WEX Inc.
Q4 2007 Earnings Call Transcript

Published: 25 Feb 2008

[Operator:]

Good day everyone and welcome the Wright Express Corporation’s fourth quarter 2007 financial results conference call. As a reminder today’s call is being recorded. There will be an opportunity for questions and comments after the prepared remarks. (Operator Instructions) I would now like to turn the call over to Mr. [Steve Elder], Vice President of Investor Relations. Please go ahead sir.

[Steve Elder]:]

Good morning and thank you for joining us. With me today is our CEO, Mike Dubyak and our CFO, Melissa Smith. The financial results press release we issued earlier this morning is posted in the Investor Relations section of our website at www.WrightExpress.com. A copy of the release has also been submitted as an exhibit to an 8-K we filed with the SEC. We also issued a press release this morning regarding the acquisition of the assets of Pacific Pride Services which Mike will be discussing in a few minutes and that release is posted on our website as well. We’ll be discussing a non-GAAP metric, specifically adjusted net income during this call. Please see Exhibit 1 included in the press release for an explanation and reconciliation of adjusted net income to GAAP net income. I’d also like to remind you that certain information contained in this call constitutes forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially fro those forward-looking statements as a result of various factors including those discussed in today’s press release, our Form 10-K which was filed on February 28, 2007 and our other SEC filings. While the company may choose to update forward-looking statements in the future, we specifically disclaim any obligation to do so even if our estimates change. You should not rely on these forward-looking statements as representing our views after today. With that I’ll turn the call over to our CEO, Mike Dubyak.

[Michael E. Dubyak:]

Good morning everyone and thanks for joining us. Looking across all the parts of the business we closed 2007 with a good fourth quarter and the business is performing well as the new year begins. It was in the fourth quarter a year ago that we began seeing the impact of a softening economy but our financial results in the 12 months since then and the milestones we achieved in 2007 demonstrate two important points. Number one our business model gives the ability to consistently deliver shareholder value in the short term and number two we’ve been successful at the same time in creating new products and pursuing alliances and acquisitions with the potential to diversify our business and generate greater value for the long term. In terms of our ability to benefit when economic trends start strengthening I think we’re in a better position than we were when 2007 began. Looking at the fourth quarter highlights adjusted net income was on the high side of our guidance. The majority of our revenue drivers came in where we expected including the number of transactions processed and transactions per active vehicle. Total fuel transaction volume increased 7% from the fourth quarter of 06 to 63.1 million transactions. This was hard-earned growth because the annuities side of our business was just as soft this past quarter as it was in the fourth quarter a year ago albeit for different reasons. The growth we enjoyed came from our front end and from very low attrition. The fourth quarter concluded a year in which our overall attrition rate improved to 4.7% the lowest in seven years. Involuntary attrition was down partly because of the large account cleanups we completed in 2006. Voluntary attrition was a very low 2.3%. I believe this is attributable to our high level of customer satisfaction which demonstrates the value of strong service and outstanding products as things that truly differentiate Wright Express. This was also a good quarter and a good year in terms of fleet credit loss. We have consistently forecasted losses for 2007 at the midpoint of our historical range and that’s where they came. Melissa will have more to say on this topic in a few minutes. With respect to the front end we saw a solid performance in our direct and co-brand channels. This translated into another quarter of growth in the mid-size and large fleet markets. The number of vehicles in this category increased 5% from the fourth quarter last year. This was also another good quarter in our heavy truck business where the vehicle count was up 13% from Q4 last year. In small fleets the number of vehicles overall was basically flat this quarter compared to Q3 and down 3% from the fourth quarter of 2006. As in the past few quarters growth in the Wright Express direct channel where average vehicles grew 10% year-on-year was offset by private label where small fleet vehicles were down 8%. We’re still seeing the impact of the cleanup of cards that occurred in 06 but private label transaction volume during the fourth quarter was essentially flat sequentially. A key focus for our long term growth potential is in small fleets so executing on our strategy for this market is key. In the direct channel we need to deliver on our reputation as the premier fleet product. In private label we need to reinforce our position as the best outsourcing partner for players like the big oil companies and card issuers who want to see their fleet portfolios grow. If you look back at the fourth quarter and the year in the small fleet market our new relationship with Citi was the most significant milestone. It will take more time for the Citi relationship to generate small fleet growth but everything we’re seeing in the integration and product development tells us that we’re moving in the right direction. We have a dedicated team in place to gear up for the Citi conversion effort which we expect to roll out in the latter part of this year depending upon the development and implementation time. Citi clearly recognizes the high level of value we bring in terms of portfolio management, our ability to deliver high activation rates, high customer satisfaction and high retention. They also recognize that partnering with our marketing and sales organization will help their private label portfolios grow and diversify their revenue streams. In the distributor channel we’re roughly two-thirds of America’s 150,000 retail gas stations are controlled. We’re making three kinds of growth investments. First and with good results is a focus on branded distributors. For example during the fourth quarter we renewed a five-year contract with one of our key partners, Sinclair that calls for Wright Express to continue delivering a new set of fleet management tools to Sinclair branded distributors. Number two was our direct distributor program where we’re soliciting multi-branded or private brand distributors to market their own fleet cards on our program. We have a direct offering for distributors, a product that we’ll continue to enhance going forward. Strategy three is illustrated by the announcement we made this morning. The WEX universal fleet card has been accepted at Pacific Pride franchise locations for the past three years and on prior calls I’ve discussed a new distributor program we’ve been developing with Pacific Pride. I’m very pleased to be able to say that after making a significant investment to an enhance their product offering we will be taking this relationship to the next level. We have signed a definitive agreement to acquire Pacific Pride for about $32 million in cash which we intend to finance through our existing credit facility. Pacific Pride is a profitable business that generates approximately 80% of its revenue from transaction fees and revenues for 2008 are forecasted to be approximately $7 million. We expect the acquisition to be accretive to our non-GAAP earnings in the first 12 months of combined operations and to have no impact on our margins. We anticipate closing the transaction by the end of the first quarter of 2008 and we expect Pacific Pride to be accretive on both a GAAP and non-GAAP basis in 2009. Pacific Pride has a compelling value proposition for distributors and the fleets they serve making it a strategic fit for us. For franchise distributors Pacific Pride offers exclusivity and an outstanding fleet management product set. At the same time in the same way that MasterCard or Visa functions at the association level for banks Pacific Pride serves as a network clearinghouse that effectively expands each distributor’s geographic footprint by giving them access to each other’s sites. For fleets Pacific Pride’s value proposition is the same as ours, strong purchase controls, exceptional security and outstanding reporting capabilities. Their platform and product set which we’ve now enhanced give us immediate access to a broader universe of local fuel marketers and enhanced pricing and settlement capabilities. Our ability to offer this comprehensive value proposition should strengthen our relationship with distributors and small fleets they serve accelerating our strategic initiatives in these key markets. Pacific Pride is a company with an outstanding reputation, management and employee team and we look forward to welcoming them into the Wright Express family. The over 330 independent fuel distributors in Pacific Pride’s franchise network also represent a cross-selling opportunity for our TelaPoint business. Every Pacific Pride franchise manages fuel storage tanks at their retail and bulk sites and the TelaPoint product is a web-based solution for fuel inventory management that has always been focused on the distributor market. By way of background adding TelaPoint made strategic sense because we service a number of oil companies with retail and wholesale sites that require inventory management services. We can leverage these existing relationships and now with our distributor strategy and the acquisition of Pacific Pride we will be able to create great synergy and offer more value to oil companies of all sizes. TelaPoint’s pipeline is growing just as we planned. Once the Pacific Pride acquisition closes our next key objective is to have the TelaPoint Wright Express and Pacific Pride sales groups work together more closely to capitalize on both direct and cross-selling opportunities. WexSmart our tele-matics initiative is also going well. We’re seeing the growth accelerate consistently from month to month even though customers are taking the time to test a few sample units before they commit to a full roll out. This quarter the convenience store oil company Sheets has signed on as the first private label marketer to offer our tele-matics product to their fleets. Our MasterCard business remains very strong. Purchase volume grew 45% from Q4 last year to roughly $484 million. As we saw through the year MasterCard growth in Q4 was driven by strong demand for two key products, our purchasing and single-use account cards. The purchasing card has been very well received in the under served mid-size to small business market. The single use, or as we call it, Ghost Account product is mainly used in the online travel industry and more recently in the vehicle warranty business. We’re in the early stages of tapping this part of the market and the potential looks very promising. We’ve added three new reps to our MasterCard sales group this past year and we are looking forward to them reaching full productivity within the next couple of quarters. In many respects MasterCard is a model for future organic growth in our business. In developing MasterCard we leveraged our ability to provide customers with meaningful information on the transaction and applied it to different kinds of purchasing activity. We’re leveraging this same model in pursuing new business in the construction vertical. As with tele-matics developing the right mix of web-based functionality will take some time. This is in large part because at the point of sale the data capture information needs and construction are very different from fueling at the pump. Contractor spend for building materials and supplies is a $400 billion market more than twice as large as the fleet market we currently serve. So the opportunity is significant. We recently signed our first major partnership focused on the construction vertical a branded program for Bobcat the construction equipment company. Bobcat is an ideal long-term strategic partner for us in this attractive vertical market because of the outstanding product and brand and we look forward to providing them with a world class set of services that enhance their success in meeting the needs of their customers. In closing our performance in the fourth quarter and through the year demonstrates that we have a strong resilient business model and a great reputation for delivering value to our customers. In a soft economy we’ve capitalized on these assets and supplement slower growth in our fleet business with solid contributions from MasterCard and other new ventures like TelaPoint. We will continue to work towards our goals of capturing a larger share of total fleet and corporate spend diversifying our sources of revenue and pursuing opportunities for alliances, mergers or acquisitions that can accelerate our growth and/or enhance our strategic position. With that I’ll now turn the call over to our CFO, Melissa Smith.

[Melissa D. Smith:]

We are very pleased that once again earnings for the fourth quarter were in line with our expectations. In addition we exceeded to top end of our revenue guidance primarily due to the price of fuel which was $0.32 higher than projected. In a period of economic uncertainty our business continued to grow and generate predictable operating results. As Mike mentioned general economic conditions are having an effect on vehicle growth in our existing customer base. However, thanks to the success on the front end and our low attrition numbers we were able to grow total transactions 7% from the prior year in Q4 and 4% for the full year. We also performed well in terms of credit quality. Our loss rate for the fourth quarter was flat with Q4 last year at 23.2 basis points. This brings the full year to 16.3 basis points of loss for our fleet business which is approximately the midpoint over our losses from 2001 through 2006. This is consistent with the guidance we provided throughout the past year. I’ll talk at length about credit quality in a moment. First let’s focus on the operating results for the quarter. Total revenue for the fourth quarter of 2007 increased 28% to $90.7 million from $70.8 million from the fourth quarter of 2006. Net income to common shareholders on a GAAP basis was $4.6 million or $0.11 per diluted share. This compares with $19 million or $0.46 per diluted share for Q4 last year. The company’s adjusted net income for the fourth quarter of 2007 increased 46% from last year to $19.7 million or $0.49 per diluted share. This non-GAAP figure excludes an unrealized mark-to-market loss under derivative instruments as well as the amortization of purchased intangibles. Adjusted net income for the fourth quarter last year was $13.4 million or $0.33 per share. For full year 2007 net income to common shareholders on a GAAP basis was $51.6 million or $1.27 per diluted share. This compares with $74.6 million or $1.81 per diluted share for 2006. Again for the full year adjusted net income grew from $55.8 million or $1.36 per diluted share in 2006 to $76 million or $1.86 per diluted share in 2007 an increase of 36%. Let’s discuss revenue growth in our fleet and MasterCard segments. The average number of vehicles serviced was approximately $4.5 million compared with approximately $4.4 million a year ago. Total revenue in the fleet segment of our business grew 31% from Q4 of last year to $84.9 million. Payment processing revenue in our fleet segment was up 37% to $64 million from $46.6 million in Q4 last year reflecting the Exxon-Mobil private label business switching to payment processing in Q1. The number of payment processing transactions increased 18% to $53.4 million and transaction processing transactions decreased 31% to $9.7 million. The total number of transactions processed this quarter increased 7% to $63.1 million from $59.2 million for the fourth quarter last year. Our net payment processing rate for Q4 was down 2 basis points from the sequential quarter and down 18 basis points from the fourth quarter a year ago. The year-on-year decline is due mainly to the Exxon-Mobil conversion combined with higher fuel prices. The average retail fuel prices was $3.06 per gallon increasing 29% from $2.37 per gallon recorded for the same period last year. The average spend per transaction tracked the increase in the price of fuel. The MasterCard segment contributed $5.7 million in total revenue in Q4 compared with $6.1 million a year ago which is a decrease of 6%. This decrease was due primarily to the sale of MasterCard stock for $1.6 million in Q4 last year. Excluding this the increase would have been 27%. This growth is driven largely by MasterCard purchase volume which increased 45% from $333 million in Q4 last year to $484 million this quarter. As Mike mentioned we’ve been able to drive continued MasterCard growth in large part by selling our product into new markets. Increased spend has been partially offset by declining net interchange rates as some of our larger customers hit higher rebate tiers. Turning now to operating expenses on a GAAP basis the total for Q4 was $51.1 million. This compares with $42.2 million in the fourth quarter last year. The increase reflects the combination of higher salaries expense, operating interest, depreciation and amortization and credit losses. Since credit quality is a topic that’s on everyone’s mind today we want to spend a moment discussing this more specifically. The credit we extend to fleets is not revolving credit. These customers pay us in 30 days in the same way these businesses pay most of their other suppliers. The number of days it takes on average to pay Wright Express has remained consistent over a period of many years and continues to remain consistent today. We have traditionally experienced higher losses in the first and fourth quarters. This pattern held constant in the fourth quarter of 2007 and we expect it to occur again in the first quarter of 2008. Looking at 2008 as a whole we are projecting our losses to move closer to the high end of our historical range. We’ve been seeing an increase in customer bankruptcies coupled with larger losses per customer and we expect these trends to continue. While we cannot totally limit our exposure to losses in a period of economic decline we do have a history of continued customer payment in economic downturns. Our product is integral to our customers’ businesses and our payment trends reflect the overall economic value our customers are receiving. On a total basis including both fleet and MasterCard product loss in the fourth quarter was up $2.5 million from Q4 last year to $8 million. However losses on the fleet segment were similar to Q4 last year at 23.2 basis points of losses as a percentage of payment processing expenditures. Operating interest expense for the fourth quarter was up by $3.2 million from Q4 a year ago to $9.1 million. As in the past several quarters the increase reflects higher interest rates and higher average debt levels. The higher average debt levels are attributable to the Exxon-Mobil portfolio, fuel prices and the increase in payment processing transactions. Going forward we anticipate benefiting from the recent interest rate cuts. Since the end of the year quoted CD rates have declined about 1%. However it’ll take some time to work into our Certificate of Deposit base. About half of the current CD balances will roll off and be refinanced in the first six months of the year. As this happens the advantage we receive from the reduced rates should more than offset the increases we anticipate in elevated credit losses. The increase in depreciation and amortization for the fourth quarter is primarily the result of the new internally developed software placed in service and the purchase of TelaPoint in August. We expect depreciation to continue increasing moderately reflecting our recent increase in capital investment. As you will see on the reconciliation of adjusted net income to GAAP net income in the press release we have approximately $681,000 of amortization this quarter related to that purchase. Salary and other personnel costs were $17 million in the quarter up $1.7 million from last year. The increase is primarily related to two areas. Stock-related compensation and a separation agreement with a former executive. 2008 is the last year we expect to see a significant increase in annual stock compensation as we reach the fourth year of our [ALTIP] program. Our headcount is up 12 people from last year to 692 primarily due to the purchase of TelaPoint. We’ve seen a shift in personnel towards our sales and marketing group which has lifted the average salary. Let me take this opportunity to get into detail around the adjustments we made to our second quarter results to reflect a change in the state of Maine tax law. The new law was enacted in June, 2007 and effectively reduced the company’s taxable income and loss of portion to the state of Maine. This resulted in decreases in the amount of the company’s net deferred tax assets, the related contractual liability to Avis Budget group and the company’s blended state income tax rate. This correction resulted in a roughly $2 million non-cash charge to the company’s previously issued financial statements for the June quarter. While the correction also affected our six and nine month results for the periods ending September 30th of 2007 by the same amounts our results for the third quarter were not materially affected. Returning to our Q4 results our effective tax rate on a GAAP basis was 39.1% for the quarter compared with 38.4% for Q4 a year ago. Our adjusted net income tax rate this quarter was 36.7% compared with 35.2% for Q4 last year. We expect the adjusted net income tax rate to increase about 0.5% next year due to an increase in nondeductible stock compensation expense. Turning to our derivatives program during the fourth quarter we recognized a realized loss of $5.8 million before taxes on these instruments and an unrealized loss of $22.8 million. As a reminder in 05 and 06 we effectively hedged 100% of our earnings exposure to changes in fuel prices and in 2007 and 2008 we have hedged approximately 90%. At the point we’ve also completed hedging 90% of our anticipated earnings exposure through the second quarter of 2009. The weighted average price we’ve locked in for the first quarter of 2008 is $2.53 to $2.60 a gallon compared with a high of $2.48 for 2007. The weighted average prices for 2008 are locked in between $2.54 and $2.60. Due primarily to higher fuel prices at the end of the quarter our accounts receivable balance net of reserves for credit loss was $1.1 billion compared with $802 million at December 31, 2006. Nearly all of this increase was offset by increases in our accounts payable and operating debts. Our financing debt balance declined $7 million from approximately $207 million at the end of the third quarter to approximately $200 million in Q4. We concluded Q4 with a leveraged ratio of approximately 1.4 times which is below our targeted range on a pro forma basis. Assuming the acquisition of Pacific Pride at December 31st our leverage ratio would have been 1.6. We continue to target leverage between 1.5 and 2.0 times and will allocate our free cash flow to its best use with it’s debt pay down, share buy backs, additional acquisitions or additional internal reinvestment. Capital expenditures were $19.5 million for the full year 2007 reflecting our continued reinvestment on our core product offerings and strategic diversification. We expect our level investment to ramp in 2008 reflecting the worth required for the Citi conversation. We anticipate total cap ex to be between $24 and $27 million in 2008. We continued executing on our share buy back program this quarter repurchasing 168,000 shares at a total cost of approximately $6.1 million. This brings the cumulative total purchase since our board authorization in February of 2007 to 1.2 million shares or approximately $38 million. I’ll conclude with some major assumptions and our financial guidance for the first quarter and full year 2008. Let me remind you that our forecast for these periods are valid only as of today and remain on a non-GAAP basis that excludes the impact of non-cash mark-to-market adjustments on the company’s fuel price related derivative instruments and the amortization of purchased intangibles. Although our share repurchase program remains in place we have not included any potential EPS outside from this. The fuel price assumptions are based on the applicable NYMEX futures price. In addition our annual guidance includes the impact of the Pacific Pride acquisition. For the first quarter of 2008 we expect to report revenues in the range of $87 to $92 million. This is based on an average retail fuel price of $3.13 per gallon. For the full year 2008 we expect revenues ranging from $383 to $393 million based on an average retail fuel price of $3.06 per gallon. As for earnings for Q1 of 2008 we expect to report adjusted net income in the range of $17 to $18 million or $0.42 to $0.45 per diluted share. For the full year 2008 we expect adjusted net income in the range of $86 to $90 million or $2.11 to $2.21 per diluted share on approximately 41 million shares outstanding. With that we’ll be happy to take your questions. Andrea, you can proceed with Q&A now.

[Operator:]

(Operator Instructions) Our first question today will come from Anurag Rana with KeyBanc Capital Markets.

[Anurag Rana:]

Would it be possible for you to give us some idea as to when you can all make downturns, what kind of transaction processing quote should we be looking at and also could you please remind us also about the range of credit losses historically that you have seen in such an environment?

[Michael E. Dubyak:]

On the transaction side as you know, Anurag, we had started to see the slow down last year, a little bit more pronounced in the third quarter which continued into the fourth quarter. So we are projecting that to basically be similar to our core growth all through 2008. So we’re seeing that annuity slow down and at this point we’re not expecting that to pick up during any of 2008. We started to see it before other sectors were talking about slow down and so far it’s holding steady and we’re keeping it at that level.

[Melissa D. Smith:]

And relating to bad debt our losses in the last several years have been between 11 and 22 basis points which includes 01. In the last 10 years the high point has been 24 basis points.

[Anurag Rana:]

Just once more, could you give us some idea about the financial impact of the acquisition that was done today in terms of transaction growth?

[Melissa D. Smith:]

Pacific Pride processes about 32 million transactions and I think Mike said earlier that about 80% of their revenues comes from transaction-related fees.

[Operator:]

Our next question will come from Abhi Gami with Bank of America.

[Abhishek Gami:]

A few questions. On Pac Pride just following up on your last comment, Melissa, doing the math on that it looks like Pac Pride will add around $0.02 to annual EPS on a non-GAAP basis. Does that math sound about right?

[Melissa D. Smith:]

What we said is it actually just slightly accretive on a non-GAAP basis to our current year results and it will be accretive both on a non-GAAP and GAAP basis in 09.

[Abhishek Gami:]

How fast has Pac Pride been growing?

[Michael E. Dubyak:]

It’s been just a steady growing business because their product set has not changed that much over the years. What we’ve been building is the ability to provide more services to their distributors in terms of online products, settlement capabilities, all the way out to funding receivable. So those are some of the things we’ll be putting in place over time to accelerate in effect the growth rate on revenues but also allow them to reach out and sign up more distributors to their programs with some of these new products.

[Abhishek Gami:]

Your guidance, your commentary regarding accretion, does that take into account some of the new programs providing revenue upside or is that primarily benefits from the existing products and cost takeouts?

[Melissa D. Smith:]

We’re not expecting to see significant growth in 08, it’s really more into 09 as we continue to roll out that product functionality to their customer base.

[Abhishek Gami:]

On Pac Pride also do you have a plan to expand them more nationally? There are a number of states in the Northeast that they don’t currently cover.

[Michael E. Dubyak:]

Yeah, we think with some of the new product sets it gives them more appeal in the marketplace so clearly we’re going to look to try to drive more franchise sales on their program. It should be a natural for us with some of the enhancements we’re doing in terms of product offerings.

[Abhishek Gami:]

One more quick question then I’ll come back later. On the credit provisions for 08, in the fourth quarter it looks like there was a higher level of net charge offs versus kind of the trend line, does that mean based on your calculations or your methodology that by mid-08 we should essentially be seeing a slightly higher than normal provision level?

[Melissa D. Smith:]

We’ve seen moderately higher trough drops in the last couple of months that have been led in large part by an increase in the size and the number of bankruptcies. So that’s something that we’re projecting into our first quarter estimates. If you look back in 07 we talk about seeing some seasonality typically anyway. We had 23 basis points of loss in the first quarter of 07 on 16, a little over 16 for the full year. We think we’re going to see kind of a similar trend in 08.

[Abhishek Gami:]

Just quickly then do you also know the debt of points on your cost of funds for your CDs and your interest rate on deposits for the quarter?

[Melissa D. Smith:]

The fourth quarter of 07, I presume you’re asking?

[Abhishek Gami:]

Yes, for the fourth quarter.

[Melissa D. Smith:]

The all-in blended rate was about, a little under 6%.

[Abhishek Gami:]

Do you have the exact rate by any chance?

[Melissa D. Smith:]

I’ve got 5.9 and that’s all-in including fees.

[Abhishek Gami:]

Okay, great. I’ll come back with some more later.

[Operator:]

We will hear next from Tien-Tsin Huang from JP Morgan.

[Reggie:]

It’s actually Reggie filling in for Tien-Tsin. I guess a quick question 1Q guidance, it was down sequentially from 4Q. Just wondering if that’s the Citi ramp up or what’s driving the sequential I guess step down in the 1Q earnings?

[Melissa D. Smith:]

It’s impacted by the credit loss that we’re anticipating and again it’s a similar trend to what we had in 2007. The first quarter 07 our actual results were roughly 20% of the full year results and that’s roughly what we’re projecting right now, too. So you’re seeing that being driven down in part by our estimation of credit loss.

[Reggie:]

As far as I guess tele-matics, can we get an update on how I guess that’s progressing and how you’re seeing the economics you know kind of work out there as far as its revenues per month and any other details can you provide on that one would be great.

[Michael E. Dubyak:]

It’s still a small program in terms of revenue. I think what we are seeing is very strong response rates to our mailers. We’re seeing people signing up but they’re testing. I think some of the trends we’re now seeing is that they’re re-upping so after they test they do come back and then order additional units. We are growing basically as we talked about over the last year. We’re seeing the growth increase. We’re seeing good response although we have no sales yet, but seeing good response even with some of our larger fleets and we were glad to see that Sheets who’s a great marketer signing up as a private label now to market the program. So we know the product is ready for the price points and the functionality for our market, it just that it’s probably going to roll out slower than we thought, but we still feel very good about the trends.

[Reggie:]

And then on the funding cost side, can we get I guess some type of range that you guys are assuming for funding costs in 08?

[Melissa D. Smith:]

We’ve built in the recent rate cuts into our estimates for the year and so we’re just rolling them in as we’re projecting the CD balances to roll off. I said before that about half the portfolio would roll off in the first six months and the weighted average actually at the end of January was about eight months remaining on the CD balances, if that helps.

[Reggie:]

And then I guess finally any color you can provide for geographical weakness where you might be seeing slower growth or anything that you might want to add there?

[Michael E. Dubyak:]

We haven’t seen any geographic anomalies, if you will, in terms of certain areas being slower than others at this point.

[Operator:]

(Operator Instructions) We’ll go next to David Parker with Merrill Lynch.

[David Parker:]

I think in your comments you talked about the annuity side of the business being soft and you mentioned that it was for different reasons than beforehand. Can you just provide a little bit more color on that please?

[Michael E. Dubyak:]

When we saw the slow down in the fourth quarter of 06 what we really saw then was utilization of vehicles so we tracked transactions per active vehicle and we saw that down. What we saw happening though throughout the year was there was some recovery on that but then we started to see a slow down in the growth of our annuity business which typically would grow in the range of three to five, three to four to five percent based on GDP on their transaction growth, just adding new business and growing their business. We started to see that come off as the year progressed and by the fourth quarter the transactions per active card were somewhat back to normal, but the other really kept going down and that was the growth of transactions, the growth of vehicles with the annuity or the existing business. So that’s when we started to see the economy impact differently, they started to probably utilize their current vehicles more but were not expanding their business because of the economic slow down.

[Reggie:]

Okay, great, that’s very helpful. And then with Pacific Pride, can you just talk about the integrations plans? It sounds like you’re going to leave them relatively alone and not going to be cutting costs. I mean are those are your general plans for Pacific Pride?

[Michael E. Dubyak:]

To some extent, yes, because it’s not a large group and they’re kind of running a different type of business. A lot of the integration to some extent has been already invested in terms of the back-end products and services, the enhancements we have been working with them to build and roll out over the next year. So the good news is that as we do that more and more of their transactions start to reside on our platform. So the rest of what they do in Portland, Oregon or Salem, Oregon will pretty much stay intact. There’ll be some integration naturally of benefits and things like that, but not much else in terms of cost synergies.

[Reggie:]

And then in terms of the 08 guidance, is Pacific Pride included or excluded from that guidance?

[Melissa D. Smith:]

It is included assuming that it closes within the first quarter.

[Reggie:]

And then just final question, you’re pursuing the construction vertical, you signed the deal with Bobcat. What are some other adjacent verticals to the fleet market that you might look at that are similar to the construction vertical as well?

[Michael E. Dubyak:]

I would say right now that’s the one we’re focusing on. We think we have enough to build into that marketplace which I said is huge, a $400 billion market that has a lot of different merchants embedded within that market. So I think that’s where our focus at least for verticals is for the next number of years, I think we’ll be focusing on that market.

[Operator:]

Our next question will come from Ben [Kadlick] with First Investors.

[Ben [Kadlick]:]

When I look at your guidance for 2008 can you kind of walk us through maybe the timing of your investments in the Citi contract and how operating margins should look going throughout the year as maybe revenue ramps and we get some leverage on the operating line?

[Melissa D. Smith:]

The Citi contract, Mike said in his comments, we’re heavily dependent on a joint team working with Citi on the timing of when that’s actually going to occur. Right now we said the latter part of the year, so it’ll be towards the very end of the year. In advance of that we need to ramp up our resources so roughly six weeks to eight weeks in advance, we’ll be adding about 100 people in order to deal with that contract. The other things we’ve said is that it’s lower than their average transaction processing fee, given the size of the relationship and it will decrease our operating margins once you roll it in, assuming the price of gas is neutral, about 1%.

[Ben [Kadlick]:]

So when I think of your EPS guidance for 08, I mean is it possible to quantify what kind of sort of short-term negative impact that would have in 08 and how we should look at maybe 09 as a positive. Is there a way to frame that?

[Melissa D. Smith:]

The biggest impact it’s going to have is on our capital numbers for 2008. I’d say that’s the largest impact when you look at it particularly on an earnings basis. There’s going to be a little bit of dilution on an earnings basis depending on the timing of when that comes in. We don’t anticipate it being material.

[Ben [Kadlick]:]

Again if I look at your, the range of your earnings guidances, I don’t know if conservatism is the right word to use, but is that conservative based more on your questions about the health of the credit market or how much of that is built into sort of the Citi ramp?

[Melissa D. Smith:]

There’s a lot of uncertainty right now I think particularly around what’s happening overall with the economy. So, as Mike said earlier, we’re anticipating when we put together our guidance that we’re going to see a pretty similar year as far as growth as we did in 07 excluding the impact of Citi and then on top of that we do anticipate to see elevated losses in a benefit of interest rates. So we’ve reflected all of that in there, but there’s a lot of unknowns still as we go into the year.

[Operator:]

We’ll hear next from Robert Dodd with Morgan Keegan.

[Michael Shepherd:]

It’s actually Michael Shepherd in for Robert. Just one quick question we had on the construction vertical you guys are talking about, are you guys going to be taking on the credit risk with that business or how is that going to work?

[Michael E. Dubyak:]

Yes, we will be taking on the credit risk with that business so we will provide funded programs as we do to other partners and even the initial program with Bobcat, we take on the credit risk. We also have built, which I think is starting to differentiate us, is a strong front-end credit model which is very different than our fleet credit model to make sure it helps us manage and maintain a good portfolio management on that program.

[Melissa D. Smith:]

The customer mix that we also know well, it’s a different mechanism that we’re using to service them, but a piece of our business now is related to contractors. So we do have really quite good experience in dealing with that segment of the business.

[Operator:]

(Operator Instructions) And we’ll take a follow-up question from Mr. Gami.

[Abhishek Gami:]

There’s about $1.9 million on the cash flow statement relating to I think purchase of receivables, can you just describe what that was or why that was done?

[Melissa D. Smith:]

We purchased a very small accounts receivable portfolio and we’ve talked in the past how we’re converting some of our relationships from transaction processing to payment processing. We did that with one of the smaller relationships we have. So it would be similar to what you saw happen last year with Exxon-Mobil only they’re smaller, much, much smaller size.

[Abhishek Gami:]

It’s just simply flipping them over, there’s no purchase consideration involved in doing that?

[Melissa D. Smith:]

No, we pay them for the value of the accounts receivable portfolio based on market assessment.

[Abhishek Gami:]

And then just as a clarification, I think you said earlier that your cap ex for the year was $19 or $20 million, did I hear that wrong? Am I reading this wrong? The cash flow statement says about $16.6 million.

[Melissa D. Smith:]

Yeah, that includes a capitalized lease that you need to add in from the cash flow statement. Non-cash where we capitalized one significant lease.

[Abhishek Gami:]

And also, Mike, earlier you mentioned that the growth rate expectation for 08 would be similar to that of 07 at the core. Now, you’ve put about 7% growth in the fourth quarter, say about 4% for the full year, should we be keying off of that 7% number for 08? In other words, is that a sustainable sort of growth rate for 08 or is that 4% number more the realistic growth rate?

[Michael E. Dubyak:]

Yeah, we’re talking more the entire year number, the 4%.

[Abhishek Gami:]

So coming up with the 7% number in the fourth quarter, what would lead to a further softening into 08?

[Melissa D. Smith:]

Some of things that are affecting the fourth quarter, we talked about the fourth quarter of 06 hasn’t seen a rapid decline in that transactions per active card. We’ve got, as Mike said, it was off in the fourth quarter of 07 for different reasons but they weren’t exactly equal. So you get a little bit of peck up on that comp.

[Abhishek Gami:]

I’ll follow up on that one off line.

[Operator:]

(Operator Instructions) And at this time we have reached the end of our Q&A session and we’ll now turn the conference back over to Mr. Mike Dubyak for any closing or additional remarks.

[Michael E. Dubyak:]

I’d like to just thank everybody and thank you, Andrea. Thanks everyone for listening. We look forward to speaking with you again next quarter and this concludes the call.

[Operator:]

Thank you and that does conclude our conference call for today. We thank you for your participation and joining us. Have a great day.