WEX Inc (WEX) 2005 Q3 法說會逐字稿

Good day and welcome, everyone, to Wright Express Corporation third-quarter 2005 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Steve Elder, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon and thank you for joining us. With me today is our CEO, Mike Dubyak, and our CFO, Melissa Goodwin. We released our third-quarter financial results only a short while ago, so I will begin with a brief summary of the results and key metrics. The release is now posted on our website at wrightexpress.com. Following the summary, Mike will review the Company's operations for the third quarter. Then Melissa will discuss the financials and we will open the call for your questions.

Before we begin, I'd like to remind you that we will be making statements about Company's future results during this call. These statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements represent the Company's views only as of today, October 26, 2005 and are based on current expectations in light of the current economic environment. While the Company may choose to update forward-looking statements in the future, we specifically disclaim any duty to do so. You should not rely upon these forward-looking statements as representing the Company's views as of any later date.

Forward-looking statements and projections are inherently subject to significant economic, competitive, and other uncertainties and contingencies which are beyond the control of Wright Express. The Company cautions that such statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are specified in the prospectus filed by the Company on February 16, 2005 in connection with the initial public offering and subsequent filings including our form 10-Q for the second quarter of 2005 and other filings with the Securities and Exchange Commission.

In addition, during the call, the Company will be using certain non-GAAP financial measures as defined under SEC rules. Where required by these rules we have provided a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures as exhibit 1 and 2 in the press release dated today, October 26. As I mentioned, the release can be found our website at wrightexpress.com. A copy has also been submitted as exhibit to an 8-K we filed with the SEC.

With that, let's move on to the summary of our results and key metrics. During the third quarter, total revenue increased 41% to $67.4 million from 47.9 million for the third quarter of 2004. Net loss to common shareholders on a GAAP basis was $6.2 million or $0.15 per share, compared with net income of $12.9 million or $0.31 per diluted share for Q3 last year. The Company's adjusted net income for the third quarter of 2005 was $13.4 million or $0.33 per diluted share. This non-GAAP figure excludes an unrealized mark-to-market loss of $29.7 million on our derivative contracts before taxes.

The third quarters of 2005 and 2004 are not directly comparable due to the non-cash earnings fluctuations associate with our fuel price derivative contracts. To provide a more meaningful comparison, exhibits 1 and 2 in today's press release present adjusted net income for the third quarter of '05 and non-GAAP net income for the third quarter of 2004. Melissa will discuss our results and more detail.

Next I will turn to the key metrics we look at in evaluating the Company's performance. The average number of vehicles serviced increased 9% from the third quarter last year to approximately 4.2 million. Total fuel transactions processed increased 14% from Q3 a year ago to 60.9 million. Average expenditure per payment processing transaction for Q3 increased to $50.72, an increase of 39% from the same period last year. Average retail fuel price for Q3 increased 38% to $2.57 per gallon compared with $1.86 for the same period last year.

Total MasterCard purchase volume grew to $252.4 million, an increase of 38% from Q3 last year. Finally we paid $5.5 million in principal on our long-term debt balance this quarter. This brings the total paid year-to-date to $40.5 million.

Now I'll turn the call over to our CEO, Mike Dubyak.

Thank you, Steve. Hello everyone and thanks for joining us this afternoon. The Company's numbers this quarter speak for themselves. Demand for fleet card solutions remain very strong. Our front-end sales and marketing engine produced strong growth in the COBRA and private-label and direct channels and in all three of our core markets, large, mid-sized, and small fleets.

Q3 was also a great quarter from an operational standpoint. Along with the front end, our strength in portfolio management and product differentiation are what truly drive the business. Whether it is acquiring or retaining customers, minimizing credit loss, or creating products that add value by satisfying new customer needs, we made significant progress this quarter.

One of the best measures of our confidence in portfolio management is the depth and durability of our strategic relationships who rely on us to manage their fleet portfolios. Contracts with several strategic relationships were up for renewal this year and we have renewed every one of them. Most recently COBRA and partner Enterprise Rent-a-Car as well as private-label partners such as Gulf Oil Limited Partnership, Getty Petroleum Marketing, and Sheets Inc. Just to reinforce the point about durability, our relationship with Getty Petroleum goes back nearly twenty years to 1986 when they signed on with us as our first private-label partner.

Our total revenues were up 41% in Q3 and higher fuel prices were a big factor. But look beyond that and you see the underlying trend, sustained and solid organic growth and business volume. Looking at the number of vehicles serviced, the number of transactions processed, or MasterCard purchase volume, this was another strong quarter for Wright Express. It was also the third quarter of exceptionally strong growth that we posted this year.

In the first quarter of 2005, the number of payment processing transactions was up 8% from Q1 last year. That growth accelerated to 12% in Q2 of '05 and 19% for the third quarter. Some of the third-quarter volume growth was due to the Gulf Coast hurricanes and the concerns about fuel supply that followed. So rates have increased this dramatic won't be sustainable forever, but we do think it is realistic to expect the business to continue producing growth that is both solid and predictable. And to do so on a long-term basis.

We have talked often about the size of our marketplace. And just last month Havill, a market research firm, released new industry data reporting U.S. fleet market size as 40 million vehicles. This includes commercial and government vehicles of all sizes in fleets of all sizes, large, mid-sized, and small. This is significantly different from the estimate we included in our prospectus, a market size of 27 million vehicles, which was the most current verified information that we had at the time.

Another key piece of information from Havill's research is that only 60% of the fleet fuel consumption happens on a credit or charge card of any kind. That means nearly 40% are purchasing through cash, house accounts, and other means. As we have highlighted consistently, this non-card market segment is a key target of ours.

Fleet operators have limited alternatives to paying retail prices at the pump but they can find ways to operate more efficiently and minimize their fuel usage. That is where the suite of Wright Express fleet cards add value, especially with prices where they are today.

At a basic level, using the card allows the fleet operator to control driver purchases at the point-of-sale. We believe that fleets who use our program save an average of 5 to 15% of purchases mainly by preventing unauthorized use. Beyond that, our proprietary network and e-commerce platform allow the fleet operator to monitor the activity of every vehicle and driver. Our technology solutions allow them to create customized reports they can use to better manage their operations in additional and powerful ways.

We have always had a strong presence in the large and medium-sized fleet markets, where fuel purchasing activity tends to be managed more aggressively. Q3 was another quarter for growth in these markets. Thanks to our past investment in front-end sales, we enter the quarter with a strong pipeline of new business and prospects. And our team did an outstanding job in converting the pipeline into active accounts.

The number of vehicles we serviced in the large and medium fleets grew 11% in Q3 last year. This was partly due to cards issued on an emergency basis to fleets affected by Katrina that could no longer access bulk fuel. Although these cards will remain with the customers, we expect they will only be used during emergency situations. So they won't produce the kind of fueling patterns we typically see.

If you look across the large and mid-sized fleet landscape, one segment where we see significant new opportunity is in the heavy truck market, specifically the private carrier segment. We have been aggressive in growing our sales force for this segment and are giving our salespeople tools they can use to win business. As a result, the number of heavy trucks we serve was up 35% in Q3 last year.

The potential is even greater in the small fleet market. Small fleets represent our biggest growth opportunity in terms of fuel purchase volume and we are making good progress in capturing this potential. Penetrating small fleets presents some challenges, chief among them finding these businesses and generating leads. We have been addressing this challenge with some very successful front-end strategies for identifying and reaching out to small fleets.

We are also developing some interesting channel opportunities in the small fleet market. One example is our Affinity program. This targets the independent fuel distributors and independent brands who operate the vast majority of U.S. retail fuel locations and specialize in servicing small fleets. Again, the results of this and other programs speak for themselves with the number of vehicles we serviced in the small fleet market increasing 6% from Q3 last year. This is down from the 9% growth we posted in Q2. Although we saw 16% growth this quarter in our direct marketing channel, we had slower growth in our private-label business.

Looking longer term, our strategy is to find leverage points where we can apply our front-end sales engine to penetrate new opportunities. One example is the Wright Express Business Card pilot program. The business card combines all the benefits of a fleet card with some great services that appeal to smaller companies such as reward points for travel and retail purchases, roadside assistance, and pre-employment screening service. We are also planning to roll out some additional offerings in the next couple of quarters.

The business card launched on a trial basis in Q2. We are currently meeting targeted goals for the tests and the market response has been encouraging.

Another one of these leverage points is the Wright Express Service Network or WESN which takes us beyond fuel purchasing into vehicle maintenance expenditures. WESN is progressing very well. We have recently added Bridgestone/Firestone, one of the country's largest service chains to our accepting merchant list. This is exactly the kind of major service relationship we envisioned as a way to build early momentum for the service network. They will be launching national rollouts during the next few months and the awareness they generate should expand our WESN business pipeline as we move into 2006.

As Steve said, Q3 MasterCard purchase volume grew 38% year-on-year and we expect to build on this momentum going forward. MasterCard has great potential as a product for small to mid-sized businesses and we are capturing this potential not only by gaining share in the underpenetrated market but by winning customers in head-to-head competitive pursuits. We not only have a better overall MasterCard offering, but in offering the strongest in purchasing as well as travel and entertainment. These represent our most profitable MasterCard products.

In addition, our MasterCard sales force continues to do a great job targeting prospects and closing deals, resulting in strong increases in revenue.

Before I turn the call over to Melissa, I will try to anticipate the questions you may have about the Gulf Coast hurricanes. In retrospect, the financial effects of Hurricane Katrina and Rita were a mixed bag for us. Some customers in the Gulf Coast region stopped doing business or severely curtailed their fleet activity, but this was offset by increased activity in emergency and first responders fleets, like utilities. In addition, certain major commercial fleets could not access their bulk fueling facilities and started fueling at retail locations instead. We issued more than 30,000 new cards for these fleets virtually overnight, and that's what kept them on the road during the crucial first two weeks in September.

We also temporarily relaxed our payment standards for our small fleet customers in the region, knowing they could be out of business for some time. And we updated our website every hour to let people know where retail fuel is available on a 24-by-7 basis. These are the types of customer service activities that create strong loyalty to Wright Express.

Looking ahead, there may be some rebound in fleet fuel demand associated with recovery and rebuilding in the Gulf Coast region, but the critical factors are probably tied to overall economic growth. Obviously we're not in the economic forecasting business. If fuel prices began seriously dragging on the economy, that could affect fuel purchase volumes and credit loss. On the other hand, we have already seen higher fuel prices improving our pipeline and close rate, especially with small fleets as they try to cope with higher costs. So this too could be a mixed bag.

Right now all we can do is point to the Company's actual results in Q3. Despite what happened to fuel prices, fleet purchasing remained very strong and we saw continued improvement in all of our key performance metrics. We have got a solid front-end engine for driving growth and we feel good about how we have been able to use the front end to generate business in the new market segments we've identified. Our plan is to continue in this direction.

We are looking at some additional channel opportunities in core business as well as some interesting ideas for new markets. We are confident that Wright Express can continue generating steady topline growth. At the same time, our risk management strategy should continue to support the visibility and predictability of our cash flow and future earnings.

I will now turn the call over to Melissa.

Thank you, Mike. Hello and good afternoon, everyone. This was an extraordinary quarter for Wright Express. A key strength of our business model is its scalability. This was demonstrated in the third quarter. Along with the volume growth that Mike outlined, we are firing on all cylinders in the business; strong sales, low credit loss, reduced leverage, and increased productivity. The convergence of these factors being extremely favorable coupled with the scalability of our business led to a very profitable quarter. These drivers should continue to have a positive impact on our results going forward. Keep in mind, fueling activity tends to be slower in Q4 because of the holidays.

I will start with the details on total revenues for Q3, which increased 41% to $67.4 million from 47.9 million for the same quarter last year. Payment processing revenue grew 49% year-over-year to $50.3 million. This is quality growth driven in large part by a 19% increase in the number of fuel transactions to 44.3 million from 37.3 million a year ago. We also continue to see growth in the average expenditure per fuel transaction, which increased to $50.72 from $36.59 for Q3 of 2004. The increase in the average expenditure was primarily driven by a 38% increase in the retail price of fuel.

The pricing environment remained stable this quarter. Adjusted for the higher price of fuel, rebates to large long-term customers were relatively flat with Q1 and Q2. The average number of gallons per transaction increased less than 1% from last year after rising more than 2% in both Q1 and Q2. After the hurricanes the number of transactions increased but there were fewer gallons per transaction. We attribute this to fleets reacting to the rising price of fuel in September by topping off their tanks more frequently in order to fill up before the next price increase.

In addition, we believe that in certain parts of the country there were real or at least perceived supply shortages. When fleets in these regions found a location with fuel, they topped off their tanks. Now that supplies issues are diminishing, we expect to see a return to something closer to normal fueling patterns. And given the gains that we have made in the heavy truck market, we anticipate seeing the average number of gallons per transaction continue to grow in Q4.

As Mike said, our MasterCard products also did well this quarter, contributing $3.6 million to payment processing revenue, up 52% from 2.4 million for Q3 last year. The increase in revenue was driven by a 38% increase in the spend volume across our MasterCard products.

Our transaction processing revenue was up 4% from Q3 of last year, which is about the same as an increase in the number of transactions and our account servicing revenue increased 9%, which is in line with the increase in vehicles serviced. Finance fees in Q3 were $4.1 million, up 68% from 2.5 million a year ago. This relates primarily to higher average past due balances resulting from the increase in payment processing transactions and fuel prices.

Turning to operating expenses on a GAAP basis, total operating expenses were $33.3 million, compared with 26.8 million in Q3 last year. The two periods were not directly comparable because last year's Q3 operating expenses did not include incremental public company costs as well as a number of other items that were included in Q3 of 2005. We have detailed these numbers in exhibit 2 in today's press release, which reconciles non-GAAP net income to GAAP net income for the third quarter of 2004.

Apart from these costs, the year-over-year increase in operating expenses primarily relates to rising interest rates on our operating debt. It also reflects growth and depreciation expense on our technology platform as well as increases in sales and customer service personnel to support new business.

I will note that transactions for FTE were 96,000 this quarter compared with 88,000 in Q3 last year, a productivity lift of 9%. Q3 was another great quarter in terms of our credit loss experience. Managing the short-term credit exposure of our customer base is key to keeping the losses down and this is an area that we focus on very intensely. Our provision for credit losses in Q3 of '05 was $2.3 million, which includes 1.3 million directly related to the hurricanes. This was up from 1.7 million in Q3 of '04. However, credit losses as a percentage of total payment processing expenditures in the fleet related business actually declined this quarter from 10.1 basis points in Q3 last year to 9.2 basis points. Our credit loss tends to fluctuate quarter to quarter and we anticipate the fourth quarter to trend toward historical averages.

Turning to depreciation and amortization, the total was $2.5 million for the third quarter of 2005, an increase of 50% from 1.7 million in Q3 last year. As we continue to invest in upgrading our technologies platform, we expect to see an increase in depreciation.

Our effective tax rate on a GAAP basis was 23.8% in Q3 versus 38.9 for the third quarter of 2004. Our GAAP tax rate is affected by the unrealized loss on our derivative instruments, so we expect to see it fluctuate from quarter-to-quarter. Our Q3 tax rate was 38% for adjusted net income. We expect this, the rate to be fairly constant going forward.

Now let's look at adjusted net income. Adjusted net income for the third quarter of '05 was $13.4 million or $0.33 per diluted share. Our non-GAAP net income for Q3 of last year totaled $10.3 million. In determining non-GAAP net income for the third quarter of 2004, the major adjustments were the new cost of operating as a public company as well as financing costs related to the debt we incurred to pay a dividend of $306 million to our former parent company prior to the IPO.

The Company's adjusted net income for the third quarter of 2005 of $13.4 million would have represented a 30% increase over non-GAAP net income in Q3 of 2004. Year-over-year, adjusted net income for Q3 2005 reflected higher interest rates on both operating and financing debt. This contributed an additional $2 million to expenses before taxes and $800,000 of depreciation expense. Pulling all this together, the adjusted net income margin for the third quarter of 2005 was 20%, compared with 21% a year ago on a non-GAAP basis.

Turning now to the balance sheet, total assets were $1.5 billion at September 30, 2005. They consisted mainly of a $803 million in accounts receivable net of reserve for credit losses and 495 million and deferred income taxes arising primarily from our tax receivable agreement with our former parent company. Total liabilities were $1.5 million, consisting primarily of 360 million in accounts payable; 414 million in operating debt; 227 million in financing debt; and 404 million payable to our former parent company under the tax receivable agreement.

Next some brief comments on our fuel price risk management program. We expect to continue executing on our plan to purchase derivative instruments on a face basis to manage the Company's fuel price related earnings exposure going forward. Ultimately we expect to lock in about 90% of our adjusted net income exposure every quarter on a rolling basis. Our goal is to enhance the visibility and predictability of our cash flow and future earnings.

The non-cash mark-to-market adjustments associated with these derivative instruments will continue. As a result, the Company's quarterly GAAP net income may be prone to significant fluctuations and may not properly reflect operating results for that particular quarter.

During the third quarter of 2005, we recognized a realized loss of $8.7 million before taxes and an unrealized loss of 29.7 million. There was a gain of approximately 1.6 million between the additional revenue we recognized due to higher fuel prices compared to the realized loss on our derivative instruments. This gain results from the mismatch between changes in wholesale and retail fuel prices during this quarter. Although our hedging strategy is designed to minimize these mismatches, it does not totally eliminate them and we expect to see some upside potential in the fourth quarter as well. This is potentially in the range of $0.02 per share and we factored it into our Q4 earnings guidance.

Turning now to financing activity, in Q1 we placed a $350 million senior credit facility in connection with our IPO in a special dividend to our parent. We remain committed to deleveraging the business and paying down this debt. Including a $5.5 million payment in Q3, we have paid down a total of $40.5 million through the first nine months of 2005, leaving a balance of 179.5 million on the term loan.

Since Q3 was such a strong quarter from a profitability perspective, it is logical to ask why we did not pay down a larger amount of our financing debt. As you may know, we use a special purpose FDIC insured bank to fund our accounts receivable balances. We are required to maintain certain levels of capital at the bank. The dramatic rise in the price of fuel caused us to commit higher levels of capital in Q3; therefore we had less capital to pay down our financing debt. The balance on our line of credit remains $50 million with an additional 32 million in letters of credit used to secure our derivative instruments. We are currently paying LIBOR plus 150 basis points on the outstanding amount of both the term loan in the line of credit and 30 basis points on the unused portion of the line of credit. The spread over LIBOR was 25 basis points lower than Q2 and will continue to drop as our leverage ratio continues to drop.

I will conclude the Company's prepared remarks with our updated guidance. Let me remind you that our forecast for the fourth quarter and full year 2005 are valid only as of today and are made 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. The fuel price assumptions are based on the applicable NYMEX futures price.

I will add the reminder that due to the holidays, businesses typically fuel less in Q4 than other quarters. Our estimates are as follows. For the fourth quarter of 2005, we expect to report revenues in the range of 63 to $68 million. This is based on an average retail fuel price of $2.58 per gallon. For the full year 2005, this would result in revenues ranging from 240 to $245 million based in the average retail fuel price of $2.35 per gallon.

As for earnings for Q4 of 2005, we expect to report net income before unrealized gain or loss on derivative instruments in the range of 12 to $13 million or earnings per dilutive share of $0.29 to $0.32. For the full year 2005, this would result in net income before unrealized gain or loss on the derivative instruments and the non-reoccurring charges for the first quarter in the range of 48 to $49 million or earnings per dilutive share of $1.17 to $1.20 on approximately 41 million shares outstanding.

With that, we will be happy to take your questions.

(OPERATOR INSTRUCTIONS) Tien-Tsin Huang, JPMorgan.

Can you give us an update on the next round of fuel hedging? What it might look like in the timing event?

Yes, we have said and the 8-K that we put out in the hedging program that we're going to purchase the hedges systematically every quarter. We have not put out an 8-K for that yet, so obviously haven't purchased anything so far this quarter. But it is our intention to do so and to roll in as we have said before another 30% to the additional quarter so that would put us at 90% hedged for the second quarter of 2007; 60% to the third quarter; and 30% to the fourth quarter.

From a pricing perspective, we are monitoring that on a daily basis and we're just continuing to watch the market.

But from a timing perspective, I guess, one is somewhat relatively few here in the coming weeks. Am I correct in thinking that?

It will be before the end of the quarter.

Okay, before the end of the quarter. Okay. And then I guess I was hoping maybe you could give us just a little bit more detail on what is driving the favorable trend in card losses. Because that was a surprise to us.

Yes. The third quarter was actually a very low number for us. We have said before that our credit loss number does vary from quarter-to-quarter and we saw favorable trends with the amount of what we call charge-offs to the amount that we're writing off within our portfolio. It was beneficial to us. We think it’s reflective of both the good practices that we have had internally and the overall economic conditions. We talked about the fourth quarter moving more toward historical averages. We think that that is really because of the impact of fuel prices rippling through a little bit and affecting some of the smaller businesses. And so we expect that is a great number in third quarter and we think we will continue to have strong credit loss experience but not quite as strong in the fourth quarter.

Okay, and if you could repeat again, what was driving the increase in finance fees again?

It was really if you look at the increase in the average size of the transactions as well as the number of transactions, so the transactions grew 19% and the size grew 38%. The combination of those two things are what is driving the finance fees primarily.

So it is a function of average ticket, not more delinquencies?

Yes, correct.

Okay, thank you.

Greg Smith, Merrill Lynch.

Just first of all, Melissa, the $1.6 million gain you mentioned from the spread between wholesale and retail, is that a pretax number?

Yes, it is.

Okay, great. And then you said you're expecting maybe a little bit of a benefit in 4Q but as we look out into '06, should we basically assume the kind of standard $0.60 spread activity going on?

That is our assumption at this point. We have not seen a long-term change and the correlation between the two. We believe this to be short-term but I think like everyone else, we're watching the marketplace.

Okay. And then if you were to roll out the next hedge, say today or tomorrow, what kind of retail prices do you think you could roll that out at?

It approximates the hedge that we put in place for 2007.

So similar price to what you already did roll out part of '07 at?

Yes. I think what we have seen anyway is a short-term spike in prices that have not necessarily translated into a huge difference in the 2007 prices.

Okay. And then I know you guys have been going through sort of a back end conversion process from an old platform to a new platform. Where do you stand on that and what kind of cost savings do you hope to achieve?

Yes, we have put a lot of the systems in place, new AR system, some of the front-end CRM systems, a new authorizer. We are still completing some of the transitions over to a new transaction processing system and that will come in stages because we will continue to develop new products for our customers that need new products in the marketplace to compete effectively. So we will straddle in effect on the transaction processing side two platforms for some period of time. But over time we will see some reduction in cost but I don't think we factor that in 2006 (ph) (multiple speakers)

We don't anticipate seeing anything in the short-term -- more long-term benefit.

Okay, thanks a lot.

Abhishek Gami, Banc of America.

Considering the ongoing roll out of the new technology platforms, is that what is driving the headcount down? It looks like it was down about nine or ten heads again this quarter over last quarter? Or are you outsourcing more? Is there anything else going on in there?

We have approximately the same number of heads in the third quarter. We had 636 ending the third quarter which is pretty close to the second quarter average. So what we found is we have been able to by making some of the technology enhancements and by just productivity improvements in our business, we have been able to maintain a pretty consistent number of FTEs in our business.

As well as if I could add -- the online programs, the adoption rate of online reduces some of the calls into customer service as well so it just reduces the number of calls we have to take based on transaction growth.

Great, and one other question. Can you talk a little bit more about some of your more future endeavors such as getting into the jet fuel market? Perhaps anything you are doing in Europe or outside of the U.S.?

Yes, I don't think we see ourselves in the jet fuel market. We do some corporate programs today on corporate jets. We worked with another party on that but we do provide that primarily to some of our state businesses.

On the international scene today, our primary focus right now is really just to do more in the Canadian market. And we think the international would have to be somewhat based on working with some of our strategic alliance partners.

How big are you in Canada today?

Today in Canada we actually have a good presence because we do the processing for Imperial Oil, which is Esso Canada, which is the largest oil company in Canada. So by doing their private-label we already have a good presence. What we want to do is build a presence on our universal card program.

Great, thanks very much.

(OPERATOR INSTRUCTIONS) Colbert Foley, Credit Suisse First Boston.

First question just on the transaction growth of the payment segment. I know you talked about some of the benefits there from the hurricane and some of the positive and negatives there. Any chance you could quantify what you think the transaction growth may have been without those pluses and minuses?

We have gone through our portfolio at a pretty detailed level to try to put together an estimate on that. Obviously you have to go through each individual fleet and make some big, broad assumptions when we did so. But we think it is between a 1 to 3% impact in the number of transactions. That's the best guess that we have.

Really? Great. And just on the competitive environment, it sounds like Comdata has been looking to get a little bit more active in the market you guys have focused on in the small, mid-sized. Any change in the competitive environment you are seeing?

Nothing that we haven't anticipated. We clearly see Comdata doing some things more aggressively in the market. We have seen others, even Voyager and others being more aggressive. But nothing we have not anticipated. We still as you can see we had great growth in the mid and large sized fleet marketplace. So I think we're watching closely and we're making sure that we are factoring all that into guidance as we give that information out.

Okay, great. Just last, can you give us an update on uses of cash? Is debt pay down still the number one priority?

Yes, we still considerate delevering the business to be the first priority but we're looking at other options as ways to deploy capital as we get closer to our target.

Great, thanks. Good job on the quarter.

(OPERATOR INSTRUCTIONS) Pat Burton, Citigroup.

Congratulations on the quarter as well. Great numbers. My question relates to the current capital structure. Are you comfortable paying down debt out of free cash flow or at some point do you envision perhaps deleveraging the balance sheet through other means?

At this point we feel very comfortable with the amount of cash flow that we are generating. And because of the combination of the cash flow that we are generating and the fact that we're growing our earnings, we are delevering very rapidly and we think that that is an appropriate thing for us to do right now.

Good. Since you have been public, has there been any pick up in perhaps companies coming to you guys wanting to sell out or acquisition activity?

I can't say any more than there's activity in the marketplace in terms of people looking to do things. We are aware of different opportunities, but we're not doing anything in particular right now. But we want to be available to pursue something if we thought it made sense for us and would help us grow with some of these new ideas and new areas that we think we can do some leveraging with our front-end sales.

I'm not sure that it's been any different since we went public. It gives us more options as public company but it is a pretty small market out there. So I think the activity level and interest, it has been pretty similar. or.

Thank you.

Abhishek Gami, Banc of America.

Earlier you referred to the 60% (ph) of fleet fuel transactions that are on some sort of card. Do you know what proportion of that is on a dedicated fleet fueling card verses, say, a general purpose MasterCard or Visa?

Second part of that question would be of your wins, how many of those are coming against other general-purpose cards and how many are coming from the noncard market?

Yes, on the first piece of your question, when we look at truly a fleet card program like ours, we anticipate somewhere in the range of 8 to 9 million vehicles using programs like ours of the total. So when we talked about the 40 million vehicles with 60% using cards of some sort, you can kind of factor that out and say okay, eight to nine of those are using a program like ours. We do not have good statistics on the general-purpose cards. We see a little bit of that in the upper market where somebody might be using a purchasing card for all of their purchases for their corporations including fuel.

We have actually lost some business to that. We've actually gained some business back because they didn't have the same controls to monitor fleet purchases. We see a little bit of it in the really small end of the market where a small proprietorship might be using a bank card if you will, but we don't have good statistics. We try to track when we're losing some business. We try to track when we're gaining some business. But it is really hard to really get good statistics on that specific information.

Okay, so when you are out selling, are you selling against the idea of the general-purpose cards don't have the same level of controls? Or do you sell mostly against just the idea of better controls against cash or other noncard forms of payments?

It depends. If we're talking to somebody who is using a general-purpose card, we specifically talk about the controls we have. And the 5 to 15% savings is very real there because they won't have the same capabilities on controlling their drivers on what they're buying, when they're buying, where they are buying. So we can drive that same 5 to 15% savings if somebody is on a general-purpose card even for a major fleet if they are using a general-purpose card because they are trying to tap into, say, a purchasing card discount.

If they really sit down with us, we can show the savings against whatever that discount is. We can basically overwhelm that discount.

If it is a cash customer, we're also using the same 5 to 15% savings because clearly they are not controlling what their drivers are doing and they really can't control unauthorized purchases. So in either case, we believe the 5 to 15% is real.

Peter Park (ph), Park West Asset Management (ph).

Great quarter. I wanted to quickly ask -- you're using cash that you generate to pay down debt. What is the leverage that you want to get to? And after you reach that point, how long will it take? After you do that, what is your use of capital at that point? Thank you.

Sure. We have targeted between 1.5 to 2 times EBITDA historically as where we would like to be. And we think after we get to that level that we're going to be looking at other alternatives and quite frankly we're looking at all the alternatives now because we are delevering pretty quickly and we have been looking at the idea of both doing a share repurchase program, interested in entertaining the idea of acquisitions, but at this point in time we're being pretty disciplined about the fact that we're going to use our first order business is to pay down the debt.

Thanks very much. Good luck.

Greg Smith, Merrill Lynch.

Just thinking out, if we assume fuel prices stay at the current levels, do you think we will see any structural shift in the industry that could impact you either positively or negatively?

I would think if you are talking $2.50 to $3.00 dollars, we would have to consider could there be some impact on bad debt? Could there be some impact if the economy starts to drag as I said? Could that then cause some reduction in fuel transactions by our fleets? On the other hand because of higher prices, as I said earlier, we are seeing a stronger pipeline and a stronger close rate in terms of what we are able to generate with our front-end sales. So that is why I talked about being kind of a mixed bag.

Greg, are you worried about some type of a change in the correlation between wholesale and retail?

No, I'm just trying to think across the board what could change if we are in sort of some new era for fuel prices.

No, obviously that has always been a potential because we are hedging on wholesale price and retails where we benefit.

Is there anything that may change customer behavior as far as their thought process as to whether or not to have tanks in the ground, anything with higher fuel prices increasing risk to any extent?

I don't see the tanks in the ground. I think the liability of doing that is pretty high today for anybody to start putting new tanks in. I mean if they are a very large customer or very large fleet they may already be doing it. I just don't see anybody trying to say that is how they would try to go about securing fuel in the future. So I don't see them putting in tanks.

Okay, thanks a lot.

Mr. Dubyak, it appears there are no further questions at this time. I'll turn the call back over to you for any closing remarks.

Thank you, Justin. Just to summarize, Wright Express is moving in the right direction as we begin the fourth quarter. Because of the work we're doing on the front end, we are on track in terms of revenue growth and our pipeline is in great shape. Building on our strengths and product differentiation and portfolio management, we're exploring promising new markets, improving the performance of our business, and most importantly, delivering greater value to our customers.

We appreciate your interest and look forward to speaking with you again next quarter. This concludes our call. Have a good evening.