end customers or is this something like go-to-market strategy that boost your confidence there?

Mike Dubyak

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

Unidentified Analyst

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

Steve Elder

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

Operator

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

Tom McCrohan - Janney

A quick question on the trends in the fleet segment, can you give us any color on what the growth rate was in payment transactions for the month of June and for the month of July?

Steve Elder

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

Tom McCrohan - Janney

Okay the growth this quarter [1%] is a good run rate to go with as in decelerated if you look at the months?

Steve Elder

No, it hasn't decelerated from their certainly.

Tom McCrohan - Janney

And then to ask another question on PaySpan do the insurance carriers need to opt into this program to shift payments on to the credit card rails. Or is this something that you and PaySpan control without their input?

Steve Elder

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

Tom McCrohan - Janney

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

Steve Elder

They still have to opt in.

Tom McCrohan - Janney

They still have to opt in. And Mike obviously its going to generate fee income that didn’t otherwise exist before, you said there will be ACH system. So how would the split work, how would handle those fees be divided amongst new band and presumably the insurance carrier?

Mike Dubyak

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

Operator

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

Tim Willi - Wells Fargo

Couple of questions, one is Steve on the housekeeping side. What was the revenue contribution of CorporatePay during the quarter? Or how should we think about that in terms of just the underlying organic growth rate?

Steve Elder

The actual revenue contributions with over $1 million for a couple of months we own them. I think you can kind of comfortably put this in the $5 million to $10 million range in your annualized revenue. Much like our OTAs, they've a spike in the summer months when people travel more. So you will see a little bit more in the third quarter but you know, kind of it is $5 million to $10 million revenue business.

Tim Willi - Wells Fargo

Okay, and then in terms of the guidance you mentioned slight dilution from this yield, is that mostly a one-time cost associated with closing on the transaction or is that because you said you starting to backed out, you got intangibles backed out of your adjusted guidance. So what will cause that dilution from this acquisition?

Steve Elder

The company on a standalone basis before we bought it was a profitable business. So what's causing the dilution, I mean, part of it is one-time expenses including the small tax impact that we had in Q2 but mostly the integration expenses that we have plans for the company to grow business and so we’re going to throw some resources at it to integrate it in to our business.

Tim Willi - Wells Fargo

Okay, two more questions, on M&A, and I think international, you talk, more so obviously Europe, etcetera but what is Asia as for a greater sort of Pacific [rim] look like, you know, the presence you have in Australia and with the software platform you bought several years ago. Are there active discussions on pipeline and APAC regions relatively to what you think about in Europe and elsewhere?

Mike Dubyak

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

Tim Willi - Wells Fargo

Okay, and the last in the MasterCard business, any updates on verticals, I think you've mentioned education, is one that you think has a lot of potential overtime and I think you also from time-to-time talk about property, P&C insurance, personal property insurance is another opportunity also with the healthcare businesses you signed. Any updates on either of those verticals and progress you are making?

Mike Dubyak

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

Operator

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

Michael Grondahl - Piper Jaffray

Could you help us understand what your customers need to see and maybe it’s just a better environment for same store sales taking a little bit of a boost?

Steve Elder

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

Michael Grondahl - Piper Jaffray

Got you and then you did mention I think it was a $50 million deposit with MasterCard, could you just may be highlight what that was for a little bit more specifically?

Steve Elder

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

Operator

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

Tien-tsin Huang - JPMorgan

Just wanted to ask about how is the credit loss outlook, your term is pretty clear, your (inaudible) performing but is this slowing same store a precursor for higher losses may be that we should think about in '13 and I know its too early to give guidance but just a (inaudible)?

Steve Elder

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

Tien-tsin Huang - JPMorgan

Just reaching back to the under hedging, given the over performance and the lower rate are you going to change your notional hedging as the overall. I mean its last where the hedge rates are today?

Mike Dubyak

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

Steve Elder

If we would execute another you know our next hedge it's in the range of $3.30 today.

Tien-tsin Huang - JPMorgan

And last one just on the [merchant] litigations that nothing directly impacting Wright Express but in terms of the surcharges it wasn’t clear to me as Wright Express is a network and key network would be included in that level playing field discussion of being surcharged or not, so what's your view on that Mike or Steve around surcharging and what it means for Wright Express? Thanks.

Steve Elder

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

Tien-tsin Huang - JPMorgan

But anyway to potentially guide what that might look like or…?

Mike Dubyak

Well, what we are referring to is that the 10 basis points for (inaudible), so we would be looking at our, you know you would have to look at our volume and it depends on what period of time that relates to as well, when they actually implement it, because we do have some seasonality.

Operator

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

Phil Stiller - Citi

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

Mike Dubyak

Well, you are talking about the gas stations or retailers having the ability to charge for credit?

Phil Stiller - Citi

Yes.

Mike Dubyak

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

Phil Stiller - Citi

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

Mike Dubyak

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

Phil Stiller - Citi

And just last question on the hedging strategy; you guys haven't put on the new hedge yet, its been about five months, are you guys price sensitive at the 3.30 level or what's the strategy there?

Mike Dubyak

No, I think that we have said some times in the past, we have been looking at things like the 200 a average and trying to say should we do a hedge in the last quarter we decided not to, but our plan is to still do hedges on a regular basis going forward.

Operator

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

Greg Smith- Sterne Agee

Steve, you mentioned this tax issue in Australia, if that sort of goes against you, what impact do that have on your overall effective tax rate?

Steve Elder

Especially what we are talking about is kind of FinCap rules and the intercompany debt that we have in place related to the purchase of, we tell decisions at the time; essentially the tax impact of that interest would be disavowed, at least some portion of it. I can’t really estimate it for you particularly well because it’s still kind of in early stages of discussions down there and so until we know what actual final rules are, it will be difficult. What I can tell you is that we’re currently deducting in the range of –well, we’re currently receiving a benefit of between $5 million and $6 million a year in our tax rate which we wouldn’t certainly not expect to loose a 100% of that, but depending on what the final outcome of those rules are, it could be certainly some portion of that.

Greg Smith- Sterne Agee

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

Mike Dubyak

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

Greg Smith- Sterne Agee

And then it’s just, they are obviously incented to do this too because they get a share; I mean not only is it maybe more efficiently better for their customers, but economically they are highly incented to move volume from a paper check to a card transaction right?

Mike Dubyak

Correct, absolutely.

Greg Smith- Sterne Agee

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

Mike Dubyak

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

Operator

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

Robert Napoli - William Blair

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

Mike Dubyak

Yeah I think that it’s still the chicken and egg; we have built the product so the investments been made; now it’s a matter of just getting more sites signed up and that’s the process we are driving right now to try to get to the fleets longer term.

Robert Napoli - William Blair

It looks like U.S. bank is maybe getting and now kind of ignoring this business for a while; it looks like they are getting a little more aggressive; are you seeing that in the market?

Mike Dubyak

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

Robert Napoli - William Blair

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

Mike Dubyak

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

Operator

And at this time there are no further questions. Do you have any closing remarks?

Mike Dubyak

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

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