WEX Inc.
Q4 2008 Earnings Call Transcript

Published: 11 Feb 2009

[Operator:]

Good morning everyone, and welcome to the Wright Express Corporation fourth quarter and year-end 2008 conference call (Operator Instructions). At this time, for opening remarks and introductions, I’d like to turn the call over to Steve Elder, Vice President of Investor Relations. Please go ahead, sir.

[Steve Elder:]

Good morning, 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 now posted in the Investor Relations section of our website at www.wrightexpress.com. A copy of the release has also been included as an exhibit to an 8-K we filed with the SEC. We’ll be discussing a non-GAAP metric, specifically adjusted net income during our call. Please see exhibit one 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 we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release, most recent Form 10-K and other SEC filings. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not rely on these forward-looking statements after today. With that, I’ll turn the call over to our CEO, Mike Dubyak.

[Mike Dubyak:]

Hello everyone and thanks for joining us. We executed well in a very tough economic environment this quarter, as planed we added three pieces of business from the Federal Government including GSA Fleet, one of the largest fleets in the United States to our portfolio and continue to diversify our revenue streams. We generated significant cash flow during the quarter and continue to maintain excellent liquidity. As a result we exited the quarter very well positioned to face the challenging economic environment ahead and even more so compared with our competition. We continue to see deterioration in the business model during Q4, if you exclude new customer editions and look only at the install base of fleet accounts on a same-store sales basis in the second and third quarters, we saw low single-digit declines in total fuel transactions. This decline continued in Q4 as the economy weekend further. The drop in volume was broad based and the vast majority of our SIC codes were down from the prior year. Customer activity continued its gradual decline in October and November and then held off more significantly in December, volume form existing customers decline 9% from December of ‘07. We believe December results were impacted by an unusually high number of businesses curtailing operations around the holidays. Even with the addition of the GSA portfolios in December, total payment processing gallons were down more than 4% from Q4 last year, below the assumptions in our fourth quarter guidance. Another big factor in our results this quarter was the drop in the fuel prices, which also reduced our revenue. The average price decline from $3.06 per gallon in Q4 2007 to, $2.59 this quarter, wile our guidance was based on $2.90 per gallon. Looking at the front end of our business for the full-year, the sales force added more than 600,000 new vehicles in 2008 including approximately 278,000 from the Federal Government, which exceeded our plan at the start of the year. Going into the year we expected our existing customers to add about 1% to their purchase volume compared to 3% to 4% historically. What we saw however, was continued erosion in both the number of active vehicles and gallons per vehicle. Fueling volume in our existing customer base actually declined by about 4% for the year. We’ve offset some of this erosion by adding new business and controlling attrition. For the full-year voluntary attrition was 1.8%, well below our target of 3% which speaks to our ability to service our customers and generate great customer loyalty. As we expected the other major challenge in the fourth quarter was credit loss. Our guidance assumed a difficult collection environment and a higher level of charge-offs coupled with falling fuel prices leading to roughly 40 basis points of credit loss. The actual Q4 number came in at 51 basis points raising the full year losses to 28 basis points. The receivable portfolio performed overall above what we had expected, but credit loss was higher than we assumed due mainly to a single large fleet bankruptcy. We took a number of steps last year to reduce credit risk and offset some of the downside by tightening our credit standards and reducing the credit lines. We will continue to segment our portfolio and make adjustments as needed based on new information. We also altered the way we calculate late fees by increasing both the interest rate charged and the balance subject to the charge, while the vast majority of customers are still paying us on time, we want to increase the penalties on those who don’t. We expect this change to help offset some of the increase in credit losses we’ve seen. The front end of our business continues to perform well and we expect this to help us in our results in 2009. We reorganized our sales force in the beginning of the fourth quarter and they’re continuing to do a great job bringing new accounts. As I mentioned earlier, the big story this quarter around customer acquisition was adding the General Services Administration to our government portfolio. The implementation occurred as expected at the beginning of December, adding approximately 278,000 vehicles. We will not see the full impact of the GSA until Q1 2009. Largely as a result of adding GSA, the average number of vehicle serviced in the mid and large size fleet market was up 11% from the fourth quarter of ‘07. In small fleets, the number of vehicles overall declined 1% year-over-year, as the business environment weaken. In our heavy truck private carrier fleet segment, the vehicle count was up 1% from the fourth quarter of last year. Breaking down our small fleet sales results by channel, in the Wright Express direct channel the average vehicle count was up 1% from Q4 year-ago. In private label the number of small fleet vehicles was down 4% year-on-year. Each of these comparisons is affected by the declines in our existing customer base that I spoke about earlier. As we begin the first quarter, our sales pipelines are in good shape. We just had our annual sales meeting and the group is excited about the wider way of products, they now have to offer to both new and existing customers. We’re also making good progress on our long-term revenue diversification strategy. One focus in this area is the WEXSMART telematics business, and Q4 was the best quarter ever for WEXSMART. With new partners in fleets buying into the program, we added nearly a 1000 vehicles in December alone. WEXSMART expanse our value proposition by helping fleets reduced miles travel and maintains cost. Along with providing us with a new recurring revenue stream from each customer WEXSMART makes it less likely for the customer to switch providers for their payment processing solutions. Therefore our relationship with the customer is that much more resilient. Our first diversification play was MasterCard. Purchase volume on our MasterCard was up 21% from the fourth quarter last year to $586 million. This channel is continuing to grow despite headwinds in the travel sector, which represents a significant portion of our MasterCard spend. Although the market is declining overall, our sales reps have continued to identify new sources of spend at existing customers. In April last year, we announced that we would suspend the development of a new product for the construction industry. As we went through our strategic planning process, we still believe the construction marketplace represents an attractive opportunity. However, given the problems in the economy and a construction in particular, as well as the constrains of our 2009 budget, it’s impossible to predict when it will make sense for us to enter the market. This uncertainty lowers the probability that we will utilize the software we developed for the construction vertical. As a result, we’ve taken $1.5 million non-cash asset impairment charge this quarter, related to the prior investment in product development. This one-time non-cash charge does not affect our business operations or liquidity and we’ve excluded it from our Q4 adjusted net income. Looking at the other diversification efforts Pacific Pride met its numbers for the year and is doing well. Telephone is positioned for solid 2009 and we also feel good about our most recent acquisition, The New Zealand-based FAL which we’ve re-branded Wright Express New Zealand. All in our diversification place, WEXSMART, International, TelaPoint, Pacific Pride and MasterCard contributed approximately 14% of our total revenue in the fourth quarter and we expect this growth to accelerate in 2009. Our ability to make cash acquisitions like FAL and Pacific Pride, while also paying down our debt and buying stock this past year demonstrates the power of our business model. It also demonstrates on today’s market, there are tremendous advantages in having a healthy level of liquidity. Our free cash flow was very strong throughout 2008. Looking back at the full-year, we generated more than $100 million in cash, which we use to acquire Pacific Pride and FAL for a total of $42 million and to reduce our financing debt by $29 million compared to December 31, 2007. This brought our leverage down to roughly 1.3 times EBITDA at year-end. We also brought back 1.5 million shares of stock during the year for a total of nearly $40 million including 515,000 shares of $7.6 million in the fourth quarter. Before going any further into the financials, I’ll now turn the call over to our CFO, Melissa Smith. Then I’ll return for a brief wrap-up, before we go to your questions.

[Melissa Smith:]

Good morning everyone. Our business model was put to the test in the fourth quarter with lower volume, declining fuel prices and elevated credit losses all working against us. However, we closed 2008 with a strong stronger quarter for new business and we were reporting $0.32 of adjusted net income. The business generated strong cash flow in the fourth quarter and through the year and we exited 2008 with an exceptionally strong balance sheet. Among the other positive this quarter, we reduced operating interest expense in strong growth in telematics hardware sold. In addition near the end of the quarter, we’ve raised the fees we charge for late payments, helping to offset some of the increase in credit losses. We also paid down the significant amount of financing debt and we received the cash benefits from our hedging program. That being said, we say increasing headwinds as the quarter progressed. I’ll take some time to focus on each of these areas as well as provides some insight into our thoughts on 2009, after a quick review of our financial metrics. For the fourth quarter 2008, total revenue decreased 11% to $80.9 million from $90.7 million in the fourth quarter of 2007. Net income to common shareholders on a GAAP basis was $65.2 million or $1.66 per diluted share. This compares with net income of $4.6 million or $0.11 per diluted share for Q4 last year. The company’s non-GAAP adjusted net income for the fourth quarter of 2008 was $12.5 million or $0.32 per diluted share, compared with $19.7 million or $0.49 per diluted share for the fourth quarter of last year. Adjusted net income excludes an unrealized mark-to-market gain on derivative instruments, as well as the amortization of purchased intangible. As Mike mentioned earlier for the fourth quarter of 2008, we have also excluded $1.5 million non-cash asset impairment charge related to the product development for the construction vertical. For the full-year 2008, net income to common shareholders on a GAAP basis was $127.6 million or $3.22 per diluted share. This compares with $51.6 million or $1.27 per diluted share for 2007. Again for the full-year, adjusted net income on a non-GAAP basis was $74.1 million or $1.88 per diluted share, compared with $76 million or $1.86 per diluted share in 2007. The 2008 figure also excludes the asset impairment charge. Looking, specifically at the fleet segment, total revenue declined by 12% to $74.5 million in Q4 2008. The average number of vehicle service in Q4, 2008 was approximately $4.6 million, compared with $4.5 million a year earlier. Total transactions grew 6% in Q4 2008 to $66.9 million from $63.1 million in the fourth quarter of last year. The majority of the growths stand from the specific prior transaction, excluding specific price the total number of transactions was down nearly 4%. With the lower price of fuel and declines in fueling volume, payment processing revenue in our fleet segment was down 21% to $50.4 million from $64 million in Q4 last year. The number of payment processing transactions was down 4% compared to the fourth last year. The average expenditure per payment processing transaction for Q4, 2008 was down 16% from the fourth quarter of last year to $52 and $0.69 due to the drop in fuel prices. Out net payment processing rate decreased five basis points in Q4, 2008 from the prior year to 1.86%. Compared to the third quarter our net payment processing rate was up 15 basis points. As we expected approximately 55% of our transactions in the fourth quarter were merchants with hybrid contracts and we benefited from these agreements in the fourth quarter. Unlike the sequential third quarter of 2008, when higher fuel prices drove down the rate for some merchants, the lower fuel prices in the fourth quarter of ‘08 drove up our net payment processing rate sequentially due to the transactions fees embedded in our rates. Rebate as a percentage of fueling dollars paid to large fleets and leasing companies were flat compared to the third quarter. The MasterCard segment contributed $6.3 million in total revenue in Q4, compared with $5.7 million in the fourth quarter of last year, an increase of 11%. Our single use product made up the majorities of the spend increase in the quarter. The total purchase volume was $586 million, which is up 21% from $484 million in Q4 last year. The growth in spend volume was offset in part by an increase in the rebates paid primarily due to mix. Turning now to operating expenses, on a GAAP basis the total for Q4 was $61.9 million. This compares with $51.1 million in the fourth quarter of last year. We continue to refine our cost structure and with credit losses, the only notable exception operating expenses were inline with last year. I’ll speak to credit loss first, which on the total basis including both fleet and MasterCard was up $6.5 million from Q4 last year to $14.5 million. As Mike said earlier, our loss rate in the fleet segment came in higher than the 40 basis points we projected for Q4 at 51 basis points. This rate was higher than anticipated due primarily to a large bankruptcy. Our customers like many other businesses out there have experienced liquidity issues and cash flow storages. In general, we continue to experience a very difficult collection environment and saw decline in the amounts we are able to recover on previously charged-off balances. While the vast majority of our customers have continue to pay us, on average in less than 30 days, we have seen increased loss rates as customer’s age into delinquent categories. To give you some perspective on collections, approximately 99% of our balances are current when adjusted for changes in fuel prices. On the accounts that have charged-off, roughly 85% of the losses were less than $25,000 in size, even with the one large bankruptcy loss. Analyzing our portfolio as we continuously do, we’ve seen only a modest decline in credit quality today and we believe the fundamental in the portfolio are reasonably solid. For the full-year 2008, we had 28 basis points of loss. This is several basis points higher than our historical range of 11 to 22. Historically credit losses tend to be higher in Q1 and Q4 each year. We’ve adopted new credit scoring tools and taken some other steps to further mitigate credit risks. Including reducing the size of the credit lines we’ve made available at the higher risks fleets, implementing new heavy truck fleet requirements and revising our policy on late fees. Our credit is not revolving credit, but we do charge late fees to customers who don’t pay us on time and we’ve adjusted our fees to increase the incentive for timely repayment. Looking forward, our guidance for the full-year 2009 assumes a prolonged recession and we anticipate further pressure on business which will impact the credit quality as a portfolio. Although, we cannot predict how long the recession will last or how deep it will ultimately be, we are assuming that our losses for 2009 will be in the range of 45 to 55 basis points, but we are not able to exercise control over the macro economy or the credit markets in which we operate, we will continue to segment the portfolio, and make adjustments to our credit and collection practices to try to limit our exposure. Let’s now move onto other key expense lines; salary and other personal costs were $16.9 million in the quarter flat with last year. Our average headcount for Q4 was 704 compared with 693 in Q4 last year. The growth in headcount was related to our Pacific Pride and FAL acquisitions combined these two acquisitions added 38 people to our headcount in Q4. During the fourth quarter of 2008, we’ve restructured our fuel sales organization and streamlined several administrative functions of eliminating 53 additional positions across the company. We continue to expect the reorganization to generate approximately $4 million in annual savings going forward. We’ll continue to look at opportunities to streamline the organization throughout the year. Salary expense for the fourth quarter includes the bonus expense for associates only totaling $500,000. This award was discretionary and approved by our compensation committee to recognize solid execution in 2008. Looking ahead to 2009, we’ll be suspending all merit fee increases for the year, but we will be continuing our short-term incentive grant program and adding stock options to our long-term incentive grounds. Moving on service fees, we’re up in the fourth quarter by $500,000. This increase is due to fees repaid to process MasterCard transaction and is inline with the increase in the spend volume. Other expenses were up approximately $2.6 million, about half of which is telematics hardware expenses. Depreciation and amortization expenses was up by $1 million from last year due to $800,000 in amortization related to our acquisitions and $200,000 for new assets placed into service. As I mentioned, operating interest expense was a positive factor in the fourth quarter, declining by $1.7 million from Q4 a year ago to $7.3 million. Our average operating debt level, including CDs and Fed funds was $632 million compared to a $586 million in Q4 last year. We use CDs issued by our industrial bank to finance our receivable. For the quarter, the interest rate on our CDs and Fed fund borrowings declined approximately 17 basis points from Q3 to 3.9%. For the year 2008, our interest rate declined nearly a 100 basis points. We expect to continue to benefit from low interest rates in 2009. The CD portfolio is continuing to rollover and approximately $212 million in CDs or one-quarter of the portfolio, rolled over during the quarter. We have approximately $230 million in CDs maturing within the first quarter of 2009. We continued to have excellent access for short-term borrowing to fund our receivable balances. However, our receivable balances drop by $670 million in the fourth quarter, mainly due to rapidly declining fuel prices. As a result, we ended 2008 with significant cash balances as maturing CDs did not keep phase with the decline in receivable balances. This temporary balance will diminish over the course of Q1, 2009 as certificates of deposits mature. Our effective tax rate on a GAAP basis was 37.1% for the quarter compared with 39.1% for Q4 a year ago. Our adjusted net income tax rate this quarter was 38.3% compared with 36.7% for Q4 2007. Let’s now turn to our derivatives program. During the fourth quarter we’ve recognized a realized gain of $800,000 before taxes on these instruments and net-unrealized gain of $86 million. Reflecting the extraordinary decline in oil prices we concluded the fourth quarter with a derivative asset of $49 million, a swing of $86 million from the end of Q3. The bottom end of the collar that we have locked in for 2009 is $0.24 higher than the bottom end we locked in for 2008. Our weighted average prices locked in for ‘09 are between $2.79 and $2.84. Our guidance assumes an average fuel price of $1.97 for 2009. So, we expect to receive significant cash gains from our hedging program in 2009. For the portion of 2010 that we have completed hedging which is approximately 50% of the full years target, their average price is in the range of $3.39 to $3.45. As we announced in December we have temporarily suspended new purchases of derivative instruments. Looking at the current situation world oil prices remained very low and our overall fuel price related earnings exposure has diminished as hybrid contracts have increased. Prior to our December announcement, we were targeting hedging 90% of our estimated fuel price related earnings exposure for 2009 and we have partially hedged the first two quarters of 2010 with the target of 80%. We expect the hedging will continue to be an important to our business model going forward and we still intent to purchase derivatives in the future, but these purchases will not be made as far as expanses in the past. Our reentry point will be reviewed on a quarterly basis. As I mentioned earlier accounts receivable balance, net of reserves for credit loss decreased to $700 million from $1.1 billion at December 31, 2007 and more than $1.3 billion for the end of Q3 due primarily to the decline in fuel prices. They were similar decreases in our accounts payable, which also reflected the drop in fuel prices. We have about 3.5 years left on a revolving credit facility. We’re currently paying a rate of LIBOR plus 58 basis point which significantly better than the current market rates. We had approximately $280 million available to us under this agreement as of the end of the quarter. We pay down $42 million in financing debt ending the quarter at a $171 million. We also repurchased 550,000 shares of stock, spending a total of $7.6 million in the quarter. The resilience of our business model was demonstrated this year by an exceptionally strong free cash flow, which totaled more than a $100 million for the year. We concluded Q4 with the leverage ratio of approximately 1.3 times. We continue to target leverage between 1.5 and 2 times for the long-term and will allocate a free cash flow with best use whether it’s debt pay down, share buybacks, acquisitions or internal reinvestment. As Mike mentioned in 2008, we used our cash flow pretty equally across all of these areas. However, given the current economic conditions the premium on liquidity in today’s markets and the absence of better alternatives our leveraged will likely remain below our target level temporarily and we will maintain a bias towards liquidity. Capital expenditures were $3.8 million for the fourth quarter reflecting continued reinvestment in our core product offerings and strategic diversification. In light of the slowdown in business volume this past year, we focused on reducing these expenditures wherever possible and for 2008 total CapEx was $16.1 million. Looking forward, our strong financial position will allow us to continue investing in our infrastructure and we anticipate spending $14 million to $17 million in 2009. I’ll conclude with some key assumptions and financial guidance for the first quarter and full-year 2009. We’re assuming continued deterioration in the economy and therefore further declines in fuel purchasing volume through the year. Although we are planning on continued success and signing new customers and lower attrition rates, we expect both these factors to be offset by a decline in transaction volume within our existing customer base of approximately 10% to 15%. We’ve also assumed a significant year-on-year decline in fuel prices, substantially counted by our fuel price derivative instruments. So, the majority of 2008, we’re about the top end of our hedge collar, but we expect we’ll be operating below the collar in 2009. As a consequence we expert to report realize cash gains this year as apposed to the realize losses we saw for most to 2008. At the same time we’re expecting to see some further erosion in the credit quality of our portfolio and commensurate increase in charge-off during the year. For the full-year we expect credit losses to be in the range of 45 to 55 basis points. Let me remind you that our forecast in the first quarter and full-year 2009, are valid only as of today and are made on a non-GAAP that excludes the impact of non-cash, mark-to-market adjustments on our fuel price related to derivative instruments, the amortization of purchase intangibles and adjustments related to the deferred tax assets and tax receivable agreement with our former parent company. Although our share repurchases program remains in place, we have not included any potential EPS upside from this. The fuel price assumptions are based on the applicable NYMEX futures price. For the first quarter of 2009, we expect to report revenues in the range of $61million to $68 million. This is based on an average retail price of $1.98 per gallon. For the full year 2009, we expect revenues ranging from $270 million to $285 million based on the average retail fuel price of $1.97 per gallon. In terms of earnings, for Q1 of 2009 we expect to report adjusted net income in the range of $10 million to $12 million or $0.25 to $0.31 per diluted share. We expect adjusted net income for the full year 2009 in the range of $51 million to $59 million, or $1.30 to $1.50 per diluted share on approximately 39 million shares outstanding. I’ll now turn the call back over to Mike. Mike Dubyak Thanks Melissa. Before we’re going to your questions, I’d like to close with some thoughts about the year-head. In developing the guidance that Melissa outlined, we made what we believe are reasonable assumptions about the economy and its potential impacts on our business. Given the extraordinary uncertainty right now, we think we are being realistic by planning for lower transactions volume in a challenging bad debt environment in 2009. On the up side, we will continue to generate significant cash flow while the country is in the middle of our recession. We’ll have the advantage of the full twelve months of specific pride, versus ten months in 2008 along with the full-years benefit from the GSA fleet and the potential for approximately $2 million additional transactions from the large new portfolio we’ll be adding with Citi. We signed a new contract with Citi and expect the portfolio to be on board by the end of the second quarter of ‘09. This will be a fully funded program similar to other private label portfolios, which have no revolving credit component. We are continuing to look at ways to improve productivity across the organization and take additional cost out of the business. In addition as Melissa said, our ‘09 financial results will reflect hedging at higher prices than last year. I spend a considerable amount of time with our associates and as we begin the New Year, I can say that our people are highly energized not only to outperform the economy, but to capitalize on the competitive advantages that we have and increase our market share at a very challenging time. If you compare us with others in our space, not only do we continue to deliver great value and high quality service to our customers, but our leverage ratio is low and we are strongly positioned in having an industrial bank to fund our receivables at a competitive rates. So, if you step back and look at Wright Express today, we are profitable and financially strong. The quality of our credit portfolio and the way it’s being managed are both very high and we continue to have great confidence in our business model. We are hitting our targets for adding new vehicles and controlling attrition, and the diversification strategy we embarked on two years ago is driving new and growing streams of revenue. Our goal as we begin 2009 is to build on these strengths and maximize the results we produce even in difficult market conditions. We are continuing to invest in our growth strategies and in our people. I am confident that Wright Express will be positioned for industry leading growth when the economy turns around. With that we will be happy to take your questions. Operator you can proceed with the Q-&-A now.

[Operator:]

(Operator Instructions) Your first question is coming from Tien-Tsin Huang - JP Morgan Chase & Company.

[Tien-Tsin Huang:]

Great thanks so much. I have a few questions, the first one is on the payment processing rate that came in higher than we expected, which is great. What’s the new rule of some now that we can maybe used for changes in fuel price and how that might influence the discount rate?

[Melissa Smith:]

Sure, the last thing that we published would show a $0.10 change on fuel prices, has above $0.10 change in earnings for 2008. It’s a little bit less than that now with the hybrids in place. So, we are getting a bit of a buffer from that and that’s obviously un-hedged.

[Tien-Tsin Huang:]

I’m sorry if I wasn’t clear; the payment processing rate, the discount rate, and the sensitivity of that that changes in the spot of fuel prices?

[Melissa Smith:]

Yes, it’s about a $0.15 change in rate.

[Tien-Tsin Huang:]

Then just a couple more, just in the funding cost. What are you assuming in your outlook on the funding side? Can you give us some guidelines on that Melissa?

[Melissa Smith:]

Yes, we are assuming they are going to continue to fund through our brokerage CDs and our Fed funds. Through the end of the first quarter, we think we’ll have more CDs as they continue to roll-off and as we reduce those cash balances. So, we wanted to see a significant change in rates in the first quarter to what we have in Q4. From that point forward, the current rates right now are between 1% and 3% on CDs and as I said in the fourth quarter for us it was about 3.9%. So we should see some significant declines in Q2 and going forward to the rest of the year.

[Tien-Tsin Huang:]

Last one, then I’ll jump-off. The personnel expenses, what’s the good run rate to assume here coming of the 4Q level. I know that we have some Citi ramp-up as well and you’ve got the risk to. So I want to make sure, we’ve got the right run rate?

[Melissa Smith:]

Yes, we’re presuming the year to have a similar number of average rate sources as we are ending 2008, so there are some pluses and minus. If you look at our salary cost for the fourth quarter, there’s a couple of things will change. We had a charge of $250,000 associated with the risk included in that, there is also that one-time bonus of $500,000, but it’s excluding our ongoing step, which is a little over $1 million in the quarter. Those three things are going to be kind of one-time unusual adjustments, but the run rate on people should be similar to Q4.

[Tien-Tsin Huang:]

Okay, it sounds like it probably shouldn’t change too much then. I mean, given those pluses and minuses and the Citi coming aboard.

[Melissa Smith:]

Yes, I think that’s fair.

[Operator:]

Your next question is coming from Anurag Rana - KeyBanc Capital Markets.

[Anurag Rana:]

Good mornings everyone. Melissa, could you please give us a little more details on the free cash flow, which seems a bit high in this quarter and what kind of free cash flow should we assume for ‘09?

[Melissa Smith:]

Yes, in the fourth quarter because fuel prices declined as rapidly as they did, it allowed us to dividend more money up from our industrial bank. We have to keep a percentage of their assets and capital and that really drove the increase that we saw in the fourth quarter. On a normal basis assuming flat fuel prices, that amount that we are throwing off in adjusted debt income, which should translate what you’d seen in cash flow and the course the year and that’s been true historically on average since we’ve been public.

[Anurag Rana:]

Great and on the low end, it assumes to be somewhere around $50 million. What do you intent to do with that free cash flow in ‘09?

[Melissa Smith:]

Yes, we’ve talked about continuing to look at the areas where we’ve invest in the past. We saw a $70 million authorized on our share repurchase program. We’ll continue to look at that as an option. You can see that we’ve had bias towards paying down debt. So, that will continue to be an area that we’re going to look at and then obviously acquisition opportunities and there is opportunity out there and that’s any way that we would be interested in it as well. Since, we’ve been publicly gone roughly third into each of things.

[Anurag Rana:]

Thanks. Any new portfolios that might be coming onboard that you had aware of at this time?

[Mike Dubyak:]

No, there is nothing at this point that we would say as imminent, but except for the one that we’ve talked about which is the Citi agreement that will bring on the private label portfolio in the second quarter.

[Anurag Rana:]

Lastly, could you please give us anymore details on, some of the new credit policies that you have implemented over the last few quarters? Thank you.

[Melissa Smith:]

Sure. The ones, we’ve implemented earlier in the year, we saw significant losses in relation to the size of our accounts and some of our heavy truck, customer base and so we changed payment term requirement within that part of our business. We’ve also across the board going through each quarter and looked at the amount of credit that we have outstanding. We look at things based on the risk grading and have restricted credit through the higher risk accounts. On an annual basis we are reviewing accounts and looking at whether or not anything has changed or deteriorated within the customer population for our larger accounts and so we’re continuously evaluating that. The late fee changes that we’ve made, it’s not a change that’s show on there credit policy, but we wanted to make sure that we had as much incentive in place as possible to deter late payment. So, it’s been a whole host of different things. In general we’ll continue to look at post mortems on any of the loss we have there more significant and we’ll make minor changes ongoing our collection and credit practices.

[Operator:]

Your next question comes from Paul Bartley - PB Investment Research

[Paul Bartley:]

Thanks good morning. Just on the loss ratio in the fourth quarter. So, excluding the one-time bankruptcy, are those have been in the 40 basis point range in the fourth quarter?

[Melissa Smith:]

It would been have in the 40’s, yes. It would have been above 40 though.

[Paul Bartley:]

Okay so, you’re just assuming some continued deterioration in 2009, from 40 levels?

[Melissa Smith:]

Yes, we preset a couple of things. We’re presuming Q4 and Q1, they are normally high points and we are presuming that to be true again in 2009 and we’re also presuming the fourth quarter we had a higher loss. We are presuming we are going to have higher one time losses in each of the quarters, just as a planning assumption right now.

[Paul Bartley:]

Then as you look at the 10% to 15% expected decline from existing customers, anyway if you could give us anymore color on that. I mean which parts of the portfolio is that coming from, is that more to do with some of the bankrupt customers going away. How you’re looking and kind of what’s driving that?

[Mike Dubyak:]

Yes, Paul there is a couple of things. First of all the big picture is the existing customer base is just contracting, so a ten vehicle fleet is now a nine vehicle fleet. We’re also seeing that vehicles they have left are buying on average fuel on average per vehicle than they were be four, but we’ve seen across most of our SIC codes the contraction. It’s primarily in areas like construction, some of the special trade contractors, wholesale trade and durable goods. If you look at it geographically, probably more so on the East Coast and the West Coast a little bit of upside in business services and a little bit upside in the Gulf Coast with business services in oil and gas customers, but they’re contracting with business slowdown is the primary issue.

[Paul Bartley:]

You talked a bit about the new business momentum still being relatively good, you obviously had the big GSA contract in ’08. I mean if you kind of strip that out and kind of look at over the course of the year, are trends still pretty favorable are you comfortable with the value proposition and then what are you hearing from customers as you go out and try to sell them on the product?

[Mike Dubyak:]

We’re still very bullish as we said. I mean even if you take out the GSA, we added significant new vehicles last year; there is still strong demand for the product. We’re seeing as we said strong demand for the WEXSMART telematics product another way for fleets to control their expenses. So, our pipeline is strong going into this year, so the value proposition is still something that’s going to sell and we believe we’re going to see good results in our front end of this year as well.

[Operator:]

Your next question comes from Tim Willi - Avondale Partners.

[Tim Willi:]

A couple of questions; first, with the industrial loan bank, is there anything around FDIC premiums or anything given, all that’s going on with the banking industry that you have heard or would expect. I heard that there has been some talk potentially of premiums going up on deposits. I’m not sure about that, is there anything there we should think about in terms of debt entity?

[Melissa Smith:]

We have seen an increase in the premiums that we are getting for FDIC insurance, because the asset base is declining in 2009. Those are the increase in premiums being offset by the reduced asset base. So, it’s not really having a material impact on the comparability from year-to-year. From a regulatory perspective, I think that we would presume, we are going to see increased regulatory scrutiny like, we are seeing in a lot of areas, but we don’t expect this point to have much of the financial impact on our business model.

[Tim Willi:]

Okay, second question just around fleet growth and then sort of this some other comments you made in response to earlier questions, and your comments around the state of our customers. Outside of general business slowdown, which is clearly obvious, is there anything that you’ve sensed that small businesses have clearly been hurt by more restricted credit and it’s translated into the impact on your business, if there were some kind of fix for the banking industry? There was a lot of talk yesterday about trying to get credit to small businesses etc. That could have some kind of potential positive impact for your company. Just trying to sort of separate what might be general, macroeconomic versus somebody can’t get a $75,000 line of credit to stay in business and keep moving forward.

[Melissa Smith:]

Yes, I think what you just said is what we’re hearing from customers, where losses as I said earlier are predominantly less than $25,000. So, it’s really coming from small business and bankruptcies have increased and what we’re hearing from them is liquidity issues. In some cases, it’s just general slowdown in their business itself, but some of it is their inability to secure liquidity or when they can at rates they cant stand business. So, I think that had an impact historically, or at least for last couple of quarters and going forward if that loosens I would expect that’s going to have a beneficial impact on us.

[Tim Willi:]

Okay and then last question on credit. I think on the third quarter call, you had talked about the big truck category, while smaller part of the business. Probably I think you had called out the credit deterioration there is pretty notable and you put these programs back in place in the quarter. I’m just curious. Did you see any kind of improvement with credit and collections in the big truck sector after making those changes or as it continued to sort of move with the same pace?

[Melissa Smith:]

I’d say, there is two parts to that response. One, we’ve added new business, we’ve added it in different payment terms and so that reduced our exposure. When we’ve gone back to our existing customer’s in that particular segment in change payment terms, we’ve seen not a significant impact on our losses. I think those customers in particular are experiencing the higher level cash flow shortages right now and so change in payment terms which requires and to accelerate the payment has a negative impact that’s offsetting any pick-up or getting based on a reduced exposure.

[Operator:]

Your next question is from Robert Dodd - Morgan Keegan & Company.

[Robert Dodd:]

Hi, guys one housekeeping one first. The $1.5 million non-cash charge. Can you tell us which line items that were embedded in?

[Melissa Smith:]

Sure. It’s in occupancy and equipments.

[Robert Dodd:]

One of the comments you made was about 99% of your customers are still adjusted [Inaudible]. I mean, you’ve only got 1% of your customer base delinquent is what it sounds like now. I mean can you compare that if you have any data to what was a typical kind of level in the ‘03 to ‘05 period and then maybe what you sold back in 2001?

[Melissa Smith:]

Yes, I don’t have 2001 data with me, but it’s in pretty standard for us to be around 99% level. It’s not dramatically different, what we’ve seen even through the course of 2009 is current customers, if anything are a little bit more current and the ones that have aged out and historically paid us, but just paid us more slowly or the ones that are more likely to now become delinquent.

[Robert Dodd:]

It’s really a collections issue more than an increase in delinquencies?

[Melissa Smith:]

Yes and actually even if you look at it from a risk perspective, look at the portfolio. We rank it based on risk rating. If you look at the year-over-year December ’08 to December ’07, there are not significant changes in the overall risk ratings. It’s just the ones that are higher risk or having more trouble.

[Robert Dodd:]

One of the other things, small fleets grew 1% in the year. It looks like most of your customer fairly are very much in that small fleet area sub $25,000 in charge-offs. I mean can you give us an idea of the kind the net growth in your small fleet customers? You seem to be doing a pretty good job growing new customers, but then obviously losing some at the backdrop. Can you give us any color there?

[Melissa Smith:]

Yes, I mean that would where we’d see higher involuntary attrition, would be in that customer base and our involuntary attrition as Mike said was 3.8%. That’s going to be largely in that small fleet category, so --.

[Mike Dubyak:]

But, even the voluntary attrition would be high with small fleet as well. Just knowing some of the portfolios on the private label side of their closing stations or things like that impact us. So, we see it both from a voluntary and involuntary standpoint.

[Robert Dodd:]

One last question; on the hedge, I assume 18 months ago when you were putting the ‘09 hedge in place, you were not presuming the level of economic deterioration that we’re seeing right now. So, would that imply essentially the over hedged in terms of the number of gallons covered, because if the same store kind of volume growth. So your customer base is going to be down 10% to 15%. I assume you didn’t bill that in. Are we going to see any abnormal hedge mismatches in any parts in ‘09 or is that what kind of washing out with GSA, Citi, etc.?

[Melissa Smith:]

When we purchased the hedge, we’ve used pretty conservative assumptions on growth and historical cost associated with changes in fuel prices, which includes credit loss. Obviously, there have been a lot of changes to those assumptions since we made the purchase. So, based on our current assumptions for 2009, we would have more than 90% hedge. It’s pretty early to tell; we’ll go through the year-end and see how things actually perform. Right now that’s an advantage for us because fuel prices are low.

[Operator:]

Your next question comes from Tom Mccrohan - Janney Montgomery Scott.

[Tom Mccrohan:]

Hi, everyone. Melissa, what would be the normalized cash on hand if you adjusted that for the CDs that didn’t mature?

[Melissa Smith:]

It’s about $40 million.

[Tom Mccrohan:]

Just to clarify on the transactions, the payment funded transactions coming from the GSA. I had in my note $7.5 million payment transactions from that government contract, is that right?

[Melissa Smith:]

Yes

[Mike Dubyak:]

Yes

[Tom Mccrohan:]

Okay and then that I here Mike, Citigroup. I had in my notes $4.5 million of payments funded transactions from Citi this year or its lower?

[Mike Dubyak:]

Well that’s an annualized number, do it would be close to $2 million for the year. $4.5 is an annualized number.

[Tom Mccrohan:]

Okay, if you just kind of ramping that up.

[Mike Dubyak:]

Right, because we want to get started in probably the later half of the second quarter.

[Tom Mccrohan:]

Did you disclose the dollar amount of the dividends from the industrial loan bank this quarter?

[Melissa Smith:]

It’s about $65 million.

[Operator:]

Your final question comes from Jason Deleeuw - Piper Jaffray & Company.

[Jason Deleeuw:]

This is Jason Deleeuw calling for Bob. I was wondering what transaction trends you’re seeing from your installed base in the month of January relative to December?

[Mike Dubyak:]

Yes, we’re pretty much seeing as we said 9% was the drop off in December and we’re predicting that 10% to 15%. So far what we’ve seen in the first part of this year is pretty much in that range to 10% to 15% drop off, probably on the lower end though.

[Jason Deleeuw:]

Thanks and then on the rebates, I think you said they were flat in the fourth quarter versus third quarter. Can you just speak to that in terms of the customer mix; I mean there are just fewer large fleets being signed up. Can you speak to the competitive environment in winning fleets?

[Mike Dubyak:]

We talked about it in the last quarter, some of the co-brand relationships in the large fleets. So that’s pretty much stable at this point, but new large fleet business will continue to be competitive. So, we know there is going to competitive impacts on our rebates and we still have to get rebates in the large fleet market place, but it’s not a very ratable level and it’s growing significantly.

[Jason Deleeuw:]

So, we would expect those pressures to be less that what we saw in ’08, in the course of the year?

[Melissa Smith:]

I think where you saw was increase pressure, particularly when fuel prices were escalating. So, there is the more pressure in the middle part of the year, the second and the third quarter. As Mike said, we’ve always presume there is going to be some continued increases in rebates overall over a period of time, but we decide to be more ratable in part of this year.

[Jason Deleeuw:]

Then just a last question is on Citi, they’ve taken a look at all other businesses and the private label business and I was wondering if you guys are anticipating any impact from Citi’s actions and on your contract that you anticipate coming on in the second quarter.

[Mike Dubyak:]

No, we don’t because we’ll basically be taking over the management of that portfolio on behalf of Citi’s. So we’ll be funding the receivables and managing all aspects of the relationship on behalf of Citi, if you will in this relationship with an oil company.

[Operator:]

Thank you. Mr. Elder, it appears that there are no further questions. Therefore, I’d like to turn the call back over to you for any closing remarks.

[Steve Elder:]

Well, thank you Jacky and thanks everyone for listening. We apologize again for that brief power outage we had apparently a telephone pole went down nearby us, but we are back up and running. Anyway, we look forward to talking to you again next quarter.

[Operator:]

That concludes our conference call. Thank you for joining us today.